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Is this RIO business socialism or capitalism?

Hector McNeill1

When I have presented the real incomes approach to economics there is often a degree of puzzlement amongst those present caused by an inability characterize RIO-Real Income Objective policies as left wing or right wing, socialism or capitalism. Well, I can answer this. It isn't any of these approaches because most of these labels apply to notions that at their root operate on the basis of the assumptions that the economy works on the basis of the aggregate demand model. Clearly if these so-called approaches all have the same flawed perspective on economics, there will be cognitive barriers to understanding an economic theory and propositions that reject this model and base all analysis on an alternative and more applicable model.

Much ado about nothing....?

Before explaining why RIO is neither socialist or capitalist (is that possible? I hear someone murmur) it is important to understand, in the political economic context, what so-called socialists and so-called capitalists are about. The mechanism of General Elections in the United Kingdom sees victorious political parties proudly wearing the mantle of proxies of their benefactors "in the name of the majority" in a cynical parlour game maintained through misleading assertions, propaganda and disinformation. Whether our political parties actually deliver "socialism" or "capitalism" in practice is another question altogether. It is on occasions difficult to separate policies and outcomes and point to any imposed system as socialist or capitalist.

A deeply troubled foundation to the political evolution in the United Kingdom 1945-2020

At the end of the First World War some British troops ended up murdering some of their officers because of allegations of lack of concern for troops in battle. Following a disastrous Versailles Treaty and the Trianon Agreement that reduced Hungary to 30% of its original size leaving millions of Hungarians to fend for themselves in countries where they became minorities, Winston Churchill warned of the likely consequences of this vindictive treatment, but was ignored. The impositions on Germany combined with the Great Depression gave rise to Nazi Germany leading to another war including the rise of Fascism in Italy and Spain. Confidence in the decision making competence of British statesmen and politicians was at rock bottom, in spite of the fact we were on the "winning side". A new political era and motivation on the part of the British electorate was signalled by Winston Churchill,
our victorious war time leader, losing the first post-war General Election to Clement Attlee and the Labour party. There was, on the part of businessmen, land owners and the richer segment of society a fear of Labour because of misconceptions as to the logic and emotions that gave Labour a mandate. On the other hand the recriminations against the Conservatives and those who supported the Conservatives reflected a lack of confidence or trust on the part of the "working class". Politics in Britain entered a contentious period. However, if one is to try and make a judgment as to any differences in economic performance between what some would consider to be a socialist Labour governments and capitalist Conservative governments it is difficult to do so.

A notion as to why this is the case, was explained by the Italian political scientist, Gaetano Mosca (1858 – 1941) who developed a governance by an elite theory and the notion of the political class. He opposed what he referred to as pure democracy because he considered it to be essential that the ruling class should not be homogeneous but should consist of people who are diverse in origin and interests. However, political power tends to originate from a single source, even with universal suffrage, which he considered to risk the development of oppression. The second issue is that whoever is elected is considered to represent the so-called majority. Primitive societies are ruled by “organized minorities” who direct the affairs of the "disorganized majority". So Mosca's model as a primitive governance by an elite appears to fit the United Kingdom post-1945.

Labour and Conservative governments 1945-2020

Since then, in rounded years, there have been 32 years of Labour governance and 43 years of Conservative governance over this 75 year period i.e. 43% of the time under Labour and 57% of the time under Conservative administrations. These administrations are indicated by year and colour coded down each side of this article content (Blue: Conservative, Red: Labour).

Economic policies

In terms of "wings", Labour is considered to be left wing and socialist and Conservatives, right wing and capitalist. So in order to comprehend any relevant differences we have material for a case study in assessing their relative performance in economic management.

Following the post-war Bretton Woods agreement it is notable that between 1945 and 1971 there were no financial crises.

