Why did Lonergan analyze the structure and rhythm of the productive process before he analyzed the monetary aspects of exchange and the inner contradictions of the manipulation of interest rates?
Quick answer: Money is to buy goods and services. Payments of money are congruent with the network of the production and provision of goods and services. The production of goods and services is prior in the order of understanding to the correlated payments for goods and services. Therefore, the structure of the current, purely dynamic, productive process – as to factoral makeup, functional interdependencies, flow quantities, and timing – sets the pattern for the pattern of payments. It is conceptually prior to, and really determinate of, the normative flowings of money.
real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis. If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory. But it doesn’t say the way the thing works. [CWL 21, xxviii]
The first requirement for the scientist is that he employ a scientific heuristic to order his questions and analysis wisely and determine the nature of the answer he seeks, i.e. the nature of his goal.
Investigators soon lose the right track if they do not carefully and accurately grasp the goal of their science. So too, students can have serious difficulties and worries when they do not understand what the goal of their studies is and what means they should use to get there. [CWL 12, 7]
It seemed best to discuss in order the goal intended, the act by which the goal is attained, and the movement by which we advance toward that act. [CWL 12, 7]
The macroeconomic scientist is trying to understand the whole economic process, how elements relate to one another, interconnect, fit together, depend upon one another, mutually define and determine one another. And first in the order of understanding are the relations of the process of production.
For the human mind is such that it does not wonder about things just individually but, understanding individual elements, goes on to ask how they are connected with one another. [CWL 12, 17]
There must be an order of questioning. Shall we discover the immanent intelligibility of the real process, or shall we construct an imaginary monetary castle in the air?
Questions cannot be put in any order whatsoever. Some questions simply cannot be answered until others have been resolved. And sometimes the answers to one question immediately provide the answers to others. [CWL 12, 23]
… putting things in their right order is the special talent of the wise person, and so the wise person will start with the problem that is first in the sense (1) that its solution does not presuppose the solution to other problems, (2) that solving it will expedite solving a second problem, (3) that solving the first and second problems will lead right away to solving a third, and so on through all consequent connected problems. [CWL 12, 23]
For understanding is about principles. A principle is defined as what is first in some order. And understanding the first is such as virtually to contain in itself the answers to the rest of the questions.
Next, understanding is about principles. A principle is defined as what is first in some order. Therefore, it belongs to understanding to grasp the solution of that problem that is first in the order proposed by wisdom. Since this order is such that solving the first means that the others are expeditiously solved, the understanding should be such as virtually to contain in itself the answers to the rest of the questions. [CWL 12, 23]
… the questions are put in such an order that, once the first is solved, the solutions to the others follow with almost no difficulty. Therefore, because the later solutions are connected to the first as conclusions are connected to some principle, all solutions after the first seem to be the proper province of knowledge. [CWL 12, 25]
Some points are such that, unless they are understood, nothing else in the entire treatise can be understood.
In the systematic way the understanding of some points is more necessary than the understanding of others: some points are such that, unless they are understood, nothing else in the entire treatise can be understood; neglecting to understand other points may deprive us only of part of the understanding of the entire treatise; and finally, some points are included just so that others may be more easily understood or that the connections with other questions may be clearer or that we may proceed more promptly to the applications. [CWL 12, 73]
The concepts and terms of the initial understanding must be systematically formed so as to serve to define and express the later problems and solutions.
… if solving the first problem virtually solves all the others, the concepts and terms in which the first problem and the first solution are defined and expressed cannot be significantly changed if they are to serve to define and express the later problems and solutions. Clearly, then, it is not the arbitrary malice of professors but the interconnected questions and solutions themselves that demand both systematically formed concepts and a technical terminology that corresponds not to any concepts whatsoever but to systematic concepts. [CWL 12, 25]
… a system of definitions is introduced through which the solutions can be formulated, and because a technical terminology is developed for expressing the defined concepts. [CWL 12, 25]
Unwise persons understand the productive process imperfectly; but imperfect understandings are themselves partly new problems. Unwise persons are the source and cause of new problems; a new system arises, but it is just a semblance of a true system; the knowledge of unwise persons who do not put questions in their proper order is a morass of obscurity and confusion. Their problems do not really exist.
