The Real Economy

Welcome...

The Real Incomes Approach (RIA) integrates microeconomic and macroeconomic considerations into a single model geared to the maximization of real income levels of individuals and economic units. As such it is distinct from conventional macroeconomic theory and practice based upon Keynesianism and Monetarism.

My work on RIA started in 1975 at roughly the same time as what came to be known as the Supply Side economics was being developed, but it remains distinct from this approach². In 1976, a very simple fact became evident to explain the relative economic inefficiencies and periodic economic and financial chaos that has accompanied "macroeconomic management". This it the reality that conventional macroeconomic theory and practice as exemplified by Keynesianism and Monetarism (KM) has no microeconomic foundations. This results in such KM policies being fair weather policies that "work" under broadly stable conditions but which are unable to address serious disturbances in commodity or financial markets without creating winners, losers and some who remain in a policy neutral impact state. In contrast, RIA was developed on the basis of microeconomic production analysis and a review of the constraints on performance imposed by population income distribution. As a result an economic theory and practice model was established to avoid the differentiation imposed by KM policies on the economic and financial status of economic and social constituents.

What is the challenge?

In simple terms the challenge facing us is to manage the economy in a way which sustains or increases real income levels and encourages an adequate distribution of real income between economic unit revenues, profits, shareholder dividends, individuals and families as employees, the self-employed and consumers. This is not what current policies achieve and to understand why this is the case a short review of the development of RIA is provided.

Initial work on RIA

The motivation to initiate work on RIA came in 1975 to address the failure of Keynesianism to manage slumpflation which was becoming an issue at that time following the international petroleum price shocks of the 1970s. It was evident that Keynesianism was associated with perverse policy decision outcomes in the sense of generating policy-induced implications for segments of the economy causing them to suffer outcomes which were neither reasonable nor required. For example a common outcome of policy decisions has been corporate failures, unemployment and house repossessions. Governments and economists have tended to dismiss such perversity by wrapping it up in a parcel on which they write "medicine", "belt-tightening", "austerity" or even "adjustment". However, in constitutional terms, when such events result directly from policy decisions they represent a form of arbitrary collateral damage. Where this damage affects people and economic units whose rational expectations might have excluded such possibilities then policy has somehow created victims. Circuitous discussions can arise when one considers the question of whether victims were irrational risk-takers of whether the victims suffer from irrational policy decisions³, but this misses the point. Just the possibility of such a state of affairs in the policy environment serves to raise several questions concerning the adequacy of macroeconomic policy. At the root, I am convinced that such perversity arose, and continues to arise, from an arbitrariness in decision-making caused in good measure from inadequacies in economic theory, analysis and therefore propositions leading to rough and ready outcomes. What was thrown up into high relief by the events of the 1970s and the exchanges between economists and policy makers was that the adequacy of economic theory, the models if you like, and policies based upon these, can only be judged in terms of the combined economic and distribution effects on the very people who elect governments to manage their affairs,

Since it is the electorate who pay both in terms of transactions in markets and in terms of having preferences satisfied government, it is evident that macroeconomic policy cannot operate as if it were aloof from the constitution of the country. Governance has a responsibility to ensure that all activities, including economic, contribute to the wellbeing of a population by safeguarding and upholding peoples' expectations of interpersonal social and economic behaviour, under the law, so that all benefit and the process be considered to be acceptable. Whereas economic considerations have become paramount in just about every international summit shaping the collaboration between countries, it is becoming increasingly apparent that where constitutional principles are undermined by macroeconomic decisions, or international market events, then this erodes confidence in the normal expectations of fair treatment of all segments of a population. This has significant constitutional implications on what sort of social and economic organization is deemed acceptable by the communities making up the nations of the United Kingdom.

Constitutional economics and public choice

Having developed RIA which possesses a specific property of assessing the contribution of policy and sector actors in satisfying constituency preferences it would appear that RIA supports constitutional economics. An issue arises however that does not undermine RIA's contribution but, rather, throws some doubt on the assumptions made by those who develop public choice models. If it is assumed that public choice models are ways to analyse the practical formation of ordered preferences in markets and voting behaviour through which preferences are satisfied then we enter a world of fantacy. This is because the constitutional models applied under the jealous manipulation of political parties is a fundamental reason why, in reality, there is very little public choice.

