The reader will benefit most from this section if he has previously read – at least once, but preferably more than once – CWL 15, *Macroeconomic Dynamics, An Essay in Circulation Analysis*, and in particular, pages 23-35, which treat the surplus process.

Also, one should study and understand the formula called the *lagged technical accelerator _{[CWL 15, 36-7]}, with *special appreciation of the symbols

*k, t,*

*t-a, n ,*and

*n-1*

* k_{n}[f’_{n}(t-a)-B_{n}] = f”_{n-1}(t) – A_{n-1 [CWL 15, 36-7]}*

Finally, it must be kept in mind that the economic process is always the *current, purely dynamic process*. Thus, we seek the understanding expressed in formulations, which are always currently and universally explanatory of all current configurations – whether equilibrated or disequilibrated.

Let us begin with isolated quotes to pique interest in our treatment of *pure surplus income*. This first excerpt regards Lonergan’s scientific heuristic: “The objective of analysis is to discover the … **functional** (inter)relationships (which implicitly define the functional rates and explain the dynamics of events).” [CWL 15 26-26 ftnt 27].” This excerpt has been significantly reworded by us, though not changed in meaning. The original wording is provided in the footnote below.[2]

“Functional”is for Lonergan a technical term pertaining to the realm ofexplanation, analysis, theory; Lonergan illustrates his basic meaning of ‘explanation’by referring to D. Hilbert’s method of implicit definition: … In Lonergan’s circulation analysis, the basic (dynamical) terms are rates (implicitly defined by their functional relations to one another) – rates of mutually conditioning, and interdependent productive activities and rates of mutually conditioning, and interdependent payments. The objective of analysis is to discover the …functional(inter)relationships (which implicitly define these rates and explain the dynamics of these rates to one another). [CWL 15 26-26 ftnt 27]

Functionings are rates of productive activities and rates of payments. Velocitous functionings are the terms of explanation. Functionings are the elements of theory.

The following excerpt implies that the functioning herein conceived as *the flow of* *pure surplus income*, or as the *monetary correlate of expansionary investment*, is a constitutive phenomenon intrinsic to the process, but is not understood by academics, politicians, and journalists.

Now it is true that our culture cannot be accused of mistaken ideas on

pure surplus incomeas it has been defined in this essay; for on that precise topic it has no ideas whatever. [CWL 15:153]

The next excerpt makes the important distinction between functional surplus income and corporate accounting’s “profit.” To better appreciate the distinction, please refer to the schematic Diagram of Rates of Flow, nicknamed the “baseball diamond,” of interdependent velocitous monetary transfers. The debit and credit categories of the accountant’s Income Statement leading to net profit and Statement of Cash Flows leading to the change in the cash balance are sublated by the categories of a theory of functional velocities which explain the dynamic economic process.

Surplus income is not the same as profits of conventional accounting. The latter are a simple matter of the excess of accounts receivable over accounts payable. They include a firm’s additions to its portfolio,[3] and living expenses (no matter how high) of the upper echelons. This accountant’s concept of profit pertains not to macroeconomics but to microeconomics. …Surplus income as a macroeconomic concept is the social dividend (and rate of saving: see CWL 15, note 186)[4] that results from the

functioningof an expanding economy. It receives contributions from basic outlay (i’O’), as well as from surplus outlay (i”O”) The possibility of a contribution (to surplus income) from the basic circuit arises from the balancing (“crossover”) contributions to basic income from surplus outlay (c”O”). Without such a crossover balance one circuit is suffering an inflation while imposing a deflation on the other. … The (basic) price spread is the excess of basic receipts over basic costs.[5] In microeconomics it is interpreted as profit, and so trade-union leaders argue that commercial and industrial profits justify a rise in wages. But in macroeconomics, which is aware of the need of a crossover balance for equilibrium, the basic price spread is to a greater or less(er) extent a part of the social dividend (rate of saving to be invested) in an expanding economy. It is only in the static economy that it justifies a rise in wages. … On any turnover, then, the possible sources of surplus income are the flows of money into surplus transitional receipts, namely, 1.) existing surplus firms maintaining the level of the previous turnover by spending on surplus supply the sum of i”O” and i’O’, 2.) existing surplus firms increasing the level of previous turnover by drawing on the redistributional function by (S”-s”O”), 3.) emergent surplus firms drawing on the redistributional function by (D”-s”I”) to acquire plant and equipment (i.e. units of enterprise getting into the business by acquiring plant and equipment in order to produce plant and equipment.). CWL 15, 145

*Pure surplus income* is a concept representing an identifiable, purposive flowing of money. The flowing is a concrete economic functioning. Pure surplus income is a functional flow implicitly related to other functional flows such that they are interdependent and mutually define one another in operations and in equations of scientific significance.

