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RIO and Locational State Theory
Changing perceptions on welfare and constitution

Hector McNeill1

Arthur Pigou's 1920 book of welfare economics laid the ground for associating macroeconomic policies with the interests of constituents. James Buchanan wrote extensively on the role of public choice in establishing a constitutional economics that supported agreed laws on expected social and economic behaviour.

However, the central tenets of macroeconomic theory and practice were crystallized in the form of monetarism centuries ago when any serious concern for constituents was not a priority because there were no participatory decision making mechanisms involving the majority of the populations. This, in essence created the default reality of governance being concerned with "political economy", or decisions based on the interests of the governing elite. In terms of the representation of interests in what we now consider to be democratic elections and parliamentary procedures, the main interests of those who govern persist in maintaining policies shielded from any influence of the majority. Monetarism is maintained as the foundation of macroeconomic policy to which Keynes added a variant to address depressions.

This note explores how the transformation in real incomes analysis, resulting from Locational State Theory considerations, can help set a course to an economic model that is more in line with the interests of the majority.


Pigou's work had the effect of pointing out that in relation to the conditions facing constituents the overbearing weight of macroeconomic policy based on monetarism was an insufficient condition for solving specific and real problems facing the majority. For example, Pigou considered the issue of externalities arising from certain activities, such as polluting industries. The Pigovian Tax levied on polluting activities could discourage these activities and their expansion and encourage changes in technologies to reduce these effects, thereby benefiting the majority. The basic modus operandi of this type of policy is to create incentives for a change in behaviour. Whereas, this sort of "imposition" is considered by those doing the pollution as being a negative incentive, involving them in additional expenses, it is notable that the Pigovian tax became the basis of global carbon trading (CT) to the benefit of all, including polluters. However, CT has a drawback because it is slowing down the rate of technological innovation leading to changes in technology of polluters because the CT tax has simply become a cost of doing business. This issue will be revisited later on in this note.

Externalities affecting real incomes

It is evident that the externalities, such a pollution, are the direct result of the activities of specific economic units. From the standpoint of real incomes whose makeup have been transformed by Locational State coordinates, free items, as well as those acquired through price-based transactions in markets, are now included. It therefore is clear that "free" air or water pollution features in the real incomes account that measures the standard of individual existence. The judge of this standard of individual existence is not governance or those creating the externalities, but the individual. The fact that pollution is "free", it has become part of our environment, is not a basis for discounting its significance to individuals2. For example, the current suppression or reduction in the rate of growth in real incomes which limit people's freedom to explore options and progress as they desire, are "free" externalities generated by macroeconomic policies. As in the case of Pigou's consideration of pollution, consideration of the impacts of monetarism on the majority become an inescapable problem requiring a solution. However, this will not be solved by applying negative incentives that revert to the status of the cost of doing business. For example, the "light touch" financial regulatory regime has ended up with sanctions that are so weak, in relation to the balance sheets of offending organizations, that it has become prudent to break the law in an unethical sense because the benefits of such behaviour outweigh any likely sanctions; the cost benefit of transgressing regulations is financially attractive. This cynical reality points to the perverse nature of financial regulations, shaped not by any process of participatory public choice, but rather, by those in power following the preferences of the financial sector that wields the power.

Positive incentives

It is far more productive to apply a policy logic that does not reflect a fear of the financial sector's power but rather acts to encourage fully corrective behaviour. This is only possible if the result of desired change is even more beneficial to economic units than not responding to the incentive. RIO-Real Incomes Objective bases policy instruments on a positive incentives model geared to encouraging raising productivity, price competition and market penetration and growth.

The asset-wage rift

The experience with the 1929 Crash, the 2008 financial crisis and the decade of experience with quantitative easing (QE) makes very clear that monetarism positively promotes the interests of assets holders, a minority, and discourages the interests of wage-earners, or more specifically, constrains the rate of rise in wages of the majority. As a result of the centuries old financial structures, government revenue-seeking and the emergence of a legal and regulatory framework covering taxation and company accounting, there is a parallel imposition of a systematic discrimination against wages while favouring profits. Law does not have to declare that companies should constrain wages in order to raise profits, but the accounting regime encourages this bias. This state of affairs only has to rely on the decision making preferences of managers with an eye on shareholder value to take decisions that constrain wages rises. Therefore the sources of the externalities that constrain real incomes are not only part of the centralized nature of monetarism but the very administrative operational legal and regulatory structures used to "manage" monetary and fiscal affairs also contribute to an intensification of forces acting against the interests of the majority.

