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Home -> Charles Francis Bastable -> Public Finance -> Chapter I

Public Finance - Chapter I

1. Preface

2. Chapter I

3. Chapter I a

4. Chapter II

5. Chapter II a

6. Chapter III

7. Chapter IV

8. Chapter V

9. Chapter VI

10. Chapter VII

11. Chapter VII a

12. Chapter VIII

13. Chapter VIII a

14. Book II Chapter I

15. Chapter II

16. Chapter II a

17. Chapter III

18. Chapter III a

19. Chapter III b

20. Chapter IV

21. Chapter V

22. Book III Chapter I

23. Book III Chapter I a

24. Chapter II

25. Chapter III

26. Chapter III a

27. Chapter III b

28. Chapter IV

29. Chapter V

30. Chapter V a

31. Chapter VI

32. Book IV Chapter I

33. Chapter II

34. Chapter III

35. Chapter IV

36. Chapter V

37. Chapter VI

38. Chapter VI a

39. Book V Chapter I

40. Chapter II

41. Chapter III

42. Chapter IV

43. Chapter IV a

44. Chapter V

45. Chapter Va

46. Chapter VI

47. Chapter VIa

48. Chapter VII

49. Chapter VIIa

50. Chapter VIII

51. Chapter VIIIa

State Economy. General Considerations.

THE question of the nature and amount of public
outlay forms, as we have seen, one of the cardinal branches
of Finance; it has an important influence on the other
departments of the subject, and may be regarded as the
final object of the financial system. In order to estimate
correctly the expenditure of any given society for state or
public purposes, it is desirable to see the general features of
the agency which so applies this part of national wealth.
Most persons are familiar with the conception of a state
economy, and are even prepared to adopt the view prevalent
among students of social science, that Society is an organism
with an independent life, manifesting itself in the exercise
of different functions, one set of which has been specialized
in the regulating organ or the State. Without pressing
this resemblance so far as is sometimes done *, we may
accept the evident fact that the state organization has
certain points of analogy with the arrangements of the
individual, and that in regard to economic action the com-
parison is particularly close. The individual and the State
have each receipts and expenditure. Each endeavours, or
should endeavour, to obtain the greatest result with the
smallest effort ; for each it depends on the relation between
these economic categories, whether wealth is being accumulated or debt incurred ; and for each a careful method
of keeping accounts is needed as a safeguard against errors.
There is, however, a still closer parallel to be found in the
case of those associations formed for the accomplishment of
certain special ends which are usually known as 'juristical
persons ' or corporations. From the ordinary private part-
nership, through the local trading company, the progres-
sion can be traced up to such a body as the East India
Company, that in some respects was sovereign all but in
name. In all these associations the principal financial
phenomena are exhibited in a similar manner, and in a
way that helps to explain the character of state Finance.
The existence of such general resemblances should not,
however, conceal from us the fact that public agencies are
in some essential points distinct from the c economy ' of
the individual or of the association. It is the presence of
these special and peculiar features that renders the exami-
nation of state economy needful in treating of Public

| 2. The first distinctive point in the public or state
economy is its compulsory character. The individual or
private association has to submit to limits other than those
of his or its own will, but so far as legal restraints are con-
cerned, the State stands above them in a position of inde-
pendence. / It is entitled to claim all the services and
property of its subjects for the accomplishment of whatever
aims it prescribes to itself.' When stated in so rigid a
form, the proposition is likely to awaken dissent, and
yet from the strictly legal and administrative point of
view, it is a commonplace since the time of Austin l . The
effectual limits to state action depend, not on any legal or
administrative rules, but on the difficulty of overcoming the
obstacles set by external nature, and the sentiments of its
subjects. Its expenditure and the objects to which it is
directed, are bounded by the productiveness of the national industries, and the facility with which the national wealth
can be obtained through taxation for public use. The
compulsory nature of state action is, then, a trait which
marks it off from the individual or the private society.
JJ> A second point of difference appears in the ends to be
attained through state agencies. They are mainly, as
Roscher remarks 1 , of an immaterial kind : the protection
of the society against aggression, or internal disturbance,
and the promotion of progress in civilization, are hardly
capable of being definitely measured and assigned a precise
value, nor even if they were, could the share of each indi-
vidual be allotted to him in the exact proportion that he
was willing to pay for it. The force of the State must I
prescribe what is to be paid by its subjects as a body, and '
the share that shall be borne by each. As regards expendi-
ture, the absence of a strict standard makes it very hard to
judge the extent to which the public resources should be
applied for the satisfaction of the several wants. This
vagueness is made still more apparent by confining our
attention to a single public need in a given country say,
the amount of protection against foreign and home enemies
required by England at present. How shall we determine
the expenditure that is suitable for this object ?