The general approach to economic policy in the United Kingdom was shifting towards Keynesianism whereby government expenditure would be used to maintain full employment and stimulate economic growth. However, in what became known as the Golden years of Keynesianism between 1945 and 1965 a detailed research study by Robin Matthews, Professor of economics at Cambridge University, demonstrated that no Keynesian policies were applied during this period under the 9 years of Labour and 12 years of Conservative governments. Under Keynesianism a government deficit would have been expected whereas the governments ran current account surpluses throughout the period and policy was highly deflationary. It would seem, judging from policies in the following years, that the lessons were completely lost on both parties. The lesson was that the reason for the unprecedented growth and very low levels of unemployment was the reconstruction post war recovery and companies essentially going about their business unhindered by intrusive economic policies. Real incomes and the standards of living of the majority of people advanced apace in a country that made health services accessible to everyone through the new National Health Service.

Central planning

One of the criticisms leveled at the Labour party was its "socialist" adherence to "central planning". However, Harold MacMillan's Conservative government (1957-1959) was as much at home with industrial policies worked out between industry and unions and the government as was any Labour administration. In those days having recently come through a war where central planning by government had been an essential and relatively successful basis for policy. There was a better understanding of the utility of central planning for specific purposes. After all, Keynesianism had, as one of its policy instruments, government investment in public works and infrastructure projects which are, of course, centrally planned.

The demise of the gold standard 1971

Both France and the United Kingdom requested gold from the US in exchange for dollars but ended up receiving dollars instead. 1971 President Nixon closed the "gold window" that meant dollars could no longer be exchanged for gold. This signalled the end of the Bretton Woods Agreement and heralded the return to the pre-Bretton Woods financial instability to come in a new world of devaluing fiat currencies.

1973, the end of Keynesianism?

Attention to these developments was diverted by a sudden sequence of events starting 1973 when the international price of petroleum rose steeply and kept on rising until 1981 by a factor of around 6 in real terms. This gave rise to slumpflation, the combination of rising prices (inflation) and rising unemployment.

Keynesian policy instruments could not contain this inflation because the whole superstructure of the theory was based on the aggregate demand model (ADM) that considers unemployment to be a result of inadequate "demand". On the other hand, inflation in the ADM world is caused by excessive demand. However, the slumpflation crisis was the result of cost-push inflation arising from the high rate of price rises of an important production input, petroleum and petroleum derivatives. So higher demand through government debt based expenditure would only increase inflation according to the ADM and reducing expenditure would increase unemployment.
In the meantime...

An generally un-noticed event occurred just after the closing of the gold window with Black and Scholes publishing a paper on the hedging of options which resulted in a rapid adoption of algorithmic decision analysis models based on the Black and Schole's model to trade in derivatives and other financial instruments. This gave rise to an impulse in the process of financialization associated with a transition from engineering and innovation management of production enterprises to an emphasis on the financial product where whole companies became commodities generating income for financial institutions and shareholders. This initiated an erosion in the linkage between productivity, profitability and price earnings ratios and share prices. A grey market appeared where the turnover was to become larger than national economies consisting of trade in derivatives and financial options over which government authorities had no oversight or control. An generally un-noticed event occurred just after the closing of the gold window with Black and Scholes publishing a paper on the hedging of options which resulted in a rapid adoption of algorithmic decision analysis models based on the Black and Schole's model to trade in derivatives and other financial instruments. This gave rise to a rise in what became known as financialization associated with a transition from engineering and innovation management of production enterprises to an emphasis on the financial product where whole companies became commodities generating income for financial institutions and shareholders and an erosion started in the linkage between productivity, profitability and price earnings ratios and share prices. A grey market appeared where the turnover was to become larger than national economies consisting of trade in derivatives and financial options over which government authorities had no oversight or control.

