.2. The merits of the Diagram of Rates of Flow representing the unitary threefold process
.3. List of concomitances constituting the unitary whole
.4. Concomitances underlying the principle of equivalence in Functional Macroeconomic dynamics
.5. The phenomenology of credit and its concrete and abstract meanings
.6. The phenomenology of inflation as an imbalance of flows
Lonergan’s treatment of the intelligibility of the plane circle provides to us a clue. In the basic insight defining the plane circle, – that all radii are equal – all the interrelated concepts tumble out together in an intelligible unity. The all-together intelligibility points to a template for explanation in the macroeconomic field; it fore-casts a singular unified intelligibility of the dynamic, organic economic process. In the sweeping comprehensive act of understanding, all the abstract explanatory conjugates explaining the dynamic economic process are “yoked” together by their functional relations to one another. The interdependencies of the flows which constitutethe whole dynamic system are grasped in a solidary whole. And the patterns of the formulation are isomorphic with the patterns in the objective, unitary economic process. The principle of unity and wholeness is a single, comprehensive intelligibility.
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]
So, it is fore-cast by our clue that, in the sweeping insight into the economic process 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. All the explanatory conjugates of macroeconomic dynamics tumble out in unison, because all are needed to express adequately the single sweeping insight.
… let us divide ideally constructed processes into systematic and non-systematic. Let us define systematic processes by the already enumerated properties that, other things being equal,
- the whole of a systematic process and its every event possess but a single intelligibility that corresponds to a single insight or single set of unified insights
- any situation can be deduced from any other without an explicit consideration of intervening situations, and
- the empirical investigation of such processes is marked not only by a notable facility in ascertaining and checking abundant and significant data but also by a supreme moment when all data fall into a single perspective, (and) sweeping deductions become possible, … [CWL 3, 48/71]
The act of insight, also called the act of understanding, yields mutually-defining explanatory terms interrelated intrinsically to one another. Thus, when one is understanding by a single sweeping insight a Euclidean planar circle or a unified whole organic system of velocitous economic functions solidary with one another, all the interrelated, interdependent, explanatory terms – both the precisely analytic foundational terms and the deduced superstructure of terms explaining the process – tumble out together and cohere with one another. They “hang together” in a single, solidary, unified whole because the process itself is composed of functional flows which “hang together” in a single, solidary, unified whole. The whole set of terms and relations constituting the explanatory equations is isomorphic with the process itself. (See Understanding All in a Unified Whole)
… one should attend as carefully as possible to the term of any process of reasoning, when inquiry and discursive reasoning have ceased and the intellect comprehends many things as a unity. For it is the function of reason 1) to inquire into sensible data in order to come to know quiddities; 2) to work from quiddities that are understood separately in order to formulate general principles; 3) to proceed discursively from principles to conclusions; and 4) to argue from cause to effect. … But when reasoning has finished, the intellect begins its work and attempts to apprehend in a single intuitive grasp effects in their causes, conclusions in their principles, nd quiddities in their sensible data. And the more powerful the intellect, the more things it comprehends in fewer and more synthetic acts. (CWL 12, 629)
Every act of understanding apprehends many things as one. … No multiplicity is implied in the act of understanding itself, because it is a single intellectual apprehension of many things. No multiplicity is implied in the species by which understanding occurs, for this species is to the act of understanding as first act is to second act and therefore, since the second act is one, so also is the first act. No multiplicity is implied in the primary object, for in it many things are understood not in a multiplicity but in and through a unity. (CWL 12, 665)
… we understand many things through many words because we proceed through several acts in which we understand particular things to an understanding of several things in a unity. And yet when we have understood several things in a unity we also are wont to utter a single word, words like geometry, history, (macroeconomics) … .(CWL 12, 669)
All the terms and relations of the single insight or the single set of unified insights are coherent, for coherence basically means that all hang together from a single insight. “ … the key discovery is the interdependence of the whole.”
In the field of macroeconomics, abstract correlations in the data yield a scheme of interdependent flows concomitant with one another. The abstract terms of the explanatory dynamic pattern are implicitly defined by their functional relations. Thus, the abstract correlatives explaining the process, by their abstraction in a unification or oneness, are universal, invariant, and applicable in any instance.
Euclid and Hilbert set up a unitary basis for geometry. Newton set up a unitary basis for mechanics. Lonergan set up a unitary basis for the dynamic economic process.
