The consensus model (CM) holds that there is only one equilibrium that needs to be maintained for economic stability. This follows, as a matter of logical necessity, from the model’s fundamental assumptions. The evidence is, however, clear that, independently of each other, asset prices, money supply and demand all need to be kept in balance. The widespread scepticism among economists and central bankers over the single equilibrium assumption is thus abundantly justified. Two important conclusions follow: CM must therefore be discarded if economic policy is to achieve growth with low and stable levels of unemployment and inflation. The existence of three possible disequilibria requires at least three independent policy instruments to allow the economy to be managed successfully. In addition to monetary and fiscal policy, another instrument is thus needed, which tax policy can and should provide. If used appropriately, these three tools can preserve stability. Importantly, the correct use of tax policy should not only prevent the policy errors which have led to rapid inflation and financial crises but restore the trend growth of developed economies to the rates achieved before 2000.

The number of zombies has risen this century and growth has slowed. Both have a common cause in the bonus culture but, unlike Japan after 1990, there is no direct causal link. Ultra-low interest rates have not slowed growth. While monetary policy is largely responsible for the surge in inflation and the current high risk of another financial crisis, higher interest rates, not offset by other measures to stimulate the economy, would have slowed rather than boosted growth. The popularity of these misconceptions arises from (i) otherwise fully justified concerns about monetary policy, (ii) misunderstanding the concept of creative destruction, and (iii) confusing companies with the businesses they own. Overleveraged companies are refinanced or liquidated; the distinction depends on the difference between their scrap and potential stock market value, the relevance of which is denied by the consensus economic model. Analysing the issue thus requires the use of other economic models.

Classical economics assumed that interest rates would adjust, or could be adjusted, to ensure that there was no mismatch between private sector intentions to save and invest. Interest rates were therefore assumed to be the sole policy tool needed to maintain full employment. Keynes revolutionised economics by postulating the possibility of a liquidity trap in which interest rates could not fall low enough to boost demand and that fiscal deficits would then be needed to prevent large-scale unemployment. The consensus today is that demand can be maintained by some mixture of fiscal and monetary stimuli, with the latter including quantitative easing (‘QE’) as well as by the management of short-term interest rates. The underlying assumption of this consensus is that the private sector’s ex ante net savings surplus is cyclical, at least after allowing for the impact of fiscal policy, i.e. it is purely due to those temporary weaknesses in demand which accompany the business cycle and is thus not a secular problem arising from some structural change in the economy. Neoclassical economics, on which monetary policy is based, has no adequate model which explains how private sector savings and investment are determined. The consensus view that the ex ante savings surplus is cyclical has therefore no support in economic theory. Neoclassical theory wrongly assumes that the savings/investment balance is the only source of economic disequilibrium. Another is q, which is the ratio between the market value of companies and their net worth. QE drives up q, which is mean reverting through changes in equity prices which, when sharp, have a marked impact on the economy. Falls in q are faster than rises, but their timing cannot be known. The economy is thus unstable and unpredictable when q is high.

The Japanese economy has been growing at less than 1% over the past 20 years. This is a marked fall from its previous trend. This decline cannot be explained by any weakness in business investment, which is little changed as a percentage of GDP. I show that the explanation lies in the fall in tangible investment, the decline in which has been often overlooked as it has been offset by a rise in the share of total business investment taken by intangibles. The trend growth of economies depends on the speed at which the value of the produced capital stock rises. As intangible assets depreciate much more rapidly than tangibles, growth depends on the value of tangible assets. The level of net tangible investment thus determines trend growth. The fall in the trend rate of Japanese growth is thus due to the fall in tangible business investment. This mirrors the similar slowdown seen in the USA.

Corporation tax is a tax on investment. Current plans to increase the rate in the UK and the USA will, if implemented, severely damage their economies. That such self-destructive folly has met little opposition and is seldom even debated results from the weakness of current consensus economic theory—the neoclassical synthesis. The impact of corporation tax cannot be assessed without a command of financial economics. Except in the form of a few aprioristic and demonstrably false assumptions, finance is absent from the consensus model and this is widely accepted as its major fault. If implemented without offsetting policy measures, a rise in corporation tax will exacerbate two major economic problems. It will retard the already poor rate at which labour productivity and output grow and it will amplify the structural ex ante net investment deficit of the private sector. In the UK tax credits for tangible investment are planned for the next two years. The damage from a rise in corporation tax could be more than offset if these were made permanent and, in the USA, if similar credits were introduced.

