Crossing Traditions, Combinatorial Progress

The Sax-Mazzola-Wicksell-Lindahl theorization of public goods is itself one of the finest examples for the combination of heterogeneous elements, and cross-fertilization across different strands: it is based on the combination of the optimizing calculus of mar­ginal utility theory and conceptualizations of collective wants in the German tradition from Hermann to Wagner.

The impact of nation-specific traditions is not confined to the prehistory of public economics. It extends well into the twentieth century: while international interac­tion between the various strands of neo-classical economic theory after the rise of marginalism in the late nineteenth century contributed to the dynamism of the new para­digm, the large-scale internationalization of what is now perceived as predominantly Anglo-Saxon public economics took off only well after World War II.

As has been repeatedly pointed out, earlier Anglo-Saxon public economics, notably including Pigou’s (1928, 1932a) comprehensive conceptual framework of public finance and market failure on the basis of Marshallian economics, completely overlooked the continental literature on public goods and political provision mechanisms.

It remains to summarize some of the ways in which heterogeneous traditions were combined in the post-World War II era when globalized modern public economics began to emerge. The foundational texts of modern globalized public economics published in the 1950s and 1960s explicitly reflect the multifarious background of modern public economics. Examples include Baumol (1952), Musgrave (1959), Buchanan and Tullock (1962), Kolm (1964), Mancur Olson (1965), and an essay by Duncan Foley (1967), which is seminal in terms of its formal treatment of equilibrium concepts related to public good provision, associated with the names of Lindahl and Wicksell. Finally, the group of economists associated with the Cowles Commission (many of them European emigres with a good command of mathematics) must be mentioned in the context of paradig­matic changes beyond the Pigovian framework. Three keywords must suffice to indicate the directions and the background of that change: general equilibrium economics, mech­anism design, and social choice theory. All three currents include systematic analyses of mechanisms and choice procedures of the public sector as well as frameworks for less partial analysis compared with Marshallian/Pigovian partial equilibrium.

The texts mentioned above and some parts of the surrounding literature provide inci­sive insights into the history of the subject and its importance in the formative period of modern public economics.

Further interdisciplinary perspectives including legal, political, behavioural, and nor­mative theory are part of this picture. The discussions in the wake of the Coase theorem (1960) enhanced developments emphasizing (1) transaction costs as a crucial category defining the role of public sector institutions in a market society and/or (2) well-defined private property rights as the essential starting point for market exchange, thereby trig­gering modes of governance that aim at curing market failures preferably not by means of public institutions, but by making the system of private property rights ever more perfect. Another paradigm gaining ground in the 1960s puts agency in the public sector centre stage, emphasizing systematic distortions of public decision making and coining the notion of government failure: the Virginia School of Public Choice with its neo- Hobbesian and contractarian thrust popularized models of politics “as if it were market exchange”. The seminal work by Buchanan and Tullock (1962) set a specific agenda and provided a foundational frame for modelling the public sector.

As the practical perspective of public economics hinges upon a broadly acceptable and consistently applicable metric of social preference in terms of which public policies and institutions are evaluated, the combination of developments in economics and ethics are still on the agenda, as is illustrated by the combination of optimal taxation theory with the Rawlsian difference principle (which implies that reforms are seen as desirable if and only if they benefit the worst off) or the recent debate on non-utility information, freedoms, rights, capabilities, and issues of responsibility (Fleurbaey 2008). The basic architecture of the public sector - its goals, purposes, and principles - is a genuinely interdisciplinary problem, involving political philosophy as well as economics. At the applied and explanatory levels, there are important interdisciplinary interfaces includ­ing fiscal sociology and fiscal psychology. To summarize, interdisciplinary perspectives along with “national traditions” are setting the stage for combinatorial progress.

The importance of conceptual and methodological foundations for key issues in public economics is also highlighted by the conception of merit wants (or merit goods), introduced by Musgrave (for example, 1959) for areas of public activity where consumer sovereignty is not useful as an assumption. More recently, advances in behavioural eco­nomics re-invigorate foundational discussions related to merit wants, even though this terminology is rarely used in that literature (see Shafir 2013). Further examples illustrat­ing the importance of conceptual issues and the interdisciplinary dimension include the economics of fiscal federalism and of (semi-)public institutions beyond the nation state, from common property institutions (famously brought to the fore by political scientist Elinor Ostrom 1990, largely arguing in a semi-public good framework) to issues of global governance.

All that should not come as a surprise. The core issues of public finance as envis­aged by Schumpeter cannot be dealt with by merely applying methods and models provided by general economic theory. Those issues (1) sometimes require autonomous conceptual developments, as exemplified by concepts such as “public goods” or “merit wants”, (2) sometimes entail an immediate relationship to foundational issues regarding the problems of a science aiming at both “light and fruit”, and (3) sometimes suggest a specifically straightforward quest for interaction with other disciplines. This notably includes positive political theory (public choice can be seen as a specific strand of it) and fiscal sociology emphatically endorsed by eminent economists such as Pareto and Schumpeter. In a nutshell, all this crops up in the early version of the famous displace­ment effect hypothesis suggested by Peacock and Wiseman, stressing the importance of history, environment and “attitudes” (that are more commonly theorized in political science and sociology). Straightforward interdisciplinary horizons also include political philosophy: think of issues such as tax justice. Or think of “property rights” that gained prominence in the wake of Coase (1960) and developments in “law and economics”, but have a long tradition including nineteenth-century strands of public economics influenced by natural law thought.