Lonergan's Early Economic Research: Texts and Commentary 9781442660397

Table of contents :
Contents
Abbreviations
Preface
Editor’s Introduction
1. Economics and the Dialectic of History
2. Critique of Contemporary Methods
3. Reading Economic History
4. Price and Market Equilibrium Analysis
5. The Equilibrium Rate of Interest
6. The Velocity of Money and Turnover Frequency
7. Reading Schumpeter
8. Communications
Bibliography
Index

Citation preview

Lonergan’s Early Economic Research: Texts and Commentary

A fragment of Lonergan’s notes from the early 1940s on Eric Lindahl’s Studies in the Theory of Money and Capital (see chapter 2, page 68, this volume). Courtesy of the Lonergan Research Institute at Regis College, Toronto.

MICHAEL SHUTE

Lonergan’s Early Economic Research Texts and Commentary

U N I V E R S I T Y OF T OR ONT O P R E SS Toronto Buffalo London

© University of Toronto Press Incorporated 2010 Toronto Buffalo London www.utppublishing.com Printed in Canada isbn 978-0-8020-9864-1

Printed on acid-free, 100% recycled paper with vegetable-based inks. Lonergan Studies

Library and Archives Canada Cataloguing in Publication Lonergan, Bernard J.F. (Bernard Joseph Francis), 1904–1984 Lonergan’s early economic research : texts and commentary / Michael Shute. (Lonergan studies) Includes bibliographical references. isbn 978-0-8020-9864-1 1. Macroeconomics. Lonergan studies

I. Shute, Michael, 1951–

hb172.5.l76 2010

339

II. Title.

III. Series:

c2010-901715-3

This book has been published with the help of a grant from the Canadian Federation for the Humanities and Social Sciences, through the Aid to Scholarly Publications Programme, using funds provided by the Social Sciences and Humanities Research Council of Canada. University of Toronto Press acknowledges the financial assistance to its publishing program of the Canada Council for the Arts and the Ontario Arts Council.

University of Toronto Press acknowledges the financial support for its publishing activities of the Government of Canada through the Canada Book Fund.

Contents

Abbreviations / vii Preface / ix Editor’s Introduction / xiii 1 Texts / xviii 2 Context / xxiii 1

Economics and the Dialectic of History / 3 1 Introduction / 3 2 Texts / 10 2.1 Notes on William Graham Sumner’s ‘Bequests of the Nineteenth Century’ / 10 2.2 Notes on Edward J. Coyne’s ‘National Economic Councils’ / 12 2.3 ‘Essay in Fundamental Sociology’ / 15 2.4 Excerpts from ‘Outline of an Analytic Concept of History’ / 44 2.5 Excerpts from ‘Analytic Concept of History, in Blurred Outline’ / 47

2

Critique of Contemporary Methods / 51 1 Introduction / 51 2 Texts / 56 2.1 Notes on Lionel Robbins, An Essay on the Nature and Significance of Economic Science / 56 2.2 Notes on Frank Knight, Risk, Uncertainty, and Profit / 65 2.3 Notes on Erik Lindahl, Studies in the Theory of Money and Capital / 68

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Contents

2.4 ‘Econ. Phil, I, §5’ / 68 2.5 Essay Fragment / 70 3

Reading Economic History / 72 1 Introduction / 72 2 Text / 74 2.1 Notes on Heinrich Pesch, Lehrbuch de Nationalökonomie / 74

4

Price and Market Equilibrium Analysis / 102 1 Introduction / 102 2 Texts / 105 2.1 Price / 105 2.2 Market Equilibrium / 106

5

The Equilibrium Rate of Interest / 111 1 Introduction / 111 2 Texts / 113 2.1 Notes on F.A. Hayek, Monetary Theory and the Trade Cycle / 113 2.2 Equilibrium Rates of Interest / 119

6

The Velocity of Money and Turnover Frequency / 122 1 Introduction / 122 2 Texts / 124 2.1 Notes on F.A Hayek, Profits, Interest, and Investment / 124 2.2 Notes on C.F. Roos, Dynamic Economics / 127 2.3 File A330–31 / 133

7

Reading Schumpeter / 134 1 Introduction / 134 2 Texts / 136 2.1 Notes on The Theory of Economic Development / 137 2.2 Notes on Business Cycles / 141

8

Communications / 150 1 Introduction / 150 2 Texts / 151 2.1 ‘Savings Certificates and Catholic Action’ / 151 2.2 ‘Quebec’s Opportunity’ / 155 2.3 ‘Italian Mentality’ / 157 2.4 ‘Economic Centralization’ / 159 Bibliography / 163 Index / 173

Abbreviations

Collected Works of Bernard Lonergan (Toronto: University of Toronto Press) General Editors: Frederick E. Crowe and Robert M. Doran CWL2 CWL3 CWL6 CWL10

CWL15 CWL17 CWL18 CWL20 CWL21

Verbum: Word and Idea in St. Thomas Aquinas. Ed. Frederick E. Crowe and Robert M. Doran, 1997. Insight: A Study of Human Understanding. Ed. Frederick E. Crowe and Robert M. Doran, 1992. Philosophical and Theological Papers, 1958–1964. Ed. Robert C. Croken, Frederick E. Crowe, and Robert M. Doran, 1996. Topics in Education: The Cincinnati Lectures of 1959 on Philosophy of Education. Ed. Robert M. Doran and Frederick E. Crowe. Revising and augmenting the unpublished text prepared by James Quinn and John Quinn, 1993. Macroeconomic Dynamics: An Essay in Circulation Analysis. Ed. Frederick G. Lawrence, Patrick H. Byrne, and Charles Hefling, Jr, 1999. Philosophical and Theological Papers, 1965–1980. Ed. Robert C. Croken and Robert M. Doran, 2004. Phenomenology and Logic: The Boston College Lectures on Mathematical Logic and Existentialism. Ed. Philip J. McShane, 2001. Shorter Papers. Ed. Robert C. Croken, Robert M. Doran, and H. Daniel Monsour, 2007. For a New Political Economy. Ed. Philip J. McShane, 1998.

Other Works of Bernard Lonergan CM

Caring about Meaning: Patterns in the Life of Bernard Lonergan. Ed. Pierrot Lambert, Charlotte Tansey, and Cathleen Going, Thomas More Institute Papers 82. Montreal: Thomas More Institute, 1982.

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Abbreviations

3Coll Method OACH

A Third Collection. Ed. Frederick E. Crowe. Mahwah: Paulist Press, 1985. Method in Theology. London: Darton, Longman, and Todd, 1972. Latest reprint: Toronto: University of Toronto Press, 1990. ‘Outline of the Analytic Concept of History.’ LRI Archives.

Other Works Joseph A. Schumpeter. A History of Economic Analysis. New York: Oxford University Press, 1955 (1954). LDSE Michael Shute. Lonergan’s Discovery of the Science of Economics. Toronto: University of Toronto Press, 2010. OLNDH Michael Shute. The Origins of Lonergan’s Notion of the Dialectic of History. Lanham, MD: University Press of America, 1993. TGE Heinrich Pesch. Teaching Guide to Economics. 5 vols. Trans. Rupert J. Ederer of Lehrbuch der Nationalökonomie. Lewiston, NY: Mellen, 2002. HEA

Journals and Series JMDA LW MJLS

Journal of Macrodynamic Analysis Lonergan Workshop Method: The Journal of Lonergan Studies

Archives LRI

Lonergan Research Institute

Preface

This volume grew out of research into the origins and development of Bernard Lonergan’s economic theory. Among Lonergan’s private papers bequeathed to the Lonergan Research Institute in Toronto were his notes on economics. Many of the pages were handwritten. In assembling and transcribing these materials, I began to realize that they were a valuable source for understanding how Lonergan developed his macroeconomic theory. When Lonergan’s economic essays first appeared as volume 21 of The Collected Works of Bernard Lonergan, the editor included some of these pages. The present volume makes available much of the rest of the material. Lonergan built his discoveries in economics on related developments in methodology found in his early writings on the philosophy of history. Because of its methodological importance for the development of his economic theory, significant material from this early work in the philosophy of history has been added, including the important 1934 fragment ‘Essay in Fundamental Sociology.’ Written with the enthusiasm of youthful discovery and remarkable in its candour, this essay on the dialectic of history is the first expression of many of the major themes that would occupy him for the rest of his life. The present volume will be of interest primarily to scholars of Lonergan’s economics and the dialectic of history. Lonergan’s two major economic essays provide few clues as to the influences and sources that went into his discovery. In his detailed research notes we get a better idea of how he transformed the raw materials of his reading into his original theory. His notes on Heinrich Pesch’s Lehrbuch der Nationalökonomie reveal his interest in the mercantilists, Cantillon, and the Physiocrats. He no doubt identified with the efforts of Cantillon and the Physiocrats to correct the faults of

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mercantilist economic policy by developing a more adequate economic theory. In his work on the ‘equilibrium rate of interest’ we witness his gradual discovery that there is no such thing. Hayek provided background for his work on turnover frequency, which led him to an alternative to the quantity theory of money. His reading of Schumpeter reveals his great interest in business cycles theory as well as the practical details of production and banking. Late in his life Lonergan remarked that ‘if Catholics had spent some of their time in the British Museum ... we might have a good answer to Marx.’1 This volume provides the evidence that Lonergan decided to be the twentieth century Catholic who did the legwork required to improve the odds for a better global economy in the twenty first century. The volume should be a useful resource for understanding the development of Lonergan’s original ideas on economics and for understanding how he appropriated the work of mainstream economists. Since his early work in economics and the dialectic of history significantly influenced his mature understanding of science and of methodology, the volume will also appeal to scholars interested in the development of his thought. Finally, because these materials were of great significance for my own research in writing Lonergan’s Discovery of the Science of Economics, the volume provides a companion to that work. While much of a scholar’s labour is accomplished alone, that labour is not possible without the support and encouragement of others. I have many to thank. Most important, I thank Joyce West, who has sacrificed much for the sake of this book. Research on the project was funded by a General Research Grant from the Social Sciences and Humanities Research Council of Canada and a Vice-President’s Research Grant from Memorial University of Newfoundland. The initial transcriptions were done while I was a recipient of a Lonergan Research Fellowship from Boston College. The Lonergan Research Institute in Toronto and the Lonergan Centers at Boston College and the Milltown Institute of Philosophy and Theology in Dublin allowed me unfettered access to their archives. Frederick Crowe, Robert Doran, and Michael Shields of the Lonergan Research Institute have encouraged and assisted me in my research for many years. In Boston, Joe Flanagan and Fred and Sue Lawrence provided Joyce and me with unfailing hospitality and friendship. The interest shown by Fred in the early stages of the work was instrumental in my decision to carry forward with the volume. William Mathews was a graceful host while we were in Dublin and has helped me on questions about the details of Lonergan’s life. Philip McShane encouraged the project from the beginning and provided expert

1 CM 163.

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advice. Bruce Anderson provided many helpful comments on my interpretation of the manuscripts. Patrick Brown and Tom McCallion helped me to sort out many puzzles in the original documents. William Zanardi advised on matters of style. James MacLean, Brad Levett, David Bell, and Ute Simon-Okshevsky provided assistance with translation. Noeline Bridge compiled the Index. I thank Mary Walsh, administrative secretary in the Religious Studies Department at Memorial University, for taking care of details too numerous to list. Finally, I would like to thank Ron Schoeffel at the University of Toronto Press for his encouragement throughout the writing process, Theresa Griffin for her impeccable editorial work, and Anne Laughlin for her assistance in the final stages of production. Grateful acknowledgment is made to the Lonergan estate for permission to use unpublished materials from the archives of the Lonergan Research Institute of Toronto.

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Editor’s Introduction

Late in his life Lonergan expressed regret that he did not say more about research.1 At only three pages, the chapter on the functional specialty Research in Method in Theology is the shortest in the book. Sharing similar brevity is his treatment of the functional specialty Communications. Functional specialization is Lonergan’s proposal for a division of labour for theoretic collaboration. It directs inquiry to particular specialties that are intelligently linked to a shared total set of specialties. In the collaborative movement from Research to Communications, data are processed so as to inform and direct future action. In this process there are two identifiable movements. The first movement is a recovery of achieved meaning and values. Data are collected and sorted with respect to relevance (Research), organized and interpreted (Interpretation), and placed in historical context (History), and the results are sorted according to their contribution to the best explanation of the data and events (Dialectic). The second movement mounts an effort to use the best from the past in order to deal with current issues. It establishes the best direction forward that is not tied to specific places and times (Foundations), reaches relevant pragmatic truths within the foundational context (Doctrines), uses past successes to develop strategies for future action (Systematics), and adapts and communicates these in the local context (Communications). Both Research and Communication are specializations of experience. Just as the senses make data available for understanding and judgment, so Research ‘makes data available’ for the collaborative processing of functional specialization.2 Communications, 1 See Frederick E. Crowe, The Lonergan Enterprise (Cambridge, MA: Cowley, 1980). 2 Method 127.

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on the other hand, is concerned with ‘external relations.’3 It makes the results of the process of functional specialization available to diverse audiences. Together, Research and Communications forge the all-important link in the feedback system for functional specialization, as what is sent out through Communications becomes data for further Research. 4 Lonergan’s presentation of Research and Communications in Method in Theology does not do justice to these specialties.5 If one were to compare, for example, his treatment of them to that of Foundations and Dialectic, the poverty of presentation is obvious. One of the difficulties that must have faced Lonergan in writing about these specialties of experience is the very specific and local nature of both. ‘For doing research, whether general or special, is always a concrete task that is guided not by abstract generalities but by the practical intelligence generated by the self-correcting process of learning.’6 Research brings to light the relevant details of life. ‘But, perhaps unfortunately, research is an enormously diversified category and doing research is much more a matter of practice than of theory.’7 It ultimately aims for ‘a complete information-retrieval system.’8 Likewise, Communications are always directed to local audiences and to diverse media, and must adapt to these diverse contexts. Speaking and writing for one’s colleagues in a particular field or specialty is different than communicating the same results to specialists in another field, to politicians, or to the local paper. By contrast, Foundations and Dialectic have a general application. Dialectic aims at a comprehensive viewpoint.9 Foundations objectify and make thematic what is true irrespective of particular times and places.10 These were both zones of inquiry in which Lonergan was well practised. The materials from the Lonergan archives reveal both the extent and the breadth of his research. His published articles and books are but the visible peaks of the mountain of research that supports them. A study of the ex-

3 Ibid. 132. 4 See Philip McShane, A Brief History of Tongue (Halifax, NS: Axial Press, 1998) chap. 3. 5 Philip McShane expands on what Lonergan intended for this specialty in ‘Systematics, Communications, Actual Contexts,’ in Religion in Context: Recent Studies in Lonergan, ed. Timothy P. Fallon and Philip Boo Riley, 59–86, College Theology Society Resources in Religion 4 (Lanham, MD: University Press of America, 1988). We need similar efforts that would flesh out his larger vision for the functional specialty Research. 6 Method 149. 7 Ibid. 8 Ibid. 127. 9 Ibid. 129. 10 Ibid. 130.

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haustive detail in his two works on Aquinas amply illustrates this. Lonergan once remarked that those disagreeing with his interpretation in Verbum would have five years’ work in front of them.11 An outstanding instance of Lonergan’s research is in the field of economics. When Insight was published in 1957, no one could have suspected the research that supported the few pages he wrote on the economy.12 It was only when he made his files on economics available to the Lonergan centre in Toronto that scholars could even begin to appreciate just what he had accomplished. Given the amount of writing devoted to Lonergan’s work, surprisingly little of it has been devoted to his own research and intellectual development.13 More attention has been paid to comparing his thought to that of other thinkers or applying aspects of his work to various contemporary issues.14 Certainly it is important to include his voice in professional and public discourses, but the effort runs the risk of haute vulgarisation of his achievement. Communicating Lonergan’s meaning presents interesting difficulties in the contemporary context. His style is frequently dialectical and offers a vigorous challenge to the prevailing viewpoint, both within his own Catholic community and within the academic community. Closer to home, it is perhaps too easy to assume that we know what Lonergan actually meant. Lonergan himself alerts us to this danger in his discussion of classicism. By classicism I mean the fruit of an unsuccessful education in which, first of all, there is no real grasp of theory of any kind – mathematical, scientific, philosophic, or theological. Theory is proposed and studied, but in the subject there is no real serious differentiation of consciousness; all we get as a theory are the broader simplifications offered by a professor to introduce or round off a lecture or a course, or the products of haute vulgarisation. But [the classicist] is never bitten by theory; he has no apprehension, no understanding, for example, of the fact that Newton spent weeks in his room in 11 From a conversation with Philip McShane. 12 CWL3 234–36 [209–11]. The context is a discussion of common sense insight. 13 There has been significant work on Lonergan’s intellectual development by Frederick E. Crowe, Richard Liddy, William Mathews, Mark Morelli, and Patrick Brown. The publication of William Mathews’ intellectual biography Lonergan’s Quest: A Study of Desire in the Authoring of Insight (Toronto: University of Toronto Press, 2005) is most welcome and will no doubt spur on more research in this area. 14 This is easily confirmed by a survey of titles in Terry Tekippe’s Bibliography of Secondary Sources, at .

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which he barely bothered looking at food, while he was working out the theory of universal gravitation.’15 Lonergan’s achievements in philosophy and theological method are, like the prior achievements of Newton, the product of a theoretical mind. Consequently, serious attempts to understand what is going on in Insight or Method in Theology require that we be ‘bitten by theory.’ Without this shift to theory the revolution promised by generalized empirical method and functional specialization will be a ‘delayed revolution.’16 When we turn to his economic writings, however, their technical expression makes any headway virtually impossible without the theoretical shift. Lonergan wanted to understand what economy is, and that meant specifying the basic terms and relations or significant variables of the science of economics.17 Macroeconomic dynamics is the achievement of science in economics. One of the reasons Lonergan’s economics has so far failed to merit its proper place among his major works is that readers must come to personal terms with a scientific revolution. This present volume makes available significant documents relevant to Lonergan’s own struggle to realize the scientific revolution in economics. For the past decade I have been investigating Lonergan’s work in economics. Fortunately, his private papers were organized and available for study. His various essay attempts were typewritten. Most of his notes, however, were handwritten. It is in these handwritten notes that Lonergan’s creative struggles are most clearly evident. Those who have had occasion to work with Lonergan’s handwritten notes will know that legibility is not their primary quality: the notes were for himself, and, of course, he could read his own handwriting. It was evident to me that, in order to make these notes accessible, it was necessary to transcribe them. The notes are the core material of this book, in which I have included other relevant unpublished work from the same period. The volume, then, consists of one part of a twopart study of the origins and development of Lonergan’s economics. The second volume, Lonergan’s Discovery of the Science of Economics, is an interpretive study of Lonergan’s work in economics, history, and theology up to the completion of ‘An Essay in Circulation Analysis’ in 1944. The focus of the present volume is on the specialty Research. It makes available the primary materials for the second study and thus augments what is now available in 15 CWL6 155. See also CWL10 145. 16 The allusion is to Herbert Butterfield’s account of the delayed scientific revolution in chemistry in his Origins of Modern Science, 1300–1700 (London: Bell, 1965). 17 The argument is made in detail in LDSE passim.

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volume 21 of the Collected Works. That volume includes Lonergan’s various essays in economics up to and including the 1944 version of ‘An Essay in Circulation Analysis.’ It also includes a small selection of handwritten fragments culled from archival documents. The present volume vastly expands the amount of primary material available. We turn now to the basis for selection. Lonergan divided the functional specialty Research into two broad categories. General research aims at a complete information-retrieval system. Part of such an information-retrieval system is the collecting and cataloguing of manuscripts and the preparation of critical editions of texts. Although this volume may contribute to a future complete edition of primary material, making such a contribution was not my aim here. Special research, on the other hand, ‘is concerned with assembling the data relevant to some particular question or problem, such as the doctrine of Mr. X on the question Y.’18 The present volume falls more readily into the second category. The task here is special research. What I have in mind is nicely captured in the following: ‘You can collect books, fragments, data, in a certain order that you consider convenient for later reading, interpretation, for the question: “What does this mean?” But that very collecting can have an eye on the future: there can be a desire not just to find out, but to “get something across.”’19 I have, therefore, chosen material that highlights Lonergan’s struggles towards a satisfactory formulation of his theory.20 In the light of this choice it is important to recognize that Lonergan’s discoveries in economics were in the context of significant developments in methodology. Included, then, is material related to methodological issues. In the various versions of his economics essay, Lonergan gives few indications of the sources that provide the basis for the discovery and refinement of his macrodynamic economics. Likewise, he gives little indication of how his discovery came about. He writes: ‘To discover such terms is a lengthy and painful process of trial and error. Experto crede. To justify them, one cannot reproduce the tedious blind efforts that led to them; one can only appeal to the success, be it great or small, with which they serve to account systematically for the phenomena under investigation.’21 Lonergan was properly interested in the results. It is only later that scholars take an interest in how theories are discovered and refined. The material on Lonergan’s economics can be conveniently divided into

18 Method 127. 19 McShane, A Brief History of Tongue 85. 20 There are indications of further developments. See CWL21 203–204. On the circumstances of Lonergan’s decision to stop further work, see LDSE. 21 CWL21, 112.

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two parts. Lonergan worked on economics from 1930 to 1944. His work was put aside, however, from the fall of 1938 to the spring of 1940, as he turned his attention to writing his doctoral dissertation. On completing the dissertation, he returned in a hurry from Italy to Canada because of the war, and took with him only what he regarded as essential. That included his dissertation and his work in the philosophy of history, but not the work he had done in economics. Therefore, most of the primary sources date from the period 1941 to 1944. The paucity of material from before 1940 is reflected in the present volume. I have augmented the selection from this period with such material from the ‘History’ File (File 713) that sheds light on his early thinking in economics. In contrast, there is a comparative wealth of notes and sketches documenting Lonergan’s efforts between 1942 and 1944 to ‘envelop and confine’ his basic discovery. This material makes up the bulk of the present volume. Of particular interest is Lonergan’s work on general equilibrium theory, which provides an excellent illustration of his research process.22 As the focus of the present volume is on the years up to 1944, I have not included any of the substantial material available from Lonergan’s efforts to present his economics at Boston College from 1978 to 1983.23 A compilation of Lonergan’s unfinished efforts to refine for publication his 1944 manuscript, on which he worked between 1979 and 1983, appears as Macroeconomic Dynamics: An Essay in Circulation Analysis.24 In any case, it is my view that almost all the significant developments in Lonergan’s work in economics proper occurred by the spring of 1944. How we are to understand the relationship between Lonergan’s two periods of work in economics is an important and complex issue, and I address it in chapter 8 of Lonergan’s Discovery of the Science of Economics. 1

Texts

With the exception of the three published articles in chapter 7, all the material in this volume comes from the personal files recovered after Lonergan’s death in November 1984. Lonergan changed residence a number of times during his career. In 1933 he moved from Montreal to Rome to begin his

22 See chaps 4 and 5 below. 23 This material includes tapes and transcripts of his lectures. Patrick Brown taped the lectures, and the transcripts represent the labour of Nicholas Graham. Lonergan researchers owe a great debt to both. The tapes and transcripts are available at the Boston College Lonergan Institute and the Lonergan Research Institute in Toronto. 24 CWL15.

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doctoral studies. In 1940 he returned to Montreal to teach, and then in 1945 moved from Montreal to Regis College, Toronto. In 1953 he returned to Rome, where he stayed until 1965, when illness brought him back to Toronto. In 1974 he spent a year at Harvard University as a distinguished scholar. In 1975 he moved from Toronto to Boston, where he stayed until failing health brought him back to Canada in 1983. Whenever he moved, out of necessity he culled his personal files. We can safely assume, then, that these files, which Lonergan kept for about forty years, had significance for him. What interests the scholar does not always coincide with what was important to the original author. Notice of an outstanding gap comes to us in a letter Lonergan penned to his superior in 1935, indicating that he had been writing on economics.25 Quite likely this material is part of the ‘Essay in Fundamental Sociology.’26 Lonergan kept only the last 35 pages of the original document, apparently judging the first 94 pages expendable. Given the lack of material documenting Lonergan’s work in economics prior to 1941, the lost part of this essay would be quite significant. On the other side of the coin, Lonergan was in the habit of using the verso of rejected pages. Consequently, we have sketches, notes, and parts of early drafts of essays on the back of pages saved for other reasons. We find an outstanding instance of this practice on the back of notes made in preparation for a course on grace.27 As indicated, the present selection highlights Lonergan’s early development as an economist and methodologist. With one exception I have not included material already published in Collected Works 21, though crossreference to that volume is important for understanding the context of the fragments in this volume.28 Although there are scattered pages on economics to be found in other files, Lonergan kept his economics notes together primarily in three files, catalogued in the Archives as A332, A335, and A336. A336 contains notes from 1933. A332 and A335 contain notes made after he returned to Canada in 1940. Rather than present them in the order in which they appear in the files, I have rearranged them according to topic areas.

25 Letter to Father Keane, 22 January 1935. 26 ‘Essay in Fundamental Sociology’ is included in chap. 1 below. For a detailed account of and commentary on this document, see OLNDH 74–99. 27 LRI Archives File A330/A331. For examples, see pp. 132–33 below, and CWL21 214–18. 28 That exception is the section ‘Lonergan and Schumpeter,’ p. 139 below. See CWL21 213. Since all the other notes Lonergan took on Schumpeter from Files A332 and A335 are reproduced in this volume, this short section has been included for the sake of completeness.

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Chapter 1 includes all the primary materials related to economics prior to the fall of 1938. With the exception of three pages of notes from the summer of 1933, the selections come from File 713, which collects Lonergan’s work on the philosophy of history.29 It was the ‘real analysis’ of the analytic concept of history that provided general methodological foundations for his economics.30 In chapter 2 we turn to his notes on economic methodology. Lionel Robbins was the most influential methodologist of the 1930s, and Lonergan carefully read his An Essay on the Nature and Significance of Economic Science. All his notes are included here, as well as those on Frank Knight’s influential volume Risk, Uncertainty, and Profit and a short comment on Erik Lindahl’s Studies in the Theory of Money and Capital. The chapter concludes with two fragments from early attempts to set down his discovery. Chapters 3 through 6 provide a glimpse into Lonergan’s reading of the history of economic theory and of contemporary economists. His main source for the history of economic theory was chapter 2 of Heinrich Pesch’s Lehrbuch der Nationalökonomie.31 The history of economics and the history of economic theory were both important components of his approach to economics. Early on he conceived of his project as ‘the pure theory of economic history.’32 What particularly interested him was Pesch’s account of the development in economic theory from mercantilism to the Physiocrats. Whereas the mercantilists were concerned with practical policy such as the favourable balance of trade, which would enhance national trade and commerce, the Physiocrats were theoreticians. They addressed the shortcomings of mercantilist policy by developing what they regarded as a new science of economics. Lonergan’s self-understanding of his work mirrors their earlier efforts. Although his notion of scientific analysis differs substantially, like that of the Physiocrats, he wished to develop a ‘new science’ of economics. In the Physiocrats, Lonergan found elements – such as their

29 The three pages of notes from File A336 date from his regency in Montreal. The material in File 713 dates from 1934 to 1941 at the latest. On this file, see OLNDH chap. 3. On its relation to Lonergan’s economics, see Michael Shute, ‘Economic Analysis within Redemptive Praxis: An Achievement of Lonergan’s Third Decade,’ in LW 14, ed. Frederick Lawrence (Chestnut Hill, MA: Boston College, 1998) 243–64. 30 See Bernard Lonergan, ‘The Analytic Concept of History,’ ed. with an introd. by Frederick E. Crowe, MJLS 11:1 (1993) 1–36. 31 Heinrich Pesch, Lehrbuch der Nationalökonomie (Berlin: Freiburg im Breisgau: Herder, 1920). These five volumes have been translated into English by Rupert J. Ederer as Teaching Guide to Economics (Lewiston, NY: Mellen, 2002). 32 See the fragment ‘Econ. Phil, I, §5,’ p. 69 below.

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emphasis on production, a model of money circulation (Quesnay’s tableau économique), and a notion of surplus – that he would develop in his own way. When he returned to economics in the 1970s, Schumpeter’s History of Economic Analysis served the same purpose as Pesch’s volume had in the 1940s. Again Lonergan’s interest remained primarily with the Physiocrats. Lonergan’s refinement of his own work from 1942 to 1944 was enhanced by his engagement with the best of previous efforts in economic theory. The notes on Schumpeter he took in preparation for his lectures at Boston College show a continued interest in same period in the history of economic theory, especially in the work of Turgot and Quesnay. Chapter 3 includes all his notes on Pesch’s work. Chapter 4 contains notes on equilibrium analysis as it applies to markets and price. Price and market equilibrium were basic components in general equilibrium theory. Because it unavoidably highlighted the dynamic features of an economy, the phenomenon of interest presented a problem for equilibrium theory. Lonergan’s macrodynamic economics developed a new context for understanding both price and market equilibrium. Interest theory remained problematic for him. As these notes show, however, he was satisfied in the 1940s that there was no equilibrium rate of interest. Lonergan was especially interested in the Austrian economists and those influenced by them. In chapter 5 is found Lonergan’s analysis of the notion of the equilibrium rate of interest, including the notes on Friedrich Hayek’s Monetary Theory and the Trade Cycle. In his notes on Hayek’s Profits, Interest, and Investment Lonergan makes a connection between turnover and interest rate theory.33 Part 2 of For a New Political Economy provides us with more detail about Lonergan’s research on turnover in preparation for writing the ‘Essay in Circulation Analysis.’ His analysis of the problem was integral to the precise specification of the dynamics of monetary circulation and an essential element in the alternative he developed to the quantity theory of money. Chapter 6 contains notes on Hayek’s book, plus additional material on turnover analysis. In this chapter I have included notes on C.F. Roos’ Dynamic Economics. Lonergan exploits some suggestions from Roos’ book to support his developing notion of pure surplus income. The chapter ends with two pages, found on the back of notes taken in preparation for his thesis, in which he works on the details of turnover frequency and velocity. Although Lonergan mentions Keynes at the beginning of ‘An Essay in

33 Friedrich Hayek, Monetary Theory and the Trade Cycle (London: Jonathan Cape, 1933), and Profits, Interest, and Investment (London: Jonathan Cape, 1939).

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Circulation Analysis,’ Schumpeter was a more significant economist for him, and he took many notes on both The Theory of Economic Development and Business Cycles. By contrast only one page on Keynes is found among his notes.34 Like Lonergan, Schumpeter was interested in understanding cyclical economic phenomena. He was keenly aware of the methodological significance of dynamic analysis and had an outstanding knowledge of the history of economic theory. He explored the influence of financial and productive innovations and economic rhythms. Although it is likely that Lonergan had already worked out the basic elements of his theory, reading Schumpeter helped him refine his work, especially the writing of ‘An Essay in Circulation Analysis.’ He praised Schumpeter’s The Theory of Economic Development as ‘a beautifully thought out piece of work,’35 and he cites Business Cycles in ‘An Essay in Circulation Analysis’ for its treatment of long cycles.36 Lonergan reread Schumpeter’s Theory of Economic Development in the late 1970s. As mentioned already, Schumpeter’s History of Economic Analysis took over the role Pesch’s Lehrbuch der Nationalökonomie had had for him in the 1940s. Chapter 7 contains all Lonergan’s notes on Schumpeter up to 1944. Finally, in chapter 8 are offered several published documents from the early 1940s related to Lonergan’s efforts to communicate elements of his discovery. These documents help us locate his appreciation of the ultimately practical implications of his theoretical work. The material is not presented in strict chronological order. The choice of order simply highlights some lines of inquiry in Lonergan’s research. In any case, it would be difficult to provide a definite order of composition of this material. We can, however, say with some confidence that the material in chapter 1 was written between 1933 and 1938, and the remaining selections between 1941 and 1945.37 Most of the later material comes from Files A332 and A335 of the Lonergan Institute Archives; although we cannot be more precise about the dates, the contents of File A332 were clearly written before those of File A335. Aside from minor changes to the original text for the sake of consistency in the use of punctuation and spelling, the texts are transcribed as faithfully as possible from the originals. Minor editorial

34 The Keynes page was published in CWL21. 35 This remark was made during the Question Period at the 1978 Lonergan Workshop. Nicholas Graham’s transcription of that session is at LRI and various other Lonergan centres. 36 CWL21 306. 37 All except one item, a report of a 1945 lecture Lonergan delivered in Kingston, Ontario, were written by the spring of 1944 at the latest. See chap. 7 below.

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changes within the text are enclosed in brackets, but most bracketed interpolations are Lonergan’s own. ‘[?]’ indicates an indecipherable word or words. An effort was made to approximate the layout of Lonergan’s notes as they appeared on the original pages. 2

Context

It may surprise some readers to discover that Lonergan’s original interest was in economics, not theology. Why economics? We find the following in an interview Lonergan gave in 1981: I studied philosophy in England, the professor of ethics I had Fr. Lewis Watt, in 1929 he brought out a book, Capitalism and Morality; and at the time no economist would admit that any moral law had anything to do with economics. But there followed the big depression and the idea of morality began seeping in, not too much ... And I got back to Canada and the depression was on and the rich were poor and the poor were out of work and there were a lot of economic theories floating around and I became interested in figuring out what was wrong with them. I [had] studied a bit of economics during philosophy year [at Heythrop] on the side. We had five hours of physics – a waste of time because it wasn’t physics it was just simplification – and I always felt the study of physics would be fine but in 1926 it was a little passé – I was interested in economics.38 Lonergan’s student years were situated between two world wars, mostly during the Depression. Like many intellectuals of that time, he understood that Western culture was in a state of crisis. After October 1929, the economy was the outstanding element of the crisis. So, while economics presented him with a suitable intellectual puzzle, it also offered a timely problem with an obvious moral dimension. Lonergan realized that you could not simply apply moral principles to the economy. As the old saw goes, the road to hell is paved with good intentions. Any moral determination required insight into how economies functioned. Lonergan grasped that the just wage debate dominating Catholic discussion of the economy was, for that reason, flawed. In a late essay, ‘Moral Theology and the Human Sciences,’ he drives home the point that moral theology must work in conjunction with the appropriate science. He distinguished three classes of situations: when the

38 From an interview with Luis Morfin, s.j., 11 July 1981. Transcribed from a scribbled transcription of a lost part of the interview.

xxiv Editor’s Introduction

science is well established; when the science is not sufficiently determinate to yield fully concrete applications; and when the human science is open to suspicion. In the first class, he cites the example of medical ethics, in which it is comparatively easy to reach agreement on a moral course of action. Although disagreements on moral issues still occur, most participants in the discussion will readily agree in their interpretation of the relevant medical information. For the second class, he advises a course of ‘social experimentation’ in which social scientists and moralists collaborate in the gradual process of ‘discovering better policies, plans and procedures.’ In the third class, however, ‘the human science is itself open to suspicion. Its representatives are divided ideologically. They advocate contrary courses of action, all of which have their respective good points, but none is without very serious defects. The notorious instance at the present time is economics.’39 More than sixty years ago, when Lonergan began his study of economics, he understood that the science needed in order to create a just economy did not exist. Studying economics was, therefore, the moral course of action for him. In an interview in 1981, Lonergan was asked, ‘Do you think there can be any rules for undertaking a work?’ His answer was surprisingly forthright: ‘Understand what analysis means. An analysis leads from what everyone knows to significant variables that are mutually dependent – preferably dynamically dependent – on one another. In that way, you have your primitive terms and the source of a basis for developing a science as an analytic structure. Since your basis is analytic, whenever you apply it to anything, you’ll have the analysis of that thing.’40 When he began, his goal was the discovery of a set of dynamically interdependent significant variables for the science of economics. That goal involved two related investigations, one methodological, the other, economic. We begin with the methodological quest. From 1926 until 1944, Lonergan worked on the meaning of ‘analysis.’ That quest began with a dispute in logic. At Heythrop College, Lonergan was introduced to the logic of J.S. Mill.41 In a series of essays published in a Heythrop College student publication, he presented an alternative to Mill’s deductive principles for formal logic. Basing his argument on his reading of Newman’s Grammar of Assent, Lonergan proposed that ‘the alternative criterion is the mind itself, “far

39 Bernard Lonergan, ‘Moral Theology and the Human Sciences,’ CWL17 302. 40 CM 226. 41 On the relationship between J.S. Mill and Lonergan, see William Mathews, ‘On Lonergan and John Stuart Mill,’ Milltown Studies 35 (1995) 39–50.

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higher, wider, more certain, subtler, than logical inference” which can use all our knowledge, evaluate evidence in the concrete, and remain in harmony with natural procedure neither a priori doubting everything or accepting anything.’42 Out of an investigation of the dynamic operations of the mind, Lonergan eventually discovered a set of procedural norms that, because they are based on how the mind actually operates, do not have to be invented or imposed. This dynamism of the mind is the prior source of all formal logics. Explicating this dynamic provides a general set of dynamically interdependent variables applicable to any zone of human knowing and any method, whether theoretical or practical. From this viewpoint, scientific method is a specialization of the general method of the mind itself. From 1933 to 1938, Lonergan was in search of the basic variables for method in the human sciences, what he called the ‘differential calculus for history.’43 This effort culminated in a set of essays on the analytic concept of history.44 The essays passionately endorse the establishment of a democracy founded on human liberty. They offer a scathing criticism of liberal and Marxist philosophies of history, both of which fail to understand the real relation between freedom and order, which, in Lonergan’s view, characterizes genuine liberty. Liberalism champions liberty, where liberty means each following his or her own light. But this position fails to provide a meaningful higher viewpoint that serves to order the myriad decisions of individuals. We are left with a democracy of individual tastes and the balancing of political powers. Marxism recognizes this lack of order and introduces the material dialectic of history, which sacrifices liberty to a dictatorship of the proletariat. For Lonergan, liberty is the principle of progress, and it includes both economic and political liberty. It is not opposed to order. Lonergan’s discovery of the inadequacy of formal logic as a foundation for method was pivotal. An understanding of the developing mind provides the fundamental dynamism. An affirmation of free choice in the light of this understanding means that norms can be identified and distortions uncovered. Liberty is achieved by observing the exigencies driving genuine human development. An examination of how developments of the mind interact with the schemes of the material and communal environment makes a general theory of historical dynamics possible. Lonergan names his method ‘real analysis,’ and with it he derives an initial set of general

42 ‘True Judgment and Science,’ CWL20 41. 43 ‘Essay in Fundamental Sociology.’ See p. 20 below. 44 The last of these essays has been published. See Lonergan, ‘Analytic Concept of History.’

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categories for the human sciences. Real analysis ‘proceeds from an analysis of human nature’ and results ‘not in the categories of the metaphysicians but in something like the causally and chronologically interrelated view of the astronomer; this, because it analyses not being but action.’45 Lonergan assembled his categories from the triad of progress, decline, and recovery and from a set of three historical stages rooted in the stages he identifies in the development of the mind. Because the norms of the mind are applicable to human praxis, his analysis gives us a broad outline for integrating the theoretical and the practical. Developing this outline was a central intention of this work. His procedures differ from those of both liberal and Marxist analyses of history. The liberal fails to take into account the existence of evil and so imagines an almost automatic progress. The Marxist accepts the distorted situation as real and moves to correct it. Without a moral ideal, however, the Marxist cannot meaningfully distinguish between good and evil, and the two are conjoined in the name of realpolitik. The radical option of eliminating the whole system is adopted. In contrast, Lonergan’s analysis requires the intelligent sifting out of what is good in the situation. It combines freedom with order. The distortions and ideologies are ultimately countered in a praxis informed by the theological virtues of faith, hope, and charity.46 In sum, Lonergan’s analytic conception of history is an initial sketch of what becomes the genetic-dialectic systematics for historical studies developed more fully in Insight and Method in Theology.47 It signals a vital and significant transformation of method in the human sciences, one that makes macrodynamic economics possible. During the 1930s, Lonergan worked on economics, properly speaking. While the material evidence of this effort is slim, we know that social credit theory was the initial focus of his attention.48 From 1933 to 1938 his main interest was in the philosophy of history. In 1935, in his letter to Father Keane he claimed to have an understanding of the ‘inevitable laws of economics.’49 Whatever his understanding consisted of, it was conceived as part of his effort to develop a theory of Catholic Action.50 In the course of his work on the analytic concept of history around 1937, Lonergan refined his search and developed the broader context of the general dynamics of history; this deveopment greatly influenced his approach to economics and,

45 Bernard Lonergan, ‘Analytic Concept of History, in Blurred Outline,’ LRI Archives File 713. See p. 49 below. 46 See CWL3 chap. 20, especially 740–50 [718–29]. 47 See CWL21 xxiv. 48 See LDSE 58–59. 49 Letter to Father Keane, 1935. 50 See LDSE chap. 2.

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eventually, opened up a way to integrate his economic analysis with other kinds of analysis and, in the end, with moral praxis. While we do not know when Lonergan made his key discoveries, he first set them down in 1942 in ‘For a New Political Economy.’ In this essay he lays out the fundamental set of dynamically related variables. Production and operational exchange flows are differentiated into two circuits, basic and surplus. He distinguishes redistributional exchanges from the operational exchanges tied to the production process. He identifies two crossover movements between the basic and the surplus circuits. All these movements are assembled imaginatively in the ‘baseball diagram’ that will remain the central image of his economic analysis.51 He further identifies the phases of the pure economic cycle and establishes the existence and significance of pure surplus income. Clearly benefiting from the dialectic analysis of his analytic concept of history, he contrasts a pure economic cycle with its distortion in the trade cycle identified in mainstream economics. ‘For a New Political Economy’ was a major accomplishment. It expresses the core of Lonergan’s breakthrough and is his answer to both Marx’s political economy and liberal-capitalist economics. He writes: ‘The problem, I think, is clear. We cannot rely on the old political economy: it was democratic but it has been found wrong. We cannot rely on the new economics: it is accurate but it can solve real problems only by eliminating democracy. What is needed is a new political economy that is free from the mistakes of the old, a democratic economics that can issue practical imperatives to plain men.’52 With its commitment to genuine liberty and its insistence on the order discovered through real analysis, ‘For a New Political Economy’ readily displays its continuity with the analytic conception of history. Lonergan was not completely satisfied with the essay. The drive of his quest was towards pure formulation.53 There followed a period of ‘envelopment and confinement’ of his discovery, culminating in the purely economic analysis of ‘An Essay in Circulation Analysis.’54 This development mirrors the ‘divide and conquer’ strategy he worked out while conceiving the analytic conception of history. The earliest essays on history are set within the context of a theology of Catholic Action. In the later essays the analysis is

51 For the first version of the diagram, see CWL21 65. On the next page Lonergan offers another diagram, representing the main circuits alone, that is, without the redistributional flow included. 52 CWL21 5. 53 On pure formulation, see CWL3 602 [597]. 54 The reference is to Lonergan’s use in Insight of a military metaphor to describe the advance of metaphysics. See CWL3, 508–509.

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progressively confined to what is proper to philosophy of history alone.55 A key to Lonergan’s advance was his adoption of Newton’s model of approximation. In economics his first exposition is set in the broader context of political economy; but circulation analysis is pure macroeconomics. Many of the refinements in his economics after ‘For a New Political Economy’ come from his efforts to understand turnover rates.56 His dialectic engagement with equilibrium theory sharpens his analysis, especially in terms of precision in formulation.57 Consider, for example, the set of equations in the 1944 essay, which expresses the relations of acceleration between circuits with the equivalent discussion in ‘For A New Political Economy.’ In ‘An Essay in Circulation Analysis,’ the relationship is precisely held together in the following series: k2[f2′(t – a) – B2] = f1″(t) – A1 k3[f3′(t – b) – B3] = f2″(t – a) – A2 k4[f3′(t – c) – B4] = f3″(t – b) – A3 58 In ‘For A New Political Economy,’ the formal relations contained in these equations are distributed in the discussion in chapter 5 of trader, distributor, and consumer multipliers in the context of a theorem of continuity.59 Another fruitful instance of development is Lonergan’s discussion of circulation trends.60 He refines his analysis of the cycle of income and prices and develops his theory of superposed circuits to handle international trade and the influence of government taxation and spending on economic circuits. Lonergan’s development from 1942 to 1944 certainly merits further study, and his notes from that period constitute a main source for such a study. With ‘An Essay in Circulation Analysis’ he achieved a satisfactory account of his new theory. It was this version of economics that was the basis for his course in economics and the dialectic of history at Boston College from 1978 to 1983. Research into Lonergan’s economics, especially in the context of functional specialization, is in its infancy. There is much to learn about the theory itself as well as its connection to and influence on the rest of his work. It is my hope that the probabilities for wider attention to his economic theory 55 56 57 58 59 60

On this movement in his thought, see OLNDH chap. 6. See chap. 6 below. See chaps 4, 5, and 6 below. CWL21 244. Ibid., 56–74. See ibid. 275 n. 4.

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will be improved by the efficient shifting of attention by Lonergan scholars to an appreciation of his whole work in the context of functional specialization. The discovery of macrodynamic economics was a solo project. Reaping the benefit of it, however, will require a collaborative global venture. As he said about the future implementation of his own work: ‘Now to work out in detail the conditions under which this must be done, and to prescribe the rules that must be observed in doing it, is a vast task ... There will be need not merely for sober and balanced speculation but also for all the concrete inventiveness, all the capacity for discovery and for adaptation, that we can command.’61 The present volume is part of a working out of the details, in this case providing the evidence of Lonergan’s own research that led to his discovery of macroeconomic dynamics.

