I recently completed an overview of the British Strategic Review. This publication is a new annual review of the factors and decisions that determine the prospects and wellbeing of the British nation. The Review has a new website which can be accessed here: British Strategic Review
. The feedback on this review has been positive. I, like others, found that the significant difference between this and other strategic studies is that this document reviews the efficacy of economic theory and policy to unravel worrying gaps in the theory which explain some of the less well explained failures in policies.
The editor of the British Strategic review is the British economist Hector McNeill, the leading international developer of the Real Incomes theory and policy (RIP). He has managed the Strategic Decision Analysis Group at the Systems Engineering Economics Lab, Hampshire, UK since 1985.
He initiated the RIP development work at the same time as supply side economics, in 1975 at the same time that the Canadian economist Robert Mundell was advancing thr development of supply side economics.
McNeill is a graduate of the universities of Cambridge and Stanford. He is a development economist and and systems engineer with over 35 years experience in applied strategic decision analysis logic.
Hector McNeill is a British economist and systems engineer, the box on the left provides a short resume of his experience. In this interview, conducted on 20th and 21st February, 2022 I had the opportunity of interviewing Hector McNeill to learn more about the analysis, finding and likely direction of economic theory and policies.
Part 1, 20th February, 2022:
Why was the BSR produced?
During the last decade there has been some confusion surrounding the efficacy of the policy of quantitative easing and the APEurope (Agence Presse Européenne) Correspondents' Pool wanted a more in depth analysis and explanation of how this policy works and they approached us to ask if we could produce such a document.Turk:
Yes, I am aware of this because, as you know, I was involved with the Pool, but in your own words why did the Pool make this request?McNeill:
Most contributors, or correspondents share information through the APEurope Correspondents' Pool. I think they cover ten alternative media outlets about 50% are news commentary and the other 50% specialized topics including innovation and political economy. If you space out the lags in time between economic theory advances, the formulation of policies based on that theory and securing results, the time involved can be between 10 and 50 years minimum. In part, some of the delay is related to the domination of economic theory by largely academic organizations and people who base advance on peer-reviewed publications which tend to involve like-minded people and, this process seldom involves non-economists who, based on their practical experience, have some appreciation of whether the theory stacks up with reality. The test of a good theory is the degree to which it represents reality and therefore its suitability as a foundation for policy design.
At the moment we are entering a phase in our national affairs when there is an urgent requirement for better quality information to assess theoretical advances, identify new policies and to get this information out into the public square to develop the notion of participatory pubic choice. This is my understanding of why the Pool made this request, to address a serious current shortage of accessible information to disseminate ideas for more appropriate policies through APEurope media.Turk:
Yes, I think this sums it up correctly. What has been your plan to address this challenge, we now see the results but where is this going given that APEurope has decided to make this an annual publication?McNeill:
Well, first of all, I had thought this would be a one-off. I was gratified that APEurope regarded the results as being so significant that they have decided to make it an annual. They asked me to manage this process and we are drawing up a terms of reference for the annual.
But, personally I have been heading enquiries into economic theory since 1975, now based at SEEL and approaching a 50 year period of dedicated research and development. This work has proposed different policy instruments and targets as alternatives to conventional systems. We are therefore in a position to break down the time barrier between raw economic theoretical progress and coming up with policy solutions. As a result the BSR contains information on how theory is changing and what instruments are emerging as a result. This is quite unique for strategic studies which tend to base their tactics on an acceptance of conventional economic policy frameworks and operations.
|"CIA money supported the formation of the Congress for Cultural Freedom in 1950, headed by Melvyn Lasky, in West Berlin.|
They also supported such magazines as Encounter.
These gave Labour politicians like Anthony Crosland, Denis Healey and Hugh Gaitskell platforms to disseminate their views on a socialism which steered away from Clause IV, nationalization and pledged support for NATO."
"NATO aside, what Crosland came up with, and which Bell acknowledged, was an escape from ideology towards logical feasible beneficial ways to manage the economy."
"However, in the case of Denis Healey who in 1975, turned to monetarism, this drove the policy paradigm into another ideology which has been a self-evident failure."
Over a period of 50 years, under the influence of financialization, both the UK and the USA economies have been ruined by a dangerous obsession with excessive monetary injections."
"The event giving rise to this ideology was the 1973-1983 OPEC petroleum ten-fold rise in petroleum prices."
"From then on conventional policies were biased towards a small increasingly powerful group of asset holders and biased against the majority."
"This minority faction has maintained this ideological policy through being benefactors and funders of political parties and key politicians and media ownership."
"The British Stratgic Review and Note series, explains in theoretical and practical terms why monetarism is flawed."
The Review initiates the tracing of a blueprint of how we can begin to move forwards in a policy framework with objectives and instruments free from ideology."
