A lack of demand

When Margaret Thatcher and Ronald Regan accepted the argument of Milton Friedman that ‘The Social Responsibility of Business is to Increase its Profits’ business realised that it needed to increase demand so big business, banks and governments relaxed regulation. Banks could increase their profits by lending more, so they did. Business loved this because they were increasing their profits due to the consumer boom. Governments loved it because their tax take went up whilst reducing taxes on the rich due to increased demand and unemployment was constrained as people were employed in the retail sector in the western world whilst they could claim they were helping the third world by exporting manufacturing jobs to them and reducing world poverty. Loose monetary policy, the reduction in taxation and an inadequate policy on house building ( and a lack of a land tax allowed a boom in house prices which banks were happy to lend against the asset value of ) resulted in a feedback loop further expanding the supply of credit. The results of this can be seen in the graph below. As the asset prices of the securities held by banks collapsed, the government moved to protect the banks and prop up the economy by transferring the losses on assets to the public by borrowing against future tax receipts.

Graph Showing UK National Debt

National debt UKNational debt UK : ONS
Keynes anyone?

About Of Men and Markets

A student of politics and economics View all posts by Of Men and Markets

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