This paper gives the announcement that the 2^nd edition of DRGTPE is available at Dutch University Press. The basic idea of the book is that Keynes’s General Theory is generalised even further by including endogenous government in the model, so that we arrive at a truly general Political Economy. By including ‘stagnation in economic policy making’ in our analysis we arrive at a better understanding of the Great Depression and the Great Stagflation. The general theory also explains why it would be advisable for a democratic society to create an Economic Supreme Court as a separate constitutional power, next to the Legislative, Executive and Judicial branches. This book primarily gives theory and stylized facts, and it is primarily directed at my fellow economists. The colleagues specifically will need to learn to understand the Definition and Reality methodology before they will appreciate that my analysis is scientifically warranted. Much work remains to be done in practical research. And much work remains to be done by the other professions. It may be hoped, none the less, that the parliaments of our democratic nations investigate the issue too, so that there is more hope for improvement in the living conditions of the many victims of the current imbalance of powers.
 
 

Colignatus (2005) - henceforth DRGTPE - is available now, see http://www.dataweb.nl/~cool/Papers/Drgtpe/Index.html
and http://www.rozenbergps.com/index.php?frame=boek.php&item=621

Below contains 

• a discussion of the differences with the first edition,
• the list of ‘what is new’ with respect to current economic literature,
• the abstract and cover text, 
• the table of contents.

PM. Colignatus (1992) - the ‘background papers’ - remains useful, also to understand the refinement in the analysis. This also holds for many chapters that appeared earlier as working papers at EconWPA, see http://econwpa.wustl.edu. The general rule is that DRGTPE gives the basic argument, and where statements differ from earlier texts, it will generally be obvious where DRGTPE improves upon that earlier argument and where DRGTPE decided to neglect an angle that now detracts from the main argument.
 
 

This 2005 edition of this book is virtually the same as the 2000 edition. This note discusses the points of consideration. References are in the book.
 
 

1. The major change seems to be that I now use the name Colignatus for my scientific work for better distinction from political or commercial work. I remain of course a single individual but the papers and books can be usefully labelled differently. In some archives you will have to keep searching on the name "Cool".
2. Unfortunately, I have not been able yet to extend the discussion as indicated in chapter 32 on dynamic optimality. The prime cause is a new job in a new field that required much new study.
3. The book now uses euro’s. I didn’t use the latest data but use those of Colignatus & Hulst (2003) for consistency. The Enlargement of the EU from 15 to 25 member states on May 1 2004 caused some changes in the data and text however. A discussion with Henk Folmer (Wageningen University) caused an update on OECD data and papers, clarification of some points in the argument, and the longer Abstract below.
4. Colignatus (2001) "Voting theory for democracy" is my implementation of the theory on social choice within Mathematica. An earlier suggestion of (1990c) for an algorithm was developed in more detail, which caused me to find a name for it: this became the "Borda fixed point" approach. Further reflection caused the paper Colignatus (2002) "Without time no morality" that now has been adapted to a new chapter in this edition. The total enriches the analysis on Arrow’s Theorem with a practical social choice algorithm.
5. The chapter with notes on ethics has been added.
6. The chapters on the reduced form have been re-united into Book IX again. In the earlier paper Colignatus (1992b, 1995a) they already formed a unity, but in the first edition of this book they got separated for a reason that appeared unconvincing.
7. Since Coligatus (1990) had in its title "After 20 years of mass unemployment", I could write (2004) "After 35 years of mass unemployment", and this has been included as a chapter. Since the (1990) paper was hit by censorship and the intermediate years have seen no resolution of that matter, I now advise to a boycott of Holland till that censorship is resolved. Please study the chapter closely.
8. The following comments can be included at this very spot:

1. Much of current policy focus is on the EU Lissabon Strategy and issues like pensions. This book does not explicitly discuss these but it would be a mistake to conclude that this book would not be relevant for those topics. The point is that this book already had that long term approach to start with. Lissabon and pensions are new kids on the block and one should rather study this book before proceeding with new policy making.
2. Advised reading is Skidelsky (2000), the third part of his biography of Keynes.
3. Lomborg (2001), "The skeptical environmentalist. Measuring the real state of the world", gives an impressive review of the problems in this subject. As an economist and non-ecologist it is difficult for me to say anything about his comments on the state of the ecology. Three statements in the realm of political economy are:

