The Functionality of Pure Surplus Income

In the monetary circulation of each round of expansionary investment, nonconsumption incomes are directed to the expansionary investment. These pure surplus incomes may emanate from a greater price spread in the basic circuit as more money in the system chases the same quantity of consumer goods, or they may emanate from producers of capital directly receiving more money than they need for their standard of living. Whether called net macroeconomic savings or pure surplus income, these pure monies get reinvested – either directly by the recipients or, after functioning to pay down bank loans, by relending by the banks to other entrepreneurs – in more and more and more capital equipment. The same monies are invested over and over and over again and additional capital equipment is built and put into use over and over and over again until investment opportunities are diminished and repair-and-maintenance requirements claim use of the money.

(Further, as eventually the expanded capital gets put to use producing more consumer goods, the process will require working-capital loans – another expansion of the money supply – to pay employees enough to purchase the expanded bounty and to keep the expansionary capital from sitting idle. Thus, even if the rate of periodic expenditures for repair and maintenance is less than the rate of previous capital expenditures, the expansion of the basic circuit will demand that funds be deployed to those people who will purchase the fruits of the capital expansion.)

Accountingwise, the initial swelling flow of what is explained singularly as pure surplus income to human beings gets categorized variously and reported in the nonexplanatory National Income Accounts as interest, rent, wages, salaries, dividends, retained earnings. The swelling of the circulation of systematically-normal pure surplus income is misunderstood as to its genesis and purpose and, as not properly understood, remains unrecognized or, at best, mysterious. It is as though the legitimate accounting categories act as a veil over the macrodynamic functionings. Thus the functionings, though operative, are unnoticed, much less understood.

Now it is true that our culture cannot be accused of mistaken ideas on pure surplus income as it has been defined in this essay; for on that precise topic it has no ideas whatever. [CWL 15, 153]

Again, Lonergan is not doing corporate accounting or National Income accounting. He is explaining the economic process. His analysis is functional.

I have insisted on focusing on the central issue: the need of a functional analysis of the productive process and its correlated monetary flow. [McShane 1980, 200]

Lonergan’s analysis is concrete but heuristic. It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria. [McShane 1980, 117]

The division is not a matter of social relations or of property or of the properties of things: it is a functional analysis. … The aim of the analysis is to reveal the possibilities of the productive process as a dynamic system. One moves forward to that revelation in so far as one appreciates the different ways in which basic and surplus stages may relate. [McShane 1980, 119-20]

The analysis is functional and leads us to define five monetary functions which reveal a set of circulations of money. [McShane 1980, 121]

Now whatever the difficulties of measurement, the functional distinction is undeniably valid. [McShane 1980, 121]

the diagram is an aid to separating and understanding functions. The circles are not places, nor are they, say, groups of capitalists, workers, bankers, exporters. … The diagram represents the functional journeys. [McShane 2017, 79]

you begin to glimpse the necessity and the plausibility of the functional analysis for the understanding and guiding of the globe’s economy. [McShane, 2017, 81]

We stick with our simple illustrations … to get you used to thinking in terms of these functional distinctions. [McShane, 2017, 85]

The difficulty here is the absence of the functional classifications, basic and surplus, and the rhythmic ramifications. It is like trying to have a clear view on fire-hazardous chemicals prior to the emergence of the perspectives of Lavoisier and Mendeleev. [McShane, 2017, 87]

Many will still find it difficult to think functionally. (I hope you do not imagine) in terms of suppliers passing money on to buyers who pass money on to some redistributive area. [McShane, 2017, 88]

Lonergan uses technical terms pertaining to the realms of explanation, analysis, theory to provide the scientific-explanatory-systematic-theoretic relations among the functional flows of income, among which is nestled the particular flow called pure surplus income. He is explaining the economic process.