61 Ibid., 105–106.

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Lonergan’s Early Economic Research: Texts and Commentary

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1 Economics and the Dialectic of History

1

Introduction

In an article written in July 1941 for the Catholic newspaper the Montreal Beacon, Lonergan introduced the principle of ‘superflua status, surplus income’ to make the case that Catholics ought to support the Canadian ‘war bond’ effort.1 The reference is significant in Lonergan’s intellectual history, as the first published evidence of his work in economics. His use of the notion of surplus income, which he would later define further as pure surplus income, is particularly important. Lonergan did not mean by surplus income something equivalent to Marx’s notion of surplus value, which Marx understood as profit on products beyond the value of the labour required to produce them.2 What, then, did Lonergan mean? He writes, ‘Such surplus is income beyond one’s reasonable requirements for his standard of life.’3

1 Bernard Lonergan, ‘Saving Certificates and Catholic Action,’ is reprinted in its entirety in chap. 7 of this volume and in CWL20 68–73, at 72. ‘Superflua status’ is emphasized in the original document. 2 For a mainstream presentation of Marx’s notion of surplus value, see Mark Blaug, Economic Theory in Retrospect, 4th ed. (Cambridge: Cambridge University Press, 1985) 226–27. For a Marxian interpretation of surplus value, see Ernest Mandel, Marxist Economic Theory (New York: Monthly Review Press, 1968). For Lonergan’s critique of Marx’s notion of surplus value, see ‘Bernard Lonergan Responds (3),’ CWL20 285. Lonergan means by surplus profit ‘a flow of income beyond all cost of living, all taxes and charities, all maintenance and replacement: it is a net surplus, an excess profit that can be spent only by being invested,’ CWL21 50. 3 ‘Savings Certificates and Catholic Action,’ p. 154 below.

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Lonergan’s Early Economic Research

Lurking behind this simple explanation written for a popular Catholic weekly newspaper was a theory of the normative rhythms of a growth economy. For Lonergan, pure surplus income was a particular consequence of an economic expansion and was relevant to financing that expansion. He developed his understanding of surplus income in the context of an economic model whose basic variables included two distinct yet related circuits, a basic circuit that provided goods for the standard of living and a surplus circuit that accelerated the rhythms of the basic circuit. The idea was new, and it was a central piece of the economic theory he was working on. He would come to the conclusion that the failure to understand the phenomenon of pure surplus income was a main cause of the Great Depression.4 He writes in ‘An Essay in Circulation Analysis,’ ‘Now it is true that our culture cannot be accused of mistaken ideas on pure surplus income as it has been defined in this essay; for on that precise topic it has no ideas whatever.’5 Lonergan had been developing economic theory for about eleven years, and, clearly, by 1941 he was making some progress. His work following this article, which found expression in ‘An Essay in Circulation Analysis’ three years later, is fairly well documented because Lonergan held on to many of his notes and essay drafts. Unfortunately, the same is not true of his work prior to this time. Very little hard evidence of Lonergan’s work in economics before 1941 survives. As a consequence we have no way of knowing when exactly he figured out the basic elements of his theory. We can say with greater assurance that Lonergan began to work on economics in earnest after his return to Canada from Heythrop College in England. We know that initially a focal point of his research was the oversights in social credit theory, a popular economic theory at that time in both England and Canada. From 1930 to 1933, Lonergan was in the regency stage of his Jesuit formation. Because regency was a break from formal studies, it afforded some leisure for private study. Whatever initial progress he made, he kept to himself. But three surviving documents, all dating from the summer of 1933, represent the first evidence of his research in economics and afford at least a glimpse into his interests during this period. The documents are a clipping of an article by John Collingwood Reade from the Canadian journal Saturday Night on the World Economic Conference held in London in 1933; notes on an article by William Graham Sumner called ‘Bequests of the Nineteenth Century’; and notes on Edward J. Coyne’s article ‘National Economic Councils.’ Reade’s subject is the need for economic programs to fit the ‘inexorable facts’ of the world economy. He argues that the policy of

4 CWL21 297–98. 5 Ibid. 296–97 [CWL15 153].

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restricting production to solve the economic problem constitutes a retrograde step; what is needed instead is a new method of financing distribution. The view has echoes of social credit doctrine. The problem of how to exploit an economic expansion while avoiding a crash was a central puzzle for Lonergan. Both the Sumner and the Coyne articles critique the nation-state. Coyne’s article explored, positively, the idea of national economic councils. Efforts to establish such councils in the second decade of the twentieth century epitomized the search for a middle way between the extremes of laissezfaire capitalism on the one hand and the socialist planned economy on the other. Such efforts were in line with the subsidiarity principle championed in the papal encyclical Quadragesimo Anno.6 We can locate the proximate origins of this notion in the German economist Heinrich Pesch, who proposed vocational groups as offering a ‘middle way’ between the capitalism of producers and the union socialism of workers.7 As Coyne observes, larger and higher organizations tend to take over functions that can be performed efficiently by smaller and lower bodies. It is clear that Lonergan was keenly aware of the shortcomings of bureaucratic planning for meeting the political and economic challenge of the Depression. It is their shared critique of bureaucracy that links the two articles by Sumner and Coyne. Later, Lonergan would cite the Antigonish Movement as an exemplar of the ‘middle way.’8 In Lonergan’s mature philosophy, criticism of ‘bureaucratic’ or central planning is informed by his understanding of human liberty; on the evidence of File 713, he reflected on human liberty considerably during the time prior to writing his doctoral dissertation. Liberty was to take on great significance in the dissertation itself, which dealt with Aquinas’ efforts to satisfactorily reconcile the fact of human freedom with divine grace. In Insight, liberty is the principle of progress, and it is opposed by the ‘hierarchy of officials and bureaucrats ... whose authority and power are in inverse 6 Pius XI, ‘Quadragesimo Anno: Encyclical Letter of His Holiness Pius XI,’ in Seven Great Encyclicals, ed. William J. Gibbons, s.j. (Glen Rock, NJ: Paulist, 1963). Coyne cites the ‘subsidiarity principle’ from that encyclical, Edward J. Coyne, s.j., ‘National Economic Councils,’ Studies: An Irish Quarterly Review 22 ( June 1933) 288–306, at 292. 7 Pesch’s ideas had a major influence on this encyclical. On Pesch, see Richard E. Mulcahy, s.j., The Economics of Heinrich Pesch (New York: Henry Holt, 1952) 178–88. For Pesch’s ideas applied specifically to the social encyclical, see Oswald von Nell-Breuning, Reorganization of Social Economy (Milwaukee: Bruce, 1936). 8 See Bernard Lonergan, ‘Quebec’s Opportunity,’ Montreal Beacon, 12th year, no. 50, 2 May 1941, repr. in chap. 7 below and in CWL20 143–46.

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ratio to their familiarity with the concrete situation in which the new ideas emerge.’9 Lonergan’s notion of liberty is not the liberal notion of the autonomous rational decision-maker that informs neo-classical choice theory. Lonergan’s notion owes more to Aquinas’ exploration of free choice in the Summa Theologica.10 For the mature Lonergan, liberty is realized through personal authenticity set within the context of the structure of the human good as presented in chapter 2 of Method in Theology.11 Lonergan’s commitment to this enlarged notion of liberty as a basis for a properly functioning economy is precisely expressed at the beginning of ‘An Essay in Circulation Analysis.’ ‘The function of prices is merely to provide a mechanism for overcoming the divergence of strategically indifferent decisions or preferences, and ... since not all decisions and preferences possess this indifference, the exchange economy is confronted with the dilemma either of eliminating itself by suppressing the freedom of exchange or of certain classes of exchanges, or else of effectively augmenting the enlightenment of the enlightened self-interest that guides exchanges.’12 These notes from the summer of 1933 give us a small glimpse into Lonergan’s first research into economic matters. After his move to Rome in the fall of 1933 to study philosophy at the Gregorian University, the pace of Lonergan’s advance quickened. His thought was developing in many areas simultaneously, and one begins to get a sense of the true fertility and breadth of his mind. His thinking on economics moved forward in tandem with that on broad metaphysical and theological isssues. In a letter to his superior written in January 1935, Lonergan refers to a long essay he has written on the philosophy of history that ‘takes the “objective and inevitable laws” of economics, of psychology ... and of progress ... to find the higher synthesis of these laws in the Mystical Body.’13 But what inevitable laws did he have in mind? Did they include the notions of basic and surplus circuits, surplus income, and the pure cycle? Given the evidence currently available, we have no way of knowing. The ‘Essay in Fundamental Sociology,’ referred to in the 1935 letter, is a significant document for understanding Lonergan’s development. In the earlier Blandyke Papers, his student works from 1928 and 1929, he had tack-

9 CWL3 259. 10 St Thomas Aquinas’ notion of freedom and free will is developed in the Prima Secunda, especially in QQ 1–21. 11 Alternative presentations prior to Method can be located in Topics of Education in 1959 (CWL10), and in an appendix, ‘De Bono et Malo,’ written as a supplement to De Verbo Incarnato in 1965. 12 CWL21 231–32 [CWL15 6]. 13 Letter to Father Keane, 22 January 1935.

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led specific philosophic problems, most notably in logic and the philosophy of science.14 In ‘Essay in Fundamental Sociology,’ he attempts a general viewpoint or metaphysics that includes history as an essential, not an accidental, feature of its structure. We can recognize here features of Insight in embryonic form, in such things as the reliance of his metaphysics on an account of cognitional structure and the tripartite structure of progress, decline, and redemption, which makes its first appearance in this essay. The first 94 pages of the 130-page essay have not been preserved. It is quite possible, even likely, that the lost pages contained early attempts to establish what Lonergan at the time referred to as the ‘inevitable laws of economics.’ Even though Lonergan makes explicit reference to him only infrequently, Christopher Dawson’s influence is paramount in the essay.15 Dawson’s attempt to develop a dynamic base for social analysis had an important influence on Lonergan’s approach.16 In several essays from the 1920s, Dawson highlights the problematic lag between the material or economic and the spiritual or moral development in Western culture.17 In The Age of the Gods Dawson advances the view that technological progress is definitive for developments in the structure of economic institutions and that the economy shaped the rise and developments of specific cultures.18 The theme of cultural crisis evoked by technological and economic developments was central to Dawson’s thought in the 1920s and 1930s, and that theme seems to have formed part of the context for Lonergan’s effort in ‘Essay in Fundamental Sociology.’ The challenge for human cultures is to adapt to the new material context while maintaining continuity with the spiritual core of the civilization. It is clear from ‘For a New Political Economy’ that Lonergan understood the infrastructural role of the economy in the development of culture. He also drew from Dawson’s analysis of the alternation of cultural and economic development, understanding his own efforts in economics as part of a vast project to meet the contemporary cultural crisis. Dawson, like Marx, understood the importance of dynamic analysis. The differences between Marx and Dawson are significant, how-

14 On the Blandyke Papers, see LDSE chap. 1, and CWL20 chaps 1–5. 15 Lonergan regarded Dawson as a serious thinker. This high estimate of Dawson is reflected in a comment Lonergan made in the early 1940s, in which he referred to Dawson as ‘perhaps the profoundest English thinker of the present time.’ See ‘Italian Mentality,’ p. 158 below. 16 See LDSE chap 1. 17 See, for instance, Dawson’s collection of essays Progress and Religion: An Historical Inquiry (London and New York: Sheed and Ward, 1929). 18 Christopher Dawson, The Age of the Gods (London and New York: Sheed and Ward, 1928).

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ever, and they helped shaped Lonergan’s attitude towards Marxist theories of history and economy. Dawson was critical of Marx, especially of his secularist stance and his materialist and determinist philosophy. Lonergan would share Dawson’s view of Marx. In 1931, in an essay on Gilbert Keith Chesterton for the Loyola College Review, he wrote: Private judgment has come to mean the intellectual’s right to say what he pleases and the average man’s choice of what may chance to please him best. With a happy combination of circumstances, a generous allotment of luck, and an imposing tome of pseudo-science to his credit, any clever person may command the enthusiastic support of vast numbers of men. Karl Marx had German materialism, the industrial revolution, reasonable publicity, a wild theory of value, and an outrageous conception of history. That originator of a great experiment on civilization is not a unique example of noble sentiment and addled thought uniting to bring forth a monstrosity. Democracy is faced with the alternative of teaching thought or meeting its decline and fall.19 No evidence has surfaced that Lonergan read Das Kapital. It is likely he learned his Marx second-hand, probably through Lewis Watt and Dawson. 20 Nevertheless, Lonergan later discovered a bridge for communicating his own economic theory in the work of the Polish Marxist Mikal Kalecki.21 In any event, Lonergan’s appropriation of Dawson’s views on the cultural crisis in the West engendered by nineteenth century material, economic, and social developments runs through ‘Essay in Fundamental Sociology’ and the various drafts of ‘The Analytic Concept of History.’ Its basic theme appears again in Insight, neatly encapsulated in the phase ‘as technology evokes the economy, so economy evokes the polity.’22 The essay itself offers

19 Bernard Lonergan, ‘Gilbert Keith Chesterton,’ Loyola College Review (1931), in CWL20 53–59, at 56. Lonergan maintained this view throughout his life. See, for example, ‘Healing and Creating in History,’ in CWL15 97–106 [3 Coll 100–107]. 20 Watt devoted time to economics in his course in Ethics, which Lonergan attended at Heythrop College in 1928–29. The notes for this course are available at various Lonergan centres. Lonergan cites Dawson’s essay ‘Karl Marx and the Dialectic of History,’ republished in The Dynamics of World History, ed. John J. Mulloy (London and New York: Sheed and Ward, 1957), in ‘Healing and Creating in History,’ CWL15 104. Dawson’s essay was originally published in 1935. That is likely when Lonergan read it. 21 See CM 165–66. 22 See CWL3 234–46 [209–11].

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interesting clues as to how far Lonergan’s thinking on economics had advanced from the previous year. There is a clear focus on productive rhythms of transformation and exploitation in the economy. Economy is, however, subsumed under the general dialectic of history. Its locus is the ‘dialectic of fact’ that ‘has its first motion in material needs.’ Lonergan presents the modern economy as a product of the oscillations of material development and the retrograde movement of the imposition of the material dialectic on the development of culture, which is the dialectic of thought. ‘New ideas’ in response to practical challenges play a central role. In his mature economics, it is significant innovations in the methods of production that initiate surplus expansions in an economy. As the 1935 Keane letter shows, Lonergan envisaged his economics research in the context of his search for a general theory of macrodynamics, which he would later name the analytic concept of history. These early documents lack the precise differentiation of the economic and the political that later characterized ‘An Essay in Circulation Analysis.’ By 1938 Lonergan had developed ‘real analysis’ as the method for a philosophy of history. That development would inform his approach to economic theory.23 To illustrate what he meant by real analysis, there are included here selections from two of the essays on the analytic conception of history from File 713. The ‘Outline of an Analytic Conception of History’ is the second of four essays Lonergan wrote in 1937 or 1938 on the analytic conception of history. He begins the essays with an account of the stages of human intellectual development. To it he adds accounts of decline and recovery. The result is an account of the stages of history modified by the fact of decline and efforts of restoration. In the present selection from the essay, Lonergan locates economic activity in the context of the dialectic of history. He reasserts the priority in time of economic development. Ideally, economic development leads to more complex division of labour and the possibility of greater leisure. His notion of a positive role for economic transformations is contrasted with modern economic theory and practice, where ‘economics is discovered, – to create the modern agony by its false realism.’24 There are two selections here from the essay ‘Analytic Concept of History, in Blurred Outline.’ In the first, Lonergan establishes with some precision what he means by ‘real analysis.’ Real analysis makes possible a move out

23 Lonergan’s real analysis is highlighted in the editor’s introduction to CWL21. See also Michael Shute, ‘Economic Analysis within Redemptive Praxis: An Achievement of Lonergan’s Third Decade,’ in LW 14, ed. Frederick Lawrence (Chestnut Hill, MA: Boston College, 1998) 243–64. 24 OACH, p. 147 below.

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of the comparative statics approach of neo-classical economics to the fullfledged dynamics of his economics essays. The second considers the social surd. The significance of the third selection lies in its positioning of the relation of economic to cultural development. Normatively, economic development is for the sake of culture; typically, however, we collectively choose the obvious and more easily grasped benefits of widening over the more difficult task of deepening. 25 2

Texts 2.1 Notes on William Graham Sumner’s ‘Bequests of the Nineteenth Century’

Sumner’s ‘Bequests of the Nineteenth Century’ was written in 1901, and republished in the Yale Review in the summer of 1933.26 Lonergan’s notes on this article, along with those on Coyne’s ‘National Economic Councils,’ were found together in a folder among his personal papers.27 It is most likely that Lonergan read this piece when it came out in the summer of 1933. The paper Lonergan typed it on is the same as that for numerous fragments from this period.28 The theme highlighted in Sumner’s article reflects Lonergan’s interest in the economic and political questions as they appear in the essays on the philosophy of history. Sumner’s substantial criticism of the power of the modern state was a view forcibly expressed by Lonergan in the File 713 writings, especially in the 1934 ‘Essay in Fundamental Sociology.’29 The theme reappears in the context of the notion of liberty in chapter 7 of Insight.30 ‘Wherever there is a force in human society the problem is to use it and regulate it; to get the use and prevent the abuse of it. The state is no exception; on the contrary it is the chief illustration. In all forms of the state

25 On widening and deepening as modes of exploiting the transformations made possible by a surplus expansion, see CWL21 17–19. 26 William Graham Sumner, ‘Bequests of the Nineteenth Century,’ Yale Review (Summer 1933). 27 LRI Archives File A336. 28 This information comes from the Item Catalogue for the LRI Archives prepared by Robert Doran. 29 For example, Lonergan writes, ‘For however successful liberalism may be considered inasmuch as it holds power, there can be no doubt that this fact of power is at the root of the distempers of the present day,’ ‘Essay in Fundamental Sociology’ 95 in original. See p. 16 below. 30 CWL3 239–60.

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which have ever existed, families, groups, classes, corporations have struggled with each other to get into their hands the power of the state. To get control of this power is to win the industrial products, after other people have made them, without labour of one’s own.’ It makes no difference which class is governing: monarch, aristocracy, middle class (bourgeois), or demos.31 ‘The modern industrial state transfers millions on a punctuation mark in an act of the legislature. To get the legislative machine into one’s control is worth ever so much more than it ever was before. To get the use and avoid the abuse of the state is harder than it ever was before. It is harder in the democratic republic than in any other form of the state. There are thousands of men in public life or in the lobby who suppose that this is all as it should be. They suppose that to elect a legislature and then work bills through it which will be to somebody’s profit is the regular order of things. That, they suppose, is what it is all for. There is not a civilized state with parliamentary institutions which has not had a financial scandal within ten years.’ ‘It is a great mistake to say, as we hear people say every day, that this abuse is perpetrated by capitalists and corporations. It is perpetrated by everybody.’ ‘Some people are very elegant against anybody who, as they say, bribes a legislator. It takes two to perpetrate a bribery ... It is possible that a man may buy a legislature to get what he ought not to have. It is also possible that a legislature may blackmail a man before giving him what he ought to have. There are many grades between these two extremes ... Why does not the people elect legislators who will do their duty and not take bribes at all? ... Our popular teachers and preachers will not entertain the possibility that the people is at fault. In fact, the people is altogether at fault. It has not done its first duty in the premises, and therefore the whole institution has gone astray.’ Legislature merely a conflict of interests.32 Representative gov’t does not represent anything in particular. Atomism of territorial divisions. Parties. Unintelligence.

31 [This is not a direct quotation from Sumner, but Lonergan’s summary.] 32 [These three lines are not direct quotations from Sumner but Lonergan’s summary of the key points.]

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2.2 Notes on Edward J. Coyne’s ‘National Economic Councils’ The Coyne article was published in Studies, an Irish Jesuit publication, in June 1933.33 As Lonergan was in Ireland and England in the summer of 1937, prior to the beginning of his Jesuit ‘tertianship,’ it is possible he read the article at that time.34 But the fact that it was kept together with the Sumner article makes it highly likely he read it when it appeared, in 1933. Coyne wrote the article against the backdrop of Quadragesimo Anno, which appeared in 1931. He responds positively to the notion of subsidiarity promoted in the encyclical, and to the emergence of National Economic Councils in mainland Europe as an example of the subsidiarity principle in action. Lonergan seemed particularly interested in the organizational details of the Councils. National Economic Councils By Edward J. Coyne S.J. Studies, June 1933 Institutionum reformatio atque emendatio morum More reform would take too long institutionum reformatio means remodeling the social structure or institutions, not the social order as the official trans. [‘]When We speak of the reform of the social order it is principally the State We have in mind ... because on account of the evil of ‘individualism’ as We call it, things have come to such a pass that the highly developed social life, which once flourished in a variety of prosperous institutions organically linked with each other, has been damaged and all but ruined, leaving thus virtually only individuals and the State. Social life lost entirely its organic form; the State, which now was encumbered with all the burdens once borne by associations rendered extinct by it, was in consequence submerged and overwhelmed by the infinity of affairs and duties. Q. Anno [Quadragesimo Anno ], C.T.S. [Catholic Truth Society], [’]35 p. 36 (another example of the faultiness of the English translation; a whole clause is omitted – haud parvo ipsius reipublicae detrimento – ‘social life lost entirely its organic form’ is really 33 See n. 6 above. 34 See Frederick E. Crowe, ‘A Note on Lonergan’s Dissertation and Its Introductory Pages,’ MJLS 3:2 (1985) 1–8. 35 [This passage is a quotation from an English translation of the encyclical and includes Coyne’s footnote on the translation from pp. 288–89 of the article. Lonergan placed the footnote in brackets.]

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‘respublica ... amissa forma regiminis socialis ...’ and ‘encumbered’ is susceptis, a word with a hint of ‘unjust or inopportune usurpation’ in it.[’] [‘]Modern democracy, our respublica, is nothing more than an oligarchy licensed for a certain number of years by the unorganized mass of citizens and dependent to a great extent on a reasonably competent and benevolent bureaucracy. Half-a-dozen Cabinet Ministers (the “stronger” personalities of a given Cabinet) and half a dozen or so Civil Servants (heads of departments or “experts”) literally dominate all the “social” and a great deal of the economic activity of the citizens of a country. The regime has not existed very long and certainly has not been a very striking success. Citizens, deprived of any scope for the social side of their nature, became, unnaturally, “individualists,” each intent on his own affairs. The State, at the same time, found itself faced by the task of maintaining the smooth functioning of social relationships, a task requiring the whole-hearted cooperation of individual citizens. This cooperation, from the very nature and form of the state, has not been forthcoming: individuals, precisely because they felt themselves only “individuals” and not “members of a social body” became and remain individualists, paying their Cabinet Ministers and Civil Servants to look after the social machine. Simultaneously, they jeopardize the running of this delicate moral mechanism by refusing to part with any of their individual liberty and by ruthlessly or thoughtlessly pursuing their own individual or class interests without any serious care whether these interests run counter to the common good of the whole. The result is that the State is forced to intervene especially in the economic sphere, endeavoring by technical economic adjustments (tariffs, bounties, social services, taxation, etc.) to rectify evils and injustices due not to economic but social causes. Were human society properly, that is, humanly and naturally, organized, the very existence and nature of the organization combined with the nature of individual man would tend almost automatically to regulate economic activity for the common good. In so far, classical economists are quite right; there is a praestabilita harmonia, there is much wisdom, given the necessary conditions, in laissez faire.[’]36 Q.A. p. 37 ‘Let those in power, therefore, be convinced that the more faithfully this principle (of subsidiary or auxiliary social activity) be followed and a graded hierarchical order exist between the various subsidiary organizations, the more excellent will be both the authority and the efficiency of the

36 [This entire passage is a direct quotation from the original article, pp. 290– 91.]

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social organization as a whole, and the happier and more prosperous the condition of the State.’37 Ibid. ‘... it is an injustice, a grave evil, and a disturbance of right order for a larger and higher organization to arrogate to itself functions which can be performed efficiently by smaller and lower bodies. This is a fundamental principle of social philosophy, unshaken and unchangeable, and it retains its full truth to-day.’ National economic councils in France, Germany, Italy, Czechoslovakia, Yugoslavia, and to some extent Spain. Start from above downward seems most practical. National Economic Council, France Herriot gov’t, January 192538 i) to examine and discuss all the major economic and social problems that arise – a task of vigilant supervision ii) to secure for the gov’t the technical advice of persons who are at once specialists in their own department and representatives of practical business or professional organizations iii) to maintain a permanent liaison between the actual economic and business world and the various ministers who have to deal directly or indirectly with economic affairs.’ This task, necessary and useful; beyond ability of civil service No question of council usurping powers of Parliament or Cabinet nor even dealing in detail with the solutions to various problems. Examines problems from gov’t and from members Directly under the Prime Minister Consists of general assembly, permanent committee, secretariat General assembly, 141 members elected 27 represent consumers, cooperative societies, savings bank depositors, unions of large families etc. 90 for labor; 9 for intellectual workers and education; 33 for managerial work; 42 for wage earners; 6 rural and urban artisans 24 for capital; 9 for industry; 9 for commerce, rest for landowners, financial interests. 37 [Quadragesimo Anno] 38 [From here on in the notes, Lonergan summarizes key points that interest him regarding National Economic Councils.]

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Members receive traveling expenses. Prime Minister settles which organizations shall be represented in the assembly and in what proportion. Meets four times a year for ten days Committee consists of four vice-presidents and ten members. Secretariat is a disposal of committee; experts etc. Poincaré ‘qu’il était une de ces institutions provisoires qui gagnent tous les jours de nouveaux droits a l’immortailité.[’]39 Jouhaux ‘ce qu’il faut, c’est organiser les rapports entre les éléments patronaux et ouvriers en fonction de l’intérêt général qui les domine.’40 La Régie coopérative, defined: The exploitation of an enterprise (by workers, management and users) not with a view of realizing an individual profit or of distributing dividends, but solely in view of the needs of the community and with no other end than to procure for the consumers the maximum of utility and economy. 2.3 ‘Essay in Fundamental Sociology’ The ‘Essay in Fundamental Sociology’ (also referred to as ‘Philosophy of History’) was very likely written in the spring of 1934.41 It is one of the essays in File 713.42 Lonergan composed it either while he was taking a course on Church history at the Gregorian or shortly after he completed the course. The essay shows the influence of the course’s content, though Lonergan’s appropriation of the material is quite original.43 The essay was a fairly sub-

39 [‘that it was one of those temporary bodies that every day earn more and more the right to go on forever’ (literally, ‘earn new rights to immortality’). See Charles Rist, A History of Monetary and Credit Theory from John Law to the Present Day, trans. Jane Degras (New York: A.M. Kelley, 1966) 55, regarding Poincaré’s effort, in apparent imitation of John Law, towards the devaluation of French currency in 1926.] 40 [‘what is needed is to organize the relationship between the employer and the worker groups in terms of the prevailing general interest.’ Lonergan correctly changes Coyne’s ‘générale’ to ‘général.’] 41 On the dating, see OLNDH 69 n. 21. ‘Philosophy of History’ is the title of the section of the essay that Lonergan kept. It was almost certainly a part of the longer ‘Essay in Fundamental Sociology.’ 42 For a detailed analysis of this essay, see OLNDH chap. 4. 43 Lonergan’s detailed notes of this course are held at the LRI Archives, File A334.

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stantial 130 pages, but Lonergan kept only the title-page and the last section, of 36 pages, entitled ‘Philosophy of History.’ The title-page contains the famous quotation from Book 5 of Plato’s Republic declaring the philosopher-king a solution to the political problems in the Athenian polis.44 For Lonergan, the ‘solution’ to the contemporary political crisis is a Christian philosophy of history. The essay contains indications of Lonergan’s developing ideas on economics, clearly influenced by his reading of Dawson’s Age of the Gods. Essay in Fundamental Sociology ‘Consider what I’m about to say.’ ‘Go on,’ he said. ‘Unless,’ I said, ‘the philosophers rule in the cities or the ones now said to be kings and rulers pursue philosophy seriously and properly – unless in this way political power and philosophy are brought together and the many now pursuing, in their various ways, the one without the other are necessarily excluded –, there can be no lack of troubles, my dear Glaucon, for the cities, nor, I suppose, for the human race, nor will this theoretical constitution, which we have now described, ever come into existence or see the light of the sun. But this is the point that has made me long hesitate to speak, since I saw just how greatly this speaking would be counter to common sense. For it is difficult for others to see that in no other way can a person fare well in either private or public life.’ Republic 473d–e PHILOSOPHY OF HISTORY The significance of the quarrel between church and state is not to be confined to the period extending from the middle ages to the successful and complete emergence of liberalism.45 For however successful liberalism may be considered inasmuch as it holds power, there can be no doubt that this fact of power is at the root of the distempers of the present day. A philosopher cannot be content to ask of history, who holds the power? He must ask whether this incidence of power is for human progress or for human extinction. There is much in the present world-situation to confirm the view that liberalism in power is for the destruction of civilization.

44 Republic 473d–e. 45 [Lonergan hand-wrote and then crossed out the opening ‘By “liberalism” is to be understood the effective negation of the control of reason as right reason.’]

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But the philosopher need not confine himself to this single question. To analyze liberalism fundamentally leads to the discovery that there are two aspects to human life: every act of the person is an internal act of will and an external activity; the internal act of the will has been the concern of the church and its opposition to liberalism; the external activity, merely as an external activity, is a motion for an end in its own order and it has been the control over this order that the liberal states have been vindicating as their right. Plainly, we put the question in its full philosophic generality when we ask[:] what is the end of the external human action as such[?]. For if there is an end to individual external acts, and to sets of such external acts, so there must be an end common to all external acts. If we determine this end and determine the laws by which it is attained and under which action to the end evolves, we arrive at what is called a philosophy of history. We define the philosophy of history as the pure theory of external human action. We premise that human action is in its material cause a flow of change – sensible in consciousness, physical in the subconscious and the external world – that it is in its formal cause the emergence of intellectual forms with respect to this flow of change, that it is in its effective control the act of free will, which in itself is an act of love for the intelligible form (appetitus rationalis sequens formam intellectus),46 which in its implicit effect is an approbation or an inhibition of what is happening in the flow of physico-sensitive change. Thus, in the action of the individual there are three things: the physico-sensitive flow of change; the intellectual forms with respect to the phastasmal flux; the power of imposing the intellectual forms upon the flow of change, thus transforming behavior into rational conduct and speech into rational discourse. These three causes merge to constitute a single action: for what is caused by a material, a formal and an efficient cause is one and not three. Further, it is to be noticed that the basis of the one human flow of action lies in the material-physical-sensible order; what takes place in this order is pre-moved and (prescinding from the immanent control) predetermined by what takes place outside the individual; on the other hand, the immanent control of intellect and will is no more than a control; it is not a power of initiation but only a power of approval or inhibition. What you can think about depends upon external experience. What you think about it depends upon the mentality you have imbibed from an environment of home, school, university, and the general influences of others. The man with original thoughts from the viewpoint of history is merely an exception to the general rule; he is an instrument of social change and he is

46 [rational appetite follows the form of intellect]

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taken into account only in the theory of change and not in the theory of the regular event. Finally, the end of the individual as an individual is to accept the intellectual forms (effective assent to the true, consent to the good); by this means he attains the ejuevrgeia47 of his personality; on the other hand, inasmuch as he fails to accept the intelligible dictate and make it effective, he is merely predetermined by the physical flow; also, he sins[,] for sin is the failure to obey reason. But on top of this immanent end of individuals as individuals[,] there is the external flow of action, which is reasonable or unreasonable according to the goodness of the individuals, which nonetheless is something in itself. Now we must grasp the intimate connection between the internal and immanent action of man and his external and transient action. This connection is the intelligible unity and the material distinctness of men. Men are one in possessing one nature. A nature is the intelligible form explaining why a thing is of the kind it is. Men are many by matter. I am I and not somebody else, not for any assignable or conceivable reason but purely and simply as a matter of fact. Matter is the sensible antecedent to thought in its irreducible form; it is what can never be abstracted from phantasm and so never can be explained; and it can never be abstracted and never explained because there is no explanation, because it is pure matter of fact, the ultimate empirical. Finally, men are one in their action. Quidquid movetur ab alio movetur.48 This is easily demonstrated. For if anything changed without reference to something else, then it would be from every point of view the sole sufficient reason of its change. If it were the sole sufficient reason of its change, then there would be no change now but the thing would always have been what it now is becoming. This is a contradiction in terms. To deny the principle of the extrinsic mover is to suppose that a sufficient reason for change is not sufficient for the change at any time and, besides, that it was not sufficient but became sufficient without any sufficient reason of the becoming. Hence, everything that a man does or thinks is pre-moved by the action of other things. Further, this pre-motion extends into the intellectual field and constitutes the pre-motion of the will. In response to this release of pre-motion the will need not act: but if it does act then it acts according to the pre-determined intellectual form; if it does not act, then it sins in 47 [= energeia, ‘fulfilment.’ Energeia originally meant power or energy, and it is that word of Artistotle’s that the medievals translated as actus or operatio. See CWL2 111 ff. Since the context here has to do with one’s end or telos, ‘fulfilment’ might best express the author’s intent. I would like to thank Michael Shields, s.j., for his advice here.] 48 [Whatever is moved is moved by another]

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failing to follow the dictate of reason, while what takes place in action is pre-determined by the sensitive mobiles, the previous intellectual pattern, habits, etc., all of which are pre-determined. Thus, besides the unity of human nature there is the unity of human action. Human action is always pre-determined to either of two alternatives: one rational[,] the other irrational. Which is elected is not ultimately predetermined, though it may be proximately by the person’s character or habit of will. Nonetheless, these human elections, though free, are strictly subordinate to a statistical law. Men turn out in ever much the same proportion of good, indifferent and bad. What differentiates one social epoch from another does not lie in the individual wills of the time but in the upper and lower limits set these wills by the previous age. No man can be better than he knows how and no man can be worse than his temptations and opportunities. Thus the heritage of intellectual vacuity and social chaos given by the nineteenth century to the twentieth is the real reason why the twentieth is such a mess. Now, considering that all that takes place outside the human order in this world is pre-determined, considering that all of human action follows the pre-motions of the material world and previous human action according to a statistical law, we arrive at the conception of history as the flow of human acts proceeding from one human nature, materially individuated in space-time, and all united according to the principle of pre-motion. Hence, nature explains why man is of the kind of being that he is. History explains why men are doing what they are doing. Matter is the principle which makes the one human nature into a successive manifold of individuals operating the earlier upon the later according to the law of a pre-determined bracket of influence and a statistical uniformity within that bracket. Now, plainly it is impossible to influence human wills to do good without exerting an influence upon the external action that pre-moves and statistically pre-determines wills. This is the claim of the church, of spiritual authority. On the other hand, the flow of human action considered merely as an external flow is for definite ends yet entirely under the control of the wills. This is the basis of the continuous rebellions of the state from mediaeval times to the present day. We put the problem on its true philosophic basis by asking the meaning of history, the purpose of the external flow as such. Now, despite the cries of obscurantists to the contrary[,] there is as a matter of fact such a thing as progress. It is further manifest that progress is the fundamental concept in any theory of the external flow, the effective solidarity of mankind. For what is important in any flow is its differential. What flowed in the dim and distant past is of no earthly interest to us. But

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the differentials of what has flowed since integrate into the reality of the present, and that is of supreme concern to us. Further, the differentials of flow are something beyond the elements, the individuals in the flow. The nineteenth century was a century prating of Truth, Beauty, and Goodness. It had no concern for the differentials of flow in virtue of an asinine confidence in political economists. It has landed the twentieth century in an earthly hell. All the good intentions in the world are compatible with all the blunders conceivable. The nineteenth century was a century of good wills and bad intellects. The combination is fatal. Men being reasonable according to their individual lights of reason offer no guarantee that they are reasonable. Nor is any effort of the epoch to stabilize intellect, to make all think alike whether by newspapers, government education, official prejudices and histories and all the rest, any guarantee that the total and the differential of the total wisdom of the epoch is truly intelligent and reasonable. What is needed is a metaphysic of history, a differential calculus of progress. But what is progress? It is a matter of intellect. Intellect is understanding of sensible data. It is the guiding form, statistically effective, of human action transforming the sensible data of life. Finally, it is a fresh intellectual synthesis understanding the new situation created by the old intellectual form and providing a statistically effective form for the next cycle of human action that will bring forth in reality the incompleteness of the later act of intellect by setting it new problems. This follows from the very nature of the human intellect. It is a potency. A potency does not leap to its perfect act but goes through a series of incomplete acts on its way to attaining the perfect act, which is, as St Thomas says, perfect science. Let us generalize. The angelic intellect is instantaneous. It understands all there is to be understood in its individual world simply by being that individuality; it is intellect in act. The human intellect is intellect in potency; it is gradual; it arrives at its perfect act through a series of interactions between objective situations giving rise to intellectual theories and intellectual theories changing objective situations. Finally, as the angelic intellect knows all its to-be-known in the single instant of its being (aevum)[,]49 so the human intellect works through its stages of development in the instant of its being[,] which is all time. Thus, intellectual achievement is not the achievement of individual men[,] for individual men are unintelligibly different; intellectual achievement is the achievement of the race, of

49 [Aevum is a neologism referring to the location of angels, literally, an ‘airy place.’]

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the unity of human action; the individual genius is but the instrument of the race in its expansion. However, there is such a thing as sound philosophy, that is, definitive knowledge with an immutable basis. Philosophy stands above the shifting scene of time. Its basis is in the pure forms of knowledge. Sense knowledge, even in the perfect act of intellect, will be knowledge of an inexplicable multiplicity: that is, the difference of this point from that, and of this instant from that, and of this particular thing from that, with no possibility of there being any conceivable reason why each point, each instant, each particular thing is the particular that it is and not another. This gives the first element in metaphysical reality: the category of matter. Next, consciousness will always necessarily be a consciousness of action, of something acting, of the self acting: this existing substantial action, this ens per se, is no more to be understood in itself as an existing ens per se than the difference between points can be explained in terms of more points.50 We are forced to set up another metaphysical category, which is the ultimate basis of there being anything to be conscious of, just as matter is the ultimate basis of there being anything to perceive; this category is contingence[,] and contingence can no more be explained in terms of other contingent beings than matter can be explained in terms of more matter; contingence is the ultimate empirical in the order of consciousness just as matter is the ultimate empirical in the order of sense. Finally there is intellect[,] and it has its form. This form is the truth of the intelligible. Whenever you understand, you go on to ask whether your understanding is true, for instance, whether the circle really is all that it is because it is the locus of points equidistant from a centre. And when you understand that it is, then you know truth. Now truth is true not in virtue of your knowing it. It is true in itself[,] and the change merely happens in you in virtue of the contingence of your being. Thus, truth as an absolute, as something that is what it is in itself despite what you may happen to think and indifferent to what you happen to think, is the ultimate form of intellect. Perfect science will be true. Naturally, I can only outline the basis of the immutability of philosophy, of the way it takes hold of elements that will necessarily be found in the ultimate and perfect science of the perfect act of the human intellect. How philosophy sets up a theory of life on the basis of a triple metaphysical category of matter, contingence, and intelligible truth, is a question for a different essay much more elaborate than this one. The only point to be made 50 [Lonergan’s use of ens per se, usually translated as ‘being of itself,’ is odd here. Ens per se is usually opposed to ens per aliud (a being by another) or ens per accidens (accidental being, that is, what Lonergan refers to as a conjugate in Insight).]

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clear at present is the possibility of philosophy, of an universal science that is the form of all science, because it rests on the forms, the outer edges, the frames, of all possible knowledge. Now the possibility of philosophy leads us to distinguish between two phases in human progress: the automatic stage[,] in which there is a constant succession of brilliant flowerings and ultimate failures; the philosophic stage[,] in which the historical expansion of humanity has its ultimate control in a sound philosophy that not only is sound but also is able to guide the expansion effectively. Next, the actual course of human events divides this division once more into two sections. Hence we have: A. The world prior to the discovery of philosophy, that is, up to Socrates, Plato and Aristotle. B. The failure of philosophy to fulfill its social mission, that is, from Plato to the Dark Age. C. The automatic cultural expansion following upon the Dark Age and continuing up to the present. It has had a sound philosophy but not social consciousness of the social necessity of philosophy. D. The future. We may say a few words on each of them in turn. A. This period as a period is either pre-history or revealed truth. Since Catholics believe the Old Testament because they believe the New, we are following a logical order in postponing a consideration of revelation till the emergence of the New Covenant, the Mystery of Faith in the Blood of Christ. Hence we must turn to the pre-historians, and I count myself fortunate to be able to draw upon Mr. Christopher Dawson’s undoubtedly brilliant and, by the competent, highly praised Age of the Gods. Unfortunately, my memory must act as intermediary between that book and this essay, so I should in advance beg pardon for any inaccuracies. Let us distinguish the primitive cultures of hunters, fruit-gatherers, fishers, megalith devotees, etc., together with the merely peasant culture marked by painted pottery, from the higher culture of the Mesopotamian Temple States and Egyptian Dynasties. The theory of these last two is that the discovery of the ox and large-scale agriculture with its long-term investments necessitated a new idea of property – land that was not merely inviolable as hunting ground but not even to be walked on at will. This idea was made socially effective by the cult of the Mother Goddess who owned all the land and all its fruits, whose servants the agriculturalists were, from whom each received the bounteous reward of his labours.

