 Real Incomes Approach
Real Incomes
We manage a new economics medium, Real Incomes, recently launched by APE - Agence Presse Européenne
Real Incomes is an online medium which provides an analytical review of the essential issues concerning the British economy.
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Following the Great Depression, John Maynard Keynes set out the role of fiscal policy in managing the economy in his book "The General Theory of Employment, Interest, and Money" (1935). This system was refined through application and practice. In the 1970s the global economy was destabilized by three consecutive international petroleum price shocks in 1973, 1979 and 1980. The emerging situation of slumpflation combined increasing unemployment with inflation. The effect of inflation was to devalue the currency and therefore its purchasing power thereby reducing real income levels of the economy as a whole. This situation was counter-intuitive to Keynesian theory since it was never expected that inflation would be associated with high unemploymwent and a slump. Failing to fashion convincing policies there was a side-step in policy emphasis to Monetarism whose leading advocate, at the time, was Milton Friedman. Monetarism has dominated macroeconomic management since that time. However in the early 1990s this system began to exhibit cycles, high corrective interest rates, a rise in unemployment and fall in real income and even house repossessions.
KM policy shortcomings
Keynesian and Monetarist (KM) policies have been characterised by a lack of engagement with the more down to earth but complex topic of the structural relationships between technology, economics and finance and the enterprise level issues of managing technique to achieve real incomes growth through the manipulation of supply side operations. KM policies apply aggregate policy instruments such as tax, interest rate, money supply across a population and an economy made up of enterprises all facing different circumstances according to their investment cycles and sector conditions. The ability of enterprises to respond to any specific economic policy varies and therefore it is difficult to optmise adjustment. Indeed, the overall success of any fiscal policy occurs at the expense of some participants in the economy.
Political risk
A notable failure of KM policy advocates was and continues to be the lack of coherence between economic and political stability. Thus economic stability will continue as long as there is not some other major autonomous impact in the form of a significant rise in the price of an essential commodity imported to the economy (see natural reosurces). The constraints on governments to respond in a rational fashion to such natural resource-related impacts is that their fiscal regimes are too dependent upon duty, value added tax and levies on, for example, petrol (gasoline) as a source of revenue. Therefore when such price variations occur the fiscal regime augments and levers the damage into the economy. This easy source of fiscal revenue, however, comprimises the government into having to resist lowering revenues from such commodities since this would undermine their ability to implement policies. Part of the problem is that political parties either do not recognise this political exposure or rather, they are not prepared to explain this real trade-off to the electorate. In order to lower economic and political risks fiscal policy needs to be adjusted to establish an environment of moderate public expectations as a realistic basis to reduce the dependence of government revenue on the prices of imported commodities whose prices are subject to autonomous political influence.
Increased risk
The reality is that in the case of the United Kingdom, since the 1970s petroelum price shock, the cost components of the price of petrol at the pump for the consumer, for example, has risen from being 50% government revenue to over 75% government revenue. As a result the combined risks for our economy and indeed the survival of the party in government when some price shock comes along, have increased and nor decreased.
The Real Incomes Approach
The Real Incomes Approach adresses this particular weakness in the KM approaches to macroeconomic management. The Real Incomes Approach to economics places more emphasis in macroeconomic management on encouraging freely deployed supply side adjustments according to the direct interests of companies and markets so as to encourage and sustain rises in real income levels through moderation in prices and suppression of inflation. This is achievable because each company is motivated to optimise in their own interests but in a way which helps depress inflation. The original work on this approach was initiated in 1976 and a monograph published in 1981. Our research work has continued since that time and new revised publications will be released at the end of 2007 (see Charter House Essays in Political Economy). |