The central bank fiscal action dynamic

The agents nominally in charge of governance are political parties. However, James Buchanan recognized that such organizations possessed their own interests and agendas which come into play around the questions of the establishment of public choice. All political parties pander to the preferences of their paymasters whose contributions to the finances of political parties and selected politicians, actions that remain largely out of sight. Political parties have been effective in distancing constituent opinion and concerns with respect to monetarism by placing such decisions in the hands of so-called "independent" central banks who look after "monetary policy". Central banks basic decision analysis concentrates on the "health" of the financial system where stability is equated with profitability of the sector. Most monetary policy and regulatory regimes, during the last 30 years, has been prejudicial to wage earners. The buffer or price politicians and governments pay in this process is that central banks will declare that policy has done all it can and there is a need for fiscal action. This means the politicians need to change aspects of policy which more obviously affect the majority of constituents. So they will fiddle with taxes and allowances in a micro-managed sense while, at all times, never questioning the central bank's imposition of prejudice on the majority. In reality fiscal policy cannot do much because of the basic legal and regulatory framework relating to enforceable corporate taxation and accounting norms, whose basic principles were established before we were a democracy. There is therefore very little government, those we assume are in power, can do without a radical reform in constitutional principles related to finance, corporate taxation and accounts. Certainly, the financial sector, management accountancy and audit firms have no interest in disturbing their cash flows for the sake of wage earners.

Welfare economics?

The valid notion of welfare economics cannot advance far because of the overbearing constraints imposed by monetarism. Following Keynes, governments have increasingly exercised the options of raising loans (debt) to assist when there are major economic problems. However, the way in which this system works appears to be a permanent welfare function supporting the interests of the finanical services sector. Not only do central banks decisions greatly favour the sector, if there are issues and threats of failed loans and failing balance sheets, the government steps in to help the financial services sector with generous gifts such as quantiative easing. However, the impact of quantiative easing has been to undermine welfare provisions for wage earners and those with difficulties from a variety of causes and which in economomic and financial terms constitute a fraction of the costs of the financial sector bail out. The system operates as a welfare state for the financial services sectors. But since this is disguised as monetary policy under the control or in agreement with an "independent" central bank, its fundamental welfare nature is obscured. The term "bail out" has been applied widely but it is odd that this is not equated with a particularly generous welfare provision to those being bailed out.

The retort to this observation is that the financial services sector creates investment to create jobs, innovation and economic growth. If that is the case why is it that during the last 25 years the record has been one of falling investment, declining innovation and falling real incomes. Employment was, before Covid-19, stable but average hourly rates were falling in real terms. On the other hand, there has been massive inflation in the asset markets bolstering the wealth of asset holders.

Politics and power and economics

In this political economy, it is very clear that the resistance to policy that genuinely works in favour of wage earners can only be reduced by exposing the political nature of economic policy decisions. To clarify, policy decisions have a far greater political weight favouring a small percentage of the constituency than any economic logic in favour of a general growth in real incomes of the majority. Decisions are heavily weighted in favour of those in power. "Too big to fail" was a mantra circulating at the time of the 2008 financial crisis but this would have been better expressed as "Too powerful to be allowed to fail". It is now well-established that politicians faced threats from the financial sector representatives of a collapsing the economy and mass unemployment. In their panic and ignorance of the options, we have had to endure the decision to impose a decade of quantitative easing (QE) that has further exacerbated the serious issue of income disparity and declining real incomes of the majority in this country. More injurious and an affront to constituents was the "logic"" applied to justify QE, completely misrepresented the reality (See, A Real Money Theory - A note and The real incomes component of the Real Money Theory - A note ).

If power continues to be exercised in such a way as to continue to prejudice the majority, in favour of agents who are not part of an elected government, then this country is not a democracy, in the sense most people have been brought up to believe. More disturbing is the fact that political parties possess insufficient independence and courage to expose this reality for fear of their own demise.

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

2 Most issues including polluting pesticides affecting people (e.g. Monsato's (now Bayer's) Roundup glycophosphate weed killer), excessive issuance of addictive opiod prescriptions by medical practitioners and other harmful medicines or medical treatments are extensions of this same group of live issues facing society.

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