The economic orientation of the Cambridge Economics Network is towards the evolution of the Real Incomes Approach to Economics. This term was coined by the British economist, Hector Wetherell McNeill in 1976 following his investigations into the causes of slumpflation (stagflation) caused by the sharp rise in the international price of petroleum in 1973.
|Notable contributions of the Real Incomes Approach and RIP to economic thought and analytical concepts during 1975-2022|
Below we list the main items that in total constitute a new economic theory and policy proposition
designed to secure a positive systemic consistency
through sustained real economic growth:
- Establishment of real incomes as the principal macroeconomic target
- Establishment of the over-riding principle of positive systemic consistency
- A disproof of the money volume average price relationships assumed in Quantity Theories, including QTM, the Cambridge equation and the Real Money Theory (RMT as a major extension of the Cambridge equation
- Based on items 3, established that Quantitative Easing is a policy with no coherent theory
- Replacement of the Aggregate Demand Model (ADM) with the Production, Accessibility and Consumption Model (PACM)
- Development of the transactional envelope analysis to show the relationship between disposable incomes and accessibility to goods and services according to the feasible maximum prices, unit cost curves and margins - to replace static supply and demand curves – and the identification of “occluded” transactional envelope areas as market conditions that deny lower income segments access to basic essentials
- A full explanation of the constitutional issue surrounding the fact that there are demonstrable diametrically opposed interests in policy priorities on the part of: a. Asset-holders and traders, and b. Wage-earners
- Sustainable real incomes require real incomes growth which is determined by corporate price setting and wage settlements. The sustainability of price setting and wage settlements is determined by the trajectories of corporate physical productivity. A real incomes policy has to provide incentives to attain a state of increasing output-for-less input
- An extension of the logic and evidence to explain why the United Kingdom needs to expand its manufacturing sector and raise import substitution
- The introduction of price performance ratio as a measure of corporate performance
- The introduction of a family of price performance levies as the RIP corporate incentive for real incomes growth
- The ability to arrest short term inflationary rises and to reverse inflation through a microeconomic price-setting strategy which remains viable as a result of the ability of companies to manage policy instrument values and levies
- The ability to maintain medium to long term physical productivity trajectories based on the learning curve and innovation to facilitate future unit price adjustments to be moderate or counter-inflationary
- A practical extension of constitutional economics by aligning corporate choice logic with policy objectives
- Removing the contention from public choice as creating incentives to align the interests of shareholders, work forces and consumers to support actions and decisions to augment real incomes, the policy objective.
- Creation of a state of posiitve systemic consistency by reducing the zero-sum nature of monetarist policy impacts and creating support for generalised win-win state of affairs leading to medium to long term policy traction and real sustainable economic growth.
Each of these items is explained in the working paper: 3.Contributions of the Real Incomes Approach to economic thought - A resumé
Please note: As a result of producing the working paper mentioned above it is apparent that RIP work has generated a series of concepts and terms which refer to states and relationships that are not covered or referred to in conventional economic theory nor policies. A full understanding of these concepts/terms is essential to understand RIP as well as to recognize these gaps in conventional theory and practice. Therefore an additional document is in preparation to cover "RIP terminologies and word usage"
which should be released in early August 2022.
McNeill developed a policy solution proposition in the form of Real Incomes Policy (RIP).
However the underlying logic to RIP rests upon a foundation consisting of a historic legacy of contributions to economic development work by the economists
Adam Smith and Jean-Baptiste Say and the more recent work of Nicholas Kaldor, Robert Solow and Kenneth Arrow.
McNeill acknowledges the contribution of Robin Matthews in pointing out oversights and suggesting ways to improve RIP analysis in 1981 which resulted in the real incomes approach becoming a general macroeconomic theory for the effective management econmies under all circustances as opposed to being limited to eliminating stagflation.
How does RIP differ from conventional economic paradigms?
In contrast to Keynesianism, monetarism and supply side economics and indeed, modern monetary theory, RIP is not based on the Aggregate Demand Model (ADM) but rather on the dynamic entrepreneurial model of Jean-Baptiste Say, adjusted by McNeill into a Production Accessibility and Consumption Model. Economic growth results from the creation of more accessible goods and services as well as new products and services. Such origins of growth are the result of learning, experience and realizations of better ways of creating things. The management of this innovation is, as explained by Say, is dependent upon the actions of entrepreneurs organizing production to use resources more efficiently. Final consumers cannot "demand" products and services that do not exist, while entrepreneurs take the risk of assuming what they produce will find a market. Therefore wages paid to those engaged in this process, which in general came from savings already achieved as a result of increasingly efficient production, create a rise in real disposable incomes above the current levels of consumption. As a result, when new products and services are released, the then aggregate wage bill will represent the source of funds for consumption of the new products and services. The effectiveness of this model as a source of economic growth depends upon the competitivity of prices of output.
This is a short explanation of Say's Law that production processes and associated payments for inputs circulate to generate the realized levels of consumption, or "demand".
In a world now committed to the ADM or using monetary injections to be the origin of economic growth, Say's Law does not appear to make sense. However, Says's Law and overall economic model, cannot be understood without embedding the role of physical productivity growth resulting from innovation and the essential nature of entrepreneurial activity in generating demand as a result of rises in purchasing power, or Real Incomes growth.
The empirical evidence for identifying the mechanisms RIP uses to create incentives, does not come, in general, from economists but more generally from engineers or individuals with a particularly practical bent. This can be appreciated from the listing of key persons contributing to the RIP concept to be found under menu item "Contributors"
There is no formal connection between the Cambridge-Economics.net and the University of Cambridge or the Faculty of Economics at Cambridge University.