Dr. Ivo Coelho – A New Science of Economics?

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A New Science of Economics? Bernard Lonergan’s Proposal by Dr. Ivo Coelho, Philosopher, Priest and Rector of Ratisbonne Monastery, Jerusalem

Bernard Lonergan’s economic theory has been described as “one of the great overlooked intellectual discoveries of the twentieth century.”[1] This is partly because Lonergan was a theologian by profession, and his output consisted mainly in the areas of philosophy and theology (his great works are Insight: A Study of Human Understanding, and Method in Theology), but also because the two essays he produced as the fruit of fourteen years of sustained work (“For a New Political Economy” [1942] and “An Essay in Circulation Analysis” [1944]) remained unpublished during his lifetime.[2] The ‘new’ in the title of the essay of 1942 might be explained by Lonergan’s conviction that economic theory has not yet broken through to the status of a true science. But it also indicates the fact that Lonergan’s analysis is dynamic from the start – something that might be seen in the title of the second essay. Joseph Schumpeter had remarked on the static nature of current economic analysis, and had called for its replacement by a system of general economic dynamics into which statics would enter as a special case. Schumpeter’s own theory began with a static analysis into which he subsequently introduced the ‘destabilizing’ effect of entrepreneurial activity. Lonergan, instead, focuses immediately on the activity of production, particularly in its occurrence on the massive scale associated with economic cycles, revolutions and surges, and so his analysis is precisely a system of general economic dynamics into which statics enters as a special case.

The central distinction governing the whole of Lonergan’s economic analysis is that between two flows of goods, basic and surplus. The basic flow or circuit is concerned with the production of goods and services that enter directly into the standard of living. The surplus flow or circuit is concerned instead with the production of the means of production. Corresponding to these are two flows in the exchange process. The distinction between basic and surplus circuits is not original to Lonergan, being found also in people like François Quesnay, Joseph Schumpeter, Karl Marx, Michael Kalecki and Christopher Dawson. The problem is that in these economists the distinction tends to be a nominal one: producer and consumer goods are not considered as dynamic flows or circuits; the distinction does not enter into the counting of transactions or the calculation of the GNP and GDP; or else the true focus tends to be on the pricing mechanism rather than the production process. Lonergan, in keeping with his aim of shifting economics to the status of a true science, makes the distinction fundamental, and ensures that all the significant terms and relations of his analysis flow from this distinction.

To the distinction between the two flows, Lonergan adds a considering of widening and deepening. Widening is the increase in the number or size of units of production. Deepening is the increase in the efficiency of existing units of production; it reduces labour, increases leisure, and makes cultural development possible. Widening is subject to the law of diminishing returns, because with more units of production, more resources are needed for maintenance and replacement. Deepening instead leads to increasing returns. By means of the shifting relationship between the basic and surplus circuits, Lonergan distinguishes four phases of the ‘pure cycle’ or ideal line of development of the economic set-up: the static, the capitalist, the materialist, and the cultural. The capitalist phase is one of deepening: there is an expansion on the surplus level, but the basic level remains constant. The materialist phase is one of widening: the surplus level remains constant but there is an expansion on the basic level. The cultural phase is at this point the same as the materialist phase. The static phase, naturally, is one in which there is neither surplus nor basic expansion.

An example might help. In a food-gathering economy, there is a routine of seeking edible fruits and vegetables, eating them where they are found, and moving on when the supply is exhausted. Other things being equal, each year is much the same as the last. This is the static phase. If, however, a member invents the idea of a basket for gathering food, and if the tribe adopts the idea, a new phase begins. Now time and resources have to be set aside for making baskets. Food requirements, however, remain the same; and as long as the baskets are being made, there is no increase in supply of food. This is the surplus or capitalist phase. When the baskets are ready and put to use, the production of baskets slows down. Now the gathering of food takes less time, and more food can be gathered. This is the basic or materialist phase. With more time on their hands, the tribe may begin using baskets for ornamental or religious purposes; this is the cultural phase. Eventually the new production routines will set in, together with a higher standard of living, thus bringing in a new static phase.