Monetarism and more central planning, 1975-2020

A brusque intervention came from the Chicago School of monetary economics largely promoted by Milton Friedman. This did not bring new solution to the underlying structural economic causes of the slumpflation crisis i.e. the need to change the economy to petroleum substituting technologies, but simply asserted that monetarism was the future of macroeconomic policy. The basic operation was a return to a more aggressive intervention by governments in markets on the basis of an agenda that saw the financial services sectors as the main vehicle for driving the economy. The flaw in this approach was the same issue facing Keynesianism, the monetarist model was based on the same ADM. Monetarism operates on the basis of a centralized planning model which is somewhat stark in terms of structure. No analysis is applied to intersectoral and work force requirements but rather sweeping all-embracing assessments lead to the determination of interest base rates and volumes of money to be released into the economy, based on debt. So two variables, interest rates and money volumes are established centrally and imposed on individuals and companies who each have vastly different conditions and prospects. There is no possibility for individuals and company management to operate in free competitive markets with respect to access to money.

This basis for the "management" of the economy is highly introspective in the sense that the political party in power serves as the proxy of their benefactors and as a result conduct policies in line with their wishes. But monetary affairs and policies were established long before there was even any notion of universal suffrage in the United Kingdom (see "The opportunity cost of our democratic deficit") and monetarism and policies on monetary affairs were never an issue the "people", as Mosca's disorganized majority, on which the electorate is even considered to have a voice. This is such an ingrained habit developed over the last 500 years with universal suffrage only having been around for 100 years the two political parties have maintained this bizarre exclusion of the electorate from any participatory contributions to monetary policy decisions.

Both socialists and capitalists promote their belief in freedom and yet the fixing of interest rates causes a large number of individuals and companies to be limited in their ability to achieve what they wish either because interest rates are too high or too low, resulting in monetary diversion into assets and the introduction of hurdles by banks who prefer to make easier money on the asset markets. On the other hand, high or low interest rates the financial services industry do well. So this centrally imposed one-size-fits-all monetary policy has a profound impact of the exercise of freedom of the majority (those disorganized folk). From the standpoint of the electorate and a wide range of companies these constraints on freedom come from the totally disoriented basis for economic analysis and decision-making exercised by the elites, whether they are socialist or capitalist.

It is the details that are important not the sweeping assumptions

My first exposure to economics was by attending lectures as an undergraduate, given by economists who were also extension service personnel from the Farm Economics Branch at the School of Agriculture at Cambridge University. As part of our course we were required to visit farms and gather what we considered to be key data from the farmer concerned and to then identify a farm plan to increase the farmer's profit. This meant gathering data on the crops and livestock "enterprises" on a farm, the variable inputs such as fertilizer, pesticides, water, labour, seed, concentrates and other inputs. We then needed to ask about the farm area and available equipment and their capacities as well as soil types because some crops did not do well under certain conditions and sometimes heavy (clay) soils created problems at harvest time.

Because we were taught by economists who worked with farm extension officers (National Agricultural Advisory Service) a specific aspects of this work was the dissemination of new technologies and techniques to farms to improve productivity. Indeed, the use of gross margins (GMs) and linear programming (SIMPLEX) was used generate optimize plans to be handed back to farmers. The pioneer in promoting the use of GMs was David Wallace the Gilbey Lecturer in Agricultural Economics at the School who was also very much involved in research on social conditions in the countryside. The governments at the time were interests in promoting the use of GMs to promote productivity because they wanted to reduce the price subsidy policies. NAAS essentially had the mission of promote innovation and advances in technology and technique to ensure farmers real incomes could rise while subsidies were reduced.

I should also add that we also studied agricultural policy and, as a result of the very practical nature of the microeconomic teaching, we soon build up an appreciation of the difficulty of any policy to meet the needs of an amazingly heterogeneity of farm conditions, sizes, locations and level of farmer competence. It was more than obvious that any policy would end up generating a mix of winners, losers and those in a sort of limbo or neutral policy impact state. The overall conclusion one drew from this type of training was, it is the details that are important. The other important lesson is that if decision makers do not take the trouble to understand the full range of sector conditions it is likely that introducing "well-intended" policies could prejudice a large segment of the sector to the degree of many farmers becoming bankrupt.

