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CURRENT EMPHASIS IS ON MACROECONOMIC POLICY, OTHER DOMAINS BEING ADDED TO AS ISSUES SECTIONS COMPLETED

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Introduction - Back to the Future - I  / Forum feedback

Boolean Library - What is the Real Incomes Approach to Economics? / Forum feedback

Back to the Future - II  / Forum feedback

A Real Incomes analysis concerning the question of wage settlements & inflation -in preparation


Not a change in the physical production model, rather understading how to improve its contribution to society

This short introduction is to point out that the recovery of the British economy requires a paradigm shift involving the mechanisms within the economy that operate to generate wellbeing and social harmony.

As human endeavour works out more efficient ways of producing products and services, there is a transformative process combining learning by doing accumulating experience associated with the identification of innovations that further refine the utility of output. Associated with the process of innovation and increasing efficiency, it is possible to deliver products and services having used less material and shorter human inputs, involving fewer mistakes and waste and reducing unit costs. This entrepreurial process was that described as the model of how the economy functioned in 1831 by the French economist Jean-Baptiste Say, pictured on the left. It needs to be stated that Say was not an academic economist but in fact had broad involvement in trade and he was a businesman who owned a large spinning factiory in Auchy-lè-Hesdin in the Pas de Calais which employed around 500 people

Entrepreneur: An entrepreneur is a person from any activity who identifies and excutes opportunities to make use of resources in a more efficient way.

Innovation: An innovation is when a task is executed in a different way in a specific location for the first time.
The critical role of wages in demand

The result of this entrpreneurial process is a capability to reduce unit prices to ensure that they are accessible to the fullest range of incomes of the population so this relative price deflation makes possible a generalised rise in real incomes because more can be purchased for any given disposable income. Because the "cost of living" under such a regime
"It is not so much that operations people in production companies don't know how to innovate, the financial conditions imposed usually raise the risk to levels that demotivate a large number of potential entrepreneurs"

To say that entrepreneurs can only innovate by taking risks is greatly exaggerated"

"The Real Incomes Approach provides the means for companies to initiate a sustained process of entrepreneurial innovation to raise real wages and demand while minimizing commercial risks"

Hector W. McNeill
remains stable or declines, the levels of consumption for essential basic as well as preferred products and services rises so what is referred to as "demand" is, in reality, a function of real wages, productivity and price setting. The more costs declne through innovation, the easier it is to lower unit prices to gain more market share as a result of the impact on the level of real wages, consumption and, therefore final demand.

Such a process is an economic growth path driven by a continual rise in productivity and appropriate price setting.

Like the other industrialist, Henry Ford,
Ford
Say pointed out that wage levels establish demand levels. When Ford was asked why he paid his work force more than competing companies, he reasoned that in this way they would be able to purchase the cars manufactured by his company. Today, we see the impact of miniaturization and lower power consumption in the information technology (IT) domain which while increasing the logical procesing power devices cost less enabling a widespread accessibility of IT devices at lower prices.

The promise of this process is the ability to lower unit prices so that the purchasing power of incomes rises.

The Aggregate Demand (AD) paradigm has had poor results



Innovation in a AD world

The recent failure of the Silicon Valley Bank is a good transparent example of how the Aggregate Demand paradign based on the flawed Quantity Theory, results in central banks raising interest rates to "contain" inflation. As should be apparent, inflation is best reduced through innovation and raised productivity. However, the erroneous logic of the Quantity Theory results in monetary policy undermining the very institutions that support innovation.

Under the AD macroeconomic policy framework entrepreneurs face a double jeopardy in attempting to bring about innovation:
  1. The conditions demanded by the bank;
  2. The constant uncertainty of central bank decisions.
The result is that many who are more aware of the risks impose by the bank and government desist from taking on such unacceptable risks.
Over the last 78 years,the principal expressions of the AD paradigm, Keynesianism, Monetarism and Supply Side Ecomnomics have resulted in declining investment, productivity and real wages and a movement away from the Say model. The world centres of indusry & manufacturing have moved from the USA, UK and Europe to those countries that champion the Say model in East and South East Asia. China alone, in 2023, now has a larger industrial sector than the USA, UK and Europe combined.

The significance of onshore industry and manufacturing

As recounted in the issues page, the larger the industrial and manufacturing sectors the more of the innovation in that sector can bedisseminated to other sectors in the form of more effective, lower cost machines, equipment and devices used in agriculture, mining, other manufacturing activities and services. Since such products are made only in the industrial and manufacturing sectors the source of national economic growth through innovation is generated by the industrial and manufacturing sectors. As the industrial and manufacturing sectors decline in size so does national innovation and derived growth from that sector's impact on the rest of the economy.

The impact of post-1975 globalization

Between 1975 to 2023 the balance of payments for British industrial and manufactured products rapidly declined causing the country to lose its ability to originate and disseminate its productive innovation and efficiency to the rest of the economy.


Logical low risk innovation procedures


Given the high level of risk associated with finance in the AD environment, see Box 1, there is an urgency to bring about rapid change in productivity arising from advances in technologies and technique while reducing risk. This would avoid an emphasis on long term projects starting off with research in academic organizations but would emphasize "shop floor innovation" (SFI) that introduces operational advances in an incremental and very low risk manner. This avoids the risks associated with ambitious projects.

SFI has the benefit of experienced people learning on the job and becoming increasingly proficient resulting in definite measurable advances in productivity.

The Real Incomes Approach, policy, Price Performance Policy provides incentives to help companies increase productivity, sustain highly competitive prices while avoiding exposure to financial risk. The detail of the business rules under such a policy will be set out later in this "potential solutions" page.
Monetary flows that originally went to well-paid onshore activities, were increasingly diverted to imports resulting in rises in the wages paid to foreign employees in offshore plants.

Therefore, although businesses investing offshore raised their own profits and justified this in terms on lower prices of imports, the opportunity cost to the nation in terms of the loss of onshore innovation and income for the industrial and manufacturing sectors has had a devastating impact.

Basic requirements to recover industry and manufacturing

Today, the British economy is largely concerned with logistics of information, financial assets and imported products, constituting a nation of service providers, shop keepers and servants. However, the general capacity of the population and the industrial and manufacturing sector to produce goods that others need in other countries at competitive prices has been drastically diminished.

The argument that financial services help to balance poorly performing balance of payments in goods misses the whole point referred to above that the fundamental contribution of industry and manufacturing to innovation in all sectors of the economy and therefore to a self sustained economy has been lost. This is not a new conversation. Nicholas Kaldor, Professor of Economics at Cambridge University, made this point in his inaugural lecture in 1966. In 1975, when UK macroeconomic policy gave more emphasis to monetarism, Kaldor warned that the United Kingdom would end up as we have ended up. Kaldor was fully aware of the imperative of innovation in technology to Britain's future wellbeing having studied the


Shop Floor Innovation

Shop floor innovation is the process of in situ operational change arising from those operating a system identifying ways to improve the effectiveness of a process in terms of speed, waste and error reduction, improved energy efficiency, less worker input time and a constantly refined and improved product or service.

This requires changes in the organization of production, the participation of labour in production suggestions and change as well as agreements on the relationships between the increases in human productivity and the share in income resulting from improved overall performance.

Such agreements should be, in essence, productivity agreements which ensure a mutual benefit in the form of real incomes of shareholders, management and the workforce as well as the real value of profits.

There is little doubt that this can only be possible is there is in place a macroeconomic framework that provide incentives designed to lower the risks associated with the innovations introduced for all concerned.
contribution of technology to economic growth.

If I might reduce this issue to a few key points that cause the gaps in the provisions of our economy I would refer to a statement by Henry Ford, "A business that makes nothing but money is a poor business". Financial services, of course, have a role in the economy but cannot be relied upon to create employment with wages that sustain demand at levels for enabling industry and manufacturing to thrive.


The needed "fiscal policy" revolution

Fiscal policy is generally involved in a government revenue-seeking process. This is normally operated through taxation and levies used to raise revenue for public expenditures. However, the collection of money is also used as a side arm for monetary policy to augment the effects of monetary policy in raising or reducing disposable incomes and consumption. This is because taxation has a more direct quantitative impact of absolute disposable incomes whereas changes in interest rates have an impact that is lagged and has a varying impact according to constituent group. However, in both cases the association between inflation and money volumes or aggregate disposable incomes in based the flawed monetary theory applied under the AD concept.

Corporate taxation is determined by corporate accounts which divide items, in general terms, into production input costs, income from sold output, profits and tax obligation. Labour is classed as a production cost and therefore remains in tension with profits, ownership (shareholder) dividends and management salaries. Since management decides on the assignment of funds to production operations and decides wage levels to be offered (within any legal norms), labour payments are lower down on the management priority lists. The corporate taxation/accountancy complex is a problematic domain for the prospects of labour.