Euclid’s achievement was to bring together all these scattered theorems by setting up a unitary basis that would handle all of them and a great number of others as well. … similarly, mechanics became a system with Newton. [Method, 241-42]
Lonergan’s achievement was to unify all the scattered theorems of Walrasian textbook macrostatics by setting up a unitary basis for macroeconomic dynamics; the new basis would be a dynamics; it would be an interrelation of conjugate velocities and accelerations; and it would be at an adequate level of abstraction (first and second derivatives) for a velocitous and accelerative process constituted by interdependent flows of so much or so many over an interval, i.e. flows expressed mathematically as velocities and changes of velocities – d/dt and d2/dt2.
Taking into account past and (expected) future values does not constitute the creative key transition to dynamics. Those familiar with elementary statics and dynamics (in physical mechanics) will appreciate the shift in thinking involved in passing from equilibrium analysis (of, for example, a suspended weight, a steel bridge, or a static intersection of curves)…to an analysis where attention is focused on second-order differential equations, on d2θ/dt2, d2x/dt2, d2y/dt2, on a range of related forces, central, friction, whatever. Particular boundary conditions, “past and future values” are relatively insignificant for the analysis. What is significant is the Leibnitz-Newtonian shift of context. [McShane, 1980, 127]
Insight yields “form.”
Ought there not to be introduced a technical term to denote this type of intelligibility? … The intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…What we have called the intelligibility immanent in sensible data and residing in the relations of things to one another might be named more briefly formal causality … [CWL 3, 78/101-102]
Functional Macroeconomic Dynamics, also called Macroeconomic Field theory, is a theory of the immanent intelligibility or “formal cause” of the objective economic process. It is a unified field theory explaining the system of relations of explanatory, interrelated and interdependent functionings among themselves.
… , as to the notion of cause, Newton conceived of his forces as efficient causes, and the modern mechanics drops the notion of force; it gets along perfectly well without it. It thinks in terms of a field theory, the set of relationships between n objects. The field theory is a set of intelligible relations linking what is implicitly 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. What is a mass? A mass is anything that satisfies the fundamental equations that regard masses. Consequently, when you add a new fundamental equation about mass, as Einstein did when he equated mass with energy, you get a new idea of mass. Field theory is a matter of the immanent intelligibility of the object. (CWL 10, 154)
Macroeconomics became a unitary system with Lonergan’s Functional Macroeconomic Field Dynamics.
… the key feature… is not social (e.g. class struggle), legal, or proprietarial. Even more significantly, it is not derived from prices, values, interest, profit, or wages…….It is the functional aspect of the differentiation of productive rhythms that is of systematic importance….What makes all the difference is how the purpose or function of each set of productive activities differs from that of the other. (CWL 15, Editors” Introduction lxi)
The economic process is a circulatory process of a) production of items, b) exchange of items produced, and c) finance of series and levels of production and exchange. Note in the following the phrase “functionally congruent.”
… production occurs by means of and in view of payments: expenditures that become receipts, and outlays that become income. Money intended for expenditure performs a demand function; and money intended for outlay performs a supply function. Thus, outlay and expenditure, income and receipts, all function as operative in monetary circulation, because they are each functionally congruent with distinct productive processes. [CWL 15, Editors’ Introduction lix]
Now as the statistical approach differs from the descriptive, the analytic differs from both. Out of endless classificatory possibilities it selects not the one sanctioned by ordinary speech nor again the one sanctioned by facility of measurement but the one that most rapidly yields terms which can be defined by the functional interrelations in which they stand. [CWL 21, 112]
While a few economists have noticed and struggled with particular functionings in the economic process, none has been able to discover a unified, explanatory theory and formulate a systematics of the process. Lonergan is alone in formulating and explaining the concrete economic process in terms of functionings.
Lonergan pointed out that this (functional) differentiation of economic activities … is discussed by traditional economists such as S. M. Longfield (1802-1884), John Rae (1796-1872), Nassau Senior (1790-1864), Eugen von Bohm-Bawerk (1851-1914), and in the heavily disputed “Ricardo effect.” But Lonergan credits Piero Sraffa (1898-1983) as having clarified it most thoroughly in his famous essay, “Production of Commodities by Means of Commodities” (1960). Yet even Sraffa does not use his sophisticated explanation of the “Ricardo effect” and the “roundabout” or “concertina”-like phenomena associated with it in the way Lonergan does. [CWL 15, Editors’ Introduction, lxii]
Establishment economists are stuck in the rut of wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth.
