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10/11/2022: Last weekend's APE Correspondents Pool Workshop on Economic Development Policy options for Britain helped clarify both the causes of the current cost of living crisis but more importantly pointed to a specific solution which differs from the current position adopted by the government, as well as most economists.

The solution proposed is based on the Real Income Objective (RIO) an approach to economic theory and practice which tackles rising prices directly to immediately impact constituent purchasing power and to slow down and eventually reverse inflation and the decline in real incomes.

This is in marked contrast to the monetary fixation of the government attempting to balance government revenues and expenditures under such high levels of inflation as to make such a balance impossible. As a result taxation might rise and public services will be cut back while the government policy does nothing to control inflation. This will not be helped by the Bank of England applying flawed monetary theory which will cause a deepening depression and possibly stagflation.

This two day workshop consisted of day one consisting of short introductory presentations followed by participatory analysis of details. Day two was an all day review of the many policy options arising from the previous day's understanding of the RIO approach to economics.

This article covers day one because the conclusions to day two became too extensive and the write up is still being completed. The findings will be published by the Cambridge-economics network and the British Strategic Review.

The morning session (5th November) covered the causes of inflation and the constitutional crisis created by monetarism in the form of a widening income disparity. A short introduction by Nevit Turk, the Economic Correspondent of APEurope, was followed by a morning session reviewing the British Strategic Review document "Monetary deception".

The afternoon session on 5th November was introduced by Hector McNeill, Director of the George Boole Foundation, with an overview of how Price Performance Policy works to tackle price inflation. This was followed in the workshop session by a Power Point providing some of the finer details. This Power Point presentation provided some quantitative simulations comparing standard corpoate tax environment cases with 3P cases to demonstrate how 3P can kill off inflation while keeping companies afloat. This session attracted many questions and was of enormous interest. In the information pack was a working paper listing the ,19 significant contributions of the Real Incomes Approach to economic thought.

The conclusion on the first day was that the RIO approach and Price Performance Policy is very different from the current emphasis of the government and, indeed, most economists, who dwell on monetary solutions. RIO addresses what is fundamentally a supply side production productivity issue. RIO is a completely different perspective of economic theory and practice. Contrary to common belief, monetary theory and practice has little effective relationship with supply side production processes supplying goods and services. However, it is the productivity of supply side production processes that enables the output of more price competitively priced goods and services as well as payment of compensatory wages. Purchasing power of wages is eroded by inflation. In order to reduce inflation it is necessary to address rising input costs by improving productivity or substitution for companies to remain competitive with a range of prices that consumers can afford.

Monetary policy and the volumes of money in the economy have no direct effect on prices because these are set by companies who are in competition and raising price results in loss of market share. Prices are not set by the Bank of England. Inflation, in the main, is caused by rising costs. The notion that inflation can be reduced by depressing "demand" by raising interest rates or taxes is actually inflationary because it raises the costs of finance for both consumers and companies or reduces disposable income. This irrational theory is based on the Quantity Theory of Money, which the document, "Monetary deception" demonstrates to be flawed.

Besides this fundamental error in monetary theory, the same document explains why the default outcome of monetary policy is to enrich asset holders and traders while reducing the real incomes of wage-earners.

Besides the Bank of Englnd decisions to raise interest rates, the bulk of the current inflation is caused by the rising prices of energy. This energy crisis, although passed off as a global crisis is, in reality, a result of inappropriate policy decisions by the government related to the imposition of sanctions on Russia. Thus this energy price crisis is a direct result of UK government decisions. It is also this outcome which has generated the most severe gap in the budgetary balance linked to the attempt by the government to subsidize consumer energy bill payments. As a result of a tight gas and petroleum market, maintained as a result of OPEC+1 policy decisions, the energy price crisis is likely to last in the same way as in the 1970s-1980s. Therefore the government will not have sufficient funds to continue to subsidize consumer energy bills.

The government is applying fiscal rules in an attempt to balance government revenues against public expenditure commitments and as a result, the attempt to subsidize consumer outlays on energy, it will be very difficult to "balance the books". As inflation continues, this process will enter the realms of an impossibility because nothing is being done to attack prices or rising costs.

RIO is an approach that sets policy objectives to be real incomes. Real incomes are determined by wage levels, prices and inflation. Wage levels, prices and inflation are all determined by the levels of supply side productivity. Therefore, in order to reduce inflation companies need to be provided with incentives to reduce moderate or unit prices through a sustained investment in productivity enhancing actions. Under normal circumstances levels of productivity take time to build up and as a result any price moderation or reductions are associated with future operations.