“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; … ¶Lonergan went on to identify the contemporary notion of a “function” as one of the most basic kinds of explanatory, implicit definition – one that specifies “things in their relations to one another” (Insight 37-38/61-62). In Lonergan’s circulation analysis, the basic terms are rates – rates of productive activities and rates of payments. [CWL 15 26-26 ftnt 27]

He consistently uses implicit definition to gain terms related to one another, and thus terms of scientific significance. He assigns new meanings to the words costs and savings based on their functional explanatory relations to one another. These words denoting functionings become abstract technical 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 (among costs of basic production) the element of pure surplus in the salaries of managers; worse it would not include (among costs of basic production) replacement costs, nor the part of maintenance that is purchased at the surplus final market (which are both part of the costs of surplus production and correlated with ordinary surplus income) … 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 (of outlays in both circuits that move to basic income) … 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 ( i.e. pure surplus income). 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][1]

pure surplus income … is the monetary equivalent of the new fixed investment of an expansion…..our culture can not be accused of mistaken ideas on pure surplus income as it has been defined…; for on that precise topic it has no ideas whatever………However the phenomena referred to by …”pure surplus income” are well known. Entrepreneurs are quite aware that there are times of prosperity in which even a fool can make a profit and other mysterious times in which the brilliant and the prudent may be driven to the wall……….Thus pure surplus income may be identified best by calling it net aggregate savings and viewing them as functionally related to the rate of new fixed investment [CWL 15 152-53]

Pure surplus income is “quite an interesting object.”

Pure surplus income may be defined for present purposes as a fraction of total surplus income. This fraction will be denoted by the symbol v, where v is the fraction of surplus expenditure that goes to new fixed investment. … This pure surplus income is quite an interesting object. When v is greater than zero, it is a rate of income over and above all current requirements for the standard of living, since that is provided by I’, and as well over and above all real maintenance and replacement expenditure, since that is provided by (1-v)I”. Thus one may identify pure surplus income as the aggregate rate of return[2] upon capital investment: entrepreneurs consider that they are having tolerable success when they are not merely “making a living,” no matter how high their standard of living, and not merely obtaining sufficient receipts to purchase all the equipment necessary to overcome obsolescence, but also receiving an additional sum of income which is profit in their strong sense of the term. [CWL 15, 146]

There is no choice between increasing and decreasing returns; they constitute the essential ebb and flow of the universal rhythm. [CWL 21, 27]

In our culture, dominated by the biases of commonsenseism, egoism and groupism, implicit definition and an orientation to unbiased empirical method, unbiased explanation and unbiased theory are overwhelmed. Implicit definition and a fully dynamic heuristic rarely exist, and when they do exist, lack a voice to be heard or an audience to listen. Thus the functionality of pure surplus income is never detected and recognized explicitly as the inevitable monetary correlate of capital expansion running undetected through the various accounting categories of payments to human beings. The participants in the economy experience it only as mysterious, i.e. unexplained and without origin or formal cause; good times and bad times; unexplained swelling and contracting of wages, salaries, interest, bonuses, dividends, and retained earnings. They do not understand the ideal pure cycle and pure surplus income’s ideal functioning in an intrinsically cyclical system of interdependent velocities in the manner of a Newton or Laplace. In the twenty-first century we still need to bring economics to the level of Laplace’s 19th century cosmology, then to the level of 21st century field theory.

The participants experience surges and ebbs, but they do not understand the explanatory functional relations. To use another analogy, though the analogy is flawed, we may say that today’s economists at the Central Bank need an infrared insight to detect the three key functional incomes – basic, ordinary surplus, and pure surplus, not visible to the National Income accountant’s unaided eye – which explain the interdependent functionings within the overall economic process. We are wandering lost in ancient mysteries and the eminent politicians and academics are our makers and priests of economic myths.

 

 

 

[1] We have four equivalent names for the same phenomenon:

  1. pure surplus income, (in the sense of normatively good income which is exclusively associated with capital expansion)
  2. net aggregate savings,
  3. the monetary correlate of expansion,
  4. the social dividend.

 

[2] In the section titled Interest Payments; The Interest Ratio; and “The Macrodynamic Rate of Return” we psecify the meaning of “rate of return” in macrodynamics as the current flow of current pure surplus income rather than as a reward accruing to past investments.