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

Public Finance - Chapter VI

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

Expenditure On Industry And Commerce.
Constitutional And Diplomatic Expenditure.

1. EXPENDITURE for directly economic objects has'
often occupied a large place in public outlay. To foster
industry and commerce was long regarded as a leading
function of the State. In fact, it is to this conception that
we owe the origin of Finance and Political Economy l .
The great object of the Cameralwisscnschaft of the i8th
century was to give instruction as to the right direction of
national resources, and most of the earlier economic writers
of France and England held that it was very important to
encourage economic enterprise.

The complete revolution wrought by the combined
labours of the Physiocrats and Adam Smith exonerated
the State from this difficult, indeed impossible, task ; but
it is a vulgar error to suppose that the advocates of in-
dustrial liberty did not recognise certain definite duties of
the State in economic matters. Apart from the exaggera-
tions inevitable in so violent a change of opinion, we see
that the sound sense of Adam Smith and Turgot fully
understood that in several directions the Government could
beneficially aid the efforts of producers 2 . The necessities
of practice have made it incumbent on States to undertake
a series of duties intended for the advantage of industry
and commerce.
There is, however, a distinction to be made at the outset.
In one sense all state expenditure may be said to be for
the benefit of industry. The armies and navies of modern
States are productive of the security needed for the protec-
tion of industrial effort. The administration of justice and
the maintenance of an efficient police have the same effect.
A great deal of administrative supervision has, or is sup-
posed to have, considerable influence in increasing produc-
tion. One of the strongest pleas for aid to education is
based on its economic value, and writers of the School of
Hume would regard the inculcation of honesty and frugality
as the most useful function of the clergy. So close is the
consensus of social phenomena that there is no part of
public expenditure that may not aid the progress of econo-
mic production.

2. Besides this more general action of the State on
industry, there is a special one. Portions of the public
revenue are devoted to objects either solely or principally
economic ; and it is the employment of this part that we
have now to consider. It again may be divided into
expenditure on industry and commerce generally, and that
on special trades or employments. Of the former we may
notice the following as the most usual :

(1) The cost of maintaining a monetary system, as in the
case of the English gold coinage.

(2) The establishment and preservation of a system of
weights and measures.

(3) The enactment (as in some countries) of a commercial
code with possibly a special tribunal or tribunals.

(4) Agencies for facilitating communication and transport,
viz. post offices, telegraphic communication, roads, railways,
and canals. In the same group may be included light-
houses, surveys of coasts or new countries.

(5) Consular and diplomatic establishments chiefly for
the benefit of foreign trade, but with an indirect action on
home industry.

The slightest glance at the above list at once suggests a
criticism. Some of the agencies included will, under proper
management, yield a profit to the State, and therefore more
fitly belong to the domain of state industry. The English
Post Office and the Prussian railways earn large net
revenues for the States to which they belong, and the
currency system may, by the imposition of a seigniorage
be made to cover its cost, and probably leave a surplus.
The answer to this difficulty is not hard to find. Granting
the truth of the assertion on which it rests, the fact remains
that in many cases the State has to incur cost for the
objects mentioned. The gains of post offices and railways
will be noticed in the proper place l . There are, however,
some that have a recurring deficit 2 , which has to be met
out of the funds derived from other sources. We get but
one more illustration of the difficulty of drawing ' hard and
fast lines ' in social inquiry. What is in one country a
cause of expenditure, is in another a source of gain as a state
industry, while in a third it yields revenue through taxation.