The first problem and all the connected subsequent problems are solved imperfectly. But imperfect solutions are only partly solutions, and so they are also partly new problems. … The wisdom that puts the new problems into order is the wisdom not of the truly wise but of those who have poorly understood. The solutions to these new problems come from the very persons whose poor understanding was the source and cause of the new problems in the first place. Thus, a new system arises, but it is just a semblance of a true system. Its problems do not really exist, its order will please those who have little wisdom, its principle will satisfy only those whose understanding is superficial, and its knowledge will be a morass of obscurity and confusion. [CWL 12, 25-27]
The unwise economist, who does not put questions in their proper order, will concoct pseudo-systems and monetary theories which are only castles in the air.
… understanding is fruitful, so that when some first problem is solved, the remaining connected problems will be easily brought to a solution. This very fruitfulness, however, has its disadvantages. The same system that can be understood, grow, and keep improving can also be poorly understood or not understood at all, with the result that those who understand poorly will concoct pseudo-systems to solve pseudo-problems. [CWL 12, 29]
(Lonergan’s model and the analysis) involves an enlargement of perspective and a proper ordering of assumptions. But I must note immediately how intimately the ordering is within the perspective: “as the hypothesis is the principle in mathematics so the end is the principle in praxis.” … The movement of Lonergan’s analysis might be described as a paradigmatic descent from a concrete heuristic of the productive process determined by the end of that process. The monetary order is conditioned by, and correlated to, the rhythms of production adequate to the end. [McShane 1980, 125-126]
A threefold harm is inflicted on college freshmen who are taught only the Walrasian part rather than the Lonerganian whole.
… a part of knowledge cannot be omitted without inflicting a threefold harm on learners. First, omitting the part means that they will not learn that part. Second, and more seriously, knowledge itself will be mutilated. What constitutes knowledge as knowledge is found not in the part but in the whole, and so to hand on some parts as if they were the whole is to work against knowledge rather than to serve it. Third, and most seriously of all, mutilated knowledge will sooner or later be distorted. [CWL 12, 29]
… one who reaches … understanding … that is most fruitful does not solve just one single problem in a sterile fashion …, but solves one problem directly in such a way that one simultaneously reaches a virtual solution of many others. [CWL 12, 43]
Consider the TV talk shows – financial, political, and sports. Do the so-called experts ever not take the part for the whole and pass the part on as the whole to others. And consider the legions of so-called experts in economics and finance in our colleges and universities.
… there never seem to be lacking those whose diminished wisdom is ready and eager to take a part for the whole and to pass it on as such to others. [CWL 12, 65]
The following excerpts are evidence of Lonergan’s wise ordering of questions in his analysis. They distinguish analysis, the way of discovery, from synthesis, the way of teaching. They provide heuristic advice to professors:
analysis begins from matters of fact, say, the conspicuous recurrence of changes in plant and equipment and the concomitance of such changes with the business cycle. Next analysis turns from such instances of concomitance to lists of successful and unsuccessful changes. Finally, from a study of such instances, by a process of trial and error, analysis aims to arrive at an ever fuller understanding of business cycles. [CWL 15, 9]
So the first movement toward acquiring science begins from an ordinary prescientific description of things and ends in the knowledge of their causes. This first movement has been called: (1) analysis, because it starts from what is apprehended in a confused sort of way and moves to well-defined causes or reasons, (2) the way of resolution, because it resolves things into their causes, (3) the way of discovery, because previously unknown causes are discovered, (4) the way of certitude, because the ordinary prescientific knowledge of things is most obvious to us, and so the arguments we find most certain begin from such knowledge and to on to demonstrate matters that are more remote and more obscure to us, and (5) the temporal way, because causes are not usually discovered instantaneously, any more than they are discovered by just anyone or without a certain amount of good luck. ¶The other movement starts from the causes that have been discovered and ends by understanding things in their causes. This movement is called: (1) synthesis, because fundamental reasons are employed both to define things and to deduce their properties, (2) the way of composition, because causes are employed to produce things or constitute them, (3) the way of teaching or of learning, because it begins with concepts that are fundamental and especially simple, so that by adding a step at a time it may proceed in an orderly way to the understanding of an entire science, (4) the way of probability, partly because it often attains no more than probability, but also because people frequently have no clear discernment of just where or when they have reached certitude, and (5) the way of logical simultaneity, because, once the principles have been clearly laid down, all the rest takes comparatively little time; it can be accomplished in a few short deductions and applications. ¶For examples of the two ways, compare the history of a science like physics or chemistry with the textbooks from which these sciences are taught. History reveals that these sciences worked out their various demonstrations starting from the most obvious sensible data. But when one goes to a textbook, one finds at the beginning of the book in chemistry, only the periodic table of elements from which three hundred thousand compounds are derived, or, in physics, Newton’s laws, Riemannian geometry, or those remarkable quantum operators. The reason for this difference is, of course, that inquiring, investigating, and demonstrating begin with what is obvious, while teaching begins from those concepts that can be understood without understanding other elements. [CWL 12, 61-63]
