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17/10/2022:Jeremy Hunt has an almost impossible task but there are practical solutions to the dilemma facing this country. This weekend we will post some basic facts concerning economic theory and what works and what does not work in time to resolve our problems.

The solution is more concerned with sorting out our horrendous foreign policy front and actions by the Ministry of Defence that continue to exacerbate our crisis on the energy availability and price front. This aspect constitutes the majority of the current government proposed expenditure, sinking the rest of the budget.

A real solution requires Real Politik and objectivity focussed on the ability of this country to protect the interests of the British constituency as opposed to supporting dead-end and wasteful and failing foreign policy and military gambits that are directly prejudicing our economic circumstances. It will take a considerable amount of courage to articulate these facts and to propose a practical solution to the benefit of the country.



The current problem has its origins to events that took place in the early 1970s and which threw the world into a similar situation.

To summarize, the 1973 price hikes in the international price of petroleum imposed by OPEC created a recession on a world wide basis characterized by stagflation or the combination of rising inflation and unemployment. The state of the art conventional economic theory and derived policies in the shape of Keynesianism and monetarism did not possess either an adequate theory nor policy instruments to tackle stagflation caused by rising energy prices. Rather than acknowledge the gaps in economic theory and practice economists and policy makers muddled through. Johans Witteveen the Managing Director of the IMF conceived of the idea of recycling the massive accumulation of petrodollars in OPEC countries. This initiated a process of highly concentrated tranches of money seeking ways to apply them and this led to financialization, the explosion in financial assets in the form of derivatives and a hedge fund approach to the economy.

This was not the theoretical or policy advance in economics required to handle energy-based inflation because this generated a broad trend of a rising disparity in incomes, a rapid rise in the wealth of asset holders and traders and acceleration in deindustrialization in the UK and the USA, deskilling of the workforce and a steady decline in real wages as increasing volumes of funds were directed into offshore investments in lower income countries taking shape as "globalization".

This paradigm culminated in the 2008 financial crisis. At this stage, rather than revisit the process of identifying the gaps in economic theory and practice, the "solution" selected was an intensification of financialization in the form of quantitative easing (QE).

During the late 1970s two different economic theories and policy proposals appeared to address stagflation. One was "Supply Side Economics" (SSE), largely developed by the Canadian economist Robert Mundell. The other was the "Real Incomes Policy" (RIP) developed by the British economist Hector McNeill. SSE was applied in combination with a significant rises in interest rates and falls in marginal tax rates leading to an increase in unemployment and thousands of families having their homes repossessed. RIP was a very different solution which was never applied. However, SSE was not particularly original in the sense that is was a variant on Keynesianism and monetarism because its operation was based on the same assumptions on the role of money injections driving economic growth in the economy. Readers no doubt will recognize the similarity to the recently stated objectives of the last Chancellor and Liz Truss. Just as in the period 1970s-1990s this would not work now with the same source of inflation being energy prices and the economy being in a fundamentally weaker position. When Geoffrey Howe as Chancellor launched his budget in 1981 including supply side features 365 economists wrote a letter to the Times stating that this form of monetarism would depress industry and not have the effects stated. The majority of these economists were Keynesians and it is notable that they did not provide alternative propositions. The reason was that neither monetarism nor Keynesianisn possess solutions to this type of crisis.

Whereas SSE appeared in the 1970s it has hardly evolved at all and like Keynesianisn and monetarism there has been very little advance in either theory or practice in spite of the fact the levels of income disparity continue to get worse along with productivity and falling real incomes.

On the other hand, RIP constantly evolved both theory and policy propositions since 1975 when its development began to the present day, a development period of over 47 years.

In order to highlight some of the theoretical advances and policy solutions it is preferable to give practical examples in the context of our current inflationary problems which are the result of four policy-related factors:
  1. Bank of England quantitative easing applied for over 12 years;

    • The legacy of this policy was significant inflation in asset prices which fed into supply side inputs creating a systemic or structural inflation;

    • The associated impact was a steep rise in income disparity and declining real wages affecting purchasing power;

    McNeill has explained that the central monetarist tenet is the Quantity Theory of Money (QTM) that relates money volume directly to the prices of goods and services. However, he explains that if money volumes rise under conditions of low interest rates, as in the case of quantitative easing, most money flows into assets and overseas. As a result a good proportion of the money that is intended to finance investment in the supply side is directed by banks and hedge funds into assets such as land, commercial and domestic real estate causing rises in rents and prices and share buy backs used to provide massive bonuses for executives. The prices in asset markets rise as a direct function of the money injected into these markets. As a result the wealth of asset holders and traders rise while real wages fall and income disparity rises.