The macroeconomic framework needs to be able to support the ability of policy instruments to provide incentives for there to be a greater focus on innovations and competitivity which creates a mutual collaboration in generating mutual benefit as a result of the energy and vision of the labour force and management working in close collaboration.

This introduction is not a political statement made to denigrate financial services or even the ill-founded AD paradigm. The purpose of this paper is to contribute in the spirit of yet another Henry Ford statements,"Don't find fault, find a remedy; anyone can criticize"."

There seems to be a tendency within the economics profession of having grouped themselves into "schools of thought" which tend to be hot houses of peer groups who generate copious volumes of theory and visions that cross reference the work of their peers. As a result, the views of how the economy works, within the economics profession remains confusing and characterized by conjecture.

As a systems engineer I find this inability of the profession to not have arrived at a consensus on this matter, extraordinary. Electrical engineers can design circuits of enormous complexity that work, water systems work as do transport systems because those involved in their design and construction have arrived a common understandings on the models they apply along with standard and metrics.

Given the serious state of affairs of our economy, it would seem that conjecture, assertion and promotion of visions without an understanding of the mechanisms whereby the economy operates, such as that explained by Say, it is important to concentrate on what will work because what has operated in the past has not been wholly beneficial. Henry Ford again, the man concerned with producing useful products summed this up in this way, "Vision without execution is just hallucination."

This might appear to be highly critical of economists, however, I include myself in this struggle we all face for clarity so as to come up with practical solutions to our common predicament. The work I present under the general rubric of the Real Incomes Approach is the result of over 43 years development work but it is not me. It stands by itself subject to analysis and criticism as a basis to improve it or even to abandon it for as yet unidentified by more promising options. Having spent some time on this approach I am confident that our solution does not lie in the domain of the Aggregate Demand paradigm but rather in the territory of the Say model which has a track record of rapid growth and industrial diversification of the economy compared with AD's industrial decline. The Real Incomes Approach is based on the Production, Accessibility & Consumption paradigm, a modification of Say's Economic Treatise sub-heading.

A text prepared by the Boolean Library follows has been updated to reflect advances in the state of knowledge of the Real Incomes Approach.

This paper is slightly more technical and I therefore ask that anyone wishing clarifications on any part to please send in queries to the forum at:

forum@uk-independents.com

or direct to me at:

hector.mcneill@realincomes.org.uk


Forum feedback on: "Back to the Future - I"

Questions:

Posted: 25/03/2023

Information is added according to progress in reading content of relevant papers, notes, and existing working documents.

As a result the completion of replies can be piecemeal as information is collected, analysed and added.

Questions
Replies
1. Given this necessary change in application of the working population which currently does not possess the required skills, what are the implications here for the national educational system from primary through to higher education?






Online course on the Real Incomes Approach to Economics



Further information on the Real Incomes Approach can be found at

Cambridge Economics Network

and at the

British Strategic Review


Note 22/03/2023:  This is an updated version of an original paper prepared by the Boolean Library. This version takes into account suggestions provided by H. W. McNeill of SEEL-Stystems Engineering Economics Lab to adjust content to the current state of knowledge concerning the Real Incomes Approach.



The stagflation crisis 1973-1993

In 1973 the Organization of Petroleum Exporting Countries imposed sanctions on the major petroleum importers by raising the international price of petroleum.

This gave rise to stagflation, the combination of inflation and rising unemployment. Conventional economic theory and derived policies of Keynesianism and monetarism possessed no policy instruments to combat stagflation. All possible scenarios where the following instruments could be applied would create prejudice for constituents:
  • Raising or lowering interest rates
  • Injecting more funds into the economy or discouraging lending
  • Government borrowing and expenditure
  • Taxation to alter disposable incomes
3P-Price Performance Policy

What is described in this section is a general macroeconomic policy referred to as Price Performance Policy or 3P which can affect all sectors. 3P has the intent of encouraging reduction or moderation in price setting to enhance the purchasing power of wages and thereby raise real wages and total demand while alleviating cost of living issues. 3P facilitates this on a sustained basis by establishing an operational environment of incentives for sets all sectors off on a path of continuous rising productivity the enhancement in real incomes benefits the workforce as employees as well as consumers and also raises corporate ownership real incomes.

It is therefore relevant to a levelling-up policy able to reduce poverty through real growth as well as contribute to the reduction in income disparity between regions of the United Kingdom.
In 1975, the economist Hector Wetherell McNeill aware of these drawbacks, reviewed economic theory and policy propositions to identify a way to tackle stagflation.

By 1976 (See Note 1), this effort resulted in a set of observations and logical principles that explained why conventional instruments could not solve the stagflation issue.
A sustainable industrial policy

Governments are not good at selecting activities and sectors requiring development. This is best left to management and works forces within a macroeconomic regulatory framework that provides companies and work forces with the incentives to raise productivity with the objective of generating mutual growth in real profits and wages. Such a policy needs to remain vigilant to avoid policy increasing the risks to entrepreneurs wishing to introduce innovations to raise productivity.

Rather than introducing red tape, policy incentives need to provide companies with the freedom to allocate resources to maximize their contribution of real incomes for corporate ownership and the workforces both as employees and as consumers.

The process should also support a development of more-for-less production systems in order to reduce costs as well as reduce the pressure on natural resources including GHG emissions. Productivity is central to this mission.
All conventional instruments under what is an Aggregate Demand (AD) paradigm (See Note 2) assume that inflation is a demand-pull phenomenon. As a result, all of the policy instruments are designed to manage the economy on the basis of the management of aggregate demand which was and is equated with the amount on money in the economy.
Nicholas Kaldor & British Industry

In 1966, in his inaugural lecture as Professor of Economics at the University of Cambridge, Nicholas Kaldor explained the importance of an industrial policy to Britain's economic survival.

All of the gadgets, machines and devices used by all sectors of the economy come from industrial and manufacturing sector. Therefore the productivity of all sectors depends to a large extent on the productivity enhancement capabilities of industrial output. Therefore the core of national economic innovation and development lies in the maintenance of a productive and efficient industrial sector.

Kaldor predicted that the advent of monetarism dominating UK macroeconomic policy in 1975 spelled the decline in the UK economy because national industry and manufacturing would be undermined over time. His predictions proved to be correct.

The reason was that a lack of perception of the nature of real incomes depending on productivity and price setting, increasing amounts of UK investment went offshore and investment and productivity in the UK industrial and manufacturing declined along with real wages, creating the depressed zones so often referred now referred to as in need of "leveling up".

Although asset holders and investors state that offshore manufacturing brings cheaper imports and therefore lowers the cost of living, the associated cost is the decline in UK industrial output and income from export earnings and thr associated decline in real wages and rising income disparity associated with increasing levels of poverty. This is the current state of many in the BRitish economy today and this is a measure of the real associated impact of offshore investments.
McNeill pointed out that inflation, in the circumstances of 1975, was almost entirely cost-push (rising petroleum prices) and therefore required supply side solutions targeting unit costs and, in particular incentives for companies to change aspects of production including substitution of cost-raising inputs and actions to change technologies and techniques to increase productivity to control or reduce unit costs and thereby reduce the rate of rises in output prices or even to reduce them.

McNeill observed that conventional policies were not able to maintain traction in the sense that whereas inflation might be a target, invariably other states would change, so as to become of more significance than inflation, such as unemployment, the balance of payments, exchange rates, purchasing power of the currency, real income levels or real income distribution. Although this results in changes in policy targets, McNeill called attention to the fact that the unique policy target indicator of such events, in each case, remains the state of real incomes. By focusing on real incomes the necessary adjustments in any policy instruments become more evident. He therefore posited that by establishing real incomes as the policy objective across all sector operations and for constituents that:
  • It becomes easier to manage this at the macroeconomic level;
  • Policy traction (See Note 3) would become more effective.
With real growth, the zero-sum nature of conventional policies (generating winners, losers and some who remain in a policy neutral impact state) could be replaced by an evolving state of a positive systemic consistency (See Note 4) where all constituents experience a consistent rise in real incomes.

However, there was still the challenge of identifying the specific policy instruments able to bring the objective of stabilizing or raising real incomes a reality. The problem with the existing set of policy instruments was that their only effect was, and is, on the volume of money or aggregate disposable incomes since Keynesianism and monetarism were both aggregate demand management (AD) based. However, there were no mechanisms or cause and effect relationships within AD model to generate rises in real incomes. There existed a faith in "the market" and "competition" in bringing about investment and innovation.

