Public economics and normative economics
Here are some elements of a broader view in an historical perspective. Public economics is interested in prescriptive knowledge regarding what the public sector should do and how.
Unsurprisingly, the scope of the normative focus depends on the politico- economic context. In the feudal tradition, the household of the prince was framed as a quasi-private affair, implying the quest for expedient solutions on the revenue side while the expenditure side is not naturally regarded as a subject of analysis and justification. Yet a limited normative perspective regarding taxation is pursued from early on, for example, in the controversies on excise taxes in the times of Hobbes and Petty. In the writings of cameralists such as Justi, budgetary issues became framed by considerations on what the goals of policy should be. Compared with the comprehensive normative framework of welfare economics, the pre-history of public economics as an “art” is characterized by normative principles and perspectives associated with pragmatic and limited goals. The rationales and the ambiguities of the early normative concerns are vividly summarized in Fritz Karl Mann’s “ideals of tax policy” (1937), commencing with ideas of equitable taxation in the context of natural law reasoning. In the course of the development of modern market economies of the past two centuries, the importance of the normative perspective evolved together with the growing public sector amounting to 30 to 60 per cent of gross domestic product (GDP) in the advanced economies of today. If the public sector is big, the patterns of revenue and expenditure more urgently require some kind of public justification. They require specific forms of justification if the political environment is a democracy cherishing individualist values: the pattern of public activities should demonstrably benefit all/most individuals. It cannot be justified in terms of some vague idea of the flourishing of the state (see Mann 1937: ch. 6). That is, the value of public economics as a socially useful subject depends on the availability of sustainable approaches of normative economics congruent with individual values. It is no coincidence that some of the greatest economists contributing to public economics (such as, Wicksell, Pigou, Samuelson, Arrow, or Sen) devoted substantial efforts to the development of a sustainable architecture of normative public economics.Providing useful answers to the questions such as
1. Which are the properties of “good” tax bases and structures?
2. Which kinds of public institutions, public utilities, or public transfer schemes are solving the most salient problems emerging in the dynamism of market economies?
3. Which are the core properties of global institutions and workable mechanisms for controlling greenhouse gas emissions?
may be regarded as important fruits of seeking economic knowledge beyond the pure pleasure of truth. Such answers presuppose theorizations of social preference somehow integrated within economic analysis. Hence the analysis of social choice based on individual values is on the agenda of modern public economics.
A few simple observations indicate why economic reasoning on issues such as taxation is concerned with a complex interface of positive analysis and normative issues. Think, for instance, of tax policy. Suppose that we accept some normative principle of a “good” tax system, such as horizontal equity, requiring that taxpayers with the same ability-to- pay should pay the same amount of taxes. This principle must be implemented under real-world conditions. The process of implementation will require making operational normative concepts in a complex economic environment. This will entail assumptions (for example, regarding the definition of income) and specifications (is the individual or the household liable to pay the tax?) that are not innocuous from a normative perspective.
Second, taxation is a good example for the coexistence of rights-based principles (such as horizontal equity) and utilitarian considerations, which easily get mixed up in an incoherent way in the absence of proper analytical frameworks. Third, ideals of a “good” tax system may be of questionable value if the underlying normative principles are not sustainable at a sufficiently general level. Finally, it cannot be taken for granted that positive analysis is independent of whether legally adopted normative principles are widely shared, or whether they are biased towards the special advantage of particular groups. For instance, tax compliance may be affected.The quest for a sustainable normative perspective is complemented by a focus on the conditions of implementation and institutional design in the public economy, including the mechanisms of the public sphere and the choice of policies at various levels of government. The combination of normative stance, implementation, institutions, and market interdependencies is perhaps the most important general characteristic of public economics throughout its history. Hence public economics tends to employ a very broad class of research strategies. Issues of implementation include theoretical problems implied by analysis of markets and public institutions under non-ideal circumstances: it is no co-incidence that the economics of the second-best is an indispensable concept and tool of public economics. They also require the study of actual behaviour, institutions and history. Take, for instance, questions such as, “Why do we have the taxes that we have?” “Why did government grow as it has grown in the 150 years antedating the 1980s?” “How did the great transformation of capitalism culminating in the modern public sector using 30 to 60 per cent of GDP in the most advanced economies come about?” “How did institutions of taxation change in the wake of the emergence of modern statehood?” Answering such questions will involve the study of political mechanisms, of the civil service, of public education, of public utilities and regulation, of social security and welfare, and the history of war and peace (Peacock and Wiseman 2010). Consider the historical account of some tax system (for example, Brownlee 2004). Histories of tax systems will refer to institutional details as well as to legal and constitutional frameworks, modes of governance, or mechanisms for coping with tax evasion. The doctrinal history of taxation principles may play a role in explaining why certain systems of taxation are in place. For instance, Pigou’s re-interpretation of the sacrifice principle (as equal marginal sacrifice) foreshadowed the trend towards historically unique high marginal income tax rates in the UK and the USA implemented in the 1940s (Pigou 1932a).