(b1) Lomborg does not yet take account of the argument by Hueting (1980) and Van Ierland et al. (2001). Statistical measurement of national income derives from the economic theory of social welfare. To approximate the social welfare function we use the income hyperplane that is tangent to it. Market prices for the environment will not suffice since there are market failures. 
(b2) In his discussion on the ‘double dividend’ Lomborg relies on economic papers that do not take into account both the analysis by Hueting and the analysis provided in this book on the Trias Politica, unemployment, the tax void and dynamic marginal rates. 
(b3) The case for an Economic Supreme Court appears enhanced. Human flourishing requires proper environmental protection, and monitoring of the information about the environment then requires proper safeguards.
4. Shiller (2003), "The new financial order. Risk in the 21st century", discusses how the market with proper government regulation can give rise to new risk instruments. Part of what I try to do with the constitutional amendment for an Economic Supreme Court, he tries to do with ‘macro-markets’, i.e. financial instruments based upon macro variables: namely, getting better information. My impression is that both approaches have merits of their own, and that it helps to disentangle what the instruments are intended for precisely. Similarly, the analysis in this book on unemployment cannot be replaced by an insurance on the distribution of income. Yet, when these more basic reforms on the Economic Supreme Court and unemployment have been implemented, Shiller is right that welfare can be improved by novel risk instruments.
5. Gould (2000:294-297) discusses Sulloway (1996) with sympathy. This seemed relevant given the importance of the latter for the draft constitutional amendment for an Economic Supreme Court. However, Van den Berg (2004) in Dutch NRC-Handelsblad reports that the validity of Sulloway’s finding is seriously questioned in Nature.
6. I reread Ayer (1936, 1978), "Language, truth and logic", and was struck by his discussion of Poincaré. Ayer, page 115: "For a well-chosen definition will call our attention to analytic truths, which would otherwise have escaped us. And the framing of definitions which are useful and fruitful may well be regarded as a creative act." In the "definition & reality methodology" the idea is that definitions concerning stylized facts are "useful and fruitful". Williams (2002), "Truth and truthfulness", is advised reading. What I take from it is that people have a ‘sense’ what is true or not, whether they are right or not, and that society can benefit from giving proper way to this ‘sense’. Now, what would be a proper way ? My approach is to give more attention to science and the scientific attitude.
7. Colignatus & Hulst (2003) is a Dutch booklet that summarizes the scientific argument in this book for the Dutch lay public. This booklet also relates to the murder of the Dutch politician Pim Fortuyn in 2002. There is a peculiar streak in Dutch society that is wildly at odds with its reputation for tolerance. Namely, the Dutch can react strongly to someone who threathens their view of the world. A similar phenomenon can be observed in other cultures too, but it is strong in Holland. My inclination is to link this phenomenon to the observation in Cavalli-Sforza (2000:184) of different mentalities in France: "Hervé Le Bras and Emmanual Todd [1981] have recently refined ideas by the French sociologist Fredericq Le Play. They believe three major types of families exist in France. (…) have proposed a controversial but stimulating hypothesis that says family structure influences political structure". These types are related to the history of Celts, proto-Basque and Franks. My impression is that Dutch society is similarly subject to some cultural mentality. 
8. When I discussed the consequences of the CPB censorship for public health, this caused developments that led to my dismissal in August 2004 from the Erasmus MC Dept. of Public Health. This is another breach of the integrity of science. Dutch readers are referred to my website. All this is too fresh to include it in this book.
9. November 2, 2004, Holland saw Theo van Gogh murdered. He is a grandson of Vincent van Gogh’s brother Theo (the elder). The younger Theo is said to have been a talented though controversial film director. The Van Gogh family had donated its collection of paintings to the state and Theo van Gogh had trouble finding funds to develop his talent. When he was murdered he was completing his film 0605 of the murder of Pim Fortuyn. Van Gogh’s murderer of Moroccan decent expressed his delusion of the 9-11 ideology. This is a new element in Dutch society that can only be understood with the input of the Bush policy on Iraq. It must be noted though that Theo van Gogh protested regularly to that other original streak in Dutch society referred to above, namely that Holland is not as tolerant and open as it may seem. One can summarize the situation as that a truly tolerant Holland would have had no fertile ground for that 9-11 ideology, while the resulting criminal extremist killed the critic of that intolerant streak. 
10. There are some Dutch books that deserve an English translation. Here I only translate the titles. Klever (1990), "Pure economic science", takes his position in Spinoza and argues that economic science should be developed from first principles in a deductive fashion. This strikes me as quite similar to the "definition & reality methodology". Mathematical economics already had the deductive approach, and econometrics assumed that only statistical approximation was feasible, but we can do better if we can find definitions that fit stylized facts. Klever also recovered Franciscus van den Enden (1665, 1992), "Free political theses". That author was a teacher of Spinoza and his book argues that democracy is the only form of government that can safeguard stability and general welfare. Klever (1981), "Dialectic thinking", must be mentioned for a better understanding of the deductive method. His discussion of Poincaré and his pupils, for example, clarifies the creative element in mathematics. Guépin (1985) "Civilization" and Guépin (1994) "The difference in opinion" defend classical rhetorics as the essence of civilized mentality. These books provide a wealth of information and are a useful antidote to expecting too much from deduction only. He highlights the tension between rhetorics and deduction by criticizing Socrates that it is rather easy to impress people by goading them into inconsistencies when they have not first defined their terms properly. (Rhetorics cannot make fun of rule based inference if the only goal of rhetorics is to get better inference.) Guépin also highlights that deduction thrives with dichotomy but hesitates with the sorites, i.e. the problem of accumulating grains of sand until the mountain moves.