Lonergan is alone in using this difference in economic activities to specify the significant variables in his dynamic analysis… no one else considers the functional distinctions between different kinds of productive rhythms 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….only Lonergan analyzes booms and slumps in terms of how their (explanatory) velocities, accelerations, and decelerations are or are not equilibrated in relation to the events, movements, and changes in two distinct monetary circuits of production and exchange as considered both in themselves (with circulatory, sequential dependence) and in relation to each other by means of crossover payments. [CWL 15, Editors’ Introduction, lxii]
The whole structure of Functional Macroeconomic Dynamics is purely relational. It is a relativistic field theory of functional relations. A macroeconomic functioning is not a mere compilation, or tally, or aggregation of particular income statement categories, such as actual and accrued wages or interest expense. A macroeconomic functioning is implicitly defined by its abstractly correlated functional relation to other functionings. The whole structure is a unitary, purely relational intelligibility.
“Lonergan’s analysis is concrete but heuristic. It focuses on a) functional relations intrinsic to the productive process, and b) their concrete boundary valuesto reach eventually a general theory of dynamic equilibria and disequilibria.” [McShane 1980, 117]
An ‘accountant’s unity’ … 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, 26, ftnt 26]
“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; … Lonergan (identified) 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” … [CWL 15, 26-27 ftnt 27]
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. Moreover, not only did Lonergan’s terms differ, but he also indicated that these aforementioned terms (of neoclassical and Keynesian economic theory) were permeated, as were the terms of Newton’s theory of gravitation, with descriptive, non-explanatory residues. Hence, just as a mathematical equation may be said to be the most adequate expression of purely intelligible relations among explanatory terms in certain instances – for example, Einstein’s gravitational field tensor equations – something closely akin to Lonergan’s diagram seems necessary for the realm of dynamic economic functioning. 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]
Lonergan’s critique (shows that) by using the technique of implicit definition, the emphasis shifts from trying to define the relevant variables to searching heuristically for the maximum extent of interconnections and interdependence; and that the variables discovered in this way might not resemble very much the objects (or the aggregates) which, in the first instance, one was thinking about. [Gibbons, 1987]
Over and over again McShane endeavors to keep the analyst in a proper orientation by insisting that the analytical searching for explanation a) must be functional, b) regards a concrete process, and c) is heuristically oriented towards the discovery of an explanatory theory of the dynamical relations.
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]
Functional Macroeconomic Dynamics is a field theory.”
“… there is a point in the history of any science when it comes of age, when it has a determinate systematic structure to which corresponds a determinate field.”
… A science emerges when thinking in a given field moves to the level of system. Prior to Euclid there were many geometrical theorems that had been established. The most notable example is Pythagoras’ theorem on the hypotenuse of the right-angled triangle, which occurs at the end of Book 1 of Euclid’s elements. Euclid’s achievement was to bring together all these scattered theorems by setting up a unitary basis that would handle all of them and a great number of others as well. … similarly, mechanics became a system with Newton. Prior to Newton, Galileo’s law of the free fall and Kepler’s three laws of planetary motion were known. But these were isolated laws. Galileo’s prescription was that the system was to be a geometry; so there was something functioning as a system. But the system really emerged with Newton. This is what gave Newton his tremendous influence upon the enlightenment. He laid down a set of basic, definitions, and axioms, and proceeded to demonstrate and conclude from general principles and laws that had been established empirically by his predecessors. Mechanics became a science in the full sense at that point where it became an organized system. … again, a great deal of chemistry was known prior to Mendeleev. But his discovery of the periodic table selected a set of basic chemical elements and selected them in such a way that further additions could be made to the basic elements. Since that time chemistry has been one single organized subject with a basic set of elements accounting for incredibly vast numbers of compounds. In other words, there is a point in the history of any science when it comes of age, when it has a determinate systematic structure to which corresponds a determinate field.
