8.3 – 8.4 From Booms and Slumps to New Accounting and International Trade

 

8.3      From Booms and Slumps to New Accounting and International Trade

As mentioned in the Preface, one of Lonergan’s goals was to understand economics to find a way out of the Great Depression. Today, economists consider booms and slumps (a.k.a. the trade cycle or business cycle) a normal, if unpleasant, feature of economic activity. Definitions are available in most textbooks on macroeconomics. For convenience, we draw from an open access online resource, investopedia.com.

A boom and bust cycle is a process of economic expansion and contraction that occurs repeatedly. The boom and bust cycle is a key characteristic of today’s capitalist economies. During the boom the economy grows, jobs are plentiful and the market brings high returns to investors. In the subsequent bust the economy shrinks, people lose their jobs and investors lose money. Boom-bust cycles last for varying lengths of time; they also vary in severity.1Will Kenton, Reviewer, “Boom And Bust Cycle,” Investopedia, https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp, updated Mar 27, 2019. Accessed April 15, 2019.

There are strategies for dampening effects of the cycle. For instance, a Central Bank will decrease money supply to the economy. But the trade cycle remains.

In the two-flow structure, a few of the more evident aspects of the problem start coming into view.

What is happening during a boom? Those with influence ramp up production and sales of all kinds, that is, basic, surplus or any level of surplus (without of course being aware of those levels), producing whatever can sell or be made to sell. In accord with contemporary models, this is done regardless of needs of any community, let alone dynamics of a two-flow productive process. A boom, then, consists of accelerating any and all flows of a two-circuit productive process, in whatever directions and timings happen to be available, for the purpose of making a profit. And again, as history shows, the approach is unsustainable.2The ecological crisis is well known. For leads on the structural incompatibility of current standard practice and sustainability, see Toni Ruuska, “Capitalism and the absolute contradiction in the Anthropocene,” ch. 4 in Pasi Heikkurinen (ed.), Sustainability and Peaceful Coexistence for the Anthropocene, 1st ed., (Abingdon, Oxon: Routledge, 2017), 51-65; and Terrance Quinn, “Toni Ruuska’s Captial Ideas,” Openers of the Positive Anthropocene, January 15, 2019, https://www.anthropositivecene.org/2019/01/15/4-toni-ruuskas-capital-ideas/. Accessed April 15, 2019.

A slump is when we suffer myriad consequences of the mad rush, until such time as economies cool down enough so that the madness can begin again.

On the other hand, as we have seen, there is a totally different range of possibilities if we work within the two-flow structure. We can avoid lurching back and forth between boom and slump. For, instead, there is the normative possibility of ongoing series of double-surges. That is, there will be periods of nonnegative accelerations, the emergence and survival of which mainly depend on innovation and on adapting to emergent potentialities of the productive process.

Failure to adapt to the productive process is a mistake with cascading negative consequences, one grouping of which is called the “trade cycle.” As mentioned above, a full discussion of the problem would go beyond the introductory level of this series. But, if you have come this far, we expect that you will now find Lonergan’s concluding paragraphs on the topic both plausible and inspiring:

Thus the succession of surplus expansion, basic expansion, proportionate expansion, repeated as often as you please, would give a pure cycle3Regarding the meaning of “pure cycle,” see note 30 of section 7.3.. Of itself, it would not involve any contraction. It would be simply a matter of the intermittent emergence of acceleration lags in a general movement of expansion. Such a pure cycle can be shown to have an exigence for rather vigorous adaptation on the part of human agents as one phase succeeds another. It can be further shown that the lack of such adaptation transforms the pure cycle into a trade cycle.4CWL21, 276.

 

8.4 Practical Measures

If the profit motive is blind and ultimately destructive, so are well-intentioned attempts to solve problems of inequity through “equal distribution.” We are not suggesting that anyone needs to live in poverty. Nor are we condoning the strategies of today’s “super-rich.” On the contrary, implementing the new economics will all but eliminate rampant poverty and eventually will redirect funds that presently are being removed from circulation and hoarded in off-shore accounts. The problem is that the idea of equal distribution ignores at least two facts:

(1) It is a normal feature of an exchange economy that some individuals will handle large sums of money and that, undoubtedly, will have relatively large personal incomes. (There are, e.g., CEOs of global manufacturing firms, and the like. But there are also those whose material needs are modest.)

(2) Even though well-intentioned, the equal distribution approach is an attempt to solve the problem of inequity (e.g., “the (much less) than 1%”) and poverty by working within contemporary flawed models. In particular, the approach ignores the fact that there are two flows and linked rhythms and that, normatively, wages will regularly need to be adjusted as communities live through changing phases of the productive process.

One might ask: ‘How do we apply it?’  And, ‘Can we apply the new theory to resolve specific debates about wages?’

The problem is partly cultural, “mechanical,” and technical.

The “mechanical structure” is found in any exchange economy, ancient or modern, whether malevolent or benevolent, whether one nation is dominated by another or a group of nations is cooperating.

The cultural side of the problem includes questions about the standard of living. There is always a present standard of living, an emerging standard of living and, perhaps, a potential standard of living.

There is also the problem of whether or not a community of economists and financiers is interested in and willing to learn the new economics. Economists will provide counsel to support the functioning of the two-flow structure. That, in turn, is for the purpose of sustaining a standard of living or helping a community transition toward a new standard of living, or managing each simultaneously. We are touching on depths of the problem that call for globally effective omnidisciplinary collaboration. We will discuss that in section 10.

To end this section, we briefly draw your attention to just two aspects of implementation:

(1) The two-flow structure is local, global and, indeed, glocal. In order to make informed decisions about what to do, economists working within the new economics will need data. That data is not presently available. A main source will be from accounting methods that advert to and distinguish two flows, as well as (as much as necessary) “layerings” of payments that are initial, transitional and final.

(2) There should be no serious obstruction to obtaining the needed data. Indeed, global payment tracking systems for entire supply chains are already available. For the new economics, it will mainly be a matter of adding in additional classifiers for accounts and payments, as needed.

Modern exchange economies are part of a single global economy. This means that in order to go on with our introduction, we need to say something about “international trade.” That will be the topic of the next section, where we will also drop the artificial hypothesis of “closed economy.”

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