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A snippet of Kaldorian logic for building back better

Hector McNeill1

Nicholas Kaldor (1908-1986) had a logical objection to the monetarists alignment of monetary volumes with inflation; the same logic applies to the Keynesian model.

Nicholas Kaldor (1908-1986)

©Cambridge Journal of Economics

Nicholas Kaldor was an early opponent to monetarism and most of what he stated against monetarism turned out to be correct in practice. He was one of the few economists to disagree with the doctrine of the monetarists and he led the intellectual assault worldwide against the monetarist view that inflation is always and everywhere a monetary phenomenon in a causal sense caused by excessive government expenditure financed by money creation.

The development work of Real Incomes Approach had established in 1976 that inflation is not a monetary phenomenon but more closely related to productivity insufficiency.

On the other hand Kaldor had a more fundamentally logical reason that because money is largely made up of credit which comes into existence because it is required then money is endogenous to an economy, not the causal factor in the determination of output and prices. Our own work is complementary and adds that if credit is going into productive investments then this cannot cause inflation but rather to deflationary conditions leading to higher real incomes.

If these logics are extended to look at Keynesian policies it is evident that the spender and investor is the government and therefore the normal due diligence criteria for good investment need to be applied. In other words it is necessary to analyse the direct returns to infrastructural investments to the economic and social constituents.

Since Kaldor expressed his views, monetarism has morphed into intensive financialization and endogenous money has been greatly augmented by exogenous money, much of which does not go into productive investment but assets. Some 50% of the stock market share boom has been caused by share buy backs applying QE funds.

So the monetarist model has changed.

However, from the standpoint of government investment and Keynesianism the same rules should apply as pertain to private business investment seeking a return.

Things are not what they seem

The World Bank, a Bretton Woods institution, completed investment portfolio reviews in 1992 and in 2010 which showed that 35% to 45% of government economic development projects fail. Also the number of projects funded and subjected to cost-benefit analysis (CBA) fell between 1960 and 2010 from around 85% of the projects to around 20%. OQSI (Open Quality Standards Initiative) concluded that this significant international government loan-funded failure rate was linked to a failure in due diligence design procedures and comply with internal World Bank regulations on the determination of returns based on productivity gains.

Measuring which benefits?

Prest and Turvey2 define the CBA process as,

"maximizing the present value of all benefits less that of all costs, subject to specified constraints".

Their cost-benefit model is based on the then modern economic theory and outlines four key issues to address for successful CBA:
  • Which costs and which benefits are to be included?
  • How are the costs and benefits to be evaluated?
  • Discounting of future benefits and costs over time to obtain a present day value.
  • What are the relevant constraints?
Although as dedicated students following course on CBA, it has to be pointed out that, in practice, undertaking CBA ends up being quite different from theoretical methods, for example: Textbooks assume that:

a. All (relevant) impacts are known and covered.
b. All impacts are equally certain.
c. All impacts are quantified in monetary terms.
d. All costs and benefits are properly discounted.
e. The most beneficial option can be identified.

In practice, the practitioner attempting to carry out CBA finds that:

a. Some impacts are in verbal-qualitative terms only.
b. Some impacts are uncertain.
c. Some impacts are quantified, but not monetised.
d. Few impacts are monetised.
e. There is a trade-off to be resolved by decision makers

As a result many of the benefits "measured" via CBA is what the assessors and decision-makers agree to make them and in the case of governments justifying some action to "benefit" the constituency, they have tendency to exaggerate CBA benefits by finding an array of secondary and tertiary benefits which essentially divert this procedure away from having anything to do with due diligence. As a result, the promise never materialises into something as significant as stated.

The current appeal to infrastructural investment, building back better and a string of proposed new deals, in a period when throwing money at problems appears to be the underlying logic, needs to be subjected to a change in the rigour applied in the evaluation of public initiatives by linking quantifiable productivity gains to potential inflation reduction and real wage augmentation.

The Cost-Benefit of Keynesian and Monetarist economists?

But don't hold your breath. The alarming reality is that the current known universe of Keynesians and Monetarists still rests on aggregate demand model (ADM) and the discredited Quantity Theory of Money (QTM). However, an economy that is in equilibrium and gaining real incomes growth needs to apply the Production, Accessibility and Consumption Model identified by Jean Baptiste Say almost 220 years ago. It is apparent that Monetarists and Keynesians lack independence because of their dependency and need to adjust their focus to the movement of political party power benefactor interests. For the sake of the country, some of them need to break out of this aimless intellectual prison. They could make a beneficial start by terminating the trivialization of Say and make more effort to understand the significance of Say's model of the economy. The Real Incomes Approach is an attempt to lay out the foundation for such an approach which, as time passes, is becoming of increasing relevance to our economy and the constituents of this country, brought to an unacceptably low pass by the fixations of Monetarists and Keynesians.

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

2  Prest, A. R., and Turvey, R., "Cost-benefit Analysis: A Survey", The Economic Journal 75(300):683-735, 1965.

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