CHAPTER II GENERAL CONSIDERATIONS CONCERNING PUBLIC EXPENDITURES The financial 4. Public and Private Business Compared. activity of a government, like that of an individual, is concerned with the expenditure of money. In other respects, however, such as the ends pursued and the means employed, public and private business offer many points of contrast which are well presented by Eheberg:1 1. The ends sought by the state reach far beyond the sphere of individual activity. The economic activity of an individual is limited to the effort to procure, by means of mental or physical labor, the material goods which are needed to support life and satisfy his higher wants. The purpose of the state, however, is, first and foremost, to provide immaterial goods which defy measurement in money and yet are the basis of all spiritual or material progress, such as legal security, the maintenance of peace and national independence, and the development of the economic life of the people. 2. In private business the ruling principle is special service and special payment: every service rendered receives its appropriate payment which is determined by mutual agreement between buyer and seller. But the services rendered by the state, in so far as they are of a general and immaterial kind, cannot be individualized and separately valued; so that special payment for special service is impossible. The payments which citizens make for services received from the state are not determined by contract, but by the authority of the state and according to norms which it establishes. Except in so far as it draws revenue from productive property which it owns, the state 1 Finanzwissenschaft, Einleitung, § 3. secures its income by compulsion; it possesses, that is, the right to demand the services of its citizens without payment, and to levy taxes upon the incomes or property of its subjects or other persons who happen to be within its jurisdiction.1 3. The facts, that many of the services of the state are of an immaterial character and minister to intellectual or moral needs, and that many of them cannot be valued in terms of money, make it difficult or wholly impossible to compare the cost of production with the value of the product, as must be done in every well-ordered private business. While the payments which the citizens make in the form of taxes or duties can be readily calculated, the services rendered by the state cannot be reduced to figures. In this latter case an estimate can be formed only by a careful comparison of outlay with the results of expenditure. Often, too, it is necessary to observe the results achieved over a long period of time, since only then can it be determined whether the domestic or foreign policies to which the state devoted its revenues justified the sacrifices and met the expectations of the people-whether, that is, they contributed to spiritual and material progress. Such a comparison of the burden and the profit can best be made by an intelligent and unbiased representative assembly. . . . 4. A further peculiarity of public business is the unlimited duration of the elements with which it deals. Many expenditures for public purposes are made for the future as much as for the present. For this reason it is just that future generations should bear part of the burden of important public works or the defense of the state against great dangers-a thing which is accomplished through the agency of public debts. 5. Finally, public business differs from private in that it is limited in respect to its outlay and its income. The outlay of 1 Eheberg here alludes again to the fact that the state may have landed domains or public industries from which some revenue is raised. But he says that history shows that taxation has steadily increased in importance, at the expense of these revenues from domains and industries. Ed. 2 For this reason, as Wagner observes, "the state can undertake enterprises which no private business could attempt on account of the limited duration of its life." Finanzwissenschaft, I. 14-15. Even more important is the consideration that in private business a quick return from the investment is generally desired, whereas the state can afford frequently to sacrifice present to future returns. Ed. the state is limited by the range of the duties which are assigned it at any time; and the amount of its income depends upon the nature and extent of its outlay. While in private business the acquisition of wealth is not limited in this manner, the income of the state finds its measure in its financial needs. And while in private business expenses must be regulated by the income, the income of the state is determined, rather, by the amount of expenditures which are requisite. It is true that, in determining upon public expenditures, the possible revenue available should not be left out of consideration; 1 but within these limits the state regulates its income according to its expense. 5. The Economic Effects of Public Expenditure: Early Opinions. The economic effects of public expenditure are far reaching. If the outlay is wisely directed, the economic life of the people may be greatly benefited,2 while unwise expenditure tends to impoverish a country. But, besides these obvious direct effects, public expenditure produces certain important indirect results. No inconsiderable part of the income of society is taken by governments in the form of taxes, and the expenditure of such enormous sums affects profoundly the direction which industry takes, and, sometimes, the rate of wages which must be paid in private occupations.