Ed Weick suggests that I might be confusing cause and effect in my "33. A vote of no confidence", where I suggest that advanced, high-tax, welfare state-type economies might suffer progressive collapse due to demoralisation, partly caused by a growing black economy.

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EW

Keith, I wonder if you're not confusing cause and effect here. I've spent a little time in a couple of countries in which the "black economy" was a large part of the overall economy. I would suggest that the cause was the overall economy, or really the lack of one or of a sufficiently responsive one. In the Russia of the mid-90s, the centrally planned economy of the Soviet Union had collapsed, and the only way ever so many people could stay alive was to participate in the "shadow economy". There was no similar collapse in Brazil, but the mainstream economy was simply not equipped to handle things like the mass migration of people from the countryside to Sao Paulo and Rio when agriculture was modernized and mechanized.

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The case of Brazil today is somewhat similar to the state of England during the 18th and 19th centuries -- with millions of people flocking into the cities. At that time most of the economy was, in modern parlance, a 'black economy' because hardly anybody except the rich paid taxes. When Lloyd George reformed the tax structure in 1909 he lowered the tax thresholds so that even some of the working class started to pay income tax for the first time. Indeed my grandfather, was proud to pay it. He was a blacksmith in a famous engineering works in Manchester and he worked at such a furious pace that he was the only blacksmith there who needed two strikers. Accordingly, he earned a great deal more than the average and when it became known along the street in which he lived that he was about to pay his income tax, people would line up in their doorways and watch him as he walked along the street to the post office to pay it. The Lloyd George tax, as it became known, was paid once a year, so this ceremony was a notable occasion. To pay income tax was a sign of high status among working people in those days -- far more than the china cabinet or the aspidistra in the front room. (I suspect that as the payment date drew nigh my grandmother let it be known to her neighbours that her husband was going to pay his income tax on Saturday next, and the news rippled along the street.)

As for Russia, or the USSR as it then was, I'd like to suggest that in many respects it could be considered to be an advanced economy right up to its point of collapse in '92. It had a superb health service, low food, housing and travel costs for the poor, an educational system giving superb opportunities to most city and town children, and some of its technologies were among the best in the world. Its people didn't pay income tax because its employer, the state, took it at source before it reached the pay packet. But from what I've read, this virtual income tax amounted to about 80% of its GDP (about 50% of GDP being required for its armaments industry and defence). Despite the difference in its political systems from the democracies of the west, the USSR could be placed at one end of a fairly smooth continuum, with Finland and Sweden following on at about 60% taxation, running through the European countries at about 45-50% and onto Japan and America at about 30-35%.

The USSR couldn't sustain this high taxation rate, and collapsed. The Nordic countries couldn't sustain theirs either and have retreated to a 45-50% tax rate in recent years. As for the remainder of the west European countries, particularly Germany and France, they're plucking up courage to reduce taxation because enterprise is being stifled at present. But those countries -- and this must now also include Japan and America -- have huge off-balance sheet liabilities too, just like Enron, if not far worse, in the shape of future health care and pensions commitments. The USSR was an extreme case, and collapsed in spectacular fashion but I am now seriously thinking that similar dire fates, albeit more gradual perhaps, await all the other developed countries, too, over the coming decades unless national cash accounts are made more transparent and taxation reformed accordingly.

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EW

It would seem to me that people commit themselves, as labour and capital, to economies on the assumption that the economies will continue on the same path as they have followed in recent experience. There is an expectation of continuity and certainty, which, if sufficiently violated, leads to a suspension of the ordinary rules of economic behaviour. Yet people have to continue to live, and to do so they have to make their own rules and, in effect, create an alternative economy to the crippled or broken mainstream one. In time, the mainstream economy will recover or a new economy that is a synthesis of the mainstream and the shadow will emerge. The latter is what I believe has happened in Russia under Putin and the oligarchs.

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I agree that there's a great amount of continuity between successive forms of governance. Cultures takes generations to change. Even when there have been catastrophic intermissions, old patterns resume. The communist regime of the USSR after the 1917 revolution was not a great deal different from the secret police-type regime of the Tsars before it. Despite the Chinese communist takeover of 1949 and the even worst catastrophe of the Cultural Revolution which followed, their type of government is now almost imperceptibly slipping back to the Imperial mandarinate systems of former times (the only important difference being that the present-day mandarins are pro-trade rather than anti-trade). The latest figures I've seen are that government spending is only about 20% of GDP. It would be interesting -- if you and I were to live that long! -- to know whether the Chinese government will keep that level of expenditure much closer to the present figure than western governments have been able to.

Just one more point about Russia which tends to confirm the point about continuity. The recent arrest of some of the oligarchs who made immense fortunes when the big utilities were privatised in a rush after the collapse of the USSR suggests to some Russia-watchers that the old KGB habits are reasserting themselves. (Those of the oligarchs who seem to have made it 'on their own', however, and haven't been sending their money abroad, but reinvesting it in Russia, don't seem to be in danger, however. In other words, although Russia is still heading towards a more private market economy, its Tsarist-type state still has enormous powers and can act ruthlessly when it wants to. Your point about a synthesis is well taken.)