Public goods and the public good
Sensationist political economists did not limit their investigations to the behaviour of individuals, be they consumers or producers. The State had to be brought into the picture.
Should the State interfere with private agents in the economy? Should it produce some goods or services? What should its resources be? How are public decisions taken?The nature of public goods and the problem of the free rider
The sensationist approach to the State is based on market failures and on the quid pro quo approach (Faccarello 2006). What are its main features?
At the end of the seventeenth century, and against the current practice of the time, Boisguilbert had already maintained that the State should not interfere with economic agents in markets, and should limit its action to the fundamental tasks of police, justice and defence. Turgot agreed: one should “reduce to a minimum the number of tasks that a government should undertake” (to Richard Price, 22 March 1778, in Turgot 1913-23, V, 535). The first duty of the State is “to maintain the private property of people in the country and to protect them against foreign attack” (Turgot 1776, 183). But in fact the role of the State is wider, and the expenses of police, justice and defence are special cases of a more general class of expenditures. While the public authority should not do what people can do on a private basis and in a much more efficient way (Turgot 1759, 602-3), it should nevertheless intervene when markets fail to work properly - in modern words, when there is a “market failure”. These interventions entail expenses made “in the interests of all” and could even limit property rights. This is also what Condorcet meant when, among the definitions he gave of the object of public finance, he always mentioned “public prosperity”. Taxation, as he wrote, for example, in his Essai sur la constitution et les fonctions des assemblies provinciales, “ceases to be legitimate if it exceeds the amount necessary for the defence of the State, for the maintenance of the peace and security of the citizens, and for those works and establishments really useful to common prosperity” (Condorcet 1788, 279).
But what are these “works and establishments” that the State should be in charge of? Basically, the main cause of market failures is the nature of some goods: goods whose consumption by an individual cannot be prevented because there is no rivalry in their consumption and no exclusion in markets if the individual does not want to pay for it.On the one hand comes the problem of the rivalry or non-rivalry in consumption. “There are some objects”, Turgot wrote, “that... all people can enjoy at the same time without harming one another. There are also other objects which are destroyed in use or, even if they are not destroyed, can only satisfy one man at a time.” “All the objects in nature can be classified under these two groups”, he added, or find themselves in an intermediary position: “from the sky that everyone can see, to the food which can satisfy only the hunger of a single individual, the endless variety of all beings surrounding us compose all possible shades between these two extremes” (Turgot 1753-54, 381).
On the other hand, a criterion for exclusion was clearly stated by Condorcet when he raised the problem of the free rider. He noted that if the principle ofjustice is to be interpreted rigorously, an expense financed by taxation on account of its general utility should only be introduced if all the taxpayers agree to pay for it. But, he remarked, this may not always be the case:
if, at the same time, it is impossible or very difficult to prevent those who did not wish to contribute towards this expense from benefiting from it, we can consider as legitimate the obligation to contribute, even independently of unanimous consent.
(Condorcet 1788, 280)
A general criterion is stated explicitly:
Two conditions are therefore necessary to legitimate the devotion of tax to useful expenses: it is necessary that the utility of these expenses be proved, and also that they not be at the sole expense of those who consent voluntarily to them, if they are unable to prevent others from also benefitting from them.
(1788, 280)
This is the reason why Condorcet, in his Vie de M. Turgot, listed “public works” as an expense to be financed by taxation. “The state of society”, he writes, “necessarily requires public works useful to all citizens or to the inhabitants of a city, village, or district” (Condorcet 1786, 185).[109] One of the main examples of such works concerns the basic infrastructure of a country: rivers, canals and especially a developed road network allowing easy communication between provinces, towns and villages - for the creation and maintenance of which private activity was judged inefficient and inappropriate. This is not only of importance to the political and administrative organisation of the country. In the opinion of Turgot and Condorcet, it is above all an essential condition for the realisation of free trade.
