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Concerning the Nature of Public Expenditures


The purpose of a study of public expenditures is to dis cover the meaning of expenditures through the agency of the State for the life of the people, and in this manner to arrive at those general principles which control governmental appro priations. Some of the considerations which present them selves in this connection have been recognised by writers upon finance in their treatment of the just limits of taxation, but there are many reasons why the class of questions which lie in controversy may be more advantageously approached from the side of appropriations than from that of taxation.

The general principles disclosed by a study of public ex penditures cannot be formulated into definite rules of adminis tration; this, however, is no reason for regarding them as un important, since they will prove to be of assistance in defining the several points of view from which appropriations may be considered, and in this manner lead to an adjustment of the nation's finances in harmony with the political aims and social theories accepted by a people. This remark seems neces sary in order to curb somewhat the expectation of the student that the conclusions of this investigation into public expendi tures will be of a very definite or explicit character. For the purpose of guarding against an ill-advised use of public moneys, whether in the form of extravagant appropriations or of equally extravagant parsimony, reliance must be placed upon what has been termed the political remedies for public abuses, and, as has been already remarked, it is essential to the efficient working of this remedy that the people be in formed upon all matters pertaining to the use of public moneys. The analysis that follows may be regarded as a contribution to the formation of an efficient public opinion.

b. The Point of View from which Public Expenditures should be Regarded. The question which arises at the threshold of this investigation pertains to the point of view from which public expenditures are to be regarded. Shall the experi ence of the individual in the expenditure of his private income be accepted as pertinent in considering the fiscal operations of the State, or does the nature of the State differ so radically from the nature of the individual that considerations which may pro perly influence the one are necessarily foreign to the interests of the other? Upon this point there does not seem to exist any harmony of opinion among writers on finance. The tendency at the present time is to emphasize the differences which exist between individuals and the State, and to assert that the ex perience of the individual is of little use when the broader questions of public economy are under consideration. While agreeing substantially with this point of view, so far at least as to recognize that much the larger number of practical ques tions in public expenditure rest for their proper understanding upon the fact that the State represents a collective and per manent rather than a personal and terminable interest, it is readily admitted that the arguments which naturally spring from it may be applied with such rigour as to lead to de cidedly erroneous results. Although the State in its fiscal operations must follow rules imposed by its own nature, this should not blind one to the fact that the government does not exist in and for itself. Questions of public expendi ture are not to be judged independently, but rather in the light of the relation which public activity holds to private activity. So important is this consideration for a proper un derstanding of the subject that we may pause for its more perfect elucidation.

(i) The Individual Point of View. The most common as well as the most crude form of presenting the thought that the financier has little or nothing to learn from a study of domes tic expenditures is found in the statement that the individual adjusts expenditures to income, while the State adjusts in come to expenditures. In a sense this is true, but the im pression which it leaves is hardly tenable. It is true that the State, being a corporate personality, has no pecuniary needs except such as are required for the performance of its delegated functions. It is true also that in order to perform the services assigned the government must be placed in pos session of a definite amount of income. But it must not be forgotten that the general income of the people, from which the income of the State in large measure arises, should as a matter of right and does as a matter of fact exert a decided influence upon the extent and character of the functions which the State may undertake. The government of a wealthy peo ple may very properly enter upon services calling for in creased revenue which would not be defensible in the case of a poorer people. It thus appears that for public expenditure as well as for private expenditure there does lie back of the question of the amount that may be economically assigned the conception of a fund of wealth out of which payment must be made. Public appropriations are limited by the relation which they hold to the amount of wealth at the disposal of the people, or, to express this in another way, to the productive capacity of a nation's industry, including public as well as private industry. It is the social income rather than the governmental necessities which must be accepted as a start ing-point for a theory of public expenditures.

