Home page

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 Sunday 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 Saturday sessions are covered in Part 1 of this article.

Friedman's problem with details

One of the notable issues associated with monetarism and monetarists is a strong ideological faith in its assumptions but there is a worrying issue of a lack of attention to details. There is an over-emphasis on associative correlations as opposed to cause and effect relationships which make evident the mechanisms which expose the ways in which money impacts prices, productivity and wages.

Hector McNeill, the lead developer of the real incomes approach, observed that Milton Friedman (1912–2006) in appearances during the late 1970s, was never able to explain the specific mechanisms whereby money volumes cause inflation in the prices of goods and services. Whenever asked Friedman would become somewhat adament and defensive and assert that,

"... it happens in the long run!".

McNeill observed that this is not a mechanism.

This behaviour has been commented on by other British economists. For example, in the book "Expansionary Fiscal Contraction" (see below left) Robert Neild (1924-2018) refers to Friedman's assertion that inflation is the result of excessive expansion of the money supply and that the economy, being self-regulating, would soon return to the 'natural rate of unemployment. However, Friedman never explained the cause and effect mechanisms involved. Robert Neild and Frank Hahn (1925–2013) wrote a letter to the Times in 1980, criticising monetrarism stating that with market imperfections, a reality, there were no specific elements to suggest the economy would return to some equilibrium point automatically as Friedman asserted.

For what is is worth, Nicholas Kaldor, some time before this, had explained that adding "equilibrium seeking" functions in econometric models did not square with reality. The economy is always in a disequilibrium and the more innovative the economy, the more change occurs to disturb any "equilibrium".

Friedman did not appreciate Neild and Hahn's letter and in a somwhate aggressive reply to the Times he included a choice statement, "We can know that a bird flies and have some insight into how it is able to do so without having a complete understanding of the aerodynamic theory involved.".

Notice this is simply a redundant statement and is flippant. It does not address the issue of importance for any serious economic policy designer of the need to understand the specific mechanisms involved. If this is not important, are we accepting that the default function of economists is to risk the wellbeing of the whole national constituency by exposing it to an unproven socio-economic experiment that has no theoretical foundations?

Friedman then listed in his reply, a series of points, to the effect that there was an historical association between money and prices, with variable time lags. Without offering any better causal explanation than that, he reasserted in remarkably strong terms his view that the economy would recover automatically from the monetary squeeze.

Later, in a live debate with Friedman, Neild has stated that he found Friedman's constant ability to avoid saying what caused the historical association between money and prices, by means of prevarication and mockery very annoying. However, this did expose the fact that Friedman did not in fact know what the mechanisms were, and frankly, did not seem to care.

It is worth noting that in 1970 Friedman responded to Kaldor's valid observations made in the Lloyds Bank Review, that Friedman had got the causal details linking money to demand, the wrong way round, in his typically disrespectful, off hand and dismissive fashion, stating that "Professor Kaldor is a Johnny-come-lately".

In 1981, 362 additional economists signed a letter prepared by Hahn and Neild, to the Times, criticizing the Conservative goverment Budget combining supply side economics elements with monetarist elements.

McNeill admits that although this letter was correct the authors did not make any alternative proposition. Indeed, Sir Geoffrey Howe, the Conservative Chancellor at the time, also noted the lack of any proposition attached to this letter. According to McNeill, it is unlikely that they had any alternative propositions because the then "alternative" Keynesian instruments could have no impact on cost-push inflation. McNeill's opinion is that the basis for a solution lay in the then past works and statements of Nicholas Kaldor linked to technology and innovation.

McNeill circulated a monograph on the Real Incomes Approach to all political parties in 1981 to provide, at least, an optional policy. His observations on this experience were that each remained in their own bubbles incapable of contemplating logical alternatives. The only MP to engage on this topic and who clearly understood the concepts, was Richard Wainright of the Liberal party economics spokesman.

