BRITISH STRATEGIC REVIEW - MONETARISM AND THE REAL ECONOMY < 2022       Monetarism & The Real Economy Release date: January, 2022. This edition of the British Strategic Review traces the development of macroeconomic theory and practice between 1929 and today but with an emphasis on the decisions and outcomes affecting the British economy. The evident divergence of macroeconomic policy from the constitutional needs of the majority of wage-earners intensified in the 1970s when Denis Healey opted to abandon Keynesianism for monetarism in 1975. The conditions of an unnecessary IMF loan in 1976 intensified these conditions even further. Being supportive of the ideological bent of the governments of Margaret Thatcher, monetarism was even further intensified leading to a steady erosion of British industry and manufacturing. In 1973, the IMF under a management favouring the political objectives of the OPEC petroleum price hikes, combined with stringent international loan conditions, modeled on the loan to the UK in 1976, led to a prolongation of slumpflation by something like 20 years and a progressive decline in worldwide wage-earner real incomes. A growing obsession of politically influential asset holders demanding increasing injections of money into the economy intensified in the 1980s with government policies that increased the financialization through regulatory relaxation and rising monetary injections into the economy. The growth in offshore investments following the failure of the Bretton Woods agreement and exit from the Gold Standard, over time, led to a hollowing out of British industry and manufacturing and an inability of the country to maintain a positive balance in payments in goods. In Europe, the country to resist this type of policy-induced decadence was Germany where the political class has a better strategic grasp of the importance of national industry and manufacturing as the foundation of real economic growth. Until recently, Germany had a positive trade balance greater than that of China. In Q2 2021 the USA and the UK had trade balances of -$190 billion and -$12 billion respectively whereas Germany and China had trade balances of $87 billion and $55 billion, respectively. These very poor performances of the UK and USA are the result of seriously defective monetary policies which have never provided the types of incentive necessary to maintain their industry and manufacturing sectors. Germany succeeded in achieving this performance with higher average wage rates ($52,000 against UK's $42,000). There are significant structural issues in the UK which go beyond its inept macroeconomic policies. This edition of the British Strategic Review explains why the theory applied in taking decisions on monetary policy is flawed. This is established on the basis of an easy to understand analysis comparing the outcome of quantitative easing. This demonstrates convincingly that the Quantity Theory of Money has no relationship to real events; it never has done. This also explains why quantitative easing did not turn out as expected but exacerbated an already dire state of the economy. In this context the role of the Bank of England in promoting quantitative easing is reviewed taking into account the recent Lords Economic Affairs Committee evidence and report entitled, "Quantitative easing: A dangerous obsession?" Certainly the more detailed analysis in this Review supports the conclusion of one of the providers of evidence that quantitative easing is a policy without a theory. This is complemented by a more detailed critique of the "central bank narrative". In a sub-section entitled, "The validation of policy theories", in Section 6, the logic of decision analysis is applied and in a few sentences dismounts convincingly the Quantity Theory of Money from its perch in the temple of monetarism. It is notable that both of the main British political parties, Conservative and Labour, do not come off well in a transparent assessment of their economic management of the economy. Indeed, the surprising but very apparent adherence of both parties to monetarism and its faulty logic, is exposed as the reason for the decline of the British economy over the last 50 years. Having identified crucial gaps in monetarist theory and derived practice, this Review addresses these gaps on the basis of logical propositions across critical economic and constitutional functions. It points to the required theory and policies to bring the British economy back onto a sustainable growth path. In an environment of political economic stasis, feeding on the conviction that "there is no alternative", this Review raises the potential sights of national economic ambition by providing practical steps to jettison the current state of policy ineptitude. A list of contents is provided below. Please note that the final contents may vary according to final editing and content recommendations received in the internal review process. This publication will be available in printed and e-book formats. Contents Executive Summary SECTION 1 Constitution and economics Freedom of expression in word and action Constitutional economics Private and public goods Monetarism and the Real Economy Monetarism The general components of the economy