Technology, technique, learning & innovation

The reason KM policies have no microeconomic foundations is recognizable in the fact that the main texts of Keynesian and Monetarist schools can be characterised by the complete absense of reference to the main sources of economic growth and economic efficiency. These are technology, human techniques in applying technology, human learning and innovation.

Initial work on RIA

The motivation to initiate work on RIA came in 1975 to address the failure of Keynesianism to manage slumpflation which was becoming an issue at that time following the international petroleum price shocks of the 1970s. It was evident that Keynesianism was associated with perverse policy decision outcomes in the sense of generating policy-induced implications for segments of the economy causing them to suffer outcomes which were neither reasonable nor required. For example a common outcome of policy decisions has been corporate failures, unemployment and house repossessions. Governments and economists have tended to dismiss such perversity by wrapping it up in a parcel on which they write "medicine", "belt-tightening", "austerity" or even "adjustment". However, in constitutional terms, when such events result directly from policy decisions they represent a form of arbitrary collateral damage. Where this damage affects people and economic units whose rational expectations might have excluded such possibilities then policy has somehow created victims. Circuitous discussions can arise when one considers the question of whether victims were irrational risk-takers of whether the victims suffer from irrational policy decisions³, but this misses the point. Just the possibility of such a state of affairs in the policy environment serves to raise several questions concerning the adequacy of macroeconomic policy. At the root, I am convinced that such perversity arose, and continues to arise, from an arbitrariness in decision-making caused in good measure from inadequacies in economic theory, analysis and therefore propositions leading to rough and ready outcomes. What was thrown up into high relief by the events of the 1970s and the exchanges between economists and policy makers was that the adequacy of economic theory, the models if you like, and policies based upon these, can only be judged in terms of the combined economic and distribution effects on the very people who elect governments to manage their affairs in a rational manner. I have mentioned above that macroeconomic policy cannot operate as if it were aloof from the constitution of the country. Governance has a responsibility to ensure that all activities, including economic, contribute to the wellbeing of a population by safeguarding and upholding peoples' expectations of interpersonal social and economic behaviour, under the law, so that all benefit and the process be considered to be acceptable. Whereas economic considerations have become paramount in just about every international summit shaping the collaboration between countries, it is becoming increasingly apparent that where constitutional principles are undermined by macroeconomic decisions, or international market events, then this erodes confidence in the normal expectations of fair treatment of all segments of a population. This has significant constitutional implications on what sort of social and economic organization is deemed acceptable by the communities making up the nations of the United Kingdom.A persistent question which needs to be addressed to those whose preference it is to manage through monopoly intervention is just how ministers, economic planners and so-called independent interest rate setting committees, know what individual economic units, and people living within the economy, want to achieve. This question is fundamental since the very people charged with the responsibility to manage the economy serve, in theoretical terms at least, a governance formed to uphold the will of the people. Economics therefore has a fundamental constitutional dimension. It is paradoxical that for the most part, economists avoid consideration of this issue by, it would seem, considering constitution to be an issue of legislation, law or history. But the constitutional implications are central to the identification of better economic policy design.

Its the political economy, stupid

In delving into Real Incomes one faces the immediate issue of "political economy" as opposed just the "economy", that is, the need for the economy to run effectively in terms of serving a population, within a political system. During the last 20 years the phrase: Freedom, democracy and the rule of law" sums up for some what is required to keep the economy in line with constitutional objectives and avoid inequitable outcomes arising from economic activities. Unfortunately things are not that simple and there remains a lot of work to be done in the field of constitutional economics. A particularly complex issue is the dominant role of the motivations of political parties and politicians in influencing the degree to which sound constitutions meet or fail to meet public expectations, even in so-called democracies. One of the more interesting courses on "economic development" I attended as a student was a series of lectures by E. A. G. Robinson at Cambridge in 1967. In contrast to a course of Development Project Evaluation I attended in the same academic year, largely geared to financial assessment, Robinson emphasized the problems of getting the decision-makers, that is the politicians, to accept economic proposals. In the end the politician is looking at his own position and that of his party, first and foremost and no amount of economic logic will change that motivational priority. On top of that the politician needs to contend with the fact that in spite of the rhetoric, they know that until now, economic policies often end up with unexpected and often perverse outcomes for which politicians and their parties might have to pay a price.

