Circulation Analysis

Our philosophy group does not meet his week so I thought I would attempt an outline of Lonergan’s Circulation Analysis for those unable to plough through his two volumes. He refers somewhere to a pons asinorum, and this is it.
There is a moment when a study becomes a science. The details are left behind and some concise relation henceforth covers the details. For Theology it was Philip the Chancellor’s distinction between natural and supernatural (1230). For Physics it was Newton’s F=MA. For Chemistry it was Mendeleev’s Table. For Biology it appears to have been Darwin. For Psychology it may well be Fr Robert Doran’s work on the fruitful tension between psyche and intentionality. For Philosophy it is Lonergan’s making objective the dimensions of subjectivity. In Economics it is Lonergan’s claim that ‘the crossovers must equal’.
Lonergan reckons that his work makes Economics a science. He was a bellicose young man quite likely to bop you on the nose for no good reason if you lived in Buckingham, Canada before he joined the Jesuit novitiate. His Economics arose as an occupation during the war, 1943, 1944 holiday occupations. I think his Economics was his ‘war effort’, his contribution to the future. He would far have preferred to have been machine gunning his way round Monte Casino.
If he made Economics a science in the 1940’s, he did not stay with it. He got busy with Verbum, Insight, Method and his three collections. From the Third Collection we learn that in Economics, moral precepts should be technically specific. I suppose it is the genius of the Church to be technically specific in getting you to arrive at Mass on Sunday before the Gospel if you are to fulfil the Obligation. The Pons Asinorum has to set out the basic footfalls for getting to Heaven!
In 1943 Lonergan was 39, a mature man. He had passed through the Great Depression, aware of the misery it caused but also aware of false solutions, Socialism, Communism Nazism. A Major Douglas had arisen in Canada – his party still exists, no wonder – who proposed that the State should pay everyone for being a citizen. Lonergan’s father had been a hard working map maker. The idea of income for free was repellent to him. At the end of his Economics he laments that moneys meant to go for improving the lot of all should go on welfare. He is not soft.
In England a sort of genius John Maynard Keynes had arisen. In the seventeenth century his family had produced recusant priests. He was that paradox that can arise in England, an Etonian, a scholar, but of the professional classes. He was wonderfully free therefore, echoing in a way Bertrand Russell who was definitely upper crust and therefore free to be a conscientious objector in World War One. So Keynes wrote after Versailles on The Economic Consequences of the Peace. He was a great essayist. He wrote a book on probability which it was said only he understood and then only sometimes. Luminous with intelligence, he was concerned for the here and now – ‘In the long term we are all dead’ he wrote. Economics in Cambridge had been expounded by Alfred Marshall and then by Pigou who was concerned with welfare. I think one could say the Cambridge school was in favour of competition and reluctant to admit the State too much into economic affairs. The General Slump though led Keynes to write his General Theory in 1936. It advocated deficit spending to heal unemployment. Keynes went on to prove his competence by running the war at 3% and playing a part afterwards in the Marshall Plan and the World Bank. Keynes died in 1948 I think and has subsequently been accepted as the economic architect of our modern world.
In opposing Keynes, who was Lonergan? A scholastic type who had read Schumpeter on Trade Cycles and who played Bridge well. The fact that Lonergan was a scholastic helped him to identify the world of economics and produce a more subtle theory of things, so that, with understanding developing the economic world could retain its freedom. He saw Keynes as putting man’s freedom in the hands of ‘experts’.
He identifies the economic world as the world of money and markets where goods exchange for a price. The world of fruit gatherers was pre-economic and there might possibly be a post-economic world where gadgets which repair themselves meet all our needs. He identifies the end, the purpose of economic life as the sale of goods and services to the consumer. To explain the world of booms and slumps he has a joker in the pack, technical progress, which allows the amount of goods and services to increase and so, if all goes well, the standard of living to increase. He distinguishes long lasting assets like houses from goods currently produced. His analysis essentially deals with what is currently produced, including new houses sold this year.
The result of his analysis is that the boom happens because new equipment is being produced to raise the level of output. The whole economy is stretched and people are employed and prices are high. The slump time comes because the new capital gets in place and output can increase but at present prices, output cannot be afforded by many households. The paradox is that, if understood, the time of slump could be a time of unprecedented prosperity.
Lonergan has a technical expression to explain his key position, which is essentially very simple: ‘the crossovers must equal’. He means that households must be able to purchase the goods and services produced by firms and firms must be able to cover their costs paying wages and dividends to households. In our current situation the problem to be understood is not so much the sub-prime loan but the sub-prime household. The sub-prime household is buying things which are available on the market but at prices it cannot afford. There comes a point where the debt cannot be maintained.
In distinguishing the movement of goods and services as they are worked up from raw materials from the financial flows where ‘the crossovers must equal’, Lonergan has done for Economics what Hervey did for Biology when he identified the circulation of blood.
I have lived with Lonergan’s theory for 20 years now and so have answers for some things I do not think he addressed.
The question is where does the State fit in? I see the State as the household of households, and so essentially a purchaser of goods and services alongside other households. You might get a system where the State is in credit (through taxing the households) but the households are in debt. In fact the State gets in debt as do households but with this difference. The State bonds are sort of blue chip to the banking system allowing banks to increase the quantity of money. We find our post Keynesian world has been in constant inflation – a fact that would have made John Maynard Keynes turn in his grave.
The other question is, can the theory be understood by the ordinary man? Can one expect shops and firms to recognise the difference between boom and slump and to see that this is a time when prices need to be lowered? Instead of profit maximalisation one needs as it were a public sympathy for consumers, making everything reasonably possible for them rather than squeezing from them everything one can. For freedom to flourish in Lonergan’s world everyone must be able to understand the basic economic situation and act with concern for the common good as well as their personal good.