Functional Macroeconomic Dynamics is a New Science of a National Income Accounting

Let there be a new National Income Accounting entitled Gross Domestic Functional Flows, which explains the notions of the process.

In a long-term expansion, a surplus stage characterized by a temporary greater or lesser abundance of pure surplus income must normatively be succeeded by a basic stage characterized by higher basic income to purchase the fruits of the capital expansion.

Lonergan’s point is that there is no automatic mechanism creating monetary boundary conditions for a shift into this final distribution and price system. Attempts to persist in accumulation (of capital) stage (pure surplus) incomes would rather eventually be frustrated by the labour supply boundary condition…producers could only lay off workers to avoid a growing hoard of the new tool…Lonergan suggests we consider more cooperative solutions based on a collective understanding of his more sophisticated national income accounting which illustrates the full employment need to (increase basic incomes rather than) accumulation incomes which have lost their dynamic profit motivation. (i.e. now they are only sloshing back and forth for exchanges between stocks and bonds in the secondary markets doing nothing useful.) [Burley 1992-2, 278]

We need an explanatory scheme of Gross domestic Functional Flows. We need new tricks of a new trade. The current arrangements of conventional profit-loss corporate accounting, National Income accounting, and Flow of Funds accounting do not provide the reliable indicators needed for management of the economy. We need a more sophisticated, adequately-explanatory national income accounting.

Conventional profit and loss accounting is an exercise in the realm of common sense, not an analysis and explanation of equilibria and disequilibria in the realm of theory

An ‘accountant’s unity’: that is a category used in (conventional) accounting. For Lonergan, (conventional) accounting generally denotes an enterprise within common sense which uses descriptive, as contrasted with explanatory terms (on these terms see Insight 37-38/61-62, 178-79/201-3, 247-48/272-73). Insofar as that is true, the accountant’s unity is not an adequate index for the normative, explanatory analysis of the productive process. [CWL 15, page 26, ftnt. 26]

It is true that the distinction between basic and surplus is functional (rather than profit and loss categorial), and that a number of activities may at one time be surplus and at another basic. So (the conventional accounts of) labor, services, power, transportation, materials can be known as contributions to the basic or surplus function only through further determinations and even special inquiries……….still the (Lonergan’s) analysis itself will provide rather convincing indicators, and as expertise develops the new tricks of a new trade, there well may be discovered methods of attaining a sufficient accuracy for practical purposes. [CWL 15, 72]

The new macroeconomic accounting scheme would relate explanatory functionings; it would gather and relate the aggregate, functional product flows and monetary flows of the economy. It would be an explanatory dynamics and, thus, in marked contrast with the conventional, self-interest accounting of microeconomics. We would have a new scheme measuring and relating explanatory flows and reporting the stresses and strains of disequilibrium; i.e. a new science of Gross National Flows!

We will revise the meaning of certain conventional terms and we will introduce new terms.

There is a sense in which one may speak of the fraction of basic outlay that moves to basic income as the “costs” of basic production. It is true that that sense is not at all an accountant’s sense of costs; for it would include among costs the standard of living of those who receive dividends but would not include the element of pure surplus in the salaries of managers; worse it would not include replacement costs, nor the part of maintenance that is purchased at the surplus final market………..But however remote from the accountant’s meaning of the term “costs,” it remains that there is an aggregate and functional sense in which the fraction…….is an index of costs. For the greater the fraction that basic income is of total income (or total outlay), the less the remainder which constitutes the aggregate possibility of profit.[1] But what limits profit may be termed costs. Hence we propose ….to speak of c’O’ and c”O” as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. [CWL 15 156-57]

Surplus income is not the same as (GAAP) profits. The latter are a simple matter of the excess of accounts receivable over accounts payable. They include a firm’s additions to its portfolio, and living expenses (no matter how high) of the upper echelons. This accountant’s concept of profit pertains not to macroeconomics but to microeconomics. …… [CWL 15, 145]

Our formula for GDF will not be a mere tally of corporate and government account balances giving no explanation of equilibrium, disequilibrium, or percent of potential. It will be understood as a set of functional velocities implicitly defined by their functional relations to each other.