.2. The merits of the Diagram of Rates of Flow representing the unitary threefold process
… it will be well at once to draw attention to J.A. Schumpeter’s insistence on the merits of the diagram as a tool. (Schumpeter, History 240-43, on the Cantillon-Quesnay tableau.) … [CWL 15, mix of 53-54 and 179]
First, there is the tremendous simplification it effects. From millions of exchanges one advances to precise aggregates, relatively few in number, and hence easy to follow up and handle. … Next come the possibilities of advancing to numerical theory. In this respect, despite profound differences in their respective achievements, the contemporary work of Leontieff may be viewed as a revival of Francois Quesnay’s tableau economique. Most important is the fact that this procedure was the first to make explicit the concept of economic equilibrium. All science begins from particular correlations, but the key discovery is the interdependence of the whole. … While it is true that a tableau or diagram cannot establish the uniqueness of a system or rigorously ground its universal relevance, it remains that the diagram (of the interconnections of a few precise aggregates) has compensating features that Quesnay’s system of simultaneous equations may imply but does not manifest. … There is the tremendous simplification (a diagram) effects. … The aims and limitations of macroeconomics make the use of a diagram particularly helpful, … For its basic terms are defined by their functional relations. The maintaining of a standard of living (distinct process 1) is attributed to a basic process, 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 (distinct process 3) are concentrated in a redistributive function, whence may be derived changes in the stock of money 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, mix of 53-54 and 179]
The concomitance or intelligible linked-togetherness of Lonergan’s abstract explanatory conjugates in equations whose patterns are isomorphic with the patterns of the economic process constitutes the unitary basis of a unified systematic whole.
.3. List of concomitances, interdependencies, and interconnections forming the unitary whole
Our theme is unity and unification. Correlative terms tumble out in unison in the single sweeping insight that understands the entire, unified, dynamic, economic process. Except for a possible addition of a channel from the Central Bank up into the Redistributive Function to represent expansion and contraction of the money supply correlated with expansion or reduction of transactions, the process is represented or modeled as a closed unitary circulatory system in the Diagram of Rates of Flow.
- .1. Outlays with Expenditures [CWL 15, 144]
- .2. Incomes between and with Outlays and Expenditures [CWL 15, 144]
- .3. Basic and Surplus Incomes as the adjustment of the rates of each to the total incomes required in the current phase of the pure cycle [CWL 15, 144]
- .4. Concomitant variation of two crossovers as the condition of equilibrium
- .5. Proportionate concomitant flows of products and money payments to avoid inflation and deflation
- .6. Magnitude and velocities of productive turnovers concomitant with magnitudes and velocities of payments
- .7. Normative requirement of the balance of concomitant government spending and taxes (in both circuits)
References to pages containing numbered list above
.1. Outlays with Expenditures [CWL 15, 144]
.2. Incomes between Outlays and Expenditures [CWL 15, 144]
.3. Basic and Surplus Incomes as the adjustment of the rates or each to the total incomes in the current phase of the pure cycle [CWL 15, 144]
[CWL 15, 144] A condition of circuit acceleration was seen in Section 15 to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]
.4. Concomitant variation of two crossovers as the condition of equilibrium
Let G represent the crossover difference in favor of basic demand, so that
G = c”O” – i’O”
and the condition of equilibrium will be
G = 0 (CWL 15, 49-50)
[CWL 15, 175] Need the moral be repeated? There exist two circuits, each with its own final market. The equilibrium of the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay. But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. That is the essence of dynamic disequilibrium. [CWL 15, 175]
Implicit in the condition of dynamic equilibrium, G = c”O” – i’O’ = 0 (CWL 15, 49-50), is that the crossovers balance, that is, that incomes, I”, saved for investment and incomes , I’, for consumption vary concomitantly according to the requirements of the phase of the pure cycle of expansion.