6 Adequacy in such cases,' says Dr. Sidgwick, * cannot be
defined by a sharp line. Most Englishmen are persuaded
that they at present enjoy very tolerable protection of
person and property against enemies within and without the
country, but it would be difficult to argue that our security
would not be enhanced by more and better-paid judges
and policemen, or more and better-equipped soldiers and
sailors V

The problem, it is evident, can only allow of an approxi-
mate solution, such as the actual circumstances will permit,
and this finds its expression in the sentiment of practical
statesmen, who say with Sir R. Peel, ' In time of peace you
must, if you mean to retrench, incur some risk.'
When the problem is widened so as to include the rela-
tions of the several wants of the public organs of the society,
its difficulty is increased ; the adjustment of the separate
items of outlay and the proportion that the total amount
shall bear to the sum of national revenue, is a task that
tries the abilities of the most skilful administrator.

'In connexion with the direction of public expenditure, a
third feature of public economy comes into prominence ;
one which, it is true, may in some degree be found in private
associations, but in a very restricted form. That is th
existence of special interests opposed to the general welfar
It goes without saying that the individual desires what he
deems to be for his own good, and in most private companies
the shareholders wish for the prosperity of the institution
in which their capital is invested. There are, however,
cases where the holder of a few shares may make a gain
indirectly, through some action of his company, which will
lower its dividends, and being so far c an economic man/
he may vote for and advocate that course. Instances of
the kind are not very common, and the power possessed
by persons in the situation just described is so slight that it
may be neglected. The state organization is differently
placed. ' Sinister interests ' exercise a good deal of control
on its actions. There are large classes whose aim it is to
increase, not to reduce, the public expenses. More par-
ticularly is this true of salaried officials, who readily
advocate increased outlay, but offer a determined opposi-
tion t-j any savings 1 . Military and naval officers are
extremely anxious to insist on the importance of increasing
our land and sea forces in order to secure a better system
of defence. Every additional outlay unfortunately fails to
attain this object, which seems as far off as ever.

Reaction against the evils produced by these tendencies
has, iii England at least, raised up an opposite school of extremists, who are opposed to even the outlay required
for real efficiency. The inherent difficulties of the state
economy are thus intensified by conflicts of interest and
sentiment which, if not peculiar to it, at all events are most
prominently exhibited in its working.

A fourth point of difference between the economy of the
individual and that of the State, is shown in the determi-
nation of the area of work for each. The citizen will
naturally adopt the most profitable employment open to
him, or if it should seem expedient, he will combine several
different occupations. The interest of others is a very
secondary consideration ; his activities, their sphere and
extent, will depend on the ' net advantages ' to be gained.
His investments of capital will be similarly determined.
Within the customary limits of law and morality he will
seek to make his advantages as great as possible. The
field of state action has to be mapped out on different
grounds. The fact that a particular business or part of
social action could be managed by the State without
economic sacrifice, does not prove that it should be handed
over to public agency. It is in general a sound practical
rule that 'the State should not interfere with private enter- j
prise/ and whatever be the theoretical qualifications needed,
it is plain that even its partial truth limits the operations
of the public power. The existence and constant working
of individual and associated ' economies ' (Privatwirth-
sckaften] beside and -under the protection of the great
compulsory economy (Zwangwirthschaft] of the State, is a
point which should never be forgotten.

