A world of inevitable cycles?
In reviewing the sociological historic and contemporary output of academic studies, the World System work on repetitive hegemonic cycles of the rise and fall of centres of power in the world mostly point to the likelihood that we are currently in the final throes of US hegemony. The hegemonic cycle consists mainly of a country starting out with high productivity, expanding exports, accumulating cash and financial weight and then switching to a range of activities heavily weighted towards financialization and speculation. The notable aspect of this work is that it is extremely fatalistic in presuming that hegemonic cycles are inevitable and now it is the turn of a new rising hegemony in the form of China.
When also surveying macroeconomic theory as carried in the erudite volumes of "well-established" economists, there is a very notable gap in macroeconomic theory. This is an almost complete absence of any embedding of any of the details which started off the hegemonic cycle, the tail end of which we now find ourselves. There is no reference to technology, technique and innovation. At least the social historians accepted that so-called Kondratieff technological cycles as a reality.
On the other hand, macroeconomics also contains an additional flaw of a fatalism. It is similar to that of the hegemonic cycle buffs, but not so much linked to sociopolitical cycles or its lack of attention to technological imperatives. The problem is that in spite of the considerable disruption to the lives of people in the final throes of the current cycles, including risk of warfare and revolution, economists, when faced with the same historic dilemma encountered by many past generations, plead that, "There is no alternative". Their lamentable position is to try and bend flawed economic theory to attempt to resolve issues in a way that reflects a failure to understand why there are no lessons from the past to help us address our current dilemmas.
There are no useful lessons from the past because in the past an important variable did not exist but which in terms of theory and notional understanding does exist today lying in wait to be put to good use in resolving the lack of adequate action or practical policies.
Universal suffrage - a missing link
The missing variable which did not exist in the past but does now is universal suffrage and the concept of participatory national development and a constitution organized to gain orientation based on informed public choice. It is only during the last century that Britain has had universal suffrage but since its existence appearing between two terrible wars led to a preoccupation with the state of the people in terms of the state of health and poverty and a fear of unemployment stoked by the experience with the Great Depression.
William Beveridge's proposal on the welfare state were what the people desired and the period between 1945 and 1965 saw unprecedented growth, the introduction of a National Health Service, rising real incomes and standard of living and with the wages of lower paid workers rising faster than those in higher income segments. The paradox was that this successful period of growth and general wellbeing was not the result of the economic theory proposed by Keynes in his General Theory. Robin Matthews the Professor of Economics at Cambridge University produced a detailed review published in the Economic Journal in 1968 on why full employment has been secured during this period. The conclusion was that no Keynesian policies had been applied during this period. Rather than expansionary and potentially inflationary monetary policies, policies throughout the period were strongly deflationary and government current accounts remained positive. From the Kondratieff diagram the dominant growth industries and technologies were electrical technologies, chemicals, automotive and petroleum-based industries. Although there are always issues to be resolved, in general governance appeared to be relatively successful in keeping the majority of the population satisfied with progress. During this period, as a result, the advance of concepts such as participatory development planning involving the voters was displaced by a tripartite planning system supported by the government, the unions and business. The concept of participatory development of policies involving the public never advanced and while there was a general feeling that government was effective, there as no demand for any transition to the development of a system of public choice based on the decisions of an informed public.
To a large degree, the success of the 20 years following the war created an over-confidence on the part of political parties that it was their role to set the policy agendas and to attract voters to support them in general elections. Indeed the intense rivalry between political parties was a reason that a broader participatory system was not developed because the parties wanted all constituency decisions to be based on agendas set by the parties. The concept of government or representation reflecting the mix of constituent needs was corrupted by the general elections only involving political parties and the choice being deflected from the resolution of concerns at the level of individuals, families or communities into a set of political party manifesto pledges, many of which were mutually contradictory. As a result the British constituency was never to find itself voting on a mix of policy proposals that could satisfy the broad range of needs of the population.