… the acceleration of the productive process, if it is to succeed and not be destroyed by circulation maladjustments, postulates that in a proportionate expansion the rate of saving be constant, that in a surplus expansion it increase, that in a basic expansion it decrease. The implications of this postulate will concern us in subsequent sections on the cycle of basic income, the cycle of pure surplus income, and the cycle of price spreads. (CWL 15, 133)
(CWL 15, 131) Not only is it true that this second type of price variation is different from the first, but also one must give it a different kind of attention. When prices rise because of real scarcity, one may speak of a requirement for variation in E’ and E” over and above the variation postulated by dQ’/Q’ and dQ”/Q”. But when prices rise or fall because the distribution of income has not anticipated these requirements correctly, then price variation is not a postulate for variation in E’ and E” but rather a spontaneous effort at adjusting what should already have been adjusted. (CWL 15, 131)
With G at zero, positive or negative transfers to basic demand (D’ – s’I’) and consequent similar transfers to surplus demand (D” – s”I”) belong to the theory of booms and slumps. They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds). The immediate effect is on price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy. [CWL 15, 64]
The central adjustment is variation in the rate of saving. This rate may be defined, conveniently for present purposes, as the ratio of surplus income to total income. Assuming that the rate of saving will not differ appreciably because income is derived from basic or surplus outlay, we may denote this rate by the symbol w, so that
w = I”/I’ + I” (CWL 15, 131-32)
.5. Proportionate flows of products and money payments to avoid inflation and deflation
.It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy. To this endwe compare two flows of the circulation: the real flow of property, goods, and services, and t he dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)
Add to the immediately-above quote. Search
The excellence of the exchange solution becomes even more evident when contrasted with the defects of a bureaucratic solution. The bureaucrat … (gives the people) what he thinks is good for them, and he gives it in the measure he finds possible or convenient; nor can he do other wise, for the brains of a bureaucrat are not equal to the task of thinking of everything; only the brains of all men together can even approximate to that. … when a limited liability company has served its day, it goes to bankruptcy court; but when bureaucrats take over power, they intend to stay. … when the pressure of terrorism is needed to oil the wheels of enterprise, then the immediate effect is either an explosion or else servile degeneracy. … the exchange solution is a dynamic equilibrium resting on the equilibria of markets. … every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. The generality of this equilibrium makes it indifferent to endless complexity and endless change; for it stands on a level above all particular products and all particular modes of production. While these multiply and vary indefinitely, the general equilibrium of the exchange process continues to answer with precision the complex question, Who, among millions of persons, does what, among millions of tasks, in return for which, among millions of rewards? Nor is the dynamic solution unaccompanied by a continuous stimulus to better efforts and more delicate ingenuity. For the uniformity of prices means that the least efficient of those actually producing will at least subsist, while every step above the minimum efficiency yields a proportionately greater return. (CWL 21, 34-35)
.6. Magnitude and velocities of productive turnovers with magnitudes and velocities of payments
(CWL 15, 58-59) In every unit of enterprise there is some determinate turnover magnitude and turnover frequency. The magnitude of the turnover depends upon the number of items handled at once and the selling price of each item. The frequency of turnover depends upon the period of production plus any time lag involved in sales and collection. In general, each unit of enterprise first estimates demand, which determines both rate of payments received and rate of supply; in the second place, it estimates turnover frequency from its conditions of production and of sale and, caeteris paribus, selects a more rapid rather than a less rapid frequency; in the third place, it finds its turnover magnitude determined by the other two factors. The estimate of demand comes first, because there is no use producing without selling. The estimate of frequency comes second, because a more rapid frequency is, in the main, an advantage but one can never have as rapid a frequency as one pleases. Finally, turnover magnitude is left to be determined by the other two factors, because turnover magnitude is the easiest to control of the three. (CWL 15, 58-59)
.7. Normative requirement of the balance of government spending and taxes (in both circuits)
[CWL 15, 85-86] … Once the possibility of an unbalanced budget is established, the precedent can be invoked to persuade politicians to carry on other wars: wars on illiteracy, on poverty, on ill health, on unemployment, on insecurity. Where the profit motive does not prove efficacious, the state must intervene. … the increasing volume of transactions requires a larger money supply, and the central bank can be persuaded to meet the demand. … it appears to be less evident that a vicious circle of ever more demands for a larger money supply with no increase in real income is inflationary … In any case there has emerged in fact if not in name the welfare state.