‘New’ is taken here in comparison to others, and thus includes points also made in my earlier publications on this analysis. New is:
 
 

1. clarification that if you don’t index subsistence for average income, then you create poverty
2. clarification that minimum ‘income’ is not an ‘income’ but a mechanism (with multiplier)
3. the concept of the Tax Void 
4. the dynamic marginal tax rate, and its relation to labour supply and macro-economics
5. these explanations for the shift of the Phillipscurve:
1. by the minimum wage and tax void, or poverty
1. directly, and caused by differential indexation of exemption and subsistence
2. indirectly, by the crowding out effect, shifting of the tax burden etc.
2. by misguided macro-economic policy (not understanding taxes, fighting inflation with the wrong means)
6. clarification that ‘there is no poverty trap’
7. suggestion for a simple nonlinear tax function, clarification for households
8. suggestion of a possibly ‘dromedary shaped’ labour supply
9. clarification on the concept of a ‘free lunch’
10. proper definitions of risk and uncertainty
11. clarification for the impact of the minimum wage (tax void) on sheltered and exposed sectors
12. clarification on the Definition & Reality methodology
13. the theorem on the possibility of full employment, via the reduced form
14. integration of deontic logic with preference theory
15. the proper interpretation of Arrow’s Theorem
16. the Borda Fixed Point method
17. the theorem on the possibility of co-ordination, via the reduced form
18. description of actual bureaucratic processes on these subjects, so that we better understand how the Great Stagflation came about (comes about)
19. the concept of the Economic Supreme Court, in its political and historical relation to both the Trias Politica and economic science, and a draft constitutional amendment to start thinking about
20. clarification of the moral imperative with regards to Russia and Eastern Europe
21. positioning this analysis with respect to a standard small macro model and the work of other authors.

The prime conclusion of this book is that Western democracies are well-advised to install an Economic Supreme Court. This volume includes a draft constitutional amendment that shows that such a measure can indeed enhance democracy.