Fifthly, a private economy differs from that of the State
not only in the limitation of its area of action, but in the
object of its working. It seeks to obtain a profit from its
operations ; in the language of Finance it aims at a ' sur-
plus.' The individual or company who just makes ends
meet at the close of the year 1 is not in a prosperous condition. Something more is required to give a fund for
expenses beyond the necessary minimum in the former
and for dividends in the latter case. The greater the
surplus the more successful is the result deemed to be.
The ideal of state economy is, on the contrary, to establish
a balance between receipts and expenditure. A State
that has very large surpluses is as ill-managed as one with
large deficits 1 . The practical rule is to aim at a slight
excess of receipts over outlay in order to prevent the
chance of a deficit. The position of the State as drawing
its resources from the contributions of the several private
economies under its charge is the reason for this course of

The last of the points of difference usually noted is
rather apparent than real ; it results from the mode adopted
in regulating state Finance, but in fact state and private
economy here fundamentally agree. The private person
must, it is said, regulate his expenditure by his income ;
the State regulates its income by its expenditure. Such is
in form the common mode of determination. The in-
dividual says, ' I can spend so much : ' the finance minister
says, * I have to raise so much.' On looking more care-
fully into the matter, we discover that a certain amount
of expenditure is necessary to support individual life, and
that each person must procure that amount at least
under peril of death. For all classes above the lowest
this minimum of expenditure rises to a higher point and
increased outlay is essential for the obtaining of increased
income 2 . On the other side state expenditure is not
definitely fixed, it has to be determined by various con-
siderations, one of which is the pressure that its discharge
will place on the national resources. We can easily con-
ceive the United States wisely incurring expenditure that
an Indian administration would as wisely avoid Though the several characteristics that we have
been engaged in noticing, mark clearly the distinct and
peculiar aspect of public economy, we have still to con-
stantly bear in mind that the consumption of wealth for
public ends is a part of the consumption of wealth in general.
As a study of human wants must prove the basis of
the economic theory of consumption, so must an examina-
tion of the number and order of state wants be an essential
part of our present inquiry.

The classification most familiar to English readers is
that of J. S. Mill who distinguishes between the * necessary *
and the ' optional ' functions of government l . The value
of this division is, however, much impaired by his sub-
sequent admission that no employment of state agency
can ever be purely optional, as also by the further con-
cessions made in his examination of the limits of laissez
faire. The arrangement suggested by Roscher is more
in analogy with the case of private outlay, viz. that into
(i)jiec5sary j (2) useful, and (3) superfluous or ornamental
expenditure 2 , corresponding to the necessaries, decencies,
and luxuries of individual consumption. It does not
require much acumen to add, that the first head is un-
avoidable, that there is generally a presumption in favour
of the second, while there is always one against the last.
The formation of such general categories as the foregoing
does not help to solve the real difficulties of the matter.
The terms used to describe the groups just mentioned
carry with them an already-formed judgment. By placing
a particular form of expense under the heading of ' neces-
sary ' or of * ornamental ' outlay, we have pronounced an
opinion on its merits or demerits. It still remains to
settle and this is by far the most troublesome part of our
task the several items to be placed under each head.
In order to meet this difficulty we find it necessary to
consider the proper functions of the State, and how far it , is bound to discharge each and all of those functions
under circumstances of financial pressure. One of two pos-
sible lines of inquiry may be adopted. Starting from our
conception of the State, we may seek to determine the
proper sphere of its action, and the amount of its justifi-
able outlay within that sphere, using either general reason-
ing or appeals to specific experience as our guide. Or we
may prefer to trace the development of public tasks and
endeavour by following their direction in the past to form
an estimate of their present position and probable future.
It may even be expedient to combine the two courses of
inquiry, using each as the corroborator or corrective of the
other. Here, as often elsewhere, the historical or inductive
method comes in to support and check the conclusions of