* 1 This qualification is strongly emphasized by Roscher, who quotes Frederick the Great as saying that a state will bankrupt itself if it adopts the policy of saying, “I need so much; raise the money," rather than, "I have so much money, and can therefore spend so much." Finanzwissenschaft, § 109. — ED. 2 This benefit, of course, is the justification of the expenditure. The first constitution of Pennsylvania (1776) declared that "the purpose for which any tax is to be raised ought to appear clearly to the legislature to be of more service to the community than the money would be, if not collected." This, perhaps, was suggested by the remark of Sir James Stewart: "If the money raised be more beneficially employed by the state, than it would have been by those who contributed it, then I say the public has gained. . . ." Inquiry into Political Economy (1767), Bk. V. ch. 7. 3 Leroy-Beaulieu estimated some years ago that the taxes levied in various countries of Europe represented from 6 to 15 per cent of the income of the people. Traité, I. 133. 4 Capital will flow naturally into those industries the products of which are in But there is an old and very common fallacy, that governmental outlay is, in itself, a good thing, since it "puts money into circulation" and increases the demand for labor. Jean Bodin, for instance, in 1576, enlarged upon the advantages which come from the expenditure of the royal revenues upon public works: "For beyond the fact that such works are necessary, there result besides great benefits to the commonwealth; inasmuch as by this means the arts and artificers are supported, the poor are relieved, and dislike of taxes and duties is removed, when the prince restores to the public at large and to individual subjects the money he takes from them." Not infrequently this fallacy is found in company with the mercantilist notion that no sort of expense is seriously detrimental provided the money be spent for goods of domestic production, and not for imported commodities.1 Thus Sir William Petty argued that expenditures for public works should be increased because, among other things, indigent people can be employed thereon; and said: "Now as to the work of these supernumeraries, let it be without expence of Foreign Commodities, and then 'tis no matter if it be employed to build a useless Pyramid upon Salisbury Plain, bring the stones at Stonehenge to Tower-Hill, or the like. . . ." At the present day such errors recur persistently in popular discussions, usually in some such form as the following paragraph which appeared in a wellknown newspaper in 1902: "What does the heedless throng know about the Philippine question, anyway; and what does it care? To be sure the army is costing the people millions. great demand for public purposes. So, too, if governments offer more than the market rate of wages for labor, the wages in private employments may be affected. 1 Sir Thomas Mun, for instance, wrote concerning luxurious expenditure as follows: "Again the pomp of Buildings, Apparel, and the like, in the Nobility, Gentry, and other able persons, cannot impoverish the Kingdom; if it be done with curious and costly works upon our materials, and by our own people, it will maintain the poor with the purse of the rich. . . ." annually, but it is furnishing employment for thousands of men who might otherwise be idle, and the army supplies are purchased in this country, while the money for munitions and ordnance is disbursed in America to Americans. The war gives employment to idle men and distributes money to the contractors who are manufacturers." 6. The Views of Smith and Say. Although at least one of Petty's contemporaries perceived that such an idea was absurd,1 it remained for Adam Smith to destroy the foundation of this as of other mercantilist theories. Smith showed 2 that all nonproductive expenditure diminishes, so far forth, "the funds destined for the employment of productive labor," even though "the expence of the prodigal should be altogether in homemade, and no part of it in foreign commodities," the exportation or non-exportation of gold and silver making no material difference in the situation. Accordingly, while he considered it unnecessary to repeat the general principle, he argued that particular forms of public expenditure in no way increased the industry of the country or the employment given to labor. He says:8" says: "By the reduction of the army and navy at the end of the late war, more than a hundred thousand soldiers and seamen, a number equal to what is employed in the greatest manufactures, were all at once thrown out of their ordinary employment; but, though they no doubt suffered some inconveniency, they were not thereby deprived of all employment and subsistence. The greater part of the seamen, it is probable, gradually betook themselves to the merchant-service as they could find occasion, and in the meantime both they and the soldiers were absorbed in the great mass of the people, and employed in a great variety 1 In 1699, Charles Davenant remarked: "Some persons have a strange notion, that large payments to the state are not hurtful to the public; that taxes make money circulate; that it imports not what A pays when B is to receive it." 2 Wealth of Nations, Bk. II. ch. 3; Cannan's edition, II. 320–322. 3 Bk. IV. ch. 2; Cannan's edition, I. 434. |