Besides the production process, of course, there is the exchange process, and here the invention of money as a medium of exchange makes possible a massive expansion of the economy. Since Lonergan believes that production is primary, it obviously follows that the exchange economy must adapt to the phases of production rather than the other way round. As for the instruments of finance – banks, taxes, stock markets, second-hand trade – these are needed to move money where it is needed. Since these are not themselves production but merely change in ownership, Lonergan refers to them as redistributive exchange. A point to be specially noted, however, is what Lonergan calls pure surplus income. There is a profit that is merely an excess of selling price over cost price; it is registered merely because cost price does not include the seller’s private cost of living. There is, instead, another kind of profit that is an excess over and above the cost of living, taxes, charities, maintenance and replacement: this is pure surplus income. Such a pure surplus occurs only during a surplus expansion, and it is meant not for the private pockets of the entrepreneur, but rather to be invested so as to keep the surplus expansion going.

Let’s have a look now at the way Lonergan explains exchange in the different phases. In a stationary economy, what is income for sellers is expenditure for buyers. Part of basic income goes in wages, buying raw materials, etc.; part has to be set aside for surplus expenditure, and so crosses over to the surplus circuit. On the surplus level itself, part of the surplus income goes in wages, raw materials, etc., and so crosses over to the basic circuit, and part goes in surplus expenditure. One of the key elements in Lonergan’s theory is that the crossover flows between basic and surplus circuits have to balance. If, for example, the crossover from basic to surplus is greater than the crossover from surplus to basic, the basic circuit would be deprived of money, and the standard of living would eventually be lowered. In contrast to mainstream equilibrium analysis that focuses on monetary equilibrium and ignores production rhythms, Lonergan holds that money must adjust to production rhythms. And the balancing is not automatic, but rather something that requires intelligent interventions based on an understanding of crossover flows. There are, therefore, no iron laws of economics that function regardless of human factors. Lonergan’s entire thrust is towards active and intelligent control of economic flows; and it should have become evident that such control is vitally related to and dependent on adequate economic theory.

In a static economy, all available funds are used to maintain the current standard of living. For real economic growth, however, a significant infusion of new funds is needed. This means that mechanisms of credit are needed. The introduction of new funds into the surplus circuit leads to an increase in production and therefore in income. In the pure case, there will be surplus income. Pure surplus income, however, is not to be prematurely sent to the basic circuit; it must be reinvested. The slogan here is ‘thrift and enterprise.’ Lonergan does not hesitate to speak of an anti-egalitarian distribution of income during the surplus expansion: “To increase the rate of saving, increase the income of the rich. To decrease the rate of saving, increase the income of the poor. [This] is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle.”[3] Thus, some combination of new credit and reinvestment makes surplus expansion possible. In time, the surplus expansion slows down. The benefit of new producer goods is felt in the basic circuit, leading to increased production of consumer goods and services. Now comes the time to allow money to flow into the basic circuit, and here Lonergan speaks of an egalitarian shift in the distribution of income. The slogan here is benevolence. The two crossovers are balanced, since money from the basic circuit goes to the surplus circuit to buy the new producer goods, while higher wages and incomes in the surplus circuit flow down to the basic circuit. The overall standard of living improves, till eventually there is a new static phase.

