National traditions: an overview

This should be kept in mind in the context of the following overview of the broader background and the impact of some of the most important “national” traditions and schools, commencing with the British tradition.

[F]ew will dispute the more than sufficiency of these reasons, to throw, in every instance, the burden of making out a strong case, not on those who resist, but on those who recommend gov­ernment interference. Letting alone, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil. (Mill 1848 V.xi.7)

In the British tradition, the links between economics and public finance are very close from an early time onward. Regarding areas such as tax incidence or optimal taxation, dealing with issues of public finances as a specific chapter of the economic analysis of markets (rather than a field of its own) has obvious advantages. Notice that British public economics maintains that kind of conceptual affinity to economic analysis of markets also regarding the analysis of the tasks of the public sector: it developed the market failure approach to explain/justify government interference, thereby providing the basis for a natural extension of rigorous analyses of price systems to cases where some “real” interdependences are not mediated by “correct prices”.

However, the Anglo-Saxon tradition inaugurating normative public economics as the theoretical underpinning of government intervention on a case-by-case basis was highly important for the development of the discipline. It included the systematic application of theoretical tools and empirical methods for a wide range of problems. The Pigovian programme (1932b, 1935) in particular promoted successfully the professional role for university-trained expert economists, whose command of analytical/empirical tools enables them to give theory-based technical advice.

The theoretical and political environment of nineteenth-century Germany with its history of political fragmentation and the national challenges posed by the Napoleonic wars sets the stage for a different agenda. Fundamental institutional questions of a “late nation state” are the topic of discussions for decades. In political philosophy, Kant and Hegel had come up with different versions of theories emphasizing the foundational interdependence between modern market society and modern state. Well-ordered insti­tutions of the public sphere and private property were conceptualized as two comple­mentary requirements of free welfare-enhancing exchange. That broader vision of the state and the tradition of cameralism came to be merged with basic insights of Smithian economics. Indeed, Prussia’s Stein-Hardenberg reforms in the early nineteenth century (following Prussia’s defeat by Napoleon) were inspired by German Smithians. In the same period, writers such as Adam Muller used Smith’s thought as a critical reference point for their own Romantic thought, stressing organic conceptualizations of society. The combination of the historical setting and the various intellectual influences contrib­uted to a framework in which foundational problems of the state were translated into a conceptual framework for the public economy. The state is seen as an institutional framework co-evolving with the market system. Rather than perceiving government as an agency in charge of amending market failure here and there, it is framed as an encom­passing (re-)productive agency.

Compared with the British tradition, the German style of thought is much more geared towards institutional foundations and the characteristic mechanisms of the public sphere - and to a unified theory of taxation and expenditure. As indicated by the work of Sax (1887) and elaborated by Wicksell’s (1896) collective choice mechanism regarding the provision of tax-financed public goods, the concept of public goods is a more expedi­ent starting point for analysing the logic of collective action and the economic functions of the state - which are not limited to correcting specific distortions of the price system in an otherwise well-ordered society. Notice that the public sectors of “late nation states” were engaged in encompassing co-ordination problems and corresponding big issues of institutional design and nation building. Large-scale problems were in the focus of the agenda, not “local” co-ordination gaps here and there in an otherwise well-ordered market economy.

In France, the political system was characterized by a high degree of centralization, beginning with very early modernity (fifteenth century) and accelerating in the seven­teenth century when administrators such as Vauban began to deal with problems of gov­ernance and taxation in a systematic fashion, setting the stage for a prominent role of the public sector in economic development (infrastructure, industrial policy). The French philosophical landscape is diverse throughout the centuries, including currents which tend to prepare the ground for interventionist rationalism, but also currents emphasiz­ing the ruse of spontaneous processes. Seen together, the range of foundational concepts pertinent to normative public economics is extraordinarily wide, including (1) utilitarian reasoning, (2) various versions of natural rights (with different stances vis-a-vis “pos­sessive individualism”), and (3) emphasis on non-homogeneous interests based on class structures. At any rate, the French brand of a sensationist approach and “enlightenment rationalism” is specifically important for thinkers such as Condorcet and Turgot: their contributions include pivotal conceptualizations, including non-rivalry as a distinct characteristic of public goods as well as elaborate reflections regarding the normative dimensions of public economics under the premises of enlightenment. The latter is also the background of early normative reasoning on the logic of collective choice, famously culminating in Condorcet’s voting paradox. The nineteenth century saw the coexistence of three important strands: (1) seminal contributions by engineer economists such as Dupuit, who adapted the metric suggested by utilitarian philosophy in the context of optimizing solutions to practical problems regarding the evaluation of public projects; (2) associationist/socialist thinkers such as Pierre-Joseph Proudhon or Jean-Charles Leonard Simonde de Sismondi whose contributions include arguments in favour of tax progression based on the differential incidence of the benefits of public goods in a class society; and (3) various strands of liberal/libertarian economists in the wake of Say whose writings deal with the question of how to justify government and its limits in an individu­alist market society, based on private property (see Faccarello 2010).

In centres such as Florence, Renaissance Italy saw the earliest forms of proto­capitalism in Europe. In terms of politics, Italy is notorious for its pronounced frag­mentation, leaving it as the second important late nation state in the nineteenth century. Fragmentation set the stage for politics as a specific game of private interests, epito­mized by Niccolo Machiavelli’s prince, including the Condottiere as private entrepre­neur supplying military power. Influential treatises such as Giambattista Vico’s Scienza Nuova (1725) developed visions different from optimistic perspectives of rational reform promoted by enlightenment. So, Italy has a certain tradition of disenchanted perspectives emphasizing strategic aspects of the political business. From the point of view of historical challenges, foundational issues of public sector economics related to the task of nation building came to be high on the agenda in the second half of the nineteenth century. Together with more coincidental circumstances, this may explain that Italian economists such as Mazzola congenially interacted with German language theorists regarding conceptualization and analysis of public goods. Indeed, the kind of public good theory that was exported to Anglo-Saxon economics mainly by economists with continental intellectual roots such as Musgrave, was a German-Austrian-Italian- Swedish co-production. Buchanan was particularly fond of a specific Italian twist of that kind of theory, triggered by the sceptical view of politics: the Italian literature soon began to develop lucidly “realistic” economic model-sketches of public decision making with its distortions. Pareto was critical of that literature, arguing that political power games cannot be captured by economic models but instead require a kind of fiscal soci­ology to account for irrational forces. Notice that disenchanted views of politics gained some ground in France in the second half of the nineteenth century: a case in point is Paul Leroy-Beaulieu’s “positive” account of distortive tendencies in public choice (Faccarello 2010).