The Real Economy

RIP-Real Incomes Policy
Thematic note

Getting rid of inflation

Hector McNeill¹
SEEL
17/11/2021

This note is part of a series as a sequel to the article, From nominal growth to stable real incomes. To place this note in context readers are encouraged to read this article before reading this note.

The reason I initiated the development of the Real Incomes Approach to Economics in 1975 was to get rid of inflation. At that time the international petroleum crisis had created slumpflation, the combination of high inflation with rising unemployment. Since we are teetering on a similar set of circumstances it is worth re-emphasizing RIP's role in controlling inflation.

Some gaps in conventional policies

The gaps in conventional macroeconomic policies were more than apparent in the mid-1970s through mid-1990s with the failure to combat slumpflation caused by the rapid rise in international petroleum prices. The reason for this failure was the mantra that "inflation is caused by excessive demand" when in reality it was quite the reverse. It was caused by cost-push inflation raising costs and therefore prices and decline in profits and the purchasing power of incomes. In summary the effect was a fall in real incomes of both companies and consumers.

Price Performance Policy

RIP has two macroeconomic policy instruments:

The PPR is a measure of progress of each economic unit in lowering the ratio between changes in output prices against variations in input costs. The PPL is a rebate on a basic levy according to the PPR values achieved. Economic units can manage their affairs to minimize the levy even to zero. In this way the macroeconomic policy is coordinated by the participatory development of companies and their work forces and not by largely arbitrary interest and debt targets.

RIP bases policy impact and success on the knowledge and calculations made by the economic actors thereby solving the calculation and knowledge problem in an operational structure that more closely approximates participatory constitutional economics.

Keynesian or monetarist instruments of interest rates, private or government borrowing could not solve this issue, in fact they would make things worse. The only effective response was input substitution and changes in technologies and techniques to enhance productivity.

The Real Incomes Approach regards economic growth as having to be established on a paradigm of more-for-less where more is real incomes and the less is resources consumed to generate that real income. This is to be achieved by providing incentives for better use of resources through innovation in technologies and human technique (See, "Tacit & explicit knowledge")

This is to be achieved applying policy instruments which economic actors (corporate ownership, managers and work forces) can manipulate to maximize immediate income and margins as a result of any investment. In this context, income constraint by work forces is also considered to be an investment in the sense that it is a time-base economy in costs. Physical investment is a time-based augmentation in productivity to compensate both the past work force constraint and future profits. The two are equivalent. Jospeh Schupeter observed that the significance of profit is that it is the guarantee of future activities (through investment) and of future employment (through a rational choice of technologies). In terms of policy, the Say model recognises the role of wage-earners in generating consumption, or what monetarists call demand. But there is a distinction, "consumption" is generated by increasingly efficienct supply side production enabling higher wages and moderated or lower unit prices whereas "demand" is increasingly generated by (exogenous) money supplies through debt, unaccompanied by rising productivity or rising wages; our current state of affairs.

The tax regime does not help

Notice that work force constraint and physical investment are considered to be equivalent with each justifying a return. However, corporate taxation places labour as a cost item when considering company accounts. As a result with a view to maximizing profits to maximize net-of-tax results, labour rates tend to be put on ice, sometimes over several years. During the last 40 years the buying back of own corporate shares by companies has become legal and has resulted in profits being replaced by share price as a corporate objective because executives and managers link their incomes to these levels through incentive schemes and share options. However, the notion of corporate productivity being measure by share price/earning ratio is no longer applicable because although share prices are booming as a result of quantitative easing (QE) actual productive investment and productivity are declining. As a result it is difficult to pay higher wages.

The current circumstances

With the breakdown in supply chains and shortages in availability of products, due to Covid, competition is insufficient to prevent companies taking advantage of shortages to raise prices. The German decision to delay authorization of NorthStream2 gas supplies is, it would seem, the result of US cash diplomacy coming to bear of specific agents in Germany leading to a rise in gas prices on the spot market. From what I understand, Saudi Arabia and other petroleum producers will deploy a petroleum price maintenance or rises in a perverse strategy to slow down the current growth in import economies. All of these factors aggregate to create a similar circumstance to 1975 or a form of slumpflation.

To create an escape velocity to run ahead of such dstructive strategies it is essential that macroeconomic policy becomes more proactive in accelerating our real growth though a process based primarily on rises in productivity and reducing inflation. In this way Price Performance Policy can help balance a more-for-less growth while raising the real incomes or both economic units and wage-earners.

¹ Hector McNeill is director of SEEL-Systems Engineering Economics Lab

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