Professional ethics?

On reflection, and after trying to apply economics in international, governmental and private domains I have become more aware of another perversity arising from the strange difficulties many economists have in admitting the that failures in policy are not always the fault of politicians or events or even God. Economists are protected by the fact that when some proposition is applied in the guise of policy by governments, the risks rest with the politicians and not the economists. In most other professions, for example civil engineering, if a bridge collapses it is usually traced to a failure in design, the fault of the engineer, or to materials procurement where political graft has caused reduction in qualities of materials specified and therefore used. Either way the allocation of responsibility is fairly clear. It is certainly true that economic policies fail often as a direct result of political party intervention or cherry picking to deflect the thrust of policy towards group or party-supporting-lobby interests. But the follow up analysis is never that clear with a frustrated electorate voting in another political party who, as if upholding a British tradition, will only take up governance to play act the same process but in the name of other declared objectives. In terms of professional ethics there is much to be desired in the field of economics for the profession to be required to distinguish more clearly what of proposals was substituted by tendentious inputs from politicians or even legislatures. The reason is that as a profession which helps shape decisions taken on behalf of the electorate by a government, then an ethical process is required whereby economists help the general public understand better the significance of political decisions, of any type, which could affect the outcomes. The fact that economists work closely with government and indeed are paid by them, does not mean that they have to abandon ethical standards when their advice is not followed. There is a need for open qualification of all political decisions in line with the rationale of freedom of information since this can raise the standards of review and debate and help more people understand what is being decided and why, in their name. If an economist does not feel sufficiently confident to work according to an ethic of clarifying the costs associated with alterations to proposals by politicians then the situation degenerates into one casting doubts on the value of the economic analysis applied and therefore on the competence of the economist concerned. It is common for economics to be associated with different "schools of thought" but which, under the intense partisan environment of British politics, degenerate into schools of "assertion". This does no one any good, least of all the electorate who are expected to distinguish between options.

One might have thought that the adoption of a new basis for macroeconomic management would have been associated with a removal of this destructive process. But while developing my thoughts on a Real Incomes Approach it became quite evident to me that Monetarism, which was becoming more widely discussed in the 1970s as the likely substitute for Keynesianism, was just as likely to deliver the same sorts of outcome perversities. Indeed, as things have turned out some 25 years later, like Keynesianism before it, Monetarism has had time to have undergone periods when theory could not explain events in a satisfactory manner and therefore policy was wanting. Both approaches, which in shorthand I call KM (Keynesian-Monetarist), have had negative constitutional implications for very similar reasons as discussed in this introduction.

The source material for this document includes work developed since 1975 and in particular six documents:

1. "Inflation, Its Control through Price Performance Fiscal Policy," McNeill H.W., Rio de Janeiro, 1976.

2. "Price Performance Fiscal Policy - A Real Incomes Approach", Hambrook Publishing Company (HPC), ISBN: 978-0-907833-00-4

3. Notes on Real Incomes Policy - An outline, McNeill, H.W., December, 1981, HPC, ISBN:978-0-907833-05-5

4. On the Problem of Technological Ignorance Amongst KM-Economists - Supply as demand, McNeill, H.W., December, 1981, HPC, ISBN: 978-0-907833-10-9

5. Price Fixing, Quotas and Restricted Markets - Free and constrained markets, McNeill, H.W., December, 1981, HPC, ISBN: 978-0-907833-15-4

6. Moral Philosophy and Political Economy - Individual preferences and the economic motivations, McNeill, H.W., December, 1981, HPC, ISBN: 978-0-907833-20-8

as well as from notes and observations extending the body of analysis during the last 25 years or so.

The Real Incomes Approach has been fashioned to account for constitutional issues in addition to economic issues and the main reference document used here is:

7. "The Briton's Quest for Freedom - Our unfinished journey...", McNeill, H.W., July, 2007, HPC, ISBN: 978-0-907833-01-7

Please note that this remains "work in progress" and some content may change or be split into two or more new sections designed to enhance clarity of exposition.

I welcome comments, questions, suggestions and feedback on the content from anyone who has an interest in this topic.

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