The Real Economy

Macroeconomics, the problems

This article has been reproduced with the kind persmission of Agence Presses Européenne

Introduction

Nevit Turk¹
Agence Presses Européenne

This article is an interview with Hector McNeill a British economist who, in 1975, initiated the development of the Real Incomes Approach to economics, an alternative approach to macroeconomics. His motivation was to investigate why Keynesianism and monetarism, and subsequently supply side economics (KMS policies) were incapable of avoiding serious and arbitrary prejudice on the economic and social constituencies resulting from commodity price or financial shocks and why policies designed to resolve the economic crises further exacerbated the prejudice in an arbitrary manner.

The Real Incomes Approach to economics has evolved, over the years into a distinct macroeconomic and microeconomic theory accompanied by a set of decision analysis options embodied in sets of coherent²:

macroeconomic policy strategies and propositions
microeconomic strategies for the optimization of resource allocation

This approach is designed to avoid most of the disadvantages of conventional policy practice.

However, McNeill remained dissatisfied with the fact that there were some issues which appeared to be defy resolution centred on what he refers to as the "profit paradox". In October 2014 McNeill came across an article by Peter Drucker that referred to Joseph Schumpeter's view on the role of profits which, according to McNeill, represents an important contribution to the solution of the "profit paradox". McNeill considers Schumpeter's contribution to provide an important clarification of most of the outstanding issues facing macroeconomic policies. These have a significant impact on microeconomic theory as well as providing a basis for a more efficient and optimized operation of fiscal policy. As a result McNeill embarked on a full revision of the theory and policy implications of the Real Incomes Approach in November, 2014. He considers the current evolving version to provide a more transparent analysis and basis for resolving today's main macroeconomic policy challenges.

What follows is a summary of the first interview given by Hector McNeill since this realization and entitled: Macroeconomics - the problems, where he explains the overall problems with conventional macroeconomic theory and policy centering on the profit paradox. A second interview entitled: Macroeconomics - a solution explains the "missing link" in the form of the solution to the profit paradox based on the Schumpeterian perspective providing the key to unlocking outstanding and unresolved issues in the theory and practice of the Real Incomes Approach.

These interviews took place in Portsmouth, Hampshire, England during November, December, 2014 and January 2015. An additional interview was completed in late February early March 2015 covering Hector McNeill's views on the political changes affecting Greece and the Eurozone, this interview is entitled: Greece & the Eurozone

In order to facilitate reading I have added subtitles to this report. The Real Incomes approach has introduced a range of new concepts to economics, some are somewhat technical. Where these are mentioned I have provided references to sources for those interested in exploring these aspects in more detail.

Nevit Turk

Posted: 8th March, 2015

Macroeconomics, the problems

Nevit Turk: Before we started this interview you were asking me about the type of publication Emancipation is and we agreed that it is an online magazine for a general readership. You said it was worth initiating the interview with a general statement concerning economics.

Hector McNeill: Yes, it is worth emphasizing that economics, by the fact that it represents an integration of relationships between people, resources, technologies, techniques, processes producing goods and services and the use of money, is a very complex topic. Discussions on economics can sometimes simplify issues to such an extent that many fundamental and more complex inter-relationships are poorly integrated into analyses. It takes many years of dedication and experience to build up a clearer picture and appreciation of what we know and still do not know.

There is a fundamental problem in macroeconomics in that there is no consensus on a general theory but there exist several so-called schools of economic thought each of which view and analyse economics through a specific kaleidoscope. This conditions adherents to a specific mindset which tends to resist anything that appears to be countering the pre-established diktats of any particular school. As a result many economic discussions are fruitless and are more a case of the defense of analytical perspective turf as opposed to objective economic analysis.

There is also a practical complication related to the fact that economic theoretical progress is atomized not only by the schools of thought mentality but also due to the fact there are researchers in well known departments of economics in universities as well as sole researchers, like me, who have no habitual connection with a university. This leads to a general degradation in the communication and sharing of knowledge and, therefore, a genuine lack of awareness of where the frontiers of different aspects of economic theory lie and where most rapid and practically advances are being made. Tied to this is a considerable amount of uncertainty as to which economic theoretical advances are of most practical use.