    McNeill has elaborated an alternative to the QTM referred to as the Real Money Theory (RMT) that contains 14 variables that absorb funds and therefore influence the prices of goods and services by also including several classes of assets, savings, and offshore flows to the QTM's 4 which only contains variables representing goods and services.

  2. Government fiscal policy - the balance between government revenue and expenditure;

    • Embedded in the government's fiscal policy is a confusion as to the type of growth required to reduce inflation;

    McNeill has explained that as in the case of the 1981 budget and subsequent rise of interest rates in a policy-induced depression, thousands of families lost their homes through repossession while unemployment increased. This is why the Conservatives, at that time lost the subsequent election. Raising interest rates makes use of finance to invest higher cost so production capacity usage tends to decline raising overhead costs.

    This notion of money volumes causing inflation as imagined by the Quantity Theory of Money is quite wrong. Price rises are the result of corporate price setting under conditions of inflationary input costs. Prices are set by companies not by the Bank of England. But the Bank of England raising of interest rates, increase commercial costs reduces margins and the market collapses with falls in consumption as people lose their employment. The BoE does not have either the right instruments nor mandate to handle inflationary conditions.

  3. Bank of England monetary policy largely reflected in interest rates;

    • Embedded in the Bank's monetary policy is a failure to understand that altering interest rates exacerbates real incomes;


    McNeill has explained that listening to politicians it is evident that most confuse more money with higher demand and therefore economic growth. This was one of the principal errors made by Milton Friedman, as pointed out by Nicholas Kaldor, in an exchange of notes published in the Lloyds Bank Review in 1970. However, the type of growth needed to tackle inflation is physical productivity growth which can help substitute higher cost inputs by lower cost inputs, and based on economies and rises in productivity, can moderate or even reduce unit costs and thereby moderate or even reduce unit prices of goods and services. In this way real purchasing power of wages can rise as a result real as opposed to nominal growth. Politicians certainly use the right buzz words such as productivity and innovation but they seem to think this comes about through some force of osmosis. On this question most propositions pay off in 5 or even 10 years in the future; examples would be basic R&D, talk of academic initiatives or infrastructural projects and the like, but these do nothing in the short term and this is the main challenge facing the constituents of this country.

  4. Government foreign policy decisions affecting energy prices.

    • By purposefully avoiding a response to Russia's requests for peaceful negotiations the government supported the US policy of aggression against Russia

    • This strategy, including the use of sanctions, is the cause of high energy prices

    • This strategy has sacrificed the lives of thousand of Ukrainians in the name of NATO policies




    SDAG has estimated that, to date, Ukraine has received an estimated £65 billion in military support from NATO countries in the form of military equipment, training and cash transfers. The current estimates of collective NATO member government payments or allocations of subsidies to assist constituents afford energy bills is around £ 1 trillion. This does not include the rest of the world. This is not a cost-benefit but rather a cost with a multiplier cost impact. The multiplier has increased as successive countries have refused to accept Russian gas and petroleum imports. The threats of Russian price caps have failed with the OPEC+1 decision to support Russia by decreasing production of petroleum and Russia declaring capping countries will receive no supplies. This is a significantly negative result for supporting fighting as opposed to negotiations for peace which has prejudiced all constituents and government budgets.

    Most equipment supplied has been destroyed. Budgetary support "disappears"; there is no transparency. And yet, Ukraine is demanding more arms and unaccaounted budgetary support and resorting to insulting those heads of state who resist while trying to mitigate the negative "Ukraine effect" on the worsening economic circumstances of their own constituents. In the meantime UK constituents face an increasingly dangerous cost of living crisis that could spark widespread social unrest. Rather than solve the headline issues this government is introducing legislation to counter protests, a central tenet of British democracy and source of major beneficial changes in legislation.
    McNeill has explained that something like 60% of the current government proposition in tackling the energy price rise is to subsidize or cap energy prices. Although this is aimed to alleviate difficulties and indeed suffering of constituents it does nothing to eliminate the cause of the energy inflation and is therefore not sustainable.