Innovation victim of easy returns

The assumption made by supporters of Supply Side Economics is that lowering of marginal tax rates for high end earners might result in more investment. However, as money is made available at lower interest rates it becomes easier to make higher returns with less assumed risk by "investing" in assets as opposed to "risking" any innovative investment in the production system with less certain returns.

McNeill observed that under stagflation all of the existing policy instruments exacerbated the state of affairs by depressing the economy. He therefore devised a mechanism to augment innovation and productivity over the medium to long term while bringing the benefits of this innovation trajectory in the form of lower unit prices in the short term in a parallel process.

The Price Performance Ratio - PPR

Most economists consider the investment and productivity cycle to be a medium to long term affair after which the benefits in terms of productivity achieving lower unit costs resultes in the setting of more competitive prices feasible. However, then (1970s-1980s), as now (2022-2023), the urgency lies in the need to lower unit prices in the short term to gain an immediate and generalized gain in purchasing power for constituents. The mechainism for such a change is the need for a simultaneous combination of changes in physical productivity and in price performance. To structure these productivity components into a single indicators on performance, McNeill developed the performance indicator of the Price Performance Ratio - PPR which measures the degree to which unit output prices change in response to changes in aggregate unit input costs.

Therefore in simple terms the Price Performance Ratio is estimated using the flowing formula:

PPR =  δUP
  δUC
Where:

PPR is the Price Performance Ratio;
δ UP is the rise in unit price;
δ UC is the rise in aggregate unit cost;
aggregate unit cost is the is the sum total of all variable inputs contributing to unit costs.

The objective of the PPR  is to create a direct relationship between price performance (competivity) improvements to the performance of physical productivity improvements. This has different impacts on the resulting state of consumer real incomes and corporate margins.

In terms of real incomes policy the PPR has the following associations in relation to buyers of outputs (consumers):

Consumer real income impacts of PPR values
PPR value
Affect on inflation
Affect on consumer real incomes
> 1.00
Inflation increases
Real incomes fall faster
= 1.00
Inflation remains the same
Real incomes fall
< 1.00
Inflation falls
Real incomes rise

Therefore consumers and the workforce gains from the state of affairs when the PPR is less than one. In terms of real incomes policy the PPR has the following associations in relation to corporate margins of producers:

Corporate margin impacts of PPR values
PPR value
Affect on inflation
Affect on corporate margins
> 1.00
Inflation increases
Margins increase
= 1.00
Inflation remains the same
Margins remain stable
< 1.00
Inflation falls
Margins fall

In this case, companies lose out is PPRs are less than unity (1.00). It is evident that there is a tension between the policy objective of raising consumer real incomes by lowering inflation and the impact of this state of affairs of lowering corporate margins in the short term.

However, under inflationary conditions the price elasticity of demand for products and services, that maintain prices below the rate of inflation, increases significantly. This results in corporate growth as a result of increased consumption and market penetration. However, if companies can raise their productivity sufficiently they can, in many cases, lower unit prices resulting in an even faster rate of market penetration.

Supply side factor market business-to-business and business-to-consumer supply chain impacts

The relationships between goods and service inflation and consumer real incomes are as described above. However, in the case of industrial and manufacturing capital goods, equipment and infrastructure the lower PPRs associated with moderated or reduced prices of suppliers can augment margins of those purchasing such goods as a result of lower variable input and capital goods prices. Therefore, the analysis set out above is less stark and industrial and manufacturing productivity can contribute significantly to the productivity of supply side goods and service activities.

Margin impacts of capital goods & variable inputs on margins associated with PPR values
PPR value
Affect on corporate input costs
Affect on corporate margins
> 1.00
Inflation increases
Margins increase
= 1.00
Inflation remains the same
Margins remain stable
< 1.00
Inflation falls
Margins rise


Therefore where consumers of industrial or manufacturing companies are the customers of companies that have PPRs of less than unity they gain an advantage. However the companies supplying consumers and other industries and who achieve PPRs lower than unity, there is a reduction in margins but possibly an associated rise in market share resulting from relativelty lower prices.
It therefore becomes evident that industry and manufacturing capital goods and variable input production PPRs have an important contribution to supply side production of consumer goods and services. Indeed, the efficiency and level of capital goods and variable input prices as well as their design and utility in raising the efficiency and productivity of all economic sectors, has a vital role in supporting real incomes growth and real national economic growth.

Note on deflationary conditions

The above scenarios only relate to the conditions of inflation. Indeed, McNeill's initial proposal for 3P was only geared to this condition. However, Robin Matthews on reviewing a 1981 monograph on 3P noted that it is necessary to include the state of affairs for this policy under conditions of deflation. McNeill introduced the PPR formula for falling prices later (see Note 5) and this transformed 3P into a general macroeconomic policy as opposed to one only addressing inflationary conditions.

Whose real income?
Postitive systemic consistency

National accounts-based economics, budgeting AD monetary policy combine to creates a zero-sum situation where money moves arond the economy in such as way as to create income disparity. Policies tend to create winners, losers and those who somehow remain in a neutral policy impact state.
Pareto

This is because there is an inadeqate growth in productivity and price moderation resulting in someone's gain being represented by someone else's loss.

Economists often refer to a Pareto optimality in an economy where no one can gain more without someone else losing that same amount.

McNeill's Positive Systemic Consistency rejects such a situation as representing, in reality, optimality or efficiency. This might exist in a circumstance of stasis but this is virtually impossible other than ina severe depression because the economy is never, in fact, in equilibrium when there is innovation occuring because more is being produced for less. As a result, the efficient or optimial circumstance is where there is movement driven by innovation providing more for all.

In the context of Joseph Schumpter's observation that profits provide the guarantee of future activities and employment, McNeill introduced an overriding strategic national objective element to the purpose of a real incomes policy that remained consistent with the principle of upholding a state of positive systemic consistency by aiming to:
  1. Combat inflation by stabilizing and reversing unit price increases;
  2. Increase the real incomes of company owners, shareholders, management and the whole work force as labour & consumers;
  3. Increase international competition as measured by increasing the export of consumer and capital goods component of the balance of payments;
  4. Decrease the levels of income disparity associated with item 2;
  5. Be evolutionary so as to maintain traction by constantly improving productivity, price moderation and rises in real incomes;
  6. As a function of item 1 to stabilize or enhance the value of government revenue.
A policy instrument for sustained real incomes growth

Given the vast range of company activities spread across multiple sectors and involving multiple supply chains, and with each company facing a unique set of circumstances with respect to the technologies and techniques used and financial status, it is irrational to consider fixed policy instrument values, such as interest rates or tax rates can have any other effect than to introduce differentials in the ability of companies to respond to policy objectives.

Constitutional considerations

It is irrational to impose policy instruments that create winners, losers and those unaffected by policy. Even if this effect is relatively small it does have fundamental constitutional implications. These are that government in establishing regulations associated with economic policies should not prevent constituents as corporate owners, employees or self-employed from pursuing their real income objectives and the legal framework should also prevent constituents as corporate owners, employees or self-employed from constraining the ability of others to achieve their real incomes objectives. This summarizes to some extent the role of constitution in being able to provide conditions to support the interests of the state, community and each individual. McNeill coined the phrase, "positive systemic consistency" to represent that state where all benefit from policy and where the typical zero-sum game static balance sheet approach to policy is done away with.

The Price Performance Levy (PPL)
Price Performance Levy (PPL) periods

It is proposed that the PPL would be applied somewhat like Value Added Tax (VAT) on the basis of "Levy periods" these might have to vary according to economic sectors. Based on a resource of knowledge on corporate throughput and PPR performance, work is advancing on an IT-based continual calculation process where periods are replaced by a moving average PPR  which in reality greatly enhances the management calculations required for profitable price setting.



It is therefore imperative that policies maintain a consistent objective while allowing companies to adjust their activities freely to accord with their particular circumstances in order to maximize their real incomes. This creates a unique set of conditions for a real incomes policy to satisfy in order to be successful. The role of policy needs to be one of providing an incentive for companies to emphasize a better choice and allocation of capital goods and variable inputs so a to lower their PPRs in the production of goods and services. The incentive provided under this policy regime should therefore consist of a rebate on a levy applied according to the PPR achieved.
Becoming price-setters rather than price-takers

Microeconomics has a specific production theory known as "Marginal Cost pricing" where production is not extended beyond a specific point when marginal return is equal to marginal costs.

Under 3P rather than being price-takers and applying marginal cost pricing companies can become price-setters to establish a maximized benefit from market penetration and a growth in real incomes. Thus, those companies selling at the relatively lower prices for similar products will not only gain market share but their products will enhance the purchasing power of a growing proportion of consumers.
The levy (Price Performance Levy - PPL) can consist of a base rate (B), somewhat like a corporate tax, the levy paid depends upon the PPR achieved. The lower the PPR below 1.00 the greater the rebate. It is suggested that this levy should be designed to allow companies who have extremely low PPRs and very high productivity be permitted to enter a zero levy status. This, therefore, provides a very strong incentive for companies to orientate their investment, procurement and resources allocation to maximize their contribution to their own, and by default, consumer real incomes. To the degree that work forces are also the national consumers this policy not only raises their real incomes but generates an across the board incentive for real purchasing power rises and a more competitive economy.