Banks are not there to “force their money upon people,”4 nor “do they congratulate themselves if they are loaned up.”5 A banking committee is not “an automaton” but understanding and attentive to purpose and situation, “ judging chances of success of each purpose and, as means to this end, the kind of man the borrower is, watching him as he proceeds …”6 “It should be observed how important it is for the system of which we are trying to construct a model, that the banker should know, and be able to judge, what his credit is for and that he should be an independent agent. To realize this is to understand what banking means.”7 “the banker’s function is essentially a critical, checking, admonitory one. Alike in this respect to economists, bankers are worth their salt only if they make themselves thoroughly unpopular with governments, politicians and the public. This does not matter in times of intact capitalism. In the times of decadent capitalism, this piece of machinery is likely to be put out of gear by legislation.”8 McShane, Philip (quoting Joseph Schumpeter’s Business Cycles I and II) Implementing Lonergan’s Economics, in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University, pp. 196-204
.8. The system’s spontaneous attempt to correct distortive imbalances among flows
(CWL 15, 131) There would be, for instance, a radical maladjustment between circuit and productive acceleration if, when surplus rates of production were increasing more rapidly than basic, basic rates of income were increasing more rapidly than surplus. Then interval after interval, an increasingly excessive amount of monetary income would be moving to the basic final market, and there would follow a rise in prices quite different in kind from the normal rise resulting from increasing scarcity. Such a rise would not be an ordinary scarcity but at once a consequence and, as will appear, a corrective of disproportion between monetary and real consumer income. ¶ Not only is it true that this second type of price variation is different from the first, but also one must give it a different kind of attention. When prices rise because of real scarcity, one may speak of a requirement for variation in E’ and E” over and above the variation postulated by dQ’/Q’ and dQ”/Q”. But when prices rise or fall because the distribution of income has not anticipated these requirements correctly, then price variation is not a postulate for variation in E’ and E” but rather a spontaneous effort at adjusting what should already have been adjusted. Accordingly, such adjustment variations in prices will be ignored for the moment to be considered more in detail in the next section (entitled The Cycle of Basic Income).
.4. The principle of concomitance and the principle of equivalence in the unity of the unified system
.a. The principle of concomitance in Lonergan’s Macroeconomic field theory
In the production process, Outlays by units of enterprise are Incomes to productive people; and in the vending events, Expenditures by buyers are Receipts by units of enterprise.
Though in the temporality of the basic (point-to-point) production-and-sale process, O’ = I’, which goes to E’ = R’, which then circles back around to O’= I’, … constitutes a circulation which takes more or less time; the flows constitute, by “the principle of concomitance” or linkedness, a unified whole basic circulation. Outlays are identified and unified with Incomes as two concomitant reverse and obverse aspects of transactions in production. The four aspects, O’, I’, E’, R’, of the two types of transactions (basic and surplus) of basic production and sale together constitute a unified circulation. Each monetary event is a condition of its successor; and each successor is the fulfillment of its conditioning predecessor.
All payments are made by people to people, whether as unemployed individuals, productive workers in a unit of enterprise, entrepreneurs or rentiers, or workers providing government services. Only people – as individuals or in the person of a unit of enterprise – have bank accounts, whether personally, or indirectly and virtually as compensated participants in an organization. Ice cream does not have a bank account. Payment by Smith for ice cream is a final payment to the Mrs. Jones Ice Cream Parlor, which has finally assumed the previous initial payments to humans producing cream, flavors, cones, scoops, prior in the ice-cream supply chain. We don’t make payments to ice cream itself; ultimately we pay all the people in the chain of supply of ice cream. Ice cream does not have a bank account.
One may ask, Do not the utterances “concomitance” and “ the economic process always is the current process” signify simultaneity with respect to quantity and time? The answer is No, that’s what banking and credit are for. And that’s what gives credit a theoretical meaning as well as the common everyday meaning of a “loan.”
In his analysis Lonergan employs the method of implicit definition exemplified by Hilbert’s geometry and modern field theory. (parentheses are ours)
On this (methodological) model (i.e. implicit definition), circulation analysis raises a large superstructure of terms and theorems upon a summary classification and a few brief analyses of typical phenomena. Classes of payments quickly become rates (velocities d/dt) of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal conditioning there is added the external conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted by productive rhythms of goods and services………There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns…CWL 15, 18
The frame of reference thus represents a system of flows; i.e. a structure of interrelated or interdependent flows. The monetary flows are clearly recognized and defined; and these determinate and measurable flows themselves may be called channelings; and their paths may be conceptualized as channels or pipes boundaried by their implicit equation. As a set of interdependent, interconnected, interacting parts this structure of flows can be conceived as a mechanism. This frame of reference represents the dynamic functional relationships of the macroeconomy.
Further, from normativity, divergences automatically bring about correctives. The stress of the divergence by A is identically a dynamic strain on B. B “seeks” to restore the normative reciprocity and concomitance.
