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Constitutional aspects of the Real Incomes Approach

Hector McNeill1

Constitutional economics is an approach to economics that is not afforded the consideration it merits. As a democracy, so-called, it is of fundamental importance that more consideration is given to the ways and means of improving our methods of public choice in the United Kingdom. By that is meant, how can the electorate have more of a direct say in decisions on matters that affect their lives, including decisions on economic policy. Clearly the current first-past-the-post electoral system based on different political parties atomizes any generalized public choice. For example, the current government has just 24% of the support of the electorate and yet has an absolute majority in Parliament.

Clearly there is scant democratic legitimacy for allowing such a poorly supported group to take command of the public sector, or 40% of the GDP and to impose macroeconomic policies on the social and economic constituencies which create significant differentials in the form of winners, losers and those unaffected by policy.

This article explains why the Real Incomes Approach is a new front which presents a practical option for improving the constitutional economics of the United Kingdom.

The problem with conventional macroeconomic policies is that they cannot accommodate the wide variations in needs of economic and social constituents each of whom have different economic circumstances, objectives, capabilities and access to resources. Keynesianism, monetarism and supply side economics are all monopoly state imposed impositions in markets making use of interest rates, money volumes, taxation, government spending and debt so as to set the tune and the constituents are expected to make the best of it by attempting to dance to the tune. Constitutional economics, that is the economic priorities of the constituents simply do not enter the decision analysis applied in coming up with policies.

The Real Incomes Approach, in the form of Price Performance Policy, establishes a simple and transparent economic objective of sustaining or increasing real incomes. Real incomes determined by three main elements:
  • nominal incomes
  • productivity
  • unit prices
Therefore policy needs to adjust on a constant basis the relationship between these elements. However, it is clearly impossible to maintain this adjustment through some form of monopoly state interventions in any of these elements. This is because these are all determined by economic unit management and their workforces and cannot be established by policy emanating from some government. Productivity, unit prices and resulting revenues that are transformed into nominal and finally real incomes all remain firmly under the control of economic units. Therefore, in constitutional terms, the decision analysis that determines these aspects of economic activity remains with those who are directly affected by the outcomes. There is an additional dimension to this in the form of an appreciation that price moderation or inflation control under growth conditions is not something that requires central government impositions attempting to manage "aggregate demand" through interest rates, government expenditure or taxation. The careful adjustment of price-setting in response to input price rises and adjusted through investment in technology and human resources can bring about enhanced real incomes in the form of bonuses for shareholders and employees while enhancing the real incomes of customers by sustaining or increasing the value of the currency (purchasing power).

Constitutional economics operates on the basis of securing a consensus on objectives as well as on the means of securing those objectives. By establishing real incomes as the economic objective of economic operations there is no division between companies and customers or between companies and employees. Conventional policies cannot achieve this simply because of the profit paradox and government revenue-seeking disrupting transparent decision analysis on resources allocation and giving rise to divisive tax evasion and avoidance, hidden profits and the squeezing of wages. Conventional policies operate within a highly contentious economic framework that undermines social cohesion.

James M. Buchanan

An important aspect of constitutional economics is 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. Public choice theory points out that it is close to impossible to satisfy the majority through the current constitutional mechanisms that exist where the assembly (Parliament) taking decisions is centralized and, in addition, its members are identified and act in line with the wishes of political parties rather than constituents.

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.

According to Buchanan the ethic of constitutionalism is where the individual who is expressing preferences for social and economic conduct, together with others in society, adopts the moral law as a general rule for behaviour. He rejects any organic conception of the state as superior in wisdom, to the citizens of this state. This philosophical position forms the basis of constitutional economics. Buchanan believed that every constitution is created for at least several generations of citizens. Therefore, it must be able to balance the interests of the state, society, and each individual.

The sophistication of Buchanan's analysis related to his making sense of "Political Economy" by making a distinction between politics and policy. Politics sets the rules of the game, whereas policy is focused on strategies that players adopt within a given set of rules. Questions about what are good rules of the game are in the domain of social philosophy, whereas questions about the strategies that players will adopt given those rules is the domain of economics, and it is the play between the rules (social philosophy) and the strategies (economics) that constitutes what Buchanan refers to as "constitutional political economy”. Buchanan, did much to introduce ethics, legal political thinking, and social thinking into economics and therefore set out a more rational canvas upon which to found a better future. The Real Incomes Approach is an attempt to embrace these important considerations in a practical way, leaving economic and social constituents decide what is best for them.


An important constraint on the advance of constitutional economics as a basis for improving transparency and logic in economic decision making has been the growth in extra-constitutionalism which combines the interests of large corporations including banks, political parties, the media and intelligence agencies. Within this nexus many decisions are taken without any reference to the electorate, including economic decisions. There is a movement that one can perceive with recent negotiations on trade deals where the public has no access to the evolving content of decisions that will affect their lives, employment and standards of safety. The corporations are being provided with the privilege of determining trade deal proposals and while elected representatives, so-called, have no idea what is in these potential agreements. Corporate funds bank-roll much of this effort to fix public choice as a single option. However, corporations do not have the vote and have no natural role in this form of damping down the options for public choice. At least, in the case of the Real Incomes Approach there is no corporate taxation which thereby eliminates any right of corporations to meddle in public choice. The substitution of profits by investments in technology and human resources and real incomes becomes the measure of corporate performance. This results in the direct beneficiaries and interested parties in corporate performance being the owners, shareholders and the workforce, all of whom pay personal taxation and, when UK nationals, also have the vote. The Real Incomes Approach provides these individuals with adequate decision analysis powers to manage the economy in a transparent fashion and to the mutual benefit of all rather than participate in extra-constitutional activities of dubious merit and which should be outlawed and brought within our constitutional framework.

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

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