The Real Economy

Hector McNeill¹
SEEL

One of the most important aspects of English Common Law has been the provision that pioneered many of the inspirational changes introduced into law regarding the protection of individuals bringing the element of the sanctity of human life and treatment of individuals, to the pinnacle of legal provisions in secular society. This occurred without the intervention of ideologies, philosophies, religious tenets, judges, political parties or governments. The driving force behind this vital evolution were the steps taken by society resulting from juries of citizens deciding that the law could not be justly applied in a particular case, and that the accused was therefore not guilty.

Decisions of this type by a small collection of citizens exercised their judgement according to "the community conscience" in deciding how law should be applied within a simple framework of commonly agreed expectations of what would be considered to be reasonable or understandable behaviour under given circumstances. Underlying this process is one of an often unstated standard of people's expectations of how they should be treated under any given circumstances.

Economics is a domain of decision making where the "legal logic" is economic theory and operational frameworks result from decisions usually manifest themselves in the form of policy. Within any policy framework, invariably corporate behaviour can prejudice individuals as has been observed with 12 years of quantitative easing (QE). Surely, as a fundamental part of policy design, there needs to be a place to resolve this dilemma of conscience in economics.

Twelve years of increasing income disparity and falling real wages, raises the unavoidable question of people's expectations when a policy is announced and explained by politicians and what turns out to be the result of other people's actions within that policy framework.

If there has been unexpected prejudice, where is the provision that permits the community conscience to take a decision to prevent future prejudice or even claim compensation?

Corrective mechanisms

At law a jury decision creates a precedent to guide future decisions so as to avoid future prejudice as well as to introduce modifications to the law designed to improve it to achieve the same end. Economic policy has no such safety mechanism.

General elections as the Catch-22

The offhand escape clause is that the "next election" provides those prejudiced with the vote to change the government and bring in another one. This results in a new government who in returning to their particular team of "economic advisers" will apply the very similar and likely-to-be-prejudicial policies because they are based on an attempt to apply the very same economic theories, in practice. However, if the economic theory remains the same, policy variants based on a limited set of policy instruments are unlikely to change outcomes.

Public choice

This issue is a central theme of constitutional economics where an effective process of public choice, based on factual evidence, can provide people with the opportunity to decide between policy options. But not only is economic theory not a topic of public discussion, extraordinarily, monetary policy and the decision-making mechanisms governing monetary policy are never laid before the people of Britain to decide on options.

There is no choice

But I am getting ahead of myself here. The reality is that there are no options other than a dedication to a constant attempt to apply a policy model fixed centuries ago that was never designed to build in any considerations of the needs of the wider community beyond those close to those ruling or "running" the country. As a result macroeconomic policy, and here we can refer to monetary policy, continues to have the tendency to favour the interests of a small number of winners and a larger majority of relative losers. Of course, the default cop out clause is that all of this is the result of the "free market forces". This is a diversionary tactic. But our subject matter here is the people of this country. So, is the role of economists in devising policies, that of safeguarding the wellbeing of the national constituency or just a select few.

The need to apply economic development principles

In the article, "Leading issues in development economics", I referred to Gerald M. Meier (1923-2011) of Stanford University. He wrote that²

"An economist is both a trustee of the poor and a guardian of rationality."
and that...

"As trustee for the poor, the economist respects the values of altruism and economic justice. As guardian of rationality, the economist respects self-interest and efficiency. But does not the future course of development depend in large part on the capacity to combine the seemingly incompatible values of the trustee and the guardian? Can the professional developer combine a warm heart with a cool head?"

Meier entertained such thoughts because he was a development economist. Development economists work in a domain where the majority of the nations concerned are poor and therefore the majority of the development economist's task is to identify how to raise the status of the majority to benefit the future sustainability and economic resilience of a country. On initiating the analysis to find solutions, development economists carry out gaps, needs and constraints analysis in order to determine what has caused or is maintaining poverty as a basis for designing feasible solutions. Development has a vitality because it addresses extremely difficult situations but cannot rely of sterile macroeconmic theories. The requirement is workable policies and incentives that solve the specific issue of participatory economic growth. It is participatory because on the ground development actions usually target specific communities to improve their wellbeing. As a result there is a rational oversight by the community concerned enabling them to assess the relative success of the development action.