The fundamental structure for current policy making in a democracy is Montesquieu’s model of the separation of powers, i.e. the Legislative, Executive and Judicial branches that form the "Trias Politica". It appears that this structure still allows room for economic policy making that is detrimental to the life and liberty of the citizens of the state. The key issue appears to be that there is no independent protection of the quality of information. With all the social, economic and political interests involved, the current process of economic policy making allows the current constitutional powers too much room for distortion of the information. Economic theory then suggests the creation of an Economic Supreme Court as a separate constitutional power with the task of the scientific management of information. The legislative and executive branches would still decide on policy targets and policy execution, but they would lose the power to interfere with the scientific handling of information. This argument can be developed purely theoretically. The economic experience of the last century shows that the argument is also practically relevant.

Political Economy as a science has the general objective of explaining and advising the management of the state. Two hallmark reference points exist in the General Theory by Keynes (1936) and the analysis by Tinbergen (1956) on the principles and design of economic policy making. These studies show that the state can be subject to long periods of economic recession and even depression if not properly managed. Since the end of World War II, application of these ideas has allowed spectacular economic growth while depression has been prevented indeed. However, the economic record especially since the 1970s is mixed, with issues like stagflation, problems with the welfare state and continued poverty and also with the issue of sustainable development and protection of the environment. It can be shown beyond reasonable doubt that economic policy has been detrimental to the life and liberty of many of its citizens while this came about by mismanagement of the available information.

An element of self-reference arises when economic policy uses economic theory itself, so that theory should include theory. Increasingly over the years, economic theory has gotten a role in the management of the state, and developments in the real economy cannot be properly understood without reference to the economic ideas adopted for national policy. Since economic theories give conflicting advice, part of the management problem of the state is the selection of the appropriate theory, and this selection is more and more the key management problem. At the next higher level of abstraction, the process of selection becomes the focus of attention. The problem then becomes what that process is, what criteria of transparancy and fairness it satisfies, and how the process itself affects the economy. The current structure gives too much room for political elites and bureaucrats to neglect the basic rights of the population at large. The criterion to judge an optimal improvement in the structure of economic policy making is not just economic growth but can be taken in the concept of democracy itself and the citizen’s right to be properly informed.

Keynes’s General Theory can be generalised even further by the inclusion of endogenous government in the model, and in particular economic policy making itself as that is guided by economic theory. Keynes clearly anticipated this line of thinking, where he wrote: "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back." (GT:383) The new point now is that this does not only concern "practical men" but economists themselves too, and the whole institutional framework for economic advice. When economic policy making itself is part of the model, economic stagnation can be explained as stagnation in that realm, and the solution for economic stagnation can be found there too.

OECD nations had full employment in the 1950-1970 period, and Japan and Sweden had it much longer. So it would seem that full employment at least is feasible. However, after the period of full employment, all nations showed the phenomenon of stagflation, which is a worsening trade-off between inflation and unemployment (represented as the shift of the Phillipscurve), frequently associated with stagnating growth. Instead of full employment and a steady growth of welfare, OECD nations suffered a long period of insecurity from 1970-2005.

This volume analyses the different periods and finds the likely cause. The fundamental cause is the common Trias Politica structure of economic decision making that all OECD nations share over time and space. At an operational level, stagflation can be explained by the tax policy that OECD nations have in common as well.

The common tax policy is based upon a particular economic theory that has become the conventional economic view of our time. This conventional theory sees tax as a penalty on work effort and holds that statutory marginal rates have major disincentive effects. Marginal tax rates are a useful penalty on (inflationary) wage claims in wage-bargaining, but the conventional view is that the disincentive effect dominates. Following this theory, policy has been to reduce marginal rates at the cost of lower exemption. Another measure was to switch from the income tax to a Value Added Tax (VAT) that has no exemption at all.

The common tax policy has static and dynamic components. Statically, exemption is low. Dynamically, there is the tendency of reducing exemption even further. The low and ever lower exemption causes rising tax levels and hence either poverty or higher labour costs in the lower wage brackets, causing unemployment, and causing higher taxes to pay for the benefits. What is crucially wrong about current policies is the phenomenon of differential indexation. Exemption is indexed on inflation, while subsistence, by social psychological causes, rises with inflation and real income. This differential indexation causes ever increasing problems with poverty and unemployment.