4. The primitive theory of politics, if theory it can be
called; accepted the omnipotence of the State as a leading
principle. The legislator was to fashion the society in the
mould which seemed to him best ; the very idea of indi-
vidual claims had no place in such a doctrine. In its
passage through feudalism European society obtained the
idea of private liberty, though, owing to the imperfect state
organization of the period, the effect that might naturally
be expected was not produced. The centralized mon-
archies which succeeded the mediaeval system claimed the
privilege of regulating individual action in a mode that in
some respects recalled classical antiquity. The religious
and political struggles of the sixteenth and seventeenth
centuries were the result of their undue activity in those
domains of human life. Commerce and industry did not
assert their right to freedom till a later period. State
regulation of industry found its highest expression in the
so-called mercantile system of the seventeenth century, and
particularly in the administration of Colbert 1 . The re-
action against this policy produced the first theory of
state action that had an economic basis the doctrine of laissez faire or as it was entitled by Adam Smith ' the
simple and obvious system of natural liberty.' Its rise at
the particular time was the result of powerful forces. It is
true of humanity that ' it learns truth a word at a time ' so
that, as the problem of the sixteenth century had been
religious liberty, that of the seventeenth political liberty *,
it was reserved for the eighteenth century to assert the
claims of industrial and commercial liberty. The similarity
in general features of these movements is remarkable.
Each was the natural reaction against exaggerated pre-
tensions ; each perhaps attached too much importance
to its special object, but all have profoundly affected
European society for good. In examining this earliest
scientific theory of the State it is most desirable to see
exactly what its doctrines really were. The common
opinion that the advocates of laissez faire were opposed
to any state action is dissipated by a study of their writingS4
They lived in an age of restrictions in which the most pressing
work was to get the 'many hindrances to effectual indus-
trial activity removedi A body of thinkers, who included
Quesnay, Turgot, and Du Pont de Nemours among its mem-
bers, can hardly be said to be indifferent to the needed
functions of the State. The real bearing of the laissez
faire or * natural liberty ' system can be best appreciated
by a consideration of the exposition given of it by Adam
Smith. In a well-known passage of the Wealth of
Nations he has set forth the functions of the ideal State
in a manner that leaves no room for mistake as to his

* According to the system of natural liberty, the sovereign
has only three duties to attend to j three duties of great
importance indeed, but plain and intelligible to common
understandings ; first, the duty of protecting the society
from the violence and invasion of other independent socie-
ties ; secondly, the duty of protecting as far as possible, every
member of the society from the injustice or oppression of every other member of it, or the duty of establish-
ing an exact administration of justice ; and thirdly, the
duty of erecting and maintaining certain public works,
and certain public institutions, which it can never be for
the interest of any individual, or small number of indi-
viduals, to erect and maintain ; because the profit could
never repay the expense to any individual, or small num-
ber of individuals, though it may frequently do much more
than repay it to a great society V

It is only necessary to read this passage in order to see
that the policy favoured by Adam Smith was not a purely
negative one. The State has not merely non-economic
functions ; where private interest is likely to prove insuffi-
cient, it has economic ones also, and those, too, of great
extent and importance, as will appear when considering
his more detailed discussion.

The predominance in the domain of political speculation
of the laissez faire view is a commonplace of the historians
of political economy 2 . We need not repeat the account
already given of the different effect of the Smithian doc-
trine on French and English thought. It will suffice to
see the operation of newer tendencies, and for this purpose
we may pass at once to J. S. Mill. His theory of state
action is in fact a product or rather application of his
utilitarianism, and thus we are led to expect what we do
in fact find, viz. a close resemblance between his practical
proposals and those of Bentham 3 . He declares emphatically

' The admitted functions of government embrace a
much wider field than can easily be included within the
ring fence of any restrictive definition, and that it is
hardly possible to find any ground of justification common
to them all except the comprehensive one of general

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