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The common failure of conventional economic policies is their creation of winners, losers and some who remain in a policy neutral impact state. This is because conventional policies introduce a differentials in impact created by a zero-sum approach to policy assuming that if some gain, others have to lose. This assumption is rejected by the real incomes approach to economics, a contemporary extension of constitutional economics.

This article reports of the exchanges in the Saturday sessions in a recent weekend APEurope Correspondents' Pool Workshop (06/08/2022-07/08/2022) consisting of presentations prepared by SEEL-Systems Engineering Economics Lab on "Positive Systems Consistency". These workshops are sponsored by the George Boole Foundation.

The Sunday sessions will be covered in Part 2 of this article.

A tenet of constitutional economics is that a country's constitution should serve the interests of the state, the community and the individual. A second tenet is that policies developed under the terms of the constitution, clearly need to meet the same test of satisfying the interests of the state, community and individuals. Because Britain does not have a written constitution the ability of policies to transgress the need to meet the needs of all constituents becomes problematic because of party politics. As a result, the real incomes approach to economics, as a branch of constitutional economics, has the tenet of "Positive Systemic Consistency" (PSC) i.e. policies should benefit all constituents. This is a major challenge in a partisan world. There is therefore a need for politics to be organized in a way that facilitates the achievement of PSC. Is this a criticism of the British constitutional settlement and resulting system of democracy? Yes it is.

Whereas we equate democracy with freedom there is an urgent need to reject setting up some idealized description of democracy and then seducing ourselves into thinking this is the current state of our "democracy". This has the danger of sliding into the unhealthy state of schizophrenia with all believing in something that does not square with reality as we wonder why an increasing proportion of working people in this country cannot afford basic essentials. The jarring contrast of the ideal image with what we behold carries with it the danger of those who occupy a space where our democracy is not delivering as we imagine, become marginalized because they are the evidence that our democracy is not was we would wish to believe. For some this creates a state of embarrassment created by unrealistic notion that, as a country, we are better than our actual state. This is not a question of confusing democracy with economics but rather understanding the importance of individual freedom for self-determination. From this element of freedom, it is possible to establish that economic relations and democracy are one in the same thing.

Freedom

The basic notion of freedom under a constitution and, in particular, within policy frameworks, is that nothing should be imposed that prevents individuals and families from pursuing their individual objectives. At the same time, it is necessary to prevent individuals and families from limiting the ability of others from pursuing their own objectives. Thus the underlying state of freedom is that both the constitutional provisions, including the public goods of law and regulations, create a terrain within which acceptable conduct under the law also aligns with notions of fairness and what is expected of human behaviour. This, in general, would align with a general community conscience of expected standards of acceptable behaviour.

The degree to which individuals can act to advance the pursuit of their objectives depends upon their ability to access the resources they require to achieve their ends and, for this, in today's economy, there is a need for a basic level of real income. Thus the size of an individual's real income determines the command they have over resources and services with which to achieve their objectives. This is an economic question. On the democratic side there needs to be a system whereby individuals can have some say over legislation and policy design when these affect current and future real incomes. To ensure that this is the case, there is a need for bringing to the fore a fundamental tenet of constitutional economics in the form of provisions to enable public choice.

The simple and logical deduction from these basic propositions is that in order to ensure that the constitution, legal and regulatory provisions uphold the interests of the state, community and individuals, the imperative is for individuals to have access to the means of influencing policy design so as to safeguard their real incomes and preferably to see future increases on real incomes as the foundation of expanding options and opportunities for freedom of expression and self-advancement. The philosophical derivation of this logic is that individual freedom is directly determined by individual real income levels.

Our contemporary state

As a world and country we face a worsening cost of living and climate crisis which in terms of the tenets referred to set real incomes as the fundamental solution to these crises. This is not to be confused with "economic growth" measured in terms of pounds sterling. Real incomes encompass a series of important associations which, quite often, politicians fail to mention if they ever refer to the notion of "real incomes". Today, because of rising inflation, more reference is made to real incomes as the value of nominal incomes (number of currency units earned) discounted by price inflation in order to define what can be purchased in real terms as goods and services. This is somewhat paradoxical because the Bank of England target for inflation is 2% per annum which is equivalent to a real incomes reduction of around 18% each decade; and yet they consider this to be a stable state.

