Zbigniew Piekarski looks at the history of public finance

"The life of man (in nature) is solitary, poor, nasty, brutish, and short."

- Thomas Hobbes, Leviathan, 1651

Thomas Hobbes, writing at the time of the war between the King and the Parliament of England, saw humans as basically selfish creatures who would stop at nothing to better their own position. Therefore, he postulated, governments were created in order to protect people from their own selfishness and evil, and the best government was one that had the greatest power - the Leviathan.

One such Leviathan was Prince Otto Furst von Bismarck-Schonhausen. In 1883, the "Iron Chancellor," as he was known, was the first European leader to devise a comprehensive scheme of social security offering workers insurance against accident, sickness and old age. His reasoning was simple: when all the citizens depend on the state, they won't try to overthrow it or destabilize it, and they will freely give up their fundamental liberties.

This new German policy (developed by a pragmatist) was enthusiastically praised by British Fabians (idealists), and later adopted by all European nations.

The initial aims of the welfare state were limited and pragmatic. They were to provide an element of security and to produce a healthy and educated labor force which, through increased production, would add wealth to the economy.

However, as with all great schemes of central planning, unintended consequences began to emerge.

Soon a fresh generation of undereducated overachievers, who were repulsed by physical labor and the trade market, started to discover new "fundamental human rights" which the state could accommodate. New professions (social worker, stress counselor) were created.

The individual had to be protected from himself at all costs and in all spheres of life. Regulations were applied to the workplace and then even into the home. Promises of endless bounty and continued prosperity without personal responsibility continued and liabilities were deferred to succeeding generations.

As the state sector expanded so, too, did its need for revenue. Initially it was to be supported by the actual producers of wealth (businesses) and by the rich through "progressive" taxation. Unfortunately, each time that the rates rose to levels that were not deemed as acceptable by the "milk cows," they either left the jurisdiction of the state or entered into tax-avoidance schemes created by ex-employees of the state.

Then the land of "Liberté, Égalité, Fraternité" applied the idea of equality by introducing the value added tax (VAT). This taxed the rich and poor alike and funded further expansion of the state and its servants.

To the Leviathan, the economic definition of "scarcity" and the law of diminishing returns did not exist, for if one state ran out of funds then it could always borrow from another. If any state really got into trouble then it could always default, devalue its currency or inflate its prices. As Adam Smith himself noted, no government in history has ever has repaid its debts, although some have pretended to do so.

Soon a greater percentage of the population was employed by the state than was engaged in the actual production of goods, and, as their remuneration levels increased, more state employees began to form the new "middle class."

The increase of rules and regulations from the state meant that overeducated underachievers (as opposed to undereducated overachievers) started to swell the ranks of the established professions (who initially defended the liberty of the individual against the excesses of the state). Those who were numerate and lacked imagination became accountants and those who could add the art of punctuation to their written and verbal skills became lawyers.

Then came a time when individual states realized that the promises made to their subjects could never be kept, for there was insufficient "real" wealth being generated by the few producers left on their territory. All that actually existed was the endless circulation of credit. The solution was simple and had worked in generations past: Create a larger Leviathan within which the lines of responsibility would become blurred, and privatize the public debt burden.

What we are seeing now in all the markets of the established capitalist economies are the effects of the privatization of this debt burden. From the 1970s, individuals have been encouraged, and even impelled, to hand over their money to financial institutions who, in turn, have passed on bad stocks and bad debt onto their clients. At the same time they have supported the state by buying its debt.

The financial sector arose to facilitate trade and to provide credit in order to expand the means of production and increase employment. Now its main function is to assist the state in the supply of cheap credit and the creation of asset bubbles. It has swollen its ranks with the overconfident, the ignorant and the irresponsible in order to ensure success. Every stock market bubble in history, starting with the South Sea and Mississippi bubbles in the 1700s in Britain and France, were sponsored by the state with the collusion of the Barons of Finance.

Invariably the present cycle will force many individuals to be "free" and end up as part of the service industry, scraping out a living by doing laundry for the few remaining servants of the Leviathan. In the U.K., the promised "merit" bonuses for 20,000 teachers were cancelled in order to save L500 million. This is a sign of things to come.

On the WSE: The WSE should be thankful to Greenspan, who has increased liquidity yet again in order to avoid deflation and added $100 billion to the money supply over the past few weeks. Some loose change is finding its way to "emerging markets," and the WSE should enjoy it while it can.