A Real Incomes Approach to macro prudential management
KM policies gain time and not traction. They provide a support for continued cash flow at an ever-increasing price.
This disastrous process can be summed up in the fact that since 1945 the purchasing power of the pound sterling has fallen by over 95%. No one in their right mind can claim that macroeconomic theory has provided the policy instruments and targets that sustain currency value by balancing money volumes to real output.
At the moment we are experiencing a decline in fundamental economic activity caused by lack of confidence in the future condition of the economy (read aggregate nominal income growth) and politicians and SMEs fret over the fact bankers will not lend. SMEs, it would seem, and politicians, are actually concerned that the economy is not heading further into debt; this extraordinary situation is a vivid demonstraion of the poverty of macroeconomic theory. Indeed the rounds of never-ending discussions where no one really comes down with firm predictive outcomes; the reality is that macroeconomic theory provides insufficient guidance. Is this caused by macroeconomic theory being too complicated to understand or in macroeconomic theory being incomplete; it is both.
If one takes the trouble to scan the principal Keynesian and Monetarist texts, and the public policy theory derived from them, one will note a perculair and fundamentally important ommission. We know that the vast majority of economic growth and well-being arises as a result of learning, technological innovation and refinement in technique and yet neither of these macroeconomic schools have a coherent theoretical basis nor policy structures for managing these central sources of real economic growth and stability. The talk is aggregate nominal demand, interest rates, money volume and employment, all treating the economy as a homogeneous black box with registers showing the state of each policy target.
Macroeconomic policy to encourage performance?
It was therefore a relief, in the late 1970s to find a new approach, Supply Side economics, calling attention to this significant but obvious oversight in the KM camp. But the concept of reducing tax as a means to encourage investment in higher performance and lower unit priced output is one whose success depends upon the specific reactions of management to lower marginal tax rates. Just like KM policies, Supply Side faced the challenge of having to configure policy instruments in order to sustain traction.
Under Reagan, Congress and pork barrel politics gave no serious thought to this and applied policies which had little to do with supply side, even although it was dubbed as such. The same self-intested chaos in Congress can be seen in the recent attempt to come to agreement on a coherenct and effective policy in handling the overal debt situation within the country and of government. It is the easiest strike to make to criticise politicians for such self-interested behaviour but the theory and practice of macroeconomics provices no coherent options that have traction. This is not a partisan or philosophical issue; the theoretical foundation is not there in KM theory nor in what has passed for the Supply Side.
Traction, that is, moving to positions in economic performance that meet with general approval can only be gained by balancing two elements of traction. One is the combination of technology, technique and learning and the other is managing preferences under a state of affairs marked by a diversity in constituent interests. Current macroeconomic theory and practice represent virtual deserts on these topics. In plain language one concerns the encouragement of optimised productive investment and operations development across a very diverse constiutuency by bringing constitutional economics more centre stage. The range of analytical and management tools to achieve this at the micro level are all there but macroeconomics lacks the equivalent links and means to enable managers to apply these on a consistent basis, largely because of one size fits all policies (interest rates, aggregate demand, taxation etc).