In terms of being a policy objective, real incomes does not necessarily mean more money but rather more accessible resources with which to achieve individual ends. Under both the problem of the cost of living crisis, the carrying capacity of natural resources of the planet and green house gas emissions creating rising temperatures (climate change), the long term trajectory of real incomes can only rise on the basis of less consumption of natural resources (carrying capacity) and applying technologies and techniques which release less greenhouse gases into the atmosphere. The only way this can be achieved is through higher productivity achieved through input substitution and changes in technologies to secure the state where more is produced for less. It is necessary therefore to place at the foundation of any real incomes policy the practice of natural resources conservation.

This not to assert that written constitutions have proven to be better. Even written constitutions, including the early propositions in England, qualified any version with the caution that the content was to be perfected to respond to emerging future circumstances. In the USA, each time there is a mass shooting the wringing of hands and attempts to control guns is buffeted by absurd reference to a constitutional provisions linked to militia, the old form of formation of fighting forces, and the admission that things are not perfect but that society is still working towards an ever perfect Union.

The once beautiful city of San Francisco has several zones smelling of human excrement as a result of a lack of sanitation provisions for the growing number of homeless people; this is in a very rich state and the location of Silicon Valley. If anything, the actual track record shows that after 250 years this process of perfection has occurred across the technological front but it is now failing on the social and economic front and, in particular, concerning the real incomes situation of the lower income groups.

The same concepts expressed in different ways

Adam Smith explained in a straightforward manner that individuals pursuing their vocational interests become adept at producing improved goods and services and therefore increasingly serve the general interests of a community and by extension, a country. One of the most enthusiastic supporters of Adam Smith's approach was Jean-Baptiste Say, the French economist. He built some flesh around the bare bones set out by Smith. He explained that entrepreneurism, the ability to recognize ways of doing things more efficiently, has an important role in advancing technologies and techniques leading to real economic growth. Because wages paid to those employed in supply side production made up the total demand within the economy, it became evident that real economic growth arises from improvements in productivity, or more-from-less, enabling unit price reductions and a generalized rise in purchasing power of wages. This rise in real wages, or what can be purchased, can occur with no actual change in the level of wages paid because it is a price reduction effect. At the national level this represents real economic growth with higher levels of consumption.

Demand, economic growth and inflation

Nicholas Kaldor explained that the monetarist notion of monetary injections creating demand and economic growth, as advanced by Milton Friedman, was a misinterpretation of the sequence of events involved. Loans are raised by supply side production companies as a result of their needs to improve productivity or expand capacity. In other words the finance raised has not created demand but rather was responding to an emerging demand generated internally by companies who are on an economic growth path. An important association with this type of demand is that it invariably results in rise in the scale or operations or a rise in productivity, resulting in no inflationary impact at all. Thus, such monetary injections are made as a result of an already existing demand and the injections are proportional to real economic growth reflected in subsequent productivity and output prices.

Although not referred to explicitly by Kaldor, consumer demand arises from consumer ability to expand cash flow for their needs, based on their current or expected income as well as available assets to present as collateral or loan guarantee. Here again the demand is derived from household needs as opposed to a demand generated by loans. There is a hidden message here which is of particular significance to the latest decision by the Bank of England to raise base interest rates by 40% (0.5% over the existing 2.25%). The Bank explained this decision by stating that it was designed to tackle inflation. The logic of monetarism is that inflation is caused by excessive demand and therefore using interest rate rises to depress demand will reduce inflation. However, this assumes that inflation is caused by demand pull factors whereas the current inflation has been caused by rises in the combined prices of energy, housing and commercial property and food. These particular factors create cost push inflation for both supply side production companies and households. Raising interest rates will raise the costs of housing mortgages and commercial property and the cost of any finance necessary to improve productivity to reduce inflation. As a result raising interest rates will exacerbate the situation for households and business creating a state of depression and falling demand. This will result in increasing number of firms operating at below capacity increasing overhead costs and creating yet further pressure on margins and a pressure to raise prices in a collapsing market.