Following graduation I remained at Cambridge to complete a post-graduate course in agricultural economics. This meant attending the macroeconomic and microeconomic sequences at the Faculty of Economics including an excellent course on Project Evaluation and Biometry, as compulsory requirements. The Economics Faculty was where I was first introduced to aggregate demand concepts or the ADM. We received lectures form various economists including Joan Robinson, E. A. G. Robinson, Nicholas Kaldor and many others. The first thing that struck me was that moving from the very detailed data set environment of farm planning where the details are important and determine the difference between a good and a bad farm plan, our lecturers in economics were quite content to deal with sweeping generalizations and a lot of graphs based on mathematical "models" and "econometrics". At the macroeconomic level the level of detail did not get beyond Land, Labour and Capital and the models at the time, such as Cobb-Douglas production function, seemed to ignore the complexity or heterogeneity of the economy. When I would ask where the data for a specific impressive graph came from, and by that I mean how the data was collected, the response was often the citation of a mathematical formula or the work of some long forgotten academic economist. On the other hand if, in my ignorance as a student, I still insisted as to the source of data, the explanation would switch to the lecturer explaining that he or she was explaining a concept with the strong implication that my question was not relevant. With people like Joan Robinson and Cambridge having been the alma mater of John Maynard Keynes the macroeconomic courses were dominated by Keynesian "analysis". It was a sort of cultural phenomenon which for some reason uplifted many faculty basking in the reflected glory of the old master who had died just 20 years before. Somewhat like the Quantity Theory of Money (QTM), Keynesianism, at least how taught, seemed to me to pulsate on a fuzzy cloud of unreality because of its distance from the real economy. My conclusion was that is seemed to be a collection of assertions since by that time in the late 1960s, Keynesian policies had not been applied in the United Kingdom as confirmed by Robin Matthews, Professor of Economics at Cambridge, who was less associated with the Keynesians and of a more independent mind; he even gave a good series of lectures on montarism when the Thatcher government ventured into this terriroty.

Where does that get us?

Keynesianism to this day remains relatively unscathed as a foundation of macroeconomics alongside monetarism creating a hybrid system. In the end it it is all monetarism. However, because the constituency is not permitted to question what is in reality an ADM concept, we are faced with a policy instrument set and general analysis that has no possible adjustments or accommodation for the heterogeneity of the individuals and companies in the economy. This one-size-fits all the policy set is dangerous because Keynesianism and monetarism contains no notions or adequate recognition of the critical role of innovation in technology and techniques in being the source of economic growth and, as the salvation of those who otherwise could not survive under current economic trends.

Socialism and capitalism

In the United Kingdom both Labour and Conservative have religiously adhered to the tenets of the Keynesian and Monetarist generalities and as a result socialism and capitalism in this country have not been particularly effective in bringing about an optimized growth in real incomes in the economy when policies have in fact been applied. The reason, in reality is self-evident but our political party leaderships only take initiative that do not cross the desires of their benefactors and so this ridiculous state of affairs continues. Until the disorganized state of economic analysis is exposed by bringing the constituency into the arena of policy discussions where they can explain the particular gaps and needs facing them, economic policy can never begin to address the underlying needs of this country.

RIO-Real Incomes Objective policies

The work giving rise to RIO was initiated in 1975 in an attempt to identify an economic analysis that would build a theory and policy propositions to solve the slumpflation crisis. However, by 1976 when the significance of real incomes became apparent, I named the approach the real incomes approach. However, there is a significant detail. In 1981, I sent a monograph summarizing the approach to Robin Matthews, who was then Master of Clare College at Cambridge. I later visited him to secure feedback on the proposition. and he pointed out that the price performance ratio analysis I had produced assumed inflationary conditions as a legacy of having initiated this work to address slumpflation. He asked, "What happens if you have deflation?" I didn't have a ready answer because this was a gap in my work. This was a large oversight on my part and his question was vital because when I completed the deflationary analysis the result was a general macroeconomic theory and policy instruments able to address any conditions and not just being a fix for inflation.

