Diversity of topics

The heterogeneity of scholarly backgrounds reflected in the diversity of contributors to public economics indicates the intricacies of its subject matter. In so far as it studies the purposes and mechanisms of the public sector in a market economy, it has to deal with the logic, the virtues, the limits and failures of the market.

Given those multifarious dimensions, a contribution stressing characteristic chal­lenges posed by public economics as a subject of the history of economic thought cannot aim at a sketch of all currents and topics that are somehow important. Consider the eco­nomics of taxation: concern with fiscal revenues is probably one of the oldest branches of positive economics. Theorists well before Adam Smith saw that in the absence of some understanding of market interdependences no systematic answer to crucial questions regarding taxation is possible: think, for instance, of tax incidence. The same applies to what is now called the “excess burden” of taxation, but also to socially desirable incen­tive effects captured by the concept of Pigovian taxes. Tax progression and the choice of tax base may be regarded as more narrowly technical issues, even though various definitions of income (as tax base) again presuppose assumptions which are by no means innocuous from the point of view of economic analysis. Arguments from social philosophy and ethics are invoked in the context of normative considerations regarding justifiability of patterns of taxation, such as horizontal equity, the leave-them-as-you- find-them rule (taxation should not change the relative wealth positions of households), ability-to-pay, or the benefit principle.

Each of these aspects, issues, or sub-subfields has a history of its own, sometimes com­mencing with thinkers such as Hobbes (for example, in the case of consumption taxes) or even earlier. The same applies to the expenditure side of the public budget and the func­tional core of governmental activity: thinkers such as Hobbes and Hume are renowned for emblematic statements and thought experiments regarding conditions where private coordination fails and life is solitary, poor, nasty, brutish, and short. Collective wants, public goods, social insurance, and the evaluation of public projects including cost­benefit analysis are further examples indicating the number and scope of conceptual histories covering the expenditure side. The list could be continued with public choice, or planning and budgeting. Mechanism design connotes profound issues regarding the way in which informational decentralization and incentive problems should be dealt with in the public sector.

Normative frameworks used in public economics include utilitarianism, contractual- ism and the natural law heritage. Studying the way in which those frameworks may be applied to typical problems of the public sector requires specific conceptualizations and is a demanding endeavour of its own, pursued by welfare economics: pertinent strands include Pigovian welfare economics, new welfare economics, social choice theory and subsequent developments such as welfare economics of the second-best and new approaches in normative economics integrating distributive criteria and non-utility information (such as, freedom, rights, capabilities and functionings).

Finally, there are some basic aspects regarding research methods and theoretical architecture: the question partial versus less partial (“general equilibrium”) analysis is relevant for most of the above-mentioned issues.

However, one might try to integrate all those sub-currents and issues within a grandi­ose Whig story of progress in public economics. Accordingly, progress occurs as every­thing relevant known by earlier generations is also known by more recent generations of theorists - and something more. Here is a shorthand version of a Whig history of public economics as cumulative progress of what has become a tool-based science: the early and rude state of public finance was characterized by (1) a diversity of national strands and (2) a poorly systematized mixture of fragmentary economic insights, cooking recipes, rules of public accounting, and economic “principles” and “laws”, supplemented by philosophical speculation regarding the purpose of government or the nature of the state. The more theoretical ingredients included the arguments supporting Wagner’s law of the increasing relative importance of the public sector, Mill’s anticipation of market failure theory, Ricardo’s work on taxation and public debt, and the four principles of taxation as summarized by Smith (1776 V.ii.b):

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible... in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.

Indeed, Smith anticipated a broad range of concepts, from ability-to-pay and benefit principles to excess burden. In the twentieth century, public economics was more and more integrated into neoclassical economics, becoming a part of a globalized and cosmo­politan science based on a rigorously individualist theory of the public sector supported by formal modelling and quantitative research. National traditions became obsolete. Issues such as public spending or optimal taxation (once addressed by sets of principles, ad-hoc recipes, and philosophical speculations regarding the purpose of government) are now systematically integrated in a welfare-theoretic framework. The models of modern economics are the basis for quantitative analysis regarding the multifarious dimensions of public revenues, public expenditures, and public sector mechanisms. The optimiza­tion of goal-achievement in the public sector is made precise in an overarching welfare- theoretic framework, while paying due attention to the distortions caused by the intricate problems of public sector decision making: since the diffusion of public choice theory beginning in the 1960s, governmental behaviour is no longer conceptualized within the framework of the omniscient and benevolent planner - the implications of informational asymmetries and rent-seeking by interest groups are taken care of in micro-based models capturing agency problems in the public sector.

Some such kind of Whig story of progress does indeed capture an important aspect of the development of modern public economics, as summarized by works such as Atkinson and Stiglitz (1980) in the format of an advanced textbook. Progress in areas such as tax incidence, public debt, or externalities are clearly depending on advances in modelling interdependences in market economies. Indeed, model-based economic analysis is applied to specific problems of the public economy since the time of Ricardo. Specific advances in public economics are derived from the progress made with regard to economic modelling and econometric methods: general economics makes available theoretical tools and methods that subsequently are applied to problems of public eco­nomics. Today, progress in terms of tools and methods is a core element of substantial advances in public economics; think, for instance, of the role of game theory in areas such as (semi-)public goods.

That notwithstanding, the co-evolution of economics, public finance, and the public sector in modern market economies cannot be fully accounted for by the straightforward narratives suggested by a Whig perspective of cumulative progress. The overall history of public economics is far more complex. This should not be surprising, given the theo­retical scope and the practical complexity of public economics. The multi-dimensional interfaces of public economics suggest that views of linear progress solely driven by ever more sophisticated economic theory and tools - plausible as they may seem at first sight - miss important aspects of advances, breakthroughs and vicissitudes in the theories and models of the public sector. The lacunae of a Whig perspective are reflected in two salient characteristics of the development of public economics:

1. In the politically and culturally diversified setting of post-Renaissance Europe, the way in which national traditions developed, interacted and eventually to some extent became merged, affected in important ways the development of the discipline at least until the 1960s.

2. Despite the undisputed role of analytical and empirical tools for twentieth-century advances in modern public economics, the evolution of public economics is to a remarkable extent based on conceptual and combinatorial progress even in the decades after World War II (probably to a higher degree than progress in general economics). That is, progress in the field is not solely driven by advances in technical tools and modelling. This is true even for the core of the theory of public econom­ics and not merely for those parts of applied public finance and tax policy analysis which clearly hinge upon national traditions enshrined in tax codes or budgetary rules.

The next section summarizes some of the reasons for the specificities of progress in public economics, while the two sections following it expand on above observations (1) and (2).