The Real Incomes Approach - where's the beef?I have received one or two communications as well as questions which have cropped up at question sessions at the end of talks, all of which suggest that I need to make a more clear exposition as to the specific reasons why the Real Incomes Approach is distinct from Keynesianism and Monetarism. In addition, I appear to have given the impression that the Real Incomes Approach, as exemplified by Price Performance Fiscal Policy, is a version of Supply Side economics. So some people seem to be asking, "Where's the beef?"
There are aspects of the Real Incomes Approach which are difficult to appreciate from the standpoint of conventional economic theory as well as conventional policy practice. Indeed, for many, the approach is at first difficult to understand and to some extent counter-intuitive. However, I would contend that the counter-intuitive aspects are exactly those where the presumptions embedded in our conventional approaches to economics are deficient both in terms of theory and practice. I will not let this statement just hang there without a little more explanation. I can state that the areas of confusion in Keynesianism, Monetarism and the Supply Side relate to weak theoretical foundations relating to:
- what drives the economy
- a general under-estimation of the need to embed the motivations arising from the free expression of preferences on the part of management and consumers in shaping both policy instruments and targets
These two points can be summarised as a failure to incorporate sufficient considerations relating to constitutional economics within conventional economic theory applied in the policy domain. I think that this is because constitutional economics has tended to run in parallel to other approaches as opposed to becoming fully integrated. Indeed, the Real Incomes Approach is sometimes better understood from the standpoint of constitutional economics.
Arising from these points it can be stated that a lot of the excellent work advanced by the Cambridge economist Arthur Cecil Pigou 1 , relating to welfare economics and, in particular, externalities, has subsequently not been correctly applied because of unrealistics assumptions concerning the operation of supply and demand. By exploring this topic more thoroughly it is possible to point out shortcomings, all of which cause Keynesian, Monetarist and Supply Side policy instruments to lack traction and thereby generate externalities which I have referred to in other papers and articles as "perversities". Indeed, such policies are so poor that they generate unpredictable internal differential and sometimes damaging impacts. These should not be graced with an appeal to normality by calling them externalities to be accomodated through additional tinkering at the edges to "correct" them through levies, taxes or subsidies. Externalities are quite often a form of "collateral damage" arising from policies which are incapable of adjusting, in an appropriate fashion, to the natural diversity of the social and economic constituencies. It is better, in terms of setting out a foundation in the quest for better policy, to accept that these eventualities should be considered to be policy defects so as to force the focus back onto economic theory and practice.
In this context traction is the level of probability that a target variable will attain the values desired as a result of specific changes in some policy instrument. Traction therefore relates to a desirable state of affairs of improving the predictability of policy outcomes in terms of policy targets moving in the right direction and as far as necessary to satisfy the mutual preferences of managers, the workforce and consumers.
I will addressing all these points in three tutorial sections, downloadable papers (including some quite old ones) and in three separate articles. I hope to post these around 10th July, 2008.
1 Arthur Cecil Pigou was a Cambridge trained economist who was born 18th November, 1877, at Beachlands (Ryde) on the Isle of Wight and he died 7th March, 1959 in Cambridge.
Posted 30th June, 2008.
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