Choice of economic policies
During the successful launch of the NHS and a period of increasing prosperity and while Keynesian policies were not applied, it is paradoxical that economists did not concern themselves with refining macroeconomic policies to promote still further technological innovation in the sense of promoting stable employment by other means. The reason this was not done was that the "market" seemed to be solving the problem. Even Anthony Crosland the thoughtful Labour MP and economist, came to the conclusion that capitalism had solved the problem of employment and decent wages. Cambridge University, being the alma mater and workplace of Keynes became a centre for the "development" of Keynesian theory. Students attending the Faculty of Economics received a bloated diet of Keynesian theory; very much a theory because, at that time, it was not being applied in practice. However, the performance of the economy resulted in a complacency on the part of economists and political parties.
"Hello, is that Cambridge? We have a problem...."
However, the rapid rises in international petroleum prices in the 1970s and the rise of slumpflation put an end to the status of this genteel theorizing. It was soon realized that in practice, Keynesian policy instruments could not solve this problem; the world entered into a policy crisis mode.
"Hello, this is Chicago, we have a solution!"
However, the assertive contributions of Milton Friedman of the University of Chicago, although fundamentally wrong, were considered to be an alternative to what turned out to be a useless Keynesian policy toolkit. The reality was, however, that monetarism was not a solution. There was very little to distinguish Keynesianism from monetarism since both relied on the same aggregate demand model and using control of exogenous injections of money to influence inflation and employment, at the same time. The fall back position of both Keynesians and monetarists was excessive demand causes price inflation and therefore curtailing demand through taxation and raising interest rates could reduce inflation.
Wrong theories for the evolving problems
However, the inflation experienced with the petroleum price crisis was cost-push inflation caused by a sudden and continuous increase in the price of a major economic input, petroleum. This forced companies using petroleum and petroleum derivatives to raise their prices in order to survive and thereby drive inflation. Therefore this had nothing to do with demand. It is quite extraordinary that both Keynesian and monetarist theories contained no policy instruments to handle this state of affairs. Frankly, both schools of thought were half-baked because they only focused on aggregate demand conditions and essentially ignored aggregate supply conditions.
In 1975, two separate alternative developments in economic theory and practice were initiated. One emerged as "supply-side economics" following the work of the Canadian economist Robert Mundell. The other development was "the real incomes approach to economics" developed by the British economist Hector McNeill. Paradoxically, supply-side economics is not one that places any agency into the hands of the supply side activities producing goods and services. It also does not advance economic theory but rather was a marginal taxation variant of fiscal policy following the "trickle down" concept. With respect to slumpflation, the supply-side economic approach was combined with significant interest hikes under the Reagan administration and Thatcher governments. These combinations, predictably, caused prejudice as a result of house and farm repossessions with millions losing their homes. Income disparity rose significantly reversing the trends achieved during the successful period 1945 through 1970s.
Genuine supply side policy
On the other hand, the real incomes approach was an important change to economic theory. It is able to translate into practice placing agency into the hands of the supply side producers of goods and services, through specific incentives to invest in appropriate technology. This could address the issue of supply-side cost-push inflation. As a result the motivation for generating increased growth through investment results in the generation of inflation-reducing real growth. McNeill is of the opinion that, if it had been applied at the time, the real incomes approach would have had the effect of encouraging petroleum input substitution as well as increased efficiency of any activities using petroleum, including heralding renewable investment. However, this approach was never entertained by economists and therefore never applied by governments.
Motivations for changes in theory
It is interesting that Keynes was frustrated by the fact that the economics taught at Cambridge had no answer for the situation of the mass unemployment experienced during the Great Depression, and this is why the emphasis of his General Theory is directed almost exclusively at raising employment through public works. However, his theory had not taken into account what was required to resolve price shocks caused by important economic inputs, or cost-push inflation.