British gaps and needs

What is not fully appreciated by most economists appears to be that the current state of the British economy presents exactly the same challenge. However, most economists do not apply the development economics approach. Currently their is an alarming tendency for policy makers to imagine that by applying the same theories and adjusting some of the existing policy instruments it will be possible to solve current issues. This has been tried this now for over 70 years. However, the track record is sufficient to show that little attention has been paid to the fundamental problem of raising real incomes across the board to drive real economic growth. This is why we now have such significant regional disparities. It is more than apparent that the main constraint on the development of the British economy is a lack of coherence between the national needs and policy propositions and added to this the repeated attempt to apply a defective economic theory.

False economies

Monetarists, in particular, confuse rises in share prices as a policy success when, as a result of policy, share prices bear almost no relationship to the prospects, efficiency or productivity of the companies concerned. Over 50% of share price averages have been driven upwards by cheap money from quantitative easing being used by companies to buy their own shares to create a speculative binge.

In this process real investment and productivity become marginalized and too little attention has been given to the role of wage levels of the majority of citizens in contributing to the vibrancy of the economy. In the world of development economics this sort of challenge is solved by raising wages through an ordered and targeted investment in higher productivity processes and the achievement of competitive prices so as to raise real purchasing power of all in the economy. The logic here is not some esoteric theory or flawed quantity theory of money (See why the QTM is flawed: "A Real Money theory II" ) but rather the simple fact that national consumption comes mainly from the levels of disposable incomes of those employed. These levels of consumption generated from the wages paid by the supply side remains the most secure indicator of the performance of a successful developed economy.

More discipline required in economics rather than of people

Gerald Meier referred to the need for rationality in the identification of economic and policy solutions. This requires a focused and disciplined approach, not to be applied to, or at, the poor but rather to the efficacy of the economic policy solutions, and to judge the effectiveness of economists on the basis of their ability shape policies that raise real incomes. Who is in the spotlight here is not the poor but rather the performance of the outcomes of economists and government policies in eliminating poverty.

Besides blaming the plight of the poor on their inability to survive in the free market or their lack of initiative is a disgraceful excuse for ineffective poorly designed policies. But this logic has led to reductions of support mechanisms. This is conveniently justified, almost on a moral basis, of stigmatizing a group as being considered to be feckless and desiring to survive on the basis of getting something for nothing. This translates into an all too convenient notion for lazy economists and ineffective policies, that an increasing proportion of the population are to blame for their economic state reflecting a casual inhumanity, fundamental constitutional irresponsibility and dishonesty.

Increasing underdevelopment

During the last 50 years and accelerating during the last 12, the proportion of the population who have been gravitation towards a status of lower real incomes and poverty now approaches 40% of the population who are considered to be "actively employed". Those attempting to maintain their standard of living have become heavily indebted.

Today, most young people cannot afford to purchase a home and some have difficulty in paying rising rents. If governments wish to dismiss all of this by focusing our attention on the booming stock market and real estate markets while deflecting questions on the growing levels of poverty by stating that the state is paying those in difficulty, enough, we face a serious state of affairs. Under such circumstances, it would seem that it is time for a reassessment of our constitution is well overdue. To install a process of public choice there is a need to bring macroeconomics, monetary policy and fiscal options into the public arena to permit a full review of policy options that have at their roots alternative transparent economic theories.

The excuse will be that finance is too sophisticated a topic to be understood by "constituents". As in the case of a jury decision the defense has to be clear in the logic of the defense and if the prosecution cannot explain its case to the "constituents" the jury will decide there is no case to answer and in this case proposed policies would not be able to be implemented. Therefore simply by bringing monetary policy and fiscal options into the public arena and before a jury, we will be able to judge who can justify their case and have faith in permitting the public choice in the interests of the majority to prevail.

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

² "Development Economist Gerald M. Meier Remembered", Graduate School of Business, Stanford University, 2011.

³ McNeill, H. W., "A Real Money Theory II"

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