This market collapse cascade is a direct result of the Bank of England decision to rise interest rates and the already high prices and rents of housing and commercial properties is a direct result of the Bank's 12 years of quantitative easing.

Income distribution

One of the impacts of the ongoing prejudice created by the Bank of England policy of quantitative easing was to accelerate the very obvious rise in income disparity. The Bank might not have realized that this would be the impact but by 2012 this was the obvious effect. In spite of this knowledge, the Bank did nothing to correct this significant differential in benefits accruing to asset holders and traders whose wealth and income rose several-fold, while increasing numbers of wage earners saw their real incomes falling to the degree of not being able to afford basic essentials. Most wage-earners have bank accounts and are therefore customers of financial institutions. The Bank of England expanded is "prudential regulations" to include customer protection at the level of individual banks and equivalent which include provisions for enforcing compensation for bank customers in instances of poor or unfair practice. At the same time, the Bank's monetary policy was undermining the real incomes just about the whole constituency and "customers" in a more significant way but where there are no provisions to ensure compensation for the constituents involved. The Bank of England's behaviour manifested in its policy decisions is a case study of a failure of monetarism to achieve a positive systemic consistency in the distribution of income which has had a devastating impact on the extend of freedom of the people of this country. The Bank of England's independence has come at a heavy price for the country; this status needs to be reviewed.

Democracy

In the context of constitutional economics and to avoid the type of monetary policy disasters that have befallen this country it is more than apparent that the question of public choice looms large because too many important decisions that impact the wellbeing of constituents are being taken without their involvement. Political party manifestos tend to have no reference to monetary policy because this has been cocooned away under the wraps of BoE independence and a tight control over decisions serving the interests of the financial services sector. The general excuse is, of course that finance and monetary policy is very complex and beyond the grasp of most voters. But here we come across the same sort of nonsense concerning the role of juries in financial fraud cases. If defence lawyers are permitted to intentionally confuse both judges and juries it is evident that there are inadequate minimum standards of evidence. The same is true in the case of Bank of England decisions concerning both interest rates and overall policy. Indeed, in establishing monetary policy priorities government need to be required to set out the technical, economic and financial logic linking the running of the macroeconomy to monetary policy on the one hand and fiscal policy on the other as a base level minimum condition. The problem with this is that monetary and fiscal policy make the same assumptions concerning the role of demand in determining economic growth. Once the factual element that most inflation arises from rising costs as cost push inflation is accepted, all of the monetary and fiscal assumptions collapse. There is therefore a need for policy decisions to be supported by a Decision Analysis Brief (DAB) which describes the assumed mechanisms that link, interest rates and monetary injections, government borrowing, taxation and expenditure to the prices of assets (land, buildings, precious metals, financial assets, cryptocurrencies, shares, art and rare objects, savings, offshore investment), goods and services and to explain the impact on what really matters, the resulting real income levels and distribution. Whereas monetary policy has been based on a useless identity, the Quantity Theory of Money (QTM), which has no variables to take into account assets which absorbed most quantitative easing funds and drained them away from supply side production requirements. Accordingly all decisions based on the QTM have no credibility and never did.

DABs can be structured as a narrative which are intelligible to constituents. By focusing on the policy impact on the levels and distribution of real incomes constituents will have something of direct interest to them upon which to base their questions. This will help them link back into the policy if the mechanisms of how the policy affects real incomes are set out clearly. A substitute for the QTM, the Real Money Theory is an identity that includes all of the missing variables from the QTM and provides a map of where money goes and what proportion ends up in a general goods and services turnover or real incomes.

The practical steps will be presented in Part 2 covering the Sunday Workshop sessions. Links to key references will be posted with Part 2 of this article.