The Real Economy The Physical Resources Economy The Assets Economy The Financial Assets Economy The Human Resources Economy Real Incomes Real Economic Growth The Say Model Entrepreneurs Economic growth, real and nominal Human capital, tacit and explicit knowledge Tacit and explicit knowledge The development of tacit knowledge by medical practitioners The learning curve Entrepreneurialism and the delivery of results Scale of operations The cost of living and economic growth Real incomes & currency value Innovation and real incomes Endogenous and exogenous money Economic structural transformation Inflation Demand-pull inflation Cost-push inflation. Speculative asset inflation Deflation Goods and service price deflation Asset price deflation Conclusions SECTION 2 Keynesianism & the Quantity Theory of Money Money sources, volumes and the Quantity Theory of Money The Cambridge equation What prices are referred to here? Something is wrong with this identity In the meantime, during this period Claude Shannon and George Boole How did Shannon work this out? Blind spots Wright’s Law Conclusions SECTION 3 Turmoil and adjustments 1944-1965 Imperial preference United States strategy Bretton Woods Contemporary analysis The rise of the American Empire Post-war Britain 1945-1965 The stages of economic growth Economic mechanisms, the slide into oblivion Britain’s hegemonic cycles & publication date of “The Stages of Economic Growth” World systems, cycles and warfare An inaugural lecture A warning A route into the study of economics Our learning curve The farmer’s learning curve Economic incentives Biomedical considerations and policy design In the meantime, during this period The discipline of decision analysis Systems engineering Sputnik From circuit switching to transistors SIMULA 1 and Object-Oriented Programming Moore’s Law Packet switching Email Conclusions SECTION 4 Further turmoil and the turning of the tide in the 1970s The unstable craft in an increasingly choppy sea Unanswered question From a national strategy to mutual suicide pact Slumpflation The role of the IMF in maintaining high petroleum prices Pattern of behaviour Extending the slumpflation crisis The possible reason for the IMF behaviour Getting in on the act Going in the wrong direction Witteveen and the British economy Interest rates as a monetary policy instrument Spreading the word The New York Mercantile Exchange (Nymex) and Petroleum Invincible, audacious decisions, coke-heads and hookers Futures markets Hedging Market driven hedging Heady optimism, hedge funds and assets The corruption of futures markets Post Gold Standard gold prices Unanswered questions Policy development responses Supply side economics Real Incomes Policy The performance of other Bretton Woods institutions Safer options Climate change, income disparity and sustainability No effective response to criticisms Loss of control The reshaping of monetary policy The reshaping of foreign policy In the meantime, during this period From integrated circuits to microprocessors Databases and queries Conclusions SECTION 5 The monetary cascade 1980-2000 Financialization The decline in ethical decisions Real incomes depreciation treadmill Avoiding a dollar run by replacing a gold rush by an asset price rush A dangerous addiction The destruction of the Say Model The 1981 Budget Economies are always in a state of disequilibrium “Ideas” concerning the National Health Service Taming the media by changing truths The City and the Bank of England independence The Clause IV moment The Private Financialization of Health provisions Project scale, staffing deficiencies Britain’s State -of-the-Art Tacit & Explicit Knowledge in the Industrial Arts In the meantime, during this period 5th Generation The leap of faith into knowledge engineering and artificial intelligence Prognos & General Technology Systems Limited Learning systems Hand held computer communications Locational-state theory Accumulogs The global network Huawei Racal, Vodafone and China Telecom World Wide Web The “Onshore Engineering Club” initiative Other UK gaps and needs Conclusions SECTION 6 2000 to 2022 and the proof that monetary theory is flawed The grey market Alan Greenspan’s 2000 address The Bank of England, quantitative easing and the death of the QTM Thrift and savings The option of sanctions and people’s quantitative easing Fraudsters escape criminal charges Quantitative easing as a dangerous addiction The semantics of Bank independence Range of evidence Comments on 5 aspects of the central bank narrative Why QE is a policy without a theory The real economy The validation of policy theories Quantitative easing and real incomes Adding the asset classes to the QTM Asset loading Where goods and services inflation come from Modern Monetary Theory In the meantime, during this period 5th Generation The results of a leap of faith into artificial intelligence Social media Social media issues The emerging platform economies Gig work and accelerated downward spiral in real wages Doing evil and the deconstruction of objective facts Blockchain and Bitcoin Bitcoin, assets or a medium of exchange? Scalability and speed of resolution issues Bitcoin as official national currency Bitcoin as exchange medium and asset revisited