    The somewhat paranoid and blind approach to the emerging Ukrainian situation during the period 2007 through to February 2022 was one of intentionally provoking Russia by ignoring several rational propositions from Russia to include Russians in a mutual strategic security framework. Since 2014, the ongoing killing of ethnic Russians in the Donbass by Ukrainian military and not encouraging Ukraine to act on the Minsk Peace agreement upon which Russia was relying to avoid having to enter this action on the side of the Donbass citizens ended up with the current situation. Even when, in Ankora, in March/April 2022 the Ukrainians and Russians were about to initial a peace agreement, Boris Johnson discouraged Zelensky from following this pathway. The result of this irresponsible decision has been over 65,000 Ukrainian military personnel having perished and something like 200,000 have been permanently injured while our government encourages Ukraine to continue its killing of former Ukrainian ethic Russians in the Donbass. Associated NATO actions have resulted the flow of Russian gas being reduced and then cut off permanently by the attack on the Nord Stream pipeline. This precipitated the whole of Europe and UK into this energy crisis. This has exacerbated general inflation beyond the structural inflation created by 12 years of quantitative easing.

    As a result, our economic circumstances depend on whether or not we will have a mild winter; literally, the economic stability of this country and degree of suffering of Britiah constituents now depends upon the weather!! By limiting the energy subsidy for constituents to this winter, Jeremy Hunt can reduce the overhang by around £31 billions but whether this will work depends upon whether or not we carry on with the current belligerence or change direction to peace-seeking diplomacy. If we continue to act in a way contrary to the interests of consituents we end up once again depending on next year's weather!! Not exactly the sign of a well thought out strategy.

    The jingoistic senseless behaviour of those "managing" our foreign and security policy can be measured in the current confusion and ineptitude of the government, but remaining in denial, as to the disastrous impact of our foreign interventions on the economic wellbeing of the British population. Excuses such as, "this is an international problem" or this inflation is the result of "Putin's war" are displacement statements to draw attention from the fact that this state of affairs is the result of a self-evident incompetence on British foreign policy front which in promoting NATO's agenda has demonstrated a complete misunderstanding of the impact of such flighty "strategic" decisions on the cost of living and suffering of the population of this country. Such decision have also impacted the populations of European Union, Ukraine, the Donbassas as well as low income countries all facing declining economic circumstances and a general movement towards global depression. This economic catasrophe is a direct result of the reluctance of NATO members to seek a diplomatic solution as from 2007 to work with Russia to establish a European and Russian strategic security framework. With the collapse of the Soviet Union in 1992 those with a more strategic vision spoke of a "peace dividend" but armament companies and hedge fund managers lobbied against this and political parties in need of funds began to reverse this more rational intent back into rivalry and a paranoid media-based campaign to develop Russia-phobia. Our declining economy and economic struggles are the result.

Real Incomes Policy (RIP) can be likened to a plumber in comparison with town planner. It concentrates on the specific actions companies need to take under conditions of inflation as well as the policy instruments required to encourage companies to address inflation and productivity in the short term rather than some time in the future. Rather than apply grandiose top down policy instruments such as interest rates or quantitative easing which only raise supply side costs and squeeze margins and create unemployment, RIP makes use of a measure of price productivity or the degree to which a company raises, maintains or reduced inflation applying an indicator referred to as the price performance ratio (PPR). This is simply the change in unit output prices in response to changes in unit input costs. Thus a company with a PPR in excess of unity (>1.00) is increasing inflation. A PPR of unity (=1.00) signifies that a company is simply passing on the input inflation to output prices. The desirable condition is a PPR of less than unity (<1.00) which signifies that a company is reducing inflation and raising the purchasing power and real incomes of its consumers. The incentive provided to companies is a price performance levy (PPL) which is reduced to the degree companies lower their PPRs below unity. By lowering the PPL companies end up with raised margins to compensate for the degree they lower unit prices. However, rather than apply this to delays in price reductions to accompany the normal physical productivity-related unit costs curve reduction arising from increased productivity, RIP only pays the levy rebates for realized (delivered) price reductions. Therefore companies reduce unit prices in the short run to immediately raise consumer purchasing power, or real incomes, and then continues to work on physical productivity using the PPL rebate to compensate for early price reductions as opposed to the conventional later price reductions which under inflationary conditions are seldom feasible.

This approach is the equivalent to a highly adaptive industrial policy within which any company can respond according to its abilities and resources to improve performance in a low risk manner. There are no government impositions that create winners, losers and those who remain in a neutral policy impact state. As consumers, work forces can contribute to and realize rises in real incomes and across the nation the aggregate effect would be a rise in real incomes as opposed to a meaningless growth based on more money in the economy. Because the objective is higher real incomes for all, including corporate owners RIP aligns macroeconomic objectives with corporate objectives and thereby secures traction and sustainable growth. In terms of climate change and planetary carrying capacity the aim is to move towards more for less and this is how the economy can grow under RIP.


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