Ependitures/Receipts  =                                Outlays/Incomes

GDFF =     P’Q’Basic + Π”Κ”   =        p’a’Q’Basic + p”a”Q”R+M + π”a”K”expansionary + π”α”Κ”R&M to self

Since the process is a process of flows, this formula is a formulation of flows, i.e. of so much per interval. Though it appears algebraic and static because we omit the symbols and , it is differential with respect to time. I.e. it is a formula relating velocities. And accompanying it would be formulae symbolizing changes in the velocities, i.e. accelerations. Description and common sense are to be replaced by a functional analysis yielding an explanatory system.

the set of terms and relations capable of explaining the phenomena of the business or trade cycle would not be the same as any given pricing system that automatically coordinates a vast coincidental manifold of decisions of demand and decisions of supply, Such a system comes to sight as bookkeeper’s entities that form the basis of the preliminary descriptive classifications that need to be explained: they are the similarities “first-for-us.” The relevant set of explanatory terms and relations would have to expose similarities that reside in the relations of things to one another or what is “first-in-itself”: namely both the dynamic elements (distinct, implicitly-defined, productive and monetary functionings)and the differentials (velocities and accelerations) of the economic mechanism which reveal the significance of aggregate changes in prices that by themselves are in need of interpretation……prices as a concern for the bookkeepers or accountants are known- first-to-us by description and commonsense classification; and that (Lonergan’s) own functional analysis of production and circulation reveals an explanatory system known-first-in-itself (continue to lvii “significance”) [CWL 15, Editors’ Introduction lvi]

We are not going to discuss (the casual and incidental particulars of ) wealth or value, supply and demand, price levels and price patterns, capital and labor, interest and profits, production, distribution, and consumption. Because we are not, it certainly will be objected that our discussion has nothing to do with economic science, for economics is precisely the study of wealth and value, (interest and profits), supply and demand, and so on. The answer (to the objection) is as follows. The discussion moves on a more general plane to terminate in a more general conclusion. Because the general includes the particular ( of wealth or value, supply and demand, price levels and price patterns, capital and labor, interest and profits, production, distribution, and consumption), a generalized economics cannot but include the particular economics. CWL 21, 8

Sublation is through 1) generalization and 2) scientific analysis. The particular becomes an incidental element in the general; and the descriptive classification is replaced by explanation in terms of things related to one another.

Prices and profits are not terms of explanation. They are phenomena to be explained rather than merely accepted and reported. Sunt explananda.

One might be reminded here of a parallel in hydrodynamics: if what is at issue is a general specification of the dynamics of free water waves, a premature introduction of general boundary conditions or worse, specific channel conditions, botches the analytic possibilities….the Robinson-Eatwell analysis is hampered … by their building the economic priora quoad nos of profits, wages, prices, etc., into explanation, when in fact the priora quoad nos[2] are last in analysis: they require explanation. [McShane 1980, 124[3]]

 

 

[1] Lonergan uses the term profit in the sense of non-cost; i.e. savings or pure surplus income.

[2] The priora quoad nos – first for us – are the things which we notice first because they are related to our sensitive selves, e.g. hot and cold, fast, slow. The priora quoad se – first among themselves – are the things or terms which are related to each other, e.g. pressure, volume, temperature, space, time, mass, etc. Aristotle distinguishes ‘what is first by nature’ (proteron pros physei) and ‘what is first for us’ (proteron pros hymas) in Posterior Analytics, I, 71b 33-72a 5; compare Physics, I, 1, 184a 17-18 CWL 15, lv, note 90

 

 

[3] More fully, the quote is: One might be reminded here of a parallel in hydrodynamics: if what is at issue is a general specification of the dynamics of free water waves, a premature introduction of general boundary conditions or worse, specific channel conditions, botches the analytic possibilities….the Robinson-Eatwell analysis is hampered, not only by an absence of paradigmatic heuristic thinking in a field whose principles involve ends, but also by their building the economic priora quoad nos of profits, wages, prices, etc., into explanation, when in fact the priora quoad nos are last in analysis: they require explanation. McShane, Philip (1980) Lonergan’s Challenge to the University and the Economy, (Washington, D.C.: University Press of America) P. 124[3]