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We must here notice first of all [that] the effect of a new means of exploiting matter leads to a greater and more strictly enforced social solidarity. Second, that what differentiates the higher culture of the near East from the painted-pottery culture generally is this stricter social bond. For it was in virtue of the socialistic theocracy that the Temple States acquired their capital, supported an expansion of agriculture into its subsidiary arts and crafts, led to richer religious rites with their initial literature of song and their initial science of calendars, formed the basis of a wider expansion through commerce, ultimately to culminate in the stupendous temples such as that of Carchemish and in a caste of priests, the law-givers, the administrators of justice, the directors of it all. Next to be noted is that the unity of the Nile valley quickly imposed a political unity or unities, while the Temple States would long continue to flourish as distinct units. But this geographical difference in no way affected the ultimate result. The god or goddess that is tied down and sacred to only one spot is unequal to the task of imposing social order beyond his frontier. The gods of the states made commercial treaties [only] to quarrel again[,] till finally the whole was swallowed up in a Babylon. Priests yielded to warrior kings. Finally must be observed the nature of empire, of bureaucratic rule. It is vigorous as long as it continues to expand, for then it has a social purpose to which all else is subordinate. But expansion inevitably yields to space; decreasing returns are as much a phenomenon of empire as of business. Next, once the expansion is ended, there is no social purpose beyond preserving what has been achieved. A bureaucracy cannot integrate the individual differential forces that would make for change and advancement; it suppresses them; it rules by rule of thumb which, however excellent at the beginning of the rule, becomes more and more antiquated, more and more the understanding of a situation that is anything but the existing situation. Hence, when there is no tendency to advance, a bureaucracy merely encases a mummy, though the mummies of Egypt have lasted longer than her dynasties. On the other hand, given a fundamentally new idea, the bureaucracy passes away in a bath of blood. But, though the ancient empires could not produce such an idea as could the liberals in the French Revolution and the Bolsheviks in Russia, the human spirit was not eternally baulked. The empires of Egypt, Babylon, Crete, Assyria, the Hittites passed away and on their ruins though on the fringe of their frontiers were born the city-states of Greece. Here we have the same phenomenon as the Temple States, the small social unit that is not primarily a unit of blood but of geographical position. But there is the difference that the Greeks did not owe their rise to sages who called themselves priests but to sages who were simply lawgivers, the leaders of comrades who fought

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side by side in battle. Death, the great leveler, is at the root of democracy. And democracy was the social form that made philosophy possible. Gotama would have been as great a dialectician as Socrates had he lived in Athens. But he lived where men had not the habit of demanding the reason why for everything, of listening to orators and appraising their arguments, of following the sophists to learn to be orators themselves. This social fact differentiated Socrates from all the wise and profound men who preceded him. It was the birth of philosophy, of following reason like a breeze, blow where it will. It was the promise of the eternal search for the reasons for everything up to the ultimum cur.51 But philosophy had other presuppositions. Not only had to be dispelled the herd instinct of being satisfied with what the wise man said without bothering for any ‘why’ beyond the fact that he was wise; there was the need of a rich and precise language, of a literature to make men think of man in general terms, of science to reveal there was such a thing as science and so the possibility of a science of science. B. Philosophy emerged with the assertion of its social significance. ‘Men and cities will not be happy till philosophers are kings’ is the central position of Plato’s Republic, and the Republic is the centre of the dialogues. To Plato, Pericles, the idol of Athenian aspirations, was an idiot; he built docks and brought fruits of all lands to Athens and beautified the city and pursued a policy of anticipating enemies while they were still weak; but he neglected the one thing necessary, the true happiness of the citizens. For did not the dialectic reveal that no man without self-contradiction could deny that suffering injustice was better than doing injustice, that pain was compatible with happiness, that shame, the interior contradiction, the lie in the soul of a man to himself, was incompatible with happiness[?] And whom had Socrates ever met that he could not reduce to nonsense? To put the truth in an easier form, let me recall a sentence from one of Mr. Dawson’s reflective essays: You can give men better homes and food and clothing; you can build them theatres and parks and recreation grounds; you can decrease their labour and increase their wages and multiply a thousandfold the products of industry and the earth; and still men will not be content: but you can lead them through pain and misery, through toil and privation, and they will be happy if only they have something to die for. The point is a commonplace of history and literature; it is a fundamental element of human psychology; and it is nonetheless true because the nineteenth century liberals believed exactly the contrary. The function, then, of the state is to teach virtue. But to teach virtue you 51 [ultimate why]

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must know it; only the philosopher can know it; none but the philosopher may be king, if the state is to attain its end, if men are to be happy. We cannot but grant the truth of the Platonic position; its truth is quite a different matter from its practicability. But we must measure both the strength and weakness of Platonism. It was evident to anyone contemplating what made and unmade statesmen in Athens, what determined the policies of the city states, what was the worth of the statesmen, the voters, the policies, what was the inevitable outcome, that there was an imperative need of a higher control. This was as evident to Plato then as it is evident to-day whether we cast our eyes within the frontiers of our ever so sovereign states or beyond into the chaos of international diplomacy, or close our eyes to the present, with the relief of waking from a nightmare, to meditate on the rise and decline of all cultures and political forms. They did not pass away because some stronger thing arose to crush them; they passed away because they first decomposed. The march of Alexander through the near East, like the march of the semi-barbarian legionaries through the Roman Empire, was but the profanation of a corpse and the scattering of the ashes of what long since lay dead. But however great the need for a higher control, for the rule of reason socially dominant and freeing society from a cyclic karma, as the rule of reason frees an individual man from the intermittent domination and ultimate collapse of his passions, what we have to consider was the possibility of Platonism meeting the need. The achievement of Platonism lay in its power of criticism. The search for a definition of virtue in the earlier dialogues establishes that virtue is an irreducible something, the emergence of a new light upon experience that cannot be brought back and expressed in terms of experience. This discovery of the idea, of intelligible forms, gave not only the dialectic but also the means of social criticism. For it enabled men to express[,] not by a symbol but by a concept[,] the divine. Primitive men could understand that there was a God but they could no more express this act of understanding that transcended experience than Einstein can make you a working model of space-time so that you will be able to understand the way he understands physical phenomena. They expressed symbolically this understanding; they tended to vary their symbols with the form of their society; the hunters had mystic animals; the peasants the Mother Goddess and her consort; and the Egyptian cults offer an interesting example of a super-position of the latter on the former; then there were the sky-gods of the nomads familiar in Greek, Roman, and Teutonic mythology, while the cult of the dead, the sacredness of the family tie, the beauties of nature and its terrors provided a subsidiary host. The supreme difficulty of substituting a concept for symbolism is borne in upon us by the constant warnings of the Hebrew prophets[,] which

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had their ground in the constant back-slidings of the Hebrew people. The same example shows us the dangers of symbolism, the ease with which it passed into idolatry and superstition and, finally, orgiastic lust whether in the somber cruelty of Baal or the routs of Dionysos. Nor is the origin of such degradation hard to find. The security and wealth of the settled state where religion tends to be the symbolism of a concrete utility, social order, provide quite a different psychological setting from the isolation and misery of primitive men; there is quite manifestly a temptation to think of the present good as the meaning of religion in the former case while only the transcendent can be good in the latter. Again, religion is the explanation of reality[,] and reality offers a twofold aspect: good and evil. This gives rise to a polytheism, which even Plato hardly dared oppose. He was content that the gods be good, that men did not seek to justify their passions by painting the gods as worse than such as enjoy a Mohammedan paradise. As the basis of social reform, Plato criticized the gods and goddesses of Greece[,] and in this he sought to make education his ally by purifying it of its manifest corruptions. But his positive work was weak. His guardians were trained in what can only be called a school of mysticism, yet mysticism is hardly an art to be acquired even in its natural, merely meta-psychic forms. His theory of marital communism was a failure, however excusable in Greece, to grasp the significance in social life of monogamy and the education of children, since parents love their children even as Plato loved his philosophy[,] with a love equally disinterested and far more easily attained. Finally, his crossing out ‘mine’ and ‘thine’ from the dictionary was but using a bludgeon where is needed a rapier. Plato’s greatness lies in his fidelity to the social problem in its most acute form. His Republic, like Kant’s Kritik, set a perfect question but utterly failed to answer it. But Plato stayed with his task. He tried to develop the dialectic in a series of dialogues that puzzle the modern student from their mixture of profound and simple problems that are all taken with equal earnestness. He remained a teacher, never putting forth an idea that was not so refined and polished that a smart lad could not get the point from the other end of the dialectical game. But eventually he renounced his projected Philosophos and with it philosophy; he wrote the Laws in an attempt to play in his very modern times the glorious role of the sage and law-giver of days so long gone by. He passed his mantle on to Aristotle, but for Aristotle the one issue was science and the only science of Ethics that Aristotle would attempt was a practical ethics that neatly dodged the real questions about the ultimate of society. The stream of practical influence that proceeded from Socrates forgot Plato and Aristotle to divide into Cynic and Cyrenaic, Stoic and Epicurean. The Epicurean simply renounces all attempt at higher control; the Stoic

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manfully seeks it but can succeed only for the individual, teaching all men, but more popular in times of stress and general misfortune than in times of joy, and, when popular, not teaching men to achieve but only to die with dignity. The gods and goddesses that Plato mildly rebuked remained as strong as ever, a pall of gibbering ghosts to dim the luster of the decaying empire of Rome. The Stoics whether the victims of imperial arbitrariness or the rulers from the throne of the Caesars could not halt that decay. And though in the fourth century Christianity was an ever growing and manifest power, still Christ had not come to save the world. C. This period is a continuous advance accompanied by a continuous retrogression. The initial situation are the infinitesimal unities that were later integrated into the feudal hierarchy and, on the other hand, the Christian Church. From the church canonists came the laws that were the basis of an economic expansion by commerce, just as previously from the monastic centres came the agriculture that was the foundation of commerce. The full flowering of these two may be represented by the gothic cathedrals and the monarchies not yet exalted by any absolutist doctrine of the divine right of kings. Again from the church came the universities and the scholastic science[,] which put Christianity on a far higher natural basis than had been known in the early church. The scandal of the anti-popes was the turning point of the whole period. For when in Italy, more under Byzantine influence than under that of the Nordic culture[,] which may be represented by a circle with its centre at Aix-la-Chapelle (C. Dawson), the discovery of ancient literature not only gave a new birth to modern literature but as well cast a glamour over ancient paganism, a section of the North was able to secede from the intellectual unity of Christendom: This secession had a double cause, pagan corruption and the obscuration of papal authority. History now flows in two streams and the villain of the piece is the state. The state stabilized the heresies. The wars of religion between the states, in which religion was not the determining factor (Richelieu), gave birth to a new principle, Liberalism: this was the negation of the need of higher control; what Plato longed for, the liberal threw away. The liberal state considered itself an absolute sovereign, as much the Catholic as the Protestant, as much the kings as the later democracies. Meanwhile the positive progress continued; to law and scholastic philosophy and modern literature was added the deliriously brilliant achievement of mathematical science. Science combined with liberalism to make political economy and to transfer power from an aristocracy to a plutocracy. Liberalism is a fact not a theory: but it inevitably tends to either of two theories, modernism or Bolshevism, neither of which are autonomous theories but arise from the objective situation and represent two directions that may be adopted to make it a consistent uni-

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ty. The modernist desires to leave the whole of history without any higher control: all thought that is not positive science has no justifiable application to the objective situation since such thought has only a subjective value; all thought that is positive science merely represents inevitable law, the truth of what is going to happen in any case. The Bolshevist on the contrary takes as his starting-point precisely the indifference of the modernist to the objective situation, argues that his religion is merely a sham, an opiate to soothe the misery of those oppressed by the modernist state. However, Bolshevism uses theory only as a starting-point: its intrinsic nature is the domination of the fait accompli. It is the science of propaganda, the strategy of revolution, the political creed of cowing men by brutality and terror, and the art of permanently winning their hearts by moral perversion. As Mme. Kollontai put it: ‘Immorality is progressing favorably in the schools.’ Bolshevism is ludicrous with its initial assertion that man is no more than an animal; but Bolshevism is terrible in its power to prove its own truth by making man no more than an animal. The present situation is, on the one hand, the Bolshevist assertion of the animal in man and, on the other hand, the Church’s absolute assertion of the spiritual nature of man. Between these two historic forces lie the liberal sovereign states with their economic problems and their political hatreds and fears: these are the pawns in the game[,] however solid they may appear with their devotion to whatever is merely because it is. We now return to the general theory, which we left with the division of progress into automatic and philosophic. We observe that the initial automatic period led automatically to the emergence of philosophy. Intellect discovered the possibility of social organization for the fuller exploitation of material goods; this took the form of a socialistic theocracy and gave rise to all the material achievement of man up to the industrial revolution; it laid the basis for the enrichment of language into literature and the discovery of science; the postulate of higher control over commerce changed the rule of priests into a rule of warriors; on this followed decay because the warriors could do nothing more once they had an empire. Still out of the ancient culture and on the fringe of its influence arose the no longer nomadic warrior and so the democratic city states of Greece; democracy made philosophy possible. Next to be observed is the impotence of philosophy to fulfill its function of higher control. Men want symbols and philosophy postulates concepts. Third to be observed is the fact that Christianity was at once a symbol and a trans-philosophic higher control. In consequence modern history as a progress is in the reverse order to ancient history. The moderns began philosophy, went on to literature, developed science and then applied it. The ancients first learnt the practical arts, then literature, then science

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and finally philosophy. On the other hand, the reformation does not differ from polytheism and liberalism does not differ from the depravation of polytheism: the reformation accepted the states instead of the church because there was something it did not understand; liberalism denied higher control to bring theory into accordance with objective fact. Fourth to be observed is that while the ancient cycle was a dialectic of fact, the modern cycle was a dialectic of thought: these differ in that the dialectic of fact has its first motion in material needs (socialistic agriculture, empire, democracy, more empire)[,] the dialectic of thought has its first motion from thought (canon law, monarchy, philosophy from theology, applied science from theoretical science). Fifth to be observed is that the retrograde movement in the modern period arises from the super-position of the dialectic of fact upon the dialectic of thought. The reformation appealed to the councils above the anti-popes (not really so but apparently so, which is the point of this dialectic); liberalism appealed to the religious wars as fought for nothing (true of the way they were fought but not true of what they might have been fought for); modernism appealed to Kantian agnosticism (a problem not a philosophy); communism appealed to the indifference of religion to the social problem (true of some religion, namely such as does not vindicate its right to dictate to all consciences as consciences on all issues). Sixth, comes the emergence of the pure dialectic of fact, the realization of the materialist conception of history that Karl Marx supposed to be the true conception of history. Bolshevism deals only with facts: but it makes the facts it deals with. Seventh, we prove our assertion that the state is the villain of the modern piece.52 For, in so far as the state really could progress, it had to be subject to the higher control of intellect. The higher control of intellect we may honestly attribute neither to the general run of kings nor of parliaments. Yet as long as the state was subject to the higher intellectual control, it was in continuous rebellion; when it laid this control aside (Reformation and Gallicanism),53 it surrendered itself hands bound to the domination of

52 [The following sentence is crossed out after ‘piece’: ‘Distinguish from the state the function of internal economic order, the administration of justice and the development of law with its presupposition of a plan of social progress.’] 53 [Lonergan inserts ‘Reformation and Gallicanism’ by hand. On ‘Gallicanism,’ the Catholic Encyclopedia has this: ‘This term is used to designate a certain group of religious opinions for some time peculiar to the Church of France, or Gallican Church, and the theological schools of that country. These opinions, in opposition to the ideas which were called in France “Ultramontane,”

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economic law (Liberalism). In both cases it deliberately fostered the mere dialectic of fact in the form of nationalism – the stupid appeal to a common language and a united geographical position as something of real significance. In both cases it had to do this: in the former to have a weapon against spiritual authority; in the latter to have a weapon against economic rivals.54 D. We turn to the philosophic estimate of the future. The first point to be noted is that the antinomy of church and state is fundamental. The state is the social expression of the natural ambitions and desires of man; it is the home of literature with its universal outlook from the mysticism of romanticism to the sober, humanistic beauty of classicism and naturally ordered human life; it is the support of scientific effort with its inward enthusiasms and outwardly manifest benefits; it is the common effort of a people whose mentality is molded by a common language, common manners, common historical memories of triumphs and deep grievances, to carry on the work of human advancement till the dream of a democracy which is an aristocracy for all be realized. But not only does the state sum up the natural ambitions and desires of man at their best; it is the real power of modern times as in any time in the past. It deliberately exploits all that is excellent and much that is evil in the social mentality and in the desires of individuals to make its power an absolute and unquestionable power. Against this stands the church with its foundation not in the outward flow of history but in the consciences of individuals. For the church to take advantage of state support is, indeed, in the reasonable order of things. But this support is in the last analysis no addition to the church’s real founda-

tended chiefly to a restraint of the pope’s authority in the Church in favor of that of the bishops and the temporal ruler. It is important, however, to remark at the outset that the warmest and most accredited partisans of Gallican ideas by no means contested the pope’s primacy in the Church, and never claimed for their ideas the force of articles of faith. They aimed only at making it clear that their way of regarding the authority of the pope seemed to them more in conformity with Holy Scripture and tradition. At the same time, their theory did not, as they regarded it, transgress the limits of free opinions, which it is allowable for any theological school to choose for itself provided that the Catholic Creed be duly accepted,’ .] 54 [At this point Lonergan crossed out the following: ‘Eighth, we observe that the state had a real problem. There was in the philosophy of the spiritual authority no systematic recognition and official [encouragement?] of progress after the counter-reformation.’ Lonergan picks up this theme on p. 40 below.]

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tion[,] which is in the individual conscience; it is a support that will weather the squalls and the smaller storms of the historical process; it is not a support that will see the church through the incessant drag of the dialectic of fact. For this dialectic also has its hold on the conscience. The good men would do, they do not do. This contradiction in the conscience itself ever tends to the rationalism of making wrong into right. Till wrong is openly asserted to be right, sin is but an incidental element in the historic flow; it is a constant that vanishes when one differentiates to find the forces. But when wrong sets itself up as a theory, then it becomes a force; then sin really enters into the world; then men are unconsciously corrupted. This corruption is not merely moral; it is not merely the generalization and universalization of the defended sin; it is a continuous potentiality of further rationalism, for the false[ness] that is in men’s minds seeks to be made consistent with the truth that they possess[,] and the process inevitably ends with the falsification of all that is true. Once error has found an entrance in the name of sin, it can hardly be exorcized. For to crush the error, the sin must first be crushed; and ex hypothesi the sin could not be crushed even when man had the truth. Against the rationalizing dialectic of fact, the church has a double weapon: to remove the contradiction from the individual conscience, to make the sinner affirm that sin is sin and so preclude the possibility of trying to make out that sin is not sin, there is the sacrament and the practice of auricular confession; to crush any incipient movement of rationalization in the social field, there is the teaching magesterium of the church. Together, these two form a perfect bulwark. Hence the heretics of the sixteenth century had to precede the rationalists of the eighteenth, just as the rationalists of the eighteenth century had to precede the communists of our own. On the other hand, everything in the modern mentality outside the church – in so far as that mentality rests upon tradition set up since the reformation – is necessarily in opposition to the church. Only the mind that can sweep away the whole of the outlook imposed upon it by its environment is capable of coming back to the church: the difficulty of the task may be estimated by the fact that it took Newman over fifteen years to do so. However highly we estimate the power of the church to attract souls, we must remember that those attracted must from the nature of the case be a select minority. The first three centuries of Christianity gave the conversion of only from ten to twenty per cent of the Roman Empire. Liberalism is the supreme social doctrine of modern times, in Catholic countries as well as non-Catholic. Intrinsically, that is, as far as logic goes, liberalism is simply a cipher: the assertion that logic has nothing to do with the control of social life, with history. It was on this ground that we asserted liberalism to be the pawn between bolshevism and Catholicism. It may last

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for centuries, as did Egypt, Babylon, Rome. It cannot last forever. The political mechanism on which it rests is the ability of England to maintain the balance of power on the continent of Europe – a process that will last just so long as no power on the continent can snap its fingers at England. When that day comes we shall have a European empire; a beneficent despot or an utter tyrant according to circumstance and mood; absolute, for the modern means of warfare give a central government as great a power over a greater area as did gunpowder to the monarchs; great or insignificant, according to the carnage and cost of the initial achievement; decadent, for the economic problem will remain and a socialistic empire is not a solution. Meanwhile we note that the modern state has no claim to be a sovereign state, to make final and absolute decisions. First, because no modern state is a perfect society. A perfect society has the right of making final and absolute decisions because it holds under its control and responsibility all that is affected by the decisions. No modern state, generally speaking, is either economically or politically independent. The world is run by an oligarchy of Grossmächte and the justice of their decisions is as much open to question as the existence of their right to make decisions. Thus, there is a triple reason for the liquidation of the present order of sovereign states. First, they must be conducted on no intelligible principle; they must argue not from what ought to be but solely from what is; they cannot but be liberal, else they are not sovereign. Second, social theory as theory can assign no basis to their pretended right to making absolute decisions; they are neither economically nor politically independent and therefore they are not sovereign. Third, their action is immoral and cannot but be immoral. It is immoral in the domination of the Great Powers: even were they wise and just, they have not the right to make the decisions that they do make. Further, it is immoral in the fomentation of nationalism by the perversion of the newspaper, the school, and practically everything else: nationalism is the setting up of a tribal god not merely in the case of Germany – at whom the world smiles for its self-idolatry – but in every case; every nation foments nationalism according to its need; Germany’s exaltation of the nation is only the index of a greater need; every country does so, because no country in the present situation can be conducted on an intelligible principle and so it must be conducted on an asinine principle. Again, the action of the sovereign states is necessarily immoral in the matter of armament manufacture: no country dare tell the private firms to close up shop, because no country knows when they will need them. And, not only in this matter but in every economic question the antiquated sovereignty of the state is the fundamental difficulty; this will sufficiently appear from our discussion of economics. When we pass from liberalism to bolshevism we descend to a lower level

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in the dialectic of fact. The liberal argues from what is; the bolshevist argues from what the bolshevist by propaganda, revolution, terrorism, and sexual perversion will make of man. As the barbaric legionaries destroyed the decaying Roman Empire, bolshevism will do all it can to destroy the decaying liberal world. The bolshevik is not considered a power in the modern world much as Philip of Macedon was not considered a power in the Greek world. It is not impossible that all attempts to unite Europe will be as futile as Demosthenes’ Philippics. But it is manifest that the modern Philip has a hold upon the modern states not only in his power of arms but also in his power to win the allegiance of everyone in the liberal states who wishes justice but not Christ. Before attempting the synthesis, we distinguish: The absolute dialectic: revelation, prophecy, development of dogma. The dialectic of fact: (a) Mere fact: the ancient higher culture of the Near East. (b) Sin: The corruption of ancient culture and the beginning of the corruption in modern culture. (c) Revealed fact: the development of the Jews and of Christendom up to the end of the middle ages. The dialectic of thought: (a) Natural reason: Plato’s attempt at a social philosophy. (b) Rationalism: reformation, liberalism, and bolshevism. (c) Faith: scholastic social theory culminating in the encyclicals of His Holiness, Pius XI. We observe an anomaly, the necessity of the supernatural and the fact that the supernatural does not eliminate a dialectic based upon sin as a datum for irreflective action or theory of what is, even though sin is non-ens. The necessity of the supernatural appears in the failure of the ancients to produce a social philosophy and the fact that the modern secular dialectic of thought made sin a datum for its social theory to end with the cult of sin, bolshevism. The fact that the supernatural does not eliminate a dialectic based on sin appears both in the ultimate corruption of the Jews who crucified Christ (irreflective dialectic of sin) and in the scandal of the anti-popes, the reformation, and the subsequent dialectic of thought that had sin for its premise. We note in passing that the hope of the future lies in a philosophic presentation of the supernatural concept of social order: it must be guided by the faith[,] for reason alone is inadequate[,] as we see both in the failure of Plato’s thought and in the impossibility of presenting pure philosophy

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as an idée-force ;55 but though supernatural it must also be philosophic, for only a sound philosophy can establish the intellectual conviction necessary to reassure men, can eliminate false theories in a purely natural sphere, can give positive guidance in what the Pope called in his encyclical ‘technical matters’ lying outside the scope of his pastoral office. It will be useful to ask in what this necessity of the supernatural, as revealed by the dialectic, consists. It is a necessity not of nature but of action. Human action is one: a statistically predetermined flow; all the individual can do is accept or reject the intellectual forms supplied him for the guidance of his action by the environment; if he thinks of anything not supplied him by the environment, he is merely incidental, or he is an instrument used by humanity to bring forth a new idea which will become part of some existing movement or the initiation of a new movement. The necessity of the supernatural for action does not prove that the supernatural is not the supernatural. The supernatural is what transcends nature in its constituents, consequents, exigencies. The need of the supernatural for action does not contradict this transcendence of nature. For the need of the supernatural for action has its sole premise in sin. But sin is not a constituent of nature; it is not a consequence of nature; nor does nature by sinning establish any exigence in the order of rights but only a petition to the Divine Mercy for the gratuitousness of grace. But it would seem that sin establishes an exigence in the order of rights: the present generation suffers for the sins of the past; that the present should suffer for the past is unjust. That the present should suffer for the past is not unjust, for humanity is not an aggregation of individuals. It is one reality in the order of the intelligible. It is a many in virtue of matter alone. Now any right and any exigence has its foundation only in the intelligible. Matter is not the basis of exigence but the basis of potentiality. THE ONE INTELLIGIBLE REALITY, MAN, HUMANITY, UNFOLDS BY MEANS OF MATTER INTO A MATERIAL MULTIPLICITY OF MEN, THAT THE MATERIAL MULTIPLICITY MAY RISE, NOT FROM ITSELF, BUT FROM THE INTELLIGIBLE UNITY, TO AN INTELLIGIBLE MULTIPLICITY OF PERSONALITIES. Men become from man as grapes from the one vine; if the vine corrupts, so do the grapes; but the grapes suffer no injustice from the vine; they are but part of the vine. As is plain, there is a peculiar relation between the earlier and the later in history. We put this relation in the limiting case when we think of the first 55 [Literally, ‘forceful idea,’ meaning here ‘operative ideology.’]

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man. For the first man sinned, leaving man, spoliatus gratuitis, vulneratus in naturalibus.56 Spoliatus gratuitis, for the unity of human nature lost its divine adoption. Vulneratus in naturalibus, for the course of history was reversed: man instead of developing from an initial knowledge of philosophy had to develop by the exploitation of matter in a social form. In addition to this was set up the awful tradition of sin. ‘... by one man sin entered into this world and by sin death; and so death passed upon all men, in whom all have sinned.’ (Rom. 5.12) But there was a second Adam, to restore the divine adoption by a new creation, to set up as first mover a new tradition of grace. ‘For if by the offence of one, many died: much more the grace of God and the gift, by the grace of one man, Jesus Christ, hath abounded unto many. And not as it was by one sin, so also is the gift. For judgment indeed was by one unto condemnation: but grace is of many offences unto justification. For if by one man’s offence death reigned through one; much more they who receive abundance of grace and of the gift and of justice shall reign in life through one, Jesus Christ. Therefore, as by the offence of one, unto all men to condemnation: so also by the justice of one, unto all men to justification of life. For as by the disobedience of one man, many were made sinners: so also by the obedience of one, many shall be made just.’ (Rom. 5 15–19)57 There is no need to argue that we have here an insistence upon the metaphysical and physical relations of the one and the many: the metaphysical in Adam’s loss of grace and Christ’s restoration of it in a ‘new creation’; the physical in the fact that sin set up the dialectic of fact to bring about the ‘many offences’ and the general corruption of history. ‘For we have charged both Jews and Greeks that they are all under sin. As it is written: There is not any man just. There is none that understandeth: there is none that seeketh after God. All have turned out of the way: they are become unprofitable together: there is none that doth good, there is not so much as one. Their throat is an open sepulcher: with their tongues they have dealt deceitfully. The venom of asps is under their lips. Whose mouth is full of cursing and bitterness: their feet swift to shed blood: destruction and misery in their ways: and the way of peace they have not known. There is no fear of God before their eyes.’ (Rom. 3.9–18) ‘And as they liked not to have God in their knowledge, God delivered them up to a reprobate sense, to do those things which are not convenient. Being filled with all iniquity, malice, fornication, avarice, wickedness: full of envy, murder, contention, deceit, malignity: whisperers, detractors, hateful to God, contumelious, proud, haughty, inventors of evil things, disobedient to parents, foolish, dissolute: without affection, without

56 [spoiled in the grace-given, wounded in nature] 57 [Emphasis added by Lonergan.]

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fidelity, without mercy. Who, having known the justice of God, did not understand that they who do such things, are worthy of death: and not only they that do them, but they also that consent to them that do them.’ (Rom. 1.28–32). These are the many offences, the height of human corruption, arising from the refusal to have God in human knowledge, and brought about by a corporate responsibility of those who do evil and those that consent to evil-doers. Now Christ not only restores the divine adoption: he is also the first mover of a new order. But ‘not as it was by one sin, so also is the gift.’ The one sin proceeds from its unity to many offences; but the gift proceeds from the many offences unto one justification in Christ Jesus. The many offences are brought under a higher control, are integrated into a new movement, ‘in the dispensation of the fullness of times, to re-establish (anakeralaiwÐ ta′, integrate) all things in Christ, that are in heaven and on earth, in him.’ (Eph. 1.10) Let us study this movement of integration, of bringing the scattered elements of humanity no longer submissive to the law of reason back under the control of that law. There is no difficulty in identifying the unity of human action that is consequent to the action of Christ as a new prime mover in society, a second Adam, with what is called the mystical Body of Christ, that is, the ‘many’ of his metaphysical ‘one’ in the ‘new creation’ of humanity. In this new creation there are the two aspects of nature and action: nature is elevated by sanctifying grace; action is made good by actual grace. As we deal with the theory of human action, we concentrate attention on the latter. I would define actual grace as the pre-motion consequent to Christ. Its social form is the koiwui′a, the sharing with Christ, the communion with Christ. In itself, this social form has a fourfold aspect. As a body that lives by the blood of Christ, it is the eternal priesthood according to the order of Melchisedech and the sacraments that apply to the grace of Christ’s sacrifice. As a body that is but an extension of the body of Christ, it exercises a power of jurisdiction, admitting members into the body by baptism, excluding decayed cells from the organism by excommunication. As a body united to Christ as Head, it is of one mind and with the authority of a divinely constituted teacher; ‘we have the mind of Christ’ (1 Cor. 2.16) and that mind is not only one but authoritative. Finally, as Christ’s Body, it executes the will of the Head, of Him who exclaimed: ‘Jerusalem, Jerusalem, thou that killest the prophets and stonest them that are sent unto thee, how often would I have gathered together thy children, as the hen doth gather her chickens under her wings, and thou wouldst not!’ It is in the Body of Christ that the Christian lives and moves, lives the life of a soul elevated to the supernatural order, moves in obedience to the idée-force ; the intelligible or rather transintelligible form which by revelation is the Christian’s dictate of reason.

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Christ is the vine and we are the branches. By Him we are all that we are, for being is act and every act has its pre-motion[,] while sin is non-act, non-ens, the failure of the will to perform its immanent act of love for the intelligible form which makes action rational. But the Christian and the social form of Christianity, the Church, is in the world. ‘I pray not that thou shouldst take them out of the world, but that thou shouldst keep them from evil.’ (John 17.15) The presence of Christianity in the world gives rise to a two-fold movement each part of which divides into a prior dialectic of fact and a subsequent dialectic of thought. There is the movement of Christianity assimilating the world to itself, the work of the leaven that leaveneth the whole mass. There is movement of the world, convicted of sin yet refusing grace, in opposition to this intussusception of all things into the Body of Christ. Further the movement of Christianity may be a simple dialectic of fact, the spontaneous expansion through the zeal of apostles, the courage of martyrs (sanguis martyrum, semen ecclesiae),58 the moral beauty of Christian life. And similarly the rejection on the part of the world may be a spontaneous movement of hatred: such was the fury of the Roman persecutions (Tacitus: odio humani generis convicti sunt;59 Tertullian, Apol. 7: coepit veritas, simul atque apparuit, inimica esse 60)[,] and the liberal doubts about ‘odium fidei ’61 as the basis of the persecutions not only have no foundation in historical science but argue a singular superficiality in human psychology. Again, there is the long interplay of static action and reaction, in which the church learns the value of philosophy from the definition of the ‘homoousios’ through the scholastic systematization of dogma to the modern elevation of St. Thomas. On the other hand, during this same period the world builds up its dialectic of thought to arrive at Bolshevism as the one logical position for its resistance to Truth. Finally, there is the new apostolate and the new persecution. These proceed from the conclusions of the dialectic of thought. The Church turns to scientific sociology and missiology. Sin turns to scientific propaganda, physical domination, moral perversion. Between these two contending forces, the ajuhvr pueumatikov~ 62 and the ajuhvr sarkikov~ 63 lies the liberal idea of merely natural man, the ajuhvra yucikov~,64 with no firmer foundation than actual fact

58 59 60 61 62 63 64

[the blood of martyrs, the seed of the church] [convicted of a hatred of humanity] [truth began, immediately on its appearance, to be hostile] [the hatefulness of faith] [= anêr pneumaticus, ‘man of spirit.’] [= anêr sarcicus, ‘man of the flesh.’] [= anêr psychicus, ‘man of nature.’]

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and with no theory save a theory that ignores the two fundamental facts of original sin and the Incarnation. We now advance to our final conclusion, first examining the logic of our analysis of history, second asking what is the meaning of history. Our analysis is strictly philosophic. We lay down the theory of the intellectual unity and material difference of humanity; we divide the intelligible unity into an unity of nature and an unity of action; we demonstrate the unity of action from the principle of pre-motion; we explain the limitation of free will, by noticing that the act of free will is either an acceptance of a rational dictate (and what reason dictates is predetermined) or the non-acceptance of the rational dictate (and what then happens is entirely predetermined). Perhaps, it will be necessary for our outline of a Summa Philosophica to be read for the full appreciation of these philosophic points, particularly in what concerns freedom and the rationalization of sin. However, we legitimately assume here what we prove elsewhere. Second we study change itself. We divide change into three kinds, according to its historic significance. First is the mere change of ordinary action: man lives as his ancestors. Second is the change that follows from the emergence of new ideas. Third is the change that follows from the emergence of systems of ideas, of philosophies. The first kind of change is of no interest. The second kind of change falls into three classes: ideas that understand the objective world; ideas that are vitiated by the existence of sin in the objective world; ideas that are elevated by the influence of divine revelation. In the third section we again have these same three divisions: but there is an essential difference. The ideas of the second kind of change are ideas in the concrete while those of the third kind are ideas in the abstract. The logic of ideas in the concrete is the logic of fact: it does not work out in pure thought but in the objective situation. Thus, the temple states of Mesopotamia and the city states of Greece had no unifying idea effective in the concrete: they were forced into an empire by the lack of such an idea, but this lack did not work out as a syllogism but by wars. Similarly, the empires were logically bound to fail for the lack of an idea that would integrate the differentials of change and progress in their far-flung territories: but Egypt, Babylon and Rome passed away not by force of logic but by inner decay. On the other hand, the function of the applied dialectic of thought is to anticipate the need of the objective situation. Thus, the communist anticipates the breakdown of capitalism. The Church executes a plan for the social order. The liberal was confident that ‘laissez faire’ was an infallible recipe for the greatest happiness of the greatest number. The Church, the liberal, and the communist bring about objective social change not by ideas in the concrete but by ideas in the abstract.

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It may be asked, especially of one who writes in English, what is the value of abstract ideas applied to the situation. Let us be practical! The answer is that the abstract ideas have, indeed, a greater possibility of being wrong than the concrete ideas. Also, they work out for good or evil far more rapidly. But, whether we like it or not, the world has got beyond the stage where concrete problems can be solved merely in the concrete. Economics supplies us with the most palpable example: you have to have some economic theory in conducting the state[,] and changing from one to another with every change of government is neither intelligent, fair to the people, or fair to the wide world[,] which has to have an universal solution to the problem or go to pieces. Politics supplies us with another example. The modern state does not think in terms of the past, of its merits or demerits in being what it is; it thinks in terms of the future[,] and if it foresees that it is being put out of the running by those with more economic power and more diplomatic skill, then it simply turns berserk in the name of Odin, Thor, or what you please. The sum and substance of the whole issue is that ideas in the concrete will build you a shanty but not a house and still less a skyscraper. The modern situation demands that questions be settled not in the concrete, not by the petty minds of politics [sic] who think of grabbing all they can because they can and make a virtue of not doing what they know either to be unprofitable or impossible, but in terms of pure reason. Physical reality functions perfectly in blind obedience to intelligible law. Humanity must first discover its law and then apply it: to discover the law is a long process and to apply it a painful process[,] but it has to be done. The alternative is extinction. And practical minds are oriented towards extinction just as much whether they realize the point or not. To return to history. From the point of view of the seven dialectics, the absolute Geist of revelation which develops in its reaction to the world, the triple form of the dialectic of fact and the triple form of the dialectic of thought, we do not pretend that these do not super-pose and interact: on the contrary that is their very nature. On the other hand, we may distinguish three distinct periods that view these dialectics from a different point of view. The first period was the development of mind by material need and social collaboration: it gave the world the idea of philosophy in Plato. The second period was the development of philosophy from Plato to the emergence of the idea of social philosophy: this period continues till the need of the philosophy as the prime mover in social life is recognized generally. The third period is the development of society under the control of a social philosophy: liberalism, the negation of any social philosophy, was the fact that makes a social philosophy a necessity of which men can be conscious; communism is a wild-eyed attempt to give the world such a philosophy;

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Catholic social theory has existed since the middle ages[,] but the degree to which Catholics were conscious of the importance of social philosophy has been small almost up to the present time. Again we digress to note the peculiarity of Catholic development. Catholic development is by reaction, but reaction may be mere opposition or it may be higher synthesis; that much has been mere opposition was inevitable as long as Catholics did not grasp the significance of intellectual development and the necessary consequence of such intellectual development in social change: this failure of Catholics has always been a failure on the part of individuals.65 There were bishops who objected to the term ‘homoousios’66 because it was not in Scripture; there were contemporaries to oppose St. Thomas who followed Aristotle and took the trouble to talk about the Arabs and refute them; there are Thomists whose last thought is to imitate St. Thomas in this matter of thinking in pace with the times. Similarly, what is called anti-clericalism is at root the antinomy between a merely traditional mentality and a mentality that is thinking in terms of the future and of the problems of which the mere traditionalist has not the ghost of a notion, in fact, would flatly deny their existence, or, if they exist, that something should be done about it, or, if that is manifest, then that anything can be done about it. It is not indeed to be denied that the reactionary attitude has not a very firm foundation in fact, namely, in the very palpable fact that all the progressives are more or less in error, more or less perverse, more or less destructive. Nor is it to be denied that the reactionaries had any other course open to them in the past. You can protect the good either by simply sitting back or by advancing with the good; but to advance with the good you have to have a theory of progress and a will to progress; these were lacking. Thus it is in the theory of social order, in the re-establishment of all

65 [For Lonergan, ‘reaction’ is not necessarily equated with ‘reactionary.’ A reaction may be either positive or negative. In ‘Analytic Concept of History, in Blurred Outline,’ Lonergan writes: ‘The transition from the single dialectics to the multiple may be made by a consideration of transference and reaction. Transference is the importation into a social unit of the attainments and/or miseries of another ... Reaction commonly denotes opposition to progress or decline with the social unit. Here we use it to denote opposition to the importation of progress (unhealthy reaction) or of decline (healthy reaction)’ (p. 16 in original). Again in ‘Analytic Concept of History’: ‘Reaction commonly denotes opposition to progress or decline within the social unit: here we use it to denote opposition to importation. We distinguish healthy and unhealthy reaction. Healthy is the opposition to the importation of foreign decadence; unhealthy is opposition to the importation of foreign progress’ (28).] 66 [one substance]

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things in Christ, in the leadership of Christ, King of the historical process, Prime Mover of the new order, that Pope Pius XI has laid the foundations for a triumph over an old, inevitable, and regrettable antinomy. For it is only in the philosophy of the church that can be attained the realization of the conception which Plato could not realize. It was true when Plato penned his Republic but it is even more manifestly true today that ‘Men and cities can not have happiness unless philosophers are kings.’ To the world in its present plight of economic distress and political insecurity[,] the Church offers not philosophers but philosophy, nay, hv aJgiva Soϕiva,67 the word made flesh, Truth consubstantial with the Father and the Spirit, as eternal King, as ruler of the historic process now that history has entered on its final stage of realizing abstract ideas. We deduce the meaning of history from the intention of God’s creating man as one, one in nature and one in action. Creation aims at the manifestation of subsistential Wisdom, the Word. The angelic intellect is to the Word as the contingent to the Absolute; human intellect is to the angelic as potency to act. The contingent and the potential intellect are not merely mere participations of the absolute Wisdom but also are wisdoms in potency. To be wisdom in act they must meet with an act of love for the intelligible on the part of the will, appetitus rationalis sequens formam intellectus. But the will is free; you love because you love. To transcend freedom, creation divides into two parts: there is the angelic creation of pure individuals, specifically different from one another, and in this creation the good manifest Wisdom while the evil are the prime movers of sin in a world where there are not pure individuals but merely individuation by matter. In the material world, the manifestation of Wisdom lies in the triumph of good out of evil; because evil caused evil in the world, the world brings good out of this evil for a final vindication of good and a final triumph of the Sapientia manifestanda.68 Because men are but one in nature and action, all the good in the world flows from the pre-motion of Wisdom and would not be were it not for that pre-motion. On the other hand, all the evil in the world proceeds from its arbitrary basis of refusing the dictate of reason, spreads by a dialectic of evil till evil is crushed by its own excess to give rise to a contrary and higher movement for still greater good. No flesh may glory in the sight of the Lord, for all good has its causation both physical and moral in the pre-motion of Christ. No evil can triumph for every evil is permitted merely that good may more fully abound.

67 [= hê hagia Sophia, ‘(the) divine wisdom.’] 68 [Wisdom to be revealed]

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The role of the individual in the historic flux is two-fold. Pre-motion offers him an intelligible dictate. He may accept, but his acceptance is not an act of his but simply an act that takes place in him: for the will naturally follows the dictate of reason; that is its ‘inclinatio naturalis.’ He may not accept, but then he simply does nothing[,] for sin is non-ens,69 the failure of the will to act, something uncaused and inexplicable (because against reason), pure malice that is entirely his. This is regarding the individual from the viewpoint of the antecedents to his act or non-act. But the individual’s act is not only a bracketed product of the past: it is a pre-motion for the future. The motion of the Prime Mover is passed from one individual to the next. Now according as the individual acts according to reason or fails to do so, he decreases or increases the quantity of objective evil, of a disharmony between reason and objective fact in the world. Every individual is an instrument in the transmission of the pre-motion: but he may be an instrument for more sin or for less. He may be an instrument of sin or of Christ. ‘Let not sin therefore reign in your mortal body, so as to obey the lusts thereof. Neither yield ye your members as instruments of iniquity unto sin: but present yourselves to God, as those that are alive from the dead; and your members as instruments of justice unto God.’ (Rom[.] 6.12, 13) cf. ibid. 6.19; 7.5, 6. The meaning then of history is plain. It is the ever-fuller manifestation of Eternal Wisdom, first in a dialectic of fact and then through revelation in a dialectic of thought. The significance of the individual, ‘endured with much patience as a vessel of wrath fitted for destruction ... or a vessel of mercy ... prepared unto glory’ (Rom. 9.22, 23), is to be a transmitting unit of the pre-motion of Wisdom or to fail in doing so[,] thus creating the growing evil of the world. The direction of the historic flow is an accelerating progress as man passes from the factual more and more into the reflective dialectic. The nature of progress is to reconquer through Christ the loss nature sustains through sin. For from original sin we derive a double evil: ignorance of the intelligible and difficulty in obeying the intelligible. The function of progress is to increase leisure[,] that men may have more time to learn[;] to conquer material evil in privation and sickness[,] that men have less occasion to fear the merely factual[,] and that they may have more confidence in the rule of intellect[;] to struggle against the inherited capital of injustice[,] which creates such objective situations that men cannot be truly just unless first the objective situation is changed[;] and, finally, I am not certain I speak wildly, out of the very progress itself to produce a mildness of manners and temperament which will support and imitate and

69 [non-being]

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extend the mighty power of Christian charity. This then is the virtue of progress, the virtue of social justice, by which man directs his action so that it will be easier for his neighbours and his posterity to know and to do what is right and just. To this virtue are all men bound by the unity of human action, for the human act is twofold: an immanent rightness of will and an external transient rightness in the transmission of pre-motion. No man’s achievement is his own: he is no more than a product of the past whether in the goods of the body or the goods of the soul. No man’s achievement is for himself: it is but a modification for good or evil of the pre-motion the world has from Adam and from the second Adam, Christ. We sum up the significance of the external action of man in a citation: divinorum operum omnium divinissimum Deo cooperari in salvatione animarum.70 That is the significance of all our external acts. They are the activity of our members and our members are either instruments of sin for greater sin or instruments of justice unto the justification of others. Man is one in nature and in action. We have mentioned the fact that the greatest evil in the world is the evil that is concretized in the historic flow, the capital of injustice that hangs like a pall over every brilliant thing, that makes men and nations groan over others’ glory, that provokes anger and suicide and dire wars, that culminates in the dull mind and sluggish body of the enslaved people or the decayed culture. The Christian counterpiece to this in the Christian’s victory over sin is charity. For charity becomes not angry over wrongs, charity does not nourish hatred or threaten war, charity does not despair; charity is an eternal fire of optimism and of energy, dismayed at naught, rebuked by none, tireless, determined, deliberate; with deepest thought and unbounded spontaneity charity ever strives, struggles, labours, exhorts, implores, prays for the betterment of the unit action of man, for the effective rule of sweetness and light, for a fuller manifestation of what charity loves, Wisdom Divine, the Word made Flesh. The Sovereign Pontiff has proclaimed the Kingship of Christ. Do you know His Kingdom? ‘In the last days the mountain of the house of the Lord shall be prepared on the top of the mountains, and it shall be exalted above the hills: and all nations shall flow unto it. And many people shall go and say: Come, and let us go to the mountain of the Lord and to the house of the God of Jacob: and he will teach us his ways and we will walk in his paths. For the law shall come forth from Sion: and the word of the Lord from Jerusalem. And he 70 [Of all the divine operations the most divine is to cooperate in the salvation of souls]

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shall judge the Gentiles and rebuke many people: and they shall turn their swords into ploughshares and their spears into sickles. Nation shall not lift up sword against nation: neither shall they be exercised any more to war.’ (Isaiah 2:2–4) Is this to be taken literally or is it figure? It would be fair and fine, indeed, to think it no figure. 2.4 Excerpts from ‘Outline of an Analytic Concept of History’ The ‘Outline of an Analytic Concept of History’ was one of four essays Lonergan wrote in 1937 and 1938 dealing with the dialectic of history. It is in all likelihood the second of the four essays. Lonergan cut the essay off without finishing it, choosing instead to rewrite the entire essay. The later two versions of the essay dropped the section on Catholic Action, a deletion suggesting that Lonergan chose at this point to focus his attention on a strictly philosophical treatment of history. The present essay is of special interest as it is richer in concrete examples than the two later versions.71 We make ourselves out of our environment. We would use the word environment with some of the universality of the Ignatian reliqua.72 There is the physical environment with all the influence that makes for geographical differentiations of men. There is the environment of family[,] where mutual love and confidence creates a maximum of facility for mutual influence, while kinship readily sets up the embryonic state of tribe or clan with its sacrosanct traditions and customs. Now consider a dilemma: either man remains in this loose organization and so remains to a great extent directly dependent on the bounty of nature (primitive hunters, fishers, fruit-gatherers) or he applies his intellect to the problem of existence, discovers agriculture and then the division of labour and the necessity of the state. This dilemma suggests a law, which we would put as follows. First any development of the ‘higher culture’ of arts and literature, science and philosophy presupposes a measure of general security and leisure that can be attained only by an exploitation of discovery and invention in the economic field. What C. Dawson calls the discovery of the ox made possible the higher culture for the few; the modern discovery of the machine would seem to have its finality in making possible such culture to the many.

71 The essay is from LRI Archives File 713. It is examined in detail in OLNDH chap. 5. 72 [Literally, ‘what remains.’ The meaning here is ‘all things,’ as in Eph. 1.10.]

