The Real Economy

The state of knowledge on the Real Incomes Approach

Hector McNeill¹
SEEL

16th June, 2015

The Real Incomes Approach is a rapidly advancing field and the release of essays take place sometime after significant advances have been made. This note provides an indication of the areas of work currently being advanced and indicates where further work is required.

The last 10 months

Regular visitors to this site will have noticed that the section entitled: "Leading Issues in the British Economy" was withdrawn in October 2014. This was caused by a realization that an observation made by Joseph Schumpeter concerning profits provided a way to avoid the profit paradox (see "The profit paradox"). Joseph Schumpeter was not addressing this issue but his simple view that profit represents the guarantee of future activities and employment provided the clue to a resolution of a remaining unanswered complication facing the delivery of effective real incomes policies. This involves changes in accountancy and audit item classifications in order to increase the efficiency of resources allocation, including:

the substitution of profit by investment in technology and human resources.
the substitution of profit as the measure of corporate investment return and success by the real incomes of owners, shareholders and employees
eliminating considerations of corporate taxation from allocative decision-making

These modifications transform the Real Incomes Approach as reflected in the option of Price Performance Policy, making it more effective and in terms of the utility of the policy model providing more transparent and predictable outcomes. The elimination of the profit paradox and corporate taxation have pervasive and sometimes unexpected impacts. Therefore all of the papers, articles and notes were withdrawn, including archives 1975-1985, in order to be revise and update them. These are now being reissued with content reflecting these new findings.

A summary tabulation of the currently accepted differences between Keynesianism, monetarism and supply side economics (KMS policies) and the Real Incomes Approach in the form of Price performance Policy can be accessed here.

Current work

1. Current work is being undertaken to clarify the interplay of microeconomic management decisions on resource allocation, physical productivity and medium to long term strategies for growth. These concern significant production yield improvements associated with advances in explicit knowledge and the accumulation of tacit knowledge (See: Tacit & explicit knowledge). Whereas much applicable learning curve analysis emphasizes the tacit knowledge component, significant gains in productivity can be obtained from changes in the design of products and processes where the basis for calculation and communications of design modifications rely on explicit knowledge. The productivity gains that translate into higher real income impacts are far more significant than commonly appreciated and represent an important potential for renewed efforts in stimulating on-shore engineering. Work continues on papers to provide a clear explanation and quantitative models and techniques for management to take advantage of such opportunities. An output of this work will be a set of microeconomic business rules to guide decision-making.

2. KMS² economists still express policy options in terms of the Aggregate Demand Model (ADM) whereas the Real Incomes Approach uses a supply side Production, Accessibility and Consumption Model (PACM) (see "The PAC Model of the Economy"). One obvious difference is the increased potency of the marginal propensity to consume (MPC) and income or growth multiplier (yM) under the PAC Model of the economy (see "The Real Growth Multiplier"). This also explains a key reason that conventional policies have such low traction. The analysis of the differences between ADM and PACM continues especially in regard to identifying a coherence between microeconomic business rules and macroeconomic objectives of real incomes.

3. The assessment cycle durations used for the determination of Price Performance Ratios (PPR) (see "The price performance ratio") need to accommodate the significant variations in market prices in order to produce realistic and fair estimates. This requires a clear definition of the critical data sets and description of the appropriate collection and analytical methods. The emphasis in this work needs to be on practical convenience and transparency and clearing out any "red tape" to support microeconomic management decision-making in the optimization of the resulting PPR to maximize net of PPL (Price Performance Levy - see "The price performance levy") real income levels according to each firm's capabilities and preferences.

Future work

4. Work is advancing on setting up a online working model section on this site to provide quantitative demonstrations on the relationships described in the essays in this series. This will be a didactic series starting with simple relationships and then a gradual integration of these components into more complex models to provide a more realistic representation of the economy.

5. Accounting and audit regulations and norms and government revenue-seeking methods need to respond to the needs of a real incomes growth policy. It is of vital importance for the system to maximize the degrees of freedom for managers to respond to policy while also maximizing corporate margins and distributed real incomes. Appropriate methods are being identified including the basic information technology resources (state of the art) that can simplify these processes. An important associated development is that of the specification of clear business rules that support state of the art resource allocation algorithms (e.g. operations research methods) so as to facilitate rapid decision-making in dynamic and complex situations.

6. One of the most important aspects of a coherent real incomes growth policy is to determine the forms of agreement that exist at the level of the firm to ensure equitable compensatory distribution of real incomes between owners, shareholders, managers and wage earners. Naturally, the "solution" is related to well-designed "productivity agreements". However, such agreements depend upon a better understanding of the real distributions of benefits from corporate activities and these have always been associated with extreme sensitivity. To a significant degree this is related to the profit paradox and an inappropriate government revenue-seeking model that provides a strong incentive for secrecy and lack of transparency. It is possible to make more transparency advantageous in terms of helping raise returns to investment while satisfying real income distribution needs. It is also possible to increase market shares simultaneously. This topic is complicated by strongly held politicized views encouraged by partisan philosophical positions on the part of those who should be collaborating to their mutual benefit and to the benefit of the nation. The solution will rely upon the full complement of understanding of the workings of the real economy to identify feasible and productive solutions. In order to facilitate this work a set of contractual templates will be produced on types of productivity agreements to provide a basis for discussion and elaboration of this important topic.

7.The experience with the Scottish Referendum and what followed in terms of the result in the UK General Election of 2015, the renegotiation of Greek debt and the progress in smaller regions gaining autonomy has brought into focus the question of constitutional economics. This has become an increasingly important topic as political parties become diminished pressure groups with very low membership numbers. Legitimate and expressive representation has become a critical issue. Decision analysis conducted in such an environment needs to be transparent and participatory and work is progressing on the shaping of such provisions within frameworks provided by the Real Incomes Approach to economics.

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

² KMS-Keynesian, monetarism and supply side economics

Previous update 8th September 2014.

Updated 8th July, 2015: added item 7.