So, Lonergan orders his treatment wisely. He seeks to put analysis of the process in its right order. He begins from matters of fact; “the conspicuous recurrence of changes in plant and equipment and the concomitance of such changes with the business cycle.” He seeks to understand the principles which are first in an order. His understanding of the productive process is “such as virtually to contain in itself the answers to the rest of the questions.” “the solutions to others follow almost with no difficulty.” “the concepts and terms in which the first problem and the first solution are defined and expressed cannot be significantly changed if they are to serve to define and express the later problems and solutions.” … “it is … the interconnected questions and solutions themselves that demand both systematically formed concepts and a technical terminology that corresponds not to any concepts whatsoever but to systematic concepts.”
He places the productive process first in his ordering, and then identifies monetary flows as correlative by projection.
These differences and correlations (of the productive process of a hierarchical, advanced economy) have now to be projected into their monetary correlates to set up classes of payments. Thus a restrictive supposition is introduced into the argument. The productive process is now envisaged as occurring in an exchange economy. It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money. [CWL 15, 39]
To our knowledge, no one else considers the functional distinctions between different kinds of productive rhythms (the rhythms based upon the distinctions between basic and surplus and their order of timing) prior to, and more fundamental than, wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth … [CWL 15, Editors’ Introduction lxii]
As the reader comes to understand, the classical laws of the entire economic functioning are independent of human psychology. The classical laws are the prior and more fundamental, immanent intelligibility, or formal cause, of the process, whereas the psyche-based activities of humans – outside of the process and driving the process, as it were – constitute the external efficient cause of the process.
The scientific approach reveals a heretofore unrecognized macroeconomic mechanism, which preserves but is more fundamental than and supersedes the pricing mechanism studied in microeconomics. The pricing mechanism heretofore dominating all microeconomic and macroeconomic textbooks no longer reigns supreme. As a mechanism, the macroeconomic mechanism has general laws of its operations, and these laws supply the normative requirements for the equilibrium and for the continuity of the objective process.
What the analysis reveals is a mechanism distinct though not separable from the price mechanism which spontaneously coordinates a vast and ever shifting manifold of otherwise independent choices from demand and of decisions from supply. It is distinct from the price mechanism, for it determines the channels within which the price mechanism works. It is not separable from the price mechanism, for a channel is irrelevant when nothing flows through it. [CWL15, 17]
Lonergan identifies the adjustments of savings vs. consumption as the process proceeds through its phases in an expansion as “migrations” between strata of incomes.
Traditional theory looked to shifting interest rates to provide suitable adjustment. In the main we shall be concerned with factors that are prior to changing interest rates and more effective. … … Evidently, then, suitable migrations are a means of providing adjustments in the community’s rate of saving. To increase the rate of saving, increase the income of the rich; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used. To decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. [CWL 15, 133-134]
Lonergan’s analytic, scientific macroeconomics demonstrates that adjustment of incomes is prior to shifting interest rates and more effective than manipulation (i.e. price fixing) of interest rates.
He then demonstrates clearly how the failure to adjust savings properly to the phase-ic requirements causes a.) prices to become distorted by the imbalance of monetary flows within the channels, b.) price increases in the initial periods of a surplus expansion get misinterpreted by units of enterprise as a signal to overexpand still further, or, in the case of price decreases, as a signal to lay off employees and cause an unnecessary downward spiral, c.) the Fed to manipulate double-edged interest rates, which c.i) adjusts the rate of production to the non-normative, manipulated rate of savings rather than the rate of savings to the normative rate of production, and thus c.ii) enlivens the production functioning which it should be damping while killing the production functioning which it should be enlivening.