Graslin also considered taxation as a price in the quid pro quo tradition: it is the equivalent paid for the services of the State (Graslin 1767, 25) - limited by Graslin to protection and justice. Why is this price imposed upon citizens? One reason, like for Turgot and Condorcet, is that protection is a good for which there is no rivalry in consumption, and no possible exclusion in markets: it is thus not possible to exclude from the benefit of protection those people who do not wish to pay the price but who at the same time feel the need for this public good. Graslin perfectly sums up the free rider problem.
[T]his exchange cannot be free like the exchange between all other objects of needs.... From the moment society is formed, each member is not free to contribute or not, nor to fix what he wants to give in exchange for protection; because he is not free to either surrender this object of need, or be given less of it since all people enjoy it in common and indivisibly...; and because nobody can be deprived of it when all others are enjoying it. And, as each citizen would find it profitable to receive without giving anything, no-one would hurry to participate passively in the exchange, since they would always be certain to be included in it actively.
As a consequence, a law must decide the amount that everyone has to give; and this law is taxation.(1767, 152-3)
But there is an additional reason why the price for protection must be a tax: people have a psychological propensity to underestimate the strength of their need for protection, and hence the price they should pay in order to fulfil it. This is (1) because people receive the services of the protection of the State without really knowing all the advantages they receive from such services (1767, 154-5) and (2) because citizens underestimate their need for protection: people “receive in advance the element of wealth they pay for through taxation” (1767, 173) - and this, in Graslin’s eyes, constitutes a significant difference with respect to an ordinary exchange in markets where one has first to pay the price in order to get the object (1767, 173). These two reasons bring about an underestimation of the need for public goods, but also probably the temptation to be a free rider. People “believe that they give without receiving, they only feel the privation and they suffer from it” (1767, 155).
The total amount of public expenditure and taxation
Turgot’s and Condorcet’s analyses, however, go beyond an analysis of the nature of public goods: some developments are also devoted to what public economics calls “merit goods” and “externalities”, for which an intervention of the State also proves necessary (Faccarello 2006). Needless to say, the question of taxation is essential for them. As a tax is the price paid for a public service for which there is no market, the resources of the State should therefore only consist of taxes: a modern democratic State should not have any property and must not manipulate money. As a consequence - notably stressed by Condorcet and Rrnderer - an essential feature of this approach is that the resources and expenses of the State are not independent from each other but have necessarily to be determined simultaneously.
A theory of public finance, however, cannot be limited to the affirmation that the State should not spend too much and that the normal financing of its expenditure should be made through taxation in a quid pro quo perspective.
It is also important to determine which public goods and services should be produced and in what quantities, because the list of the goods and services useful to society could be long and it is generally impossible to provide them all at once. For Condorcet, the different amounts of public expenses may be classified according to the decreasing utility they produce: if the most useful expenses are made first, and so on, any increase in these expenses will produce a lower and lower utility and thus public expenditure has a decreasing additional utility. But public expenses are financed by taxes, and a tax means a diminution of the disposable income, a disutility. As Condorcet accepted Daniel Bernoulli’s hypothesis of a diminishing additional (marginal) utility of income or wealth - which he could also have found in Mariotte[110] - successive increases in public expenditure necessarily entail an increasing additional disutility of taxation. For a given period, the optimal amount of the public expenditure and taxation can thus be determined: public expenses “have a limit: the point where the utility of the expense becomes equal to the evil generated by the tax” (Condorcet 1793, 629). In other words, following the logic of Condorcet’s paper, their volume is determined by the point at which their additional utility is equal to the additional disutility of the taxes.Moreover, in a modern state, the decisions about public expenses and taxation must be taken by elected representatives. Hence, Turgot’s plan for transforming the political regime in France and creating a system of municipal, provincial and national assemblies. Hence, also Condorcet’s attempt to fix rules for an optimal functioning of any kind of assembly. The complex decision-making process and the probability of reaching “just” and “true” decisions through a voting procedure depending on the composition of the assembly and the degree of enlightenment of the voters are examined at length in his 1785 Essai sur l'application de l'analyse a la probability des decisions rendues a la pluralite des voix (see Chapter 8, this volume).
