Economic Supplement 2

Cause of the Slump

In the 1940’s Lonergan, after reading Schumpeter, came to an understanding of the trade cycle which he expressed in two works which are almost impossible to read. His philosophy helped him to identify the purpose of the economy – purchase of goods and services by the consumer. To help analysis I think it is I who have added in the government too as a household of households and also as a consumer. This helps one to the healthy realisation that States too are finite entities, whereas I grew up in a post-war world where it seemed to many the solution of every problem lay with the State.
The economy is an immense worldwide collaboration upon the potentialities of nature to bring about a flow of goods and services which are destined to be purchased. By work man transforms things and gets paid. The money he earns enables him to buy the products of the economy. When he buys, the finance he has earned flows back into the firms, so that they can continue paying workers and others.
There is then a circulation of finance, money coming from households and States to purchase goods and services, and money going from firms to pay or reward or obey households – wages, rents, dividends, taxes.
Lonergan’s main assertion is that ‘the crossovers must equal’. If prices are too high households maintaining their standard of living will go into debt. Via the banking system, firms will be able to supply the cash banks need to lend to households. Such a condition is incapable of recurrence year on year as interest payments mount up.
To illustrate the point I am going to put two situations, one entirely imaginable, one too vast for our imagination, yet understandable.
Henry Ford was asked why he paid his workers so well. He replied, if I don’t, how can they buy my cars? It is a joke of course, but it shows awareness that wages must be sufficient for output to be purchased.
Let us now consider the global economy, all the earners and their households, and the financial flow, as if it were one currency, going to those households. Include all the States as households. That financial flow conditions the possible debt free flow of households to firms in the purchase of goods and services. Here too, the financial crossovers must equal. There must be then a normative mark up on goods and services or the resultant price level will be too high.
In a free world economy what must guide the norms other than informed consciences of producers, who understand that they must cover their costs including costs to repair equipment? If they charge too high a price they are effectively making themselves thieves. They are ruining households and perhaps ruining their own market in the process. The concern for the outcome, the concern for the common good, le bon sens belongs to all participants in the economy.
In boom times, basic commodity prices rise in the markets. Such prices are not fixed by mark ups. The % mark up though will yield a greater return per item. When basic prices fall the amount raised by the same % mark up will fall per item. Revenues though will hold up if sales increase sufficiently. This should be the object of policy and hope in times of recession and slump.