In a closed workshop for journalists held this weekend (29th February, 2020) organized by the DIO (Development Intelligence Organization) included a review of economic schools and current challenges. An intriguing fact appears to be the case that all of the apparently "competing schools of thought", all rely on a single basic model of how the economy operates. This is the Aggregate Demand Model. Only two schools do not base their operational premises on this model. These are Constitutional Economics which remains open to rational models based on evidence-based decision analysis to explore alternative options as a basis of public choice. The other is the Real Incomes Approach which applies a different model known as the Production, Accessibility and Consumption model.
In terms of climate change, environmental carrying capacity and sustainability the Aggregate Demand Model-based policies including Keynesianism, Monetarism, Fiscalism (government revenue-seeking) and supply side economics (trickle down) all require nominal growth to maintain operational equilibrium, this creates a tendency towards intensive growth in consumption of natural resources and falling carrying capacity, all are inflationary and all create winners, losers and some who remain in a neutral policy impact state. The Real Incomes Approach, as an extension of Constitutional Economics, applies a logic that is more attuned to sustainability and provides management of economic units with rational business rules to maintain profitability. Rather than generate income disparity the Real Incomes Approach acts to reduce real income disparity.
The most recent report on Sustainable Development by the United Nations records the fact that as the economy "grows" under current policies several Sustainable Development Goals go backwards, especially those concerned with disequality, responsible consumption and production and climate action. In several lower income countries, the combination of high population growth rates, inflation and monetary policies, are creating an increase in income disparity. As a result several investments are becoming unsustainable because lower income segments are losing purchasing power as their real incomes decline; real demand is declining. The percentage of the "working" population facing real income decline in higher income countries is also increasing so as to affect "middle income" earners. There is, therefore, an increasing interest on the part of strategists and development economists in the benefits of the Real Incomes Approach because this enables the supply side to operate more effectively within the bounds of purchasing power envelopes on a profit-making basis.
A surprise revelation was the fact that so-called "supply side economics" has almost no supply side content. It is no more than a marginal tax rate fiscal device that is dependent on the Aggregate Demand Model to function. Supply side economics came to the fore in the late 1970s and was proposed as a solution to slumpflation (high inflation and high unemployment). When deployed under Reagan the so called "trickle down" effect did not work, many people lost their homes and farmers lost their family farms as a result of high centrally-imposed interest rates. The Real Incomes Approach emerged at the same time to address slumpflation directed at productivity enhancement and in reality is completely supply side. It provides producers, that is those who manage all supply side operations, with clear business rules to remain economically and financially viable and sustainable while helping raise the purchasing power of consumers helping generate real growth. The Real Incomes Approach contrasts with all other schools by not using centrally-imposed interest rates market interventions. A workshop presenter in response to a question on this issue observed that the monetarists notion of price stability is a target inflation rate of 2%. This is equivalent to a devaluation of the pound by 18% each decade. This is why the purchasing power of today's pound is less than 1% of the pound in 1945. It is true that many products have better quality and competitive prices but this policy-imposed devaluation treadmill only removes effective incentives for increased productivity. With higher productivity it is possible to have higher interest rates, and savings, and negligible levels of inflation.
At the moment quantitative easing, the combination of increased debt at low interest rates has resulted in most "new" money being directed into assets, land, land banks and share buy backs so as to create a boom in the stock market. There is therefore a considerable amount of inflation in this asset bubble. The "trickle down" has not been any benefits but falling investment and productivity, declining real incomes for those in work, resort to food banks and growing social stress. The problem with the Aggregate Demand Model which has generated this disparity is that interest rates need to rise to direct funds to beneficial investments as well as to encourage saving. However this risks a financial crisis because quantitative easing has been based on low interest debt which today exceeds the levels in 2008. Therefore, with this level of exposure, raising interest rates is likely to collapse the economy once again. The Aggregate Demand Model is inefficient and has a very poor track record.
Another interesting revelation is that the so-called Quantity Theory of Money (QTM) which has been the main model applied by monetarists, as been disproven by quantitative easing. Massive volumes of money have flowed into the economy at centrally-imposed low interest rates have neither generated effective demand or any significant inflation within the transactional economy, during the last decade. The reason for this is that the QTM model has a few variables missing and this is why what has happened is not what was expected. The missing variable is one which accounts for the assignment of increased money volume to assets beyond investment and transactions. If this variable becomes a large value this undermines any impact of money supply increase or lower interest rates because the funds are "parked" in assets and thereby withdrawn from the economy. As such the asset holding benefit the holders but money is denied the rest of the economy. This flaw was pointed out by several Cambridge economists many years ago. However, the habit of economists to revel in theory without always reflecting upon the potential practical significance of the content of their exchanges for constituents, resulted in this important observation to be sidelined. However, Milton Friedman and others convinced the government of Margaret Thatcher that Monetarism provided the solution to slumpflation during the early 1980s. The solution in the UK resulted in around 2 million households losing their homes.
The Aggregate Demand Model and the Quantity Theory of Money are far from being reliable or useful bases for guiding macroeconomic policy decision analysis, let alone justifying policy decisions and yet governments insist in using them. One of the explanations for the fact that the missing asset variable in the Quantity Theory of Money was studiously ignored was that banks and landowners knew that this would expose the ease with which they could gain assets under low interest regimes at the expense of the real economy and working population. The considerable fuss made by the banks to call for quantitative easing as a "solution" to adjusting bank balance sheets and getting the economy going again after 2008, has turned out to be a ruinous "solution" for the rest of the economy. Whether or not this justification was some form of misleading move on the part of banks is something that needs to be analysed but these actions were implemented, this is what happened. In spite of this the government does not appear to be willing to change this baseline policy in spite of the intensifying income level disparity creating a class division based on income. The paradox is that most of those people who have felt ignored and wanted "BREXIT done!" have suffered as a direct result of the policies of the government they re-elected with a large majority. The problem is assuming that there is no alternative to policies based on the Aggregate Demand Model and the Quantity Theory of Money is clearly absurd.
Given the current economic and social stakes facing the UK and illustrated in the Gel cartoon, the disruption of foreign trade by the US administration and Covid-19, the need to secure a sound trading relationship with the EU, it is self-evident that the government cannot rely on such flaky economic theory for government and private sector actors to fund what is necessary. The government ministers keep repeating that without "prosperity" or a "vibrant economy" things will not get better. The track record does not demonstrate either prosperity creation, except for a few, or a vibrant economy for the majority. They could be a lot better if only they would chase feasible objectives by changing their macroeconomic policies.