In functional macroeconomic dynamics one cannot think precisely of pure surplus income without thinking precisely of ordinary surplus income and basic income, just as in geometry one cannot think precisely of two points without thinking of a straight line, and vice versa. The define one another and are purely relational concepts. So, one’s thinking is an abstraction of the concrete, just as in mechanics Newton reached an abstract formulation to explain the concrete falling apple and in electromagnetics Clerk-Maxwell reached an abstract formulation to explain the mutually-related concrete phenomena of electric intensity and magnetic intensity.

A relational concept such as *pure surplus income* is the result of an insight grasping the relationships in a system of interdependent, mutually conditioning, velocitous functionings, in which the relations between the conceptual functionings give the very meaning of the functionings and the functionings define the relations. From the insight into the scheme of interdependent relations, all the interrelated concepts “tumble out together” into a coherent set of terms and relations.

Let us say, then, that for every basic insight there is a circle of terms and relations, such that the terms fix the relations, the relations fix the terms, and the insight fixes both. If one grasps the necessary and sufficient conditions for the perfect roundness of this imagined plane curve, then one grasps not only the circle but also the point, the line, the circumference, the radii, the plane, and equality. All the

conceptstumble out together, because all are needed to express adequately a single insight. All are coherent, for coherence basically means that all hang together from a single insight. CWL 3, 12/

The functional flow called pure surplus income is a fundamental term of systematic significance in functional macroeconomic dynamics. It must be accurately conceived and, thereby, defined.

reasoning is fruitful only if your terms are accurately defined. If the meaning of your terms is not settled, then your reasoning process just bogs down in endless verbal disputes. [CWL 10, 119]

The utterance* pure surplus income* denotes the income correlate of an expenditure on the production of an expansion of the stock of capital goods. The income may be borrowed or earned. But, without income there is no expenditure. If there is an expenditure, there was income for the expenditure.

That expenditure for expansion is real[6] investment; and investment is a dedication of income – whether the income is contemporaneously borrowed or earned in a previous period – to expansionary capital.

Pure surplus income is a *technical, explanatory* term related implicitly to other technical, explanatory terms in implicit equations. In the purely mathematical realm, whose terms are without physical or economic meaning, implicit definitions are purely relational. They define and determine one another by the relations in which they stand with one another in the equation of equality or “is-ness.” But purely abstract mathematical terms can be given economic content; then by the isomorphism of the form of the equation with the form of the dynamic economic process, the equation represents and explains the dynamics of the objective economic process. The equations represent the relations of functionings to one another in the economic process and, thus, explain the dynamic events of the objective economic process.

To understand a.) the correspondence of pure surplus productive activities to basic productive activities, b.) pure surplus income’s correlation with pure surplus productive activities, c.) pure surplus income’s relations to the flows of *ordinary surplus income* and *pure basic income*, and d.) pure surplus income’s genesis and normative career within a long cycle from zero to a maximum and back to zero, **is to understand how the economy works**. It is to grasp all the concepts together in a coherent set of relations. It is to see all the interrelated workings of the current dynamic process in a single view, or to **understand all macroeconomics in** **a single comprehensive act of understanding**.

Moreover, once initial difficulties are overcome and basic insights are reached, the investigation approaches a supreme moment when all data suddenly fall into a single perspective, …. [CWL 3, 47/71]

Again, in a single comprehensive act of understanding, all concepts tumble out together in a complete set of coherent relations.