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Second, the exploitation of discovery in the economic field brings in its train both specialization and organization. Specialization[,] because the power of the intellect is the power of the universal; organization[,] because specialization necessitates the ordering of society with different members attending to different ends and over these a hierarchy of others who attend to more general ends. Hence we may say that as matter individuates man without liberating him into full individuality, so the dependence of man upon the ‘other’ is in primitive society largely upon nature and to a small extent upon society but, in proportion to human advance, this dependence shifts from dependence upon nature to an ever increasing dependence upon society. Our first point was the priority of economic development; our second that economic development liberates man from physical needs only to impose upon him social dependence. The third is that in proportion as economic development proceeds, the social unit is of necessity enlarged.73 Because the greater the power of intellect, the higher the systematization and the broader the basis required.’74 ‘So much then for the form of intellectual development. It falls into two periods, first a spontaneous use of intellect, then a reflex; and in both periods there are two fields of thought[,] with reason predominating in the one and understanding in the other. Now if we project this form of intellectual development upon the historical process, we obtain as the ideal line of history, first a period of spontaneous history and then a period of reflex history. The first sub-divides into a period of spontaneous intellect and a period of reflex intellect. The second, though it enters the history of thought at the end of the first sub-division of the spontaneous period, becomes actual history only at the end of the second sub-division. In other words, between man’s discovery of the reflex use of intellect and his utilization of this discovery for the systematic planning of the making of man by man, there is a period of real progress of reflex intellect within the framework of the spontaneous social unit of tribe or nation. But a diagram will make this clearer. Spontaneous history: Characteristic: social unit based on kinship, tribe, nation, race. A. Period of spontaneous intellect. Field of Reason: Popular religion and morality 73 [Lonergan here deletes ‘The Temple states of Mesopotamia gave way to the ancient kingdoms; modern economic structure demands the substitution of some form of world-state for our automatic actions.’] 74 [This sentence is added by hand.]

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Field of Understanding: Large-scale agriculture, mechanical arts. Economic and political structures. Fine arts, humanism, reflex intellect. B. Period of reflex intellect. Field of Reason: religion and morality on philosophic basis. Field of Understanding: Scientific method, applied science. Enlightenment. Theories of history. Reflex history: Characteristic: subordination of spontaneous social units based on nation or race to world planning. Field of Reason: The ‘general line’ philosophically determined. Field of Understanding: Edification, from particular to general, of world state. We draw attention to the fact that we are dealing with the ideal line. Actual history is distorted by decline while the supernatural even reverses the order of natural development: the Church realized international society before progress had impressed upon man its importance and inevitability; philosophy preceded the fine arts in modern development. Radix omnium malorum cupiditas.75 As we have already pointed out, self-interest is not enlightened because it is not objective; its centers the world in the ‘ego’ of individual or class[,] and neither is the center. This bias of practical thought transforms the distinction between those who govern and those who are governed into a distinction between the privileged and the depressed. Insensibly the privileged will find the solution to the antithesis that affects themselves; too easily will they fail to acknowledge or pronounce insoluble the antitheses that militate against the well-being of the depressed. Thus they will enjoy a rapid expansion of progress, while the depressed by the mere fact of being left behind will become more and more depressed. But if the privileged are wise, they will not allow grievances to reach the magnitude that bursts into revolution; indeed they generally have such wisdom, for the essence of the bourgeois soul is not all cruelty nor vice but just the reinforcement of the instinct of self-preservation with a slight stupidity and tepidity in enterprise; and revolutions have their causes mostly in the accidental field. Nonetheless, from the nature of the process we are describing, the yielding of the privileged cannot be 75 [The verb is missing here, but perhaps Lonergan means ‘cupidity is the root of all evil.’]

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outright; sets of palliatives will again and again be brought forward, and progress, if never too painfully, will ever be more and more complexly off the right track. It is plain that the result is objective disorder: there is the fruit of rapid but narrow and unbalanced progress; there is the injustice of the existence of the depressed; there is the absurdity of the palliatives. And all, not merely abstract wrongs waiting on mere good will to be set right, but the concrete form of achievements, institutions, habits, mentalities, characters. Further, this disorder is like the complex number; it contains the irrational. Sin is going against reason; it is in itself the unintelligible; its fruits partake its nature to objectivity and institutionalize and perpetuate the unintelligible. Progressive movement in the ideal line is thesis through antithesis to higher synthesis; but to progress from an initial point of sinful disorder is quite a different thing, for the higher synthesis here cannot exist. The synthesis is an intelligible, and there is no intelligible synthesis that contains and embraces the unintelligible. Objective disorder sets problems that have no solution in the intelligible field. Acknowledge the ‘fait accompli’ and you perpetuate injustice; refuse to acknowledge it and you are but fashioning an imaginary world in which you cannot live. The major decline hastens the minor. Man achieves at once without revolutionary progress the truths of the field of reason; he needs this to give the progress of the understanding its directives. The effect of the major decline upon the minor is that progress is robbed of its compass. This might be thought a little thing: a principle is so small compared to a skyscraper; what can it matter in a city, a nation, the world. But every error when put in practice is an evil, and the magnitude of the evil may be measured by the generality of the erroneous principle: an error in the thousands is a thousand times worse than an error in the units; an error in the plan is the ruin of a construction; and error in principle is the ruin of all constructions. But the insidiousness of the major decline is that the errors it fosters are not in the fields of science, if you except the human sciences, but in the whole orientation of science and its applications. Things are well made but for the wrong ends. Chemistry continues to advance – more and more for the making of better and better bombs. Biology extends its field – and the extension is captured to give the prestige of science to the naturalist mysticism. Economics is discovered – to create the modern agony by its false realism. 2.5 Excerpts from ‘Analytic Concept of History, in Blurred Outline’ This essay is an earlier version of the ‘Analytic Concept of History,’ likely

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the third of the four essays written.76 The selection provides an instance of Lonergan’s developing thought on method. It was his breakthrough to the analytic concept of history that provided a methodological foundation for his work in economics. This selection is his most extended explanation from the 1930s of what he means by ‘real analysis.’ What is meant by an ANALYTIC CONCEPT OF HISTORY. a) Concepts of apprehension and concepts of understanding. By the concept of apprehension we know what the object is and we know what it is not. We do not know why it is what it is. Example: most definitions are of this type especially in the inductive sciences. From such definitions nothing can be deduced, except by ‘descending induction’77 which wavers between petitio principii and a guess. By the concept of the understanding we know what makes the object what it is. Such knowledge is a premise to further knowledge. The definition of the circle is knowledge of what makes the circle a circle: from it the properties of the circle may be deduced. b) Analytic and synthetic acts of understanding. Any human act of understanding is the apperceptive unity of a many. If the many in question is concrete and particular, we have a synthetic act of understanding. Example: Christopher Dawson’s historical essays, Newman’s illative sense. If the many is abstract and universal, we have the analytic act of understanding. Examples in what follows. c) Logical and real, static and dynamic, analysis. The ‘many’ known in the unity of an analytic concept may be a logical or a real multiplicity; and in the latter case, the realities may be static or dynamic. Examples: The essential definition of man, ‘rational animal,’ is a logical multiplicity: genus and difference.

76 The essay is discussed in detail in OLNDH chap. 5. 77 [Frederick Crowe advised me in a letter that the notion of ‘descending induction’ comes from W.R. Thompson’s Science and Common Sense (London: Longmans Green, 1937).]

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The chemist’s definitions of material substances are based on the real multiplicity of their material causes. The Thomist metaphysician understands limited being as a compound of existence and essence: his multiplicity is real but static. The Newtonian astronomer’s understanding of planetary motion as a resultant of different accelerations on a moving mass is an analytic concept based upon a real and dynamic multiplicity. d) Progress of the understanding. Intellectus procedit a maius generali ad maius particulare, per actus incompletos ad actum perfectum.78 First we understand things diagrammatically, in outline, from the fundamental point of view: then we fill in the details. This is true of all understanding: but it is to be complemented by the fact that the understanding proceeds from thesis through antithesis to higher synthesis until it attains its proper most general form ... e) What is meant by an Analytic Concept of History. In terms of the distinctions drawn above, ACH79 may be described as a′ an act of understanding, not merely knowing what history is, but knowing what makes it what it is; b′ an analytic act of understanding: proceeding not from historical fact to synthesis, but from an analysis of human nature c′ where this analysis gives a real, not a logical, and a dynamic, not a static, multiplicity: thus it should result, not in the categories of the metaphysicians but in something like the causally and chronologically inter-related view of the astronomer; this, because it analyses not being but action; d′ finally, in ACH, we aim only at the first and most general act of understanding with regard to history.

a) Single and Multiple Dialectics[:] The single dialectic is the succession, within the social unit, of situation, thought, action, new situation, new thought, etc. The multiple dialectic is the aggregate of single dialectics in their synthetic unity. b) Single dialectics without grace[:] Progress is of nature; decline is the 78 [Intellect proceeds from the more general to the more particular, through incomplete act to perfect act] 79 [Analytic Concept of History]

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cumulative effect of sin. Hence the course of the single dialectic without grace is an initial progress that gradually is distorted and then submerged in the flood of decline. This curve – first ascending, then descending – is accentuated by the law of the priority of the economic as a condition: for a higher culture presupposes a higher economic development to liberate man more fully from material cares. The accentuation of the curve arises from the fact that to labour and sacrifice for economic improvement is easy, to do so for the impalpable benefits of culture is difficult. Thus man achieves the first and barely attempts the second. Hence the single dialectic without grace is: first, economic development and social organization; second, cultural advance and social disintegration; third, the animalization of man on the higher level of his achievement. We may note that this corresponds to Spengler’s analogy of organic growth and decay. c) Multiple dialectic without grace[:] The transition from the single dialectic to the multiple dialectic may be made by a consideration of transference and reaction. Transference is the importation into the social unity of the attainments and/or miseries of another. Transference is real or formal: real in the case of migration and conquest; formal in the case of imitation, – importation of ideas. Formal transference is spatial or temporal: spatial between contemporaries; temporal, when it is the inheritance from a culture now in decay or extinct. Reaction commonly denotes opposition to progress or decline within the social unit. Here we use it to denote opposition to the importation of progress (unhealthy reaction) or of decline (unhealthy reaction).

2 Critique of Contemporary Methods

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Introduction

Lonergan makes the large claim that his economic theory is a ‘radically new viewpoint’ that, like the revolutions in physics brought about by Newton and Einstein, ‘transforms, reformulates, reinterprets the correlations of earlier science without necessarily denying its truth.’1 He contrasts his work with that of its well-known predecessors, that of the old political economists of the nineteenth century and of the neo-classical economic ‘scientists’ of the twentieth century.2 He claims to have reached a scientific generalization of both that will ‘yield the new political economy which we need.’3 Anticipating objections, Lonergan defends his approach with the claim that his ‘method of generalization cannot be judged by previous standards.’4 ‘For a New Political Economy’ is Lonergan’s first attempt to communicate his theory.5 In this essay he introduces the diagram, graphically represented as a ‘baseball diamond,’ that persisted as the defining image of his economic theory.6 He consolidated the breakthrough approximately two 1 2 3 4 5

CWL21 7. Ibid. 4–5. Ibid. 7. Ibid. 8. On the dating of this essay see Frederick E. Crowe, ‘Appendix: The Date of “For a New Political Economy,”’ CWL21 317–24. The existence of ‘For a New Political Economy’ was unknown until it surfaced in early 1987. For the account of its discovery, see ibid. 319. 6 See Patrick H. Byrne, ‘Appendix: History of the Diagram, 1944–1988,’ CWL15 177–202. With the discovery of ‘For a New Political Economy,’ we can push the initial date of the diagram back to 1942.

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years later with ‘An Essay in Circulation Analysis.’7 The next five chapters of this volume focus on the documents of his research during this creative period. During and after the writing of ‘For a New Political Economy,’ Lonergan directed a good deal of attention to both the history of economic thought and the work of contemporary economists. He was more interested in the work of Cantillon and the Physiocrats than in that of Adam Smith, David Ricardo, and John Stuart Mill, which formed the core of the classical canon in economics. He also read neo-classical economists. We might characterize his reading as dialectical. In interviews recorded in the last decade of his life, Lonergan regularly contrasts his approach with that of general equilibrium theory, citing both Leon Walras and Knut Wicksell, brilliant practitioners of that approach.8 Lonergan identifies Knut Wicksell in particular as ‘the man who introduced me … [to] general equilibrium theory.’9 Lonergan saw the link between the approach of deductive logicians and that of the neo-classical economists.10 His criticisms concerning the limitations of logic are evident from the beginning of his studies. William Mathews suggests that John Stuart Mill was a significant influence on the young Lonergan, mainly as a source of questions on method.11 The Blandyke Papers, written in 1928 and 1929 while Lonergan was a student at Heythrop, document this focus on the foundations of logic and his appropriation and criticism of Mill.12 Coming to terms with Mill’s deductive analysis was an important jumping-off point for his methodology. His sublation of classical logic to a dynamic method based in intentionality analysis is a key feature of his ma-

7 CWL21 pt 2. 8 Schumpeter developed his economic theory on Walras’ methodological foundation. For Lonergan’s view of Walras, see CWL15 90–91. Lonergan refers to Knut Wicksell in his lectures on Macroeconomics and the Dialectic of History at Boston College and in his replies to questions at the Lonergan Workshop in 1978. Transcriptions of his economics lectures are available at various Lonergan centres and at the Lonergan Research Institute in Toronto. 9 From a typescript of questions made by Nicholas Graham from the Lonergan Workshop held at the Lonergan Institute, Boston College, and the Lonergan Research Institute in Toronto. 10 See LDSE chap. 1. 11 William Mathews, s.j., ‘On Lonergan and John Stuart Mill,’ Milltown Studies 35 (1995) 39–50. 12 On the Blandyke Papers in this context, see LDSE chap. 1. See also Richard M. Liddy, Transforming Light: Intellectual Conversion in the Early Lonergan (Collegeville, MN: Liturgical Press, 1993), and Frederick E. Crowe, Lonergan (London: Geoffry Chapman; and Collegeville, MN: Liturgical Press, 1992) 12–17. The Blandyke Papers are published in CWL20 pt 1.

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ture thought. The results are well documented in his major works Insight and Method in Theology, and in his 1957 lectures on logic, where he integrates contemporary developments in symbolic logic into his analysis.13 In the thirties and forties, Lionel Robbins’ book An Essay on the Nature and Significance of Economic Science was the most influential work on economic methodology.14 Robbins was a follower of William Jevons and Philip Wicksteed, and read continental economists such as Leon Walras, Friedrich Hayek and Knut Wicksell. His analytic approach owes much to J.S. Mill. Like Mill, Robbins asserted an a priori certainty for economic postulates and sharply distinguished between normative and positive economics. His fundamental postulate that ‘Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses,’15 along with the associated postulate that the economist is properly concerned with means not the end of the economy, produced heated controversy among his contemporaries. Like Robbins, Lonergan sought a general analytic framework for economics, but his method of analysis differed sharply from that of Robbins. Although Lonergan maintained a sharp distinction between economic analysis and the ethics of economic preferences, he did not abandon the notion that there were norms and proper ends for economy. Robbins develops his methodology on the analytic method of Mill; Lonergan’s notion of analysis is based on a metaphysic of history based on an intellectualist reading of Aquinas’ metaphysics. The methodological approach that informs his economics eventually blossoms into the generalized empirical method of Insight.16 For Lonergan, an economy is a process in which the potentialities of nature, including human nature, are transformed through the routines and rhythms of production and exchange into a standard of living. Lonergan identified the normative character of these rhythms as economic rhythms. More fundamentally, Robbins represents for Lonergan the sort of deductive and static approach that is opposed to the dynamic method he develops in the analytic conception of history.17 Lonergan has left eleven pages of handwritten notes on Robbins’ An Essay on the Nature and Significance of Economic Science. The notes consist for the most part of direct quotations. This material gives us an idea of the

13 See CWL18 chaps 1–5. 14 Lionel Robbins, An Essay on the Nature and Significance of Economic Science (New York: Macmillan, 1932). This volume was revised in 1935; Lonergan read the 1st edition. 15 Ibid. 15. 16 See LDSE passim for the history of this development. 17 See LDSE chap. 3.

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manner in which Lonergan draws out and transforms the ideas of those he read. A good example is provided by his comments on Robbins’ sense of ‘analysis’ and ‘scarcity.’ Lonergan draws attention to the narrow scope of Robbins’ notion of ‘scarcity as the formal object of economic analysis’ with the comment ‘are there not other formal objects? e.g. Economics of Exchange.’18 The shift of attention is away from material scarcity as a criterion towards organization, the good of order, which would transform the potentialities of nature into a standard of living. Lonergan also took notes on the writings of Frank Knight, Erik Lindahl, Joseph Schumpeter, Friedrich Hayek, and Charles F. Roos. The list shows a marked interest in Austrian and Austrian-influenced economists, who are known for their analytic or theoretical approach to economics. Although Lonergan read both Walras and Wicksell, there are no surviving notes.19 There is, as we might expect, an interest in problems of general equilibrium. Lonergan focuses on the disequilibrium phenomena, a focus highlighting a central problem of this approach, its static methodology.20 Roos, Knight, and Lindahl explicitly tackle the issue of dynamics. Schumpeter was the most consistent in trying to shift the locus of economics from statics to dynamics, though he ultimately failed to go all the way, because he retained Walras’ static framework as a foundation for his dynamics. The notes on Roos appear in chapter 6 and those on Schumpeter in chapter 7. In this chapter are included the notes taken on Knight and Lindahl. Like Robbins, Frank Knight had a strong analytic bent influenced by J.S. 18 See p. 57 below. 19 Lonergan mentions Walras in CWL21 51–52. Schumpeter notes that ‘the best formulation of the Austrian doctrine [of exchange value] was presented ... by Wicksell,’ HEA 913. Knight wrote the introduction to the English translation of Menger’s Grunsätze (Principles of Economics, 1950). Eric Lindahl was a disciple of Wicksell; on that, see HEA 1085. Wicksell himself acknowledged Böhm-Bawerk and Carl Menger as major influences. See, for example, Knut Wicksell, ‘Böhm-Bawerk’s Theory of Capital’ and ‘Carl Menger,’ both in Selected Papers on Economic Theory, ed. with an introd. by Erik Lindahl (Cambridge, MA: Harvard University Press, 1958) 176–203. 20 Lonergan discusses problems with the static framework of equilibrium theory in CWL15. He writes: ‘In brief, Walras’s system is conceived on a static basis. Its author was aware that dynamic considerations will have to be dealt with. But he persevered in the line [of development] he had begun: at least, it would mark a turning point in the development of economic thought ... Schumpeter, though he seems everywhere to regard Walras with the highest esteem, wrote in a summary of the lectures he was to deliver at the University of Mexico of the need for new techniques and of the new viewpoint on equilibrium needed if a dynamic general theory were to be attained’ (91). Lonergan’s approach from the beginning was directed towards developing that dynamic viewpoint.

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Mill. Knight made his reputation with Risk, Uncertainty, and Profit, a book that, besides Mill’s influence, shows the influence of Cantillon.21 The book tackles the problem of how to account for profit under conditions of general equilibrium. Knight relates profit to the ‘uncertainty’ generated by rapid economic change. His approach suffers in comparison to Lonergan’s eventual solution to this problem: the recognition of a pure cycle in a dynamic economy and the concomitant shift in the meaning of profit depending on the phases of that cycle. Nonetheless, Knight’s approach recognized the challenge transforming economies caused general equilibrium theory, and acknowledged the indeterminacy of economic prediction. With a decided nod to Cantillon, Knight also recognized the circular nature of economic activity: ‘It is important that we bear in mind that the serpent’s tail is always in the serpent’s mouth.’22 Students remembered Knight for his circular flow diagram of the economy,23 a version of which appears in his Economic Organization.24 Erik Lindahl was a disciple of Wicksell. Lonergan saved one page of notes he took of Lindahl’s Studies in the Theory of Money and Capital. Lonergan takes a quotation from Lindahl and develops it into a short sketch on the nature of economics as a science. His conclusion is that economic science is ‘a machine from which man is distinct which man can control.’25 This recalls, and may be a source of, an oft-quoted section in ‘For a New Political Economy’: ‘A study of the mechanics of motorcars yields premises for a criticism of drivers, precisely because motorcars, as distinct from the drivers, have laws of their own which drivers must respect. But if the mechanics of motors included, in a single piece, the anthropology of drivers, criticism could be no more that haphazard.’26 Chapter 2 of Lindahl’s Studies, entitled ‘The Rate of Interest and the Price Level,’ is relevant to Lonergan’s study

21 Schumpeter writes, ‘Cantillon’s “buying productive services at certain prices in order to produce a product whose price is not certain” did not, however, quite come into its own until the publication of Professor Knight’s work,’ HEA 646. The element of risk in Knight’s analysis represents a development of Mill’s analysis. See HEA 894. 22 Frank Knight, Risk, Uncertainty, and Profit (Boston and New York: Houghton Mifflin, 1921) 180. See p. 67 below. 23 On Knight’s diagram and its influence, see Don Patinkin’s articles ‘In Search of the “Wheel of Wealth”: On the Origins of Frank Knight’s CircularFlow Diagram,’ American Economic Review 63:5 (1973) 1037–46, and ‘Frank Knight as Teacher,’ American Economic Review 63:5 (1973) 787–810. 24 Frank Knight, Economic Organization (Chicago: University of Chicago Press, 1933) 41. 25 See p. 68 below. 26 CWL21 109.

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of the equilibrium rate of interest, which is the concern of chapter 4 of this volume. Lonergan, however, did not save any notes he might have taken on the Lindahl chapter. Finally, included are two short fragments from Lonergan’s original writings of this period. Both are from early efforts to set down his discovery prior to writing ‘For a New Political Economy.’ The first is a two-page typescript labelled ’9. Econ. Phil, I, §5’; it is clearly part of a larger effort devoted to a pure theory of economic history, and therefore probably was written before ‘For a New Political Economy.’ The second fragment is the beginning of what either is an abandoned start to ‘For a New Political Economy’ or is excerpted from a separate essay. Both fragments are of interest because Lonergan saved them. The first, with its careful ordering of topics, is typical of Lonergan’s polished style. The second, though clearly written after 1940, gives us a rare taste of the passionate undercurrent that drove his inquiry and is manifest in somewhat florid prose reminiscent of the earlier ‘An Essay in Fundamental Sociology.’ The documents for this chapter come from a number of different sources. The notes on Robbins and Knight, along with the essay fragment, are all from File A332. The Lindahl page comes from File A335 and was written later. Finally, the fragment ‘Economic Philosophy’ was found in its own folder, filed as A9a in the Archives. All the files probably date from after Lonergan returned to Canada in 1940 and before he wrote ‘An Essay in Circulation Analysis.’ File A332 is likely contemporaneous with the composition of ‘For A New Political Economy.’ A335 almost certainly dates from after the composition of ‘For a New Political Economy.’ 2

Texts 2.1 Notes on Lionel Robbins, An Essay on the Nature and Significance of Economic Science

Lionel Robbins (1893–1984) was one of the major English economists in the period between the two world wars. As a macroeconomist, he was greatly influenced by Friedrich Hayek’s theory of the trade cycle.27 His influence was greatest, however, in methodology and philosophy of economics. Robbins was not especially original, but he had a talent for writing and assembling a persuasive argument. For that reason, An Essay on the Nature and Significance of Economic Science was, if not the most read book on methodology, certainly the most cited one from 1932 to 1960.28 Robbins argued persuasively (1)

27 Lonergan’s notes on Hayek are in chaps 4 and 5 below.

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that economic science was clearly distinct from both value statements about the economy, and (2) that the method of economics could be clearly demarcated from that of other kinds of social analysis. Robbins’ position on these issues was quite influential and was widely accepted by economists of the period. His account of what economics is in An Essay on the Nature and Significance of Economic Science provided Lonergan with an effective and clear presentation of the prevailing understanding of economic philosophy. The original text is LRI Archives File 332. p[.] 15 ‘Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.’ p[.] 16 ‘The conception we have rejected, the conception of Economics as the study of the causes of material welfare, was what may be called a classificatory conception. It marks off certain kinds of human behavior, behaviors directed to the procuring of material welfare, and designates these as the subject matter of Economics. Other kinds of conduct lie outside the scope of its investigations. The conception we have adopted may be described as analytical. It does not attempt to pick out certain kinds of behavior, but focuses attention on a certain aspect of behavior, the forces imposed by the influence of scarcity. It follows from this, therefore, that in so far as it offers this aspect, any kind of human behavior falls within the scope of Economic Generalizations. We do not say that the production of potatoes is economic activity and the production of philosophy is not. We say rather that, in so far as either kind of activity involves the relinquishment of other desired alternatives, it has its economic aspect. There are no limitations on the subject-matter of Economic Science save this.’ BL 1/classificatory = material object analytical = formal object 2/scarcity & alternatives one aspect that underlies all generalizations known to Robbins: a synthetic explanatory unity of these generalizations; but are there not other formal objects? e.g. Economics of Exchange p. 17 ‘... within the wide field of our definition, the attention of Economists is focused chiefly on the complications of the Exchange Economy. The reason for this is one of interest.’! p. 17 ‘Now as Prof. Mises has shown, given central ownership and control of the means of production, the registering of individual pulls and resistance, by a mechanism of prices and costs is excluded by definition. It

28 Palgrave’s Dictionary of Economics IV 207.

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follows, therefore, that the decisions of the executive must necessarily be “arbitrary.” That is to say, they must be based on its valuations – not on the valuations of consumers and producers.’ p. 19 ‘The generalizations of the theory of Value are as applicable to the behavior of isolated man or the executive authority of a communist society, as to the behavior of man in an exchange economy – even if they are not so illuminating in such contexts. The exchange relationship is a technical incident, an incident indeed which gives rise to all the interesting complications, but still, for all that, subsidiary to the main fact of scarcity.’ p. 20 ‘Prof. Schumpeter ... has attempted ... to vindicate the latter definition by demonstrating that it is possible to conceive all the fundamental aspects of behavior germane to Economic Science as having the form of exchange.’ possible construction C criterion N29 p. 23 ‘... in so far as [the achievement of] any end is dependent on scarce means, it is germane to the preoccupations of the Economist’ p. 24 ‘The economist is not concerned with ends as such. He is concerned with the way in which the attainment of ends is limited. The ends may be noble or they may be base. They may be ‘material’ or ‘immaterial’ – if ends can be so described. But if the attainment of one set of ends involves the sacrifice of others, then it has an economic aspect.’ p. 25 ‘Let us suppose this reprehensible community to be visited by a Savonarola. Their former ends become revolting to them. The pleasures of the senses are banished, the sybarites become ascetics. Surely economic analysis is still applicable. There is no need to change the categories of explanation. All that has happened is that the demand schedules have changed. Some things have become relatively less scarce, others more so. The rent of vineyards falls. The rent of quarries for ecclesiastical masonry rises. That is all. The distribution of time between prayer and good works has its economic aspect equally with the distribution of time between orgies and slumber. The ‘pig-philosophy’ – to use poor Carlyle’s contemptuous name for Economics – turns out to be all embracing.’

29 [The reference to C and N lacks a point of reference here. However, if we refer forward to comments on p. 77 of Robbins’ book, we see that Lonergan defines what he means by C and N. He writes: N.B. In a free market equilibrium price – that to which there is a tendency C – that which actually exists N ‘scarce’ relation to individuals taken singly C to collectivity N. See p. 62 below. The later notation is slightly different in its use of double underlines, but the difference is likely incidental.]

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p. 29 ‘... rejection of material comfort in favor of aesthetic or ethical values does not necessarily bring material compensation ... So far from postulating a harmony of ends in this sense, Economics brings into full view that conflict of choice which is one of the permanent characteristics of human existence. Your economist is a true tragedian.’ p. 31 ‘Economics, then, is in no way to be conceived as we may conceive Ethics or Aesthetics as being concerned with ends as such. It is equally important that its preoccupations should be sharply distinguished from those of the technical arts of production.’ e.g. roof of house paper? slate? technology How to build a house? p. 32 ‘Economics is not the aggregate of the technologies nor is it an attempt to select from each the elements common to several.’ p. 34 ‘... the problem how much wood to use for fires and how much for fencing’ = Economics – How [to] make a fire, a fence, = Technique p. 37 ‘Economists are not interested in technique as such. They are interested in it solely as one of the influences determining relative scarcity.’ p. 37 Economic theory set of relationships regarding disposal of scarce means Economic History instances of such relationships p. 40 Descriptive Economics economic history of today p. 42 Materialist interpretation of history = ‘History is the epiphenomena of technical changes. The history of tools is the history of mankind’ p. 43 ‘There are no autonomous changes on the demand side. What changes occur are, in the end, attributable to changes in the technical machinery of supply. There is no independent ‘psychological’ (or for that matter, ‘physiological’) side to scarcity. No matter what their fundamental make-up, be it inherited or acquired, men in similar technical environments will develop similar habits & institutions. This may be right or wrong, pseudo-Hegelian twaddle or profound insight into things which at the moment are certainly not susceptible of scientific analysis, but it is not to be deduced from any laws of theoretical Economics.’ p. 44 ‘From the point of view of Economic science, changes in relative valuations are [given]30 data.’ p. 47 Violent change in demand schedules – Armistice 11 am Nov. 11, 1918 31 ‘The ends had changed. The scarcity of means was different.’ p. 49 ‘The mass production of particular things irrespective of demand for them, however technically efficient, is not necessarily ‘economical’

30 [‘given’ was added by Lonergan.] 31 [The example is from Robbins.]

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p. 50 ‘fallacy of misplaced concreteness’ Whitehead’s remark applied to production without demand, ‘disuse of capital that is big but obsolete, etc.’32 p. 52 Inflation o 1/ over-expansion of capital a low interest rates reduce fixed costs b flight from money to goods B.L. 2/ inflation ceases to inflate and not possible to run these undertakings however technically efficient p. 53 ‘… during times of inflation, the artificially low rates of interest tend to encourage the expansion of certain kinds of capitalistic production in such measure that, when the stimulus is exhausted, it is no longer possible to work them as profitable undertakings. At the same time liquid resources are dissipated and exhausted. When the slump comes the system is left high and dry with an incubus of fixed capital too costly to be worked at a profit, and a relative shortage of ‘fluid capital’ which causes interest rates to be stringent and oppressive. The beautiful machinery which so impressed the newspaper correspondents is still there, but the wheels are empty of profit.’ p. 54 ‘Reckoning is by ‘weight and tale’ or by valuation – so many tons of coal or so many pounds sterling worth of coal ... physical computations may be unimpeachable and, in certain connections useful, yet from the point of view of the economist they have no significance apart from relative valuations.’ Relativity of Economic Quantities [–] p. 56 ‘...the valuations which the price system expresses are not quantities at all. They are arrangements in a certain order. To assume that the scale of relative prices measures any quantity at all save quantities of money is gratuitous metaphysics[’]33 p. 56 ‘... the addition of prices or individual incomes to form social aggregates is an operation with a very limited meaning. As quantities of money expended, particular prices and particular incomes are capable of addition and the total arrived at has a definite monetary significance. But as expressions of an order of preference, a relative scale, they are incapable of addition. Their aggregate has no meaning.[’] p. 57 ‘If we like to assume that preferences and property do not change rapidly within short periods, and that certain price changes may be regarded as particularly significant for the majority of economic subjects, then no

32 [Not a direct quotation from Robbins.] 33 [In the second edition (1935) Robbins uses the phrase ‘quite unnecessary’ where the first edition text (1932) reads ‘gratuitous metaphysics.’]

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doubt we may assign to the movements of these aggregates a certain arbitrary meaning which is not without its uses.[’] p. 58 Redistribution of incomes – ‘For a substantial proportion of the high incomes of the rich are due to the existence of other rich persons. Lawyers, doctors, the proprietors of rare sites, etc., enjoy high incomes because there exist people with high incomes who value their services highly. Redistribute money incomes ... the main initial result would be a rise in the prices of articles of working-class consumption ... If we compute the proportion of the population now producing real income for the rich who could be turned to producing real income for the poor, it is easy to see that the increase available would be negligible.’ p. 62 ‘... though at every moment34 there are tendencies towards equilibrium, yet from moment to moment35 it is not the same36 equilibrium towards which there is movement’ p. 66 ‘a change in the aggregate of production is not a definite conception’ p. 67 note ‘The theory of money ... has continually employed pseudo-concepts of the sort we have just declared suspect-the price level, movements of purchasing power parities, etc. But it is just here that the difficulties of monetary theory have persisted. And recent improvements in monetary theory have been directed to eliminating all dependence on these fictions.’ p. 69 ‘The beginning of the change dates from the coming of the Subjective Theory of Value. So long as the Theory of Value was expounded in terms of costs, it was possible to regard the subject-matter of economics as something social and collective and to discuss price relationships simply as market phenomena. With the realization that these market phenomena were, in fact, dependent on the interplay of individual choice[’] ... p. 70 [‘]In the modern treatment discussion of ‘production’ is an integral part of the Theory of Equilibrium. It is shown how factors of production are distributed between the production of different goods by the mechanism of prices and costs, how given certain fundamental data, interest rates, and price margins determine the distribution [of factors] between production for the present and production for the future. The doctrine of division of labor, heretofore so disagreeably technological, becomes an integral feature of a theory of moving equilibrium through time. Even the question of ‘internal’ organization and administration now becomes related to an outside network of relative prices and costs; and since this is how things

34 [‘at every moment’ is italicized in the Robbins text.] 35 [‘from moment to moment’ is italicized in the Robbins text.] 36 [‘same’ is italicized in the Robbins text.]

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work in practice, what is at first sight the greater remoteness of pure theory in fact brings us much nearer to reality.’ The Nature of Economic Generalizations [–] p. 73 ‘... in a free market, intervention by some outside body to fix a price below market price will lead to an excess of demand over supply.’ p. 74 ‘history does not proceed by way of generalizing abstraction.’ ‘The vulgar notion that the safe methods on political subjects are those of Baconian induction – that the true guide is not general reasoning but specific experience-will one day be quoted as among the most unequivocal marks of a low state of the speculative faculties of any age ... Such reasoners ignore the fact of Plurality of Causes in the very case which affords the most signal example’ [of it].37 (John Stuart Mill, Logic, chap X, ¶ 8.) p. 75 ‘Let us look more closely at the arguments by which it is established. The proposition that a price fixed below the equilibrium point must result in an excess of demand over supply is a simple corollary of the general Theory of Price. According to that theory, the equilibrium price must be conceived as that price which restricts demand to the available supply. It follows quite simply that if the price is lower than this, the necessary restriction will not be effected. Demand which would have been excluded by the higher price will arise and there will be disequilibrium[’] ... ‘If there were no demand beyond the available supply, and no alternative use for the factors of production involved, there would be no price. The good would not be scarce in relation to the demand for it. It would be a free good.’ ‘In the last analysis, therefore, our proposition rests upon deductions which are implicit in our initial definition of the subject-matter of Economic Science as a whole. Economics is concerned with the disposal of scarce goods with alternative uses.’ N.B. ‘In a free market’ equilibrium price – that to which there is a tendency C – that which actually exists N ‘scarce’ relation to individuals taken singly C to collectivity N. p. 77 ‘On the analytical side Economics proves to be a series of deductions from the fundamental concept of scarcity of time and materials’ ‘... it is not always realized how far the theoretical developments of the last half century have resulted in unifying analytical economics on the laws we have indicated ... Unless it is made quite clear that in the marginal analysis we possess the basis for a completely unitary economic theory, it is safe

37 [The words ‘of it’ are from Mill’s original, and are included by Robbins but not by Lonergan.]

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to say that the inner significance of that analysis has not been recognized at all.’ p. 80 ‘In the end, subjective valuations govern costs equally with productive prices’ p. 81 ‘The intricate interrelationships of the stationary state all resolve themselves into what Pareto called an equilibrium of tastes and obstacles.[’] p. 82 ‘For the community as a whole, the quantity of money may be a matter of indifference. But for the individual with given resources, to keep a certain proportion of these resources available in the form of free cash is in itself a convenience. Hence there arises a demand for money to hold – a relative valuation of cash and other resources which is expressed ‘in’ the system of prices... the old conception of velocity of circulation can be derived from modern conception of demand for money: the thing has been done very frequently (Pigou, Essays in Applied Economics pp. 174–8)[’] p. 83 ‘In pure Economics we examine the implications of the existence of scarce means with alternative uses’ p. 83 ‘The borderlands of Economics are the happy hunting-ground of the charlatan and the quack.’ p. 84 ‘It is well-known that certain of the founders of the modern Subjectivity theory of Value did in fact claim the authority of the doctrine of psychological hedonism as sanctions for their propositions.’ This is not true of the Austrians (Menger, Böhm-Bawerk) True of Gossen Jevons, Edgeworth. p. 85 ‘no one who was acquainted with modern value theory could honestly continue to argue that it has any essential connection with psychological hedonism[’] p. 86 ‘...all that is assumed in the idea of the scales of valuation is that different goods have different uses and that these different uses have different significances for action, such that in a given situation one use will be preferred before another and one good before another. Why the human animal attributes particular values in this behavioristic sense to particular things, is a question which we do not discuss.’ p. 87 ‘The fundamental concept of economic analysis is the idea of scales of relative valuations; and, as we have seen, while we assume that different goods have different values at different margins, we do not regard it as part of our problem to explain why these particular valuations exist. We take them as given data. So far as we are concerned, our economic subjects can be pure egoists, pure altruists, pure ascetics, pure sensualists, or what is much more likely – mixed bundles of all these impulses.’ p. 89 ‘ If it is assumed – that – I always buy from the cheapest seller, it is not assumed that I act for egotistical motives.’ p. 91 ‘It is the most elementary implication of the idea of scarcity that if a price is lowered the demand tends to increase.’

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p. 92 Change in price: primary effect, demand A for that good secondary effect, demand B for other goods if A unaffected, B must be,more or less income left p. 93, 4 ‘In the first place it can deal with changes in the distribution of goods which occur as a result of the equilibrating tendencies. This indeed is the function of the Theory of Equilibrium. ...[’] ‘And, secondly, it can assume changes in the given structures and describe the difference between the new equilibrium and the old. It can assume the removal of a tax, the importance of a new obstacle, the effects of change in certain property relationships. As is well known this is one of the main foundations of the Theory of Variations’ ‘But can it not describe the laws of change in the given data themselves?-Re Statistics – average elasticity of demand, etc. [–] p. 101 ‘However accurately they describe the past, there is no presumption that they will describe the future ... Important as such investigations may be, at the moment at which they are made and perhaps for a short time after, there is no justification for claiming for their results the status of so-called ‘statistical’ laws of the natural sciences’ cf Roos p. 106 Empirical studies reveal discrepancies between theoretical terminology and facts e.g. what is money now, 100 yrs ago. p[.]107 Empirical studies expose areas where pure theory needs to be reformulated and extended. They bring to light new problems. p. 107 ‘Pure equilibrium theory, as is well known, does not provide any explanation of the phenomena of booms and slumps’ p. 109 ‘Realistic studies may suggest the problem to be solved. They may test the range of applicability of the answer when it is forthcoming. But it is theory and theory alone which is capable of supplying the solution. Any attempt to reverse the relationship must lead inevitably to the nirvana of purposeless observation and record.’ p. 111 ‘... Economic Science knows no way of predicting what will be the given data at a particular point of time. It cannot predict changes in valuations. But given the data in a particular situation, it can draw inevitable conclusions as to their implications. And if the data remain unchanged, those implications will certainly be realized. They must be for they are implied in the presence of the original data.’ p. 113 Note ‘The alleged advantage of economic “planning”: – namely that it enables greater certainty with regard to the future – depends upon the assumption that under ‘planning’ the present forces, the choices of individual spenders and savers, are themselves brought under the control of the planners. The paradox therefore arises that either the planner is destitute of the instrument of calculating the ends of the community he intends to serve or, if he restores the instrument, he removes the raison d’être of

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the ‘plan’. Of course, the dilemma does not arise if he thinks himself capable of interpreting these ends or ... if he has no intention of serving any other ends but those he thinks appropriate ... Scratch a would-be planner and you usually find a would-be dictator.’ Marginal theory does not compare Jones’ scale of values with Smith’s and say that Jones is greater, more important, – Jones alone, Smith alone Hence fallacy to argue -- marginal utility to poor greater than to rich, ∴ more even distribution. p. 125. ‘... all that part of the theory of Public Finance which deals with ‘Social Utility’ goes by the board.’38 p. 127 ‘To show that, under certain conditions, demand is satisfied more adequately than under any alternative set of conditions, does not prove that that set of conditions is desirable. There is no penumbra of approbation round the Theory of Equilibrium. Equilibrium is just equilibrium.’ p. 129 ‘We cannot say that the pursuit of given ends is uneconomical because the ends are uneconomical; we can only say it is uneconomical if the ends are pursued with an unnecessary expenditure of means.’ ‘...there are no economical ends.’ p. 130 ‘It is a well-known generalization of Theoretical Economics that a wage which is held above the equilibrium Level necessarily involves unemployment and a diminution of the value of capital.’ i.e. more leisure or less to support leisure p. 133 ‘Propositions involving the verb ‘ought’ are different in kind from propositions involving the verb “is.”[’] p. 139 ‘... It is clear that many of our most pressing difficulties arise ... because our aims are not co-ordinate. As consumers we will cheapness, as producers we choose scarcity ... We call for cheap money and lower prices, fewer imports and a larger volume of trade. [’] 2.2 Notes on Frank Knight, Risk, Uncertainty, and Profit Frank Knight (1885–1962) was an American economist whose reputation rests on his thesis, which was revised and published as Risk, Uncertainty, and Profit in 1921.39 The main task of the volume is to arrive at a definition of perfect competition. Knight’s work on the subject was quite influential in its day. He was a proponent of economic liberty, but maintained that

38 [In the 2nd edition, Robbins replaces ‘goes by the board’ with ‘must assume a different significance.’] 39 Knight, Risk, Uncertainty, and Profit (See n. 22 above).

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economic theory ‘prescribes the efficient ways of achieving given ends.’40 Probability theory was an important element in Knight’s approach; he sharply distinguished true uncertainty from calculable risks. His understanding of economics was embedded in a notion of rational choice that went beyond the ‘allocation of scarce resources.’ He was generally sceptical of received theory. He contrasted the amorality of the competitive economics with a Christian notion of goodness: ‘The crucial decision is the selection of men to make decisions; any other sort of decision-making is automatically reduced to a routine function.’41 In his view the problem with economic liberalism was that it led to cumulative growth of monopoly; mainstream economics approved of competitive economics, and a cornerstone of that defence in 1921 was a theory of perfect competition. It is in this context that we can better understand Knight’s interest in uncovering the flaws in that approach. p. 64 ‘When confronted with alternative, quantitatively variable laws of action or experience, we tend to combine them in such proportions that the physically correlated amounts or degrees of each are of equal utility to the person choosing.’ ‘The phrase ‘equal utility’ – should be taken to refer to the fact of indifference of choice and not a comparison between quantities in the true sense.’ p. 65 ‘... if a given unit of a given resource is yielding in one use a want satisfaction preferable to that which a similar unit is yielding in another, the yield of that resource can be increased by transferring some of it from the second use to the first until the importance of the one is increased and of the other decreased to the point of equivalence.’ p. 64 Note all utility is relative – this is more useful than that – problem of choice between alternatives because of scarcity – if choice, then preference no matter what the motives may be [philosophic & ethical neutrality] cf Robbins hence a subjective equilibrium is the subject’s law of choice Re p. 65 if he does not effect transfer, then he does not ‘prefer’ pp. 5, 6, 7, 8, 9, 10, 13, 15,42 73, 75, 77, 86, 90, 93, 100 ff.43

40 Palgrave’s Dictionary of Economics II 58. 41 Knight, Risk, Uncertainly, and Profit 297, cited by Lonergan p. 68 below. 42 [The page number entries here and following refer to Knight’s Risk, Uncertainty, and Profit. Pp. 5–15 are from chap. 1, ‘The Place of Profit and Uncertainty in Economic Theory.’] 43 [Pp. 73–93 are from chap. 3, ‘The Theory of Choice and Exchange.’ P. 100 and following refer to chap. 4, ‘Joint Production and Capitalization.’]

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p. 93 ‘that “goods” are largely alternative to each other in production (involving the use of the same ultimate resources) is the condition of our having an economic order, an organization of want satisfying activities based on free production and exchange.’ p. 180 ‘It is important that we bear in mind that the serpent’s tail is always in the serpent’s mouth, that what the competitive system tends to give back is just what is put into it in the way of human motives and human powers, natural, acquired, or conferred and has in itself no moral attribute whatever.’ p. 168 ‘It is quite unnecessary to believe that there will be any progress toward equilibrium’ p. 292 [‘]There is only one end finally, to business activity and this is already decided upon before the business is founded; that is, to make money.’

p. 122 ‘The equilibrium condition or long-run tendency for the static state has now been formulated in three ways from as many different standpoints. From the standpoint of distribution, every agency must be in the situation where it can make the greatest possible value contribution to the social income and be valued by the contribution which it makes. From the stand-point of consumption goods, prices must be such that rates of production and consumption are equal or that costs and selling prices per unit are everywhere the same. It is important to see clearly that these statements are logically equivalent, presenting different aspects of the same phenomena. It is selfevident that costs of goods are identical in the aggregate with distribution shares, and both with prices of goods; all these are in fact different names for the total income of scarcity. A formulation including all these statements would be that consumption goods and productive sources would be so priced that equal price amounts of the second make equal price contributions of the first which have equal utilities to all persons in the system. It is really self-evident that this condition alone can be stable, that any other gets forces to work to bring it about.’

p. 124, 128, 139, 14144 p. 150 ‘In accordance with the law of diminishing returns and the specific productivity theory based upon that law, a relative increase in the supply of labor will increase the product of industry less than proportionally and decrease the relative productivity of labor. Both effects tend to lower wages per man. The same reasoning applies to any other productive service as well as to labor.’

44 [Pp. 124 to 139 are from chap. 4, ‘Joint Production and Capitalization.’ P. 141 is the first page of chap. 5, ‘Change and Progress with Uncertainty Absent.’]

