3.3 Challenging Problems for Future Follow Up

 

We have provided a glimpse into the general structure of modern economies. However, a few pressing issues, listed under the subheadings below, are not topics that can be handled in a brief introduction. Some will be discussed in Part II, Elements of Economics’ New Standard Model. In any case, we urge readers to resist the temptation to expect “quick and simple answers”.1See Journeyism 24.

 

“Levels” in the Economy …

It will be important to go into details, instances, and in particular, to track amounts and functions of payments. It also will be important to track through supply chains that begin with natural resources and end with either basic or surplus goods and services. For instance, there are numerous stages, tasks, sales and purchases that begin with iron ore, that involve smelting and eventually the manufacture, distribution and sale of hammers used in various trades, and so surplus goods. Also beginning with iron ore, different sequences end with the manufacture, distribution and sales of cooking utensils, hence basic goods.

You may recall from Section 1 that Leuk used a primitive knife to cut reeds that went into making a basket. Someone in the family-clan had already made the knife. The basket she made was a surplus good (initially used to gather berries and food, although eventually other things as well). But the knife also was a surplus good (used to make baskets). The knife was used to make a basket; and a basket was used to collect food. In today’s economies, there are similar but far more complex “levels” in the surplus part of the productive process.2The 20th century economist named Joseph Schumpeter made similar observations: “It is good to classify goods in ‘orders,’ according to their distance from the final act of consumption. Consumption goods are of the first order, goods from combinations of which consumption goods originate are of the second order, and so on, in continually higher or more remote groups.” Joseph Schumpeter, The Theory of Economic Development (Piscataway, NJ: Transaction Publishers, 2012), 16 (first German edition was in 1911). Schumpeter, however, neither discovered the basic-surplus structure, nor built his distinctions into a dynamics.

 

Money …

Regarding money, a key is function rather than whether or not it changes hands. Think of, say, money in your personal chequing account, monies not yet spent. Is some of it to be for movies and dining out with friends? Is some of it to pay rent for your apartment? In such cases, monies are poised to meet basic demand. However, perhaps you plan to spend some of those monies on a business dinner with business associates. In that case, monies are poised to meet surplus demand.

Trade and barter go back to pre-historic times. These days, there are still groups who barter. (For instance, we see this when locally available goods and services are bartered in farming communities.)3There is a “barter” option in Craigslist. We also see bartering in times of economic crisis. In Venezuela, at the time of writing, the economy was in collapse, with inflation near one million percent. In order to survive, people were forced to barter goods and services for goods and services. See, e.g., Chris Morris, “Forget the Bolívar: In Venezuela, Bartering Is the New Economy,” Fortune, May 7, 2018, http://fortune.com/2018/05/07/venezuela-bolivar-currency-bartering/. In modern economies, however, bartering is far more the exception than the rule. Even remote hunting lodges use credit cards to pay for fuel and for hunting supplies. Hallmarks of modern economics are international banking and financial services, and currencies that can be exchanged in international markets. The question arises, then, “What is money?” It is obvious that it is neither a good nor a service obtained from the productive process.4That is becoming increasingly obvious as physical currency is fast becoming obsolete. It will be important for economists to track rates of different types of payment in the economy. By “different types of payment” we are referring to economics’ new standard model, given in the diagram in Section 3.2. We are hinting at a future economic-dynamics which, for readers familiar with the terms, will be something loosely analogous to applied fluid-dynamics. This draws attention to a fundamental aberration in contemporary practice, namely, the commoditization of money.

 

Expenditures and Incomes …

Expenditure to one group is income to another. On the left of the diagram in Section 3.2, there is a downward arrow for personal incomes received by employees whose work is in the surplus part of the productive process. What about employees whose work is in the basic part of the productive process? Some of the monies that Clancy Builders pay out as basic expenditures are incomes for (to be received by) its own employees. But Clancy Builders also pays for wood and other building supplies, all of which also are expenditures in the basic part of the productive process. In each business along the way (going backward in supply chains) outlays again split. At each step, some of these go to the redistributive function, some to maintenance and more, and some to personal income. Taking all of those payments together, the other face of basic expenditures in the productive process is personal income.5A University of Toronto graduate student in finance (January, 2019) made a key observation. She had previously worked as a financial analyst for a Canadian communications business. As she observed, there will need to be developments in accounting where legers not only indicate amounts in the usual ways, but also track functions. Whether or not particular goods and services are in, or contribute to, basic or surplus parts of an economy is determined by what happens at the end of a supply chain, at final sale. Their role in the productive process is determined by subsequent usage or purpose. This will pose challenges for future accounting but, with today’s computer technology, it is solvable. As the financial analyst suggested, it may be possible to adapt existing programs for supply chains.