"The foundation is the constitutional imperative of a free public participation in the formulation and choice of policies; in short, democracy."
This risks strategic advice being unachievable; we are trying to avoid this.
One of the ground rules of decision analysis is to undertake gap analysis to identify needs. Gaps are deficiencies in the supply of some good or services or status, such as income levels. However a gap should never be identified as a process since by default, any deficiencies will then tend to be filled by simply expanding the process. However, invariably the creation of gaps is very often the process itself. In economic management, the processes are shaped by existing macroeconomic policies and policy instruments, so the intensification of imposition of these same instruments is where sloppy gap identification falls down because these are often the cause of the problem.Turk:
Can you give an example?McNeill:
Yes, the best example, which is covered in some detail in the BSR, is the theoretical foundation of monetary policy, or monetarism. In reality the so-called options of monetarism, Keynesianism, supply side economics and Modern Monetary Theory are all based on the same premise, the Aggregate Demand Model (ADM); they aren't really options at all. Thus, being "demand-based", money volumes are considered to be the determinant of levels of economic activity.
The most prevailant cause of the decline in the purchasing power of wages is a decline in the purchasing power of the currency caused by the inflation that result from demand-based policies. The monetarist aggregate demand model asserts that inflation is caused by "excessive demand" or money volumes circulating in the economy, here the implication is that inflation is essentially demand-pull. However, arising from my research in 1975-1976, it became evident that most inflation comes from cost-push inflation. In other words the reaction of companies to rising input costs is what motivates companies to reset their prices at higher levels. In a competitive economy, no amount of money volume in the economy will cause a company to raise prices to non-competitive levels since they would lose business. Business people react to what is happening at their company level which boils down to input cost variations and not generalized money volumes in the economy. Turk:
But what is the tie-up here between the theoretical implications and policy?McNeill:
There are several. If we divide the economy into those who earn money from asset holding and trading, those who are shopkeepers and those who manufacture things it is easy to see where the theory breaks down. Asset holders and trader income rises with asset price inflation. Shop keepers income rises with increases in throughput and manufacturer income rises to the degree that they used their input resources with increasing efficiency so as to achieve competitive price so as to penetrate the market. Depending upon the price competivity of manufacturers the shopkeeper can sell more so it becomes evident that the demand for shop items is related to the productivity of manufacturing. We can extend this further from shops to all services in the economy. The more efficient manufacturing who supply gadgets, equipment and devices for all sectors, the greater the rise in real economic growth emanating from manufacturing productivity and the contribution of the devices they produce to all other sectors. A recent article I published through the Cambridge Economics Network series entitled, "The implications of being a nation of shopkeepers
" covers these relationships. Therefore, although "demand" is beneficial to shopkeepers because it shifts stuff off the shelves, the rate and extent of product dissemination depends upon the productivity and quality of output of manufacturing. This dependency of the whole economy on manufacturing efficiency alters macroeconomic theory in terms of its relevance of the aggregate demand assumptions. The mistake made is the confusion between monetary policy and economic productivity.
On the other hand, if too much money injection occurs, for example through low interest rates, such as has happened under quantitative easing, there is an overflow of funds into assets where the resulting inflation and speculative purchasing can eventually leak into production side input costs. Therefore, asset holders whose investments have nothing to do with productivity end up with incomes rising in rough proportion to monetary injections while exacerbating supply side cost levels so as to impose cost-push inflation. This, we are witnessing at the moment in the UK.