The basic theory is that a PPL has a base rate B and a correctve formula based on the size of the PPR.

Examples of Price Performance Levy formulae

There are many ways to create PPL formulae combining the PPR and a basic levy (B) so as to create a lower levy estimate according to the level the PPR falls below unity (1.00). Depending upon the assesment of a manageable rate of PPL decline, formulae can intensify the impact of PPR values or make impacts more gradual. For example a "power" formulae can be of the following form:

PPL = B - (PPR)n

Where:

PPLis the Price Performance Levy to be paid;
B is the basic levy;
PPR is the Price Performance Ratio achieved during a PPL assessment Period.

The Real Incomes Approach provides for a very large range of options for applying PPLs to aggregate incomes according to the PPR. Below two types are discussed. The basic calculation of PPLs is to apply a corrective coefficient based on the PPR value to a Basic Levy expressed as a percentage e.g. 20%.

Power functions to intensify impact

When policy makers wish to change the intensity of size of the incentive to lower PPRs a power function can be used to calculate the PPL value. Thus the table below shows the effect of different PPR power functions on the size of the Levy to be applied to operational margins with a basic levy of 20%:

Some PPL power functions applied to a basic levy of 20%
The percentages indicate the levy to be paid according to the respective PPR
For comparison a conventional tax or flat tax can be assumed to be 20%

PPR power function
PPR1
PPR2
PPR3
PPR
PPL%
net aY%
PPL%
net aY%
PPL%
net aY%
0.00
0.00%
100.00%
0.00%
100.00
0.00%
100.00%
0.25
5.00%
95.00%
1.25%
98.75%
0.31%
99.69%
0.50
10.00%
90.00%
5.00%
95.00%
2.50%
97.50%
0.75
15.00%
85.00%
11.25%
88.75%
8.44%
91.56%
1.00
20.00%
80.00%
20.00%
80.00%
20.00%
80.00%
1.25
25.00%
75.00%
31.25%
68.75%
39.06%
60.94%

Key:
Benefit
Flat tax
Prejudice


In these scenarios it can be observed that the rebates increase as the PPR falls below unity (1.00). As the power increases from 1 to 3 the rebates rise for equivalent PPR values. It these cases, the rebates are equivalent to net Levy payments of between 0.31% and 15% while the rate of reduction is higher at the power 3.

Source: McNeill, H. W., "The Price Performance Levy",
Real Incomes Approach to Economics, APEurope, 2007.

based on McNeill, H. W., "Price Performance Fiscal Policy -
A Real Incomes Approach"
, INTERCOMEX, June, 1976.

Slide or i-d functions for graduated impact

Slide functions raise or lower the PPR value through simple addition or subtraction leading to gentler gradient of PPL values against PPR values.

Some i-d functions applied to a basic levy of 20%
The percentages indicate the levy to be paid according to the respective PPR
For comparison a conventional tax or flat tax can be assumed to be 20%

PPR
PPR i-c function
PPR+0.25
PPR
PPR-0.25
PPR
PPL%
net aY%
PPL%
net aY%
PPL%
net aY%
0.00
5.00%
95.00%
0.00%
100.00%
0.00%
100.00%
0.25
10.00%
90.00%
5.00%
95.00%
0.00%
100.00%
0.50
15.00%
85.00%
5.00%
95.00%
5.00%
95.00%
0.75
20.00%
80.00%
15.00%
85.00%
10.00%
90.00%
1.00
25.00%
75.00%
20.00%
80.00%
15.00%
85.00%
1.25
30.00%
70.00%
25.00%
75.00%
20.00%
80.00%

Key:
Benefit
Flat tax
Prejudice


As would be expected the slide function that increases the value of the PPR raises net tax above the basic 20% while theslide function that reduces the value of the PPR significantly reduces the net PPL paid.

Source: McNeill, H. W., "The Price Performance Levy",
Real Incomes Approach to Economics, APEurope, 2007.

based on McNeill, H. W., "Price Performance Fiscal Policy -
A Real Incomes Approach"
, INTERCOMEX, June, 1976.

A note on conventional and flat taxes

Government revenue-seeking

Under the real incomes policy of 3P where the PPL is deployed there is in fact no corporate taxation so the comparisons with conventional and flat taxes does not really compare equivalent situations but the advantage of 3P is evident.

The more effective 3P is in moderating prices and raising real incomes the receipts from the PPL will decline. However, in compensation, real purchasing power of the popultion will rise meaning that a rising proportion of products and services provided by government can be paid for either directly orthrough personal incomes tax. Naturally this would require, of course, reasonable rates of pay for employees made feasible by the more efficient allocation of resources and real income generation.

The legislation covering the division of funds assigned to shareholder, executive and labour forces is a topic for another paper in this series.
In order to provide a comparison of the relative impacts of Price Performance Levy formulae and conventional and flat taxes one can assume in the above tables that the flat tax or corporation tax is where the PPR values are ignored and the tax remains at 20%. The Real Incomes Approach sets out to compensate companies for their contribution to real incomes whereas flat taxes and conventional taxes are neutral to performance and pay no attention to the contribution of the company to the increase in real incomes. Accordingly irrespective of the performance of a company the tax rate remains the same. Thus a company undergoing significant growth in nominal terms and generating a high return and profits might also be operating in a non-competitive fashion and in fact be a generator of inflation and contributing to the reduction in real incomes. This company will, under a flat tax regime pay the same tax rate as a company investing and achieving higher performance in terms of contribution to real incomes.

Under a Price Performance Policy examples of the benefits accruing to companies who contribute to real incomes levels can be observed in the tables above and the accompanying graphs. Under the flat tax the net of tax is the remaining 80% of profits. In the case of 3P net of tax income can vary from 80%-100% of gross profits, that is, levies of between 0% and 20% for PPRs below unity (1.00).

Combining simultaneous price moderation or reduction with rising innovation & productivity

The past processes of innovation were in essence an involvement in the development of a series of increasingly refined prototypes. Until one was made that was decent enough to sell. From user reactions or even accidents, yet further refinements would be added as the volume of production and sales increased. This stepwise process involved quite often minor adjustments to prototypes such as tightening some fixture or altering some aspect of a device. As a result a good deal of the evolving innovation did not require finance, but rather, the concentration of effort to get some aspects of the desired changes right.

Today there is often the assumption made that innovation requires considerable financial investment and an ambitious project where everything has been detailed up to the final product. Even more notable, is that large amounts of money is sunk into science projects whose results are in fact unknown and success uncertain. However, they are supported because they hold out "promise".

Today we face a serious cost of living crisis which has been, to a large extent, policy-induced as a result of government policy makers' dedication to the AD model and the flawed Quantity Theory being applied as a basis for making decisions in the domain of monetary policy. There is an urgent need to combine advances in innovation with price reductions in close to real time with immediate delivery.

3P achieves this by maintaining a positive systems consistency by only providing PPL rebates in those cases where the desired result, moderated prices or reduced prices are achieved. Companies remain completely free to design the strategies and tactics applied to ahieve a lower PPR through judicious decisions and changes in operations productivity.

Normally investments leading to innovation and lower costs are undertaken with the objective of lowering prices only when the implemented changes achieve the desired costs reduction. Under 3P companies are encoureged to lower prices at the beginning of the investment period, before the costs reduction has been achieved, and then to dedicate effort to costs reduction via a series of means, to justify the price reduction in commercial terms. In the meantime, the company benefitsfrom the PPL rebate. There is no compulsion or control by government on how this is to be achieved. Companies are left to their own devices to set prices, procure, assign and allocate resources as they consider to be appropriate while taking any additional costs into account in the calculation of the PPR.

Income-price elasticity of consumption

The 3P policy environment requires that more attention is paid to the income-price elasticity of consumption of products and services (See Note 6). This entails analysing collected data on the relationship between the range of disposable incomes and then the range of price elasticities of consumption associated across this range in order to undertsand the "consumption schedules" to be expected with different unit prices. This provides a basis for determining the accessibility of products, according to price, to the population (See Note 7). This also provides a basis upon which to calculate potential volumes of sales associated with feasible prices. This provides a basis to select the most advantageous prices to be used in influencing the value of the PPR so as to maximise income within lower PPR bands.

Real time accounting

All of the calculations for periodic PPRs and PPLs occur in real time as opposed to annual accounts and tax payments. PPL is more like a VAT payment assessed on a regular basis.