Let us say, then, that for every basic insight there is a circle of terms and relations, such that the terms fix the relations, the relations fix the terms, and the insight fixes both. If one grasps the necessary and sufficient conditions for the perfect roundness of this imagined plane curve, then one grasps not only the circle but also the point, the line, the circumference, the radii, the plane, and equality. All the concepts tumble out together, because all are needed to express adequately a single insight. All are coherent, for coherence basically means that all hang together from a single insight. [CWL 3, 12/36]

The modern field theory of physics has provided us heuristic clues: “The form of any element is known through its relations to all other elements. … Field theory is a matter of the immanent intelligibility of the object. [CWL 10, 154]

modern mechanics drops the notion of force (which has a residue of external efficient cause); It thinks in terms of a field theory, the set of relationships between

nobjects. The field theory is a set of intelligible relations linking what isimplicitly defined by the relations themselves; it is a set of relational forms. The form of any element is known through its relations to all other elements. … Field theory is a matter of the immanent intelligibility of the object. [CWL 10, 154]

Modern biology also provides us heuristic clues about understanding the whole by understanding the interrelated parts:

There is a well-known interlocking of organic parts that enables the biologist to reconstruct the organism by examining , say, its bones. Now this simultaneous interlocking of parts rests on the higher system as integrator: the conjugate forms are related to one another but are also emergent in organic parts; it follows that the parts are related to one another and that through these relations the whole can be reconstructed from the part. CWL 3, 490/

As in any science, in macroeconomic dynamics there is a search for a higher unity or a more profound point of view.

The special theory of relativity … welded together into comprehensible unities the electric and magnetic fields, as well as mass and energy, or momentum and energy, as the case may be. Then out of the endeavor to understand inertia and gravitation as having a unified character there arose the general theory of relativity, which avoided those implicit axioms which underlie our thinking when we use special coordinate systems in the process of formulating basic laws. [Einstein,

Essays, pp 113-114]

One searches for explanation made up of the fewest possible mutually independent postulates or axioms, which contain virtually the deduced theoretic superstructure of relations.

Behind the tireless efforts of the investigator there lurks a stronger, more mysterious drive: it is existence and reality that one wishes to comprehend … we mean that we are seeking for the simplest possible system of thought which will bind together the observed facts. By the “simplest” system we do not mean the one which the student will have the least trouble in assimilating, but the one which contains the fewest possible mutually independent postulates or axioms; … [Einstein,

Essays, pp 112-113]

Pure surplus income, since it is the monetary correlate of expansion of capital, will be found to surge and flatten, i.e. to accelerate then decelerate back to zero. Stewards of the economy and CEO’s must understand this. To fail to understand this systematic, second-order, rise-and-fall nature of pure surplus income and its correlative correspondence with other types of income is to be in the dark in attempting to run a business or manage the economy, and further, to be misled into overexpanding, opposing the *normative basic expansion*, and making counterproductive adjustments.

Total surplus income flow is the total functional income flow in the capital circuit’s conditioned, *circular series* of outlays becoming surplus incomes becoming capital expenditures becoming receipts becoming outlays becoming surplus incomes becoming capital expenditures becoming receipts… (The reader can image this in a 4-point circle or see it in either of the two operative circuits)

As a circular circulation, the above series is repeated round after round and period after period. Though the quantities are subject to change and may wax with credit or wane with contraction, the same fundamental serial-circular pattern is repeated over and over again.

Pure surplus income is one of the two parts of this total surplus income, the other part being *ordinary* *surplus* *income*. Pure surplus income is the income which becomes dedicated to investment in a widening or deepening of the existing stock of capital. Ordinary surplus income is the income which becomes expenditure for repair and maintenance necessitated by the wear and tear on the existing stock of capital.

The flowing of pure surplus income is a velocitous functioning. It is a functioning at a rate or . The systematics of the interaction of pure surplus income with other velocitous functionings is clearly imaged in the “baseball-diamond” diagram of two circuits connected by “crossovers”. The diagram is at once a schematic of a.) the configuration of conditions among circularly-conditioned and mutually-conditioned flows and b.) the flows themselves which would satisfy the circular and crossover conditions.

This schematic diagram of monetary transfers consists of *two monetary circuits connected by crossovers*.[7] The monetary flowings should accelerate and decelerate, but always be positive, in normative patterns of surges and taperings over the course of expansion in a pure cycle of the creative-destructive process.