A condition of circuit acceleration was seen in Section 15 to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]
Potentiality and actual achievement:
… the term “productive process” is to be used broadly. … it is the totality of activities bridging the gap between the potentialities of nature, whether physical, chemical, vegetable, animal, or human nature, and, on the other hand, the actuality of a standard of living. … in every case there is one effect: the potentialities of nature become a standard of living. And in every case this effect is attained in the same way: it is attained not once and for all but only in a continuous succession of activities, by a rhythmic repetition of constant or mobile routines, by a process. ¶ The productive process is, then, the aggregate of activities proceeding from the potentialities of nature and terminating in a standard of living. Always it is the current process. (CWL 15, 19-20)
A brief exploration of this complexity (of both Outlays and both Incomes becoming bigger in the next interval) leads to the introduction of the notion of the monetary function. Thus the argument takes a further step towards defining a circulation of money……..not a rotational movement…….Rather a circular series of relationships of dependence of some flows of payments on other flows. Money moves only at the instant of payment or transfer. Most of the time it is quiescent. … it may also be dynamically quiescent, and then it is held in reserve for some definite purpose. … Money held in reserve for a defined purpose will be said to be in a monetary function. Five such functions are distinguished: basic demand, basic supply, surplus demand, surplus supply, and a fifth redistributive function. (CWL 15, 48)
The productive process is a process.
… the productive process is a purely dynamic entity. We began by saying how broadly the term was to be taken. But it is also necessary to insist how narrowly. It is not wealth, but wealth in process. … It is none of its own effects, if by effects are understood what has been completed. It is neither the existence nor the use of durable consumer goods, of clothing, houses, furnishings, domestic utensils, personal belongings, or indeed any item of private or public property that can be listed as a consumer good and has passed beyond the process to become an element of the community’s standard of living. On the other hand, with regard to producer goods a distinction has to be drawn: they are in the process as a means of production; they are in the process in the sense that labor is in the process or that management is in the process, namely, their use forms part of the process; but once they are completed they are no longer under process, any more than labor or management is under process and being produced. … factories and machinery, railways and power units, warehouses and offices are in the productive process only while being produced; once they are produced, they themselves have passed beyond the process to enter the category of static wealth, even though their use remains a factor of production. (CWL 15, 21-22)
In Einstein’s general relativity, then, the concept of a (Newtonian) gravitational field is replaced by a curved spacetime within which all things move without acceleration, locally always obeying the laws of special relativity. It is really a beautiful concept. It is not merely a reformulation of Newton’s gravitational theory. … Any change in the gravitational field, say, by a redistribution of matter or the collapse of a great mass, must result in the reshaping of spacetime. It does not reshape instantaneously, however, rather a disturbance in spacetime moves outward with the speed of light as a gravitational wave. [Serway 1986, 905]
D’Inverno points out re Einstein’s general relativity that a) the curvature of geometry in non-Euclidean spacetime is determined by the distribution of matter, b) conversely, the geometry reveals the distribution of matter, and c) thus, they are mutually revealing and mutually formulating. They constitute a particular type of identity and mutual definition, and a reciprocity of space-time geometry and space-time motion.
The field equations consist of ten equations connecting twenty quantities, namely, the ten components of gab and the ten components of Tab. Hence, from this point of view, the field equations are to be viewed as constraints on the simultaneous choice of gab and Tab. [d’Inverno, 1992, 169]
- Metric tensor gab Matter distribution
- 4-D spacetime
- The field equations are differential equations for determining the metric tensor gab from a given energy-momentum tensor Tab. Here we are reading the equations from right to left. … one specifies a matter distribution and then solves the equations to ascertain the resulting geometry.
- The (ten) field equations (connecting 20 quantities) are equations from which the energy-momentum tensor can be read off corresponding to a given metric tensor gab. Here we are reading the equations from left to right.
- The field equations consist of ten equations connecting twenty quantities, namely, the ten components of gab and the ten components of Tab. Hence, from this point of view, the field equations are to be viewed as constraints on the simultaneous choice of gab and Tab. This approach is used when one can partly specify the geometry and the energy-momentum tensor from physical considerations and then the equations are used to try and determine both quantities completely. [d’Inverno, 1992, 169]
Somewhat similarly in Macroeconomic Field Theory, 1) abstract correlations of flows in the measured data implicitly determine and define the correlatives, 2) P’Q’ implicitly contains, defines, is correlative to, and satisfies the principle of concomitance in its equality with (p’a’Q’ + p”a”Q”), and 3) constitutes one aspect of the purely relative explanation of the dynamic economic process by the functional relations of the explanatory conjugates among themselves.
Implicitly, normatively contained in Lonergan’s double-circuited, credit-centered Model of Rates of Flow are the principle of concomitance, implicit definition, and interconnected ubitary functionings (productive and monetary) among themselves.