This general thought is expressed in another way, and much more profoundly, by Stein. After some general ob servations of the relation of public finance to public economy, he proceeds to criticise the statement that the ruling con sideration in the Science of Finance is that the fiscal de mands of the Government should be complied with without question; or, to employ the author's German phraseology, that the ruling principle in the Science of Finance is the covering of the wants of the State. This assertion, he affirms, is not true. " The ruling principle is rather that, in covering the needs of the State, a due proportion be maintained as compared with the proportionate cover ing of those needs not represented by the State. Public economy (Staatshaushalt) is a branch of social economy,---one of the most important, it is true, but nevertheless a branch. There is no sovereign principle in the Science of Finance separate from the general principles of Political Economy and Social Science respecting the proportionate covering of go vernmental and non-governmental, collective and individual, necessities. The financier who appreciates only public needs will undoubtedly declare them to be sovereign. In this he proceeds no less from the atomic and anti-social point of view than the burgher who, under all conditions, aims to limit the State to the crumbs left over from the domestic budget. Con sidered by itself, the starvation of private or non-govern mental needs through a gluttonous public economy is as strictly forbidden as the spoliation and disintegration of the State through a parsimonious egotism. . . . Neither public nor private economy presents, of itself, a final end. To pam per the one and starve the other, to over-nourish the one and stunt the other, appears, upon its face, without warrant, since an effective State and a strong people are alike essential elements in national life. Both public and private needs are integral parts of a common necessity, and the one as well as the other must finally be determined according to their rela tive importance for the maintenance and development of so ciety as a whole. . . . To provide for public necessities as well as for private wants, in the ratio of their relative economic importance, is the manifest, self-apparent demand which the theory of finance that holds itself within the circle of economic vision asserts as its own, and which may be sucessfully opposed to the parsimonious citizens as well as to the spendthrift State." From the reasoning of the above paragraph, quoted freely from Stein's great work on Finance, and this treatise grants it most hearty approval, it appears that the point of view from which public expenditures are to be regarded is neither that of the individual nor of the State, but rather that of the col lective life of the community. The starting-point is the fund of wealth at the disposal of the nation; the objective point is the highest development of both individual and na tional life; the problem is to so balance the assignment of expenditures between the many various forms of consumption that the life of the people shall be nourished and the organs of the nation developed, at the point where nourishment and development are most needed. The ideal is that of a vigor ous, well-rounded, uniformly developed social organism, and, provided the student can image to himself the unity of social interests, a decided advantage may be gained by applying to public expenditures the experience of the individual with a limited income.

It thus appears that so long as discussion is confined to the fundamental conditions which determine the aggregate of money rightfully placed at the disposal of government, more assistance may be derived from a consideration of the points in which private and public expenditures are alike than of the points in which they differ. With regard also to the balancing of the amount to be expended between the various lines of service entered upon by the State, the experience gained in the management of the domestic budget may be of decided advantage in the consideration of public finances. As a larger percentage of the income of the poor man is ex pended on the necessaries of life than on the comforts or luxu ries, so a poor State will be called upon to make larger rela tive expenditures for the primary governmental functions than for those which come at a later stage of its development. The same considerations, therefore, which lead the economist to include an analysis and classification of private wants in his study of the theory of consumption require the financier to assign an important place to the analysis and classification of the activities of the State in his theory of public expendi tures. It is not too much to say that the rule adopted for determining public expenditures is the financial expression of the sociologic theory of the development of governmental functions.

(2) The Collective Point of View. One cannot proceed very far, however, in the study of the financial side of public administration without observing certain marked differences between public and private financiering. Thus, in the first place, it may be noted that the individual or corporation whose primary aim is to reap a profit from an investment will be debarred from many lines of expenditure which a govern ment may properly enter upon. Two reasons may be men tioned in explanation of this fact.

First. It is necessary for an individual to consider an in vestment as more or less temporary in character. His ex pectation of life is readily calculated, and on this account he is debarred from contemplating investments that run in per petuity. The State, on the other hand, as has already been pointed out, enjoys the expectation of perpetual existence, and consequently is at liberty to judge of an investment from this point of view. In the matter of education, for example, the State may with propriety consider the ultimate and final effect of expenditures, not confining itself to the immediate demands for instruction measured by what the people would be willing to pay for if education were a private affair. To say nothing of the necessity of general intelligence for the realization of popular government, or because of its bearing upon the character of society, it must be regarded as a sound investment for the State to undertake the maintenance of the most advanced education, even going so far as to provide sup port for scientific research of all sorts and for art education; for it is certain that every true discovery and every talent developed will sooner or later find their place in the economy of industry and react upon the life and aims of the people. Such a view is, from the nature of the case, foreign to the in dividual who, conscious that life is fleeting, is constrained to judge of every investment on the basis of proximate rather than ultimate results.

Second. An individual is under the necessity of providing for a quick return upon his investment in order that he may maintain the credit of the enterprise in which he is engaged; while the State, whose credit does not rest entirely upon the fact that money appropriated comes to be the source of defi nite income, may be rightly influenced by considerations of ultimate rather than immediate gain. It cannot be expected, for example, that an individual will develop a system of forestry, since the investment must continue for at least thirty years before it begins to return a profit, and this is a longer period of waiting than an individual cares to contemplate. It is true that a certain amount of value would accrue each year on account of the growth of the forest, but since the sys tem of bank discounts has not yet sufficiently developed to enable this increment to be transformed easily into an annual income, forestry is not attractive to the ordinary investor. The State, however, to whom thirty years is but a period in thought, would be justified in investing large sums in forestry, provided the growing of trees is itself of public advantage and the ultimate outcome of the investment reasonably sure. Its credit during the period in which the investment is unproduc tive rests upon its power of securing revenue by taxes, and the government is, consequently, able to secure capital for the establishment of forestry at the lowest possible rate of interest. Many other cases might be cited to make clear the differences which exist between public and private investments on ac count of the fact that the State, unlike the individual, enjoys a perpetual lease of life. These two, however, education and

forestry, are adequate to make clear the principle laid down.