RIO does not have centralized interest rates or corporate taxation. Interest rates become a freely determined "price" as a result of transactional negotiations between lenders and borrowers. Encouragement is given to saving by removing the ability of governments to base "policy" on money volumes and interest base rates. Policy actions such as quantitative easing would not feature as a policy options. All government revenue-seeking is based on PAYE, individual accounts, circulation taxes and levies. The one size-fit-all interest rates induce arbitrary impacts on companies and individuals limit their freedom to pursue their objectives. Corporate taxation isolates wage earners as a result of the accounting norms classifying wage earners as a cost item, in competition with profits. This creates a perverse incentive for managers to cap wages to maximize profits. On the other hand, policy provides no incentives to encourage companies to increase productivity which could maximize growth, incomes and raise real wages of employees at corporate and national levels (see RIO and Locational State Theory - Rational laws and regulations).

The combination of the price performance ratio and the price performance levy permit companies to set their prices in response to raised input costs and/or marginal investments so as to gain price performance levy reductions even reducing payment to zero. As a result the RIO policy accommodates any situation facing the majority of constituents and firms, it embraces heterogeneity, and allows each the unencumbered freedom to pursue their objectives according to their desires within the constraints set, not by policy, but their circumstances.

RIO policy provides an incentive for increased productivity and containment of inflation, thereby raising the purchasing power of the currency and real incomes of the constituency.

Economic growth

The fallacy of aggregate demand management was identified by 1976 as a result of developing the price performance ratio and then analyzing the response of firms to money volumes in the general economy. The notion that excessive demand or money volumes create inflation or lack of demand or lower money volumes cause deflation was shown to be fallacious. Unit prices vary purely as a reaction by company management to perceived circumstances and setting unit prices according to their understanding of the price elasticity of consumption for their output. There is a trade-off between risking lowering prices to penetrate the market on competitive terms and gaining a revenue stream that is either stable or increasing in real terms. This is why hyperinflation occurs when there is an assumption of increasing inflation resulting in companies raising unit prices in order to maintain or increase the real value of their income streams. This is a logical process. For this reason the QTM (Quantity Theory of Money) is invalid as a means to explain the impact of money volume on inflation because this relationship does not exist. The more recent experience with quantitative easing and low interest rates imposed on the economy added additional weight to the irrelevance of the QTM. This was because the QTM cannot explain the outcome as relatively stable prices in goods and services and a massive inflation in asset prices. For this reason the Real Money Theory was proposed as a substitute because it includes the non-circulating money components of assets and savings which are not represented in the QTM.

Is RIO socialism or capitalism?

Given the number of financial crises caused by poor regulatory frameworks and a damaging ADM as the foundation of policies deployed by Labour and Conservative governments, they share a poor track record of instability and failure to advance real economic growth to its full potential. Real wages over the last 30 years of 13 years under Labour and 17 years under the Conservatives have declined and profits have risen as a share in national output; the majority of the constituency have lost out. Labour and Conservative have participated in delivering policies were, and remain, an abuse of power in failing to provide individuals and companies with an unimpeded freedom to pursue their objectives. They have both permitted the interests of a tiny faction of constituents, whose fortunes lie in asset markets and financial services, to dominate policy decisions. They both contributed to the rising income disparity.

It should be evident that anyone proposing an alternative policy to the ADM , such as RIO, will reject any suggestion that this approach can be compared, in any way, to what passes for socialism or capitalism in this country.

The most appropriate fit for classifying RIO is as a new front for constitutional economics in its ability to permit greater freedom for individuals and companies to make their own choices in how to pursue their objectives in a way that benefits the real incomes of all. In this way the notion of public choice is no longer a zero-sum game but rather a practical win-win reality driven solely by the free actions of social and economic constituents made possible by removing the prejudicial and arbitrary central government interventions in markets associated with the flawed ADM.

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

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