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157, 163n, 165, 167, 168, 172, 176F, 179ff–183, 187, 189, 191, 192, 193, chap IX, 240, 252, 254.45 p. 297 ‘The crucial decision is the selection of men to make decisions; any other sort of decision-making is automatically reduced to a routine function.’ 2.3 Notes on Erik Lindahl, Studies in the Theory of Money and Capital46 Erik Lindahl (1891–1960) was a leading member of the so-called Stockholm school of economics. He was deeply influenced by the work of Knut Wicksell. Lindahl’s macroeconomic treatise, Studies in the Theory of Money and Capital (1939), was a contribution to dynamic analysis. He was interested in the time factor as a problem in economic analysis. He attempted to work out a method of sequence analysis for equilibrium theory. This selection is from LRI Archives File A335. p. 21 ‘The final aim of Economic Science is either to explain the economic phenomena of the past or to forecast the economic events that will, under given conditions, probably occur in the future. In the first case we are concerned with problems of Economic History, in the second with problems of our actual life, especially those referring to the domain of Economic Policy.’ Hence study of structures Majors to connect data: all past, part past, part future Also method of procession from psycho, moral social assumptions – prior conditions of economic activity – imperatives Economic Science – a machine of which man is a part – a machine from which man is distinct which man can control. 2.4 ‘Econ. Phil, I, §5’ This short two-page selection was kept in its own file folder by Lonergan 45 [Pp. 157 to 172 are from chap. 5, ‘Change and Progress with Uncertainty Absent.’ Pp. 176 to 193 are from chap. 6, ‘Minor Prerequisites for Perfect Competition.’ P. 240 is from chap. 8. Pp. 250 and 252 are from chap. 9, ‘Enterprise and Profit.’] 46 Erik Lindahl, Studies in the Theory of Money and Capital (London: George Allen and Unwin, 1950 [1939]).

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and has been catalogued as File A9a in the Lonergan Archives. It is clearly part of a larger work. The reference to Robinson Crusoe may help to date this fragment. Frank Knight uses the Robinson Crusoe analogy in Risk, Uncertainty, and Profit, and Lonergan uses it in ‘For a New Political Economy.’47 §13. We now turn to the second part of our inquiry. Our primary concern here is the pure theory of economic history, but as occasion offers, we shall indicate some fundamental laws of the system of production for exchange. Our immediate task is the enumeration of the properties of that system. §14. In the first place, production, economic activity as activity, is a routine. Man’s need of material means for his well-being is either constant or recurring. On the other hand, the means themselves are either consumed at once or wearing away or being antiquated. §15. In the second place, production is an inert routine 5. Types of Economic Law. Economic Laws are of Three Types, antecedent, functional, technical. By antecedent economic laws we mean those fundamental limitations of production that hold in any system are simply instances of the principles of identity, non-contradiction and excluded middle. Thus in any system production is limited by the quantity and variety of natural resources, by the quantity of labor, the skill of the craftsmen, the science of the engineers, the stock of capital goods, and the degrees of technological development attained. Robinson Crusoe cannot build himself a marble palace, he cannot attend to his crops and construct his fort at the same time. The commissars cannot concentrate on the development of heavy industry and at the same time secure abundant food supply and solve the housing problem. By functional economic laws we mean the imperatives of the system. Given a set of antecedent conditions, and an end to be attained, and a system to attain it, there may be more than one way of attaining the end within the system under the conditions. But there certainly are many ways of not attaining the end. The functional economic law is the imperative that confines activity to such ways as attain the end. Further, since the system in its complete concentration is a system by which the end is attained, and activities that defeat the end are not thought of as parts of the system but deformations of it.

47 See CWL21 12, 23–24.

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2.5 Essay Fragment This fragment forms part of an otherwise unknown essay. It was found in LRI Archives File A335. The historical detail places it during the Second World War. Like the previous essay, the fragment gives an indication of Lonergan’s design for the proposed essay. Of interest is the famous quotation from the Preface of Hegel’s Philosophy of Right, which begins the selection. [A] ‘Only as twilight settles, does Minerva’s owl take wing.’ This, then, is the propitious hour. Before the candle of thought is snuffed out in the ‘Brave New World’ of tomorrow, let us pause to enjoy a luxury that soon will end. When the modern world was emerging from the medieval guilds & manors, it first found shape in a galaxy of city states that extended from Florence & Genoa & Venice across the Alps, along the Rhine and about the harbours of the northern coast. The contrasts of this little world in miniature stimulated economic treatises particularly on the coming of foreign trade and, when the city states were overshadowed by the later, more bulky national states, the [?] ideas took on the form of mercantilism, a collection of recipes to guide an absolute monarch in the important task of keeping his own treasury ever filled, his country ever ready to replenish it, and his rival monarchs in a less comfortable situation. But the popularity of the monarch’s world & economies took on a non[-]objective interest and a non[-]scientific air. The physiocrats tried to formulate the nature of things; more happily Adam Smith found in unshackled self-interest a comrade-inarms for the nascent industrial revolution; and a few decades later, James Mill, the father of a more illustrious son, boasted that soon political economy would be as accurate and as definitive as Newtonian Physics. Einstein suggested that Newton had not had the last word, and then the first great war of our century opened the way for the revolutionary violence & mass propaganda that compensated for the hitherto intellectual deficiencies of socialism. ‘In the beginning was the Devil’ and in Faustian style the deeds of Lenin & Mussolini, of Stalin & Hitler, have made socialism a matter of serious consideration. They now are wrecking Europe, but perhaps as Europe’s sun is setting into a night of physical exhaustion and mental eclipse, we may be able to discuss the essential lineaments of a problem that mercantilists & physiocrats, classical economists & socialists, have approached but not reached, have sought but could not find till history provided the experimental evidence & so released Minerva’s owl to flight over the ruins. [B] Like a syllogism our argument falls in to three parts. In a process of reasoning such as A is B because C is D, one has to distinguish the conclusion, that A is B, the supposed fact that C is D, and the implication that if C

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is D, then A is B. The first section of this work presents a set of implications, of major premises. They are not exclusively economic in character, but hold generally of sets of inter-connected & accelerating rhythms or rates of flow. Accordingly, for both clarity & simplicity, they are worked out without reference to economic phenomena: somewhat after the fashion of the textbook in mechanics which deals with particles, which do not exist, and perfectly symmetrical or perfectly rigid bodies, which cannot be found in nature, so we set up a working model, a set of spheres that emit hypothetical particles to one another in a fairly preposterous fashion.

3 Reading Economic History

1

Introduction

One of the great strengths of Lonergan’s approach to economics was his knowledge of and interest in the history of economic thought. That should come as no surprise to us when we appreciate that his general methodology developed out of a philosophy of history. One of the great themes of his life’s work was the integration of system and history.1 Lonergan once remarked to Frederick Crowe, ‘All my work has been introducing history into Catholic theology.’2 It is no exaggeration to say that the same approach informed his work in economics. The two twentieth century economists who most influenced Lonergan are Heinrich Pesch and Joseph Schumpeter, both of whom wrote histories of economic thought. Pesch was Lonergan’s early source on economic history; when he was writing his economic essays in the 1940s, he relied on Pesch’s Lehrbuch der Nationalökonomie.3 He turned to Schumpeter’s History of Economic Analysis when he returned to economics in the 1970s. His reading of Schumpeter’s History made its way into both his lectures and his revisions of ‘An Essay in Circulation Analysis.’4 1 On this, see Patrick Brown, ‘System and History in Lonergan’s Early Historical and Economic Manuscripts,’ JMDA 1 (Summer 2001) 32–76. 2 See Frederick E. Crowe’s article ‘“All my work has been introducing history into Catholic theology” (Lonergan, March 28, 1980),’ in LW 10, ed. Frederick Lawrence (Chestnut Hill, MA: Boston College, 1992) 49–81. 3 Schumpeter, while not especially impressed with Pesch as an economic analyst, praised his scholarship as having ‘few equals.’ See HEA 765. 4 References to Schumpeter’s History are extensive in CWL15. See the index under ‘Schumpeter.’

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As Pesch’s work was the main source behind Quadragesimo Anno, Lonergan knew Pesch’s work, at least at second hand, in the early 1930s.5 The encyclical was the subject of the Coyne article Lonergan read in 1933.6 As well, Lonergan on various occasions mentioned the advice from Quadragesimo Anno that moral theologians be aware of ‘technical matters’ in economics.7 His insistence on the importance of economic science for the moral theology of the economy has roots in Pesch. In any case, Heinrich Pesch was the most significant Catholic economist to influence Lonergan’s work. He was heavily influenced by Aquinas’ natural law ethics. His approach was critical of both laissez-faire liberal capitalism and Marxist economics and proposed an alternative, cooperative vision of economic life, which he named solidarism. Besides their influence on Quadragesimo Anno, Pesch’s ideas on solidarity and the condition of labour were to influence Pope John Paul II. Pesch championed the formation of national economic councils operating on the principle of subsidiarity. Unlike the adherents of mainstream economics after Adam Smith, Pesch did not divorce economics from ethics. ‘Human conduct and striving, which are the object of research in a social science, are evaluated according to their adaptation to the purposes which they serve.’8 As might be expected, Lonergan appreciated Pesch’s notions of solidarism and subsidiarity.9 In Pesch’s view there was a natural order to the economy, and although he distinguished economic, political, and ethical questions, he argued that an economy had its own proper end, which is the standard of living. This view was in sharp contrast to Lionel Robbins’ position that economy was about the allocation of scarce resources – the view generally held by economists at that time. Lonergan, of course, agreed with Pesch that the standard of living was the proper end of economy and shared with

5 Pesch died in 1926, five years before the publication of Quadragesimo Anno. The expert consulted for this encyclical, however, was Ostwald von NellBreuning, who was a student and disciple of Pesch. Nell-Breuning discusses the encyclical in detail in Ostwald von Nell-Breuning, Reorganization of Social Economy (Milwaukee: Bruce, 1936). 6 See pp. 12–15 above. 7 In ‘Questionaire on Philosophy: Response,’ Lonergan writes, ‘There is needed up-to-date technical knowledge of economic and political theory and their respective histories; perhaps the greatest weakness of Catholic social thought is its apparent lack of awareness of the need for technical knowledge, CWL17 370. 8 Quoted in Richard E. Mulcahy, s.j., The Economics of Heinrich Pesch (New York: Henry Holt, 1952) 18. 9 For an expansion of this theme, see the editor’s introduction to CWL15, xxxi–ii.

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him an appreciation of the economy as part of a good of order embedded in a hierarchy of ends. It was Pesch’s consideration of economy as a contributor to the whole social order that most influenced Lonergan. Like Pesch, Lonergan understood that economies provided the material goods necessary for both survival and the advancement of culture. Although Lonergan differentiates economics from politics and ethics, there is a unity to the whole of his thought that understands economics as part of the greater good of order. Pesch was a proponent of just wage theory, a theory Lonergan identified as a key problem inherent in the Catholic approach to economics in the 1930s. Nonetheless, Pesch, like Lewis Watt, appreciated the need to understand how economies actually worked, and that appreciation set a positive example for Lonergan. In the 1940s, Lonergan turned to Pesch for his expertise as an economic historian. Lonergan’s notes on Pesch, thirty-three pages in the original, are all from volume 2 of the five-volume Lehrbuch de Nationalökonomie. Volume 2 deals with economic systems alternative to Pesch’s own theory of solidarism and includes treatments of mercantilism, Physiocracy, Adam Smith, and Socialism. As these notes show, Pesch was quite detailed in his treatment. Lonergan’s interest was in the mercantilists, Cantillon, and the Physiocrats rather than in Smith, Ricardo, and Socialism, a fact reflected in his own essays. Later, when he taught economics at Boston College, he included extensive selections from Schumpeter’s History of Economic Analysis on Turgot, Cantillon, and Quesnay. As these notes confirm, Lonergan was interested in both analysis and historical studies. It is around these two focal points that Lonergan developed his analytic conception of history, and he sustained the dual pattern of analysis in his economics. These notes are held in LRI Archives File A335. Lonergan’s text goes straight through Pesch’s text from page 8 to page 85 with one exception: he places the section ‘Judgment on Physiocracy II 89–91’ at the beginning. The notes on Pesch are complete as they appear in the archive file; only repetitive headings have been removed. Numbered sections have been added for ease of use; the titles are as Lonergan assigned them. 2

Text 2.1 Heinrich Pesch, Lehrbuch der Nationalökonomie10

1. Pesch Judgment on Physiocracy II 89–91 Sincere men, welfare of state & of farmer at heart 10 [Textbook of National Economy]

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Natural reaction to mercantilism which was projection of medieval paternalism into rational state of modern times Led to a great development of accuracy of economic definitions: capital, land-rent, costs of production, division of product, income, etc. It eliminated the Realpolitik of mercantilism which saw one state’s progress to involve ruin of others. But it fell to opposite extreme, exaggerating farmers as mercantilists exaggerated trade – [its idea of natural law was full of Hobbes Locke Rousseau Montesquieu Helvetus p. 96 note 3] 99 in some individuals it led to advising the drawing up of a blue-print for all countries to be enforced immediately & in detail Failure to grasp that economics is a function of physical geography, national characteristics customs etc. 2. The Older System of Physical Economy Mercantilism Pesch II 8–15 1. Many interesting remarks in Plato Aristotle Xenophen Cicero etc. on economic events & conditions. Medieval writers engaged in evaluating moral aspects of economic activity But economic doctrine properly began only in modern period with the question: What makes a people rich? Mercantilism, Physiocracy, Smith. 2 Was mercantilism a system? It developed as a practical system of trade policy (Handelspolitik); & even as a theory, it is not the work of any single writer or even school; it represents the dominant views of a few centuries of economic practice & reflection 3. Adam Smith’s idea of mercantilism Smith supposed mercantilism to consist in the belief that wealth is gold & that, if a country does not possess gold mines, then it can become rich only by a favourable balance of trade [balance of trade: notion? appears first in Bacon of Vera 1615] But a favourable balance is had by increasing exports & decreasing imports & so this becomes the policy of every state. 4 Mercantilist Practice a Tariffs & embargos to prevent import of foreign manufacture, export of domestic raw materials [import forbidden a to force foreigner to buy manufacture b to make raw materials cheap at home] b Bounties and kick-backs for export of manufacture, import of raw materials g Embargo on export of gold or silver d Loans & other devices to encourage development of new branches of industry

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e Trade treaties with foreign states z Privileged companies for difficult fields of foreign trade h Search for colonies in foreign lands [colonies treated as mere means to welfare of home-land] 5. Did mercantilists really think gold wealth? Did Smith really believe they did? Smith speaks of popular notions & implicit assumptions – the mercantilists may not have failed to distinguish between money & wealth & yet failed to make that distinction effective in their thought A. Oncken11 Geschichte der Nationalökonomik I12 (1902) 225 states that he sought & failed to find in the whole of mercantilist literature the explicit statement ‘Wealth is Money’ – only a single instance in an unimportant work Pesch: even if mercantilists did not openly confuse gold & wealth, even if Smith was unshaken in considering it the implicit assumption of all their thought, there can be no doubt that they exaggerated the importance of gold. Friedich Kleinwächter (1906)13 De facto theory & practice in Mercantilism period was directed to increasing & protecting domestic gold supply – this direction was not an illusion – the period after the discovery of America was the birth of capitalism & capitalism had to have gold – Mercantilism is the scientific system of budding capitalism. 3 Mercantilism Theories of its Nature Pesch II – 15–22 Schmoller, Gustav:14 in Jahrbuch für Gesetzgebung, Verwaltung, und Volkswirtschaft, VIII 1884) 15ff,15 reprint in Umrisse und Untersuchungen16 (1898) 1ff. Schmoller advanced that Smith failed entirely to understand mercantilist movement; that he had no grasp of the forces of political history between 1450–1700 in which grew up the modern centralized states; that his discussion of competition, compensation, interdependence is on the small scale of a neighbourhood[.] 11 [This is Auguste Onchen. See HEA 225, 228, 244.] 12 [HEA I] 13 [The Austrian economist Friedrich Kleinwachter (1838–1927) was a historical economist. The reference is to Lehrbuch Der Nationalökonomie, 1908.] 14 [Gustav Schmoller (1832–1917) was a leading member of the ‘younger’ German historical school of economists, and a critic of the axiomatic-deductive approach of the Austrian school.] 15 [Yearbook for Legislation, Administration, and Political Economy] 16 [Sketches and Investigations]

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Schmoller considered that the essence of mercantilism was not a matter of incoming gold stocks, of the F.B.T.,17 in tariffs, bounties, Navigation Acts – that essentially mercantilism was the instrument of a social revolution, the replacement of local agricultural economy by national & state economy – the F.B.T. was merely an item in the movement. Schmoller is thinking principally of German & especially of Prussian development [note in margin Pesch G. Lonergan. M.S.] The towns of late medieval times counted a greater or less important body of merchants & craftsmen. To these burghers, the limitations of the feudal organization were so many hindrances to progress. It was to their interest to enlarge the field of exchange, to break down barriers not only within their own country but also between countries. The compass led the sailor to the open sea and the world market was the goal of the merchant. The discovery of America & of the East enlarged indefinitely the scale of this tendency. Now the commercial revolution created an ever increasing need for more money. Merchants & producers could carry on & extend their enterprise only if they had money – Again money was the object of their striving. Connected with the commercial revolution & its implicit Geldwirtschaft was the political tendency: from the feudal & corporative organization of society to that of the absolute prince ruling over individuals – the interests of the prince & the bourgeoisie coincided – the prince wanted power & wealth, and the means were the break-up of the old social structure & the enrichment that resulted from trade – but these precisely were the aims of the bourgeoisie – and the prince to ensure his own position could play off the nobility & the bourgeoisie against one another – Now in this change the power of gold again appears: it is no longer a matter of feudal pledged service but the hiring of mercenaries, no longer a matter of payment in kind from feudal subordinates but payment in cash – The discovery of powder & shot finished off the knights – hence the pressure on the royal borrowing: money was needed to run the emerging state; it could not subsist on rents of royal domains and occasional donations or taxes; it had to have money & to have it abundantly, it had to favour manufacture, trade & the F.B.T [manufacture & trade the expansion of the moment; F.B.T. increase in gold supply necessary for commercial & political expansion. August Oncken Geschichte der Naturalökonomie18 I (1902) Mercantilism was system of policies for the well-being of princes

17 [Favorable Balance of Trade] 18 [History of National Economy]

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‘System der landesfürstlichen Wohlstandspolizei’19 ‘Système réglementaire’20 Fundamentally the mercantilist care of manufacture & trade was a political opportunity. the favourable balance of trade was the single dogma that mercantilism put forward. It was but part of a larger doctrine: ‘the end of the state is the wealth & power of the prince: from this follows the subordination of the welfare of the people, the system of state regimentation of economics, the rivalry & enmity with foreign nations.’ Hence another consequence, the economic progress & effort of the people was not directed to their well-being but to the territorial & political aggrandizement of the national state – & in harmony with the absolutism of the times this was conceived as the increasing power of the sovereign. Again the capitalist profit motive not merely was the economic instrument of the state; it coloured political thinking. To Voltaire one state’s loss is another’s gain – Hence ruthless national egoism – [later this view gave way to the equally inadequate view that trade was equally to the advantage of all (Free trade)] Trade or manufacturing development in one state were considered to be simultaneously the weakening of others. (Rightly but conditionally in monetary order) Wars of the period were thoroughly at the service of trade, the extension & consolidation of trade & colonial domination – they were but an element in the chain of regulations for the achievement of wealth & power at the expense of others. Hence according to differences of territory, situation, economic & political development & circumstances generally; the practical measures of mercantilist policy varied in different countries & towns. 4 Mercantilist Theory End of Economics Pesch II 43, 44 Wilhelm Frhr. [Freiherr] von Schröder 21 Furstliche Schatz-und Rentkammer 22 1686 ‘The prince is to prefer the maintenance of his own person to the wellbeing of his subjects’ He considers it absurd to recommend thrift to the prince

19 [system of state legislation by the sovereign prince] 20 [regulatory framework. Pesch expands on the term’s use as follows: ‘The expressions “système protecteur” and “système réglementaire” which are still in use in France today to describe that system (mercantilism) come down basically to the same thing,’ TGE 2, 21.] 21 [Wilhelm von Schröder (1640–88), an Austrian who proposed the introduction of paper money as a method of stimulating the economy.] 22 [Princely Treasure and Taxes]

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The indispensable basis of Absolutism is a powerful standing army and a large ton of gold in the treasury. In order that taxes may bring in a lot of gold, attention must be paid to the well being of the people. As a householder must fertilize and plough his land, so the prince must attend to the well-being of the people – to raise taxes to a point that undermines the people’s welfare is like letting a hog into the kitchen garden Johann Joachim Becher23 Politischer Diskurs von den eigentlichen Ursachen des Auf-und Abnehmens der Städte, Länder und Republiken; in specie, wie ein Land Volkreich und Nahrhaft zu machen und in eine rechte Societatem civilem zu bringen24 ed 1 1668 ed 2 1673 (dedicated to Kaiser Leopold II) 1 Totally in favour of State control of trade 2 Insists that the ruler is for the community, not the community for the authority the ruler 3 Demands diligence & hard work from prince: ‘he is well paid’ 4 ‘Nothing does more harm and brings a people and country more quickly to ruin than a large and idle court’ 5 Republics and ‘Reichs-Stätt’ [imperial cities] are better off than monarchies because in the former there is no conflict between the interests of the country and the interests of the court 6 If a monarchy, put the interests of the country first 7 In a later work, composed or influenced by him F.W. v. Hörnigk Wohlmeynenden Fürschlag 25 1684 Kameralökonomie 26 is a sub-division of Partikularökonomie [Special economy] which is a part subordinate part of allgemeinen Landesökonomie [general national economy] 23 [Johann Joachim Becher (1635 –82).] 24 [Political discourse about the actual causes of the growth and decline of cities, countries and republics; in particular, how to cause a country to become more populous and self-sustaining (agriculturally), and to transform it into a proper civil society.] 25 [Pesch notes that the work, though published by F.W. v. Hörnigk, was written by Becher. See TGE 44.] 26 [‘Kameralökonomie’ is a technical term in the Hörnigk text meaning ‘princely management’ or ‘public economy.’ Pesch has the following on ‘cameral science’: ‘Not infrequently the concern for a prospering treasury was presented as a major concern for the economy. The country should be

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5 Mercantilists Theory Factors in Economics Pesch II 44–47 Leibnitz27: ‘Regionis potentia consistit in terra, rebus, hominibus’28 esp. land, capital, labor Mercantilist commonplace – a large population is a main factor in the power of the state but not merely a large also a well-to-do population Vauban & French King Christian Wolff Vernunftige Gedanken von gesellschaftlichen Leben der Menschen29 1721 Oeconomica methodo scientifica pertractata 1754 The two main factors of a State’s power are numerous subjects & rich subjects Becher Politischer Diskurs 30 A large population postulates the means of subsistence – Abundant food increases the population at home and attracts immigrants from abroad – The increase in the population makes it all the easier to obtain food, for it is easier to keep going in a city than on a deserted island – Hence material causality William Petty 1623–87 Founder of ‘Political Arithmetic’ Land & labor are the basic factors of wealth: labor is the father, the active principle; lands are the mother Similarly Cantillon31 in 18th Effertz32 in the 19th century Land & labor are the irreducible principles of wealth

27 28 29 30 31 32

made “prosperous” and made to “thrive” for the sake of the power of the state and the riches of the landed princes – as the “finis ultimus of all statecraft.” The welfare of the state is the source of all other welfare. In Germany the name given to the science which dealt with economic matters already pointed in that direction. There was talk of “cameral science.” If the welfare policies of the landed aristocracy belonged to that category, then the proper administration of the royal treasury for resources and rents was its principle objective. The welfare of the population was scarcely considered except to the extent that the yield in fees and taxes stemmed from it,’ TGE 43.] [Gottfried Wilhelm Leibniz (1646–1716).] [A region’s potential is dependent on its land, capital, and labour] [Rational Thoughts on the Social Life of Man] [Political Discourse] [Richard Cantillon (1680–1734).] [Otto Effertz, a German economist, wrote Arbeit und Boden, 1890. See HEA 821.]

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Among mercantilist theorists, greater or less esteem was accorded by different writers to special types of labor, in particular some thought more rather [than] less of the merchant J.J. Becher The merchant stands next to nature-trade brings the poorest countries to life, to health, to great prosperity. He considers peasants (all producers of raw materials) & craftsmen, as productive & not merely the merchant – he thinks consumption is the key that binds the three factors together. – but the merchant stands above all as a factor in increasing the food & wealth of a community He points to Mercury’s four wings: Intelligence, Determination, Money, and Freedom – the merchant must have all four He asks every help for merchants – e.g. a canal system linking Germany’s main rivers He insists that merchants can do harm as well as good – & demands that they do not chose their freedom to the detriment of population, the food supply, or the Gemeinschaft33 Von Hörnigk nine rules of Landesökonomie 34 1 Exact inquiry & full use of all resources of a country – notably of mines 2 All processing & manufacturing of raw materials in country itself 3 Greatest possible increase & useful employment of inhabitants 4 No exportation of or tampering with the currency 6 Necessary imports, bought at first hand, and paid for in kind 5 Greatest possible restriction to home products 7 Necessary imports, in so far as possible, brought as raw materials 8 Greatest possible exportation of manufactured goods, sold for gold & not by barter 9 No imports of what the country itself can provide the use of bounties (tariffs) W. Schröder35 If a country wants gold, then push foreign trade – Domestic trade is mere commutation Favours prosperous peasantry ⇒ abundance of food ⇒ lowered costs of production

33 [community] 34 [national economy] 35 [Wilhelm von Schröder (1640–88).]

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Manufacturing countries with a poor soil are away [sic] ahead of nonmanufacturing countries with rich soil. The state must discover what manufacturers are lacking within its borders & fill up the gaps – Machine-industry finds no favour with him since it robs people of their living – On the other hand, he is enthusiastic about banks which make possible a great deal of trade with very little gold Leibnitz to produce raw materials for export and then buy back the finished product, is (1715) comparable to buying back your horse from the thief that stole it denies any opposition between interest of farmer, manufacturer and merchant: farming like roots of a tree, manufacture & commerce the branches which draw in gold from foreign countries and enrich the home-land; the farmer gets a good price when manufacture & trade flourish; trade & manufacture flourish when food-supply & raw materials are abundant and excellent Christian Wolff Trade flourishes but when it is not restricted Like Joshua Gee36 he gives a list of instances in which it is profitable to export raw materials and import manufactured goods. Wolff deserves mention because in an age that looked mostly to the prince’s treasure and the prosperity of the middle class. He drew attention to the fact that wages have to provide a healthy and contented laboring class 6 Mercantilists Theory: Finance Pesch II 47, 48 J.G. v. Justi37 | Ausführliche Abhandlung von den Steuern und Abgaben 38 1762 | System des Finanzwesens 176639 Joseph v. Sonnenfels40 Grundsätze der Polizei, Handlung und Finanz 41 1765 Both grasp the volkswirtschaftliche Bedingtheit der Finanzwirtschaft 42 Both oppose the Plusmacherei (gold gaining) of the old Treasury economists

36 37 38 39 40 41 42

[Joshua Gee (1713–48). See p. 87 below.] [Johann Heinrich Gottlob von Justi (1717–71).] [Detailed Treatise on Taxes and Duties] [System of Financial Matters] [Joseph von Sonnenfels (1732–1817).] [Principles of the Police, Behaviour, Finance] [economic boundaries of financial management]

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7 Mercantilist Theory: French Pesch II 48 Bodin, Jean 1520–1597 Response aux paradoxes de M. Malestroict43 1568 Discours sur le rehaussement et la diminution des monnayes 44 1578 De la république (six livres)45 1576 thought that to double the gold supply meant a doubling of prices Explained the price level changes of XVI century by inflow of precious metals Favoured tariffs & bounties – freedom of trade – Antoine de Montchrétien, Sieur de Vateville46 Traité de l’économie politique 1615 [first appearance of term ‘économie politique’] [N.B. First appearance of ‘political economy’ James Stewart47: An Inquiry into the Principles of Political Economy 1767] Montchrétien insists on the mercantilist thesis : trade, industry, merchant marine, colonies. finance – one man’s gain is another’s loss – internal trade is no gain to the nation – the foreign merchants are pumps sucking out the life blood of the nation. 8 Mercantilists Theory: Italians Pesch II 48, 50 The Italians the great pioneers in political economy Dürhing, Kritische Geschichte der Nationalökonomie48 38f Treated especially of the evils of debased currency & of trade According to Ganilh49 the Italians had the worst economies but the best treatises on the subject

43 [Response to the Paradoxes of M. Malestroict. The full title of the original French edition from 1566 is Les Paradoxes de Monsieur de Malestroit, conseiller du Roy et maistre ordinaire de ses comptes, sur le faict des monnoyes, presentez à sa Majesté, au moi de mars 1566, avec la response de M. Jean Bodin.] 44 [Discourse on the Circulation and Movement of Money] 45 [Translated into English as Six Books of the Commonwealth. Most recently, Jean Bodin, Six Books of the Commonwealth, abridged and trans. M.J. Tooley (Oxford: Basil Blackwell, 1955).] 46 [Antoine de Montchretien (c. 1575–1621).] 47 [James Stewart (1712–80).] 48 [Dühring, Kritische Geschichte der Nationalökonomie und des Socialismus [Critical History of National Economy] 1871. See HEA 381.] 49 [ Charles Ganilh (1758–1836). See HEA 498–99.]

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Giovanni Botero50 [resembles Bodin] Delle cause della grandezza delle città51 1588 Della ragime di stato52 1589 Gasparo Scaruffi53 Discorso sopra le monete et della vera proporzione fra l’oro et l’argento54 1579 advocated a single currency for all Europe Antonio Serra55 Breve trattato ...56 (1613) Examines the general causes of the wealth of states, of Genoa, Florence, Venice – affirms mines to be the sole immediate causes of an abundance of gold & silver. Affirms mediate & proper causes to be the fertility of the land, provided the products are exchanged abroad for gold & silver, and the suitability of its situation for foreign trade; affirms general mediate causes to be the industry & ability of the people; trade especially sea-borne trade; manufacture in which products are more durable & less subject to uncontrollable factors than agriculture [&] with its natural limits; finally the type of government, the laws, order Antonio Genovesi:57 Lezioni di Commercio ossia di Economia Civile 176558 Nearest approach to systematic presentation of mercantilism 1 Wealth & fortune of a nation does not consist in abundance of gold & silver – it is only the lubricant on the axle of trade – more 50 [Giovanni Botero (1544–1617). A Jesuit scholar of the Counter-Reformation. Schumpeter regards him as a ‘great man.’ See HEA 160.] 51 [Published in English as The Greatness of Cities; literally, ‘On the Causes of the Greatness of Cities.’] 52 [The Reason of State] 53 [Gasparo Scaruffi (1515?–84). A ‘metalist.’] 54 [Discourse on Money and the True Relationship between Gold and Silver] 55 [Antonio Serra was both in the late sixteenth century. Schumpeter credits Serra with being ‘the first to compose a scientific treatise, though an unsystematic one, on economic principles and policies,’ HEA 195.] 56 [Breve trattato delle cause che possono far abbondare li regni d’oro e argento dove non sono miniere (1613) [Brief Treatise on the Causes Which Can Make Gold and Silver Plentiful in Kingdoms Where There Are No Mines]. See HEA 194; TGE 50.] 57 [Antonio Genovesi (1712–69).] 58 [Commercial Lessons on the Civil Economy. See HEA 177.]

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axles, more oil; more trade needs more gold – otherwise to double gold supply is to double prices 2 Rising price levels kill export trade & encourage imports Gian Rinaldo Carli59 (mid XVIII cent) Ragionamento sopra i bilanci economici delle nazioni 60 Solidary, interdependence of different classes in nation; hence real politician will not be a class-man 9 Mercantilists Theory: Spaniards and Portuguese Moncada61 begin XVII century-critique of previous economy Navarette 62 Bernardo de Ulloa63 mid XVIII century – Colbertism64 65 Jeronimo de Ustáriz aim of trade policy – balance that eliminates gold payments Mariana66 Portuguese – on Money 10 Mercantilists Theory: Dutch Pesch II, 51 Pieter Van der Hove (de la Court)67 Het interest van Holland 166268 Increase in national wealth through foreign trade: internal trade is unprofitable (one man’s loss another’s gain) 59 [Gian Rinaldo Carli (1720–95).] 60 [A Discussion of the Balance of Trade between Nations. In this volume Carli argues against the prevailing view that the balance of trade between two nations proves little or nothing as to the real prosperity of either nation. See TGE 51.] 61 [Francisco de Moncada (1586–1635).] 62 [Pedro Fernandez Navarrete, Discursos (1621). See HEA 168 and Alejandro Antonio Chafuen, Faith and Liberty: The Economic Thought of the Late Scholastics (Lanham, MD: Lexington, 2003) 55–60.] 63 [Bernardo de Ulloa (1682–1740).] 64 [On Colbertism, see HEA 147 n. 5.] 65 [Jerónimo de Ustáriz (1670–c. 1732).] 66 [Father Juan de Mariana (1536–1624, Madrid). A Spanish Jesuit who wrote, among many other books, De monetae mutatione, in 1665. Published in English as On the Debasement of Money.] 67 [Pieter de la Court (1618–28 May 1685).] 68 [Published in English as The True Interest and Political Maxims of the Republic of Holland (London: John Campbell, Esq., 1746).]

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Hence favour for manufacture that develops foreign raw stuffs & re-exports Friend of economic power: labor troubles to be solved in favour of the master – republic favours survival of fittest & so to be preferred to monarchy – the estate owner is more inclined to protect the weak, which is good for the family but bad for the state, in which the strong should become stronger & the weak be sacrificed. Pieter de Groot69 son of Hugo Grotius Advanced to Louis XIV the following argument against tariffs Every nation has more of some things & less of others; it is to the interest of all that there be exchange; tariffs mean that people have too much of one thing & not enough of another This idea of ‘Weltarbeitsteilung’70 according to Oncken first expressed by Pieter – Pesch finds same idea in Richard of Middleton71 (+1300) Quodl II q. 23 a1 According to Pesch, Bodin drew the proper conclusion from de Groot’s premise: no embargoes but not no tariffs 11. Mercantilists Theory: English Pesch II 52, 53 Prosperity a function of foreign trade Thomas Mun72 England’s treasure by foreign trade, or the balance of our trade is the rule of our treasure 1664 foreign trade not the sole but the principle [sic] means of increasing a nation’s wealth Mun was a director of East India Company hence all – ship building, trade, tariffs, exports, currency must be subordinate to foreign trade Trade is conditioned by existence of sound currency – Mun, North, Locke accordingly demanded a face-value currency – point had already been made by anonymous W.S. in ‘Compendious or brief Examination of certayn ordinary Complaints etc.’ 1581 Isaac Newton (in charge of treasury 1700–1727) had a currency less than nominal value for internal use, to prevent its flowing off to foreigners.

69 [Pieter de Groot (1615–78).] 70 [world division of labour] 71 [Richard of Middleton (c. 1249–1302), a Franciscan philosopher and theologian from Normandy.] 72 [Thomas Mun (1571–1641).]

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Josiah Child73 New Discourse of Trade 1668 Treatise concerning the East India Trade 1681 Low interest rates the causa causans of the wealth of the Netherlands Interest rates depend on supply & demand of capital – no use making laws. Same idea in Dudley North74 Discourse on Trade 1691 Free trade as opposed to monopoly-privilege was argued for by Misselden & Malynes (both 1622) – Child praises Navigation Acts because for good of country not of group (Magna Carta Maritima) – favours however the special case of the East India Company. Joshua Gee The Trade & Navigation of Gt Britain 1727 favours free-port-system – but asks for only two such ports Gibraltar Port Mahon Matthew Decker75 An essay on the causes of the decline of the foreign trade etc 1744 favours all English ports free for both exports & imports Josiah Tucker76 Elements of Commerce 1755 – Down with foreigners – Do better work & sell cheaper Locke (1714)77 you bring both sides to a balance quicker by taking from the heavier & putting in the lighter – hence favourable balance better than gold mine

73 74 75 76 77

[Sir Josiah Child (1630–22 June 1699).] [Sir Dudley North (1641–91).] [Sir Matthew Decker (1679–49).] [Josiah Tucker (1713–1799).] [John Locke (1632–1704). The reference is to Locke’s ameliorating comments on ‘the egoism of the mercantilist approach,’ which Pesch quotes as follows: ‘The gold and silver derived from the mines does not enrich us in the same measure as that acquired by trade. He who wants to put more weight into the lighter side of the scale will not accomplish that as quickly if he placed new weights on the scale as if he takes out of the heavier side of the scale what he places on the lighter side, since half will then be enough. Riches does not consist in the possession of a larger amount of gold and silver, but in a larger amount as compared with the rest of the world, i.e. with our neighbors. That places us in the position where we can provide a greater abundance of conveniences of life than is true of the neighboring kingdoms and states. Who own a lesser share of the world’s gold and silver, who lack the means to get surpluses and power, and are therefore poorer.’ Pesch’s reference for this passage is John Locke’s Works II (1714) 7.]

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History of Economics Pietro Custodi:78 Scrittori classici italiani di economia politica 79 Parte antica (1803, 4) 7 vols. – Parta moderna (1803–16) 50 vols. 12 Pesch II 55–

Mercantilism

A state policy in which trade, possession of gold, the favourable foreign balance & indigenous manufacture played compensating roles Both theory & practice from the late middle ages till the eighteenth century were dominated by the mercantilist state policy – it cannot have been purely & simply an error Roscher, Geschichte der Nationalökonomik, 232f 80 Pesch II 55 13 Errors of Mercantilism Pesch II 56–62 importance 1. Exaggerated idea of value of gold II 56 Not in sense that gold was confused with national wealth Need of gold a) expanding trade b) taxation machine Dühring Kritische Geschichte der Nationalökonomie, 34ff ‘Der Besitz des edeln Metalle als Wirkung und als Ursache, als Erfolg und als Anregung der wirtshaftlichen Tätigkeit unter der Leitung des Handels – dies ist, soweit überhaupt ein paar Wörte zur Kennzeichnung genügen können, die leitende Idee des Mercantilismus gewesen’81 cited Pesch II 56 Error lay in putting importance of gold too much in the foreground – it is a means to trade, trade a means to economic well-being 2. Exaggerated importance of foreign trade & industry Agricultural surplus makes possible distinction of trade, manufacture and agriculture – this distinction certainly results in vast increase of productivity.

78 79 80 81

[Pietro Custodi (1771–1842).] [Classical Italian Writings in Political Economy] [History of the National Economy] [The ownership of precious metals as the effect and cause, as the result and stimulus of economic activity under the leadership of commerce – that is the guiding principle of mercantilism in a nutshell.]

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Mercantilism insists on industry & foreign trade almost to neglect of other factors – this was meeting the challenge of his time & even more developed theory would not point out a different way [Ingram,82 Geschichte der Volkswirtschaftslehre p. 51]83 Still [Pesch II 5]] a more balanced view would have prompted greater intelligence in facing the problems of the emergent worker-class, greater care of agricultural interests On the last point (agriculture) criticism valid in varying degrees – but the general exaggeration of the importance of trade cannot be denied II 58 3. The Absolutism and the close-fisted profit-seeking of mercantilist policy Both the growth of internal trade and the problems of external pressure & expansion imposed a strong central government with a positive economic policy – But the error of the times was that the goal of this effort was not the national well-being but the power of the sovereign and the advantage of the treasury Peak of absolutism in German Kleinstaaten84 which sold mercenaries abroad 4. Exploitation of colonies & international trade rivalry Love of the home country implies ‘To wish the greatness of the home-county is to wish the ruin of its neighbours’ Voltaire II 62 Colonies totally subordinated to well-being of home-land. Peace was merely an armistice between 1600–1800 ‘Wenn [so] die ganze Zeit von 1600 bis 1800 von jahre- und jahrzehntelangen Kriegen erfüllt ist, deren wesentlicher Zweck ein wirtschaftlicher war, ... so zeigt das den Geist der Zeit in seinen wahren Lichte: die nationale Leidenschaft der wirtschaftlichen Rivalität war allerwarts in einem Grade erwacht, Daß sie nur in diesen Kämpfen ihren vollen Ausdruck und ihre Befreidigung finden Konnte.’85

82 [John Kells Ingram (7 July 1823–1 May 1907), an Irish economist.] 83 [History of the National Economy (Adam and Charles Black, 1988). Lonergan cites the German translation from Pesch.] 84 [small states] 85 [When the 1600s to 1800s is taken up with year-long and decade-long economic wars … is this an indication of the spirit of the times: the national passion of economic rivalry was awakened everywhere to such a degree that this rivalry could be expressed only in and find satisfaction only through these wars.]

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Schmoller86 Umrisse unde Untersuchungen,87 50f cited Pesch, II 63 ‘Der Mercantilismus hat in der Risctung, in welcher er tätig war, zum Teil Grossartiges geleistet. Handel und Gewerbe sind durch ihn mächtig gefördert worden. Das hat [auch] Adam Smith, ohwohl Gegner des Merkantilismus, anerkannt. Wird aber die Frage gestellt, ob der Merkantilismus unter allegemeinem [volks]wirtschaftlichen Gesichtsspunkte Lob verdient, so dürfte heute kaum jemand diese Frage unbedingt bejahen wollen... daß Merkantilsystem nicht bloß durch siene Erfolge, sodern auch durch seine [Einseitigkeiten und Ùbertreibungen,] Fehler und Mängel lehrreich geworden ist.’88 Pesch II 63 14 Physiocratic System Pesch II 64–67 New Ideas & aims 64 Reaction against mercantilist state control in name of ‘natural liberty’ 65 Medieval craftsmen protected – in same fashion & by same means (Privilege, Monopoly, Statutes, Regulations, Elimination of Competition, subsidy in international competition) the modern state favoured manufacture. But what began as an aid ended as a hindrance. In time of Colbert89 after his successful Dutch War (1672–78) the merchant Legendre at a council of producers & traders had said ‘Laissez-nous-faire.’ After Colbert under Louvois bureaucracy spawned endless officials. At same time agriculture found itself in least favoured position – feudal obligations to church & to lord, military service, internal tariffs, the destruction of war, the rank behind manufacture & trade. At death of Louis XIV state debt was 2 milliards interest 89 millions, income 69 millions – oppressive taxation.

86 [Gustav von Schmoller (1838–1917) was the leader of the ‘younger’ German historical school of economics. In the Methodenstreit controversy, he was opposed to the axiomatic-deductive approach of the Austrian school. On this, see HEA 750–92.] 87 [Outlines and Investigations] 88 [Mercantilism, as it was conducted, was partially successful. Commerce and trade had been greatly advanced. This was recognized even by Adam Smith, though he was opposed to mercantilism. However, if today the question is raised whether mercantilism, from a general economic point of view, should be praised, hardly anyone would unconditionally respond in the affirmative …Thus mercantilism has become instructive for us not only through its successes but also through its [one-sidedness and its extremes], mistakes and deficiencies.] 89 [Jean-Baptiste Colbert (1619–83). The French form of mercantilism became known as Colbertism as a result of Colbert’s influence. See TGE 21–26.]

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66 John Law90 advised foundation of a bank issue & a trade company for the exploitation of the Mississippi – shares owned ²⁄³ by state, + state’s profits to maintain value of its fiduciary issue- profits not realized, bank insolvent 21 march 1722 – 2 milliards of money became worthless, universal loss Monopoly of company remained overall overseas trade – cotton, coffee, tobacco – merely to advantage of King & countess who owned the 56, 000 shares on which there was a guaranteed income of 150 livres per share no matter what the conditions of trade 91 67 Situation cried aloud: Freedom, Agriculture. Financial Reform. Pesch II 67 – Writers of Transition Period to Physiocracy. Though Colbert had aimed not at ‘abondance de l’argent’ but at ‘abondance des denrées’ still these writers found it necessary to insist 1 On the rejection of the exaggerated regard for gold & money P. de Boisguillebert (1646–1714)92 wealth is not gold (paper would do for money) but solely in food, clothing, & necessities Vauban,93 friend of Colbert’s and a mercantilist, ‘gold & silver are not wealth but only the abundance of goods needed for human life’ Mélon94 gold is not merely not the sole riches; it is only the sign of the rest of riches Montesquieu95 gold & silver poetic wealth, merely a sign of real wealth; the Portuguese Spaniards mistook the sign for reality & so sought only sign – their success undermined its value96 Richard Cantillon The earth is the source or matter of wealth; work is the form that produces it; and wealth itself is merely food, clothing, conveniences, agréments de la vie.

