The Real Economy

Vilfredo Federico Damaso Pareto
1848–1923

Vilfredo Pareto

A person who contributed significantly to the understanding of relationships that determine the distribution of benefits in an economic system was the Italian Vilfredo Pareto. He developed several important modes of economic analysis and thought including the concept of Pareto efficiency. This is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. However, Pareto was not reflecting on the impact of productivity and as a result ended up with a zero-sum indentity. This is somewhat paradoxical since pareto was an engineer.

Positive systemic consistency looks at the same question of distribution but, unlike Pareto, refers to the circumstances which break down the zero-sum identify as a result of rises in productivity and therefore the ability to lower unit prices. As a result, everyone benefits from a rise in real purchasing power (real incomes) as a result of simpy receiving the same nominal income each month.

On the other hand, Pareto was the first to discover that income follows a Pareto distribution, which is a power law probability distribution. The Pareto principle was named after him and built on observations of his such as that 80% of the land in Italy was owned by 20% of the population. Today we see the same concept being raised in the slogan concept of "the 10%", referring to the elite who appear to have benefited more from conventional economic policies while the rest of the population have been prejudiced. This has morphed into "the 1%"

Vilfredo was an Italian engineer, sociologist, economist, political scientist and philosopher.

He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices. Choice theory is an important underlying foundation of constitutional economics and to which the Real Incomes Approach contributes.

Pareto also responsible for popularizing the use of the term "elite" in social analysis.

Positive systemic consistency

Hector McNeill¹
SEEL

The failure of conventional macroeconomic policies can be summed up in their inability to deliver a sustained traction supporting a positive systemic consistency of policy impacts across the social and economic constituencies ². In order to unpack this sentence I provide the following terminological definitions:

Positive - that which is deemed to be beneficial;

Systemic - affecting all components of the economic system, that is, individuals and economic units, in a similar fashion;

Consistency - having the same directional effect, that is, benefits accrue at all levels but the degree of benefit will normally vary;

We all know from past records and current experience that Keynesianism, Monetarism and supply side (where it has been attempted) are characterized by policy outcomes that have a notable inconsistent systemic impact. That is, policy impacts can be summed up in the creation of winners, losers and those who remain in a neutral policy impact state.

What is remarkable is, given this poor record in failing to secure the interests of the social and economic constituencies, that conventional economic policies have continued with little alteration for more than a century. Today policy-makers continue to apply the aggregate income model or aggregate demand models (AIM/ADM) as the foundation for their policy analysis. The inevitable outcome of the repetition of serious mistakes in policy which continues to this day with a consistent bias in fiscal and monetary policy towards a mode of operation that consistently devalues real incomes. For further information on a more viable model of the economy see "The PAC Model of the Economy"

It is notable that people do not complain more rigorously, not about government but, about economic models that are defunct and largely irrelevant to the majority. How much longer is the nation to tolerate government policies that impose on the economy and the social and economic constituencies an inconsistent systemic outcome? Conventional policies have unpredictable outcomes and represent a somewhat irresponsible economic social experiment affecting the lives of social and economic constituents.

The Real Incomes Approach Research Programme

It is this state of affairs that gave rise to the initiation of the Real Incomes Approach Research Programme (RIARP) in 1975 in Rio de Janeiro³ as a result of Keynesianism, and the then promise of monetarism, clearly being unable to come up with policy proposals to manage shocks to the economic system without prejudicing segments of the social and economic constituencies. The same approaches are also unable to manage the economy to avoid shocks arising from sudden changes in the market conditions of finance and commodities. This is why the quest of RIARP was to identify policy instruments that could achieve a positive systemic consistency. In constitutional terms it was important to achieve a systemic scale by using policy instruments that could be applied at the level of the firm and individual conveniently and with advantage. In this way the aggregation of the outcomes for the social (employment & incomes) and economic (productivity & growth) constituencies would result in a positive consistency. The additional challenges was to identify the common economic and constitutional ⁴ objective that would remain a coherent at the macroeconomic, microeconomic and individual level. The indicator of real incomes was the common objective identified and the issue then became the identification of the mechanism that determined real incomes under the normal conditions of economic operations (see "Why Real Incomes?"). In the context of the supply chain model for the whole economy the most appropriate measure or governor of real incomes is the relationship between the conversion of unit input values to unit output prices, on the one hand, and to the movements in nominal income, on the other. On the question of the impact of conversion of input to outputs, the price performance ratio (PPR) captures the relevant information (see "The price performance ratio"). On the question of distributing nominal income according to the contribution to real incomes growth, Price Performance Policy (PPP) makes use of a price performance levy (PPL), using the PPR as a coefficient, to achieve this purpose (see "The price performance levy").

Everyone benefitting?

One of the positions taken in terms of the optimization of income distribution is that if someone gains someone else loses. This is true if aggregate income is fixed at some nominal sum and if income is measured in nominal terms. However this constraint is eliminated if policy augments productivity and real incomes so that everyone can benefit. Futher information on the income distribution impacts of PPP can be found here "The Real Growth Multiplier" and here "Growth Impetus".

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

² the social constituency is made up of individuals and family groups and includes all voters in an electorate.The economic constituency is made up of individuals organized as economic units as individuals or groups who participate in the economic activity of a nation.

³ The RIARP was initiated in 1975 to analyse the impact of international petroleum prices on the Brazilian Economy. However,very soon the supply and demand analysis raised issues of a general inability of Keynesianism and monetarism to come up with effective policies exposing significant gaps in conventional economic theory and policy. The emphasis of the RIARP therefore shifted to macroeconomics with the first publication in 1976 concerning an analysis of the UK economy. The RIARP moved to Portsmouth, Hampshire, United Kingdom in 1978 and was absorbed by SEEL-Systems Engineering Economics Lab in 1983.

⁴ Constitutional economics became an important "container" of the Real Incomes Approach when I discovered the work on James Buchanan in 2003 - see "The Importance of Constitutional Economics"

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