It should be noted in the second place, as indicating a further difference between public and private expenditures, that a different interpretation is given to the phrase " profit able investment " by the individual and by the State. In the judgment of the individual a profitable investment is one that gives rise to money profit. The income account must show a surplus. The stocks must secure dividends, the bonds bear interest, and both dividends and interest must arise from the earnings of the business created by the investment. The State, on the other hand, regards an expenditure as produc tive which results in the creation of those social, political, or industrial conditions essential to the efficiency of private en terprise. Although the profit arising from such an expendi ture accrues directly to the individual, the expenditure is justi fied if the industries of the country are thereby raised to a higher grade of technic, or if labour is rendered more pro .ductive in consequence. The State exists for its citizens, and its chief service is to provide conditions under which the activities of citizens may prosper. But the State receives also pecuniary advantages from such investments, for, al though the increment of profit appears in the first instance upon the income account of private industries, the Govern ment enjoys, as the result of its investment, a larger source of revenue through taxes than would otherwise be the case.

There are many illustrations of expenditures which, while unproductive when regarded from the point of view of the in dividual, come to be in the highest degree productive when the fact that the State represents the collective interests of society is held in mind. All general improvements, for ex ample, like the dredging of streams for navigation, the build ing of wharves, docks, and the like, the encouragement of great public works which would not otherwise be undertaken, may be for the State a most profitable investment of capital. All expenditures necessary to create and maintain a condition of safety for persons and for property are included under this head. Thus, Italy found it necessary, a few years ago, to make unusual expenditures in order to rid the country of law lessness and violence; but this has been repaid many times to the government, and a hundredfold to the citizens of Italy, in the expansion of the new industries which the unusual security called into existence.

Our general conclusion, then, respecting the point of view from which expenditures are to be considered is the following: Since the State is the people organized in their collective capacity, and consequently the wants of the State are in reality the wants of the people whose servant the State is, a very large number of the questions respecting public expenditures are found to be, upon final analysis, questions which have to do with the collective expenditures of individuals, and on this account should be judged in the same way as an individual judges of his personal expenditures; but, on the other hand, in view of the fact that the State is an organism of perpetual life, that it is imposed with responsibilities which extend be yond the interests of individuals or classes, and, also, that it is clothed with unusual powers for carrying through the duties imposed upon it, there are, in addition to the considera tions respecting expenditure which it holds in common with domestic economy, other considerations which arise on ac count of its peculiar functions and public character. The point of view, therefore, from which public expenditures are to be regarded changes with the nature of the questions under consideration; and one of the chief difficulties in the solution of fiscal problems of this class is found in the necessity of bear ing constantly in mind these two avenues of approach.

8. The Appropriate Method of Investigation. Having decided upon the point of view from which public expendi tures are to be regarded, it seems proper to inquire next respecting the most appropriate method of investigation. Ordinarily one is willing to rest the approval of his method upon the success of his analysis, and this undoubtedly must be the final test. In the present instance, however, the conditions under which the investigation is undertaken, as well as the character of the problem, are somewhat peculiar, and an explanation of the method adopted will throw added light upon the nature of the question in hand.

It is not designed, in our effort to arrive at the social law of public expenditures, to make any considerable use of statis tics, either for argument or illustration. On the contrary, our chief reliance will be placed upon an analysis of social needs and upon an investigation into the order followed in the de velopment of State functions. This may at first sight appear strange, and it is somewhat unusual. The larger number of writers who have seriously and intelligently considered the problem of public expenditures proceed, after a cursory statement of public functions, by means of statistical inquiry. They succeed, doubtless, in pointing out some of the current tendencies in public expenditures; but they fail to place those tendencies in their proper setting or to deduce from the factor collated any satisfactory statement of the law of social de velopment as reflected in public accounts. An investigation which begins with figures is likely to end with figures.