The OECD countries have been pursueing this policy now for more than three decades, and rather little is being achieved. It is time to seriously wonder whether policy is on the right track. This book shows where the conventional theory goes wrong.

A first feature is the tax void. The tax void is the region of productivity and income between the net minimum wage and the gross minimum wage. The difference between net and gross is normally called a ‘tax wedge’, but this term is inadequate since a wedge is commonly thought to apply at a particular level while the void is a range. The income range between the net and gross minimum wage is a void since there are official tax statutes for that range but no true revenues. People are not allowed to work below the gross minimum and thus cannot pay taxes there (that is, for full timers). Ideally, as in the 1950s, the net minimum should be equal to the gross minimum so that the void is zero, and so that such workers can start earning their own living without paying taxes. Because of the current practices for tax indexation, the tax void has grown over time so that the gross minimum wage has risen much more than the net minimum wage. By result, more and more low wage workers are subject to that excessively high gross minimum and are effectively removed from the labour market. The shift of the Phillipscurve can be explained partly by this growing component of minimum wage unemployment. This analysis also points to a solution. For the tax void, no taxes are collected (on full timers), thus abolishing such void taxes will not cost anything. The argument is not quite that lowering the minimum wage will create new job opportunities, but rather that not raising the gross wage costs so excesssively would not have destroyed the opportunities that already existed. This argument designs an experiment at no cost.

The tax void causes needless unemployment for millions of people all over the world and its plain bureaucratic stupidity is a blow to naive ideas about democracy (that the current democratic structure would be adequate and provide adequate information).

The second feature in the new analysis concerns the dynamic marginal tax rate. Marginal tax rates are important - since economic theory indeed assumes optimising economic agents - but these marginal rates should be properly computed. This analysis not only considers the partial effect, assuming other things constant, but rather considers the total effect that includes all simultaneous changes. A change in a marginal tax rate is usually accompanied by a change in exemption, and both generally happen at the same time, either annually or in computer policy simulations. Private and national income change at the same time too. Individuals are frequently aware that their own fortunes are linked to the fortunes of the national economy and they will be sensitive to their relative position in the distribution of income. Work incentives may be more guided by the average tax rate rather than the statutory marginal tax rate. Hence, ‘incentives’ may not be a convincing argument against higher marginal tax rates, even though policy makers have been advancing that argument forcefully. That, in fact, the converse is true, fits perfectly with the experience of the last decades. The reduction of the statutory marginal rates, as the policy was, appears to have had little incentive effects, since the true incentive effect depends more on the average tax over time, and this average has remained high due to the problems of unemployment, poverty and lower growth. 

This book concludes that macro-economic policies in OECD nations have not countered stagflation but have actually increased it. Current policies add to labour costs, reduce incentives, fuel forward shifting of the tax burden, and worsen the trade-off between inflation and unemployment.

The new analysis points directly to a policy that will be successful and that will allow a return to full employment under stable prices like in the the 1950s. If exemption is put at subsistence, then jobs can be created at the low end of the labour market, which would save benefits and reduce average taxes, which again would increase incentives. The alternative structure and policy would also be beneficial for inflation. If low productivity labour has a stronger position in the labour market, then the risk of unemployment is spread more evenly, and trend-setting high productivity labour will be cautious about wage claims.

A welfare state is defined as a state that doesn’t let people die and thus provides benefits for the lowly productive anyway. The welfare state can be run more efficiently by using those resources, instead of going into benefits, to instead reduce labour costs and to price the lowly productive into jobs. The analysis on inflation and unemployment thus results into the proposition that, since the present situation is inefficient, an improvement is possible from which everybody can benefit. 

This book provides theorems in mathematical economics to prove its points. The central questions in the political economy of employment in the welfare state are: can one solve unemployment, does one know how, and does one want to ? The book presents a model that satisfies the stylized facts and thus serves theoretical and empirical uses. 

