The Real Economy

Bare Bones Price Performance Policy

Hector McNeill¹
SEEL

On the home page of this site it is stated that:

"The overall relevance of the Real Incomes Approach is that it is sufficiently generic in application and yet able to respond to the specific needs of all economic and social constituents so as to provide effective growth conditions for:

countries facing sovereign debt, government deficits and/or high levels of private debt

developing countries

economies in transition

developed economies

currency unions

It is as relevant to a range of countries such as Brazil, a resource rich country, to countries such as the United Kingdom who need to terminate "austerity" policies, to Greece under extreme debt and austerity as well as to Hungary and other transition economies simply because it is a paradigm that promises to be able to deliver real economic growth combined with currency stability. Much of the theory of the Real Incomes Approach can appear to be counter-intuitive for those trained in conventional economics. Therefore it can be easier to explain the Real Incomes Approach by describing the mechanisms or operational aspects of Price Performance Policy.

This note does just that. Because there are many new terms making up the theory of the Real Incomes Approach, links to more detailed information are provided at appropriate locations in the text.

Bare Bones PPP Version 3
Internal note
SEEL-Systems Engineering Economics Lab.

How does Price Performance Policy (PPP) work?

The Real Incomes Approach to economics provides the theory for a policy proposition known as Price Performance Policy. This note explains the mechanics of operation of PPP without reference to the theory of the Real Incomes Approach to economics. Those wishing to learn more about the theory can access details at:

www.realincomes.org.uk

The operation of PPP is based on the Production Accessibility & Consumption model of the economy (See "The PAC Model of the Economy")

The Objectives of PPP

To secure economic growth based on sustaining or increasing the real incomes of owners, shareholders and employees of private economic units as well as employees in the public sector. The resulting economic growth in real incomes is accompanied by low or zero inflation (See "Why real incomes?").

Administrative framework

PPP operates within a legal framework where there is no corporate taxation². Profits are substituted by investment in technology and human resources³ and corporate returns are measured in terms of the real incomes of owners, shareholders and employees. The regulatory framework for accounts and audit require minor changes for this system to operate transparently.

Policy method

The policy method is to deploy policy instruments that are applied to the operations of both the private sector and public sector with the objective of securing productivity increases to moderate or reduce the unit prices of good and services.

A levy, the Price Performance Levy (PPL), is applied to corporate margins (see "The price performance levy"). This levy is not a tax designed to raise revenue for government but rather it acts as an incentive to encourage managers and workforces to manage the corporate price performance ratio (PPR) (see "The price performance ratio"). The PPR is the relationship between unit output prices and unit input costs. PPRs of less than unity (<1.00) signify a reduction in inflation. The PPR formulae are applicable under inflationary and deflationary conditions. The PPL value is determined directly by the PPR, so as the PPR is reduced and productivity increases, the PPL to be paid falls. Rational resource allocation decisions can result in the PPL being reduced by management decisions to zero. However, the containment or reduction in unit output prices can only be achieved on the basis of increases in productivity so the resulting PPL payment depends on management decisions that secure an operational performance that is evident from operational unit output price trends; the PPR estimate is not based on virtual paper based accounting. The difference between the maximum PPL (when PPR = 1.00) and the operational PPL is a rebate that serves as an income bonus to owners, shareholders and employees. The bonus is paid over and above a basic salary scale with each receiving the bonus in proportion to their basic salary. Shareholders who are not employed by the company receive bonuses in proportion to their holdings. Therefore operational price containment results in increases in nominal incomes of all associated with an economic unit and since prices are stable or falling, their real incomes as well as those of their customers, increase. No subsidy is involved in this process because the funds applied come from the corporate cash flow.

Achieving sustained growth

The current anaemic growth in the UK economy is the typical result of conventional policies that lack traction because of the lack of positive systemic consistency and poor sustainability for lack of incentives that encourage more effficient resources allocation. One reason PPP can sustain both traction and more efficient resources allocation is the direct adaptability of the policy to the specific conditions and capabilities of each economic unit. In addition, the income multiplier is higher under PPP with moderated or falling prices resulting in growth being associated with a more equitable distribution of incomes.

For further information see "The Real Growth Multiplier" and "Growth Impetus"

Promoting growth in consumption

Real incomes growth and moderated or falling unit prices result in direct benefits to all income classes providing an impetus to growth; all generated by supply side resources management. PPP is the only policy that achieves positive systems consistency in outcomes (see "Positive systemic consistency")

Government revenue to pay for public services would come from personal income taxation. Because there is no corporate taxation under PPP the augmentation of wage rates would be manageable. In order to reduce leakage, pay should be based on the operation of PAYE (pay as you earn) taxation.

Under PPP the operation of public services would be subject to the same legal framework and accountancy regulations as the private sector operations based on PPR estimates and the application of the PPL. As in the case of the private sector, the payment of personnel is based on basic salary scale plus bonuses arising from PPL reductions secured through rises in productivity.

Outcome

Inflation contained growth in real incomes is based upon rises in productivity that make possible contained or lower unit prices for public service goods and services. The increased purchasing power of the currency, within national boundaries, augments the purchasing power of government revenues and thereby reduces the nominal budget requirements to cover public service provisions. As a result the tax burden or overhead is gradually reduced as a result of growth in real incomes.

The currency value remains stable and the national cost of living declines. Because growth is productivity-based import substitution and exports should increase.

Other impacts of PPP

For a summary of a comparison between Keynesian, monetarist and supply side policies and the Real Income Approach PPP see:

www.realincomes.org.uk/synthesis.htm

20th June 2015.

¹ Hector McNeill is the director of SEEL-Systems Engineering Economics Lab.

² Corporate taxation is not applied because of its constraint on allocation decision analysis leading to sub-optimal allocations

³ Profits are substituted by investment in technology and human resources in order to eliminate the profit paradox and to comply with a concept identified by Joseph Schumpeter (see: www.realincomes.org.uk/pparadox.htm)

Updated: 8th July, 2015 correction of typos and missing elements; sense maintained; added links to "PAC Modelof the economy" and "Positive systemic consistency".

Updated: 25th July, 2015 clarification of section on Public Sector and box entitled "Achieving sustained growth"

Updated: 26th January, 2016 clarification of section on Public Sector.

Updated: 28th January, 2016 added emphasis that policy spplied to both private and public activities under new sub-heading: "Policy method".