Spending on intellectual property (IP) is classed in national income accounts (NIA) as investment and represents a proportion of total investment as measured. It is, however, rapidly depreciated so that it has only a minor impact on gross domestic product (GDP). Some economists argue that the amount of such spending is being understated and the depreciation rate overstated. If these claims were correct, they would result in large increases in the measured levels of gross and net output and reduce the share taken by labour incomes. If correct the resulting changes would also be important for economic theories. Current data show that the labour share of output is mean-reverting, thus supporting the Cobb-Douglas production function, and that q’s mean reversion results from changes in share prices. The suggested revisions to the data would undermine both. These claims require an increase in profits after depreciation in the NIA. However, they cannot be correct because independently generated data on equity returns to shareholders show that profits are already overstated. Profits need to be reduced rather than increased. The change made to NIA in 2013, by the inclusion of IP expenditure as investment, has led to widespread misunderstanding about the economy and should be reconsidered.

The consensus model for total factor productivity is unsatisfactory; the alternative, non-technology variables (‘NTV’) model resolves the objections to it and should therefore be preferred by economists. The key objections to the consensus model are that it is untestable, its assumption about corporate behaviour is falsified when tested and, for the accounting framework to function, the labour/capital ratio has to be as flexible on old capital as it is on new: an assumption which seems most unlikely. The differences in the results are non-trivial and the NTV model has positive implications for economic policy by showing how they could be changed to boost growth. NTV comprises all the variables, other than changes in labour and technology, that determine the level of investment and the capital stock. Changes in NTV are the net impact on the incentive to invest resulting from changes in the individual constituents, which are profit margins, the cost of equity, the cost of debt, leverage, corporation tax and the hurdle rate, which is the minimum expected return on equity needed to make new investment worthwhile in the opinion of management. The consensus model assumes that investment is partly determined by changes in the cost of capital while ignoring the impact of changes in the cost of equity and debt and in leverage. I show that this assumption is unjustified and why it is preferable to use NTV.

Piketty claims that capital rises faster than income which assumes that capital and income are independent variables. The evidence shows they are not and that the ratio of income to capital is probably stable over time. Piketty’s mistake appears to come from confusing depreciation with the cost of maintenance. Piketty uses misleading data to support his claims by confusing wealth with capital and income with output.

A new model to measure Total Factor Productivity free from the flaws which exist in previous models; appropriate data are used to test it. The model distinguishes between the contributions made to investment and growth by changes in technology and other non-technology variables. A key constituent of non-technology variables is the equity hurdle rate; since 2000 this has dramatically changed and thereby stifled investment and productivity. Reform of current management bonus arrangements is found to be essential to obviate the risk of economic stagnation.

The impact of managerial incentive structures on corporate behaviour has been a neglected area of economics. New theoretical work by Nobel Prize winning economist Jean Tirole demonstrates that ‘bonus culture’ managerial incentive systems can increase inequality while lowering investment, work ethics and welfare. The negative impact of managerial incentive systems in the US and the UK have been studied empirically by the author for a number of years and the evidence backs up this theory. Modern management remuneration systems provide strong incentives to change corporate behaviour by encouraging aggressive pricing, discouraging investment and other measures to improve productivity. The author argues that demographic and productivity changes, and not the aftermath of the global financial crisis of 2007-08, are the dominant causes of the current economic slowdown in many of the world’s largest economies. Since this can only be reversed by increasing investment it is necessary to recognise the problem of distorted incentives as the first step to remedial action. Solutions include linking bonuses to increases in productivity and providing tax incentives to reinforce changes in behaviour.

Corporate behaviour in both the UK and US has changed because of the change in management incentives. The result is that the savings’ surplus of business is no longer a cyclical problem that will end once the animal spirits of entrepreneurs have revived. It is now a structural problem. This is ignored by those who call for an end to fiscal constraint on the grounds that deficit cutting should follow, not precede, sustained recovery. No sustained recovery can be expected without a change in policy as new problems require new solutions. The UK must change the savings’ surpluses of the foreign sector by currency intervention and that of the corporate sector by changing the bonus culture.

There is a near-consensus that central bankers should focus their attention on the control of inflation, and should accordingly not pay attention to movements in stock markets. This view is reinforced by the continuing influence of the Efficient Markets Hypothesis (EMH), which maintains that financial markets correctly price firms at all times. The authors assert that this general view is incorrect. There are strong reasons, both in principle and in practice, to doubt the applicability of the EMH to the valuation of the stock market as a whole. Indicators of stock market value, such as q, show the market to have been severely overvalued at the end of the twentieth century. Previous episodes of overvaluation have been succeeded, both in the US and Japan, by severe recessions. Such recessions raise the risk of central banks losing control of inflation, due to liquidity traps; they also impose costs, in terms of output and inflation, which central bankers should take into account. Finally, central bankers already do in any case take these into account, but asymmetrically: only when markets fall, not when they rise.