Returning to the issue of the complexity of economics one needs to answer the question of where do we start when reviewing economic theory and practice in order to identify ways and means to improve our understanding of how to achieve more operational policy success. As far as I can see the best way is to set out unambiguous objectives which have universal appeal and then build the deterministic model and identify the policy instruments or factors that can help achieve those objectives.

Nevit Turk: As far as I have understood I think you consider the Real Incomes Approach to economics to be different in both theoretical and practical terms to the conventional economic approaches of Keynesianism, monetarism and supply side economics?

Hector McNeill: Yes, the Real Incomes Approach to economics is based on a theoretical macroeconomic model that integrates all economic units as coherent microeconomic components of that model. You might assume that this is the normal arrangement with the macro model being made up of the micro components. However, in practice this remains as a theoretical concept since conventional policies constitute, at any given time, a monolithic imposition of a combination of inflexible single-valued policy instruments which are not adapted to the specific needs of individual economic units and members of the social constituency. The Real Incomes Approach to economics provides a means whereby the deterministic relationship between production activities of economic units (microeconomy) and their levels of performance remain supportive of a commonly accepted outcome at the level of the macroeconomy. Thus policy instruments are not imposed but rather become tools or methods whereby managers of economic units are free to allocate resources so as to maximize their individual impacts on the state of the economy including the distribution of income. This has the effect of bringing the levels of productivity closer to the full potential resulting from a wider range of resource allocative options so as to:

dissipate inflationary pressure and currency devaluation
stabilize the value of the currency at the level of the macroeconomy
provide enhanced purchasing power of incomes
encourage a more equitable distribution of real incomes

The approach maintains a close relationship between the value of the currency and the levels of productivity of economic activities. This is important because the term "quantitative easing", that is, increases in the supply of money and lowering of interest rates are perceived to be positive whereas in fact the outcome is a quantitative depreciation of purchasing power of the currency and real incomes.

Nevit Turk: So why is this different from conventional theory?

Hector McNeill: Conventional Keynesianism, monetarism and supply side economics are based on a so-called aggregate demand model (ADM) where the levels of aggregate demand are assumed to determine a range of conditions within the economy. These include, national output, the levels of inflation and unemployment, investment, growth rates of the economy, exports, import substitution and exchange rates. The Real Incomes Approach theory relies on a so-called production, accessibility, consumption model (PACM) ³ as the basis for determining a specific condition in the economy, that of real income levels. The factors that determine the level and distribution of real incomes are generally supply side and they are also the factors that drive economic activity and growth.

Conventional theory and policy has a very weak connection between purchasing power, income distribution and currency value which are determined by differences in productivity of the economic units making up the real economy. As a result we have the situation of monetary affairs being somewhat distinct from the real economy. Although it is generally assumed that microeconomic units make up the macroeconomy, in practice conventional theory does not sustain a coherence between microeconomic and macroeconomic operations and objectives.

Nevit Turk: You have sketched a difference in theory, what about policy differences?

No positive systemic consistency

Hector McNeill: Conventional macroeconomic policy is made up of a set of disparate instruments in the form of interest rate setting, money volume determination, corporate taxation, individual taxation, public expenditure and government debt. These are used to influence what is referred to as aggregate demand and thereby secure policy objectives such as national output, the levels of inflation and unemployment, growth rates of the economy, exports, import substitution and exchange rates. Quite often, the use of conventional instruments creates conditions that result in the objectives moving in contradictory fashions. This is because aggregate demand or the general aggregated turnover of economic activities has no clearly-defined relationship to the individual needs of social and economic constituents. Indeed, all conventional policies fall down on the test of the achievement of a measurable generalized benefit, that is, with all social and economic constituents benefiting from policy actions. The normal outcome of conventional policies is the creation of winners, losers and those who remain in a policy neutral impact state.

Nevit Turk: In what way is the Real Incomes Approach different?

