Surveys of Taxation and International Values

In the 1890s, Edgeworth produced two surveys of considerable importance. These surveys, of the pure theory of taxation and of the pure theory of inter­national values, were both published in the Economic Journal and subsequently reproduced (with alterations) in his Papers (Edgeworth 1925, ii).

The approach to incidence analysis actually stemmed from Jenkin (1871/1872), who suggested that in general the price of the taxed good will either remain constant (in the extreme case of inelastic supply) or will increase. However, this result ignores interrelationships among commodities. Edgeworth showed that when such interrelationships are considered, there are circum­stances in which the price of the taxed good will fall. When discussing this “paradox”, Edgeworth reproduced his argument, which had in fact been explored in more detail in his paper on monopoly, published in Italian in the same year, 1897. Edgeworth first stated his “tax paradox” in the following terms: [W]hen the supply of two or more correlated commodities—such as the car­riage of passengers by rail first class or third class—is in the hands of a single monopolist, a tax on one of the articles—e.g. a percentage of first class fares— may prove advantageous to the consumers as a whole...

Edgeworth regarded this result as an example of a situation where ‘the abstract reasoning serves as a corrective to what has been called the “meta­physical incubus” of dogmatic laisser faire’ (ibid.; see also Edgeworth 1925, ii: 93-94). Essentially the two commodities must be substitutes in consumption and production, and the result arises partly because the monopolist has an incentive to increase the supply of the untaxed commodity. Edgeworth (ibid.: 63) also recognised that the result could occur in competitive markets. As with many of Edgeworth’s original results, this tax paradox was not a subject of continuous development. Its main practical importance perhaps arises from the fact that it attracted the attention of Hotelling (1932); for further details, see Creedy (1988).

Edgeworth discussed the various sacrifice theories of the distribution of the tax burden, giving qualified support for progressive taxation. His attitude to taxation was similar to that of the major classical economists in that he rejected a benefit approach, on the argument that taxation is not an economic bargain governed by competition. Thus in his view the problem was to determine ