Markets for Managers: A Managerial Economics Primer

CHAPTER 7 Public Finance

—‘Taxman’, The Beatles¹

Studying ‘public finance’ helps us to understand the role of the government within an economy. It looks at how they raise the money required to pay for public spending, and gets at the heart of the relationship between ordinary people and the state – we can define the state as that organisation said to have a legitimate monopoly on force (and sidestep the tricky issue of what constitutes legitimacy).

Public finance is important for managers because all companies have tax obligations. These obligations change over time and can be hard to anticipate. Understanding the objectives of policymakers can help with this. Not all government spending is funded through current taxation, and we will look at how the bond market developed as a means to finance spending. All companies utilise bond markets, not only to borrow money, but also to accumulate information about future inflation and sovereign default risk. We will also look at the history of banking, and assess some of the key strengths and weaknesses of the present monetary system. As we move into macroeconomic concepts we will start outlining the models and schools of thought that help us to illuminate the complexity of modern economic activity.

7.1 TAXATION

Arguably the most important function of government is the protection of private property – both domestically (in terms of ...