Conclusions SECTION 7 Constitutional impacts of monetarism and QE in particular Modes of income generation Wage-earner constituent sources of income Input to supply side production of goods and services Asset holder and asset transaction constituent sources of income Inputs to asset trading Why are these income lines different? The real income effects of income sources Policy impacts on nominal and real income disparity Constitutional implications of income sources Employment, electoral significance & the nature of economic value in the UK Law and governance 20 General elections Conclusions SECTION 8 Britain’s main strategic gap The British technical education scene Working against the odds Working against even greater odds The Dockyard School Border-line cases Intelligence tests Lamentable priorities STEM – Science, Technology, Engineering & Mathematics Conclusions SECTION 9 Summary analysis The nature of real growth The implications of not sustaining real growth Stages of growth The main systematic deficiencies and gaps Democracy, constitution, politics and parties SECTION 10 The next decade 2022-2032 Public choice Managing priors Policies that address our principal needs A constitutional economy The essential elements of an alternative economic theory and policy The principles policy design The Aggregate Demand Model Production, Accessibility and Consumption Model Policy traction, effectiveness & efficiency Target mechanism Constitutional aspects of freedom of choice Public choice Financial regulations Decision analysis briefs for public choice A Real Incomes Policy DAB Decision Analysis Brief on a Real Incomes Policy Gaps created by conventional policies Gaps created by government revenue seeking The balance of payments Gaps created by existing accounting regulations Gaps created by centralized policy decisions and operations The issue of policy traction Constraints facing policy movements Operational governance needs Fiscal neutrality and transitions Operational corporate needs Operational constituent needs Main operational objectives that policy needs to support 128 Policy targets Mechanisms Policy instruments linked to productivity and competitive prices Policy performance instrument: Price Performance Ratio Lowering risk Risk and productivity A devolved strategic plan The mapping out of strategic corporate options based on PPR Secondary incentive auxiliary policy instrument The Price Performance Levy Strategic options map for current and future net incomes Gaining policy traction Normal parameters of natural growth Disequilibrium for growth Balance of payments and foreign trade Import substitution Operational principles: Regulations, security and compliance Extension services Enterprise planning Corporate choice: Devolved administrations International perspectives Corporate taxation Tax rebates Clause IV revisited A contemporary interpretation Realizations ignored Labour’s policy Archipelago Wisdom, received and realized Ownership of the means of production Corporations, family firms, cooperatives and mutual Launching RIP Technology transfer Production circles Life-long learning The cynical build-up of expectations destined for disappointment Disenchantment with political parties The electoral reform roundabout Power to the people 143 The shortcomings of “Power to the people” Democracy without parties ANNEX 1 Experience with political parties: ANNEX 2 The Price Performance Ratio The origins of inflation Measuring the contribution of supply side company to inflation Inflation Deflation 148 Desirable & Undesirable States Innovation target zones Price Performance Ratios (PPRs) associated with different unit input value movements & movements in unit output prices The role of business rules in policy Why the Real Incomes Approach is different Income disparity Making the application of business rules a success ANNEX 3 The Price Performance Levy Policy - distribution of aggregate real incomes through a Price Performance Levy Examples of Price Performance Levies Power functions (intensification) Some PPL power functions applied to a basic levy of 20%. Slide or i-d functions (increments or decrements) ANNEX 4 Top countries in the global Balance of Payments League Annex 5 Bottom countries in the lowest global Balance of Payments League Annex 6 Power Report 157 Foreword Power to the People Executive Summary and Recommendations Analysis of the Problem of Disengagement The Myth of Apathy Red Herrings The Reality The Rise of New Citizens The Response to the Problem of Disengagement Rebalancing Power Recommendations Real Parties and True Elections Recommendations Downloading Power Recommendations Annex 7 Noland’s principles of public life 1. The Seven Principles of Public Life 1.1 Selflessness 1.2 Integrity 1.3 Objectivity 1.4 Accountability 1.5 Openness 1.6 Honesty 1.7 Leadership Author’s profile Title: Monetarism and the real economy Main cover title: British Strategic Review Date: Q4, 2021 Author: Hector W. McNeill, M.A.(Cantab), D.A.S. (Cantab), M.A. (Stanford) Production: Decision Analysis Group, SEEL-Systems Engineering Economics Lab., a division of The George Boole Foundation Limited Publisher; Hambrook Publishing Company, Portsmouth, Hampshire, United Kingdom ISBN: 978-0-907833-49-9