The notable aspect of Price Performance Policy (3P) is that it provides an incentive for companies to reduce unit prices more quickly while raising the investment in productivity enhancing innovation. By way of example, Learning Curve Projection (LCP) is a standard technique whereby many industries can project their likely unit costs associated with rising physical productivity as througput increases so as to project likely future unit prices as a basis for planning marketing strategies to gain market share. This form of calculation is also applied widely in many Just-in-Time supply contracts. 3P inverts the timing of price reductions associated with future lower unit costs by encouraging companies to reduce unit prices immediately to those levels expected to be feasible in say 12 months time. The impact of this is to immediately reduce the rate of increase in inflation. This is achieved by applying a corporate levy or tax referred to as the Price Performance Levy (PPL), which starts off at a basic rate of say 20% and is rebated to the extent that companies succeed in reducing unit price rises to below the rises in unit costs of inputs. This is measured by an index known as the Price Performance Ratio. Threfore the Price Performance Levy rebates are a function of the PPRs achieved in any reporting period.

The logic of this process is that any relative reductions in prices augment the purchasing power of wages even without quantitative increases in wage levels. As a result purchasing power of consumers, the majority of whom are wage-earners, increases leading to a market share increase by those companies offering lower unit priced produce. As a result the real growth impact is disseminated throughout the economy.
Jean-Baptiste Say

An interesting historic detail is contained in the information pack document on contributions of the Real Incomes Approach to economic thought. This is that this is the economic model described by Jean-Baptiste Say (1767–1832) in his "Treatise on Political Economy" published in 1821. Say emphasized the role of entrepreurship in bringing about innovations to increase the productivity of processes so as to generate increased demand for lines of production. Say also emphasized the role of wages paid by companies in a circular economy as being the source of demand for a rising consumption satisfying the growing demand for products from increasingly efficient production. Indeed, the whole industrial revolution, starting in the United Kingdom around 1830, was the result of this process.

This type of productivity-based growth was still evident in the period 1945-1965 when Britain had steady growth, rising investment, productivity and real wages. There was a significant reduction in income disparity and full employment.

However, since 1975, the switch to monetarism witnessed a 50 year decline in industry and manufacturing investment, productivity and innovations in this country resulting in falling real wages and an increasing dependence on imports. There has also been a significant rise in disparity in incomes. The rising disparity of incomes has been caused by monetary policy driving up inflation in the prices of assets, favouring asset holders and traders, while causing funds to flow away from supply side production and wages, resulting in a decline in real wages.

The only way for Britain to re-establish a resilient economy is to reverse this process. The RIO policy 3P can achieve this by compensating companies who reduce unit prices in the short term through PPL rebates used to sustain corporate margins while productivity is raised over the medium term. Since rebates are only received for delivered price reductions in each reporting period, such a policy is extremely efficient and has an immediate real incomes growth impact across all sectors.

Energy being a particularly problematic area is one where considerations miht be given to the establishment of a specific 3P rather than applying ad hoc windfall taxes. These are disruptive to cash flow. 3P can ensure corporate cash flows remain at adequate levels while helping maintain investment and productivity increases while energy prices are moderated and even reduced. Naturally gas and petroleum substitutions, by using other resources as sources of energy, needs to be an ongoing commitment to innovation.

In terms of general sustainability with reference to climate change and planetary carrying capacity 3P provides incentive for companies optimizing their production on the basis of a productivity trajectory of gaining more-for-less. Combining this with innovation-based processes that reduce CO2 and Methane-type emissions can contribute to improving the prospects for sustainability and contributing to efforts to stop the increases in ambient temperatures.

The results of the second day workshop deliberations resulted in some exciting realizations and further advances in the both theoretical and policy-related perceptions linked to the RIO approach. These findings will be used to update existing documents such as the Cambridge-economics network document, "The contribution of the Real Incomes Approach to economic thought". On a more practical front, Hector McNeill is organizing an internal work programme to produce a guideline on business rules for companies participating in a 3P framework. This is needed because microeconomic optimization procedures would be different under a 3P framework. For example, rather than remain price-takers and applying what is known as marginal cost pricing, businesses would need to become competitive price-setters and apply a marginal consumption pricing which relates pricing options to elasticities of demand within the target consumer disposable income brackets. These guidelines will be developed at SEEL-Systems Engineering Economics Lab a division of the George Boole Foundation and the international centre for the development of the Real Incomes Approach.

Additional references for further reading:

Why monetarism does not work
Why the Bank of England Cannot solve the cost of living crisis
The constitutional crisis created by monetary policy
Monetarism & The Cost of Living - BSR Special Report