Illustrations of scenarios generated by corporate responses to 3P

The diagram below illustrates the concept based on a Real Incomes Policy applying PPR and PPL policy instruments.

There are two diagrams one (A) in a stable price situation and in (B) rising input cost inflation requiring a price response.

The process of price reductions takes on a saw tooth ratchet appearance. So in each case starting with position b in each diagram there is a price drop to c which continues to d and then another price reduction to e whch continue to f and then drops again to g and then to h and a drop to i. According to the Learning Curve (Wright's Law) a diminimishing return to learning is shown with each drop being smaller. The differences between the price line AA in diagram A and AB is the gain is real growth and incomes arising from the process of price reductions. In diagram B the same sequence is shown but because input costs are rising, between each price reduction the company illustrated is coasting along maintaining a PPR of 1.00 between each price reduction so there is a see saw effect on prices. Because of the diminishing returns of the Learning Curve is can be seen that beyond point g prices begin to rise again. This indicates that relying solely on the learning curve might not be sufficient and the application of explicit knowledge, examining internal and external logistics and the applicatiomn of IT to manage data systems better need to come into play in an integrated fashion to secure raised efficiency and productivity to enable further price reductions.




Government revenue

Although, in terms of government revenue-seeking, in a growing economy this represents a decline in nominal revenue, unlike the case with supply side economics, the opportunity cost of that "lost revenue" is an immediate rise in real incomes across the economy arising from the increased purchasing power generated by lower unit prices.

Rather than analyse this from the normal budgetary basis it is important to measure the impact on national real income and the value of the currency (in terms of purchasing power) and to account for this impact in terms of budgetary expenditure also benefiting from an increased purchasing power of funds spent by the public sector.

Public sector performance

One of the other policy proposals that emerged during the period during which the Real Incomes Approach was developed is "supply side economics" a theory and policy largely developed by the Canadian economist Robert Mundell. Although, carrying the name "supply side economics" it is far less supply side oriented than the Real Incomes Approach. The basic theory is that by reducing marginal taxation rates in the higher bands there would be more money available for investment and raising productivity to facilitate price reduction and to combat inflation. Recalling the Real Incomes Policy objective of:
  1. Combating inflation by stabilizing and reversing unit price increases;
  2. Increasing the real incomes of company owners, shareholders, management and the whole work force;
  3. Increasing international competition as measured by increasing the export of consumer and capital goods component of the balance of payments;
  4. Decreasing the levels of income disparity associated with item 2;
  5. The policy needs to be create incentive to maintain a constant evolution in productivity and rises in real incomes so as to maintain traction;
  6. As a function of item 1 to stabilizing or enhancing the value of government revenue.
Supply side economics made no such provisions other than being associated, by some economists, with what became known as the Laffer Curve which simply traces out the revenue received against a range of taxation from 0 to 100%. Obviously this creates a revenue curve which increases up to a point in association with rising tax rates and then, beyond this point, declines for a range of reasons such as previous bands having removed all taxable margins or disposable incomes and because of an increasing motivation for people and companies to intentionally misreport earnings and accounting to reduce the amount of funds subject to taxation.

In terms of public sector budgets a policy that reduces tax without ensuring ways to enhance real growth is likely to end up with a deficit and raised borrowing requirement to maintain public expenditure are previous levels. On the other hand, "fiscal neutrality" might not be desired for ideological reasons with the aim to reduce public service budgets. The first experiment with this intent with supply side economics under the Conservative government of Margaret Thatcher was combined with such an intent to reduce the "public sector". In the USA, the Reagan administration carried out the same policy. In the cases of both countries there was a failure to secure any form of positive systemic consistency since income disparity rose with no equivalence between real income changes of company owners, shareholders, management and the whole work force. Higher income individuals experience a high growth rate in income and lower income segments far lower growth rates. In both the UK and US cases, supply side economics was combined with a policy of extremely high interest rates with the intent of applying the aggregate demand management reduction component while the taxation regime was augmenting, in theory, funds available for investment. It was these contradictory elements within a single policy framework that caused an initial recession as well as rise in unemployment. A predictable associated effect in both countries was a very significant rise in house repossessions in the UK and USA as well as family farm repossessions in the USA.

In most cases what were mortgages taken out in good faith and whose financial criteria and lender eligibility criteria were considered to be sound, were transformed into the equivalent to sub-prime mortgages as a direct result of government economic policies. This serious disruption, directly attributable to bad government decision making, was never considered to be a basis for government compensation for the prejudice suffered. These cases, as well as a large number of bankruptcies, loss of businesses and employment are the collateral damage of the combination of a fiscal policy variant called supply side economics and a monetary policy decision to raised interest rates to very high levels.

Supply side policy

McNeill considers the unfortunate combination of high interest rates with the supply side economics fiscal variant, ended up undermining the possible impact of supply side economics. As a result of the depressive impact and significantly reduced purchasing power of the middle to lower income segments prices and inflation did slowly adjust downwards. On the other hand any rises in productivity appear to have been temporary because the balance of payment in goods gained a little and then since this period has continued to decline in both countries. As a result it is reasonable to state that supply side combined with monetary principles failed all of the tests set out for Real Incomes Policy.

Traction

The fact that the United Kingdom has been unable to keep the balance of payments in goods in equilibrium or positive ove a period of over 40 years when this important indicators has constsntly declined, indicates a lack of policy traction. Since the change in policies from Keynesianism in 1975 to a dominance of monetarism and supply side economics gaining ground through the 1980s it is apparent that the real incomes of lower income groups have continued to decline. One reason for the lack of traction attributable to monetarism is that the Quantity Theory of Money, the basic identity showing what monetarists consider to explain the relationship between money volumes and prices, was shown by McNeill to have no logical coherence or value because it contains none of the variables which represent assets into which most of the funds released under quantitative easing flowed. McNeill created an alternative money theory referred to as the Real Money Theory. A slide sequence explaining the development of the RMT and its significance can be accessed here.


Notes:

Note 1:   McNeill, H. W., "Price Performance Fiscal Policy - A Real Incomes Approach" , INTERCOMEX (Intercâmbio Internacional de Mercadorias Ltda - International Commodity Exchange Limited), Rio de Janeiro, June 1976.

Note 2:   Formalised by John Maynard Keynes, the Aggregate Demand paradigm created an association between aggregate demand and employment. Monetarists linked aggregate demand to economic growth. The economic theories and policy practice that come under the general rubric of the Aggregate Demand paradignm include: Keynesianism, Monetarism, Supply Side Economics and Modern Monetary Theory.

Note 3:   Traction is the operational state of a policy where the objectives are attained to the desired degree within the stated time frame and budget.

Note 4:   Positive systemic consistency is the state where all constituents within an economic system are benefit from a policy unlike the notion of Pareto efficiency of the state that any person can only gain at the cost of another person. See "Positive systemic constistency"

Note 5:    A PPR for falling price, deflation, see: The Price Performance Ratio

Note 6:   Income-price elasticity of consumption introduced as stratification into what is generally assumed to be average price elasticity of consumption. This is animportant detail given the overall approach of the Real Incomes Approach bbeing based on the Production, Accessibility & Consumption paradigm.

Note 7:   Accessibility of products and services is an important consideration in the PAC model of the economy where accessibility refers to access to market information on a product or service, the accessibility of prices to disposable incomes and accessibility in terms of proximity to point of delivery and service.


Forum feedback on: "Boolean Library "What is the Real Incomes Approach to Economics?"

Questions:

Posted: 25/03/2023

Information is added according to progress in reading content of relevant papers, notes, and existing working documents.

As a result the completion of replies can be piecemeal as information is collected, analysed and added.

Questions
Replies
1. How is the PPR and PPL data collected?
2. What are the risks involved with respect to any possibilities of creative accounting?
3. Corporate taxation & accountancy rules are clearly biased against labour. Please explain in more detail how 3P eliminates this issue.
4. Please explain in more detail the required business rules that will enable managers and labour representatives to take appropriate decisions under 3P.
5. Please provide more information on the policy provisions with respect to the wage component at the net-PPL stages in each cycle.
6. Please provide some information on the role of personal taxation under 3P.
7. Will VAT still apply?



A policy-induced process has been returning us to a Dickensian Britain
with increasing income disparity & poverty .....






Why back to the future?

Charles Dickens 1806-1859 lived during the initial transition phases of the English Industrial Revolution. His works recount the precarious existence and abject poverty common amongst many living in those times.
How does policy create income disparity & poverty?

One of the questions to be sent to the UK-Independents Forum, questioned the frequent statement in documents issued under the Real Incomes Approach that the Quantity Theory under the Aggregate Demand policy paradigm actually creates income disparity and poverty. This is, of course, a controversial statement, but it is true.

