The demise of the Gold Standard in 1971 was followed within 24 months with the international petroleum price crisis and the advent of slumpflation. The simplistic logic of the so-called Quantity Theory of Money, void of Weber's and von Mises insights, saw the inflation component of slumpflation as a monetary phenomenon. Financial institutions became very critical of the Keynesian paradigm because it did not offer a way out of what was a combination of a political decisions and centralized (OPEC) price-fixing over-riding a "free" market price discovery to create a serious cost-push inflation crisis. This sapped real incomes and demand causing rising unemployment. This required medium term technological remedies linked to productivity and petroleum substitution. In reality, monetarism and its limited set of policy instruments was equally useless. This realization is why the development on the Real Incomes Approach to Economics was initiated. However, in 1975 it was not called a Real Incomes Approach because it started out as an in-depth analysis of economic cause and effect relationships to build up a macroeconomic policy model, from scratch, based on individual or microeconomic circumstances and decision analysis. At that time, I was not aware of Weber's or von Mises work but this approach was part of my initial training at the School of Agriculture at Cambridge University in agricultural sciences, technology, economics and farm planning as well as policy design. In this course of training, policy was shaped according to detailed data on farms as well as an understanding, based on a National Agricultural Advisory Service (NAAAS) official's understanding, of farmers' motivations and decision analysis. Our instructors from the School's Farm Economics Branch were well quanified economists, sociologists and data analysis specialists employed by NAAAS; all with a very practical and applied bent. As should be evident, this basis for policy design did not suffer from a calculation and knowledge problem because it was based on a consideration of individual motivations and decision analysis procedures applied by farmers. In essence while at that time not being aware of the work of these illustrious economists, we were applying a close to a Weber-von Mises analysis in our preparatory work.
In transferring to post graduate studies in Economics Faculties and Departments at Cambridge and Stanford universities, the contrast in approach was notable and at first very confusing. This was whereas instruction of both theory and practice at the School of Agriculture was all evidence-based. Indeed much of our instruction had developed a strong motivation to seek and present evidence for any economic statements made. I had entered a world where there was an almost complete lack of concern in macroeconomic policy courses with microeconomic decision analysis and evidence. Very often evidence was substituted by theoretical mathematical equations and much reasoning bordered on rhetoric. Monetary policy was poorly handled and confusing and rested on the unconvincing Quantity Theory of Money; since debunked by our experience with quantitative easing. Macroeconomics and microeconomics were taught in separate streams while the dominant theme was sweeping macroeconomic policy statements, which did not pass for much more than assertions to underpin Keynesianism and monetary policy.
The early computer-based hedging models derived from Black and Scholes options hedging model saw increased financialization as a way for the financial services sector to escape from the depression imposed by steeply rising costs and declining demand on supply side production. In the UK, this movement was given an impulse by Denis Healey who in 1975 abandoned an industrial policy linked to wages to return to the pre-Bretton Woods process of abandoning a wage policy in an attempt to improve Britain's balance of payments. In seeking a very short term loan from the International Monatary Fund (IMF) this policy was, a year later, intensified as part of the agreement with the IMF (see,
"Witteveen's folly"). The overall effect has been that between 1971 and 2021 monetary policy has reverted back to the pre-Bretton Woods model with respect to labour and wages and, as before, has paid too little attention to technology and human resources investment to raise productivity to levels that the balance of payments begins to move progressively from a calamitous negative status. This continues to be the case. However in terms of the "resources" applied to macroeconmomic policy in terms of the basic operational model (theory) and the derived policies, it is apparent that neither the Bank of England (BoE) nor government possess the instruments to manage this vital topic of the relationship between real sustainable growth, or more-for-less, and technological and human tacit knowledge advance. The intensification of the Healey, or IMF-inspired, financialization by the BoE recently through QE which has further undermined the required process directly and for what appear to be ideological reasons, or is it ignorance? The government took advantage of QE, inroduced, it should be recalled, by Gordon Brown and the last Labour government, to help its drive for "austerity" impacting wage-earners while enriching asset holders.