Positive systemic consistency

Hector McNeill: The Real Incomes Approach is designed to reduce or avoid prejudicial policy-induced differentials in outcomes between constituents by promoting a positive systemic consistency, that is, a generalized benefit across all constituents. Conventional policies cannot achieve this because the instruments deployed impose inflexible single-valued conditions that will have differential impacts on economic and social constituents. There is no coherence between business rules that benefit the individual enterprise and the objectives of macroeconomic policies. This is because there is no flexibility built in to policies that permit enterprise managers to take decisions that enable the adaptation of the full range of resource allocation options according to their specific conditions. The Real Incomes Approach avoids this problem by reducing the range of policy objectives to one that represents something of direct interest to all constituents, the level and growth in real incomes. By making real incomes the policy target it is necessary to understand the determinants of real incomes. Real incomes depend on the productivity of those working in the economic constituency, on the technology deployed, on unit output prices and therefore the value of the currency. Thus monetary aspects are not considered to be external to the real economy but rather are largely determined by productivity, cost structures and unit prices.

All conventional policies have failed to make labour productivity a central issue and policy target leading to inadequate investment in appropriate technologies and human resources. As a result Britain has become a low productivity and low wage economy. Our labour productivity levels are well below those of the USA, Germany and even France and Italy. Economic expansion is associated with increases in the employment of low skilled personnel, low productivity and low paid work paid in a depreciating currency. As a result real incomes have been declining exacerbating a cost of living crisis that is beginning to affect so-called middle income families. At the same time the share of profits of the national income has risen in comparison with wages and as a result the incomes of groups closely associated with decision-making concerning profits have tended to rise in real terms.

Monetarism

Nevit Turk: I want to cover the Real Incomes Approach in more detail in the next interview. I would like to understand better the main drawbacks of conventional policies. Could you please highlight the specific issues with conventional policies, you might start with monetarism?

Hector McNeill: Monetarism is based on a weak theory that links prices to a so-called Quantity Theory of Money (QTM) which paradoxically contains no determinants related to individual productivity, technology, feasible prices and margins. No empirical evidence has every been produced over the last 50 years to demonstrate conclusively the utility of the QTM. Monetarists have been slow to acknowledge this reality and for much time they have ignored the fact that money creation results in flows into investment for increasing productivity (productive applications) as well as into financial transactions and the driving up of asset prices (non-productive applications). These distinctions have become more evident since the 1970s. As a result monetarism has always been a parallel universe more related to "finance" as opposed to "the role of money in sustaining real incomes" on the basis of decisions at the microeconomic level and attention to the maintenance of the purchasing power of the currency.

In 1970 Nicholas Kaldor⁴ made important observations on monetarism and in particular the lack of evidence linking changes in money supply to output and employment. Milton Friedman⁵, very unconvincingly challenged Kaldor. In the 1970s many governments were convinced by Friedman's' somewhat faith-based assertions only to build up a long series of potentially unstable financial transactions which by 2007 tipped over into a fully-fledged crisis for which we are all paying a high price. Kaldor�s position that the demand for money was directly related to the need to consume commodities and that money was not the source of that demand appears to have been borne out by events. As far as I know, Kaldor did not pick up on the fact that at low interest rates money was more likely to flow into lower risk asset purchases by financial intermediaries and their clients. But his general position, as far as I have been able to ascertain, was correct. Kaldor also pointed out that the determining factor in monetary growth was interest rates. Thus interest rates are not a dependent factor but an independent factor; this simple observation has since been borne out by the outcomes of policies of the Bank of England, Federal Reserve and European Central Bank. Kaldor also considered Friedman�s insistence that money becomes income, remaining as a black box that even Friedman, a person very much prone to assertion, could not explain nor did he attempt to explain it.

Since 1945, monetary policy has undermined the real economy by not maintaining the value of the pound. The pound today has been depreciated by over 18% each decade now having a real value of less than 2% of its value in 1945. This is not an accident. It is the result of 2% inflation being equated with price stability in the eyes of monetarists. Therefore the real economics of production of goods and services has had to battle with this depreciation in the value of money and the ballooning of asset prices largely created by a lack of appropriate regulations and effective oversight of the monetary and banking system. This state of affairs has persisted for too long and was exacerbated by the recent bail out of banks associated with so-called quantitative easing and low interest rates. The main governments therefore have provided banks with a preferential treatment in terms of their role in supporting monetary policy and by bailing them out as a direct cost to the social constituency. At the moment their policy role is currently being openly abused as a result of financial transactions and financial and asset trading outstripping investment in the productive economy ⁶.