Rising productivity can be associated with rising wages and profits in economic segments undergoing rises in productivity. Under such circumstances the value of the currency rises and even without rises in nominal wages, i.e. number of pounds paid each month. Therefore, productivity has the effect of being an important contributor to monetary affairs by raising or lowering the purchasing power and therefore real incomes of the population. However, monetary policy is dominated by the notion that by altering the number of nominal pounds in the economy that this somehow contributes to economic growth. It contribute to the number of currency units recorded as GNP but this has no relevance to real income levels of real growth, this is determined by manufacturing efficiency.Turk:
In the BSR you related what you describe here to Jean-Baptists Say's work. McNeill:
Yes, Jean-Baptiste Say established a model of the economy based on manufacturing production and in which he explicitly related wages in manufacturing to the levels of consumption or demand. Since real physical productivity and therefore changes in feasible wages emanate from technological innovation and the development of human competence in making things, the source of economic growth is to be found in this nexus within the supply side production input-output relationships. Say emphasized the role of entrepreneurs as people who recognize opportunities and implement solutions to make use of existing or alternative resources to make processes more efficient and advancing economic development and wellbeing. However, such an operation, observed in the United Kingdom between 1945 and 1965 led to rising real incomes, a decline in income disparity and a rise in the standard of living across the board and full employment, all in a period when the government introduced the National Health Service.Turk:
In the BSR you suggest that this growth between '45 and '65 resulted from conventional policies not being applied. This seems, at first sight, to be quite bizarre. McNeill:
Well, it is odd that those who believe in free markets are those who don't want to believe this. The heavy weight of debt that has grown over the last half century under conventional policies has expanded under the guise of the operation of what is stated to be free market capitalism and globalization. But this debt is a direct function of either centralized government monetary injections or Keynesian centralized government debt. While advocates of such policies pretend to be in favour of small government they in fact, in financial terms and interference in markets have expanded the role of governance through central banks. The result has been a significant rise in a future taxation burden made up of paying back debt or satisfying ongoing government revenue-seeking through personal or corporate taxation and circulation taxes. By the late 1960s the growth was coming from the reinvestment of corporate profits with external finance accounting for just 10% of investment funding. This was a close to a Say model of the economy that we could get and it was successful. Robin Matthews of Cambridge University, completed a detailed study on why we had full employment between 1945 and 1965 and his conclusion was that it was because Keynesianism policies were not applied because there was full employment so no need for that. In addition, monetary policy was benign in that it was less intrusive because only about 10% of investment came from banks as a function of policy. Say during his professional life was one of the leading enthusiasts in promoting Adam Smith's ideas. It is paradoxical that although Jean-Baptiste Say's model, was based on Say's practical interpretation Adam Smith's approach to economics, Adam Smith is embraced while Say was rejected by the monetarist and Keynesian fraternity.Turk:
In concluding this first part of this interview, what are the main implications of all of this as issues we might cover in the next session? McNeill:
Given the depressing state of the economy and economic trends, we need to deliver signals of hope. Not based on hype and assertion but by pointing to practical ways to deliver a non-contentious future where the majority can benefit from effective economic policies. The message from the experience of the UK, since the second world war, is that permitting the economy, and in particular the manufacturing sector, to rise as the key component, with a lower dependency ratio, the economy can enjoy lower cost higher productivity support, then we can go in the right direction. In this context the manufacturing dependency ratio is the relative dependency of the non-manufacturing sectors on manufacturing for their inputs of equipment, devices and operational productivity-enhancing inputs as well as goods to sell. In this context I am talking about domestic manufacturing and not foreign imports. Policy therefore, needs to move from an emphasis on monetary policy or monetarism to one which limits monetary growth and emphasizes growth in economic productivity and in the relative size of the manufacturing sector. This can help raise real incomes across the board making many consumption items, including services and essentials, increasingly affordable to all constituents. This will call into question out-dated concepts of ideologically driven economic theory and practice. In the Review reference was made to Anthony Crosland's rethinking of the position of socialists which he expressed in his book, "The future of socialism
" and a colleague, Daniel Bell's book, "The end of ideology
. These opened up the possibility of ending up in an extension of the Say model, projected into the future. This was because Crosland had realized that, at that time, what he called capitalism was providing good compensatory wages. Bell recognized that this could remove the historic antagonisms and confrontational politics between the Right and the Left the deadly ideological embrace which suffocates mutual collaboration. Unfortunately, as described in the Review, this process of intellectual thought and practical propositions was rudely interrupted in the 1970s by stagflation resulting from a seven fold increase in petroleum prices within just a decade, starting in 1973. This terminated the pursuit of these productive enquiries. Unfortunately,
Denis Healey opted to abandon Keynsianism in 1975 which was less significant in practical terms than his abandonment of a wages policy and failure to follow Nicholas Kaldor's advice to establish a policy to support industry and manufacturing. This set the United Kingdom's policy bubble off in the completely wrong direction of monetarism, or rather macroeconomic policy which came to dominate the policy thinking of both main political parties in government by monetarism ever since.
So the issue of non contentious policies that aim to emphasize the rise in real incomes could not become the central topic.
Lastly, after the completion of the Review, we received so many interesting feedbacks, including from the Pool, suggesting further implications of the findings. I realized that there was a need to respond by prepating additional information for dissemination. Therefore, we agreed to introduce the "Notes" service to keep subscribers to the Review up to date on new theoretical and evolving policy implications during the following 12 months of the Review's release.Turk:
That is interesting. The Pool will like that. Do you have any view on what the Notes might cover? McNeill:
Yes, one has already been completed, and another two are in preparation. The first delves deeper into the subject of inflation. Others will review the implications of Real Incomes Policy for supply and demand theory, this is really interesting. In practical terms there are implications for business rules related to marginal price theory and how managers can maximize corporate advantage of policy incentives for innovation and productivity.Turk:
Well, thank you for very interesting interview. I am looking forward to continuing tomorrow.