Speaking more definitely, there are two reasons why, in the present condition of fiscal science, an investigation into public expenditures must take upon itself the form of a theo retical investigation. The first of these reasons is a very practical one. The statistics of public expenditures are un satisfactory when regarded as material for synthetical analysis. This is not due to paucity of material, but to the fact that governments keep their accounts in different ways, and that the phrases employed in public accounting do not always cover the same items in expenditure. It is natural that this should be the case. Public accounts are necessarily organ ized in conformity to the administrative systems of the various states; and these in their turn are adjusted to the several theories of political organization, as also to the governmental policies which for the time being control administration. This marked divergence in the accounting systems of the several states places an estoppel upon anything like a com parative study of public expenditures beyond the most rudi mentary and broadly conceived classifications. Even a ser vice of such long standing as the " military service " does not the same in all states when translated into the language of expenditures. Should one undertake a study of the corn parative cost of judiciary systems, he would find the problem .complicated by the marked divergence in the matter of fees and .by the different ways in which fees are accounted for. In some cases a fee is a net return; in others it is a gross return. In some cases no account whatever is made of court fees to the public treasury. The true cost of the judiciary in the United States, for example, cannot be ascertained, to say nothing of comparing it with the corresponding costs in other states, or of discovering a tendency with respect to this item of expendi ture by a study of judiciary accounts from year to year.

The chief difficulty, however, in a comparative study .of public expenditures is not found in the divergence of .accounting systems followed by those governments which are imposed with national or sovereign functions. We might, perhaps, get along with the federal, or imperial, or ministerial accounts of the several states; that is to say, with expenditures for national or sovereign purposes; a more -serious embarrassment arises when to these accounts there are added the accounts of the subordinate or local govern ments. What lesson, for example, can be learned from a comparative study of the expenditures of the French Repub lic and the Republic of the United States when it is remem bered that sixty per cent. of the aggregate of annual expendi tures on the part of government in the latter case is through the medium of local governments as against thirty per cent in the case of the French Republic? Duplications also must be guarded against by him who undertakes a comparative statis tical study of public expenditures. In this country, for ex ample, the accounts of each government are separate and distinct, but in Germany there is maintained a debit and credit account as between the Imperial administration and the several States that together make up the Empire. A portion of the expenditures charged to local government in France, also, goes, not uncommonly, to cover deficits in national expendi tures.

Not only must care be taken to avoid duplication in arriv ing at aggregate public expenditures, but errors are likely to arise by failure to recognise the incidental ways in which pay ment is made for public service. What light, for example, can be thrown on pension payments by comparing the pen sion accounts in Germany with the corresponding accounts in the United States? The police force in German cities is made up in part from the ranks of retired soldiers, pro vision being made for their employment as a partial substi tute for the pension. In France, also, the tobacco-shops are not uncommonly tended by public pensioners. In the United States, on the other hand, the pension is a cash transaction.

Such are a few of the many illustrations that might be given of the difficulties encountered by one who approaches the question of expenditures through a comparative study of financial statements. A comparative study of the cost of the various branches of public service as recorded in the ac counts of the leading nations is a most difficult task; indeed, it is a task of such proportions that years of patient investiga tion would be required for its successful accomplishment. To undertake a statistical investigation of this sort in an elemen tary treatise upon the Science of Finance would distort the proper proportion between the several parts of the treatise. This is the first and practical reason why, in the present treatise, no extended use is made of facts and figures in in vestigating public expenditures.

The second reason why reliance is placed upon analysis rather than upon the tabulation of statistical data is found in the present condition of the investigation itself. The service rendered by an adequate working hypothesis in the develop- went of any science is familiar to all students, and the reason now urged for considering the theory of public expenditures in advance of the formal study of the statistics of expenditures is found in the fact that the former is essential for the success ful prosecution of the latter. The sociologic significance of appropriations for the support of government presents a pro blem that has never received adequate attention from econo mists and financiers, and it is necessary, in view of the present condition of the Science of Finance upon this point, to formu late an hypothesis respecting the movements in governmental expenditures before an intelligent investigation into public accounts can be undertaken; and the author ventures to express a hope that a consistent theory of public expenditures having been set forth as a general theory of social evolution, it will prove to be of sufficient interest to claim the attention of many students, and that at their hands it will be expanded and modified so as to become eventually an established generalization in the science of which it is a part.

It is not intended to leave the impression, by this apology for theoretical rather than statistical analysis, that the general conclusions arrived at are of use only as a working hypothesis for statistical investigation. They have a value of their own, and claim confidence even before they are proven to be true in all their parts. The elements common to civilized nations are those historic factors and forces that make modern life what it is. And it is these factors and forces, rather than the administrative form assumed by them and which secures for them a definite statistical expression, which determine public expenditures. A theory of public expenditures must conse quently be built upon an intelligent appreciation of social forces and an adequate perception of social tendencies—an observation which justifies the procedure adopted by this treatise of building up a theory of public expenditures from those known and manifest features common to the social and political organization of all peoples whose government con forms to the constitutional type.

From this chapter we have learned the point of view from which public expenditure should be regarded and the method by which the investigation is to be undertaken. The chapter immediately following concerns itself with an analysis of those conditions and forces which determine the aggregate of the funds properly placed at the disposal of government.

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