Following close to 13 years of applying quantitative easing (QE) which combines monetary injections in the economy combined with very low base interest rates, enough evidence has been accumulated to throw doubts of the efficacy of monetary theory as a foundation for monetary policy. First raised as a problem by the British economist Hector McNeill, policy makers have ignored this possibility. Recently, the Lords Economic Affairs Committee published a report entirled, "Quantiative Easing: A dangerous obsession?" Andrew Bailey, the Governor of the Bank of England, considered the word "obsession" to be inappropriate. However, the evidence given by the Bank of England to the Economic Affairs Committee was entirely unconvincing. Indeed, the evaluation section of the Bank admitted that the Bank was "still learning" about the impact of QE!. Amongst the academic contributions to the Economic Affairs Committee evidence, one emphasised that QE was a policy without a theory.
Last year, the Correspondents' Pool of Agence Presse Européenne (APEurope) requested that this media organization sponsor a review of the impact of monetarism on the real economy. APEurope finally asked the Decision Analysis Group that Hector McNeill heads at SEEL (Systems Engineering Economics Lab) in the Hampshire in the United Kingdom, to undertake a review under the general title of "Montetarism and the Real Economy. Several organizations requested that APEurope syndicate this report content so as to create as wide a dissemination as feasible. As a independent syndication medium APEurope agreed to this request.
This edition of CybaCity.com provides an overview of this review prepared by the senior economist on the APEurope Conrrespondents' Pool, Nevit Turk. Nevit Turk has interviewed the author of this review on several occasions in the past an therefore has a good background to assess this latest output.
The Review has now been released (31st January, 2022) in pdf format. Readers can purchase a copy using the PayPal card payment link provided on this page.
Nevit Turks's overview follows below and his reference document is the syndicated version that has been released under the series title of the "British Stratetic Review".
Senior Economics Correspondent
The British Strategic Review is unlike any other strategy document I have read during the last 30 years. It is unique in that it not only describes how monetarism came to dominate macroeconomic policy but it also traces how some of the events that caused this transition in the 1970s have persisted. This is because the root causes, linked to faulty economic theory, derived policies and inappropriate political decisions helped maintain the problem of energy dependence and income disparity as permanent unresolved issues over the last 50 years.
In the section entitled,"Further turmoil and the turning of the tide in the 1970s" there were rising concerns with the global ecosystem, population pressure on food supplies and the limits of growth centred around Cambridge, Stanford and MIT but these were pushed to one side as a result of the International Monetary Fund's actions that enabled Arab oil exporters maintain a strategy of price rises designed to punish those who supported Israel in the wars in the Middle East. This led to a seven-fold price increase in petroleum prices within just a decade, starting in 1973.
The IMF came up with the idea of recycling petrodollars as a useful buffer to discourage a possible military responses to this globally destabilizing action. Access to these funds were extended through the IMF and from private banks to military hardware corporations and to politicians and political party coffers in the West. The petroleum price was more of an issue of the cost of living to wage-earners but not to those benefiting from the proceeds of recycling and those deciding on macroeconomic policies. The Review places the reason for this development of the recycling concept and its consequences, at the feet of the Managing Director of the IMF Johans Witteveen. He was a Moslem of the Sufi sect and they referred to him by his other name of Murshid Karimbakhsh. His decision to promote recycling was lauded for "keeping trade going", however, this development and the private sector involvement resulted in slumpflation enduring for more than 20 years into the mid-1990s helping exacerbate income disparity worldwide while petroleum substitution and alternative energy development were shelved largely because of a lack of political interest and foresight.
An interesting detail was the fact that two distinct policy options were developed to tackle slumpflation starting our around 1975. One was Supply Side Economics (SSE) and the other was the Real Incomes Approach to Economics otherwise known as Real Incomes Policy (RIP). Although SSE was taken up by the US Reagan administration, it was simply a fiscal scheme involving reductions in marginal taxation in the hope that the windfall funds would result in higher investment in price-reducing initiatives. This "trickle down" notion did not work out in practice because much of the windfall went into executive and shareholder's pockets and assets. Income disparity rose. The Thatcher government tried the same thing. Inflation did fall slightly, but this was a direct result of a decline in the international price of petroleum in the years concerned while income disparity rose.
RIP was developed by the Hector McNeill, the author of the Review. This is completely supply side, and its theory is quite different from the Aggregate Demand Model (ADM) the paradigm of Keynesianism, monetarism and SSE. I interviewed McNeill in about seven years ago when he explained that in 1975 he had attempted to write a proposal to tackle slumpflation but could not find a solution applying any of the conventional policy instruments (interest rates, taxation, monetary volume controls and government loans and directed investment) he realized that all of them, if applied, would create severe prejudice for constituents. Having received his economics training at the Universities of Cambridge and Stanford, McNeill found this state of affairs to be unacceptable. He therefore started from scratch to identify the logical mechanisms that create slumpflation in order to identify the theory behind the mechanism. He then used this to design a policy able to resolve the particular issue of tackling inflation by means that do not prejudice constituents and, in particular, wage-earners.
The House of Lords Economic Affairs Committee evidence on QE gathered during 2021 resulted in a report entitled, "Quantitative Easing: A dangerous addiction?. The Strategic British Review points out that some of the evidence presented to the Economic Affairs Committee, referred to QE as, "...a policy without a theory". The Review confirms this by presenting a step-by-step demolition of monetary theory in the form of the QTM and to present a substitute in the form of the Real Theory of Money as a more complete and more useful identity. By the same stoke, this demonstrates why the QTM is of no utility.