Keynesiaism

Nevit Turk: What about Keynesianism?

Hector McNeill: In 1968 Robin Matthews⁷ published a paper in the Economic Journal on why Britain had full employment since the war. In this he argued that far from injecting demand into the system, governments in the so-called "Golden Age of Keynesianism" had persistently run large current account surpluses, instead of the budget deficits that would have been the expected manifestation of a Keynesian stimulus. From this he inferred that fiscal policy had been not only deflationary, but strongly so in the post-war period, therefore something other than Keynesian fiscal policy must have been responsible. The answer, he felt, lay in demand arising out of wartime destruction and an unusually prolonged private sector investment boom. I would add that this period included a transition in technological structures based on economic unit level decisions contributing to productivity without the help of Keynesian macroeconomic policies. As you can appreciate augmentation in microeconomic performance had little connection to macroeconomic policies but relied upon the individual decisions taken at the level of the firm. Therefore like the QTM, Keynesianism is not supported by convincing empirical data.

Nicholas Kaldor³ made important observations concerning Keynesianism and especially in relation to the theory of economic growth and the theory of distribution both of which find no effective reference within the Keynesian model. Early on Kaldor also developed a growth model which introduced technical progress as a key factor along with investment and savings.

Supply side economics

Nevit Turk: And, finally, supply side economics?

Evidence of the benefits of stopping supply side economics

The results of stopping the supply side approach, following the Reagan period were explained by Bill Clinton in 2014. See the article,

"Some evidence on the failure of supply side economics",

in the December 2014 edition of Emancipation.

Hector McNeill: Essentially, supply side isn�t really supply side at all but is a centrally-imposed variant on fiscal policy. Supply side economics took shape and was developed in the same time period as the Real Incomes Approach was evolving. However when I reviewed this approach I realized that it was a fiscal approach that relied upon the same aggregate demand model (ADM) as Keynesianism and Monetarism. The theory is that by reducing the marginal rates of taxation to encourage investment in higher productivity processes leading to unit output cost reductions and a growth in purchasing power and economic growth and falling inflation. The main flaw with this policy is that it provides no sustained motivational incentives nor defined mechanisms for businesses to maintain their growth based on increasing productivity through a process that distributes enhanced real incomes. Because of a profit paradox, which I will explain later, a bias persists in income distribution favouring corporate ownership. Stated more clearly, as in the case of Keynesiaism and monetarism, there was no coherence between business rules and policy objectives. Thus when this was applied under President Reagan the resulting distribution of income was the typical generation of winners, losers and those unaffected. The most notable outcome was the large gains in income experienced by higher income groups and lower gains on the part of low income groups. It also generated the largest US government deficit in history paving way for the Clinton years. The approach known as supply side economics does not in fact have much to do with the supply. Convincing evidence of its validity is sparse.

Nevit Turk: Can these issues with conventional approaches be summaries in a simple form?

Why there is no applicable general macroeconomic model

Hector McNeill: Sound economic models are built to support the analysis of decisions by providing insights into the effects of different policy instruments on target variables.

At the microeconomic level the economic models relate to recognizable and measurable variables and decisions can be based upon well established optimization logic which can be applied across the different conditions facing firms.

At the macroeconomic level the models that describe or measure cause and effect are made up of aggregated classes of variables. This aggregation obscures the vast complexity and diversity of conditions that exist in the operations of different firms and industries. The levels of aggregation reduce granularity and transparency and therefore obscure the key deterministic⁸ relationships. Keynesianism, monetarism and supply side are typical macroeconomic models where the sensitivity of policy analysis to the specific conditions facing the economic and social constituencies is extremely weak leading to single-valued policy targets being applied across the whole range of microeconomic conditions. These targets are only relevant, often coincidentally, to the needs of specific companies and this leads to the well-established outcomes of the creation of winners, losers and those unaffected by policy.

