RIO and Locational State Theory
Adding individual freedom to policy objectives
Hector McNeill1
SEEL
In setting out the ethic of constitutionalism James Buchanan explained that it is where the individual who is expressing preferences for social and economic conduct, together with others in society, adopts the moral law as a general rule for behaviour. This philosophical position forms the basis of constitutional economics. To be productive this framework must be able to balance the interests of the state, society, and each individual.
Our experience with macroeconomic policy is that the state possesses a commanding role and society, whose interests are represented by a less than fully participatory electoral process, is dominated by factional political parties. This results in the individual having no effective say in decisions affecting their lives. Their freedom for exercising options is compromised by decisions made by others.
This creates constitutional issues in terms of the personal freedom of expression and choice.
By adding the space-time dimension to real income components, Locational State Theory exposes why individual objectives, pursuits and individual freedom do not feature in conventional macroeconomic theory and policies. |
Expectations
An important, but seldom referred to relationship, is that between expectations and real incomes. Expectations, arise from our culture and upbringing and are related to social behaviour, economic feasibilities and moral and ethical questions related to the things people do. The community or social conscience constitutes what people consider to be behaviour that falls within the normal range of expected human behaviour according to custom, practice, religious tenets and the law. In economics there is a well known process known as the demonstration effect whereby people become aware of a new product or service by observing others who have purchased and made use of them. As a result something that was not amongst people's expectations as something they needed, enters their domain of awareness and, after reflection, people might wish to purchase that item or use the service. If they have sufficient nominal income i.e. number of currency units available to make the purchase, then they will have increased their purchases and level of satisfaction of consumption of goods and services considered to be desirable or useful. However, a range of products that are promoted through media can have the same effect to the demonstration effect, however, many people may not have sufficient disposable nominal income to purchase what they would like to. What people observe as a range of consumption expectations amongst those with higher incomes, are not accessible to lower income families. Their feasible expectations are therefore lower.
Real incomes
Moving from the measure of nominal income, real income relates directly to what is accessible to individuals and families in terms of the goods, services, information, knowledge and devices that enable them to enjoy preferred activities such as art, playing a musical instrument, hiking, cycling or attending some church or club. So the main distinction between a single figure or range of nominal incomes is transformed by real income into something more informative. However rather than being a list of purchases, real incomes can be "animated" by applying the locational state associations with each object purchased, service received and the individual. The main effect is the time dimension, but locational state does not assign any significance to unit prices but takes into account activities that consume time. As a result, real income becomes transformed into a new dimension of time allocated to different pursuits in relation to what can be purchased and what is free, to support desired human activities; pursuits that fulfill each individual. Naturally, possession and use of this mixed bag of things and activities depends upon the relative prices of goods and services, including what is free. Products and activities to which a price cannot be allocated tend to be ignored in economic theory. However, at this level of analysis, it is evident that knowledge of the number of currency units someone earns does not inform us about what their real income is, or what each individual's expectations are of what constitutes satisfactory living. Each individual has different priorities and therefore people with the same nominal income can have quite different "life styles" and objectives in terms of what they do with their time and money. The baskets of goods and services that satisfy their expectations are very different.
FreedomAn important aspect of this more detailed real incomes "content" is that a rift appears between an individual's utility maximization function in terms of what can be purchased by a specific level of disposable income, expressed in nominal units of currency, and the what each person wants to become, expressed by what they do and how this develops their thinking and expression as reflected in this extended form of real income. People do not always know what they want to become, but their likelihood of a pleasant and fulfilling experience is, to a large extent, defined by their real income trajectory. Therefore real income provides a profile of a person's degree of freedom to pursue their own objectives. An observation on this matter is that equivalent levels of nominal income, therefore, say nothing about their state of freedom. However, real income only adds some additional guides because much of what a person wishes to become has different time horizons and demands concerning time dedicated to reflection, knowledge acquisition. The cumulative time laspes are needed for people to develope their tacit knowledge in perfecting some practical competence. Nothing is frozen in time.
The significanceof this conceptual transformationFrom the perspective of the transformation of real incomes by taking into account locational state associations there is a point of reference to human freedoms. The real incomes approach therefore contributes to a redefinition of the role of macroeconomic policy in terms of the needs of individuals. People require the freedom to satisfy these needs. This advances the case for making feasible, in terms a economic policies within a constitutional context, the balancing the interests of the state, society and each individual.
This needs to be given further thought because the individual's degrees of freedom in attaining what they wish to be is very much related to this modified expression and measurement of real incomes.
Many articles posted on this site have explained how conventional macroeconomic policies' emphasis on exogenous money values and the nominal aggregate demand model, favour those who participate in asset markets. At the same time, during the last 20 years these policies have created circumstances where real incomes, for the majority, have been declining. On the other hand, the real incomes and wealth of the minority who transact in the assets markets have increased substantially. A constitutional macroeconomic policy should provide the means whereby all have the freedom to pursue their individual objectives while not constraining the freedom of others to do the same. Conventional policies do not achieve this. They provide the means for a small minority to enjoy the freedom to accumulate wealth and rising incomes while constraining the freedom of the majority from becoming the persons they wish to become. This is because a small minority have the influence to protect their freedom while the majority are powerless to protect theirs.
1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.
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