90 [John Law (1671 –1729).] 91 [See Charles Rist, History of Monetary and Credit Theory from John Law to the Present Day, trans. Jane Degras (New York: A.M. Kelley, 1966) 43–67, for a negative assessment of Law’s legacy. For a more positive assessment, see Schumpeter, HEA 294–99, 321–22.] 92 [Pierre Le Pesant, sieur de Boisguillebert (1646–1714).] 93 [Sébastien Le Prestre, seigneur de Vauban (1633–1707).] 94 [Jean-François Melon of Pradou (1675–1738)]. 95 [Charles-Louis de Secondat, baron de La Brède et de Montesquieu (1689– 1755).] 96 [Pesch cites Montesquieu, Esprit de lois bk 21 p. 22]

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2 The Role of the Land II 68 Swing away from mercantilist view that favourable balance & its conditions (domestic manufacture, tariff barriers) the causes of wealth Colbert has done the peasantry as much harm as Sully under Henry IV had done it good: Sully considered agriculture & cattle raising ‘die beiden Nährbrüste des Staates’97 but he was no precursor of the Physiocrats believing thoroughly in state intervention. Pesch II 68–69 Boisguillebert A state obtains well-being & power through its peasant population medium prices for corn the optimum: too high & too low a bad sign Mélon98 placed national wealth in its soils [Grund u. Boden] affirmed peasants to be largest proportion of population & their income a better index of national wealth than the F.B.T. Cantillon, Quesnay, A Smith99 – similar views Véron de Forbonnais100 agriculture the basis of wealth, not like physiocratic assertion of agriculture as sole source of wealth Wealth is not [in] large scale commerce but ‘in einem guten allegemeinen Ackerbau, in den Gewerben derjenigen Einwohner, welche jenem nicht obliegen Können, und einem gesunden inneren Handel’101 Marquis d’Argenson102 all grand scale commerce reduces to usury – the ideal line in the ‘golden mean’ exemplified by Switzerland Cantillon does not make the soil the unique factor – work & soil combine to give wealth – despite his grand sympathy for the agricultural interests, Cantillon was a mercantilist & not the father of physiocracy as Jevons & Higgs tried to make out Vincent de Gournay103 merchants a real source of wealth, parallel to agriculture & not a mere offshoot.

97 [at the bosom of the State] 98 [Jean-François Melon of Pradou (n. 94 above) was John Law’s private secretary.] 99 [Lonergan assigned sections on Cantillon, Quesnay, and Adam Smith from HEA as reading for his lectures in economics and the dialectic of history at Boston College in 1982–83.] 100 [François Véron Duverger de Forbonnais (1722–1800).] 101 [in a good general agriculture, in the industry of those kinds of inhabitants which that cannot do without, and in a healthy domestic commerce] 102 [René-Louis de Voyer de Paulmy, marquis d’Argenson (1694–1757).] 103 [Jean Claude Marie Vincent de Gournay (1712–59).]

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Marquis Victor de Mirabeau104 (the older Mirabeau) wealth & Power lie not in large population, not city but country population, that is diligent, high moral character Later he conceded to Quesnay that wealth a cause & not an effect of population 15 Transition to Physiocracy Pesch II 69 – 3. Elimination of State Interference Boisguillebert removal of all local & district customs – Let state be content to keep down injustice – Nature under divine providence will attend to rest Mélon trade is the exchange of superfluous for necessary – freedom must prevail at least to extent of enabling everyone to pass on his surplus – a limited freedom that does not militate against the common good – in doubtful cases decide in favour of freedom Montesquieu did not demand absolute freedom – limitations on merchants is not restraint of trade – Trade with colonies must be monopoly of mother-country, an advantage owed the mother-country for the military protection she provides- neither Quesnay nor Smith favoured such monopoly of mother-country: in long run not to her advantage. René d’Argenson first to demand absolute international freedom from all tariffs – goods must exchange as freely as air & water circulation – the whole of Europe must be a single market in which the best producers & best nations come to top Better favour the foreign producer for the local has already the advantage of low transportation – Not only free trade in international sphere but generally ‘Pour gouverner mieux, il faudrait gouverner moins’105 – ‘Laissez faire, tel devrait être la devise de toute puissance publique, depuis que le monde est civilisé’106 See Oncken, Geschichte der Nationalökonomik I 274 The function of the state is solely to provide good judges, the suppression of monopolies, equal protection for all, constant currency, roads & canals But d’Argenson did not speak as the Manchester School in the interest of great estates & big business; his favourite was the country populace Victor Mirabeau also wanted the removal of all tolls & customs Universal peace Mirabeau, d’Argenson connected it with economic organization as did the later Manchester School

104 [Marquis de Victor Riqueti Mirabeau (1715–89).] 105 [To govern better it is necessary to govern less] 106 [Laissez faire: such should be the slogan of all public power, given that the world is civilized]

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71 J C Vincent de Gournay107 until Oncken’s Geschichte der Nationalökonomie de Gournay passed as the author of the phrase, laisser faire It was used by Legendre to Colbert; it is found in d’Argenson In de Gournay laisser faire laisser passer refers to the removal of tolls & customs – it does not imply the rejection of the mother-country’s monopoly with colonies, of privileges & prohibitions – de Gournay is, according to Oncken, simply the representative of a liberal tendency within the mercantilist frame-work [Gesch. Nat.ök. I, 291] Transition to Physiocracy Pesch II 72 – 4. Reform of Taxation Maréchal Vauban outlined a primitive system of income tax – conceived as the principle [sic] but not the sole tax – It implied the destruction of the feudal system & so was taken amiss by Louis XIV Abbé de Saint-Pierre108 favored a tax based on productivity of the soil instead of the varying ‘taille arbitraire’109 – From this Quesnay developed his ‘impôt unique,’110 but Saint-Pierre did not conceive a single tax. de Gournay’s school wanted taxes on consumption objects, especially luxuries – production was not to be taxed. 16 François Quesnay 1694–1774 Pesch 73–74 Influences: a the age, the miserable conditions of France, the sanction agst Mercantilism b son of a peasant, a doctor who followed the school of Hippocrates & believed that politics as well as medicine should let nature take her course, a doctor at the court from 1749 74

where he could contemplate at first hand the deficiencies of the administration Works scattered, published anonymously.

Oeuvres économiques et philosophiques de F. Quesnay111 Aug [August] Oncken, 1888 107 108 109 110

[See n. 103 above.] [Charles-Irénée Castel, abbé de Saint-Pierre (1658–1743).] [variable personal taxes as opposed to a fixed tax (tariff taille). See TGE 81.] [single tax. Quesnay associated his impôt unique with the fixed tax (tariff taille) proposed by Abbé de Saint-Pierre. See TGE 81.] 111 [The Economic and Philosophical Works of F. Quesnay]

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Physiocracy: the rule of the ‘national order’ – name goes back to Quesnay physiokratisches System:112 name used in Germany sooner than agricultural system: name spread in England by A Smith Quesnay Pesch II 75– Quesnay proceeded philosophically, objecting against current political theory that it took a one-sided view of historical development. Truth in its fullness cannot be known from given relations & positive law but only from antecedent nature. History sees everywhere beginning, growth, decline, decay – but this is meaningless without an a priori measure of natural order. Quesnay distinguished a natural order and a positive order The natural order, self-evident as natural or ideal for the whole of social living, presents the universal, unchangeable eternal principles. It is derived from God as First Cause. The positive order consists in practical applications & proportionate executions of the eternal principles – such applications & execution has to be adapted to changing circumstances & times. Lasting welfare is had only when the positive order realizes properly the natural order 76 The natural order implies [Ingram, Geschichte der Volkswirtscaftslehrer,113 5] 1 droit naturel à la subsistance114 Society did not destroy the Hobbesian primitive ‘everyone’s right to everything’ which in the primitive state was as meaningless as the swallow’s right to every fly in the air – Hence the natural right remains – Society must take [care] of its poor – yet each individual is free to seek more than subsistence by his own efforts. Inequality is not an evil but a manifold stimulus to progress Quesnay Pesch II 76– the natural order implies 2 the ‘sacred freedom’ of improving one’s lot as much as one can without harming others – hence full freedom in the use of property, freedom of vocation, of trade crafts 3 the unitary not the federative state, legal not arbitrary despotism enlightened Absolutism was Quesnay’s choice – He had little taste for

112 [physiocratic system] 113 [History of Political Economy] 114 [a natural right to subsist]

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Montesquieu’s Constitutionalism, considering that like republicanism it degenerated into a class-state with one- (77) sided representation of dominant interests – no division of powers but pouvoir absolu règlé par les lois115 – the monarch in this state was also le seul pontif 116 and full-fledged theocracy the best form. 4 Economically the national political form is ‘royaume agricole’117 Economic need is for subsistence & reproduction: gold is needed for currency for exchange: to seek more than this need requires is absurd. Wealth is what nourishes man & reproduces itself; its sole source is the land; the land gives it, increases & multiplies it; land, forests, mines, fisheries are alone productive; alone they yield a produit net;118 and their source is the natural fruitfulness of the land & of improvements on the land Quesnay Pesch II 79– the natural order implies 4 con’t Trade & manufacture do not give a produit net – increase in (78) value of flax woven into lace may be 1000 fold – but this increase simply represents the cost of living of the needle-artist during the period of production – hence trade & manufacture are not additional sources of wealth but mere appendages to agriculture; their role is like that of domestic servants – as long as trade & manufacture remain in this role they play a notable part in national economy & are fully justified. 5. Hence the division of the population a) la classe des propriétaires119 the highest class politically & socially (79) a classe mixte;120 politically they are unproductive; in the field of economic adminstration [improvements, roads, canals, irrigation, forest preserves, & originally the clearing of the land] they are productive & entitled to rent as their share of the produit net

115 [the ability to rule absolutely through the law] 116 [literally, ‘the only pontiff.’ Ederer translates this as ‘sole high priest,’ TGE 85.] 117 [the agricultural state] 118 [net return] 119 [landowners] 120 [a mixed class. ‘In terms of productivity, the landowners appear here as a “classe mixte.” Their political functions are unproductive, but their administrative activity on the land is productive,’ TGE 86–87.]

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b) la classe productive of peasant farmers – no produit net from la petite cûlture which barely provides sustenance for the métayers121 – Q. wished la grande culture using horses to be extended – this claim gives a produit net – he sets down a proportion that must be attained of fixed to circulating capital [avances primitives122 at least five times as great as avances annuelles123] Quesnay Pesch II 79– The natural order implies 5 con’t (80) g) Trade & industry give the third class – la classe stérile124 the name " implies no reproach but simply states the fact that the earth is creative of wealth the peasants [sic] labor multiplies it the manufacturer & trader add to it This class tries to take to itself the natural profit that has its source elsewhere – an attempt in which it succeeds to the general detriment The wealth of the land is richesses véritables125 richesses réelles126 but the traders’ profit is richesses fictives127 richesses pecuimiaires128 richesses stériles129 Foreign trade is a good thing for no country produces all kinds of goods – but the theory of the favourable balance of trade is une chimère des speculateurs politiques;130 for the gold one gets, one gives goods in equal value (Mercier de la Riviève); profits of trade are the fruits of privilege; and the merchants [sic] gain is the country’s loss 81 Criterion of economic good – the lot of the farmer: ‘Pauvre paysan, pauvre royanne; pauvre royaume, pauvre roi’131

121 [tenant farmers (who pay their rent in kind)] 122 [long-term capital. See TGE 87.] 123 [what has to be paid each year in advance for seed wages, etc. – for Lonergan, these amounts represent initial payments. See TGE 87 and CWL21 249–53.] 124 [sterile class. By sterile, Quesnay means, simply, not generating any surplus revenue.] 125 [true wealth] 126 [real wealth] 127 [fictional wealth] 128 [money wealth] 129 [sterile wealth] 130 [a chimera of political speculators] 131 [poor peasant, poor kingdom, poor king]

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‘Hat der Bauer Geld, hat’s die ganze Welt’132 Hence not mercantilist subordination of farmer to foreign trade but vice versa not shifting not excessive Vital tal for farm investment bigger produit net

High prices for farm produce

bigger capi-

The A + W of Quesnay.

Quesnay Pesch II 81– The natural order implies 5, con’t 82 Quesnay distinguishes between

"

prix naturel 133 – what ought to be prix courant 134 – what is

The ‘pris naturel’ of manufactured goods etc. = sustenance of factors The ‘pris naturel’ of farm produce a basic price – costs of production b farmer’s selling price – adds the ‘produit net’ of nature g consumer’s cost price – adds dealer’s livelihood Optimum b – a large g – b small (83) Interest rate – based on produit net of land 5 Fourth class – wage-earners ‘dernières classes des citoyens’ ‘bas peuple’ ‘petit peuple’135 No opposition between this class & farmers H.C.L. results from goods farm prices But wages gravitate about subsistence level, so no difference to worker whether cost-of-living high or low Malthusian law makes number of poor inevitable – hence state-aid Quesnay Pesch II 84 The natural order implies 6 132 133 134 135

[If the farmer has money, the whole world has money as well] [natural price] [current price] [All terms for a fourth class of the propertyless working classes, who depend on wage labour for their livelihood.]

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Taxes – essentially an impôt unique direct-land tax on rent of large land owner Voltaire136 missed point of physiocratic doctrine in his [?] ‘L’Homme aux quarante écus’137 indirect taxes rejected – in long run it falls in produit net, but is more expensive to collect, & yields less; also distorts The Positive Order is the realization of the natural order It has to take changing circs [circumstances] into consideration; it changes with them Politically – army needed for protection even after physiocracy has put an end to commercial wars – professional army – obligatory education – rentiers freely fill administrative judiciary posts Economically – an arrangement to favour agriculture – the positive order introduced a large amount of regulation despite the ‘liberté entière et absolue’138 of the natural order Population – to be increased by increasing the food-supply Pesch II 85 Turgot139 as Physiocrat (1727–81) studied theology but never ordained 86 All Quesnay’s fundamental ideas Riches is not gold – the earth the sole source 87 More insistent on freedom & less given to limit it in realizing the natural order by the positive order. He has been termed the real pioneer of practical individualism Given to dogmatism, to putting ideas rashly into practice But one of the great figures 88 In other countries a few important followers but despite one or two experiments no results No following in England where the protection of the landed interest by the corn laws made the agrarian exaggeration of physiocracy manifest. In France the ‘table économique’140 appeared to many as a discovery equal to Newton’s

136 137 138 139

[Voltaire (1694–1778).] [Voltaire, The Man of Forty Crowns, 1768.] [complete and absolute freedom] [Anne-Robert-Jacques Turgot (1727–81). Lonergan assigned a selection on Turgot from HEA as reading for his lectures in economics and the dialectic of history at Boston College in 1982–83.] 140 [economic table]

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17 Judgment on Physiocracy – Criticism II Pesch II 91–94 [a] Is agriculture alone productive? 1) It is the source of raw materials – But man cannot live on raw materials work & its organized direction also necessary 2) It supports itself & as well it supports industry & commerce Moreover the value of industry & commerce equates with the materials used to support producers during time of production. Hence it alone yields a surplus. Rejoinders B.L. one might as well say that industry & commerce support agriculture & alone yield a surplus – A surplus of raw materials results from agriculture – a surplus of finished goods results from industry & commerce Pesch answers that yielding a surplus is not the end of economies [?] 3) But in point of fact it is not solely agriculture that yields a surplus – an economic system’s capacity to yield a surplus is a function of its productivity & its thrift & its enterprise – Productivity is supplying quantitatively & qualitatively what people wish with the minimum expenditure of labor & materials – Thrift is non-direction of productivity to consumption – Enterprise is direction of productivity to new fields that may increase productivity Pesch II 95–99 [b] Individualistic Natural Law a to set up an ideal besides the positive order is not utopian – the utopian thinker leaps out of the real world into one of dreams – but any thinker that passes judgment, offers criticisms, rationally approves or disapproves must assume standards which are not mere matters of fact but ideal. b There is a tendency to refuse the name ‘law’ to whatever lacks coercive power – but there is the coercive power of conscience – without it no state can stand – Again if the only law is positive law, then no despotism nor tyranny can be unjust [right = legal, no matter how iniquitous the laws, how arbitrary, how cruel, how backward, how stupid] – Again if there is any natural law, then it regards not only the individual & the state but also the family & intermediate associations [which are necessary if the state is not to become a monster that engulfs the individual]. c the tendency to deny the natural law arises from any of a number of confusions – Natural law is not the law of the old political economists – it is not the law of Rousseau’s state of nature nor of his Contract Social – it

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does not involve a set of pundits & judges with parallel power to that of the official legal apparatus – It is the first principles on which any social positive order must be built. d The later Physiocrats with their unqualified assertion of freedom of trade [la liberté générale et indéfinie du commerce – no state intervention – elimination of guild associations] did a great deal of harm Their theory suffers from a lack of distinction between moral & physical natural laws

4 Price and Market Equilibrium Analysis

1

Introduction

Capitalizing on the marginal revolution of the 1870s, neo-classical economics replaced classical political economy to become the dominant paradigm in economics departments in the twentieth century, the one outstanding exception being Marxist economics. Lonergan understood his own work, in some sense, as that of recovering the ideals of creativity and democracy, though not the solutions, of the nineteenth century political economists. Although the marginal revolution corrected classical economics, in Lonergan’s view, it did so in the wrong way. Lonergan writes, ‘Whatever the accuracy of economics, it certainly does not possess the old democratic spirit.’1 Its only solution is to supply ‘a brain trust to an incipient bureaucracy, by supplying technicians for a totalitarian state.’2 Lonergan’s aim, however, was to preserve the creative and democratic spirit of the old political economists by placing it on firmer footing. Central to neo-classical economics is equilibrium analysis, made possible by the marginal revolution and linked to key figures like Marshall, Walras, and Wicksell. Marginal utility theory showed how the prices at which goods were exchanged were determined by the relative marginal utility of those taking part in the transactions, thus explaining, among other things, how exchange markets established prices. The question of whether market equilibrium is possible is crucial. As Blaug notes, ‘One could never confidently

1 CWL21 5 2 Ibid.

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employ general equilibrium analysis unless one had first made sure that a general equilibrium model possessed a solution.’3 Two approaches emerged: one is the general equilibrium analysis associated with Walras and Wicksell; the other is the partial equilibrium approach of Marshall. Walras’ general equilibrium solution relied on a mathematical solution to the problem. He started out with a set of simultaneous equations and applied the principle from Descartes that if there are as many equations as unknowns then the whole set of simultaneous equations can be solved. On this basis Walras proposed a theory of the market in which all prices and quantities could be uniquely determined. Marshall, on the other hand, prescinded from the general or macro level and restricted himself to a consideration of situations involving partial equilibrium, that is, microeconomics. Marshall’s work had tremendous influence in the education of economists, especially on the analysis of mainstream microeconomics, including Keynesian approaches. The problem with these versions of general and partial equilibrium analysis is that they depend upon the assumption of a static situation: you need to assume a static equilibrium to get equilibrium. Joan Robinson, with some irony, notes that the situation that best approximates the cleared market of Walras’ model is a prisoner-of-war camp.4 Given that such a situation hardly approximates the real exchange economy, economists came to talk about market forces that tended towards equilibrium. This approach was closer to Marshall’s more modest claims for partial equilibrium. Nonetheless, the analysis is still fundamentally static. For Lonergan, a functioning economy is a fully dynamic conditioned set of recurrent schemes in which new schemes will emerge and disrupt equilibrium as conceived by neo-classical equilibrium theories. Lonergan has a notion of economic equilibrium, but he conceived it in such a way as to accommodate the concrete dynamics of economic life.5

3 Mark Blaug, Economic Theory in Retrospect, 4th ed. (Cambridge: Cambridge University Press, 1985) 577. 4 See Joan Robinson, Economic Heresies: Some Old-Fashioned Questions in Economic Theory (New York: Basic Books, 1971) 4–9. 5 Initially, in ‘For a New Political Economy,’ Lonergan uses the term ‘equilibrium’ especially in discussing relationships within and between the two economic circuits. The meaning of the term for him, of course, is quite different from its meaning among equilibrium theorists. Lonergan abandons the word equilibrium in ‘An Essay in Circulation Analysis’ and replaces it with ‘concomitance.’ The issue for him is concomitance between the two circuits and between productive rhythms and monetary flows. See the index in CWL21 under ‘concomitance.’

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His theory takes into account the elasticity of supply and demand as well as the changing circumstances brought on by economic phases. The key is to continually balance the crossover flows between the basic and the surplus circuits. Taking into account the phases of the productive rhythm of any economy, he identified a normative proportion in the balancing of crossover flows, expressed as the ratio or proportion G″/G′ = G′/G″, where G″ is the rate of the flow from surplus supply to basic demand, and G′ is the rate of the flow from basic supply to surplus demand.6 The solution to the problem of maintaining equilibrium in a growth economy is to adapt monetary flows in the basic and surplus circuits to changes brought on by changes in the production rhythms. The readings selected for this chapter provide evidence of Lonergan’s efforts to understand and to transform the neo-classical notion of market equilibrium. He is concerned to identify the conditions when market equilibrium applies and when it is disturbed.7 In this respect he draws on Schumpeter’s notion of new productive combinations. The laws of diminishing utility and diminishing return central to neo-classical economics are set in the context of the dynamic rates of flow (DQ and dq) concomitant with stages of the production process (DQ′ and DQ″ and dq′ and dq″).8 In the transformed context of Lonergan’s circulation analysis, price no longer occupies centre stage in the analysis. The significant variables are drawn from his analysis of the productive rhythms of the economy as they relate to the concomitant counter-flow of monetary transactions. Lonergan will show that Walras’ efforts to produce a determinate meaning for general equilibrium analysis of market transactions is ultimately futile. When considered separately, partial equilibrium may occur in any of the basic circuit, the surplus circuit, or the crossover flows between them. When we consider all three together, however, there is not a determinate general equilibrium. To take but one instance, when surplus goods enter into use in the basic circuit, their estimated value will be indeterminate: one cannot know in advance how long a machine that produces basic goods will last. Nonetheless, ‘despite this almost baffling indeterminacy, it remains that there is a definite dynamic structure.’9 It was precisely this dynamic structure that Lonergan sought to expose in his analysis. The texts selected below all come from File A332 of the Lonergan Archives. They are in the order in which they occur in that file. Their style 6 See LDSE chap. 4. 7 We note that this was Knight’s problem in Risk, Uncertainty, and Profit. See pp. 55, 65–68 above. 8 See pp. 106–107 below. 9 CWL21 212.

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and content are close to those of ‘For a New Political Economy,’ and the similarity suggests that they were written around the time that essay was composed. But whether they were written in preparation for that essay or after its composition is impossible to determine with any degree of accuracy at this time. A study of the notes from this chapter would be most usefully supplemented by consideration of Lonergan’s discussion of markets in ‘For a New Political Economy.’10 2

Texts 2.1 Price

PRICES Free goods & services j vs. permanent scarcity relative to any individual j no incidental scarcity relative to any regular series of individuals Scarce objects I Authoritative – Orders of Rationing – Paternalism, Slavery, Socialism II Free Consent Two solutions of problems of when does who give, do, sacrifice how much of what & whether this is in return for or in anticipation of how great much of what reward Market equilibrium What is it? Balancing of present supply against past, present or future supply How does it work?

General

a Uniform prices caeteris paribus no reason to give A more that one would B asks or to take less from C than D will give. because equilibrium solution b At level where supply equates w[ith] demand [demand – past present future supply]11

10 CWL21 28–37. 11 [Alternate reading, ‘At level where supply equates to demand.’]

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i.e. one assumption of equilibrium solution i.e. price is the deterrent restricting demand to supply a short term supply fixed & deficient – urgent buyers bid up price to get goods at once & excessive – urgent sellers lower price to get rid of goods b long term supply potential | rising prices encourage production | falling prices discourage production Ultimate basis Law of diminishing utility 1) Utility is decisive as to necessity etc. of scarce object 2) The greater the supply the lower the utility that is served at the margin 3) The valuation of the marginal utility holds for the category under uniform price 2.2 Market Equilibrium 1) THEORETICAL BACKGROUND OF MARKET EQUILIBRIUM Economics deals with ‘scarce’ objects of choice – where scarcity is elastic, it can be reduced by greater effort – when scarcity is multiple alternative, the same resources can yield different products by being combined in different ways. Tendency to equilibrium = scissors of selling price decreasing from decreasing utility and costs increasing from increasing effort required to reduce scarcity still more (diminishing returns). Law of Diminishing Utility Any object first is used meet max. needs, desires, & then a descending scale of lesser needs & desires – (individual) Different uses in descending scale U1 U2 U3 U4 ... Increasing rates of use in each category DQ1 DQ 2 DQ 3 DQ 4 When DQ is so much every so often of fungible goods & services & so intensive a use (1 hr a wk, 24 hrs a day) of durable goods.

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Because price is uniform for any unit, price of object will not be greater than valuation placed on marginal use unit used. Laws of Diminishing Returns (increasing costs) Object is product of labor & land From a given quantity of land (any non human factor) the product first increases more rapidly than increase of labor, then less rapidly & finally there is no product at all from totally insufficient or totally excessive application of labor. The proposition is reversible – from given quantity of labor & varying quantities of land – Where increasing returns, better to use less land – total product could be greater when diminishing returns, rent on land of better quality equivalent to less labor required – value of labor of additional product resulting from additional unit of labor applied – Importation Disturbance of Equilibrium i.e. setting up totally new equilibrium to which to tend 1 New utilities 2 New productive combinations Diminishing utility (productivity as particular case) 1 With respect to rates of flow ‘dq’ intensity of use of durable goods [piano, [1 hr. a wk.], 24 hrs–day etc.] so much every so often of fungible goods and services 2 Arrange different categories of use of same object in descending scale of utility U1, U2, U3, U4 ... Un where Un is the marginal type of use 3 Arrange within each category each successive increment of DQ (each dq) in descending scale of utility dq11 dq12 dq13 dq14 ... dq21 dq22 dq23dq24 ... etc. 4 In case of joint utility, joint demand, in which component factors are not fixed parts of same thing then [?] variable ratios in use possible erg. more or less labor on same quantity of land greater or less intensity in use of piano

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General Physical Utility Output

Quantity of Labor Time Diminishing returns e.g. quantity of land fixed before x, concave upwards, increasing returns after x, concave downwards decreasing returns with increasing returns of labour it would be better to use less land if labour cannot be increased – because output per unit labour greater – if labour can be increased, demand strong & prices of labour rising with decreasing returns for labour, more & more land will be called into use (less productive land at least in long run) & so in long run rents average on better land. Theory holds for any variable combination of two factors 1) product per unit of both agencies (factors) increases 2) product per unit of relatively increased agent decreases & of relatively decreased agent increases 3) product per unit of both either agent decreases [unless alternative uses, no competitive system possible] viz12 3 stages as V1 & V2 increased from 0 ⇒ ∞ 2) FIELDS IN WHICH MARKET EQUILIBRIUM OPERATES (I) Fields in which market equilibrium operates

12 [Written in the margin opposite section beginning ‘Theory holds.’]

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1) Services, fungible goods, durable goods: Market price 2) Use of durable goods: rent 3) Correlation: Discounted capitalization of rents = Market price of durable goods 4) Capacity to supply goods & services at future date Present supply of factors – demand for consumption goods vs. Estimate of future annual rates of profit [ : interest on monetary capital] Diff [future prices – present costs] = profits (theoretical) Enterprise flows to fields of max. annual rate of profit, diminishes prices & profits in that field & so serves internal equilibrium of investment opportunity – i.e. brings profits down to zero. 3) FIELDS IN WHICH MARKET EQUILIBRIUM OPERATES (II) Fields in which market equilibrium operates 1 demand = past, present, future supply Demand A = present supply of consumer services, fungible goods, durable goods Demand B = use not ownership of durable goods: rent Demand C = productive services: wages Demand D – maintained or increased capacity to supply goods & services at future date

Market Price A Market Price B Market Price C

p 1⎡ − 1 ⎤⎥ i.e. Estimate of future annual rate of profit t ⎢ ft ⎢⎣ v + q ⎥⎦ = Present supply of factors – demand for factors for consumption goods Correlations (1) Market price of durable goods (A) = capitalized value of rents [discounted at least if perpetual] (2) Rent & wages are complementary Rent is the saving in labor on more advantageous non-human factors Wages are the additional product resulting from added unit of labor

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If rent is defined as saving in labor, then R + W must equal selling price13 (3) Demand for factors for consumption goods restrained by increasing rate of interest ⇒ increase in factors free from for producer goods Estimate of factor annual rate of profit cut down by high rate of interest on loan capital Interest on loan capital a particular case of capitalized value vs. rent income Correlations (1) A & B (2) A & (B & C) (3) A vs. D & (B & C) ⇑ D is future A

13 [This line replaces the following, which was crossed out in the original: ‘Unless theoretical conditions selling price = W + R when “W” and “R” vary according as undertaking has better or worse land.’]

5 The Equilibrium Rate of Interest

1

Introduction

Equilibrium theory postulates ‘the general interdependence of all economic quantities.’1 A difficulty arises, however, when we try, in this context, to account for the actual circulation of money in the real economy. There exist transfers of money that disturb general equilibrium and pose difficulties for equilibrium theorists. Two interrelated instances of such transfers are interest and cyclic phenomena in the economy. Walras’ market clearing is instantaneous, but the phenomena of interest, whether associated with investment or consumer loans, bring into play considerations of time and the issue of economic development. Trade cycle theory must integrate past conditions and present conditions in the light of future expectations, thus unavoidably involving consideration of time. F.A. Hayek brings together both issues in his Monetary Theory and the Trade Cycle. He asks, ‘Why do the forces tending to restore equilibrium become temporarily ineffective and why do they only come into action again when it is too late?’2 To answer this question Hayek developed a monetary theory of the trade cycle. Following the lead of von Mises, Hayek broke away from the quantity theory of money tradition.3 Hayek accepted the commonly held explanation that recessions

1 F.A. Hayek, Monetary Theory and the Trade Cycle (London: Jonathan Cape, 1933) 42. See p. 114 below. 2 Hayek, Monetary Theory 65. 3 This tradition can be traced back to Cantillon. See Robert B. Ekland, Jr, and Robert F. Hébert, A History of Economic Theory and Method (Toronto: McGraw-

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were the consequences of a previous boom. He noted that increases in the stock of money bring about a reduction in the interest rate below equilibrium levels, which in turn stimulates investment in production goods at the expense of consumer goods. Changes in the structure of production upset the coordinated balance between producers and consumers as anticipated by general equilibrium theories. Important to Hayek’s analysis is the notion of an equilibrium rate of interest, an idea developed by Wicksell and von Mises, which exploited Böhm-Bawerk’s analysis of capital.4 The equilibrium (or natural) rate of interest is distinguished from the money rate of interest charged by banks. The key correlation that occupies Hayek is that between the rate of interest and prices. In order to control the inflation that accompanies a boom, Hayek argues, there should be severe restriction on the growth of the money supply. This restriction may be accomplished by manipulating interest rates and by strategic taxation – these being standard, though misguided, fiscal approaches. In Lonergan’s theory, effective economic control cannot be achieved through such strategies. Any positive use of interest rates or taxation policy must develop out of a proper understanding of economic circuits and phases. Lonergan also rejects the quantity theory of money and postulates a general interdependence of economic quantities. His notion of how this interdependence operates is markedly different, however. The key to Lonergan’s approach is an understanding of the dynamic interrelations that accompany both a stationary economy (understood as a special instance of dynamics) and an economy in various phases of expansion. Central to the solution of the problem is recognition that money decisions should conform to the real exigencies of the economic process and not vice versa. In Lonergan’s analysis, therefore, the fundamental correlation is not that between interest rates and price levels. The analysis thus challenges Hayek’s conception of interest and credit creation. Lonergan’s analysis of monetary circulation will shift control of the economy away from the notion that regulation of the economy can be effectively maintained through the manipulation of the interest rate by governments and central banks. His vision is of an economy of enlightened decision-makers who encourage creative innovators and are attuned to the demands of the pure economic cycle.

Hill, 1975) 514. On the deficiencies of the quantity theory, see Philip McShane, ‘Appendix: Trade Turnover and the Quantity Theory of Money,’ in Pastkeynes Pastmodern Economics (Halifax: Axial Press, 2002) 137–53. 4 On Böhm-Bawerk’s theory of interest, see Mark Blaug, Economic Theory in Retrospect, 4th ed. (Cambridge: Cambridge University Press, 1985) 499–522.

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Included in this chapter is Lonergan’s analysis of the equilibrium rate of interest. He initially reaches the conclusion that an equilibrium rate of interest is doubtful. Eventually he concludes that there is no equilibrium rate of interest.5 That definitive, and precisely expressed, conclusion comes after a study of turnover rates, some instances of which can be found in the readings of the next chapter. The readings in this chapter, along with those of the next chapter, provide material for understanding how Lonergan dealt with the notion of an equilibrium rate of interest. The conclusion informs Lonergan’s understanding of the cycle of income and prices in ‘An Essay in Circulation Analysis.’6 Lonergan’s understanding of the pure cycle enabled him to grasp why the forces of equilibrium, as understood in the context of general equilibrium analysis, did not work. From the perspective of Lonergan’s macrodynamic analysis, it is quite plain why manipulation of interest rates does not work as an effective economic regulator. Small business owners may not be especially concerned by a 2 per cent shift in the interest rate, granted a short turnover period; but for the big builder, with a two-year turnover rate, such a rise can be quite serious. In this scenario innovative work requiring long-term financing is held hostage to a regulatory function of interest rates unconnected to the task at hand. Hayek’s book was important to Lonergan because it provided an excellent account of interest and the trade cycle within the context of equilibrium theory. This enabled him to develop precision on the question. In the end, Schumpeter’s work on interest and credit creation came much closer to Lonergan’s view.7 The texts for this chapter are all from File A332, and most likely were written around the time ‘For a New Political Economy’ was composed. The order in which they appear in the file has been reversed here, however. Though it appears first in the file, internal references to Hayek’s work make it very probable that the second section below was prepared after Lonergan made the notes on Hayek’s book. 2

Texts 2.1 Notes on F.A. Hayek, Monetary Theory and the Trade Cycle8

F.A. Hayek (1899–1992) was a central figure in twentieth century economics 5 6 7 8

See CWL21 290–92 [CWL15 141–44]. See CWL21 285, 288–90. See chap. 6 in this volume, and LDSE 207–10. London: Jonathan Cape, 1933.

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and the best-known and most influential member of the Austrian school of economists. Hayek was a great defender of the free market and was awarded the Nobel Prize in Economics in 1974. In Monetary Theory and the Trade Cycle, he analyses monetary circulation in the context of the business cycle. His analysis of credit creation and interest rate theory is Lonergan’s primary concern. The notes show that Lonergan had moved away from the quantity theory of money and was applying his distinction between basic and surplus circuit to the issue. He notes that ‘it is not always in volume of money but change in DE’/DE’ that changes structure of prices.’9 Lonergan would go on to refine his alternative to the quantity theory of money by taking up his analysis of turnover size and frequency.10 p. 42.[n] ‘By “equilibrium theory” we here primarily understand the modern theory of the general interdependence of all economic quantities, which has been most perfectly expressed by the Lausanne School of theoretical economics. ‘ Fundamental Idea G.B. Say Théorie des Débouchés p. 56 ‘The prevailing disproportionality theories are in agreement in one respect. They all see the cause of the slump in the fact that, during the boom, for various reasons, the productive apparatus is expanded more than is warranted by the corresponding flow of consumption; there finally appears a scarcity of [finished] consumption goods, thus causing a rise in the price of such goods relatively to the price of production goods (which amounts to the same thing as a rise in the rate of interest) so that it becomes unprofitable to employ the enlarged productive apparatus or [in many cases] even to complete it.’ p. 60 ‘It is not, therefore, the simple fact of fluctuation in the production of capital goods (which is certainly inevitable in the course of economic growth) which has to be explained.11 The real problem is the growth of excessive fluctuations in the capital goods industries out of the inevitable & irregular fluctuations of the rest of the economic system, and the disproportional development[,] arising from these[,] of the two main branches of production.’ p. 65 ‘Why do the forces tending to restore equilibrium become temporarily ineffective and why do they only come into action again when it is too late?’ p. 68 ‘But the entrepreneur in a capitalist economy is not – as many economists seem to assume – in the same situation as the dictator of a Socialist

9 See p. 117 below. 10 See chap. 6 below, and CWL21 134–51,157–62, and 260–68 [CWL15 56–64]. 11 [In italic type in the Hayek text.]

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115

economy ... In the modern exchange economy, the entrepreneur does not produce with a view to satisfying a certain demand (quantity of demand) ... but on the basis of a calculation of profitability; and it is just that calculation which will equilibrate supply and demand.[’] p. 70 ‘The other factor, no less important but all too often overlooked, is the price the producer has to pay for raw materials, labour-power, tools and raw materials borrowed capital – i.e. his costs. These prices, taken together, determine the extent of production for all producers operating under conditions of competition; and the producer’s decisions as to his production must be guided not only by changes in expectations as to the [selling] price of his product [,] but also by changes in his costs. To show how the interplay of these prices keeps supply and demand [, production and consumption,] in equilibrium, is the main object of pure economics, and the analysis cannot be repeated [here] in detail. It is, however, the task of Trade Cycle theory to show under what conditions a break may occur in that tendency towards equilibrium which is described in pure analysis – i.e. why prices, in contradiction to the conclusions of static theory, do not bring about such changes in the quantities produced as would correspond to an equilibrium situation.’ p. 75 ‘... the fact that every attempt to extend the productive apparatus must necessarily bring about, besides a rise in factor-prices, a further checking force – viz. a rise in the rate of interest.’ B.L. interest rises only with increase in rate of producing [?] production goods apart from banking rules of thumb p. 75 ‘... all contemporary theories agree in regarding the function of interest as one of equalizing the supply of capital and the demand arising in various branches of production.[’] p. 87 ‘Once we assume that, even at a single point, the pricing process fails to equilibrate supply and demand, so that over a more or less long period demand may be satisfied at prices at which the available supply is inadequate to meet total demand, then the march of economic events loses its determinateness and a range of indeterminateness appears, within which movements can originate leading away from equilibrium.’12 p. 114 ‘The rate of interest at which, in an expanding economy, the amount of new money entering circulation is just sufficient to keep the price-level stable, is always lower than the rate which would keep the

12 [In italic type in the Hayek text.]

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[amount of] available loan-capital equal to the amount simultaneously saved by the public.’ First cause of cycle. credit creation chap IV 169 p. 179 ‘The determining cause of the cyclical fluctuation is, therefore, the fact that on account of the elasticity of the volume of currency media, the rate of interest demanded by the banks is not necessarily always equal to the equilibrium rate, but is, in the short run, determined by considerations of banking liquidity.’13 cf. Prof. F.A. Fetter, Interest Theories and Price Movements, American Economic Review14 ‘Throughout this process the much[-]esteemed elasticity of bank funds [credit creation] is the very condition causing, or making possible, the rising prices which stimulate the so called ‘needs of business’. Truly a vicious circle, to be broken only by crisis and collapse when bank loans reach a limit and prices fall.’ cited in Hayek note p. 181 (Hayek Italicizes). cf. R.C. Hawtrey Monetary Reconstruction London 1926 2nd edit.,15 ‘so long as credit is regulated with reference to reserve proportions, the trade cycle is bound to recur.’ Problem What are ‘business needs’ What is equilibrium rate? Credit creation does not merely affect basic price level p. 128 ‘A rate of interest lowered by monetary influences, which must necessarily lead to the excessive production of capital goods.’ B.L. production of capital goods is excessive when pure inflation P′ has more than prosperity rise but rate of interest can be lowered by monetary influences without this effect. p. 128 ‘Wicksell and Mise both rightly emphasize the decisive importance of this factor in the explanation of cyclical phenomena, as its effect will occur when the increase in circulation is only just sufficient to prevent a fall in the price level.’ p. 129 There also follows from credit creation ‘changes in the relation of costs and selling prices and the consequent fluc-

13 [In italic type in the Hayek text.] 14 [Vol. 17, supplement, March 1927. Hayek notes especially pp. 95ff.] 15 [Hayek cites p. 135.]

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tuations in profits, which Professors Mitchell and Lescure in particular have made the starting point of their exposition; and the shifts in the distribution of incomes which Professor Lederer16 investigates[’] – ... ‘neither of these can be immediately connected with changes in the [general] value of money.’ p. 131 ‘The problem of cyclical fluctuations can only be solved satisfactorily when a theory of the money economy itself – still almost entirely lacking at present – has been evolved, comprising a detailed discussion of all those points in which it differs from the equilibrium analysis worked out on the assumption of a pure barter economy.’ p. 139 ‘... we constantly find those deviations of the money rate of interest from the equilibrium rate which, as we have seen, must be regarded as the cause of the periodically recurring disproportionalities in the structure of production.’ p. 140 ‘the primary cause of the cyclical fluctuations must be sought in changes in the volume of money, which undoubtedly are always recurring and which, by their occurrence, always bring about a falsification of the pricing process, and thus a misdirection of production.’ B.L. it is not always in volume of money but change in DE′/DE″ that changes structure of prices p. 147 ‘The situation in which the money rate of interest is below the natural rate need not, by any means, originate in a deliberate lowering17 of the rate of interest by the banks. The same effect can be obviously produced by an improvement in the expectations of profit or by a diminution in the rate of saving, which may drive the ‘natural rate’ (at which the demand for and the supply of savings are equal) above its previous level; while the banks refrain from raising their rate of interest to a proportionate extent, but continue to lend at the previous rate, and thus enable a greater demand for loans to be satisfied than would be possible by the exclusive use of the available supply of savings.[’] [Emphasis B.L.’s] B.L. ‘exclusive use of available supply of savings’ lets out expansion & ties one down to static phase or expansion = liquidation phase. p. 149 ‘– in principle an increase in the volume of cash, occasioned by an

16 [Hayek cites Professor Lederer in Grundisse der Sozialôkonomik IV pt 1 390– 91.] 17 [The phrase ‘deliberate lowering’ is in italic type in Hayek.]

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increase in the volume of trade, also implies a lowering of the money rate of interest’ ... ?? p. 152 ‘because the banks have no particular interest in keeping the supply of bank credit in equilibrium with the supply of savings.’ p. 168 ‘... the natural rate of interest has risen ... The reasons for this can be of very different kinds.18 New inventions or discoveries, the opening up of new markets, or even bad harvests,19 the appearance of entrepreneurs of genius who originate “new combinations” (Schumpeter), a fall in wage rates due to heavy immigration; and the destruction of great blocks of capital by a natural catastrophe, or many others.’ p. 171–3 ‘ Which bank raises the rate? The one that wishes to lose business[’] p. 175 cites 10th yearly report of Federal Reserve Board, for 1923 (Washington 1924) ‘This is the usual sequence – an increase in deposits followed by an increase in currency. Ordinarily the first effect of an increase in business activity on the banking position is a growth in loans and deposits ... Then comes a time when the increase in business activity and the fuller employment of labour and increased pay-roll call for an increase in actual pocket money to support the increased wage disbursements and the increased volume of purchases in detail.’ p. 176 [‘]Only so long as the volume of circulating media is increasing can the money rate of interest be kept below the equilibrium rate; once it has ceased to increase, the money rate must, despite the # increased total volume in circulation, rise again to its natural level and thus render unprofitable (temporarily at least) those investments which were created with the aid of additional credit.’ 183 ‘For it is not the occurrence of a “change in data” which is significant but the fact that the economic system, instead of reacting to this change with an “immediate adjustment” (Schumpeter) – i.e. the formation of a new equilibrium – begins a particular movement of boom which contains, within itself, the seeds of an inevitable reaction.’ 189 ‘So long as we make use of bank credit as a means of furthering economic development we shall have to put up with the resulting trade cycles. They are, in a sense, the price we pay for a speed of development exceeding that which people would voluntarily make possible through their savings [,] and which therefore has to be extorted from them.’

18 [Hayek cites R.G. Hawtrey, Trade and Credit (London, 1928) 175.] 19 [Hayek cites V.P. Timoshenko, The Role of Agricultural Fluctuations in the Business Cycle (Michigan Business Studies 2:9 [1930]).]

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119

199 ‘So long as the amount of credit obtainable at any given rate of interest is limited, competition will ensure that only the most profitable employments are financed out of a given amount of credit.’ 226 ‘... it is probably more proper to regard forced saving as the cause of economic crises than to expect it to restore a balanced structure of production.’20 O.K. BL. 238 ‘...owing to the existence of banks, the equilibrating forces of the economic system bring about that automatic adjustment of all its branches to the actual situation.’ 2.2 Equilibrium Rates of Interest These notes are from File A322 and are found just before Lonergan’s notes on Hayek in that file. It is clear from the notes themselves that Hayek was the point of reference for Lonergan’s reflections. 1. Notion of Equilibrium Rate of surplus income = rate of automatic savings plus rate of interest savings Surplus income = DS = DE″n DE″m D ForTr. D Budg automatic savings = large concentration of (wealth &) income interest savings = DI″ that would be DI′ if interest lowers. 2. Action of equilibrium – scissors high rate cuts down DS & raises (perhaps slightly) interest savings low rate stimulates DS & lowers (perhaps slightly) interest savings 3. Necessity of equilibrium a otherwise P′ basic price level has more than prosperity rise in boom and more than recession fall in basic expansion i.e. | pure inflation when interest rate too low | pure deflation when interest rate too high hence since enterprise is based on calculation of prices & interest rates – excessive capitalist phase when P′ to high & interest rate too low – & recession becomes sharp when P′ too low & interest too high we do not say that lack of equilibrium is the cause – it may be that entrepreneurs & managers do not sufficiently discount prosperity rise in P′ and cannot [?] banks do not permit them to discount recession fall in P′.

20 [In italic type in the Hayek text.]

