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Constitutional inconsistencies

Hector McNeill1

Some articles on this site have outlined three paradoxes which are where legal and regulatory frameworks, in support of macroeconomic policy, contravene or make difficult the promotion of constitutional objectives of fair treatment, equality of opportunity and freedom of choice.

The Real Incomes Approach to Economics is aligned with constitutional economics because its aim is to create the circumstance where individuals have the possibility of expressing preferences for social and economic conduct, together with others in society, to adopt the moral law as a general rule for behaviour. In this process the organic conception of the state is not superior in wisdom, to the citizens of the state. This is a philosophical position of constitutional economics within which each version of a constitution needs to endure several generations and be able to balance the interests of the state, society, and each individual.

This article elaborates on this position to demonstrate that out so-called democracy comes nowhere near this ideal, especially in the domain of economic policy.

Constitutional economics?

Constitutional economics is closely aligned with public choice theory. That is, a study of the mechanisms whereby the people of a country can express their freely-formed views on how we should advance, as a nation, and how the constitution can support the mechanisms that give a fair voice and levels of participation to the population in the decision-making that moulds that advance. James Buchanan, the leading international developer of constitutional economics, did however define important principles that cause us to work harder to prevent the limited vision of MPs intellectually-shackled by their membership, and by the whips, of political parties from causing yet more economic damage to the fabric of the economy and to the prospects of the people of this country (see, "The importance of constitutional economics").

Functional paradoxes
The paradoxes

The fiscal paradox

The monetary paradox

The profit paradox

Three articles on this site have drawn attention to three paradoxes (see box on left) related to government revenue-seeking, monetary policy and profits. These articles describe, in each case, conditions that undermine any notion of the individual constituent of this country remaining unmolested by forces beyond their control. Over time, constituents have been distanced from the means whereby they can have any say over taxation, monetary policy or the law and regulations applied to corporate taxation.

Government revenue seeking is a process, in reality, in competition with financial intermediation and asset holding factions to secure wealth and income from the economic activities of constituents. The main instrument of taxation is in competition with the profits of the goods and service production sectors providing the consumption needs of constituents and the capital goods required by companies. Legal and regulatory frameworks place shareholders in direct competition with wages because they lie on opposite sides of a divide occupied by profits and corporate taxation.

These competitive forces have levered the impact of monetary policy to deliver a significant growth in income disparity and devaluation of the currency (£). The remarkable fact is that the constituency, in addition to being isolated by these competitive forces, has no participation in the decisions that shape any of these elements which constitute a systemic bias.

Decisions on preferable policies for monetary management remain out of reach of the constituents of this country and are taken by individuals closely connected to financial institutions.

In the end all substantive value arising from economic activity is generated by the supply side. The way in which our economic constitution operates means the constituents have little say in how the government secures revenue by either taxing or borrowing and how assets holders gain their wealth and income through Bank of England decisions. Of course, the Bank of England operations are closely vetted by the Treasury or government of the day. There is, therefore, a constant tactical maneuvering between the Treasury and the Bank of England, who looks after the interests of the financial intermediation sector, as to the degree of tolerance endured by the constituents in transferring money to these policy sinks. There is the, often referred to, "balance" between monetary policy and fiscal policy. An example serves to explain the public face of this process. For around a decade the British governments have been accused of imposing austerity leading to falling real incomes, rising income disparity and reduced public services including National Health service staffing and Police numbers. Part of this was justified by the "need to pay down national debt". However, the rapidly declining circulation of money in the goods and service consumption markets and the arrested and declining real wage payments was a direct result of quantitative easing (QE) "managed" by the so-called "independent" Bank of England. QE resulted in a massive speculative inflation in asset markets benefiting the financial intermediation sector while generating inflationary leakage through rising prices and rents in housing, offices, manufacturing sites and land, exacerbating income disparity. QE's close to zero interest rates has also destroyed savings by those whose income comes from wages paid by the goods and service providers. The constituents of this country were never provided with any choice in these matters.

The result has been an undeniable bias in policy design and practical outcomes favouring the interests of a select minority of constituents; hardly qualifying for any relationship to constitutional economics.

The notion of Bank of England "independence" is a false logic more designed to distance any blame for the greater proportion of austerity, caused by QE, from the government. For some time there has been an orchestrated and successful effort of raising the status of the Bank's decision making, which is heavily oriented to the benefit of a tiny faction of constituents who operate banks and financial institutions, to be beyond question and reproach; very convenient for both the government and the Bank. This remains an affront to the majority and this constitutional abuse and the associated economic prejudice, endured by constituents, will continue until this facade is questioned and appropriate constitutional changes brought about.

The Treasury appears effectively to distance monetary policy decisions from most politicians.

The other side of this equation is the nature of the administrative staff in the Treasury. Linked to the image of complexity and sophistication of the operation of monetary policy it would seem that the civil servants linked to the Treasury have a very significant influence over whoever becomes Chancellor. The message seems to be that if a Chancellor doesn't succumbe and go native then they will have a difficult time. The behaviour of the Treasury during the public land disposal requirement imposed on local authorities supported a depletion of local authority assets and power. This, in many cases, involved dubious transactions, and the proceedings from sales did not to stay with the local authorities but were taken by the Treasury. This was, of course, was part of the policy promoted under Margaret Thatcher and other, largely Conservative leaders. From observations and commentaries, however, it is alleged that many in the Treasury are closely linked to or are former employees of investment banks.

The problem with this situation, if it is true, is that the occupants of the Bank of England and Treasury would almost be bound to consider constitutional economics to be "for the birds" and this would explain why the vast majority of the constituents of this country are held at arms length with respect to any say on monetary policy and their future prospects.

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

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