There are three intricately-linked masses I identify: capitalism, state-ism and socialism. The state provides benefits and services and receives revenues from taxation: taxes are levied on businesses (capitalism) and individuals (society). Capitalism (business) earns revenue by providing services and goods; it pays some taxes to the state. Society (individuals) gives money to capitalists through investment and in return for services, some earn revenues through shares, they pay taxes to the state and receive some services and benefits in return, they are employed by the state or by capitalists, some do not work or work for themselves.
In a boom, capitalism grows quickly, money flows easily in terms of investment from individuals. Services are in demand, as are goods. The state benefits in terms of healthy tax revenues. Individuals are thus paid more by the state and by business, fuelling even greater demand for goods and services. Unfortunately those who are out of work are left behind.
With all the money swirling around, capitalism is an enormous, growing, behemoth with nothing to rein it in. Profits outstrip growth in wages and taxation. Everyone is happy, apart from those who are unemployed. The state creates jobs for these people and capitalism provides loans so they can join in too. Where can this go wrong? Unfortunately the supply of capital is essentially finite, for capitalism to get very big, in economic terms, society and the state must shrink. The state is getting bigger so individual wealth must therefore be diminishing rapidly. When individual wealth dries up so will investment and demand for goods and services. In order to maintain the boom, capitalists lend money to the state and individuals so they can keep spending. Thanks capitalism! When the loans are due to be repaid there is no money left. Capitalism's ever-growing pyramid has been undermined at its foundations by giving away millions of tiny bricks, each insignificant on their own but combined together the weight is too great. Capitalism's pyramid begins to collapse into a disordered pile.
Individuals withdraw their investment and stop buying goods and services. Tax revenues from business drop. Faced with losing its income, the state offers to support capitalism. The state is the only entity that can create money from thin air. The downside is that increasing the amount of money decreases its value. Capitalism says, "Thanks very much!" we will lend you some of our money so that you can keep the economy going. Capitalism's diminished and disordered pyramid is propped up at the foundations. The state continues borrowing from the top of capitalism's diminished but still abundant pile and creates money out of thin air to keep its wheels turning; thus compensating for the loss of taxes. People gradually start to re-invest their money and purchase services.
Capitalism now says, "We're OK, thanks for the help, please could we have our money back?"
The state says, "Yes, but because I have created money from thin air, I actually owe you less in real terms than I borrowed!" Capitalism says, "I expected some interest actually!"
Tax revenues are still low, so the state has to reduce its size to compensate. Services and benefits are cut, reducing individual's income further, people employed by the state are made redundant and pay is frozen. This hurts individual's wealth, along with the creation of money from thin air, which has devalued currency and made everything more expensive in real terms. This puts pressure back on business.
This is where we are now. George Osborne, Chancellor of the UK, is now taxing transactions more, through VAT, and cutting benefits and services. Transaction taxes directly inhibit growth. He is also gradually reducing taxation on business in an effort to make the UK more appealing to big business. In his favour is a reduction in individual taxation, through the raising of the level at which income tax is applied, and an increase in Capital Gains Tax. Both of these measures appear to have been adopted at the behest of the Liberal Democrats.
Individuals have very little surplus money. In order to fuel growth individual taxation needs to decrease or benefits need to increase. If individuals start spending money, business revenues will increase, thus increasing tax revenues and fuelling private sector employment. The state can then repay some of the loans it has received and gradually reduce Quantitative Easing.