It is perhaps only natural that an economist who always doubted the logic of monetarism since university, considering professorial and lecturer's explanations to be fuzzy and very unconvinving, was the person who in the end was able to come up with a logical explanation to explain the short, medium and long term impacts of money volumes on prices. Hector McNeill in reviewing the results of quantitative easing (QE) in 2020, and having specialized in the analysis of inflation since 1975 realized that the Quantity Theory of Money was completely wrong. This was because QE or excessive volumes of money, did create inflation in the short run but not in the prices of goods and services but rather in the prices of assets in markets which became speculative as a result of large volumes of money entering them. Goods and service prices remained relatively stable. Over time, it took about a decade, the prices of goods and services began to rise as a result of significant price rises in assets which were also input costs to supply side production of goods and service activities, causing cost push inflation. Obvious examples were land, domestic and commercial real estate and commodities subject to speculative hoarding (agricultural and energy commodities) which in turn impacted agricultural production costs and industrial and domestic costs in general.

McNeill has observed that the QTM, in various formats, has been around for centuries and since it was the preserve of the elite he thinks that its original purpose was to show the connection between money volumes and asset prices, the main and continuing interest of the elites. In these relationships the original QTM can demonstrate a cause and effect relationship reasonably well. Somehow, as a result of the more evident concerns of the people of the country, in a period experiencing the rise in universal suffrage, being linked to the prices of goods and services, governments and monetarists assumed the QTM also applied to goods and services. Certainly the "modern version" created by Irving Fisher (1867-1947) and "applied" by monetarists, serves no such purpose at all. The prices of goods and services are established by the conditions of each competing company and not by money volumes in the economy.

This error continued to be a committed by monetarists because they simply assumed cause and effect relationships without bothering to enquire into the mechanisms involved. They continued to insist on relationships which do not exist and this is why when challenged, they could never identify or expain the mechanisms.

This arrogance has meant monetarism has remained the principle force in macroeconomic policy and, being an elitist interest, has resulted in the main policy benefits flowing to a wealthy 5%, very evident under QE. The damage created by this approach to economics is summarised in the recent BSR Note, "The constitutional crisis created by monetary policy".

McNeill rearranged the components of assets, goods, services, saving and offshore investment in a Real Money Theory identity, a more comprehensive version of the Quantity Theory of Money, and which provides a map of where money flows and impacts prices, an analysis that is impossible with the QTM.

In argument, Friedman was assertive and combative. This is exactly the sort of behaviour that impressed and helped convince less well-informed politicians to believe that his apparent confidence reflected a deep understanding of matters beyond their understanding. The reality is that this was clearly not true. They faced an effective one-man propaganda machine managed by a man who had a poor grasp of the critical mechanisms of the very subject he was lauded to be the leading "expert".

This country, through the Bank of England and, indeed, the world through the International Monetary Fund and central banks, have paid a heavy price in applying the policies he advocated.

Hahn, F., & Neild, R., "Monetarism: Why Mrs Thatcher should beware", The Times, 25 February, 1980. & Friedman, M., "Monetarism: a reply to the critics", The Times, 3 March 1980. McNeill, H. W.,"A Real Money Theory", DIO, 2020 and various subsequent elaborations in the series, "Charter House Essays in Political Economy" 2021 and 2022, Lord Kaldor, "The Economic Consequences of Mrs. Thatcher" in Butler, N., "Speeches in the House of Lords 1979-1982", Duckworth, 1983. Kaldor,N., "The new monetarism", Lloyds Bank Review, 1970; Friedman, M., "The New Monetarism: Comment", Lloyds Bank Review,1970.
Part 1 of this article reviewed some basic tenets of constitutional economics and the real incomes approach to economics a contemprary extension of constitutional economics. This combination of principles has given rise to the concept of positive systemic consistency or policies ensuring that all constituents benefit.The other principle is to arrange for policy design to be more directly subject to public choice. Public choice needs to be organized in a more participatory fashion so that constituents have more say over the decisions that affect their lives and degrees of freedom. In this article degrees of freedom for individuals to pursue their objectives are determined by the accessibility of the resources they need to achieve these objectives and on an individual basis; this is directly related to real incomes.

There is, therefore, an acceptance of a direct link up between freedom, participatoy democracy and economics.

Currently the country witnesses a wholly parochial process of something like 0.3% of the electorate, the total membership of the Conservative party, a tiny private organization, being able to select who will be the next prime minister. The rest of the country has no say in the matter. But this tiny faction is in control of this decision. However, in spite of the attempt to state the government has a mandate to deliver based on the last election result, the two candidates for leadership have, in some cases, diametrically opposed propositions on the economic solutions to the current cost of living crisis. Clearly under these circumstances there should be a general election for the electorate to decide if they agree with what, in several instances, represent a change in course. To actually change a mandate in midstream on the basis of the government's existing majority, makes this possible; parliament can do little abiut this. It is unacceptable that they can change the mandate without returning to the electorate for approval. Many leading politicians see themselves as the equivalent of state corporate managers as opposed to servants of the people.