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[4. Possibility of Equilibrium doubtful because interest has upper and lower limits] 4. Limits of Variation in Interest Rate Lower | 1. must meet banking cost (working capital) | 2. must attract funds to carry on redistributional activity | 3. must attract savings funds to purchase of new cap. equip. Upper Must leave a margin of profit to the entrepreneur in prosp. expansion surplus income increasing (automatic savings less possible but rapid increase, interest savings a new habit not doubtfully actual acquired – i.e. income goes to new classes) bankers unwilling to raise rate & spoil their business (Hayek) 5. Possibility of Equilibrium – Doubtful in recession surplus income decreasing rapidly, automatic savings sticky [?] interest cannot be lowered below banking costs, & this is not enough If there is to be an equilibrium rate of interest [?] [?] must keep distinct A Bankers’ costs 1. redistributional activity (liquidity of) 2. supply of working capital B Equilibrium: Rate of surplus income = Automatic savings plus interest savings | Roughly distinction between long-term & short-term interest rates | But (Schumpeter) has maintained that long-term financing is done in short term market in A Banker is a prime cause B Banker is a middle man A must continue at all times, especially A2 B has function of limiting surplus production to rate to which consumers consent

21

Working capital increases 1) cost of materials 2) cost of labour 3) number of new production units 4) turn from more labour-saving machines to more labour

21 [Line in original to mark off the next section.]

The Equilibrium Rate of Interest

Factor 4 needs an equilibrium Factor 4 results from drop in real wages Involves increase in rate of profit Hayek 1939 essay Ricardo effect

121

6 The Velocity of Money and Turnover Frequency

1

Introduction

The section ‘Net Transfers’ from the essay fragment ‘A Method of Independent Circulation Analysis’ concerns the difficulties of understanding how money changes its velocity in the circuits. Lonergan writes: A general solution of the problem is not as difficult as might appear. We have to deal not with the quantity and velocity of money in all and any payments but only with the quantity and velocity in operative payments. But operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process. In fact we shall be able to deal with the more precise ideas of turnover size and turnover frequency instead of the ill-defined ideas of quantity of money and velocity of money.1 One of the reasons for Lonergan’s interest in Hayek’s theory of the circulation of money was that Hayek, like other contemporaries of the Austrian school, explained the expansion of an economy in terms of changes in production.2 Hayek was interested in the relation between the velocity of 1 CWL21 135. 2 On the relationship of Hayek to Lonergan, see Eileen DeNeeve, ‘Interpreting Bernard Lonergan’s General Theory of Economic Dynamics: Does It Complete Hayek, Keynes, and Schumpeter?’ Paper read at the Lonergan Workshop, June 2005, unpublished.

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money and shifts in the rate of production. The problem was recognized in classical political economy as the Ricardo effect, having been identified by David Ricardo. The Ricardo effect postulated that a rise in wages encourages capital to substitute machinery for labour, whereas a decrease in wages results in the opposite. Hayek reflected on this phenomenon in the light of the trade cycle phenomena, and his reflection led him to consider the time lags involved in bringing a commodity, whether a producer or a consumer good, to market. Hayek determined that there was a significance in terms of the rate of profit depending on whether one considered short-term production or long-term production. This determination gave rise to his consideration of turnover rates in the essay ‘Profits, Interest, and Investment.’ As interest in turnover rates was not generally shared, Hayek’s book provided some grist for Lonergan’s mill. As the notes on Hayek’s essay show, Lonergan was able, on the basis of a consideration of Hayek’s argument, to show that (1) there is no equilibrium rate of interest, and (2) there are two distinct waves in an expansion. Lonergan’s own consideration of trade turnover is a fine instance of his development towards greater empirical precision in the period between his two major essays. His progress can be charted. The analysis of turnover magnitude and frequencies does not occur in ‘For a New Political Economy.’3 It makes its first appearance in the transitional essay ‘A Method of Independent Circulation Analysis’4 and enters decisively into his discussion of circulation acceleration in the later ‘Essay in Circulation Analysis.’5 His work rendered discussion of lags in terms of the Ricardo effect obsolete and integrated Hayek’s insights on turnover into the context of his own macrodynamics. Most significantly, it was his work on trade turnover that decisively overturned the long-standing quantity theory of money. The first selection in this chapter has Lonergan’s notes and reflections on Hayek’s selection of essays Profit, Interest, and Investment. It is an example of how Lonergan appropriates and advances the work of another economist. As in the next example, he is developing his notion of pure surplus income. The second selection can best be described as a reflection on the velocity of money spurred on by Lonergan’s reading of C.F. Roos’ Dynamic Economics around the time he wrote ‘For A New Political Economy.’ In these notes, Lonergan is expanding Roos’ meaning to support the notion of pure

3 The term ‘turnover’ does appear in the essay, but not the analysis of turnover frequency and magnitude that appears in the later essays. See CWL21 87 and 91. 4 CWL21 135–51. See also 157–62. 5 CWL21 260–68.

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surplus income, and he is elucidating the practical issue of how the appearance of pure surplus income as an excess of consumer balances becomes available by means of the banking system for use in the form of trader balances.6 Lonergan is also keen to point out that it is an internal matter: that it has little to do with the extra flows arising from any positive trade balance, which for the most part will have only an inflationary effect. The third selection is from the backs of pages of course notes on grace in file A330. It points to the mathematical precision of Lonergan’s research on this topic. It is just one of many fragments on the subject of turnover. Another example from the same file can be found in Part 2 of For a New Political Economy.7 2

Texts 2.1 Notes on F.A. Hayek, Profits, Interest, and Investment 8

Profits, Interest, Investment Hayek 1939 London 1 ‘Ricardo effect’ – shift in profit schedules according to turnover period 2 Shift in multiplier & multiplicand quotient Multiplicand – increment in demand for consumer goods dDE′ Multiplier – ratio between increment in demand for consumer goods dDE″/dDE′ and increment in demand for producer goods Quotient – inverse of multiplier i.e. dDE′/dDE″ 3 Ricardo effect varies multiplier – determinants "1 technological 2 proportion of fixed to circulating capital Increase in short-turnover profit schedules – decrease of multiplier Increase in long-turnover profit schedules – increase of multiplier

6 On trader balances, see CWL21 58–60. In ‘For a New Political Economy,’ Lonergan distinguishes primary and secondary trader balances, primary and secondary consumer balances, and redistributional balances. In ‘An Essay in Circulation Analysis’ these become basic and surplus expenditures (E′, E″), basic and surplus income (I′, I″), and redistributional exchanges (R). 7 CWL21 216. This fragment is the subject of Tom McCallion, ‘The Outlay Page: An Exercise in Interpretation,’ JMDA 4 (2004) 111–27. . 8 London: Jonathan Cape, 1939.

The Velocity of Money and Turnover Frequency

Quotient9

125

"Present increment in capital goods

Future & consequent increment (say after a year) of consumer goods dDE′/dDE″ where numerator lags a year behind denominator[?] Multiplier dDE″/dDE′ simultaneous Quotient inverted with effective zero rising to level of DE″ e.g. if Q = 1⁄10 then at constant rate of surplus expenditure in ten years consumer goods are increasing 10⁄10 of increase in capital goods. Selling Price

Turnover

Period

Period years Turnover volume Annual rate of profit Profit on turnover

2 24,000 6% 12%

1 12,000 6% 6%

Profits 1

1

⁄2 6,000 6% 3%

1

⁄4 3,000 6% 1 1⁄2%

⁄12 1,000 6% 1 ⁄2%

Suppose 1% rise or fall in selling price; therefore in rate of profit on turnover, provided wages and materials do not vary in price. Profit on turnover Annual rate of profit

13% 11% 6 1⁄2% 5 1⁄2%

7% 5% 7% 5%

4% 2% 8% 4%

2 1⁄2% 1 ⁄2% 10% 2%

1 1⁄2% –1⁄2% 18% –6%

In general if Annual rate of profit is ‘A’ Increase in selling price is ‘dP’ per cent turnover period in years is ‘t ’ then new annual rate of profit is ‘A + dP/t ’ provided costs (wages & materials) do not vary Next page Variations in the Annual Rate of Profits Annual Rate of Profits = Annual Profits = A Turnover Receipts Turnover Let v be annual volume of receipts – then outlay – receipts, so much every so often, say R every 1 years, so that vt = R and then ‘t’ is turnover period. Defined as interval between outlay & receipts & new outlay: 9 [In the original an arrow is drawn from ‘Quotient’ to ‘dDE″/dDE′.’]

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partly production period but prolonged when sales delayed, shortened when sales prompt.

Other terms

Quantity

Receipts

Variable Costs

Fixed Costs

Profits

per unit per turnover per year

q q/t

p pq pq/t

v vq vq/t

ft/q ft f

a aq aq/t

where p = v +

aq A=

ft +a q

t = a = pq pt

a = p −v −

p −v − pt

ft q

ft q

f 1 p −v = . − t p pq

10

More accurately

Annual rate of profits =

Annual profits outlay = A1 Turnover

aq

A1 =

t = 1 . aq = 1 . pq − vq − ft vq + ft t vq + ft t vq + ft

1 ⎡ p ⎤ = .⎢ − 1⎥ t ⎣ vq + ft ⎦ ⎡ ⎤ p 1 ⎢ ⎥ = .⎢ − 1⎥ t v + ft ⎢ ⎥ q ⎣ ⎦ Implications of Variations in Annual Rate of Profit 1 There is no equilibrium rate of interest ⎡ ⎤ p 1 ⎢ ⎥ Since A1 = . ⎢ − 1 ⎥ annual rate of profit is function of turnover t v + ft ⎢⎣ ⎥⎦ q

10 [Lonergan then repeats exactly the same expression on the next line.]

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127

period in most fundamental way – to offset alterations of new profit schedule resulting from change in price & cost patterns, interest would have to be changed per turnover. 2 There is a ‘secondary wave’ Primary wave given by C ′p″dq ″ = (P ′ – C kp′)dq′ where dq ″ increases, forced savings (P ′ – p ′) increase, and then dq ′ increases as result of increased dq″ – Prosperity – recession Secondary wave A Forced savings (P ′ – p′) increase; revise basic profit & schedules; new production (increment in dq′) plus price lag (action of K) further increase of forced savings B Forced savings (P′ – p′) can rise p′, p ″’ – further forced savings – which covers contraction caused by increasing dq ′ C Rise in p ′, dq ′, p ″, dq ″, P ′ causes rise in P ″ – surplus profit schedules revised in favor of short-turnover firms – rise in dq ″ – further forced savings D Hence general up-saving till rise in full employment threatens pure inflation -- the banks tighten – prices begin to drop – revision of profit schedules in favor of long-turnover firms – elimination of short-turnover expansion 2.2 Notes on C.F. Roos, Dynamic Economics C.F. Roos (1901–58) was a pioneer American econometrician who was one of the original founders (along with Frisch, Schumpeter, and thirteen others) of the Econometric Society. The Society began the well-known journal Econometrica in 1933, the year before Roos published his one major work, Dynamic Economics. In that work Roos applied econometric methods to economic theory. He was particularly interested in price and production fluctuations in times of economic crisis. Roos’ struggle with the precise mathematical specification of a dynamic economy was of great interest to Lonergan. C.F. Roos Dynamic Economics 1934 p. 147 ‘It is clear that it is entirely sound and, under certain restrictions, socially desirable economics to permit the practice of using loss leaders, provided the ratio of the sensitiveness of demand (for the economy) of the loss leader and its companion commodity is neither too small nor too large. The net effect of this is to increase the consumption of the loss leader and of the companion commodity and at the same time give merchant’s [sic] greater profits ... Hence it is not at all necessary to require that all goods be sold above cost, nor is it desirable. Such a situation leads only to decreased con-

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sumption. In other words[,] the whole notion of selling every good on a cost plus basis is faulty: it is based on inadequate knowledge of joint demand.[’] p. 172 ‘Thus, in the problem as formulated here, operations of entrepreneurs are largely dependent upon whether they chose optimistic or pessimistic values of Y. Therefore employment depends to considerable extent upon entrepreneurial guesses of expected price and, of course, as already pointed out, of consumer income.’11 ⇒ BL. But consumer income itself depends upon entrepreneurial decisions in the aggregate [Figure 6.1] Velocity of Money 1 Redistributional Price – neglect 2 Process a Suppose series of productive factors e.g. series T1 series T2 series T3 etc b Outlay OutlayCurve Curve

Receipts Receiptscurve curve

" Receipts = Value of Production

Graph corrected by increases or decreases in inventories Outlay = Step graph

"so much added every week so much added per month so much added per 6 mos

Smooth out step graph Difference between ordinates = ∑ Pi DQ i + ∑ dIi = Consumer balances = Trader Outlay

net outlay value of production in productive period +/– increases or decreases in inventories i =n

From Traders to Consumers

∑ Pi DQ 1 + dI i i =1

g Income step graph Expenditure

identical with outlay graph identical with receipts graph

Minimum difference = Basis for permanent loans to Redistributional Area Max dif – Min dif = Basis for Call Loans, demand deposits 11 [Italic type in Roos.]

The Velocity of Money and Turnover Frequency

129

Value of production

Dollars

Trader Outlay

Consumer Balances

Time

Trader Outlay: a step function, so much per wk, per month, per quarter, per half year, etc.

"Curve heightens a with shortening

Value of Production: at Final Market

Curve flattens

Inventories : anywhere along the line x Value of production minus Inventories

of every production period b with rise in prices a with lengthening of production period b with drop in prices

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Lonergan’s Early Economic Research

x Trader Outlay minus [Value of production other sources = Consumer Balances x Measure along ordinate

X

minus inventories] plus

X

Banking is using consumer balances to create trader balances. [Figure 6.2]12

[Figure 6.3]13

12 [This is a U.S. foreign trade diagram for the years 1923 to 1933. It graphs Exports and Imports on the same axes and scales. It shows that in those years the former were consistently higher than the latter.] 13 [This is what Lonergan refers to as a ‘rough copy’ of Roos’ graph illustrating the behaviour of the Production Index for the years 1923 to 1933.]

The Velocity of Money and Turnover Frequency

131

[Figure 6.4]14

[Figure 6.5]15

[Lonergan’s final graph is unlabelled as to content and source. It shows the

14 [The second graph by Roos on that same page traces for comparison Retail Food Prices and Wholesale Commodity Prices for the same years. The former is consistently higher than the latter.] 15 [This graph tracks the Inventories of Manufactured Goods versus those of Raw Materials, over the same period. The Raw Materials graph is highly cyclic (on a yearly basis). It shows the related Inventories as being for the most part, and certainly on average, higher than those of Manufactured Goods. Its trend is also rising with time, whereas the Manufactured Goods Inventory oscillates around a more or less level trend.]

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[Figure 6.6]16

16 [Lonergan’s final graph is unlabelled as to content and source. It shows the falling graph of U.S. Wholesale Commodity Prices over the same ten years. About the end of 1932 it breaks in two, showing separately the value of the U.S. dollar (which rose) and of gold (which fell), as these became separate with the collapse of the gold standard. There is also a smaller inset graph here, which is left completely unexplained.]

The Velocity of Money and Turnover Frequency

133

2.3 File A330–31 Found on the reverse side of notes used in preparation for the defense of his thesis, this page is related to Lonergan’s efforts to determine the correlation of net transfers with the rate of the circuits in the essay fragment ‘A Method of Independent Circulation Analysis.’17 r i1 r i2 r i3

r i4

...

r i (n –1) r in

dr i2 dr i3 dr i4 ... dr in si1 si2 si3 si4 ... si(n –1) Sin dsi2 dsi3 dsi4 ... dsin

carry costs

j=n

Cir. cap. = rij + Sij +∑(drij + dsij) j=2

drij varies with increases in initial payments per turnover varies with turnover frequency re? fixed costs that are not ‘price-costs’ wages per day dsij sij s2j

s3i s4j

varies in increases in " transitional prices transitional quantities (depends upon frequency size) number of instances varies with frequencies

DM 1 ri1 ri2 ri3 re some from [?] contribution Quantity is a function of frequency Quantity + frequency = rate of payment per interval.

17 The relevant section is ‘The Effect of Net Transfers’ in CWL21 134–47.

7 Reading Schumpeter

1

Introduction

Joseph Schumpeter was an important figure for Lonergan. While mainstream economics in the twentieth century resided on ‘the static bank’ of the economic river, Schumpeter worked seriously at understanding the dynamic flow of economic development. His results proved to be more daring and comprehensive than those of Keynes.1 Keynes, following in the tradition of Ricardo and Marshall, preferred to work with a few simple static financial and psychological variables that assume an invariant production function, the measurement of which he tied to employment levels. This approach virtually ignored the relation between economic development and monetary circulation, which was central to the approach of both Schumpeter and Lonergan. As Schumpeter writes in his review of Keynes’ General Theory, ‘Since Mr. Keynes eliminates the most powerful propeller of investment, the financing of changes in production functions, the investment process in his theoretical world has hardly anything to do with the investment process in the actual world, and any proof, even if successful, that (absolutely or relatively) falling “Inducement to Invest” will produce underemployment would have no more practical importance than a proof

1 For a pithy comparison of Schumpeter and Keynes, see Peter Drucker, ‘Schumpeter and Keynes,’ Forbes Magazine, 23 May 1983, 300–304. For a sympathetic short introduction to Keynes’ work, see Robert Skidelsky, Keynes (Oxford: Oxford University Press, 1996).

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that motor cars cannot run in the absence of fuel.’2 Lonergan appreciated Schumpeter’s stress on creative innovation, his appreciation of the function of the entrepreneur in bringing innovations to market, and his attention to the concrete realities of banking and business. It is difficult to determine what influence, if any, Schumpeter had on the initial development of Lonergan’s basic insights in economics. Schumpeter, however, never explicitly differentiated along the lines of Lonergan’s fundamental insight regarding the existence of two independent though related circuits, basic and surplus. As well, Lonergan was able to develop a fully dynamic foundation for economics, a goal Schumpeter failed to reach. Nonetheless, like Lonergan, Schumpeter grasped the importance of an analytic approach and had a keen understanding of the history of economic theory. Perhaps more than anything it was Schumpeter’s grasp of business practice that proved most valuable to Lonergan. Schumpeter understood that economic analysis must approximate actual economies. Like Hayek and the other Austrians, Schumpeter was interested in the relation of production to economic expansion. His ideas on entrepreneurial profit, credit, and interest were also valuable to Lonergan. Lonergan took notes on Schumpeter on two separate occasions. The first was during his reading of The Theory of Economic Development, and the second during his reading of Business Cycles. Lonergan likely read The Theory of Economic Development while he was writing ‘For A New Political Economy.’ In his notes on that volume he contrasts Schumpeter’s notion of development with his own view in ‘For a New Political Economy.’ The suggestion is that Lonergan had already developed his theory by the time he read Schumpeter.3 In his reading of The Theory of Economic Development, Lonergan was particularly interested in Schumpeter’s understanding of the meaning of economic development and the function of the entrepreneur in that development. Lonergan did not read Business Cycles until after he completed ‘For a New Political Economy.’ We can say this with some assurance because of the occurrence of equations of the form ΣΣ in the notes. This formulation

2 J.A. Schumpeter, ‘Review of Keynes’ General Theory,’ in Essays on Economic Topics of J.A. Schumpeter (Port Washington, NY: Kennikat, 1969) 156. Originally published in Journal of the American Statistical Association (Dec. 1936) 791–95. 3 See the section ‘Schumpeter and Lonergan,’ p. 137 below. This page was reprinted in CWL21 213. I have included it in this volume so that all Lonergan’s notes on Schumpeter can appear in one place. As its selection for CWL21 indicates, it is an important page for understanding Lonergan’s relation to Schumpeter.

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does not appear in ‘For a New Political Economy’ but is found in both ‘A Method of Independent Circulation Analysis’ and ‘An Essay in Circulation Analysis.’ With regard to Business Cycles, Lonergan was interested in what Schumpeter had to say on innovative growth. Reading Schumpeter also helped him to indicate precisely the relation between equilibrium and disequilibrium analysis. His precision in this area helps us to date his reading of Schumpeter as contemporaneous with the notes on general equilibrium and the equilibrium rate of interest. In any case, all these notes appear in File A335 on Regiopolis College stationery.4 Lonergan was also interested in Schumpeter’s discussion of the Kitchin, Juglar, and Kondratieff cycles. He identified a triple crisis of the aggregate basic price spread with Schumpeter’s combination of three Kitchen cycles in one larger Juglar cycle.5 Lonergan also took notes on Schumpeter’s discussion of unemployment and of interest. Unemployment did not figure as a significant category in Lonergan’s economics. Although high unemployment can be a disastrous effect of the trade cycle, full employment was not a goal per se of Lonergan’s theory.6 The point of a full economic expansion was to improve the overall standard of living, and, in the best-case scenario, that improvement would release some members of society from the economic necessity of work in order to contribute to the advance of culture. The welfare state produces such an effect in an unplanned and unintelligent way. Interested in solving the problem of the long-term financing of an expansion, Lonergan returned to a study of Schumpeter’s views on interest and credit in the 1980s. Because these notes are lengthy, I have inserted headings where appropriate. 2

Texts

Joseph A. Schumpeter (1883–1950) was another of the influential Austrian economists. He was greatly interested in understanding the evolution of capitalism. The Theory of Economic Development, published in 1912, is his great theoretical achievement, and it provided the basis for his subsequent work on business cycles. Schumpeter’s work on economic development

4 While teaching in Montreal, Lonergan spent his summer vacations at Regiopolis College in Kingston, Ontario, where his brother Gregory, also a Jesuit, was stationed. We can safely surmise that Lonergan used much of his time there to work on economics. See the appendix in CWL21 324. 5 See CWL21 306 [CWL15 161–62]. 6 On the disaster of unintended unemployment, see CWL21 92–93.

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has affinities with Lonergan’s work. Lonergan was also much taken with Schumpeter’s theories on interest and credit. He returned to The Theory of Economic Development in the 1970s as part of his preparation for teaching economics at Boston College. Lonergan’s annotations in his copy of the text indicate that he had considerable interest in what Schumpeter wrote about interest and credit. 2.1 Notes on The Theory of Economic Development7 p. 166 ‘Within the normal course of the circular flow there is no reason at all to be aware of the value of land as such ... Land ... is not sold in the normal circular flow, but only its uses. Therefore only their values and not the value of land as such are elements in economic planning. And the process of normal circular flow can teach us nothing about the determination of the value of land. Only development creates the value of land; it ‘capitalizes’ rent, ‘mobilizes’ land. In an economic system without development the value of land would not exist at all as an8 economic phenomenon.’ Cf my Distinction between ‘Redistributional & Operative Exchange’ p. 176 ‘In a communist or non-exchange society in general there would be no interest in an independent value phenomena.’ B.L. only the initial massacre and subsequent purges – political phenomena p. 177 ‘If entrepreneurs were in a position to commandeer the producers’ goods which they need to carry their plans into effect, there would still be entrepreneurs’ profit, but no part of it would have to be paid out by them as interest ... the whole of what they make over and above costs would be ‘profits’ to them and nothing else.’ ‘Hence nothing essential is obscured in the picture of circular flow, if it is assumed that the means with which production is carried on consists of the products of preceding periods; but in the case of new combinations[,] entrepreneurs have no such products with which to procure means of pro-

7 Lonergan used the 1934 Harvard edition: Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, trans. by Redvers Opie of the 1911 German ed. (Cambridge, MA: Harvard University Press, 1968 [1934]). The notes on The Theory of Economic Development are from LRI Archives File A332. 8 [The original text in The Theory of Economic Development reads, ‘In an economic system without development the value of land would not exist at all as a general economic phenomenon.’]

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duction. Here[,] then [,] the function of capital comes in, and it becomes evident that nothing corresponding to it can exist in a communist or even in a non-communist but ‘stationary’ society.’ 66 Development is defined by the carrying out of new combinations 1) a new good, object of supply – a new quality in object new, i.e. relative to consumers in given field; one with which they are not familiar 2) a new method of production or of commercial distribution – one not tested by experience – not necessarily a new scientific discovery. 3) opening of a new market – one that did not previously exist for country in question 4) new source of supply (raw materials, half-manufactured goods) new to country in question 5) new organization (creation or destruction of monopoly position) New combinations emerge 66 67 67

69

71 71

72 73

74

1/ α from new men who compete against and eliminate the old β in socialist or trustified capitalism, from some economic unit 2/ α side by side with all other production forces & leads [?] to increase of raw materials & employment β in competition with existing production for same materials & labor 3/ α existing firms purchase labor and materials out of receipts of circular flow new firms need credit at start, for no receipts as yet. β to supply such credit is function of capitalists. 4/ α traditional analysis: capitalist those who accumulate the production means needed for new enterprises β Schumpeter considers this a false problem: not accumulation but command enabling one to divert old uses to new combinations is the essence of the thing 5/ α traditional analysis: this purchasing power comes from ‘savings’ 1 ⁄5 of annual income in Europe or N. America β Schumpeter: it comes from creation of purchasing power by banks it does so often and de facto it would always do so if no previous development Banker is not the middle man of ‘purchasing power’ but the producer of that commodity: he is the capitalist par excellence

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Schumpeter and Lonergan My real and my circulation phases involve no distinction between growth (mere increase in size) and development (new productive combinations) For Sch.9 those two are specifically distinct – the new production functions create new situations that increase enormously the average of error and bring about the cycles. However, the ideas of capital, credit, interest, etc. that Schum. advances appear more clearly & more generally & in more detailed a fashion – The relevance of Sch.10 insistence on development as opposed to growth is in the concatenation of the phases – e.g. Sch development can take place in my static phase if DQ″n > 0 and if the new combinations are continuously offset by equal liquidations of former enterprises. Schumpeter on the Entrepreneur (1) Entrepreneur – the man who carries out new production combinations, introduces new production functions – in so far as he does so Routine work would require the intellect of a giant if not for habit and custom, for the fact that time hammers logic into men. no difference between lending machine, managing, banking etc. [84] 85 But a new programme has to be based on intuition – ‘thorough preparatory work, [and] special knowledge, breadth of intellectual understanding, talent for logical analysis, may under certain circumstances be sources of failure’ – the only proof of practicality is that it works – data, effects, counter-effects are infinite – but the new is untried. p. 85,6 ‘The more accurately, however, we learn to know the natural and social world, the more perfect our control of facts becomes: and the greater the extent with time and progressive rationalisation, within which things can be simply calculated, and indeed quickly and reliably calculated, the more the significance of this function decreases. Therefore, the importance of the entrepreneur type must diminish just as the importance of the military commander has already diminished.’ B.L. example from military commander reveals weakness of position – justification supposes Kondratieff downgrade – reliable calculation supposes absence of radical change i.e. Kon11 downgrade. 9 [Schumpeter] 10 [Schumpeter’s] 11 [Kondratieff]

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p.86 ‘Besides difficulty of untried from view-point of knowledge, also ‘difficulty from viewpoint of will.’ ‘In the breast of one who wishes to do something new, the forces of habit rise up and bear witness against the embryonic project. A new and another kind of [effort of] will is therefore necessary in order to wrest, amidst the work and care of the daily round, scope and time for conceiving and working out the new combination and to bring oneself to look upon it as a real possibility and not merely as a daydream. This mental freedom presupposes a great [mental] surplus force over the everyday demand and is something peculiar and by nature rare.’ Schumpeter on the Entrepreneur (2) 1. Intuition 2. Will 3. Opposition 1) existence of legal and political impediments 2) astonishment, condemnation, ostracism, physical prevention, direct attack simply because new. especially a in threatened groups finance b in finding cooperation trained workers g in winning over cooperation hence entrepreneur a leader12 not a capitalist who takes a risk not a manager who comes in when it is established

big corporation not necessarily an independent agent – may be socialist state subordinate in not an inventor or a discoverer who adds to knowledge Leader acts principally by will [,] authority [,] personal weight entrepreneur a peculiar leader13 those who follow are competitors who will annihilate his profit ⇒ leads not by argument, creating confidence, (exception banker), but by purchasing material & hiring labor leads for formal profit. Motives14

12 [See The Theory of Economic Development 89.] 13 [See ibid. 89–90.] 14 [Ibid. 90.]

Reading Schumpeter

a dream or will to found a private kingdom, a dynasty b will to conquer, to succeed – like sport g joy of creating, getting things done

141

not mere hedonism desirability of efforts simply not counted

b g possible in a socialist state (a directed to palace intrigue B.L.) p. 90 [‘][But] We neither style every entrepreneur a genius or a benefactor of humanity, nor do we wish to express any opinion about the comparative merits of the social organization in which he plays his role, or about the question whether what he does could not be effected more cheaply or efficiently in other ways.’ 2.2 Notes on Business Cycles15 Schumpeter wrote the two-volume Business Cycles16 while he was a professor at Harvard University. A brilliant book – but the timing of its publication, at the beginning of the Second World War and in the wake of John Maynard Keynes’ success with General Theory,17 could not have been much worse. Keynes’ work had grabbed the attention of Depression-weary policymakers and economists, and the General Theory went on to become the most influential work in economics for the next thirty years. But Schumpeter’s Business Cycles had a greater influence on Lonergan. Lonergan was especially interested in Schumpeter’s ideas on the creative role in the economy played by innovators and entrepreneurs and in his account of economic cycles. Disequilibrium exists because 1. Innovation resisted 2. Once effected hence

big clustered irregular

– imitation in widening circles induced in other fields – even though elements small tends to a transformation – resistance then imitation in a rush – some industries ahead others lag results that would not arise if smooth and coordinated

15 From LRI Archives File A335. 16 Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, 2 vols (Cambridge, MA: Harvard University Press, 1939). 17 John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1964).

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Schumpeter’s Assumptions Innovation involves New Plant [not negligible time & expense] New Firms New Men in Leadership Hence Resistance clustered advance (imitation & induced change) In some sections and not others [with different effects from smooth evolution] upgrade : radical innovation downgrade : induced, completing innovat, Innovation p100 Cluster effect benevolent neutrality to routine resistance to innovation 1) disapproval – machine -made products prevention – prohibition of machinery aggressive – smashing of machinery 2) loans easy for routine, hard for innovation labour of right type ready & available for routine consumers buy what they understand 3) inhibitions to new [partly irrational] e.g. aeroplane production if only paid on assumption that everyone now using motor-cars would as readily use aeroplane Once set-up easy to copy and to improve forced to do so by competition hence innovations cluster not spread evenly over time but in lumps not spread at random over space but in areas Transformation effect ⇒ Induced innovation Railroad through new country upsets all conditions of location, all cost calculations, all production functions Hardly any ‘way of doing things’ is optimal before [?]18 & after. 18 [The original has ‘“hardly any ways of doing things” which have been optimal before remain so afterward.’ (Business Cycles I 100).]

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Electrification ditto Schumpeter BC II 768 – quotes with approval Prof MW Watkins, Journal of Pol. Econ. Feb ’31 pp. 67, 819 automobile industry did not develop aviation bicycle carriage industry did not develop automobile telegraph " " " telephone theatre industry " " motion pictures ‘The explanation seems to be that the managers & directors of older industries once they have succeeded in establishing as an economic ‘going concern’ the special branch of industry with which they are primarily identified, lose their adventurous inclinations. They tend to become skeptical of new processes & new products. They become absorbed in the complicated routine of their own affairs and the ever recurring problems of adjustment and adaptations of which no field of business enterprise is ever free. In these circumstances it is only the far-sighted, uneasy, venturesome individuals here & there who are ready to ‘cut loose from’ a secure position and in [sic] assured income, and who have the gift of imparting their enthusiasm to other restless individuals (technicians, salesmen, laborers) and to still others with private capital, who are willing to take great risks for the chance of great gains – it is only in a word adventurers who found new industries. The aviation industry has been no exception.’20 Equilibrium & Disequilibrium Analysis Any product sells as a function of the outlay on all other products j =n

DEn = Cn ∑ G jn DO j j =1

Equilibrium of fact given by equation Equilibrium of marginal utility ΣDn =

j =n

∑ S jn 21 j =1

19 [Professor M.W. Watkins, ‘The Aviation Industry,’ Journal of Political Economy, Feb. 1931.] 20 [Schumpeter, Business Cycles II 768.] 21 [In the original there is a formula crossed out above this formula, which presumably replaces the one crossed out. It is difficult to determine with accuracy the characters in the crossed-out formula.]

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SDn = summation of marginal utilities of demand SSjn [=] summation of marginal utilities of supply DEn = Pn Cn S Gnj DQnj where there are N equations of which this is the ‘n’ th where j has successively all integral values from I to N

"

1. Equation expresses fact 2. Equation expresses tendency to balancing of marginal utility of product DE = F(u) with marginal disutility of effort & abstinence DQuj = Fn(e) Innovation redistributes centres channels transforms methods commodities begins in some sector spreads, every emergence implying & facilitating further emergence offering opportunities for further improvement until this line of attack has exhausted its possibilities

*direct line: new products

Innovation induced lines : farm machinery Invention ⇒ Knowledge Innovation ⇒ application in economic system DQijk = F(a,b,c,d,...) Variations in a b c d give variations in DQ Innovation -- setting up a new production function – either a new commodity method change in fd or new commodity, change in j or k fact that innovation not possible before certain quantity of DQijk reached, does not disprove innovating character of innovation Innovation = a new cost curve a shift of curve Innovation Schumpeter, p. 93 involves New Plant non-negligible time and outlay

Reading Schumpeter

Not necessary – important to analysis But new Plant not necessarily innovation may be non-growth financial consequences follow evolutionary consequences do not follow New Firms and New Men " true in competitive capitalism less true in trustified capitalism New emerge – compete – old react, adapt Survive (if double capital outlay can be met. B.L.). P 97, 98

| Continuous & growth adaptation to innovation || Intermittent adaptation (by bankruptcy) resulting in disequilibrium Assumption of ideally rational behaviour by business works as long as routine as long as ‘growth’ – tried experience & familiar motive ‘It breaks down as soon as we leave those precincts22 and allow the business community under study to be faced by – not simply new situations, which also occur as soon as external factors intrude but by – new new possibilities of business action which are as yet untried and about which the most complete command of routine teaches nothing[’] Socialism – economically The limiting case of growth in size & extent of production functions The transference of saving from the individual (family position) to the state

22 [Arrow from ‘precincts’ to ‘motive’ above.]

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The transference (& elimination) of innovation from the individual to the state the breakdown in moral self-control Either minimum taxes, free capitalist machine violent cycles from above connected by elimination Or social welfare program, higher taxes, breakdown of capitalist motivation, socialism Or middle way – group economics Kondratieff downturn ‘exploitation to the utmost, partly under duress, of existing possibilities of technological and organizational innovations on lines & principles established before but steadily improved in the process; revision of the whole structure of industry in quest of increased efficiency; systematic struggle with each item in the list of costs.’ Schump BC23 p759 Socialism can achieve this imperfectly if it has a model before its eyes Schumpeter, p. 660 ‘Crises would have occurred if no central or member bank had ever called a single loan, and must be understood in the light of the fact that in any economic or social system which is unable to prevent irresponsibility and misconduct correction by consequences is the only method to prevent indefinite aberration’ Case for morality of economics Analogy with medicine " cannot take organism apart to examine symptoms for diagnosis economics – statistics = symptoms for diagnosis " theory = principle of diagnosis prescription Difference between large scale and small scale enterprise

23 [Schumpeter, Business Cycles]

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in recession profits are consumer’s basic income in prosperity they add surplus income But a large scale undertaking is not satisfied by basic income Hence in recession large scale undertaking is not motivated DQijk i level of acceleration j type of goods or service supplied at final market k production function Sch Innovation Growth cf Toynbee Genesis Growth new production functions – new K’s expansion of production functions – bigger DQ’s24 Cyclic Phenomena a) cycle of learning, trial & error b) cycle of execution, phenomena capitalist phenomena Kitchins Juglars Kondratieffs Primary wave – Prosperity Recession Secondary wave – Unsound ventures, depression, revival Imperatives: function of bankers – responsibility to systems, to society |note cheap but irresponsible financing is what matters function of entrepreneurs duties of labor, operation of fields ‘There is nothing in theory or fact to justify belief in any tendency in the recurrent waves of profit (in our sense) either to increase or decrease systematically. It follows that interest fundamentally deriving from profit should also not display such a tendency’ Sch BC. p 628 True

‘profit’

= profit from innovation

interest

proportionate to marginal anticipated profit

24 [Arrow connecting ‘expansion of production functions – bigger DQ’s’ to ‘Growth’ above.]

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profit at origin of cycle interest rates in cycle recessive waves may well be equal Unemployment Unemployment Schumpeter II 511 – 511 ‘Normal’ the unemployment that would at any time exist if the system already reached the neighborhood of equilibrium toward which it is tending includes ‘seasonal;’ ‘accidental’ (= fire in factory, unemployability, change of residence, of job imperfection of competition or of equilibrium) 513 ‘Vicarious’ due to wage rates above equilibrium value 514 ‘Disturbance’ liquidation of firms, change of frontiers 514 ‘Technological’ due to any innovation Not only displacement of workmen by machinery but any change of production functions 515 ‘Secondary’ resulting from other unemployment ‘Cyclical’ = technological Technological employment results from cycle of innovations results in re-absorption at higher force real wage level ⇓ Hence ‘long-run interest of the working class is in the effects of innovations on the [total] real wage bill and not in the incidental variation of employment[,] which is but an element of the mechanism that produces the changes of the former and can be separately handled by public policy’ Interest p602 Schumpeter, B. Cycles = premium on present over future means of payment = + coefficient of tension in the system ⇑ Stationary equilibrium – only persons driving present rather than future means of payment are entrepreneurs – hence rate of interest proportionate to marginal profit [marginal increment of prospective profit for all/[any?] entrepreneurs]

Reading Schumpeter

Interest25 DE″n DE′ + DE″

149

-DE″ = DE″

m + DE″n m = maintenance n = net

Interest 10 the reward of abstinence DE″n does not go to primary consumption (helped by magnitude of incomes) 20 the price of present over future purchasing power in developing economy entrepreneurs at zero interest tend to infinity 30 the brake on expansion in non-exchange economy – forced saving effect of interest – time becomes a cost

25 [See Business Cycles II 605–38.]

8 Communications

1

Introduction

While Lonergan was working on his economics essays, he also wrote articles and reviews for Catholic newspapers in Montreal. Two of these articles were relevant to his work on economics. ‘Savings Certificates and Catholic Action’ was published in the Montreal Beacon on 7 February 1941. In this article, his first published piece on an economic topic, Lonergan supports the campaign to purchase savings certificates (war bonds). The article shows his awareness of the significance of pure surplus income and of the importance of saving in the first phase of an economic expansion.1 In retrospect, what is of special interest is his reasoning, which demonstrates appreciation of the need for a democratic (rather than an imposed) solution to the problem of financing the war effort. Unlike taxation, the savings certificate program depended on the intelligent cooperation of citizens. Education as the key to economic independence was the central precept of the Antigonish Movement, which originated in the extension department of St Francis Xavier University in Antigonish, Nova Scotia, and of which the best-known figure was Moses Coady. The Antigonish Movement developed the cooperative movement as an alternative to Marxism for the working classes during the Great Depression. Its legacy is carried on to this day at the Coady Institute on the campus of St Francis Xavier University, which now concentrates on economic development through cooperatives

1 On these topics, see LDSE chap. 7.

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in the Third World and in the various workers’ and consumers’ cooperatives and credit unions in the region. In May 1941, Lonergan contributed to the Montreal Beacon a review of Coady’s book, Masters of Their Own Destiny.2 Lonergan writes, ‘The technical training needed at the present time is in the technique of cooperation. That first of all and most of all.’ For Lonergan, education and cooperation would be the key to the implementation of a democratic vision of economic life. The Antigonish Movement promoted cooperation in practical areas of life; functional specialization emerged twenty-four years later as a model for cooperation on the theoretical level. The selection ‘Italian Mentality’ comes from a popular talk, ‘National Mentalities of Europe,’ given by Lonergan at St Anthony’s Parish in Montreal on 24 February 1941. It too was written before the composition of ‘For a New Political Economy,’ and it provides insight into both the influence of Dawson on Lonergan, and Lonergan’s own views on creeping economic centralization, a theme he would take up again in 1945 in a lecture given at Regiopolis College in Kingston, Ontario. The present volume closes with a newspaper report of that lecture. The focus of the talk returns to the themes that began the volume: How is economic liberty to be promoted and bureaucratic power reduced?3 Now, however, Lonergan has a proposal: ‘If there is to be a solution of economics compatible with human liberty, it will have to be a solution formulated in terms of precepts to individuals and not in terms of plans for governments.’ This talk is the only record of Lonergan’s speaking in public on the topic that had occupied him for fourteen years. His address was not to the economists, for whom he had written ‘An Essay in Circulation Analysis.’ It was an in-house affair, sponsored, it seems, by the Regiopolis Ladies’ Auxiliary, whose president introduced him. The local archbishop attended. 2

Texts 2.1 ‘Savings Certificates and Catholic Action’ 4

I wish to draw attention to the great significance of the government’s ‘Savings’ campaign. The obligation it places on every loyal Canadian is manifest, but what is not so obvious is the extraordinary opportunity it offers to Catholic Action. May I develop the latter point? 2 M.M. Coady, Masters of Their Own Destiny (New York: Harpers, 1939). 3 See Lonergan’s notes on Sumner’s ‘Bequests of the Nineteenth Century,’ pp. 10–11 above; and ‘Essay in Fundamental Sociology,’ pp. 15–44 above. 4 Montreal Beacon, 7 February 1941.

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Canada’s war activities are generating approximately a 50% increase in the national turnover. Added to the ordinary volume of production for consumers, expenditure by consumers, and income from that expenditure, there is another volume which produces for war purposes, is financed by the government, and gives rise to a proportionate volume of income. Say, for the sake of argument, that the former is three thousand millions a year, and that the latter is one and a half thousand millions. In that case the aggregate income of Canadians is roughly four and a half thousand millions a year. On the other hand, the goods and services for consumers are only equal to three thousand millions. It follows that there are one and a half thousand millions that cannot be spent for the very good reason that the goods and services are not there to be bought. If Canadians attempt to live to the full extent of their present income, the only result will be that prices skyrocket. For production is rapidly approaching its maximum; when that is reached more spending will not mean more goods; it will mean only higher prices. Such a rise in prices would be disastrous, both for those with money and those without any. It would be disastrous for those with money, for their money would be worth so much less. It would be disastrous for those without money, for either wages would follow the increase in prices or they would not; if they follow, then prices necessarily become so much higher again; if they do not follow, then present wage standards have to meet a higher cost of living. The obvious and necessary solution is to make the one and a half thousand millions that cannot be spent on consumers’ goods flow back to the treasury to pay for government and war enterprises. In that way the books balance, the circulation circulates. Ordinary activity generates three thousand millions in income; it can do so because the three thousand millions are spent to obtain goods and services. War activity generates another one and a half thousand millions in income; for it to do so continuously without causing a disastrous inflation, it too must flow back to its source. But the problem is, How to effect this return flow? Taxes will account for part of it, but they cannot account for all. The reason is that taxes are general rules and no general rule or set of general rules can be devised that will cut exactly the right amount out of everyone’s income. Further, the smaller the income, the greater the difficulty: to take 80% of an enormous income might not cause hardship; but to take 20% of a small income would be an intolerable burden in some cases while in others it would not be taking enough. It is easy to construct a big net to catch big fish but, when most of the fish are small, what it needs is a big net to catch little fish. Now it is not impossible to make a big net to catch even the smallest fish;

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the Germans have had one for years in their ‘guns not butter’ programme; it enabled them to turn a major part of their industry to munitions and armaments without going bankrupt despite the prophecies of antiquated economists. But we do not want the German type of net, the totalitarian state; that is what we are fighting against. Alternative then to force and terrorism, there only remains freedom and the responsible use of freedom. That is the approach to the problem taken by the Canadian government: it asks Canadians to be reasonable in their expenditure, not to increase unreasonably their demand for goods and services but to save, to save in a big way. I leave to others to expound what precisely is expected of each individual. The point to which I wish to draw attention is the tremendous significance of the government programme for all who are interested in Catholic social thought and Catholic Action. CANADIAN CATHOLICS ARE BEING ASKED, NOT TO INITIATE, BUT TO COOPERATE IN THE EXECUTION OF THEIR OWN SOCIAL IDEAS What Catholic social thought can effect has been shown in the concrete in the work done by Antigonish University5 for Nova Scotia fishermen. More recently it has been again demonstrated by Fr. Soucy6 in the backwoods in Maine. Now we have an opportunity to contribute to action on a national scale. It is of vital importance that we make the most of it. Let us see how many Catholic ideas underlie the government campaign for saving. First, there is the norm or measure of the savings the individual is to effect. It is reasonableness. According to St. Thomas Aquinas, reasonableness is the basic principle in human morality. We are asked to avoid all unreasonable increase in expenditure: what does that mean if not that we are asked to adopt the idea of status, of a standard of living fitting for various walks of life, of balanced living according to that standard. What is this if not that the old economists’ robot, motivated only by self-interest and living on the animal level of pleasure and pain, is supplanted by our idea of reasonable men living rational lives? To drive home this idea, first in our 5 [The reference is to St Francis Xavier University in Antigonish, Nova Scotia. This was the home base for Father Moses M. Coady, who, along with Father Jimmy Tompkins, started the Antigonish Movement. See Lonergan’s review of M.M. Coady, Masters of Their Own Destiny, below.] 6 [Father D. Wilfrid Soucy promoted the cooperative movement in the province of New Brunswick. See CWL20 71 n. 6.]