The following content is an extract from "Monetary deception", British Strategic Review, Note 11 issued 1st November, 2022.

THE INCESSANT RISE IN INCOME DISPARITY
THE MARGINALIZATION OF WAGE-EARNERS

Income distribution impacts

The constitutional impact of financialization


Besides intensifying the decline in supply side production, investment and productivity, QE also sustained the decline in real wages. In assessing the impacts of QE, it became evident that this policy greatly benefited one section of the UK constituency made up of asset holders and traders while it prejudiced those working in supply side goods and service provisions in exchange for wages. Not only did QE greatly increase income disparity between these two groups the main reasons for this disparity became more evident.

The unit prices of goods and services are an important determinant of the real income or purchasing power of the incomes of all constituents. The purchasing power of the currency is determined by its innate exchange value for goods and services and this is determined by the relative levels and movements in prices. Thus, if prices of goods and services are in general falling the value of the currency rises because more real products and services can be purchased for a given disposable income. If prices of goods and services, in general rise, then the value of the currency falls because fewer real products and services can be purchases for the same disposable income. Therefore, inflation lowers the value of the currency and real incomes and deflation raises the value of the currency and real incomes. Unit prices of goods and services determine “real income”.

In Figure 1, the case of wage-earners is shown where price rises (moving from left to right) cause real incomes to decline. Thus, those with a higher nominal income R1R1 see their real income declines as goods and services prices rise. The situation with those on a lower nominal income R2R2 are in a far worse situation.

These conditions face all wage-earners under inflationary conditions and wage-earners make up around 95% of the working population and voters.

Input to supply side production of goods and services

As in the case of wage-earners the relationship of the interests of supply side production sectors is the same in that preference is given to lower input prices which affect production costs. Therefore, the relationship of companies to the prices of their resource inputs and capital equipment and all variable inputs is the same as consumers.

Asset holder and asset transaction constituent sources of income

On the other hand, the situation for asset holders and traders is shown in Figure 2. In this case, unlike wage-earners, real incomes rise in proportion to prices as indicated by the line ERR.

Asset markets are referred to as encapsulated markets in terms of their separation from the volumes of transactions occurring in the production and supply side goods and service markets. These markets also tend to be managed by a smaller proportion of the constituency involving less than 5% of the working population.

With large injections of funds, such as experienced under QE, these markets were characterized by rising speculative prices. As a result, the participants in these markets could make significant margins on transactions by simply holding on to the assets for a period of time so that their sales price rose.

Figure 1: Desirable policy impacts for wage-earners

Figure 2: Desirable policy impacts for asset holders & traders



As can be readily appreciated the participants in these markets, gain no advantage from falling prices in assets, simply because what they buy is the same as what they sell and the time factor, as opposed to effort, raises the sales price. Therefore, contrary to the state of affairs in goods and services markets the purchasing power of the monetary value of the asset holding is determined by an inverse relationship between assets and innate exchange values. Thus, if prices of assets are in general falling so does the income and wealth of asset holders. If asset prices rise so does the wealth and income of asset holders.

We can sell anything!

The rapid expansion of the NYMEX petroleum trades very much operated by manipulation of price by false intended trades at high or low bids meant that purchase pries were often not problematic because by pumping in more funds, losses could be covered by selling at the new generated prices. This gave rise to the claim that, "We can sell anything!" (see: Leah McGrath Goodman, "The Asylum: The Renegades Who Hijacked the World's Oil Market", 2011.).

A major spin off from this experience was hedge funds and increasing dealing in derivatives whose prices were manipulated in a similar fashion in a upwards sliding price model upon which "hedging" was based. One model was Black & Scholes hedging model first published in 1972. This bubble, created a Grey Market Bubble larger than national economies in what constitutes a Ponzi scheme, collapsed when for some reason "asset prices fall" as a result of interrupted income streams such as in the case of sub-prime mortgages such as in 2008.

As can be seen the dependency on productive investment productivity in goods and services was replaced by asset marker manipulations with money generating more money and an increasing concentration of wealth.
Inputs to asset trading

In the case of the inputs to asset trading, these are assets to be eventually sold. Based on the early experience in the New York Mercantile Exchange (NYMEX) starting in the 1970s, this was unlike supply side productive sectors, because input prices of assets have no particular impact on profitability because of the assumption of money injections maintaining a rise in values. Therefore, assets trading as well as asset-based income follow the same straight-line positive relationship with prices.

Why are these income lines different?

There is an important difference between wage-earners and asset-holders income responses to variations in the prices of goods and services or assets. In the case of income derived from assets the nominal and real incomes rise as a direct proportion to asset prices, therefore the relationship is a straight line. Quite often income paid in the form of bonuses are proportional to the success of individuals making trades which raise the value of assets held and/or sold. As a result, there is no limiting factor on income levels, they are directly proportional to asset prices.

In the case of wage-earners, wages tend to be fixed over time so rises in the prices of goods and services take up a curved line relationship because although the nominal income (number of currency units earned) is fixed it also becomes a limiting factor when prices rise. This is why the “cost of living” is a common factor in the political discourse of wage-earners.

The real income effects of income sources

Therefore, inflation raises the value of assets-based wealth and deflation lowers the value of assets-based wealth. Therefore, the relative benefits of price movements to constituents earning their incomes from asset transactions on the one hand, and the constituents who earn wages for contributing to the production of goods and services, on the other, have an inverse relationship.

This also represents very different sets of interests on the part of these constituents on the objectives of macroeconomic policy and the potential impacts on their relative interests, according to the policy instruments applied. There is, therefore, the fact that the real incomes of the majority of the population are safeguarded by policy securing stable or falling price in goods and services. On the other hand, there is a minority of constituents who deal in assets, whose real incomes are safeguarded by policies that facilitate the rising prices of assets.

Policy impacts on nominal and real income disparity

The British Strategic Review 2022, described how monetarism has had the tendency to drive up asset prices to the benefit of a minority of constituents. On the other hand, monetary policy has no policy instruments to influence wages even although monetarism and financialization has imposed a prolonged period of deficient investment in plant, equipment and training, and wages have tended to be frozen or adjusted infrequently. The leakage of asset prices through into supply side production inputs represent an increasing income from sales and rents to asset-handling constituents while these same transactions cause cost-push inflation resulting in rising unit prices of goods and services . This results in a decline in the real incomes of wage-earners. As a result, the average levels of assets-based income constituents rise at a faster rate than wage-earners whose real incomes often fall.

Income disparity, therefore, grows on a continuous basis as a direct function of monetary policy.

Constitutional implications of income sources

The constitutional implications of the differential impact of different income sources of income on the wellbeing of the constituents are that, as things stand, the results of monetarism over the last 50 years has been one of bias or discrimination against wage-earners. Policy has diminished the relative wellbeing of the majority, while enhancing the wellbeing of a minority. Naturally these circumstances signify that policy has augmented the extent of the differences in the needs of constituents and their demands in relation to economic policies. This impact is clearly at odds with what would normally be considered to be the constitutional objectives of permitting all constituents to pursue their objectives while preventing the pursuit of objectives by any constituent from preventing others pursue theirs. In this case, each group of constituents pursue their objectives but wage-earners face specific constraints imposed, not by asset holders and traders, but as a direct result of policies that place an emphasis on the injection of money into the economy.

In the context of universal suffrage, where all people over a specific age have the vote and, in theory, at least, voting leads to a public choice on policies, including economic, the majority of voters should be able to decide on policy matters in their mutual interest to be able to advance the wellbeing of all.




Introduction

For a prolonged period the British government and Bank of England have insisted that rises in wage levels will increase inflation and exacerbate the cost of living.

There is an argument that as unemployment falls, labour markets become "tight" so labour is able to demand higher wages and as a result this is why, statistics show that wage settlements are associated with lower unemployment levels. What is less part of this logic is that as inflation rises over time, wage settlements necessarily become higher to compensate for loss of real purchasing power.

This short paper examines the main arguments used by the government and Bank of England and reviews the implications with a view to setting out the founding constitutional economic principles to identify an operational framework devoid of such contention.

The Phillips Curve
The Relation between Unemployment & the Rate of Change
of Money Wage Rates in the United Kingdom, 1861-1957

Phillips
In 1958, Alban W. H. Phillips (1914-1975), published a paper in Economica entitled, "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957" in which he set out an inverse relationship graph. This shows the relationship between money wage changes and unemployment in the British economy, based on the data set for that period. The general relationship which came to be known as the "Phillips Curve" is shown on the left as P-C.