These current events are a case study in the arbitrary nature of political party politics and how participatory involvement is avoided and public choice denied in spite of the current circumstances representing an overt and serious reduction in the freedoms of the people of this country as a result of a rapid and out of control decline in real incomes. What is extraordinary is the casual way in which the electorate accepts this unacceptable state of affairs as if it were unavoidable and therefore not a subject for public choice. Clearly a new constitutional settlement is required in this country.
Workshop details not covered in this article

A significant part of the Workshop consisted of technical and econometric explanations and simulations. Although these were clearly explained on Power Point and computer-based sessions, we decided not to cover these in this article because of the difficulty in transmitting these messages in printed format. However, at the end of this box we provide online links to documents that provide some coverage of the content or messages transmitted in these presentations. These included:
  1. The real incomes approach proof that the Quantity Theory of Money is flawed;

  2. The operation of the price performance ratio (PPR) corporate performance indicator and price performance incentive levy (PPL) under RIP;

  3. The structure of the standard corporate software (SaaS) consisting of a trading floor and database package for calculating PPRs and PPLs as well as RIP accounting;

  4. Corporate business rules to optimize growth under RIP based on decision analysis tools supporting pricing and resources allocation under RIP.

  5. Simulations of the impact of RIP on short term prices

  6. A demonstration that RIP sustains a fiscal neutrality in the sense of stimulating real economic growth in the private and public sectors while contracting fiscal income without a deficit.
On item 6 note the comments made in the box lower down on the left referring to the book, "Exansionary Fiscal Contraction".

For those interested in these details, a considerable amount is contained in the Special Edition of the British Strategic Review entitled "Monetarism & The Cost of Living" as well as in the various Notes which add some details and responses to reader queries.

Some of the more technical topics will be the subject of forthcoming papers to be published by the Cambridge Economics Network.

Participatory development in practice

Being such tiny and ideologically driven organizations, political parties always wish to avoid sharing power. The argument is often that by involving "too many people" nothing will get done because nothing will be decided or any eventual solutions will be compromised by attempting to satisfy all parties involved. One might consider the four years of dancing round the mulberry bush in parliament over BREXIT is an example. But it is not an example. This was the result on the BREXIT vote having been based on empty assertions made by a tiny minority of MPs within the Conservative party and then, when the vote was won, being unable to design a realistic proposition which should have been drawn up before the referendum in order to inform people what they were voting for. The post-referendum claims that mosts did not know what they were voting for in the fog of assertive propaganda and lack of a transparent proposition, is true.

So "Getting BREXIT done!!" had no specific meaning other than the fact that some think tanks have calculated that it will result in at least a 5% decline in the GNP.

Participatory development is the very foundation of systems engineering economics, the combination of abilities by very large groups to organize moon shots, build canals, aircraft and most engineering and manufactured goods. This works because people know what the objective is and, in general, those collaboraring each have specific experience and skills to contribute to the whole, gaining professional satisfaction from contributing to systems that provide benefits of a very much universal nature. Because of partisan ideological bias, the very people charged with policy design are their very worse enemies because the act with an inherent bias. Their tiny factional nature both in terms of membership and intellectual critical mass within parliament makes rational policy design, in relation to the gaps and needs of the general constituency, virtually impossible. When the objective is self-evident things can actually result in success, in spite of politicians. Therefore in the case of Covid-19 there was enough expertise within the country in virology and creation of vaccines and a competent national health service to end up with effective practical solutions with a generalised benefit for all constituents. The government considers this to be a success story but it is one not based on the abilities of political parties but rather on the existing competence of scientists, process engineers and medical staff in this country to respond to a national health emergency in a competent fashion.

The reason the real incomes approach to economics homed in on real incomes as the policy objective was because this is a common need and the foundation of greater freedoms and therefore it is an objective that can be attained with a common support of the constituency be they as individuals wage-earners, self-employed, company owners or shareholders they all share the common desire for stable or rising real incomes.