• The first result is a possibility theorem (can) that there are two regimes of either full employment or unemployment. 
• The second theorem explains the choice by know and want causes. Full employment results from conscious choice or chance (while lacking knowledge). Unemployment results from conscious choice or wrong co-ordination (where a Pareto optimising change is blocked only by lack of knowledge - and a lack of knowledge not by the economists but by the incompetent or insensitive policy makers).

The discussion of taxes, unemployment and inflation is basically just a minor point of the book. The major point of the book concerns the co-ordination problem. Western democracies apparently allow long periods like the Great Depression or the Great Stagflation that are detrimental to the economic well-being and security of large sections of their populations. Ideas of economists that point the way to recovery are only slowly accepted. Key examples are the ideas of Tinbergen and Keynes: for them it took World War II before they got listened to. Eventually, the political powers of that time accepted that they had to redesign the structure of economic policy making, and they gave more room to the scientists, but did not dare to give up their ultimate power to meddle with the information. Currently, the world faces the challenge of the growth of the world population from 6 billion people around 2000 to likely around 8 billion people around 2025. To manage this process, mankind would benefit from a structure of economic decision making that is both democratic and that respects the citizen’s right to know.
 
 

The economy enjoyed a golden period in the years 1950-1970 and it is not obvious what went wrong since then. Europe in 2005 has a (hidden) unemployment of 10% and relies on an extensive benefit system to prevent poverty. The US has less unemployment but at the price of more poverty – making Europe reluctant to adopt that model. The world as a whole is a political and economic mess with much and extreme human suffering. Policymakers explain developments by causes such as globalisation, technology and welfare state sclerosis. Those explanations are not convincing however since trade and technology are sources for welfare, and the only answer to poverty is a well managed welfare state. What is required is a theory that explains both the golden period and its loss since. This book provides this.

When democracies fail to care for their citizens, the cause must be looked for in the political system. The cause for the present failure can be found in the Trias Politica structure of national decision making – the separation of powers of the Executive, Legislative and Judiciary branches of government. This structure gives too much room for political elites and bureaucrats to neglect the basic rights of the population at large. This approach provides an extension and follow-up to the "General Theory" of John Maynard Keynes: by including economic decision making into the analysis, we arrive at a truly General Theory of Political Economy. The theory shows that a constitutional amendment for an Economic Supreme Court is required – for logical reasons, for the experience of the whole 20^th century, and for an actual improvement of real democracy which is so much needed for the 21^st century.

An example of the policy failure is the curious phenomenon of the Tax Void. The tax void is the income range between the net and gross minimum wage. Since people may not work below the gross minimum, those affected don’t earn income and don’t pay taxes. The taxman intends to collect taxes in that range, but since there are no earnings there, he doesn’t collect anything. The tax code only drives up the gross minimum wage, causing unemployment and the associated benefit burden. Abolishing that tax code would, since there are no revenues, not cost anything either – and create jobs. In the 1950s net minimum wage workers were hardly taxed and such taxes were gradually introduced. Policy makers have been oblivious to this issue and have actually been neglecting sound economic advice on it. 

Historical description of the last decades – Novel contributions to economics, politics and law – Mathematical theorems and proofs – Empirical data and charts – Explanations for a larger public – Solution to Arrow’s Theorem on social choice – Methodological exposition – Results related to other authors.

Thomas Colignatus (1954) is an econometrician who has worked at the Dutch Central Planning Bureau (CPB) where he developed this theory. He has an extensive web site at http://www.dataweb.nl/~cool. The discussion in this book can be combined with his Mathematica software, available on that site.

Dutch University Press

ISBN 90-3619-172-6
 
 

Book I Introduction *

Book II Trias Politica and Economic Supreme Court *

Book III Economics ‘as usual’ *

Book IV Presentations for the general public *

Book V Methodology: Definition & Reality *

Book VI Structural models *

Book VII Social Choice *

Book VIII Supportive notions *

Book IX Reduced form *

Book X Conclusions *

Appendices *
 
 

Book I Introduction *