But how should the burden of taxation be shared between citizens? Because of the inequality of incomes, a proportional income tax would be unfair: the lower the income, the greater the disutility generated by the tax. Condorcet (1793), in what would later be called an “equal absolute sacrifice” perspective, provided a theoretical proof that only a progressive income tax complies with justice, generating an equal absolute disutility for each citizen. Graslin, too, with less theoretical arguments, advanced a similar conclusion, his preference going however to progressive indirect taxes on consumption goods (Graslin 1767, 150 ff).[111] The idea made its way. Progressive direct taxation was proposed by Say’s elder brother, Horace, in an article published in 1796 in the journal of the Ideologues, La decadephilosophique, litteraire et politique. There, he stressed that a simple proportional income tax is unjust, because what the same given proportion takes from a modest income is “much more painful” than what it takes from a greater income. He then states the following rule for equitable taxation: “Taxation must be distributed in such a way that it generates in the different classes an equal inconvenience, an equal painful diminution” (Horace Say 1796, 315), which is nothing other than the equal absolute sacrifice principle. Jean-Baptiste adopted this point of view in Olbie ou essai sur les moyens de reformer les mtχιιrs d'une nation (Say 1800, 228).
Finally, the doctrine of capitalist competition presented earlier, and especially the uniformity of the profit rate, implies a critique of the physiocratic doctrine of taxation. One point, much debated at that time, was the “single tax scheme”, that is to say, the proposal that the government levy a unique tax on landowners because they were supposed to be the sole owners of the net product. Condorcet empirically abandoned this idea during the Revolution. Rrederer could no longer accept it. As the net product is in fact shared by all the owners of capital, throughout the economy, all sectors included, there is no reason to levy the tax only on the landowners, who share this net product with the other capitalists. The single tax, however, Rrederer stated, could be provisionally maintained for the sake of convenience, when it is difficult to tax these capitalists. But, in the end, the result would be the same: whenever free competition prevails, the “loi du niveau”, through migrations of capital between sectors and the consequent changes in the remuneration rates of capital, would automatically and proportionally divide the charge of the tax among all the co-owners of the net product (Rrederer 1791 and 1800-1801).
Graslin’s alternative view
Many of these groundbreaking developments were unfortunately neglected or forgotten. During the Revolution and the Empire, the hectic political events showed that to think of the possibility of a rational and just organisation of the State and of its decision-making processes was perhaps a utopian dream, and prompted more pragmatic developments or - the two trends are sometimes intertwined - even another utopian view: that of the State as a simple competitive firm like any other, producing and selling in markets a specific service: “security” - a view present in Say, which was to find its greatest developments in the writings of Gustave de Molinari (Faccarello 2010). It is interesting to note that this alternative utopian view was also in statu nascendi, some decades before, in Graslin’s Dissertation.
For Graslin, all those who work for the State, directly or indirectly, form a class (as defined earlier) because they all contribute to the production of a specific good, protection, which corresponds to a need and is in demand. But, in this respect, the public sector is not different from any other activity and it also has its own private interest, like any other class of producers (1768, 142). Its aim is not therefore to achieve the general interest of society, even if it contributes to its realisation in the same way as any other class does.
The protective power itself, while instituted for the safety and peacefulness of all, has its own private interest in the order of relationships. This interest is tied to the interest of all, in this sense it is essential for people that this power be in a condition to perform its function. But this can also be said of the interest of any class because, in the same way, it is essential for all other classes that each one in particular be in the condition to provide the object in its charge.
(1768, 142)
Similar ideas were developed by Say some decades later, when he stressed that the State was in the hands of politicians and civil servants who each have their own interests, which do not usually coincide with the public good. But the situation is not dramatic: these private interests have simply to be considered like the interests of any other profession.
An opposition of interests is... no quarrel, does not break peace. Are not the individuals who form a nation in constant opposition of interests between each other, without being at war?... Each time we go into a shop and buy, do we not have an interest that is opposed to that of the merchant?... Does a war necessarily ensue between those in power and those who are governed? Not at all. These are interests to be amicably discussed, just as are the interests of two merchants who do business together and agree on sharing outlay and profits.
(Say, n.d., 644-5)
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