For many families, gaining the ownership of their home is an important quest. In the pre-1975 conditions constituents with average incomes could afford to purchase a house to suit their needs based on mortgages, usually through mutual building societies. The Conservative party championed home-ownership (see poster on right).

The thoughtless introduction of monetarism as the dominant macroeconomic paradigm led to the Thatcher government raising interest rates to tackle stagflation. There was no theoretical foundation for such a decision other than assertions of people like Milton Friedman.

As a result, what were totally sound mortgage agreements, taken out in good faith, were converted into sub-prime mortgages by an inappropriate policy, leading to thousands of families losing their homes through repossession. Even although this was the result of the imposition of a policy with no theoretical foundations and, therefore, no justification, the Conservative government never offered any form of compensation.

Beyond the boundaries of such irresponsibility the government's reliance of quantitative easing led to speculative price rises in housing and succeeded in placing house prices well beyond the reach of average income constituents.

A common mistake made, since the introduction of supply side economics in the 1970s, has been to imagine that reducing marginal tax rates will help raise incomes and dispell inflation, by encouraging investment and rising productivity. This has never worked as imagined because the control over the tax windfalls tends to rest in the hands of corporate owners and the result is a rise in their own incomes while wages remain stagnant and investment remains well below requirements. This is why resort to raising interest rates only helped depress the economy even more. The Thatcher government attempted to do this combined with rises in interest rates and this resulted in thousands of families losing their homes through repossession without compensation (see graph on the left).

Reference has been made to the fact that real growth arises from demand from within the supply side production sectors for expanded plant or productivity-linked change. As Nicholas Kaldor observed, the finance raised to satisfy this growth did not create economic growth by increasing demand but rather the motivation for feasible expansion within the supply side is what created the demand. So the notion that money volumes result in demand and growth is a misrepresentation of events and something Milton Friedman, for example, did not seem to appreciate. At the time of the exchanges between Kaldor and Friedman only about 20% of investment came from banks with most being generated by internally assigned funds (savings). In the period 1945-1965 there was a corporate led expansion in investment in the British economy resulting in rising real wages, falling income disparity and full employment. This would seem to have confirmed Kaldor's logic. Following the 1970s debacle of stagflation caused by the seven-fold rise in petroleum prices within a decade, this supply side driven growth was seriously undermined by excessive financialization arising on the tail of recycled petrodollars. As a result the notion of monetarism being able to control "demand" and "economic growth" took hold leading to declining investment, productivity and real wages while corporate profits as a percentage of GNP rose.

Above is the cover of a book published in 20141.

The somewhat confusing title reflects the black and white binary mentality of monetarists and faith in the dictum that economic growth (expansion) can only occur if the public sector is reduced in size (contraction). Part of the argument is that,

"... public services are a drain on the economy"

or, the more colourful,

"... the public sector is there for freeloaders."

These Friedmanesque assumptions, like his failure to understand the mechanisms that govern the relationship between money and prices, seemed to reflect a lack of intellectual curiosity to understand why the public sector might have an essential role in the economy or how it might be made to contribute to real national growth. The most convenient option was clearly to cancel the possibility of any such considerations and continue to promote an unjustified dogma.

An example of this dogma was George Osborne's imposition of an unneccessary "austerity" which ran down essential public services with the able assistance of the Bank of England's quantiative easing, a more extreme variant on a policy with no theoretical foundations.

It is true that public funds managed by governments are quite often wasted and with very low impacts on productivity, costs and real economic growth.

However, under a Real Incomes Policy all public services would be subject to the same incentives as the private sector, resulting in the combination of more-for-less productivity-based growth with counter-inflationary impacts. In this way, all sectors of the economy, private and public, would contribute to a positive systemic consistency in economic benefits.

1 Needham, D., & Hotson, A., "Expansionary Fiscal Contraction", Cambridge University Press, 2014.
The only way to get back to corporate led growth of the economy, following Kaldor's logic, is to first of all make real incomes the common objective of all constituents and then provide companies and workforces with the incentives to create the type of situation that existed in the 1945-1965 period albeit involving compeletely different industries and manufacturing process technologies and techniques to generate rises in real incomes.