In statistical terms there is a coincidence between the level of unemployment and the levels of wage settlements. In general terms as unemployment falls the level of wage settlements rises.
Stagflation and the loss of coherence of the historic
Phillips Curve effect 1975-1990


Although this was the general relationship for the period concerned there was much variance i.e. data points not coinciding with the resultant curve, and since that time this relationship has broken down. The most obvious movement away from this curve occurred after the 1973 OPEC sanctions against petroleum importing countries through rises in petroleum prices in 1973. This gave rise to stagflation or the combination of high general inflation with rising unemployment. Today, we have a similar energy price crisis that also includes natural gas but caused by sanctions imposed by energy importers (USA, EU, UK and some others) on Russia and a refusal to import Russian petrochemicals in a globally tight energy market leading to signifiocant rises in prices.

The graph on the right illustrates the break down of the neat Phillips Curve into an indeterminate grey area making any reference to the original Phillips Curve of no particular use to policy decisio-making.

People as the shapers of economic principles or as factors of production

The whole discussion of economic theory and policy centres on the notion of what is best for people as constituents of the country. In this discussion, and the Phillips Curve is an example, there is the danger of forgetting that people are the reason why we are concerned with economic theory and policy therefore the role of people in the economy is of fundamwental importance in coming to rational conclusions on how policy should be shaped. The discussion surrounding the Phillips Curve is fundamentally about a "factor of production" that seems to have a life of its own because unlike other "factors of production" such as electronic components, steel, coal and commodities, it actually makes demands concerning its price or in this case, income. The reason for this is self-evident, in modern economies income is used tby people to gain access to the basic essentials they require for living, remaining healthy, raise families and remain well-informed to take rational decisions on their own and their children's education and future prospects.

Unlike cattle, crates of milk, timber or chemicals people also are constituents who theoretically have the right to vote under the conditions of universal suffrage of one vote for each person in local and general elections. In terms of governance and the identification of appropriate reconomic policies the power of people to select policies proposed should be of significance and operational through the process of public choice. This, one would imagine, should be a reason why labour should not be regarded as simply a factor of production.

People's income and freedom of choice as determinants of consumption & aggregate demand

As explained in "Back to the Future 1" the income of the population is also the funds used to transact and access those products and services people desire and therefore the population has a dual role both as contributors to production as self-employed or as employees as well as being the consumers of output in conformity with the Say model. Once again this distinguishes labour from all other factor. No major inputs to production contribute to demand; only labour does this.

""" Having disussed the PhillipsCurve with fellow students and later with work colleagues it is notable that quite often economists interpret the vertical axis in the Phillips Curve as the general inflation rate. But this is not what the Phillips Curve represents or describes. It only refers to the rise of "prices" in a part of the labour market where settlements are being agreed.

orientaion The movement away from the original Phillips Curve is associated with aggregate demand management and a misunderstanding of extreme circumstances . This gives rise to three interpretations:
  • Allowing unemployment to fall causes rises in wage settlements which will raise company costs and therefore exacerbate inflation in output prices;
  • With growth in the economy unemployment falls and if there is infltion wage settlements need to be higher to compensate for loss in real incomes;
  • This relationship does not show a correlation with inflation so there is no obvious association of inflation with unemployment and or wage settlements;
  • There is no determinanrt data that shows that inflation is in fact raised as a result of higher wage settlements.
associated with growth.

It should be noted that the demand for higher wages is related to nominal incomes compared with changes in prices or income purchasing power. As price rises cause a fall in purchasing power of nominal wages then pressure on wage demands rises. Therefore, there is a direct relationship between inflation, or the cost of living, and wage demands. Thus, wage inflation does not exist in isolation from general price inflation.

Based on the Phillips Curve, the impact of Figure 11: Stagflation (rising inflation and the petroleum price increases was unemployment) unexpected because the coordinates of high inflation and rising unemployment moved off the P-C curve to a completely different location. In the absence of adequate productivity gains, high unemployment resulting from high input cost-push inflation and absence of real increases in wages resulted in rising unemployment while maintaining a high level of inflation.

Notions of relationships between productivity and the Phillips Curve

It is arguable that by raising productivity at a sufficiently high rates and applying these gains to lowering output inflation, the rises in wage rates associated with low unemployment would be lower because the purchasing power of the currency would be higher and therefore the motivation for demanding higher rates of wage rises would be less. In schematic form the original Phillips curve is used to set out different productivity and pricing curves in the diagram on the left. Low productivity with high PPRs would be likely to produce the high wage raises with low unemployment. This is the original P-C curve. A higher level of productivity combined with a lower PPR is likely to result in a lower rate of wage rises with low unemployment as shown by the curve P’-C. The objective of RIP is to encourage a combination of higher productivity with low PPRs and a curve approximating P’’-C so as to contain the levels of inflation at low unemployment.

By bringing inflation down to lower levels there is an enhanced probability of these levels of inflation being absorbed by the next phase increases in productivity. This compound graph can be projected in a 3D representation as shown in Figure 13 showing the relationship between inflation, productivity and unemployment. Where productivity is able to lower inflation the aim of Real Incomes Policy is to trade off price productivity against physical productivity which is essential to secure unit costs control. The degrees to which this trade off can be effective depends upon process technologies and the techniques labour forces have learned to deploy.

Figure 13: 3D representation of Phillips curves locations and productivity

A policy to tackle inflation and sustainable real growth

The overall impact of this approach is to slow down the rate of inflation by acting directly on prices. This is a more efficient and effective way to tackling the cost of living crisis than providing consumers with grants and support. This particular approach provides no incentive for companies and manufacturers to moderate prices. However, if their net cash flows depend on their responding to policy and maintaining their cash flows, or increasing them by moderating prices and improving their productivity, then the monies are better spent. The incentive scheme should raise policy traction and the evolution in productivity and innovation should continue.

Raising real wages

The other principal challenge to macroeconomic management is the question of income distribution and the fact that something like 25% of the working population have wages that are just sufficient to cover essentials but in the lower wage segments support is increasingly required. However, under conditions of inflation this income group faces serious issues in not being able to continue to provide for their essential needs. Whereas Real Incomes Policy aims to moderate and/or reduce unit prices in a counter-inflationary process, this alone, can help raise the purchasing power of people on the low end of wage scales. However, as the title of the policy suggests, the overall objective of policy is to raise real incomes. It is self-evident that if the real incomes of consumers rise so does their purchasing power resulting in increased consumption and throughput of companies rising.

If as part of the PPR calculation the productivity gains also involve a marginal rise in wage rates, while securing a low PPR, then the Price Performance Levy payment might be further lowered. This incremental process can end up with the PPR falling well below unity. Thus, the procedure of managing an operational PPR also enables companies to manage the levy they will pay while contributing to the policy objective of raising wages. As a result, such a policy has a long term traction. This is made possible because the whole process remains under the control of the company and workforce decision making rather than arbitrary governmental and policy decisions on interest rates, money injections, government loans and taxation.

The whole package is transparent but it needs a sound understanding of consumption schedules of corporate output by product line. This requires an understanding of the price elasticity of consumption of each product to be able to manage this optimally.

The Phillips Curve

In 1958, Alban W. H. Phillips (1914-1975), published a paper in Economica entitled, "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957" in which he set out the inverse relationship between money wage changes and unemployment in the British economy, based on the data set for that period. The general relationship which came to be known as the Phillips Curve is shown on the left as P-C. It should be noted that the demand for higher wages is related to nominal incomes compared with changes in prices or income purchasing power. As price rises cause a fall in purchasing power of nominal wages then pressure on wage demands rises. Therefore, there is a direct relationship between inflation, or the cost of living, and wage demands. Thus, wage inflation does not exist in isolation from general price inflation.

Based on the Phillips Curve, the impact of the petroleum price increases was unexpected because the coordinates of high inflation and rising unemployment moved off the P-C curve to a completely different location.

In the absence of adequate productivity gains, high unemployment resulting from high input cost-push inflation and absence of real increases in wages resulted in rising unemployment while maintaining a high level of inflation.

Notions of relationships between productivity and the Phillips Curve

It is arguable that by raising productivity at a sufficiently high rates and applying these gains to lowering output inflation, the rises in wage rates associated with low unemployment would be lower because the purchasing power of the currency would be higher and therefore the motivation for demanding higher rates of wage rises would be less. In schematic form the original Phillips curve is used to set out different productivity and pricing curves in the diagram on the left. Low productivity with high PPRs would be likely to produce the high wage raises with low unemployment. This is the original P-C curve. A higher level of productivity combined with a lower PPR is likely to result in a lower rate of wage rises with low unemployment as shown by the curve P’-C. The objective of RIP is to encourage a combination of higher productivity with low PPRs and a curve approximating P’’-C so as to contain the levels of inflation at low unemployment.