A good general macroeconomic theory should be generic enough to enable policies, based on the theory, to be adaptable to the full range of individual conditions of firms. Current conventional theory therefore cannot be translated into policies that uphold the specific imperatives of companies and individuals; there is no applicable general macroeconomic model. As a result conventional theory when applied as policy creates serious externalities or perversities which prejudice specific segments of the social and economic constituencies. The reason for this outcome, that is, the generation of losers, winners and those unaffected, is that all individuals and firms, at any given point in time, need quite different and specific conditions of interest rates, taxation levels, money volumes and exchange rates in order to maintain and optimism their pathways for increased productivity. It is clearly impossible for conventional policies to secure a positive systemic consistency because of the diversity of individual and corporate needs. Conventional policies do not facilitate an adequate level of adaptability on the part of individuals and firms to pursue their ends; they are hampered by policies that deploy monolithic monopolistic market interventions by government.

The significance of conventional policies

There is a common misunderstanding that the reason the Eurozone has difficulties is that it imposes a common monetary policy over economies with very different needs. The Eurozone difficulties are more apparent because of the scale of the issue and the wide variance in conditions of member states. However, this is not just a Eurozone issue, it is also the circumstance in the United Kingdom where instead of member states we are dealing with wide variations in needs of regions, individuals and firms. Thus the north-south divide, a history of migration from north to south and others. The problem isn't the imposition of a "currency union" it is that policy instruments deployed under conventional policies within currency unions are inappropriate to constituents with a wide range of different needs. As a result performance differentials are exacerbated by policy.

The need for coherent business rules

A fundamental step in understanding this issue is to pose the question, "What are the business rules that could ensure that firms perform in a way that benefits them as well as the whole economy." Many will point to the array of very sophisticated decision analysis techniques used to "optimize" resource allocation at the level of the firm including marginal price optimization, linear programming and other operations research techniques such as the Monte Carlo method. These techniques are in fact very effective but the macroeconomic environment imposes conditions that compromise the achievement of the best optimal solutions simply because monolithic monopolistic policy instrument values and single-valued targets do not even attempt to permit adaptation to each firm's needs. There is, therefore, a need for business rules that are coherent with macroeconomic objectives and which enable firms to adapt optimization to their specific conditions so as to be able to benefit from any condition of the economy. Conventional policies cannot achieve this because the contributing policy elements (instruments) combine to create a systemically suboptimal and inefficient economic model.

Nevit Turk: So why isn't something being done about this, it is not as if we were not in the middle of an economic crisis?

Hector McNeill: It is an inertia, or resistance, created by differences in understanding, perception and interest. Various groups, including some economists, have too much of their image and status invested in specific approaches to economics so there is a resistance to any change that doesn't reinforce preconceived notions. There are also large differences in the levels of understanding of economics which leads to an incoherent analysis within the domain of public discussions. The media, to some extent, lack individuals with the knowledge to point to alternative approaches with conviction, something I referred to at the beginning of this interview. Specific sectors have a vested interest in maintaining things as they are.

Nevit Turk: Can you provide some specific examples of resistance to change?

The profit paradox

Hector McNeill: It is notable that, in spite of the claims that the economy operates on the basis of freedom of choice and free markets, all of the conventional policy instruments are monopolistic state interventions (read interference) consisting of interest rate setting, money supply, taxation, government expenditure and government debt. If governments want to support the operation of free markets they need to terminate such market interventions. These impositions need to be substituted by incentives and methodologies for businesses to increase their productivity applying transparent business rules to increase real incomes at the level of the firm in a way that supports an equitable real income distribution.

Profit as an indicator of performance

One of the most significant resistances to change relates to the status of profits in relation to the process of government revenue-seeking through the various methods of taxation. The system is considered to be efficient and normal, designed to gather tax revenues through the operation of a legal framework of defined accounting and audit standards. However, the accountancy standards applied have a significant impact on the outcome of optimization procedures as well as creating a significant rift between sections of the social and economic constituencies. Thus the accountancy variable to which taxation is applied is profit.The same measure, profit, is used by companies to assess their performance or relative success in their contribution to "shareholder value". There is therefore a contradiction between profit as a business performance indicator and profit as a target for taxation. This has resulted in what is now a very large scale tax evasion and avoidance operating on a global scale. Therefore far from securing a sound basis for corporate taxation, profit is transformed into other cash flow and asset groupings on the basis of a perverse resource allocation algorithms which obscure gains from business in relation to the income of owners and proactively minimize tax burdens. This distorts measures of business performance resulting in government revenue-seeking generating a far lower revenue than the potential.

