The nature of the current, purely dynamic economic process

The economic process is a process of value.

The productive process (is) a process of value. … production is not a merely technical affair;… intrinsically it is an economic affair, … production is for sale, production in view of and at every instant adapted to payments.[CWL 21, 114]

The economic process is the current, purely dynamic process.

It is always the current process of production, exchange and finance. We do not analyze present purchases of past costs; we analyze the normative equilibration of current outlays-incomes with current expenditures-receipts in two or more circuits.  We are familiar with electrical circuits and hydrodynamic circuits; and then there are monetary circuits, of which our activities are the constituents.

Our current or future enjoyment of goods, which are no longer under process, is not a constituent of the current, purely dynamic productive process.

The economic process is purely dynamic; therefore it is explained in terms of velocities and accelerations of a) production and vending of goods and services, and b) payments to workers for productive services and payments to sellers for completed products.

Therefore, its fundamental equations are differential and difference equations symbolized by the differential and difference operators: d/dt, d2/dt2, Δ/t, Δ2/Δt2.

The maintaining of a standard of living is attributed to a basic process (distinct process 1), an ongoing sequence of instances of so much every so often.  The maintenance and acceleration (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which each lower stage is maintained and accelerated by the next higher.  Finally, transactions that do no more than transfer titles to ownership are concentrated in a redistributive function, whence may be derived changes in the stock of money (distinct process 3) dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-54]

The textbooks’ Walrasian intersection of supply and demand curves is exact but it is not complete.

  1. M. Leon Walras developed the conception of the markets as exchange equilibria. Concentrate all markets into a single hall. Place entrepreneurs behind a central counter.  Let all agents of supply offer their services, and the same individuals, as purchasers, state their demands.  Then the function of the entrepreneur is to find the equilibrium between these demands and potential supply. … The conception is exact, but it is not complete.  It follows from the idea of exchange, but it does not take into account the phases of the productive rhythms. … [CWL 21, 51-52]

Lonergan held the diagram to have both explanatory and heuristic significance.  First, then, the later versions of the Essay in Circulation Analysis text draw ever-greater attention to the fact that Lonergan was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning.  To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern.  When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory. … So, for example, the existence and manner of dynamic mutual interdependence of the two circuits of payment, basic and surplus, is not adequately expressed either by descriptive terms (since this pattern does not directly relate to the senses of anyone operating in a common-sense way in a concretely functioning economy) nor by the series of (simultaneous) equations that do not explicitly manifest the interchanging of ‘flows.’ [CWL 15, 179]

Thus, some of our core equations regarding accelerations and changes of key ratios:

The development of economic dynamics within the present perspective will have its clusters of differential equations and probability functions.  [McShane, 2002-2, 68]

dI’= Σ(widni+ nidwi+dnidwi)y[CWL 15, 134] (The differential equation specifying how to adjust of the rate of saving to the requirements for consumption vs. investment of the productive phase)

d(P’Q’) = d(p’a’Q’)Basic+ d(p”a”Q”)OrdinarySurplus  [CWL 15, 157-58] (Differentials giving acceleration of expended incomes (P’Q’)and “macroeconomic costs” (p’a’Q’)Basic+ (p”a”Q”))

δJ = δa’ + a”δR + Rδa” [CWL 15, 160] (The differentials of the basic price-spread ratio)

d(ΠΚPurely expansionary)= d( π”a”ΚPurely expansionary) (Differentials of the expansion of investment)

δf = vδw + wδv   [CWL 15, 148-49] (The differentials of the behavior of the pure-surplus-income ratio)

d(ΣFi)= d(vI”)   [CWL 15, 150] (The differentials of pure surplus income)

M’ = (S’ – s’O’) + (D’ – s’I’) + G  [CWL 15, 51] (The addition of money to the basic circuit)

Σdsi= Σridvi   [CWL 21, 140] (Increments in monetary circulating capital devoted to transitional payments)

Prices are not a first, given, absolute upon which an explanation of the economic process is to be constructed. Rather than being explanatory, they require explanation.  They are last in the analysis and defined as constituents of velocitous and accelerating flows.  And it is the relations among the interdependent velocitous flows that constitute the absolutes upon which the explanation is to be constructed.

Also see Revision of the NIPA into explanatory form: