In small affairs we recognize this productivity of protective institutions without trouble, since we assign a shepherd to every herd and do not consider such expenditure unproductive. In large affairs, however, we do not recognize this, but deny to expenditures for public order and national defense the acknowledgment of their productivity.

The principal institution for the protection of society against the evil effects of violence by human agencies is the state. It protects the peaceful labor of citizens, and the products of such labor, against disturbance or destruction by domestic or foreign enemies. As little as the herd can dispense with the shepherd can society exist without government and its protective action.

Expenditure to procure domestic tranquillity and to defend persons and property against attack is, to be sure, less harshly judged than military outlay; its usefulness and the necessity of such public action is generally recognized. But should policemen be considered economically productive and the army unproductive? . . .

The unproductivity of expenditures for war is used as the chief argument against public borrowing because up to this time loans have been utilized for the most part to meet the great expenses of war. This view rests upon the assumption that the wars could have been avoided, which is a delusion. From the economic standpoint war, like any destructive outbreak of natural forces, seems to be the result of circumstances and forces which are actually operating in society and must be accepted as a given fact. For our economic life, therefore, the only possible course is to seek to make this power, like the forces of nature, useful or harmless, as the case may permit. When undertaken for the purpose of defense, war makes property secure and insures the orderly ongoing of productive undertakings; and all the wealth which, without its intervention, would have been destroyed or not produced, must be considered as produced with the coöperation of war. When it is a war of offense, it serves to obtain advantageous conditions for economic development or it averts future injuries to it. In both cases its purpose is to maintain or advance the national wealth. In the first case it secures valuable territory or favorably situated localities, or, as a commercial war, opens up avenues of

trade in regions previously closed. In the second it undertakes to maintain the balance of power, and to prevent the growth of other states which might later prove dangerous to the economic development of one's own land.

War is, therefore, under existing conditions, an event that inevitably occurs from time to time, and we should not consider it an extraordinary occurrence that wrongfully burdens industry and destroys its products. The outlay for war is one of the general costs of producing society. To diminish these costs and to provide for meeting such outlay with the least possible disadvantage to society, must be the leading economic principle in respect to war. It is realized by means of public loans.

If the state by means of borrowed capital undertakes great outlays for other purposes which immediately subserve the production of material wealth, this form of public consumption cannot be considered unproductive. This is true when it uses the money for constructing means of communication, roads, canals, railroads, and the like; and here the loans are not condemned on the ground that they encourage unproductive consumption. But could not the loans have been avoided, even in this case, if the state had limited or foregone other expenditures which are considered unproductive, as, for instance, outlay for public education and worship? These expenditures, however, are productive even so far as the production of material wealth is concerned. . . . Education improves the power of the work- · man to labor, and religion tends to uplift the people morally, thereby contributing to the safety of productive industry.

Elsewhere Dietzel says 1 that the state is a part of the "immaterial" capital2 of the nation, and the most important of all the forms of immaterial capital. The state, he says, is "a relation which the whole body of the people has created by the expenditure of economic goods or labor, in order to contribute to the production of other goods," these being the "higher

1 System der Staatsanleihen, 71, 99.

2 "Immaterial" capital he defines as "all those relations and circumstances which exert a favorable influence upon economic society and increase its productivity, and which are created by the expenditure of economic goods.”

development of society," and, in general, "the higher forms of goods." Dietzel then proceeds to argue :

This immaterial capital (the state) needs to be maintained intact, just like any other capital; and, as society progresses, must be continually increased if the equilibrium between the different parts of the whole capital of society is to be undisturbed. Every economic period must, therefore, make some expenditure for this purpose; expenditure which, according to the varying conditions of the different periods, may be of various amounts. While, then, we enjoy without expense so much of the life of the state as is an inheritance from the past, the outlay which our own generation makes for this purpose must be viewed as an investment of disposable private wealth in fixed capital which belongs to the whole community.

CHAPTER III

THE INCREASE OF PUBLIC EXPENDITURES IN MODERN

TIMES

8. The Growth of Expenditures: Wagner's so-called Law. That there has been a marked increase of public expenditures in modern times is an undoubted fact, but interpretations of this phenomenon differ widely. Professor Adolph Wagner, after examining the available data, laid down the following "law of the increase of state activities": 1

Comprehensive comparisons of different countries and different times show that, among progressive peoples, with which alone we are concerned, an increase regularly takes place in the activity of both the central and the local governments. This increase is both extensive and intensive: the central and local governments constantly undertake new functions, while they perform both old and new functions more efficiently and completely. In this way the economic needs of the people, to an increasing extent and in a more satisfactory fashion, are satisfied by the central and local governments. The clear proof of this is found in the statistics which show the increased needs of central governments and local political units.

9. A General Survey and Interpretation of the Facts: by Professor F. S. Nitti. The increase of public expenditures has been so striking as to attract the attention of many writers,2

1 Grundlegung der politischen Oekonomie, Bk. VI, ch. 3 (third edition, 1893). 2 Besides Wagner and Nitti, the subject has been treated by Leroy-Beaulieu, Traité, Part II, Bk. I, ch. 6; Bastable, Public Finance, Bk. I, ch. 8; Adams, Science of Finance, Bk. I, ch. 4; Eheberg, Finanzwissenschaft, § 23; Ely, Evolution of Industrial Society, 315-330.

but no one has discussed it more instructively than Professor Nitti,1 of the University of Naples :

As a matter of historical fact it cannot be disputed that the budgets of all countries show a continuous increase. France has been longer under a unified government than other European countries, and it is easier to follow changes in the French budget than in those of other nations. Now the French budget has steadily grown; the ordinary public revenue, stated in millions of francs, has been as follows:

We shall learn later on how far this increase is real, and how far it is merely nominal; for the present we are concerned with the fact that the figures show a noteworthy increase which becomes still more serious after 1789. If we continue our computation based upon the official documents, we shall perceive that the most extraordinary increase occurred in the nineteenth century:

(In millions of francs)

had forms of governFrance, together with

England, by its geographical position, historical conditions, and the character of its inhabitants, has ment very different from those found in a greater degree of local self-government. But in Great Britain the increase of both central and local expenditures has been as

1 F. S. Nitti, Principi di scienza delle finanze, 64-100 (1903). Translated with permission of the author. 2 Without Algerian expenses.