Similarly, 40 years later, Hector McNeill went though a similar process in 1975 becoming frustrated by the fact that economics taught at Stanford and Cambridge, which included a considerable amount of Keynesian theory, had no answer for slumpflation caused by the rise in price of a significant economic input. McNeill has noted that his initial proposals only addressed the slumpflation situation of rising inflation. Robin Matthews, the economist whose work pointed out that during the successful period 1945-1965, no Keynesian policies wre applied, provided McNeill with some advice. He pointed out that a monograph on the theory published by McNeill in 1981, did not explain how to handle the situation where inflation is falling. Matthews advised McNeill to cover this eventuality before making the real incomes approach a policy proposition. McNeill duly developed this aspect which strengthened the practical relevance of the theory in subsequent publications and articles. This had the beneficial result of making the real incomes approach of more univeral significance rather than being effective for a particular set of circumstances. McNeill has observed that, at that time, one of the politicians to have understood the real incomes approach was Richard Wainright, the economic spokesman for the Liberal Party.
If Keynes had received the benefit of this type of advice, before publishing his General Theory, there is a chance that by looking in more depth at how to sustain low unemployment once achieved, over the medium to long term, he might have realized the importance of increasing productivity as the means of sustaining both employment and real incomes growth. By introducing ways to improve investment in appropriate technologies as part of economic theory and practice, our current economic chaos might have been avoided.
Unfortunately, the initiation of the slumpflation period followed the termination of the gold standard in 1971. As UK and USA productivity began to decline, the phase of globalization accelerated with increasing flow of fiat currencies into offshore investment and a gradual decline in onshore manufacturing and industrial employment. The governments, politicians and economists had accepted that the "Stages of Economic growth" by Rostow was an inevitable transition, along the lines of the hegemonic cycle theory. There were no public forums to question this process in spite of declining employment and a lack of policy attention to corrective technologies geared to maintaining real incomes.
In 1990 McNeill undertook a survey in Hampshire funded by the Manpower Services Commission who were concerned with rising unemployment, to determine the level of interest by high technology companies to form a collaborative onshore engineering initiative. No companies showed any interest.
Removing the demos from our democracy
During the period 1990 through to 2008 governments removed financial regulations that had been pivotal to the economic real growth in the 1945-1965 period. However, there were no participatory discussions on this involving the public. Indeed, increasingly extreme liberalization occurred generating financial markets and derivatives whose size grew rapidly to exceed that of the county's GNP and while private debt increased. In reality the dominance of monetarism in macroeconomic policies had lost control of finance as a result of politicians and political parties all following the same flawed theory while implementing policies in which the British constituency had no say. Gordon Brown's first act in May 1997 was to make the Bank of England independent. This was a significant mistake because it placed monetary policy even further from any possibility of participatory decision-making involving voters. While satisfying governments and the financial services industry, this decision was followed just 10 years later by the financial crisis of 2008.
Again, with no involvement of the public, the clique of economists, policy makers, banks and central banks decided to introduce quantitative easing (QE), a policy that haddemonstrably failed in Japan since the mid-1980s. The main beneficiaries of this policy has been a very small faction of the British constituency in the form of asset holders while the majority, with no possibility of saving with close-to-zero interest rates and an increasingly depressed supply side production and services sector facing high interest rates. The result has been falling investment and productivity and declining real wages and rise in pauperism.
Putting the demos back into democracy
Clearly this situation is a demonstration of the failure to place the demos, the people as the national constituency who economic policies should serve, at the centre our processes of policy design and decision making.
It is not as if there is not sound logical justification to put the demos back onto democracy because of the horrendous mistakes made by economists, the Bank of England and government. McNeill published earlier this year a paper explaining why the Quantity Theory of Money, the go-to justification for monetary decision-making, is a completely flawed. He based this conclusion on the impacts of QE as evidence. Other papers have explained how inflation is caused under current circumstances in policy-induced speculative price rises in land and real estate leading though into cost-push inflation in the prices and rents of land, houses, offices, retail units, industrial units, warehouses and some commodities. This is creating cost-push inflation affecting an already depleted supply side production sector and is creating increasing difficulty for wage earners. There is more than enough evidence and therefore plenty to discuss. In order to change direction there is an urgent need for engagement with those most clearly affected by poor policy making, the people of this country. It is time to put the demos back into democracy.
The afternoon session of this seminar segment will be led by Hector McNeill, in one of his rare appearances, to review propositions on how to resolve this impasse in that disorientates and disrupts policy decision-making in the United Kingdom.