By bringing inflation down to lower levels there is an enhanced probability of these levels of inflation being absorbed by the next phase increases in productivity. This compound graph can be projected in a 3D representation as shown on the right showing the relationship between inflation, productivity and unemployment.

Where productivity is able to lower inflation the aim of Real Incomes Policy is to trade off price productivity against physical productivity which is essential to secure unit costs control. The degrees to which this trade off can be effective depends upon process technologies and the techniques labour forces have learned to deploy

. Risk issues for investors

The simple introduction of state-of-the-art technologies to a production process using out-dated processes can usually result in predictable quantifiable productivity impacts. This is because quantitative performance data in terms of operational costs and physical productivity of the technology concerned tends to be well-established and classified as good (efficient), average (less efficient) and poor (inefficient) practice. As a result, the risks involved in introducing state-of-the-art technologies are readily apparent and therefore involve more predictable results. Removing the loss from a loss-leader approach

The usual investment practice is to carry out such an investment, complete procurement, select the best bid, take delivery and commission equipment and begin production. Usually production proceeds and as efficiency or scales of operation rise unit output prices are established against actual performance in terms of input costs, physical productivity and prevailing market prices.

Under RIP companies are encouraged to review in some depth the likely productivity and unit costs projected to some point in the future. Rather than wait for production to reach specific levels before reducing output prices, the technique applied is to anticipate the unit price expected to be feasible at some point in the future. Rather than set this price at the point in time, when it is expected to be feasible, companies establish this price at the time of investment. The effort then goes into managing processes to meet the projected levels of productivity and turnover justifying the price set. This has the effect of reducing the rate of rise in output prices or could even lower unit prices earlier in the process. In terms of constituents this means an earlier real income impact. In both cases, this move provides the company doing this with a competitive advantage vis a vis competing companies. However, his means that the per unit return of output in the initial production stages will be lower or even negative while the output penetrates the market and gains market share. The benefit, from the standpoint of policy is that a degree of control over inflation is secured and consumers have the advantage of being presented with relatively lower rates of price increases, price stability or even falls in unit prices, helping augment their real incomes. The state of affairs for the companies depends upon the markets they serve, consumer income distribution, technologies and inputs deployed and consumption schedules established by the unit price elasticity of consumption.

The need to manage the possible



In 1981, the author reviewed the RIP concept with Richard Wainwright, then the Liberal Party economics spokesman. He turned out to be one of the few politicians that had taken the time to read and understand the concept presented in a monograph circulated at the time within political party circles as the very first edition of “Charter House Essays in Political Economy”. Wainright was interested in the concepts and his reaction was to state: “If we place this in our manifesto and we win the election we will be faced with the issue of implementing it.” It is certainly the case that at that time, the internet did not exist and the challenge of introducing such a necessary change appeared to be daunting. The oversight of RIP concerning the calculation of PPRs and PPLs would require that all transactions pass through an IT system that sustained an oversight over transactions to avoid “transfer pricing” and a string of possible fraudulent record keeping so as to exaggerate PPR reductions to end up not paying the PPL.

These requirements were made evident in 1981 by a senior partner of KPMG the audit company. He considered the proposal to be valid but he pointed out that under the then current regime the necessary information/data for companies to calculate PPRs is not collected by companies. This was an indirect confirmation of Wainright’s position. However, the data is part of corporate transaction records used in accounts. The basic requirements are known. During the last 40 years, the advance in database technologies, security interfaces, improved programming languages and the Internet and modern IT system design techniques, such as Data Reference Modelling, makes the establishment of a standardised system a relatively straightforward issue.

Our ongoing costs

As matters stand, the costs of continuing as we are, are becoming too high with increasing numbers of people are suffering creating stress and a troubling state of affairs in the country’s social and economic conditions.

The constraints established by the current policy-induced debt taxation trap have imposed on government a need to resort to palliative “solutions” that alleviate the suffering of low income constituents, on a temporary basis, but these fail to solve the fundamental problem of the causes of inflation. Having spent time in assessing the political challenges of introducing something like RIP this has given rise to considerations of several options to facilitate its introduction.

The potential benefits would appear to be self-evident and growing whereas the costs of introduction of what could be a “game changer” clearly need to be taken into consideration on the political front.

Options

Below a review of some of the considerations and options available for the introduction of RIP are presented.

The advantage of RIP is that is contains a large range of operational options all of which help shift the operational basis for the economy away from the monetarist policy-created debt-taxation trap which has constrained all current government policy propositions to date related to the “solving” the cost of living crisis.

Within the Real Incomes development work many options for applying RIP have been developed. They include making the PPL a manufacturing sector run “Development Fund” where payments made remain tagged with the name of the companies paying their PPLs. Rather than build up a fund the operational objective is to attempt to minimise the size of the fund as a reflection of advancing corporate productivity. This collaborative basis set at some distance from government overcomes some of the restrictions under the World Trade Organization which could interpret any government involvement as subsidy and a form of infant industry support.

However, a large number of developed nations with now, overbearing service sectors, face the same problem of income disparity becoming higher than in some developing countries. Because the average real incomes have been falling as a direct result of offshore investment largely in developing countries, there has been an effective displacement of former industrial and manufacturing employees in developed nations. This has been associated with a widespread loss of tacit knowledge and capabilities. There is, therefore, a need to base arguments for the essential transitions and expansion of manufacturing on the basis of poverty reduction.

It is apparent that as a so-called developed nation, politicians would be reluctant to classify a major change in macroeconomic policy as a poverty reduction measure but conveniently RIP is also a long term growth strategy based on a major investment in innovation, Rather than making RIP a generalized macroeconomic policy it would be better to make it a voluntary scheme within which no corporate taxation would be applied and companies would be allowed to withdraw from the scheme and receive back any accumulated PPL funds on doing so if they are not satisfied with the results. Initial calculations suggest that those joining a RIP scheme would be able to out-compete companies in the same sector who continue under the current policy schemes and taxation regimes. This is not an issue, since it would encourage increasing numbers of companies to transfer to operate under RIP. It is likely that RIP would be better applied to different manufacturing sectors along the lines that operatives within the sector feel would be create the best levels of incentives required to transform the sector. This is because each sector deploys distinct technologies and techniques as well as operating in different input factor and output markets. By making RIP operations sector based there would be a better focus on the specific conditions and technologies of sectors leading to an improved shared knowledge on operational practice and ability to improve the quality of project appraisals.

In order to regularize the treatment of labour in a productive fashion so that the PPL operation is linked to PPR estimates that include wage rises, it is probably best to create incentives for the creation of mutual manufacturing operations including the facilitation of any manufacturing company transitioning from plc status to mutual status. This would be reversal of the tendencies encouraged by governments in the 1980s and 1990s of encouraging mutual to become plcs with disastrous results and a steady decline in real wages. This however, would be likely to meet with shareholder resistance except, perhaps in the case of failing companies.

Depending upon the levels of impact of RIP the question of personal income tax could come into play with highly successful labour-management operations giving rise to significant controls of inflation, including reduction of unit prices, leading to income tax discounts.

One of the most successful roles for government in this system would be to help manufacturing sectors establish detailed and easily accessible information on stat-of-the-art (SoA) technologies combined with adequate economic and financial analyses on potential performance supported by actual survey data on operational best, average and poor practice combined with analyses of the reasons for the differences in performance.

It is often the case that practice and performance tends to be linked to operational experience of the workforce and management. The actual difference in performance linked to the learning curve associated with different combinations of technologies and labour need to be collected on a regular basis. This can create data sets that companies can use to estimate the trajectories of their unit costs curves to guide their unit price-setting against likely gains in unit cost reduction. This type of activity needs to be manufacturing sector-based and it might involve teaching and research organizations such as universities. However, this operation should not be slowed up by academic publishing cycles but the raw data should be published regularly and made available to all. Academic institutions should not be permitted to make any claims over the ownership of such data sets which should be a assigned a “Commons” open access categorization. On the other hand, the data should be made readily available engineering and teaching establishments.

Concluding

Given the dire situation which has been exacerbated by sanctions on Russia, the government is left with little option now other than to provide constituents in need with direct financial support.

However, there is an urgent need for the government to act in such a manner as to bring about a change in policies to help the country escape the debilitating debt-tax trap built up by an inappropriate monetary policy dominating macroeconomic management.

Post-BREXIT, post-Covid-19 and recovery in a high inflationary environment trending towards stagflation cannot be solved through the manipulation of financial factors based on national accounts and notions of “affordability”.

Real Incomes Policy provides an alternative that is a relatively uncomplicated and transparent proposition. It holds the promise of a practical and sustainable approach to help solve Britain’s productivity and real wage crisis. It is not a top-down monolith but contains a range of options on how it might operate, some of which have been outlined.

The author: Hector Wetherell McNeill