3. State aid to special branches of industry presents
much greater opening for objections ; but here, too, suitable
cases present themselves. Among these are :

(i) The introduction of new and profitable industries.
In modern times this part of state action has been usually
carried out by means of protective duties. The so-called
' infant industry ' argument is one of the best of the protec-
tionist pleas, and its theoretic force has been recognised by
most economists, but the question is really a wider one.
The problem before the statesman amounts to this : How
far is it expedient to incur a present loss for a future gain ?
And on the financial side the balance of the different public
wants, as also the percentage of the national income ab-
sorbed by the State, are elements to be taken into account
in the actual solution. In its simplest form encouragement
is given by means of bounties on production or premiums
for the establishment of new industries. A protective duty
may be regarded as a tax on the consumption of the pro-
tected article with an equivalent bounty to the home pro-
ducer ; it is, therefore, in reality more complicated than a
simple bounty. This aspect of the matter may be reserved
for a later stage of our inquiry 1 ; but here we have to note
the difficulty of escaping corruption and favouritism in the
application of a policy of encouragement. In an un-
developed industrial system such aids, if applied with
wisdom, may afford a beneficial stimulus, as was probably
the case with some of the measures of mediaeval sovereigns.
They, in some degree, occupy in economic policy the place
that despotic government holds in political evolution, but
appear quite unfitted for a progressive system of industry 2 .
The direct support of special branches of production from
the public revenue is sure to be a diminishing item of charge
in modern countries.

(2) The promotion of inventions, by the inducement of
state premiums, or even the encouragement of a higher
standard of excellence in production by the same means,
has been regarded without disapproval by Adam Smith.
Their effect is not to disturb the natural distribution of
employments ; besides, as he remarks, their cost is in-
significant 3 . A good patent law will, however, be the most
effectual way of facilitating invention 4 .

(3) The periodical holding of exhibitions of industrial
products under state auspices, and in fact at the state's
expense, is now an established custom, though it is prob-
able that the need of agencies of the kind is at present less
than it formerly was.

1 Bk. iv. ch. 7.

2 The fact that the Anglo-Indian government has adopted a policy of non-
intervention so far as industry is directly concerned is the more remarkable,
since, if ever there were a case where rulers might be supposed to be fitted by
superior wisdom and insight to direct their subjects, this would be one.
(4) Model institutions, such as agricultural schools, &c.
are also frequently formed.

(5) State subvention of railways and means of transport
for the improvement of the poorer districts of a country.

(6) Outlay on the administration of forests and drainage
is, in many countries, an important part of the economic
expenditure of the State. The former seems more properly
to belong to the subject of the * public domain ' as it usually
gives a surplus.

(7) The support of credit card institutions and assistance by
loans is also more fittingly discussed in a later part of our

I - inquiry.

\\ 4. Finally, we should remark that the State may find
itself called on to act in relation to any economic interest
of the society that it regulates. There is no strict and
universally binding rule that can mark off the area of its
action. The protest of laissez faire was directed against the
policy of continual interference. The intervention of the
public power should, however, be only admitted on clear
and definite proof of its advantage. The best safeguard
against excessive state action is to be found in insistence
on a careful calculation of all the elements entering into
each case, and more especially of the financial relations that
it necessitates.

The actual figures of modern budgets do not indicate
much danger from the purely economic action of the State.
Some exceptional cases occur where the zeal of politicians
has led them to develop the system of public works beyond
legitimate limits. Thus the several States of the American
Union at one time engaged in a reckless policy of internal
improvements that culminated in the repudiations of
1 840-50 *. The plans of the French Minister, De Freycinet,
for railway extension were also arranged on too extensive
a scale, as their subsequent abandonment proved. The
public works of India have furnished a ground for bitter
controversy ; but the opponents of the policy have not
made out their case, though under the special circumstances
of the country greater moderation might have been advis-
able 1 .

