Governments don't like to be told they are presiding over increasing disparity in income and that in reality policies favour the few over the many, or majority. Corbyn's slogan was, "For the many not the few". Nothing wrong with that, given that a fundamental basis for democracy is representation of the majority.
Part of the battle to get more attention on this issue is to prove in economic theory and practical evidence-based terms, that policies have been prejudicial for the majority. After 50 years of monetarism this is not difficult to establish
The British Strategic Review has many sections that present completely new analyses on this question. These are important because they provide a focused justification for what Corbyn has stated.
Monetarism - why it doesn't work
The monetary policy theory is based on what is called the Quantity Theory of Money (QTM). This is a simple identity or formula relating money volumes to the average price of goods and services
in the economy. The formula for the QTM most used was developed by Irving Fisher (1867-1947) as:
M.V=P.Y .... (i)
M is money supply;
V is velocity of circulation;
P is average price level;
Y is volume of transactions of goods and services
According to the QTM, increasing money volume increases P.Y.
In 1976, the British economist Hector McNeill established that the prices of goods and services
did not rise with money volumes because in a competitive economy, unit prices are set by price setting decisions of companies whose main benchmark is what is happening to input costs. Using the same reasoning McNeill also explained that most inflation comes from cost-push inflation and not from cost-pull inflation. As can be seen, the QTM's logic is based on cost-pull inflation as is the logic of the so called "Aggregate Demand Model" which applies the policy instruments of interest rates, money volumes, taxation and government loans to manage "demand".
McNeill's reasoning remained largely ignored until the advent of quantitative easing (QE) which introduced massive amounts of money into the economy at close to zero interest rates and which according to the QTM should have sent goods and service prices through the roof. However, QE, provided all of the evidence to confirm McNeill's 1976 statements. Unit prices of goods and services remained stable for about 8 years while the prices of assets went through the roof. McNeill therefore developed an alternative to the QTM as the Real Money Theory which includes savings, offshore investment and assets as follows:(M - (r + p + m + a + h + f + c + o + s)) V = P.w .... (ii)
M is money supply;
The separate non-circulating encapsulated assets market components of:
r=land and real estate;
V is money velocity (circulation rate);
P is average prices;
and where the circulating open market components are supply side production and consumption of goods, services and capital equipment in exchange for wages where:
This provides a map of where all of the QE money was going - largely into assets and away from supply side production of goods are services or manufacturing which was starved of investment.
It is quite evident that the QTM never was on firm ground as far as predicting the state of unit prices of goods and services and it did not include savings, assets or funds lost offshore. Accordingly the QTM is a largely useless identity but has been used studiously by monetarists for over 400 years starting with its identifiction in 1556 by Jean Bodin (1530–1596) a French demonologist. As McNeill has comfirmed the QTM never was a logical identity simply becausee it could never predict with any accuracy the impact of monetary policy on prices because of the interplay between savings, assets and offshore monetary flows, on the one hand, and the prices of goods and services, on the other. It is in fact useless and yet it still is part of unversity economics courses. The problem is that many economists like to apply broad sweep mathematical equations but when they are asked to explain the mechanism whereby money volumes cause rises in the unit prices of goods and services, they cannot do this because the QTM, their go to explanation, does not contain the correct relationships or variables. Milton Friedman of the "Chicago School", the leading monetarist in the 1970s, was never able to describe this mechanism and his best explanation was that, "..it happens in the long run"
, but as McNeill observed, this is not a mechanism.
Constitutional aspects - the many and the few
The starving of investment in the supply side production sectors meant that there was a virtual impossibility to pay higher wages because productivity was falling but those whose income came from asset holdings and transactions rose significantly. The British Strategic Report has two diagrams which illustrate the impact of asset price rises on asset holders and traders and goods and service prices on wage-earners as shown below.
|Source: British Strategic review citing: McNeill, H. W., "Why Real Incomes?", Real Incomes, 2007|
The policy interests of asset holders and traders are directly associated with rises in the prices of assets
as shown in the diagram on the left. This policy interest relates to the incomes of something like 2% of the British constituency, or the few. The policy interests of wage earners is for unit prices of goods and services to fall
so as to be able to purchase more for a specific wage. This policy interest relates to around 98% of the British constituency.
The main constitutional message here is that the interests of asset holders and wage-earners are diametrically opposed. However, the weight of the role of the financial sector and hedge funds as benefactors of political party support and who infliuenc media content, means that policy favours asset holders. Therefore, the overall impact of monetary policy and very much highlighted by QE, is that a policy supported by both Labour and Conservative government has greatly favoured the few whose income depends upon asset prices and transactions.So why do we now have inflation in goods and service prices?
Many assets make up important supply side production inputs or costs. Therefore over time, the ability of companies to adjust for costs by modifying their performance or productivity comes to a point that they need to raise unit output prices to survive. Therefore the key assets that cause rises in input costs and therefore translate into cost-push inflation include the rises in land and real estate prices and rents including retail units, manufacturing units, offices, warehouses and logistics infrastructures including leased vehicles and containers. As a result there is pressure for the unit prices of goods and services to rise.
At the same time since changes occurred in financial regulations, banks and hedge funds have become buyers of agricultural commodities (food and fibre) and energy products (mainly petroleum and petroleum derivatives) so as to hoard them so as to create scarcity and the bidding of prices upwards. Therefore the costs of these particular assets rise and this cost-push inflation causes rises in the unit prices of goods and services.
The combination of cost-push inflation and the rises in unit prices within an economic policy franmework of monetarism which holds back real wage increases is a direct cause of the "cost of living crisis" as currently observed in the United Kingdom.
Covid and supply side upsets have had an impact but there is a structural systemic issue associated with monetarism which sustains a downward pressure on real wages exacerbating the cost of living crisis.Conclusion
It is more than evident that macroeconomic policy requires a radical change along the lines that Jeremy Corbyn has always suggested, as having a foundation in policies that that are for the many (wage-earners) and not the few (asset holders). In subsequent part of this series we will explain how this can be achieved.
In summary the diagram below shows the diversion of money M from production side and wages to other isolated (encapsulated) asset markets as a result of Bank of England policy in support of manetarism and quantitative easing:
Source: British Strategic Review citation of:
McNeill, H. W., "Why monetarism does not work", Charter House Easays in Political Economy, HPC, February, 2021.
In the next part we will expand this analysis to explain how this relates to the successful growth of the British economy between 1945 and 1965 which included the introduction of the National Health Service and when investment rose, real incomes rose, income diparity fell and there was full employment with wages whose real value rose over the period. This was a Corbynista period where policy provided more support for the many.
However, by 1975 there had been a slow down in economic growth caused by the slumpflation (stagflation) crisis combining rising inflation and unemployment. This was caused by the rise in international petroleum prices rising seven fold within a decade. Any chances of regaining that past growth were lost as a result of Denis Healey's decision to switch to monetarism. Margaret Thatcher took advantage of this to intensify financialization that hollowed out manufacturing, pushing the wages of the many further down. This was followed by unfortunate decisions by Gordon Brown to make the Bank of England independent and to introduce quantitative easing. Just as before, the Coalition and Conservative governments took advantage of these bad policy decisions to ride out a destructive period of "austerity" running down public services and in particular the National health Service.