The evidence-giving by BoE personnel is seldom able to link wages or real incomes, in a clear functional sense, to any monetary decisions in a coherent and transparent manner. There is a considerable amount of unconvincing assertions associated with pointing to levels of "uncertainty" which means nothing that is stated will commit those making the statements to just about anything. There is no clear working model. There is plenty of evidence, after 12 years of QE, that BoE policy has undermined productive investment with next to zero interest rates having driven funds into assets. This peculiar failure to admit this major failing of policy is a function of the common institutional desire to "protect the image of the institution", and by reflection, the management and staff of that institution.
No more ping-pongThe lack of effective policy instruments on the side of the BoE, leads often to the typical central bank declaration, "we have done all that we can do it is now the turn of government to exercise adjustments in fiscal policy". This flip-flop or ping-pong tactic never was convincing but it is exacerbated by the fact that the government fails to admit or recognize, in spite of the mounting evidence, that the theoretical paradigm of monetarism is flawed and effectively undermining sustainable real incomes growth. Therefore, in this state of denial, there is no desire to seek alternative policy instruments to counter the damage wrought by the BoE. However, this "
see nothing, say nothing, do nothing" policy paralysis protects the "
independent" BoE, it would seem, because the current BoE policies have handsomely benefited benefactors of the government party.
Recently, some people from the BoE gave evidence to the Economic Affairs Committee on QE and there was a failure to present a coherent explanation of why QE has extended well beyond the "
temporary" fix for banks to "sort out their balance sheets" into a permanent and poorly explained destructive policy lasting 12 years. Because the BoE "
explanations" were so poor the final report, justifiably, referred to the policy, in the title of the Economic Affairs Committee Report, as an "
obsession". For an increasing proportion of wage-earners in this country this was a fitting label for BoE's behaviour.
In addition to the poor BoE evidence other leading economists could not agree. Their evidence ranged from the consideration of QE being a policy without a theory to detailed predictions based assertion and undeclared bases for estimating the predictions they made. Certainly QE has disproved the Quantity Theory of Money, largely because it was conceived well over 300 years ago and does not include the variables that became dominant factors in the economy since 2008 or, in reality, since 1971.
However, central banks worldwide appear to have lost control of monetary policy and the longer the government accepts this behaviour of an "
independent" body that dominates macroeconomic policy decisions, the more damage will be done to the reputation of the BoE. The dilemma for the BoE is that it is risking its "
independence" as a direct function of th increasing damage being wrought on the real economy while at the same time creating increasing challenges for a government whose handling of the interests of the majority is failing.
The Catch-22, or permanent escape clause used in evidence-giving, is that pointed questions are deflected by the bland statement that it refers to issues outside the ambit of the brief of the BoE (its terms of reference or scope of responsibilities for operational policy decisions). This does not mean they cannot suggest how things might be handled. This inability to map a coherent linked set of policy instruments over the real economy defaults to the ping-pong paralysis and it is the responsibility of "economists" to sort this serious issue out.
Towards a solutionAs has been stated many time on this site, policy needs to set real incomes as the policy objective which integrates real growth with human capabilities (tacit knowledge) with technological change based on (explicit knowledge) and any monetary questions need to be derived from this process of sustainable growth. Rapid and effective growth can arise from economies in process and autonomous reinvestment of funds derived from increasingly productive production. On top of that, external funding can help as long as the volumes do not exceed the natural growth path of physical productivity. By accelerating the rate of growth of money volumes beyond that limit we have witnessed the diversion of the majority of QE funds into non-productive lower risk "investments" in assets. A Real Incomes Policy (RIP) has the effect of prioritizing real incomes as the policy objective by providing a direct incentive to supply side investments to generate real incomes in terms of productivity, unit output prices and wages thereby linking policy instruments directly to the majority of the constituency as wage-earners. RIP instruments are effectively distributed and responsive to each economic unit requirements thereby avoiding the blind "command and control" central BoE setting of conditions which as we have seen, faces a "calculation and knowledge problem" and reality of "methodological individualism" in being unable, or purposely avoiding, to deliver beneficial outcomes for the wage-earning majority.
1 Hector McNeill is director of SEEL-Systems Engineering Economics Lab
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