' 5. We have kept one of the most essential parts of
state expenditure for the last that incurred for the main-
tenance of the central organs of the State itself. No matter
what be the form of government, the head of the State,
' the Sovereign ' in Adam Smith's phraseology, must be
supported. Round this personal head are grouped the
various branches of the executive, and in some relation to
it the legislative body also exists. In a so-called constitu-
tional or ' limited ' monarchy the prevalent European
form of this century the head of the State may possess a
private income, but is far more likely to be paid out of the
Civil List. The royal or crown lands are generally absorbed
in the public domain, and in any case they must in strict-
ness be regarded as a portion of public property set apart
from the general funds for a specific public object. This
application of public revenue is necessary, though it often
excites an amount of popular irritation that might be more
advantageously exercised in other directions 2 . The head
of the State is frequently called on to discharge ornamental
functions requiring a good deal of expenditure, and has,
moreover, to hold a higher position than the wealthiest of
his subjects.

6. A republican State is partly relieved from this ex-
pense ; its head, usually elected for a short, term, receives
the salary of a minister in monarchical States. There is,
however, a counterbalancing cost in the expenditure on the
numerous members of the corporate sovereign 3 . Nearly
all democratic societies approve of payment to legislators
in order to reduce the chances against poor men being
elected. The inevitable result is an increase in the cost of
the legislative body, and when the same principle is applied
to subordinate legislatures, a further increase has to be
faced. The belief that legislative efficiency is improved
by reward does not appear well-founded so far as Finance
is concerned. We must remember, too, that historical
conditions, and particularly the way in which wealth is
distributed, have considerable effect in determining the
wisest course. Thus the English colonies that possess
responsible government are perhaps justified in depart-
ing from the English method of unpaid legislators. At
the same time, there is an unquestionable advantage in the
development of public spirit produced by the English
system. One point is certain, viz. that the least satisfactory
method of all is the granting of small payments which do
not attract the best men, while they discourage those who
would serve without any salary. The danger of corruption
and jobbing is also brought to its highest in the case of ill-
paid legislators who are inclined to supplement their official
incomes by less honourable 'means.

The expenditure on diplomatic agents and ambassadors
may perhaps be best placed under the present head. Such
outlay is hard to classify. It might be plausibly regarded
as incurred for the sake of securing peace, and so be added
to the cost of the military and naval services. Or again, it
might be regarded as expenditure for economic objects, viz.
the promotion of trade, as the consular service undoubtedly
is. But on the whole the diplomatic staff is really repre-
sentative of the sovereign, and is entitled to its present

7. In nearly every civilized country the charge of in-
terest on credit card debt has to be considered. We shall have to
system would remark that British peers and M.P.'s obtain indirect rewards, that
are still less to the advantage of their country.
examine fully the theory of public credit card debt, and
therefore need only mention it here as an item of outlay.

When dealing with the mechanism of the financial
system, we shall have to distinguish carefully between
gross and net revenue, the former being the total receipts,
the latter the net result deducting the cost of collection
and the expenses necessary for obtaining the required
resources. Here we have simply to note these charges as
one of the parts of public expenditure, and to see how large
an item they are. In England the Customs, the Inland
Revenue, and the Post Office are mainly earning depart-
ments. The mere mention of these establishments will
suggest the remarkable differences in the relation of revenue
to cost of collecting or earning it. Savings in this respect
are as important as those made in connexion with outlay
on other state functions, but any reduction of cost which
impairs the efficiency of the fiscal service is as imprudent
as over-retrenchment in other directions.
In 1806 a gross revenue of 58,255,000 cost 2,797,000 to collect or 4-8 per
cent., while in 1826 the charge for collecting 54,840,000 was 4,030,000,
i.e. 7.3 per cent.

In France the total expense of collection for the last ten years has averaged
about 13,000,000, but of this amount 5,000,000 should be charged to the
postal and telegraphic service and nearly 3,000,000 to the expenses of the
tobacco monopoly, leaving a balance of 5,000,000 for the cost of collecting
the direct and indirect taxes l .
Having concluded our brief survey of the forms of state
expenditure, we have now to summarize the results, as also
to develope some points that could not be properly treated
until the several heads of the public services had been duly
noticed. There is, however, one topic that must be first
discussed, viz. the distribution of state outlay between the
v\ central and local powers.

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