Profit and income differentiation

Profit, as a measure of performance, has another significant problem related to its accountancy specification as the difference between input costs and corporate income or revenue. Wages are classified under accountancy rules as a cost. As a result there is an antagonism between the process of resources allocation and desirable levels of wages and profits. So in addition to the motivation for companies to obscure ownership income as well as evade or avoid corporate tax, there is an additional motivation to resist rises in wages in the process of resources allocation. The general strategy followed by corporate decision-makers is to attempt to guarantee that the payment of dividends and executive bonuses outstrip inflation so as to achieve real income rises whereas wages, not being set by wage earners, are contained and, on balance, fall behind inflation thereby resulting in constantly falling real incomes for wage earners.

Thus the combination of macroeconomic policies in the form of government revenue seeking within a regulatory environment with inappropriate accountancy and audit norms generate perverse incentives and outcomes. The most unfortunate outcome is that companies cannot in fact optimism resources allocation to achieve the potential levels of productivity because of the conflicting constraints imposed by tax policy and regulations on the resources allocation procedures. Another impact of this state of affairs has been the colouring of political discourse and extremes of opinion arising from inappropriate conventional policies.

Nevit Turk: What are the overall impacts of these issues surrounding profits?

Hector McNeill: The share of profits in national income has risen and the share of wages has decreased. At the same time government revenues have fallen in real terms. This state of affairs has been exacerbated by monetary policy which, as I have explained, has been devaluing the value of the currency and real income levels in general. As a result wage earners face a significant cost of living crisis and government revenue's real purchasing power is also declining leading to a significant strain on public service provisions such as the National Health Service.

Nevit Turk: How can this problem be resolved? Is the current austerity policy of the government succeeding?

Telesis needs to replace stasis

Hector McNeill: The Real Incomes Approach provides a basis for resolving these types of issue. The Real Incomes Approach maintains a state of telesis, that is, it provides a policy framework supportive of a steady progress towards an objective through careful planning and the intelligent use of resources. The conventional policies constrain economic development so as to err on the side of stasis, that is, there is little significant evolution in the efficiency of real activities. Of late one hears the refrain that the issue seems to be low productivity; it is exactly that and this has been caused by conventional policies.

Policy of asset stripping

The reason conventional policies exacerbate the situation is that the "solution" to debt and low productivity crises is not to concentrate on raising productivity to generate rising real incomes but rather to impose a transfer of assets to specific private balance sheets from the national balance sheet. For example, in the case of the bank bail out this resulted in significant gains to the financial sector balance sheets at the cost of significant losses in the national accounting balance sheet. The mentality applied is similar to that of those who favoured the imprisonment of debtors during the dark days of our past, a treatment imposed on Isambard Brunel's father and of course the father of Charles Dickens. The emphasis is on punishment rather than arranging matters so that all can benefit from a logical and productive resolution of the issue of unpaid debt.

Since it is impossible to generate the necessary funds to finance the bail out, based on productivity increases, within, say, a parliamentary period of 5 years or even two such periods, the short to medium term impact is asset stripping of the national balance sheet with serious implications for the rest of the economy. Destroyed assets include work places, public services that are essential to grow the economy and support lower income groups. For example the augmentation of tax or cutting of public services amounts to a process of asset stripping in the place of actions designed to enhance ongoing productivity. This has a direct impact on several classes of employed people as well as on the poor. This process is, in fact, discriminatory or an act that affects specific income classes or employment groups more than others. The discussions surrounding the problem of the large proportion of unskilled and low paid workers in the UK economy subject to an unstable employment status, is a simple one since this is caused by ineffective resources management and investment leading to the creation of a large number of low skill and low paid jobs in the UK.

Systemic failure

Thus this is a systemic economic structural problem relating to the types of investment and failure to invest in human resources. I would emphasize that the decision to raise the income tax thresholds so as to remove a groups of low paid from taxation is not a sign of success but of a failure of the system to provide employment with incomes that can afford to pay tax as well as basic essentials. In other words the drift in depreciation of the currency and perverse differentiation in profits growth associated with real income declines in wages simply means the proportion of the workforce able to pay tax is declining. Removing such people from taxation is hardly a "gift" from government. This simply emphasizes the decadence of economic policies which have failed to secure an adequate impact on real economic development.