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study clubs, then throughout the Catholic community, is not only the first step but even the whole battle in our contribution to a restoration of economic health. For either the economic machine is controlled by a group of commissars as in Russia, or it is controlled by the purchases of consumers as in democratic states; in the latter case consumers either live and buy according to rational planning, and then the economic machine can function properly; or else the consumers are simply a herd of hand-to-mouth automata shepherded about by screaming advertisements, gambling on the stock-market to augment their putative pleasures, and doing everything possible to make the economic machine expand in the wrong directions and eventually explode. Second, what is the motive for saving? It is our principle of superflua status, surplus income. Such surplus is income beyond one’s reasonable requirements for his standard of life. But plainly the one and a half thousand millions generated by our war effort are surplus income: they are in excess of the three thousand millions generated by the ordinary economy; they cannot be spent on consumers’ goods; they cannot belong to any individual’s standard of living. They happen to come to individuals, because that is the nature of the exchange system. But their function is to pay for the war effort, for that is the nature of the circulation. Catholic social thought affirms obedience to function: things have to be used as their nature dictates. The government’s war budget and taxes, its appeals for the purchase of saving certificates, and the encouragement it gives to voluntary contributions, are three elements in an elastic plan to put into practice the principle of surplus income. Since that principle is ours, we must cooperate perfectly. Now it requires only a little imagination and intelligence to grasp the significance of this situation for Catholic Action. We are asked to cooperate in a plan to execute our own principles. We are bound to cooperate as loyal citizens. But we have a very special interest in making a very great effort. For if we succeed in convincing ourselves and in teaching others to accept and practice the two fundamental points of balanced living and surplus income, then we shall learn to combine theory with practice, to understand the theory because of the practice, to spread and establish the theory through practice. It is what we have been looking for. This is not all. If we take this opportunity seriously and make the most of it, we are making here and now the greatest possible contribution we can to the development of a democratic technique that can confront and solve any economic problem. Thus we prepare ourselves for the difficulties that will follow the end of the war, and, incidentally, we win the war on its ideological plane, for the totalitarians boast that democracy cannot meet the modern economic problem.

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2.2 Quebec’s Opportunity 7 The social function of the popular school is to train and equip the masses for economic independence. Unless the masses achieve economic independence, we are doomed to the quiet death of uninspired regimentation under an intellectually insignificant bureaucracy.8 Masters of Their Own Destiny By M.M. Coady (Harpers) Reviewed by Bernard Lonergan, S.J. M.M. Coady’s Masters of Their Own Destiny is now in its second French edition; the original English is published by Harpers. It must be read by everyone interested in modern problems. Through its pages breathes the authentic spirit of Canada, a Canada facing the new age, facing its fundamental problem, and attaining a solid solution that is the admiration of the hemisphere. Universal Application It is sometimes thought that the method employed by the Antigonish movement cannot be applied universally, that it can work only under such special circumstances as are found in northeastern Nova Scotia. Nothing could be further from the truth. The essence of the cooperative movement is to teach free enterprise to those who in a regime of free enterprise have not had the initiative to look out for themselves. Why does the proletariat today include almost everyone? Why is the control of industry in the hands of fewer and fewer? Radically it is our own fault. We leave our affairs to others, because we are too indolent and too stupid to get to work and run them ourselves. The results are palpably ruinous: our system of free enterprise cannot survive if only a few practice free enterprise. Practical Education Masters of Their Destiny is a singularly pertinent book to present discussion. It shows in the concrete what practical education is. It reveals how ignorant, how unimaginative, how narrow-minded, how short-sighted, how stupidly selfish is the human material with which the economic reformer has to deal. It provides the educator with very concrete and very definite objectives.

7 [Published in the Montreal Beacon, 2 May 1941, 3.] 8 [Editor’s caption.]

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In particular, it explodes a specious fallacy. It will do us not the slightest good if we establish the world’s finest technical schools and, at the same time, fail to teach the technique of economic independence as it is taught by the St. Francis Xavier Extension Department. If our schools produce more competent technicians, then the companies will be able to have a greater product with less labour; unemployment will increase and wages will decrease; the companies will be unable to sell the greater product, and this will increase unemployment and decrease mass purchasing power still more; the government will have to undertake vast relief schemes, and the taxes will ruin the companies. There is no way out along such lines. The technical training needed at the present time is in the technique of cooperation. That first of all and most of all. That can change the face of the province as it has changed eastern Nova Scotia, Sweden, Finland. Nothing else can or will. Once the technique of cooperation is grasped, then all else follows easily. People will see before them the vision of economic independence; they will understand the necessity of study; they will cooperate with teachers in making their children do their lessons faithfully and well; they will welcome every opportunity to learn, for they will realize that that is the one condition of their survival and, at the same time, of the survival of free institutions. Quebec’s Opportunity The province of Quebec is in an extremely fortunate position. Walter Lippmann, the profound American commentator, recently accused American educationalists of having successively thrown overboard every part of the cultural heritage of western civilization.9 That accusation cannot be made against Quebec. Our universities stand in the oldest and finest European tradition; see the splendid article by Prof. Adair on the ‘Teaching Of History At McGill’ in the recent number of Culture, the Franciscan Quarterly.10 Our classical colleges are stamped with the sixteenth-century humanistic movement that lies at the root of all modern developments. If it is true that our popular schools appear illadapted to popular needs, it is also true that this lack of adaptation lies in the absence of positive social inspiration in the nineteenth century movement that created state popular schools. For that reason this defect is not peculiar to Quebec but recognized to be universal:

9 [Walter Lippman, ‘Education versus Western Civilization,’ American Scholar 10:2 (Spring 1941) 184–93. See CWL20 145]. 10 [E.R. Adair, ‘The Study of History at McGill University,’ in Culture: Sciences Religieuses et Sciences Profanes au Canada 2 (1941) 51–62.]

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obviously if there is not a social idea, there cannot be a practical end for popular education. But what the nineteenth century failed to conceive, the twentieth makes manifest: the social function of the popular school is to train and equip the masses for economic independence. It is a vast task, but a necessary task and the clear goal of the historical forces at present in ferment. Unless the masses achieve economic independence, then we are doomed to the quiet death of uninspired regimentation under an intellectually insignificant bureaucracy. Democracy will be a noble experiment that failed. To meet this challenge of the age, Quebec, I say, is in an extremely fortunate position. It has in abundance the leaders that can define and diffuse the inevitable social ideal of our time. The Antigonish movement attributes its success basically to the broad culture its originators received in Quebec, Montreal and Rome. The technical inspiration of the movement lies in England. The success of the execution was derived from training received in Canadian schools of agriculture and economics. We have the same roots, the same heritage. We have few of the blunders of educational experiment to correct. If we want to, we can set to achieving the real task of popular education on its practical side. But remember, legislators can pass wise laws in vain. All depends on the initiative and the devotion of those who carry them out. 2.3 ‘Italian Mentality’ 11 It would be much easier to speak to you tonight about German mentality and the Nazionalsozialist movement than about Italian mentality and Fascismo. Not only is the Gorman movement far simpler and easier to comprehend but also it can more readily [be] illustrated by local parallels; for instance, Hitler’s initial campaign against the Jews could be paralleled with the Ontario campaign calling itself Protestant Action12 and devoting its efforts to reviling Roman Catholics; just as religion in Ontario so the Jewish question in Central and Eastern Europe provided an abundance of inflammable material, a facile opportunity for the unintelligent to excite masspassions, and on that excitement to ride to notoriety and power. Further, just as you here ridicule the ineptitude of such a campaign and pooh-pooh the idea of it ever amounting to anything – the good sense of the people 11 [LRI Archives File A20.] 12 [Protestant Action was a product of the Orange Order, a sectarian Protestant fraternal organization originating in Northern Ireland that came to Canada with immigration from the British Isles. The Orange Order excluded Catholics from membership.]

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of Ontario is proof against such nonsense – so also in Germany was Hitler for ten years regarded as a vulgar nuisance of no importance. I sincerely trust you are right in your estimate of the fomenters of an indigenous Hitlerism, that you have good grounds for being certain that the individuals in question never heard of Georges Sorel,13 that they have no knowledge of revolutionary technique, no ambitions of creating a solid national spirit based on ignorance and hatred, and no hope of success in their effort to stimulate latent prejudice and passion into a massive intolerance. But one thing is certain: not only the people of the province of Quebec but even its Premier, Mr. Godbout, who is no anglophone, cannot arrive as rapidly as you do at your comfortable and reassuring judgment; and even though the Quebec Premier has been reassured on the point, it remains that such a campaign does infinite harm because it saps the very foundations of Canadian unity and makes ever so much more difficult the task of increasing the technical unity and centralization of the country to meet its economic problems. It is in terms of such deeper problems that one has to approach a study of Fascism, and if this adds to the difficulty of our inquiry, it also adds to its interest. First, then, let me state what that deeper problem is. Mr. Christopher Dawson, perhaps the profoundest English thinker of the present time, predicted a number of years ago that every modern state would assume an ever greater and greater control over the lives, the actions, the speech and the thought of all its citizens. The basis of such a prediction is, of course, the modern economic structure: modern economy is not a patchwork of relatively isolated units, as were the feudal manors and the medieval free cities; it is a network of complementary functions in which no part can enjoy even the vestiges of self-sufficiency. In a primitive economy each small group attends to all its needs and exchange is merely an incidental appendage, a means of getting rid of surplus products and obtaining conveniences and luxuries in their stead. In an advanced economy exchange moves from its former minor and supplementary role to become the centre and pivot of the whole of our material lives. As the depression so forcibly imprinted on our minds, there is a vast machine, the economic system, that sometimes works well, and we enjoy prosperity, and sometimes works ill, and then rich men are reduced to penury, and the labouring classes wander aimlessly about in search of work that does not exist. Because there is the vast machine which does not always function, which needs direction and

13 [Georges Sorel (1847–1922) was a French theoretician of revolutionary syndicalism, a Marxist theory advocating the destruction of the existing capitalist social order through direct action.]

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control, Dawson concludes that inevitably there will be evolved another vast machine to direct and control it. Because the economic machine is a pattern of exchanges and because exchange is at the very basis of our material lives, it follows that the controlling machine will have to enter into our lives. Because exchange is the term of economic activity, because in itself it is a psychological and moral act, because such acts are greatly influenced by all that is said and written, one immediately comes to Mr. Dawson’s conclusion: the modern state will assume an ever greater and greater control over the lives, the actions, the speech and the thought of all its citizens. This problem is worldwide: all modern states are highly centralized and the less centralized among them will be more so in the future. As you know, the present state of the question in Canada is discussion of the Sirois Report, momentarily shelved, but not at all dead. Accordingly, an examination of the Italian experiment in centralization should provide many useful lessons for our own future; it can teach us, above all, never to be overconfident, never to be deceived by appearances, never to take it for granted that the 90% excellence of a program is not going to be dominated by its 10% error. 2.4 ‘Economic Centralization’ Economic Centralization Trend World-Wide, Says Lecturer Here14 Rev. Dr. Lonergan of Montreal Addresses Audience At Regiopolis College on Sunday Afternoon ‘The trend to economic centralization is world-wide. Fully developed in Communist Russia and National Socialist Germany, and to a less extent in Fascist Italy, it is no less real in the democracies. To reverse this trend is extremely difficult. To bring it to full maturity is extremely easy.’ So stated Rev. Dr. Bernard Lonergan at a meeting held yesterday afternoon at Regiopolis College. Dr. Lonergan is professor of theology at the Immaculate Conception Theologate in Montreal, holds degrees from the university of London, England, and the Pontifical Gregorian university, Rome, and has contributed to various quarterlies. Elaborating his topic, ‘The Trend to Economic Centralization,’ the speaker pointed to the contrast between the emergence of parliaments, to enable the monarchs to obtain funds from the people, and the present situation, in which no government is embarrassed financially, in which private 14 [Kingston Whig-Standard, Monday, 9 April 1945, 2.]

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citizens have to pay taxes and subscribe to loans if they wish their money to retain its value. Where before money was a power of individuals, now it is a power of the state. In like fashion economic initiative has passed from the small man to the systematic development of new products by research laboratories and to the flotation of new issues through giant corporations. With promises of social security this transition from personal to impersonal initiative foreshadows a fuller development of state initiative. Finally, as money and initiative, so also ownership has lost its old significance. In the XIXth century, ownership, initiative, and management were in the hands of a single individual, and the number of such individuals was very large. Today, owners have been reduced to the humble role of shareholders, while the control of economic activity lies in the hands of directors, managers, superintendents – of vast bureaucracies doing everything in triplicate and providing a striking illustration of the Marxian doctrine that capitalism digs its own grave, he stated. ‘The difficulty in reversing the trend to centralization, it was claimed, as well as the real menace of this trend, lies far deeper. Victorian agnostics would have been insulted if one suggested that their position led logically to a decline in the esteem of Christian marriage. But that decline has taken place. Logic has won out. Similarly, today, there are great and sincere professions of devotion to liberty, but one may suspect the solidity of the underlying logic. The modern intellectual cannot take at face value such a document as the American Declaration of Independence. We hold these truths to be self-evident – but have not Kant and Comte disposed of selfevidence? – that all men were created equal. But is there equality in bodily physique, in heredity, in temperament, in intelligence, in character? Is it in the possession of immortal souls? How many more believe in the sterilization of the unfit?’ the speaker asked. ‘The connection between modern intellectuals and the decline of liberty is not abstract and remote. If there is to be a solution of economics compatible with human liberty, it will have to be a solution formulated in terms of precepts to individuals and not in terms of plans for governments. But it is quite apparent that economic science is doing much more to provide plans and to prepare experts for brain-trusts than to formulate precepts at once analogous, and complementary, to the old precepts of thrift and enterprise.’ Responsibility Placed Dr. Lonergan concluded with a citation from Walter Lippman’s celebrated address to Phi Beta Kappa in 1940 in which the responsibility for a great part of modern mental confusion was laid to the doors of the educators

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who ‘progressively removed from the curriculum of studies the western culture which produced the modern democratic state.’15 Among those present were Most Rev. Joseph O’Sullivan, DD, Archbishop of Kingston; Rev. Arthur Wilson, rector of Regiopolis College. The speaker was introduced by Mrs. S. Murray, president of the Regiopolis Ladies’ Auxiliary, and a note of thanks was extended by Mrs. J.C. Newlands. After the meeting refreshments were served under the convenership of Mrs. A.C. Hanley.

15 [Walter Lippman, ‘The State of Education in This Troubled Age: A Sweeping Indictment of Modern Schools and Colleges,’ address delivered under the auspices of Phi Beta Kappa at the annual meeting of the American Association for the Advancement of Science, University of Pennsylvania, Philadelphia, 29 December 1940. Available online at .]

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Bibliography

Works by Bernard Lonergan Published Works ‘The Analytic Concept of History.’ Ed. with an introd. by Frederick E. Crowe. Method: Journal of Lonergan Studies 11:1 (1993) 1–36. Caring about Meaning: Patterns in the Life of Bernard Lonergan. Ed. Pierrot Lambert, Charlotte Tansey, and Cathleen Going. Thomas More Institute Papers 82. Montreal: Thomas More Institute, 1982. Collection: Papers by Bernard Lonergan. Ed. Frederick E. Crowe. London: Darton, Longman, and Todd, 1967. Collection: Papers by Bernard Lonergan. Collected Works of Bernard Lonergan 4. Ed. Frederick E. Crowe and Robert M. Doran. Toronto: University of Toronto Press, 1988. ‘Conversations with Bernard Lonergan, 1969–1980.’ In Curiosity at the Center of One’s Life: Statements and Questions of R. Eric O’Connor, ed. Martin O’Hara, 371– 440. Thomas More Institute Papers 84. Montreal: Thomas More Institute, 1987. For a New Political Economy. Collected Works of Bernard Lonergan 21. Ed. Philip J. McShane. Toronto: University of Toronto Press, 1998. ‘Functional Specialties in Theology.’ Gregorianum 50 (1969) 485–504. Insight: A Study of Human Understanding. 2nd ed. London: Longmans, 1958. Insight: A Study of Human Understanding. Collected Works of Bernard Lonergan 3. Ed. Frederick E. Crowe and Robert M. Doran. Toronto: University of Toronto Press, 1992. Macroeconomic Dynamics: An Essay in Circulation Analysis. Collected Works of Bernard Lonergan 15. Ed. Frederick G. Lawrence, Patrick H. Byrne, and Charles Hefling, Jr. Toronto: University of Toronto Press, 1999. Method in Theology. London: Darton, Longman, and Todd, 1972.

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‘Pantôn Anakephalaiôsis (The Restoration of All Things).’ Ed. with an introd. by Frederick E. Crowe. Method: Journal of Lonergan Studies 9:2 (1991) 139–72. ‘Questionnaire on Philosophy: Responses by Bernard Lonergan.’ Ed. Mark Morelli. Method: Journal of Lonergan Studies 2:2 (1984) 1–35. ‘Questions with Regard to Method: History and Economics.’ In Dialogues in Celebration, ed. Cathleen M. Going, 286–314. Thomas More Institute Papers 80. Montreal: Thomas More Institute, 1980. Review of M.M. Coady, Masters of Their Own Destiny. Montreal Beacon, Montreal, 2 May 1941. ‘Savings Certificates and Catholic Action.’ Montreal Beacon, Montreal, 7 February 1941. Shorter Papers. Collected Works of Bernard Lonergan 20. Ed. Robert Croken, Robert M. Doran, and H. Daniel Monsour. Toronto: University of Toronto Press, 2007. Verbum: Word and Idea in St. Thomas Aquinas. Collected Works of Bernard Lonergan 2. Ed. Frederick E. Crowe and Robert M. Doran, Toronto: University of Toronto Press, 1997. Unpublished Analytic Conception of History. LRI Archives File 713. Published as ‘The Analytic Concept of History.’ Method: Journal of Lonergan Studies 11:1 (1993) 1–36. Analytic Conception of History, in Blurred Outline. LRI Archives File 713. Book References, Mannheim, Hutchinson. Handwritten in pencil. LRI Archives File A223/ Batch II\33\14. Clipping, ‘What Is to Follow the Conference?’ By John Collingwood Reade. LRI Archives File A337. Batch II\61\3. ‘De Bono et Malo.’ Unpublished supplement to or revision of De Redemptione. ‘Pars V of De Verbo Incarnato. LRI Archive Files 657, 1964.’ English trans. by Michael Shields. Lonergan Research Institute, Toronto. Economic Analysis, Notes, 1942. 40 pages of handwritten notes. LRI Archives File A332. Batch II\60\1. Economic Analysis, Notes, Nov. 1942. Item: A Method of Independent Circulation Analysis. Typescript (58) pages. LRI Archives Temporary File A333. Batch II\60\2. Published in For a New Political Economy, Collected Works of Bernard Lonergan 21, ed. Philip J. McShane, 113–51. Toronto: University of Toronto Press, 1998. ‘Economic Centralization Trend World-Wide, Lecturer Says Here: Rev. Dr. Lonergan of Montreal Addresses Audience At Regiopolis College on Sunday Afternoon.’ Kingston Whig-Standard, Monday, 9 April 1945, 2. LRI Archives File A129. Batch II\14\2. Economics. One-page fragment on compound expansion and compound contraction. LRI Archives File A314. Batch II\51\1. Econ. Phil, 1, §5. Undated notes (2 pages) on economic topics. LRI Archives Files A09 and A09a. Batch I-A\6\4–5. E. Kant – Fondamenti della Metaphysics dei Costumi. Trad. Giacomo Perticone – ed.

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Signorelli. Roma 1926. Handwritten notes in English and Italian of an Italian trans. of Kant’s Foundations for a Metaphysic of Morals. Undated. LRI Archives File 12. Batch I-A\7\1. Equations. Handwritten on back of draft of Verbum [LRI Archives File A85]. LRI Archives File A91. Batch I-B\13\6. Equations. Handwritten on back of draft of Verbum [LRI Archives File A94]. LRI Archives File A93. Batch I-B\13\9. An Essay in Circulation Analysis. Original 1944 typescript. LRI, Toronto. Published in For a New Political Economy, Collected Works of Bernard Lonergan 21, ed. Philip J. McShane, 231–318. Toronto: University of Toronto Press, 1998. ‘Essay in Fundamental Sociology.’ LRI Archives File 713. File: Economics. Notes, Clippings Item 1: Handwritten Notes on Economics. LRI Archives File A335. Batch II\61\1. Fragment, Essay towards a Pure Theory of Social Economics, 1. Economic Activity. One-page typescript. LRI Archives File A334. Batch II\60\3. Undated. Published in For a New Political Economy, Collected Works of Bernard Lonergan 21, ed. Philip J. McShane, 205–206. Toronto: University of Toronto Press, 1998. Fragments on Economics. 28 pages of typescript on reverse of notes of course on gratia operans [LRI Archives File A188]. LRI Archives File A191. Batch II\25\9. Undated. General Ethic [Metaphysic of Customs]. Notes (5 pages). LRI Archives File A13. Batch I-A\7\1. Undated. The Idea of Progress. Notes (4 pages). LRI Archives File A23. Batch I-A\9\6. Undated. Interview with Lonergan conducted by Luis Morfin, s.j., on 11 July 1981. Transcribed from tape. LRI Archives. Italian Mentality. Notes (3 pages, legal size) for the talk ‘National Mentalities of Europe’ at St Anthony’s Parish, Montreal, 24 February 1941. LRI Archives File A21. Batch I-A\9\3. Letter to Father Keane, 22 January 1935. LRI Archives. Letter to Jane Collier, Cambridge University, 12 June 1982. LRI Archives. The Managerial Revolution. Note in pencil on back of LRI Archives File A42 citing the book The Managerial Revolution by James Burton. New York: John Dray, 1942. LRI Archives File A44. Batch I-A\144. National Mentalities of Europe. 5 pages. Synopsis of talk ‘National Mentalities of Europe’ at St Anthony’s Parish, Montreal, 24 February 1941. LRI Archives. Notes on articles on society and economics. Two pages of typewritten notes on two articles. LRI Archives File A336. Batch II\61\2. Undated. ‘Outline of an Analytic Conception of History.’ LRI Archives File 713. Undated. An Outline of Circulation Analysis. 71-page typescript of essay. LRI Archives Files A330 (Batch II\58\1) and A331 (Batch II\59\10. Published in For a New Political Economy, Collected Works of Bernard Lonergan 21, ed. Philip J. McShane, 109–51. Toronto: University of Toronto Press, 1998. ‘Pantôn Anakephalaiôsis.’ LRI Archives File 713. January 1935. ‘Pantôn Anakephalaiôsis – A Theory of Human Solidarity.’ LRI Archives File 713. Undated.

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Index

Note. Page numbers in bold indicate texts. ‘BL’ refers to Bernard Lonergan. The Age of the Gods (Dawson), 7–8, 16 allocation of scarce resources, 73 analysis, xxiv–xxvii, 53, 54, 74; circulation, 104; deductive, 52; dynamic, xxii, 7, 53, 68; economic (see economic analysis); equilibrium, xxii, 102–3; intentionality, 52–3; ‘real,’ xx, xxv–xxvi, xxvii, 9–10, 48; sequence, 68 ‘Analytic Concept of History’ (Lonergan), 47–8, 74 ‘Analytic Concept of History, in Blurred Outline’ (Lonergan), 9–10, 47–50 Antigonish Movement, 5, 150–1 approximation, Newton’s model of, xxviii Aquinas. See Thomas Aquinas Austrian economists, xxi, 54, 122–3 ‘Bequests of the Nineteenth Century’ (Sumner), 4, 5; BL’s notes on, 10–11 Blandyke Papers (Lonergan), 6–7, 52 Blaug, Mark, 103 Böhm-Bawerk, Eugen von, 112 Brown, Patrick, xv n. 13 bureaucracy. See government

business cycles, x, 136; and monetary circulation, 114 Business Cycles (Schumpeter), xxii, 135–6; BL’s notes on, 141–9 Butterfield, Herbert, Origins of Modern Science, xvi n. 16 Cantillon, Richard, ix–x, 52, 55, 74 capitalism, 5, 73 Capitalism and Morality (Watt), xxiii Catholic Action, xxvi, xxvii, 44, 150, 151–4 Catholicism: and economics, x, xxiii, 74; history and theology of, 72; and just wage theory, xxiii, 74 centralization, economic, 151, 159–61 Chesterton, Gilbert Keith, 8 circuits: acceleration between, xxviii; basic vs surplus, xxvii, 4, 6, 103 n. 5, 104, 112, 135; economic control and, 112. See also ‘Essay in Circulation Analysis’ (Lonergan); ‘A Method of Independent Circulation Analysis’ (Lonergan) circulation, monetary. See monetary circulation.

174

Index

classicism, xv–xvi Coady, Moses, 150; Masters of Their Own Destiny, 151; BL’s review of, 155–7 communications, xiii–xiv, 150–61 competition, 66 consumer goods, 112 Coyne, Edward J., 73; ‘National Economic Councils,’ 4, 5, 10, 12–15; BL’s notes on, 12–15 credit, 112, 113, 114, 135, 136, 137 crises: cultural, 7, 8; economic, 127 crossover flows, between basic and surplus circuits, xxii, xxvii, 104 Crowe, Frederick E., 72, xv n. 13 cultural crisis, xxiii, 7, 8 culture: economic development and, 10; material development and, 9; material goods and, 74; material/ economic vs spiritual/moral development and, 7; technological progress and, 7; unemployment and, 136 cycles: business (see business cycles); dynamic economy and, 55; economic, xxvii; of economic phenomena, xxii, 111; of income and prices, xxviii, 113; Juglar, 136; Kitchin, 136; Kondratieff, 136; long, xxii; phases of, xxvii, 55; and profit, 55; pure economic, xxvii, 6, 55, 112; trade (see trade cycle); and trade cycle, xxvii. See also rhythms Dawson, Christopher, 44, 151; The Age of the Gods, 7–8, 16 democracy, xxv, xxvii, 102, 150, 151 Depression. See Great Depression Descartes, René, 103 dialectic: of fact, 9; as functional specialty, xiii, xiv; of history, ix, x, xxvi, xxvii, 3–50; material, 9; of thought, 9 disequilibrium, 54. See also equilibrium distribution, financing of, 5 division of labour: economic development and, 9; functional specialization and, xiii doctrines as functional specialty, xiii

dynamic analysis, xxii, 7, 53, 68 dynamic economics: and equilibrium, 103–4; macro- (see macroeconomic dynamics); static vs, 9–10, 54 Dynamic Economics (Roos), xxi, 123–4; BL’s notes on, 127–33 dynamic economy: cycles in, 55; interest and, xxi; mathematical specification of, 127 dynamics: of economic development, 134; of history, xxv, xxvi; intentionality analysis and, 52–3; of mind, xxiv–xxv ‘Econ. Phil, I, §5’ (Lonergan), 56, 68–9 Econometric Society, 127 economic activity: circular nature of, 55; dialectic of history and, 9 economic analysis, 53; and actual economies, 135; and baseball diagram, xxvii, 51; ethics of economics preferences vs, 53; and moral praxis, xxvii; and scarcity, 54; time factor in, 68. See also History of Economic Analysis (Schumpeter) economic crises, 127 economic cycles. See cycles economic development/expansion: and crashes, 5; and cultural development, 10; and division of labour, 9; dynamic flow of, 134; entrepreneur and, 135; equilibrium in, 104; and leisure, 9; and monetary circulation, 134; normative rhythms of, 4; production and, 122, 135; and saving, 150; and standard of living, 136; waves in, 123 economic history, xx, 72–101; pure theory of, xx, 56 economic liberalism. See liberalism Economic Organization (Knight), 55 economic phases, xxvii, 55, 104, 112 economic rhythms, xxii, 4, 9, 53 economic theory, xx; of Lonergan, ix– x, xx–xxi, 4, 8, 9, 51; Roos and, 127; Schumpeter and, xxii, 52 n. 8, 135

Index economics: dynamic vs static, 9–10, 54; ethics and, 73; inevitable laws of, xxvi, 6, 7; methodology, xx, 56–7; morality and, xxiii–xxiv; new, xxvii; normative vs positive, 53; philosophy of, 56; science of, x, xvi, xx–xxi, xxiv, 53–4, 56–65, 73; and social order, 74; technological progress and, 7 economy: as allocation of scarce resources, 73; and culture, 74; definition of, 53; and Depression, xxiii; expansion of, 112; just, xxiv; liberty and, 6; moral theology of, xxiii–xxiv, 73; natural order to, 73; planned, 5–6; regulation of, 112, 113; and standard of living, 53, 73; stationary, 112; world, 4–5 Einstein, Albert, 51 employment: full, 136. See also unemployment entrepreneurship, 135, 141 equilibrium: analysis, xxii, 102–3; economic phases and, 104; general (see general equilibrium); in growth economy, 104; Lonergan and, xxviii, 103–4; market (see market equilibrium); monetary circulation and, 111; partial, 103, 104; and profit, 55; sequence analysis for, 68; static, 103; static vs dynamic framework for, 54; supply and demand and, 104 equilibrium rate of interest, x, xxi, 56, 111–21, 123 ‘Equilibrium Rates of Interest’ (Lonergan), 119–21 ‘Essay Fragment’ (Lonergan), 56, 70–1 ‘Essay in Circulation Analysis’ (Lonergan), xxi–xxii, xxvii–xxviii, 4, 6, 9, 52, 72, 113, 123, 136, 151 ‘Essay in Fundamental Sociology’ (Lonergan), ix, xviii–xix, 6–7, 8–9, 10, 15–44, 56 An Essay on the Nature and Significance of Economic Science (Robbins), xx, 53–4; BL’s notes on, 56–65 ethics: of economic preferences, 53;

175

and economics, 73, 74; medical, xxiv. See also morality exchange(s): economic rhythms and, 53; economy, 103; operational, xxvii; redistributional, xxvii; and standard of living, 53 ‘For a New Political Economy’ (Lonergan), xxi, xxvii, xxviii, 7, 51–2, 55–6, 69, 105, 113, 123, 135–6, 151 For a New Political Economy (McShane), xxi, 124 formulations, pure, xxvii foundations as functional specialty, xiii, xiv free market, 114 freedom: and divine grace, 5; order and, xxv, xxvi Frisch, Ragnar, 127 functional specialization, xiii, xxviii general equilibrium, xviii, xxi, 52, 103, 104 General Theory (Keynes), 134, 141 ‘Gilbert Keith Chesterton’ (Lonergan), 8 good: and evil, xxvi; liberty and, 6; of order, 54, 74 government: central planning by, 5–6; economic centralization by, 151; spending, xxviii Grammar of Assent (Newman), xxiv Great Depression, xxiii, 4, 5, 150 Hayek, Friedrich A., x, 53, 54, 56; Monetary Theory and the Trade Cycle, x, xxi, 111–12; BL’s notes on, 113–19; Profits, Interest, and Investment, xxi, 123; BL’s notes on, 124–7; theory of circulation of money, 122–3 Hegel, Georg Wilhelm Friedrich, Philosophy of Right, 70 history: analytic concept of, xxv, xxvi– xxvii, xxvii–xxviii, 9–10, 47–50, 74; and Catholic theology, 72; dialectic of, ix, x, xxvi, xxvii, 3–50; differen-

176

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tial calcalus for, xxv; dynamics of, xxv, xxvi; economic, xx, 56, 72–101; as functional specialty, xiii; liberalism and, xxv, xxvi; Marxism and, xxv, xxvi; philosophy of, ix, xx, xxvi, 72 (see also ‘Essay in Fundamental Sociology’ (Lonergan)) History of Economic Analysis (Schumpeter), xxi, xxii, 72, 74 human sciences, method in, xxv–xxvi income: cycle of, xxviii; surplus, xxi, xxvii, 3–4, 123–4, 150 inflation, 112 innovation, 135, 136, 141 Insight (Lonergan), xv, xvi, xxvi, 5–6, 7, 8, 10, 53 intellectual development, 9 interdependence: of economic quantities, 112; of variables, xxiv interest: and credit creation, 112; and equilibrium, xxi; equilibrium rate of (see equilibrium rate of interest); monetary circulation and, 111; and unemployment, 136 interest rate: and credit creation, 114; prices and, 112; regulation of economy and, 112, 113; theory, xxi international trade, xxviii interpretation as functional specialty, xiii ‘Italian Mentality’ (Lonergan), 151, 157–9 Jevons, William, 53 John Paul II, Pope, 73 Juglar cycle, 136 just economy, xxiv just wage theory, xxiii, 74 Kalecki, Mikal, 8 Das Kapital (Marx), 8 Keynes, John Maynard, xxi–xxii, 103, 134; General Theory, 134, 141 Kitchin cycle, 136 Knight, Frank, 54; Economic

Organization, 55; Risk, Uncertainty, and Profit, xx, 55, 69; BL’s notes on, 65–8 Kondratieff cycle, 136 labour, condition of, 73 laissez-faire capitalism, 5, 73 law of diminishing returns, 104 law of diminishing utility, 104 Lehrbuch der Nationalökonomie (Pesch), ix–x, xx, xxii, 72–3; BL’s notes on, 74–101 leisure, 9 liberal-capitalist economics, xxvii liberalism: and history, xxv, xxvi; and liberty, xxv, 6; and monopoly, 66 liberty: central planning and, 5–6; and choice, 6; democracy and, xxv; economic, xxv, 6; and good, 6; liberalism and, xxv, 6; Marxism and, xxv; and order, xxv; and personal authenticity, 6; political, xxv; power of modern state and, 10; and progress, xxv, 5–6 Liddy, Richard, xv n. 13 Lindahl, Erik, 54; Studies in the Theory of Money and Capital, xx, 55–6; BL’s notes on, 68 logic, xxiv, xxv, 52–3 Lonergan, Bernard career: in Boston, xix; and Boston College, xviii, xxi, 137; as Catholic, x; changes of residence, xviii–xix; doctoral dissertation, xviii; doctoral studies, xix; at Gregorian University, Rome, 6, 15; at Harvard University, xix; at Heythrop College, xxiii, xxiv, 4, 52; intellectual development, xv; interest in economics vs theology, xxiii–xxiv; in Ireland and England, 12; in Italy, xviii–xix; Jesuit formation, 4, 12; in Montreal, xix; research of, ix–x, xiv–xv, xvii–xviii; return to Canada, xviii; during Second World War, xviii, xix, xxi; student years, xxiii; style, xv–xvi; theoretical

Index mind of, xvi; in Toronto, xix; two periods of work in economics, xviii notes, xvi, xix, xxii–xxiii; on Coyne, ‘National Economic Councils,’ 12–15; ‘Equilibrium Rates of Interest,’ 119–21; on Hayek, Monetary Theory and the Trade Cycle, 113–19; on Hayek, Profits, Interest, and Investment’, 124–7; on Knight, Risk, Uncertainty, and Profit, 65–8; on Lindahl, Studies in the Theory of Money and Capital, 68; ‘Market Equilibrium,’ 106–10; on Pesch, Lehrbuch der Nationalökonomie, 74– 101; ‘Price,’ 105–6; on Robbins, An Essay on the Nature and Significance of Economic Science, 56–65; on Roos, Dynamic Economics, 127–33; on Schumpeter, Business Cycles, 141–9; on Schumpeter, The Theory of Economic Development, 137–41; on Sumner, ‘Bequests of the Nineteenth Century,’ 10–11 papers/files, xv, xvi, xviii–xix, 4 reviews: of BL’s address ‘The Trend to Economic Centralization,’ 159– 61; of Coady, Masters of Their Own Destiny, 155–7 works: ‘Analytic Concept of History’ (Lonergan), 47–8, 74; ‘Analytic Concept of History, in Blurred Outline,’ 9–10, 47–50; Blandyke Papers, 6–7, 52; ‘Econ. Phil, I, §5,’ 56, 68–9; ‘Essay Fragment,’ 56, 70–1; ‘Essay in Circulation Analysis,’ xxi–xxii, xxvii–xxviii, 4, 6, 9, 52, 72, 113, 136, 151; ‘Essay in Fundamental Sociology,’ ix, xviii–xix, 6–7, 8–9, 10, 15–44, 56; ‘For a New Political Economy,’ xxvii, xxviii, 7, 51–2, 55–6, 69, 105, 113, 123, 135–6, 151; fragments, xvii; ‘Gilbert Keith Chesterton,’ 8; Insight, xv, xvi, xxvi, 5–6, 7, 8, 10, 53; ‘Italian Mentality,’ 151, 157–9; Macroeonomic Dynamics, xviii;

177

Method in Theology, xiii, xvi, xxvi, 6, 53; ‘A Method of Independent Circulation Analysis,’ 122, 123, 133, 136; ‘Moral Theology and the Human Sciences,’ xxiii; ‘National Mentalities of Europe,’ 151; ‘Outline of an Analytic Conception of History,’ 9, 44–7; ‘Philosophy of History,’ 16–44; ‘Quebec’s Opportunity,’ 155–7; ‘Savings Certificates and Catholic Action,’ 150, 151–4; sources, xvii, xviii; Verbum, xv Lonergan centre, Toronto, xv Lonergan’s Discovery of the Science of Economics (Shute), x, xvi, xviii Lonergan’s Quest (Mathews), xv n. 13 macroeconomic dynamics, xvi, xvii, xxi, xxvi, xxix, 8, 123 Macroeonomic Dynamics (Lonergan), xviii macroeconomics, ix, xxviii, 56, 68 marginal revolution, 102 marginal utility theory, 102–3 market equilibrium, 103, 104; price and, xxi, 102–10 ‘Market Equilibrium’ (Lonergan), 106–10 Marshall, Alfred, 102, 103, 134 Marx, Karl, x, xxvii, 3, 7–8 Marxism, xxv, xxvi, 8, 73, 102, 150 Masters of Their Own Destiny (Coady), 151; BL’s review of, 155–7 Mathews, William, 52; Lonergan’s Quest, xv n. 13 McShane, Philip, xiv n. 5; For a New Political Economy, xxi medical ethics, xxiv mercantilism, ix–x, xx, 74 metaphysics, 7, 53 Method in Theology (Lonergan), xiii, xvi, xxvi, 6, 53 ‘A Method of Independent Circulation Analysis’ (Lonergan), 122, 123, 133, 136

178

Index

methodology, xvii, xxiv–xxv, 48; of economics, xxii, 56–7; in human sciences, xxv; philosophy of history and, 72; of Robbins, 56–7; scientific, xxv microeconomics, 103 Mill, John Stuart, xxiv–xxv, 52, 53, 55 Mises, Ludwig von, 111, 112 monetary circulation: and business cycle, 114; and control of economy, 112; and economic development, 134; and equilibrium, 111; physiocrats and, xxi; price and, 104; trends, xxviii; turnover and, xxi Monetary Theory and the Trade Cycle (Hayek), x, xxi, 111–12; BL’s notes on, 113–19 money: economic process and decisions regarding, 112; flows, 104; quantity theory of, x, xxi, 111–12, 114, 122; supply, and inflation, 112; velocity of, 122–33 monopoly, 66 moral theology: of economy, 73; and science, xxiii–xxiv ‘Moral Theology and the Human Sciences’ (Lonergan), xxiii morality: and culture, 7; and economics, xxiii–xxiv. See also ethics Morelli, Mark, xv n. 13 national economic councils, 5 ‘National Economic Councils’ (Coyne), 4, 5, 10, 12–15; BL’s notes on, 12–15 ‘National Mentalities of Europe’ (Lonergan), 151 nation-state, 5 neo-classical economics, 6, 10, 51, 52, 102, 104 Newman, John Henry, Grammar of Assent, xxiv Newton, Isaac, xv–xvi, xxviii, 51 operational exchange flows, xxvii

operative payments, 122 order. See social order Origins of Modern Science (Butterfield), xvi n. 16 ‘Outline of an Analytic Conception of History’ (Lonergan), 9, 44–7 partial equilibrium, 103, 104 Pesch, Heinrich, 5; Lehrbuch der Nationalökonomie, ix–x, xx, xxii, 72–3; BL’s notes on, 74–101 ‘Philosophy of History’ (Lonergan), 16–44 Philosophy of Right (Hegel), 70 physics, xxiii, 51 physiocracy, ix–x, xx–xxi, 52, 74 planned economies, 5–6 Plato, Republic, 16 political economy, xxvii, 51, 102. See also ‘For a New Political Economy’ (Lonergan); For a New Political Economy (McShane) ‘Price’ (Lonergan), 105–6 price(s): and circulation analysis, 104; cycle of, xxviii; and economic crises, 127; equilibrium, xxi, 102–10; and interest rate, 112; marginal utility theory and, 102–3; and market equilibrium, xxi, 102–10; quantity theory of money and, 114 probability theory, 66 production: and economic crises, 127; and economic expansion, 122, 135; innovative, xxii; investment in goods of, 112; and operational exchanges, xxvii; operative payments and, 122; physiocrats and, xxi; quantities of money and, 122; restriction of, 5; rhythms of, 9, 53, 103 n. 5, 104; shortvs long-term, 123; velocity of money and, 122–3 profit, 55; cycle and, 55; equilibrium and, 55; short- vs long-term production and, 123 Profits, Interest, and Investment (Hayek), xxi, 123; BL’s notes on, 124–7

Index progress, 7; liberty and, xxv, 5–6; technological, 7 Quadragesimo Anno, 5–6, 12, 73 ‘Quebec’s Opportunity’ (Lonergan), 155–7 Quesnay, François, xxi, 74 Reade, John Collingwood, 4–5 recessions, 111–12. See also Great Depression redistributional exchanges, xxvii Regiopolis College, 151 Republic (Plato), 16 research: as functional specialty, xiii, xiv; general, xvii; of Lonergan, xiv– xv; special, xvii rhythms: economic, xxii, 4, 9, 53; of exchange, 53; of production, 9, 53, 104. See also cycles Ricardo, David, 52, 74, 123, 134 Ricardo effect, 123 Risk, Uncertainty, and Profit (Knight), xx, 55, 69; BL’s notes on, 65–8 Robbins, Lionel, 73; An Essay on the Nature and Significance of Economic Science, xx, 53–4; BL’s notes on, 56–65 Robinson, Joan, 103 Robinson Crusoe analogy, 69 Roos, Charles F., 54, 127; Dynamic Economics, xxi, 123–4; BL’s notes on, 127–33 savings certificates, 150 ‘Savings Certificates and Catholic Action’ (Lonergan), 150, 151–4 scarcity, 53, 54, 73 Schumpeter, Joseph A., x, xxii, 54, 104, 127, 134–6; Business Cycles, xxii, 135–6; BL’s notes on, 141–9; History of Economic Analysis, xxi, xxii, 72, 74; The Theory of Economic Development, xxii, 135; BL’s notes on, 136–41 science(s): economic, x, xvi, xx–xxi, xxiv, 53–4, 56–65, 73; of economics, x, xvi, xxiv, 53–4, 56–65, 73; human,

179

method in, xxv–xxvi; ideological differences and, xxiv; method in, xxv; moral theology and, xxiii–xxiv Shute, Michael, Lonergan’s Discovery of the Science of Economics, x, xvi, xviii Smith, Adam, 52, 74 social credit theory, xxvi, 4, 5 social experimentation, xxiv social order: economics and, 74; freedom and, xxv, xxvi; good of, 54, 74; liberty and, xxv; real analysis and, xxvii socialism, 5, 74 solidarism/solidarity, 73, 74 St Francis Xavier University, 150–1 standard of living: as basic circuit of economy, 4; economic expansion and, 136; order and, 54; as proper end of economy, 53, 73; surplus income and, 3 static equilibrium, 54, 103 Stockholm school of economics, 114 Studies in the Theory of Money and Capital (Lindahl), xx, 55–6; BL’s notes on, 68 subsidiarity, 5, 12, 73 Summa Theologica (Thomas Aquinas), 6 Sumner, William Graham, ‘Bequests of the Nineteenth Century,’ 4, 5; BL’s notes on, 10–11 superposed circuits, xxviii supply and demand, 104 surplus: circuit of economy, xxvii, 4, 114; income, xxi, xxvii, 3–4, 123–4, 150; physiocrats and, xxii; and quantity of money, 114; value, 3 systematics as functional specialty, xiii tableau économique, xxi taxation: and economic circuits, xxviii; and money supply, 112 technology: and culture, 7; and economics, 7; and economy, 8 The Theory of Economic Development (Schumpeter), xxii, 135; BL’s notes on, 136–41

180

Index

Thomas Aquinas, xv, 5, 53, 73; Summa Theologica, 6 trade: international, xxviii; turnover, 123 trade cycle: monetary theory of, 111; pure economic cycle vs, xxvii; Ricardo effect and, 123; and unemployment, 136 ‘The Trend to Economic Centralization’ (Lonergan), review of, 159–61 Turgot, Anne Robert Jacques, xxi, 74 turnover: frequency, x, xxi, xxviii, 122–33; and interest rate theory, xxi; monetary circulation and, xxi; size of, 114, 122–3; trade, 123; velocity, xxi unemployment, 136 variables, dynamically interdependent, xxiv, xxv Verbum (Lonergan), xv

von Mises, Ludwig. See Mises, Ludwig von wages, Ricardo effect and, 123 Walras, Leon: and equilibrium theory, 102; and general equilibrium theory, 52, 103, 104; Lonergan and, 54; on market clearing, 111; Robbins and, 53; static framework of, 54 war bonds, 3, 150 Watt, Lewis, 8, 74; Capitalism and Morality, xxiii welfare state, 136 Wicksell, Knut: and equilibrium rate of interest, 112; and equilibrium theory, 102; and general equilibrium theory, 52, 103; Lindahl and, 68; Lonergan and, 54; Robbins and, 53 Wicksteed, Philip, 53 World Economic Conference, London (1933), 4