.b. The principle of equivalence in Einstein’s general theory
.5. The phenomenon of credit; its concrete and abstract meanings
The utterance “credit” can indicate a concrete loan or it can denote an abstract explanatory conjugate or as an abstract explanatory conjugate. Credit may represent abstractly that explanatory formal element which fills the gap in time between payments made and payments to be received; e.g. the Outlays paid as Incomes and the Expenditures to be received from workers. Credit denotes the intelligible term which bridges the gap in time within the intelligible lagged aspects of the serial circulation. In the abstract explanatory theory, it is credit which fills the concrete gap in time and abstractly represents the departure from instantaneity that one may glean in the principle of concomitance in the dynamic process.
- An auto manufacturer borrows from himself or an outside lender to finance the production of a car.
- The purchaser of the auto pays off the manufacturer by renting payment money from the installment lender; i.e. the purchaser constructively takes over, or “assumes”, the manufacturer’s obligation.
- The purchaser pays down the loan with income earned as he uses the car. He makes periodic loan payments and, thus, reduces part of the total price of the collateral.
- Most loans are installment loans, whether they be for depreciating plant, depreciating equipment, or depreciating automobile. They are sound if they are paid back in full or not sound if they are not paid back in full or defaulted on.
- Corporate or personal “profit” on a factory or equipment project is simply pure surplus income, the amount over and above what is needed for repair and maintenance so it can be used for continuous productive operation.
The economic process always is the current unitary process of production and exchange, yet, comprising that “current-cy” is the combination of payments to be followed by Receipts. Within the current process there are lags in payments which must be covered by current credit. Credit is that current phantom which fills the gap in time.
Now it might be thought that this distinction between turnover magnitude and turnover frequency was valid in such discontinuous production as shipbuilding but broke down as production approximated to continuity. It happens, however, that while production may approximate to continuity, sales do not, and that the period relevant to turnover frequency is not simply the production period but the period of production and sales. The perfect example of productive continuity is the supply of electric power, in which the generation, the distribution, and the consumption of the product are practically simultaneous. However a power company cannot collect payments due as rapidly as it can supply the electric impulses. While conditions of production do not limit the frequency of its turnovers, conditions of collection provide a very palpable limit. A power company might decide to receive smaller payments more frequently, but then it would have to hire more men to read meters and a larger office staff to send out bills; further, this greater cost of collection would not yield a higher turnover frequency unless people responded and paid their bills at shorter intervals. ¶ Similarly, in every unit of enterprise there is some determinate turnover magnitude and turnover frequency. (CWL 15, 58)
.6. The phenomenology of inflation:
Within the overall dynamic functioning of the unitary economic process there may occur inflation and deflation; both phenomena have winners and losers; in both cases there occurs a swindle. Ideally,
… the dummy (money) must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services. The alternative to constant value in the dummy is the alternative of inflation and deflation. Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]
Inflation works its way in both operative circuits, in the Redistribution Function, and through all income brackets.
The purpose of this section is to inquire into the manner in which the rate of saving W is adjusted to the phases of the pure cycle of the productive process. Traditional theory looked to (manipulating) 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. ¶The simplest manner of attaining a fairly adequate concept of basic income is to divide the economic community into an extremely large number of groups of practically equal income. … In any group i let there be at any given time ni members; let each member receive an aggregate (basic and surplus) income yi per interval, so that the whole group receives niyi; finally, let us say that the group directs the fraction wi of its total income to the basic demand function, so that basic income per interval is given by the equation
I’ = Σwiniyi
… and so one obtains for the increment per interval of basic income the simpler equation
δI’ = Σ (wiδni + niδwi)yi Ftnt 189
where ni includes the adjustment due to migration. We shall consider in turn variations in basic income in virtue of δni and variations in virtue of δwi . … Hence, in migrations from low to less-low income groups, most of the increment of individual total income becomes an increment of basic income; but in migrations from high to still higher income groups, most of the increment of individual total income becomes an increment of surplus income. 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. …(and) this fundamental mode of adjustment is complemented by a further mechanism of automatic correction. (price changes) (CWL 15, 133-134)
For the full context of a) rising and falling prices, b) falling and rising purchasing power, c) the shift of the burden of changing prices, and the ineptitude of manipulating interest rates, please read in its entirety Section 26, “The Cycle of Basic Income”, in CWL 15, 133-144.