Government needs to drive up real incomes and real revenue

This trend in profits and wages places a strain on public finances and this is exacerbated by "austerity". The current austerity policies are considered to be the only option because conventional economic theory and policies either resort to monetary instruments or balance sheets transfers through taxation, neither of which have any predictive impact on productivity or equitable income distribution. What is missing is a performance or productivity policy and a maintenance of the purchasing power of the currency. Improvements in productivity reflected in unit prices can enhance real incomes and raise the value of the currency so that less nominal government revenue can secure the same levels of real public provisions. Government needs to drive up real incomes in order to secure adequate real revenue and pay off debt.

The policy of quantitative easing and low interest rates has destabilized the situation by encouraging rises in asset prices owned usually by high income segments of the constituency. As a result, there is a continuing concentration of income at the top leading to the top 1% of income earners and asset holders expanding their wealth while lower income segments endure falling real incomes and falling government revenues. This results in the national balance sheet mentality of cutting public provisions to pay off debt. It is important to note that this growth in income at the top is not related to productivity increases but rather is related to mechanisms for the capture of funds based on decision-making power that wage earners do not have. This process is bolstered by quantitative easing.

The trends point to an intensification of despair on the part of the lower income earners and an apparent increasing relevance of the Marxist analysis that profits are "excess production" captured by business owners at the expense of wage earners. Whenever this sort of visceral dialogue gains momentum the participants, on both sides, tend to forget about the imperative of productivity or efficiency. "Solutions" are sought within the political arena on the basis of identifying who is "to blame" highlighting the normal convenient list of suspects such as immigrants, people of different cultures, unfair actions by other countries and many other irrelevant factors. The leading conventional economic council has no realistic options. They insist that there is no alternative to current policies. The political discourse and media content is dominated by low level, somewhat visceral, exchanges where the status of institutions who have financial muscle but no voting rights ⁹ takes precedence over the interests of the social constituency in whose name governments are supposed to act. Thus as long as the status of profits remains poorly established, being open to different practical interpretations leading to widespread misallocation of resources and poor economic performance, we continue in a downward spiral of social discontent and potential disruption.

¹ Nevit Turk is the economics correspondent for APE-Agence Presse Européenne.

² coherent in the sense of being transparently linked and consistent in both macroeconomic and microeconomic activities seeking to sustain or increase real incomes.

³ PACM-Production, Accessibility, Consumption Model

⁴ Nicholas Kaldor (1908�1986) - was a Hungarian, Cambridge economist in the post-war period. He was born in Budapest and became professor of economics at Cambridge in 1966. The best reference covering the citations used in this interview article is Isa., Jan, "Nicholas Kaldor - One of the First Critics of Monetarism", BIATEC, Volume XIV, 12/2006 (Narodna Banka Slovenska).

⁵ Milton Friedman (1912�2006) - was an American economist, statistician who taught at the University of Chicago. A leading proponent of monetarism during the 1970s and 1980s.

⁶ Financialization and productivity

⁷ Robin Matthews (1927 - 2010) was an Oxford-educated economist who spent most of his academic career as a member of the Cambridge Faculty from the early 1950s onwards. He moved to Oxford to take up the Drummond Professorship from 1965-1975, succeeding John Hicks, and returned to Cambridge as Master of Clare College from 1975-1993. In 1980, he succeeded Brian Reddaway as Professor of Political Economy. He returned to the Economics Faculty at the height of Mrs Thatcher�s enthusiasm for the monetarist views of Milton Friedman. Eager to ensure that undergraduates should be exposed to all schools of thought, even with those with which he disagreed, he gave a series of lectures which were pointedly entitled "Monetarism". These presented a balanced, if critical, exposition, remarkable for their prescience in stressing the distinction between the traditionalist views of Friedman himself, and the much more radical position (the precursor of �New Classical Economics�) that was being put forward by others.

⁸ Determinant models are used to support the analysis of decisions. Determinant models describe the quantitative relationships between inputs (causes) and outputs (effects) used to trace the range of possible outcomes associated with the range of feasible decisions.

⁹ Corporate voting rights.