The Review calls upon past advocates of an alternative theory to the aggregate demand model in the form of the French Economist, Jean-Baptiste Say (1767–1832) and Nicholas Kaldor (1908-1986) who became the Professor of Economics at the University of Cambridge when McNeill was a student there. What brings these, apparently, unrelated economists together is based on the contributions of these economists to the basic theory of RIP in the form of the Production, Accessibility and Consumption model. First of all Say in his treatise, subtitled, "The Production, Distribution and Consumption of Wealth", published in 1803, emphasized the importance of the role of entrepreneurs in bringing about more efficient ways to deploy resources through innovation. In 1819 Say took up the chair of industrial economy founded for him at the Conservatoire des Arts et Métiers. It is this that links him to Nicholas Kaldor who was one of the first economists to introduce the impact of technology and changes in technology in models of the economy.
In 1975, Denis Healey the Chancellor of the Exchequer (Minister of Finance) under a Labour government, abandoned Keynesianism and a wages policy and introduced a crude form of monetarism whose conditions were intensified under the terms of an IMF loan. Kaldor, who had advocated a proactive industrial policy, resigned from his position as an adviser to the Labour government in 1976 to became one of the strongest and most consistent critics of monetarism during the beginning of the Thatcher government. Kaldor's predictions that the impact of monetarism would be a hollowing out of British industry and manufacturing, declines in productivity, rising income disparity and unemployment, and a falling balance of payments under the yoke of monetarism, all turned out to be correct.
Based on the general analyses covering all of the above, the Review then summaries the overall impact of monetarism in the form of a serious constitutional issue that has arisen and made more apparent under QE. This is that monetarism has created two distinct sets of constituents.Those whose incomes depend upon the wages paid by a declining industrial base (the real economy) and those whose income is proportional to inflating asset holdings or transactions. Real wages are declining affecting 98% of voters while asset holder incomes have risen sharply affecting around 2% of voters. The 2% of asset holders are the main benefactors of the Conservative party and the media so the likelihood of necessary change is very small and will remain so until the British political party system is subjected to necessary changes. In the meantime the purchasing power of around 25% of the population in work, has arrived at a low point with many needing to use food banks or take on debt to maintain their standard of living. For most, the standards of living are declining.
The penultimate section homes in on a central issue facing the United Kingdom. Germany, which exists in roughly the same geographic zone of Europe has developed since 1945, reunified with difficulty with East Germany to end up with the largest positive balance of payments in the world consisting of exports of goods or largely industrial products. Germany's balance of payments is larger than that of China a county with over 16 times the population of Germany. On the other hand BREXIT Britain's performance under a continued monetarism presents a sorry state of affairs placing the country as the second to last most negative balance of payments in the world and importing most manufactured goods. This decline over the last 50 years accompanied "free trade globalization" which created depressed rust zones in the UK, today encompassing most of the so-called "Red Wall" areas which were never fully integrated into British economic development and fell behind.
The main point is whereas Germany invested in tacit and explicit knowledge-based education and training the UK continued with a highly academic schooling both in pubic and private systems and higher education training system. Monetarism's policy impacts as the deskilling of the British work force has been a disaster. The Review calls attention to how, at school age level, there is a need to introduce a broader technical education in the UK and to move away from "chalk and talk" or "white boards and chat" and even "Zoom".
The final section spells out an approach to initiate the resolution of some of the issues facing the UK economy and society as a whole. Avoiding the clichés of building back better and levelling up, the Review, sets out convincing arguments in support of the role of learning, tacit and explicit knowledge. The monetarist theory is convincingly debunked in the Review. The outcome, in terms of policy has become self-evident for the majority of constituents. The vital role of innovation, takes the microeconomic mechanisms that can transform productivity to identify incentives, based on business rules, to lower the risk of investment and eliminate inflation. This dynamic can deliver real incomes growth and falling incomes disparity. Options around a central theme are provided.
In the final section the quandary of how to bring all of this about identifies problems associated with our political party system but pointers to solutions are presented. The Review recalls the outstanding Power Report of 2006 as a demonstration of the resistance to electoral reform by both of the leading political parties.
There is, fundamentally a strong resistance to arriving at a state where the constituents of the country contribute, in a practical fashion, to the shaping of policies that impact their livelihood and wellbeing. There is also the problem that neither of the main political parties offer alternative economic policies. In this context the Review lays bare the fact that both Labour and Conservative parties have both been relentless in their pursuit of monetarism without interruption for since 1975 and Denis Healey's fateful decision to embark on this journey. This was more as a result of panic because the Treasury had over-estimated the government borrowing requirement causing Healey to go to the IMF. There was here a lack of due diligence to double check this estimate on his part as well as an unwillingness to take notice of what Nicholas Kaldor has to say on the matter.
Neither Labour of Conservative governments come off well in this Review simply because, to this day, they have both pursued the same monetarist paradigm and therefore aside from rhetoric, they have not offered fundamental alternatives for the people of this country. Until one of them understands that there is an alternative that holds out promise, the country is likely to continue its descent as is the norm at the end of all hegemonic cycles.
This is a timely document that provokes second looks at how we have managed our affairs in Britain and it provides insights into economics of relevance to economies beyond these isles who, like Britain, need better pathways towards sustainable development.