The schematic diagram serves as a.) an image into which one can have insight into the dynamics of the process, and b.) a “frame of reference” within which to place and analyze both b.1) equilibrated monetary circulations and b.2) maladaptive, distorted monetary circulations.

Again, an *insight* is the source of *concepts*, which proceed from the insight and hang together (cohere) in an intelligibility grasped by this set of terms and relations. In our case, an insight yields several concepts among which is *the concept of pure surplus income* and its relation to other concepts, with all concepts forming the nest of coherent, explanatory terms whose interrelations explain the dynamic process.

We indicated above that to understand pure surplus income in all its correspondences within the macroeconomic process is to understand the entire economic process in a single comprehensive act of understanding. McShane notes that pure surplus income occupies “center stage” in macroeconomic dynamics. He points out that an understanding of the interaction of serially-conditioned and crossover-conditioned flows is a.) constitutive of a scientific grasp of economic dynamics, and thus, b.) the key to resolving certain differences of opinion among economists who lack a fully-adequate dynamic heuristic. The analysis of flows of functional incomes is the key to the sublation of differences among economists.

center stage is occupied by the conception, affirmation, and implementation of

pure surplus income… [CWL 21, Editors’ Introduction xxvii]The flow of income in a functional analysis, however, requires somewhat more attention: it is the corner of the analysis which holds the key to the sublation both of Keynes’ problems of consumption, savings and investments, and of Kalecki’s dictum that the workers spend what they get and the capitalists get what they spend. [McShane 1980, 120]

Let us note features of the capital-production process in the pure cycle, with whose expansion pure surplus income is correlated; then let us follow the money as expansionary capital is produced and the flow called pure surplus income is systematically generated, circulated, maintained as proper, and gradually transformed into income for repair and maintenance.

[1] CWL 15, 37-38

[2]

“Functional”is for Lonergan a technical term pertaining to the realm ofexplanation, analysis, theory; ¶Lonergan illustrates his basic meaning of ‘explanation’by referring to D. Hilbert’s method of implicit definition: … In Lonergan’s circulation analysis, the basic (dynamical) terms are rates – rates of mutually conditioning, and interdependent productive activities and rates of mutually conditioning, and interdependent payments (implicitly defined by their functional relations to one another). The objective of analysis is to discover the underlying network offunctionalrelationships of these rates to one another. CWL 15 26-26 ftnt 27

[3] Lonergan’s “additions to portfolio” may mean corporate accounting’s *retained earnings.*

[4] CWL 15, 133 The purpose of this section is to inquire into the manner in which the rate of saving W^{186} is adjusted to the phases of the pure cycle of the productive process. CWL 15, Ftnt 186: In this sentence Lonergan originally wrote: ‘the rate of saving, G.’ A substitution of W and a change to ‘social dividend’ are both prescribed in the 1979 supplement mentioned in note 185 above; the original phrase ‘rate of saving’ has been retained throughout the present section. … The supplement defines the social dividend as

- Income over and above the “standard of living,” “rent,” interest, maintenance and replacement of capital equipment
- [the means given] to entrepreneurs, investors, because they are the most likely to be able to interpret what it is for, namely, the successful introduction into the economic process of technological, commercial, or organizational improvements
- who else would know which are the possible improvements that would succeed?’

… With this definition of social dividend, compare a quotation from Schumpeter, *History* 894, which Lonergan included in another supplement: ‘[John Bates] Clark’s contribution was the most significant of all: he was the first to strike a novel note by connecting entrepreneurial profits, considered as a surplus over interest (and rent) with the successful introduction into the economic process of technological, commercial, or organizational improvements.’

[5] 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

functionalsense 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. 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 andfunctionalcosts…. CWL 15 156-57

[6] We have five equivalent names for the same phenomenon:

- pure surplus income, (in the sense of normatively legitimate income which is exclusively associated with capital expansion)
- net aggregate savings,
- the monetary correlate of capital expansion,
- the social dividend. (See CWL 15, p. 133, ftnt. 186)
- the return on existing investment

[7] As an aid, one may compare the economic circuits and payments flows to both electric circuits of current flows and fluid-dynamic circuits of pipes or channels of fluid flows.