What we have been describing is, however, the ideal case. In point of fact, the surplus expansion can be misread in several ways, giving rise to what has been called the ‘trade cycle’ with its booms and slumps. First, increased activity on the surplus level can lead to increased consumer income and to a tendency to spend on the basic level; but if the surplus expansion has not yet had an effect on the basic circuit, the amount of basic goods has not yet increased, and the result is inflation: more money available for the same amount of goods. To meet this inflation, workers and unions demand higher salaries, and there is a wage spiral. Instead of funds feeding the surplus expansion, the surplus circuit is drained, and the expansion is cut off prematurely. The boom becomes a bust. Second, governments and central banks can respond to inflation by raising interest rates. But this is too blunt an instrument: while it dampens consumer inflation, it also makes borrowing difficult, and so cuts off money from the surplus expansion. Once again the boom becomes a bust. The slowing down of the surplus expansion and the moment of the basic expansion can also be misread. On the capitalist mantra of maximization of profit, the slowdown of pure surplus income is worrisome. The reaction by large enterprises is to mop up whatever little surplus income is available, while smaller enterprises are either swallowed up or close down. The basic expansion does not take off, and the overall standard of living does not improve and even comes down. Here governments can intervene either by maintaining a favourable balance of trade, or by deficit financing. Lonergan is against both: the former either cancels itself out or else leads to a debt crisis; the latter tends to work in favour of the rich, because government tends to replay bonds and their interest by taxing the majority.

The trade cycle, as we can imagine, is not inevitable. Lonergan’s solution is to recognize and respect the rhythms of the economy, which means an anti-egalitarian distribution of income, together with thrift and enterprise, during the surplus expansion, and benevolence and an egalitarian shift during the basic expansion. To violate the organic interconnection of the economy is to smash the organism. Full understanding of economic concomitance instead leads to stability and economic well-being. In professional cricket, for example, the players make the concrete decisions, the managers give advice regarding strategy and tactics, and the Cricket Boards make and enforce the rules but do not interfere with the playing of the game. In some such way, the players in an economy make the everyday decisions, the practical economist gives advice, and the government, far from intervening in the running of the economy, evolves political consensus, sets the ground rules, and enforces them. While this might at first blush appear to be the laissez-faire policy of savage capitalism, it is instead a unique blend of economics and ethics, with the ethical requirements flowing from a careful understanding of the economy, and controls being placed, not in the hands of the government or the bureaucracy, not even in the hands solely of a small entrepreneurial class, but in those of the people at large. Obviously this calls for a massive task of education.

The key point is to convince the economic establishment to make a shift from regarding the exchange process as primary (see, for instance, the almost total concentration on GDP and GNP, and the attempt to inflation by means of interest rates) to regarding the production process as primary, and to recognize within the production process a distinction of two flows, basic and surplus. Once this has become generally recognized, we might begin to see that there are phases in the production process; that these phases call for certain types of decisions; and that thus we might be able to avoid the familiar booms and slumps of the trade process.

Lonergan is proposing, then, a new science of economics, where economics itself is recognized as being the human science that it is. This means that human intelligence and decision are vitally important elements in economic analysis. It also means that economics is subsumed into ethics in such a way that it maintains a true autonomy as a science while at the same time recognizing and accepting that there is something higher, whether this be called dharma or the human good. Accumulating wealth is not the general motive of production, nor is material progress a value in itself. The aim is that reduction of labour and increase of leisure that makes possible the overall development of the human being, and indeed, of all human beings together. The following quote from Lonergan might be an indication of the radicality of his economic proposal:

Nor is it impossible that further developments in science should make small units self-sufficient on an ultramodern standard of living to eliminate commerce and industry, to transform agriculture into a super-chemistry, to clear away finance and even money, to make economic solidarity a memory, and power over nature the only difference between high civilization and primitive gardening.[4]

Being no economist, I cannot claim any in-depth understanding of Lonergan’s economics; but I can certainly feel its fascination. Good ideas are ignored by humanity at its own peril, and here, I think, is not merely a good idea but one that has been worked out in fine detail, as even a cursory glance at the two volumes of the Collected Works will reveal. It is one that deserves to be looked at, and this little article will, hopefully, contribute to increasing that probability.

 

[1]Michael Shute, Lonergan’s Discovery of the Science of Economics (Toronto: University of Toronto Press, 2010) xii.
[2]See volumes 21 and 15 of the Collected Works of Bernard Lonergan (University of Toronto Press, 1998 and 1999).
[3]Collected Works of Bernard Lonergan 21:286-7.
[4]Collected Works of Bernard Lonergan 21:20.

 Also check out other articles by Dr. Ivo Coelho in Live Encounters Magazine

 

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