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In spite of policy - a note

Hector McNeill1

There is next to no evidence that conventional KMS macroeconomic policies have any impact on growth. On the other hand there is copious evidence to demonstrate that conventional KMS2 policies have hampered the efficient allocation of resources and depressed growth and productivity.

Growth appears to occur as a result of private and group initiative in spite of policy.

The period 1945 to the mid-1960s witnessed an impressive rate of growth and close to full employment in the British economy. A paper by the economist Robin Matthews3 was published in 1968 in the Economic Journal to explain why Britain had full employment since the war. In this he argued that far from injecting demand into the system, governments in the so-called "Golden Age of Keynesianism" had persistently run large current account surpluses, instead of the budget deficits that would have been the expected manifestation of a Keynesian stimulus. From this he inferred that fiscal policy had been not only deflationary, but strongly so in the post-war period, therefore something other than Keynesian fiscal policy must have been responsible. The answer, he felt, lay in demand arising out of wartime destruction and an unusually prolonged private sector investment boom. So success was more to do with private initiative. I would suggest that an important lesson was that the achievements in growth can be better explained by the Production, Accessibility & Consumption (PAC) Model of the economy rather than the Aggregate Demand Model. Growth occurred as a result of corporate initiative in spite of policy.

Currently we are witnessing anaemic growth in the British economy and the government, which is largely monetarist in leaning, appears to consider this to be the result of quantitative easing and the cutting back of public services.

By 2007 many companies in the United Kingdom (and the USA) had accumulated significant cash reserves. However, following the bank crisis the government decided to bail out the banks and to attempt to ease the process of banks adjusting their balance sheets so as to return to lending to support investment. The policy adopted was quantitative easing combining very low base lending rates and the release of large amounts of funds to the banks. This led to a redirection of funds invested in interest-bearing accounts into assets, commodities, real estate, derivatives and other speculative investments. This has had the effect of drying up investment funds for the productive economy. As a result, by 2010 many companies began to invest their cash reserves directed towards enhanced productivity as a basis for survival. Those companies who had not laid employees off in the intervening period were able to retain the accumulated tacit knowledge of their workforce and as a result experienced the fastest growth in productivity and sales (See: Tacit & explicit knowledge). Once again growth appears to have been the result of the Production, Accessibility & Consumption (PAC) Model of the economy rather than the Aggregate Demand Model. Growth occurred as a result of corporate initiative in spite of policy.

We need incentive policies

There is a need to question the efficacy of KMS policies if on no other basis of analysis than the presentation of evidence that they are able to support efficient and effective growth. From the analysis revealed from the development work on the Real Incomes Approach it is evident that KMS policies are afflicted by the profit, monetary and fiscal paradoxes, which together depress productivity growth and sustain ineffective and inefficient policies that lack traction as a result of their differential and inequitable impacts on the social and economic constituencies.

Macroeconomic policies should be able to provide positive incentives to encourage economic units and public services to invest in technology and human resources with the objective of raising real incomes growth by lowering unit output prices or costs of operation. Conventional macroeconomic policies do not achieve this because they rely on the Aggregate Demand Model where the profit motive remains the key driver of the economy. British experience provides no evidence that this driver achieves sustained growth in real incomes.

Modest growth has occurred under deflationary conditions as between 1945 and 1968 and since 2007 as a direct result of moderated unit output prices made possible through modest increases in productivity. The Real Incomes Approach provides incentive for companies to moderate unit output prices as well as to invest in technology and human resources. These incentives based on the price performance ratio of each company or public service is used to determine a performance levy, the price performance levy, which is paid according to the degree of control over unit output prices. This system is not based on grants or subsidies since the monies involved are the funds of companies and public service units. Sound management can lower the price performance levy to zero and the reduction in the levy is a rebate paid as a bonus to all employed by the company in proportion to their base salaries.

Sustaining growth and employment

The specific policy-induced growth in real incomes and employment is a direct result of the real growth multiplier that is derived from the income growth multiplier related to the marginal propensity to consume which is fully coherent with the Production, Accessibility and Consumption (PAC) Model of th economy.

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

2 KMS - Keynesian, Monetarist & Supply side economics.

3 Robin Matthews was an Oxford-educated economist who spent most of his academic career as a member of the Cambridge Faculty from the early 1950s onwards. He moved to Oxford to take up the Drummond Professorship from 1965-1975, succeeding John Hicks, and returned to Cambridge as Master of Clare College from 1975-1993. In 1980, he succeeded Brian Reddaway as Professor of Political Economy. He returned to the Economics Faculty at the height of Mrs Thatcher’s enthusiasm for the monetarist views of Milton Friedman. Eager to ensure that undergraduates should be exposed to all schools of thought, even with those with which he disagreed, he gave a series of lectures which were pointedly entitled "Monetarism". These presented a balanced, if critical, exposition, remarkable for their prescience in stressing the distinction between the traditionalist views of Friedman himself, and the much more radical position (the precursor of ‘New Classical Economics’) that was being put forward by others.

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