The principal objective of Real Incomes Policy is to sustain a positive systemic consistency in the corporate and work force led growth to generate real growth as a direct result of immediate unit price reductions and then a period during which companies reduce unit costs to levels that justify the new lower prices. The Real Incomes Policy incentives consist of rebates on a levy that are in proportion to the degree that unit prices are reduced. The process acts like a loss-leader where the loss is the reduction in corporate margins associated with the reduction in price but this margin reduction is made up by the levy rebate. In terms of government administration this represents monies forgone in exchange for a positive real incomes growth with immediate effect. The relative reductions in unit prices will result in the companies involved gaining market share at lower unit prices and thereby disseminating the purchasing power benefit for consumers and the workforce, generated by their activities.

Because this policy is incentive-driven there should be a willing participation in such an initiative resulting in a participatory public choice effect expressed by constituents in relation to their economic activities as wage-earners which, in aggregate, control economic expansion and national real income levels.

What happens to zero-sum and income disparity?

RIP dispels the zero-sum element of government expenditure being wasted on actions that have virtually no impact on productivity or investment. This is the case of tax reductions linked to investments over which government has no control as to whether they delivery higher productivity or not. RIP not only provides positive incentives the benefits only accrue to companies who lower unit prices. Any zero-sum differentiation could arise from companies refusing to participate in RIP. This would raise two questions. One is why do they not wish to participate in an acceleration of productivity rises and becoming more competive? The other question is how long can such companies survive when others are expanding under RIP and gaining market share as a result of rises in their competivity.

Income disparity effects on the lowest paid will decline as a result of inflation coming under a positive control so that increasing numbers will be able to purchase basic essentials and, with time, add in better quality products such as food and other products and services. The situation of income disparity under full employment is one where there is a compression of the highest and lowest incomes, as observed in the period 1945-1965 corporate led growth. RIP is likely to have the same impact.

The devolution of key decision-making to constituents

The effect of RIP would be to remove critical decision-making on economic growth from arbitrary top down decisions under the control of the Treasury, Bank of England and Chancellor. Under conventional policies such interventions generate winners, losers and those unaffected. Positive systems consistency is impossible under such circustances because the playing field cannot be levelled in this way. All companies face very different operational conditions and workforces and management constitute groups with very different capabilities. Therefore, they need to be allowed the freedom to decide what prices will allow them to compete in a lower risk manner. RIP, by facilitating companies' abilities to manage prices, margins, productivity and growth in a lower risk manner, provides the corporate sector with an "equal opportunities" environment from which all can benefit.

Real wages

An individual's purchasing power and real income rises to the degree that unit prices decline. Therefore, this price effect alone has a significant impact on real economic growth. However, under conditions of full employment there will be a churn in the lower income brackets where minimum wages rise. RIP can assist in this process by ensuring that wages do not rise at rates which counteract the real wage effects of moderated or reduced prices.


The last Beneficial Economics Review called attention to the emergence of the real incomes approach and Real Incomes Policy as the most significant current development in economics. This covers the ground in a short review: Beneficial Economics Review 2021-2022

Most of the work on this approach is covered in the documents produced by the British Strategic Review. The main Review is entitled, "Monetarism & The Real Economy" places this development in a historical context and is available in EPUB and PDF format. No charge is made for this publicaion. A shorter Special Edition is entitled, "Monetarism & The Cost of Living" is available in PDF format and also free of charge. This site also posts Notes to explain different details of the real incomes approach in response to BSR reader queries.

The Charter House Essays in Political Economy Archives at the Boolean Library have much on the real incomes approach going back to the early 1980s. We are selecting relevant papers and will post those of relevance to this article.

The Cambridge Economics Network is a relalively recent addition to resources and was established to disseminate information and papers dedicated to the real incomes approach. We understand that this site will be posting papers on the relationship between RIP and climate change and planetary carrying capacity associated with the optional productivity pathways opened up by RIP. The rate of issue of publications is slow but they are significant such as:

1. Options worth considering to solve the cost of living crisis

2. The consequences of being a nation of shopkeepers - working paper

3. Contributions of the Real Incomes Approach to economic thought - A resumé

The lead developer of the real incomes approach is Hector McNeill who has posted over 200 articles on the The Real Incomes Approach to Economics website.

Other media:

V. Ramanan has some posts of interest at Concerted Action :
Past references of interest:

Keegan, W. "So now Friedman says he was wrong, 2003"

Ramanan, V "The Case For Concerted Action - Post-Keynesian Ideas For A Crisis That Conventional Remedies Cannot Resolve 2013"