LAWCOMM | 403 | Tax Law | lecture notes |  Pieces of informaon stored

LAWCOMM 403 long notes.docx

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LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................

LAWCOMM 403 long notes.docx-CONTENT...

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

Pieces of informaon stored on a computer? (bank account, internet wallet)

Once upon a me, money consisted mainly of coins (made from gold and silver). How much money there was in circulaon (the

money supply) depended on (1) how much gold and silver was available and (2) how much of it we choose to turn into coins as

opposed to bullion and jewellery.

The amount of money in circulaon long ago ceased to depend on how much gold or silver we have; rather, it is eﬀecvely

controlled by the government and to some extent the banks. Somemes the government gets it seriously wrong and we get

what’s called hyperinﬂaon – meaning that the government creates so much money that its value collapses. Famous examples

include Germany in the early 1920s (when the exchange rate reached 4,200,000,000,000 German marks to US$1.00) and

Zimbabwe in 2004 to 2008 (when at one point prices were doubling every 24 hours).

The amazing thing, though, isn’t that some governments have somemes got it wrong, but that most of the me most

governments get it more or less right, so the value of money is reasonably stable and we can happily live our lives regarding the

money supply as some esoteric technical thing that we don’t have to worry about.

According to Friedman:



The government should not use

ﬁscal policy

to keep the economy working well.

In parcular, the government should not aempt to manage

aggregate demand



Rather, the government should use

monetary policy

to keep the economy working well.

Also, if the government manages the money supply appropriately, the economy will operate sasfactorily at

near full employment

Friedman also agreed with Adam Smith that:



The market is generally the best means of allocang economic resources; and



The government should therefore be small; and



Taxes should be low; and



The government should interfere with the market only in the case of market failure; and



The market seldom fails.

KEYNES VS FRIEDMAN



So where do maers stand today?

In the 1930s-1970s: Most western governments followed Keynesian policies on taxaon and public spending



They did not aempt to balance their budgets, did not cut spending during recessions, and did not

increases taxes during recessions



However, the consequence of this was that these governments were in a lot of debt



The reason this happened was not necessarily because they followed Keynes’ policies



It happened because they were using Keynes’ theory as an excuse to connue to borrow in

an irresponsible manner, which they did because it seemed to be the best way to win an

elecon (which Keynes did not suggest to do)



Polical pares wanted to promise to spend money on healthcare and housing etc.,

but did not want to raise taxes (because they will get less support) – they ﬁnanced

their promised by borrowing



They used Keynes’ theory as an excuse to do the borrowing

From about 1980 on: Most western governments, inﬂuenced by Friedman, returned to more market-oriented

policies (e.g. Ronald Reagan, Margaret Thatcher, Roger Douglas)

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