What is the circular flow of income in a governed economy?


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Shinypate one answered

The circular flow of income is a neoclassical economic model depicting how money flows through the economy. In the most simple version, the economy is modelled as consisting only of households and firms. Money flows to workers in the form of wages, and money flows back to firms in exchange for products. But governed economies are not just households and firms, there are multiple layers of bureaucratic overlay that interfere with, redirect, and siphon income, acting as drag on the economy, to the place where a fully governed economy cannot compete with a more ungoverned one.

The reason why is that government adds a layer of compulsory spending with every purchase; every time you purchase a good, 10% on average is added in sales taxes, which purchases a fixed set of government "services" which you may not want, and may not need, and which may not actually serve you. This money is not used to improve the means of production, nor to improve the product, nor to increase the pay of the workers, it's merely removed from the system and used to increase consumption by unproductive and largely unnecessary people. Why would a system seeking to improve the lot of everyone cripple itself in such a fashion? Because essentially  we do not trust capitalism to work to benefit some people, because we see it as a blind hand, helping without morals or knowing the merits.

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