 

The “trade cycle” or “business cycle”…

According to contemporary views, a problem considered to be endemic to economic processes is the “cyclic pattern” of “booms and slumps,” also called the “trade cycle” or “business cycle.”

Although [the name] suggests that economic fluctuations are regular and predictable, they are not. Recessions are actually as irregular as they are common. Sometimes they occur close together, while at other times they are much farther apart. For example, the United States fell into recession in 1982, only two years after the previous downturn. By the end of that year, the unemployment rate had reached 10.8 percent—the highest level since the Great Depression of the 1930s. But after the 1982 recession, it was eight years before the economy experienced another one.6Gregory N. Mankiw, Macroeconomics, 8th ed. (New York: Worth Publishers, 2016), 273.

As students of economics will know, in the attempt to modify fluctuations, governments and central banks implement various monetary and fiscal policies. Note, however, that amplitudes are measured in terms of GDP (or a modified version of GDP). Section 4.1 (below) brings out that one of the structural flaws in contemporary economics is the significance it attributes to GDP. As mentioned in the Preface, it was the crash called the Great Depression that partly motivated Lonergan to think about economics (and eventually break through to the basic-surplus structure). And so, questions about booms and slumps can be asked anew: What are booms and slumps? Is there anything that can be done to mitigate their damaging effects? Are booms and slumps necessary? As it happens, the problem can be identified as a consequence of maladaptation to normative rhythms of the productive process.7“The dynamics of surplus and basic production, surplus and basic expansions, surplus and basic incomes are not understood, not formulated, not taught. … It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash” (Bernard Lonergan, Macroeconomic Analysis: An Essay in Circulation Analysis, vol. 15 of Collected Works of Bernard Lonergan, eds. Frederick G. Lawrence, Patrick Byrne and Charles C. Hefling, Jr. (Toronto: University of Toronto Press), 82). There is also the problem of cultural context. See Section 5, below. The topic is treated in CWL21, chapters 15-17, 231-284. See, in particular, CWL21, 245 and 274-276.

 

Income and Wages …

Other problems include those associated with growing wage inequality. On a global scale, “the rich are getting (super-) richer and the poor are getting poorer.”8This is also mentioned at the beginning of Section 4, below.

 

Anomalies …

In contemporary macroeconomics, both in theory and in actual economies, there are price spirals, inflation, deflation and other anomalies. In attempts to smooth out the effects of inflation, for instance, central banks make use of monetary policies such as controlling interest rates and adjusting reserve requirements. The problem of inflation, however, is related to “booms and slumps” mentioned above.

 

Profit …

Some types of profit are normative. For instance, in both basic and surplus parts of the economy, generally, incomes above and beyond operating costs are needed to pay for maintenance and replacement, capital expansion, as well as to support research, development and innovation. Such needs are identified in the new standard model. In contemporary teaching and practice, however, the name ‘profit’ is used in a different sense, monies gained in excess of costs, with no functional identification. Institutionalized, this blind notion of profit is now a major force undermining sustainability of economies, cultures and ecosystems. This contributes to problems caused by the commoditization of money mentioned above. See also Section 4.2, below.

 

International Trade …

In the last century, international trade has taken center stage. In the new standard model, international trade is explained by “superposition of circuits.”9Lonergan, CWL21, chs. 13, 19; McShane, Economics for Everyone, Ch. 4. Philip McShane is working on a new series of essays that include pedagogy on international flows, to be available on his website http://www.philipmcshane.org, in 2019. Trade agreements that are economically sound for all involved will need to draw on an understanding of superposition of circuits and be worked out in contexts pointed to in Section 5, below.  There is a useful parallel from applied fluid dynamics. Understanding the confluence of two major rivers is graduate level work.10On confluence, see, e.g., Laurent Schindfessel, Stéphan Creëlle and Tom De Mulder, “Flow patterns in an open channel confluence with increasingly dominant tributary inflow,” Water 7 (2015): 4724–4751. Understanding and intelligently managing the confluence of international economies is far more complex than water flow.

 

Redistributive Zone …

The redistributive zone includes all normal financial services needed in the modern productive process. There are, however, financial entities that have emerged in recent centuries that are not, in fact, part of the productive process. Some readers may be surprised to learn that we are referring to today’s stock markets, to be discussed in the next section.

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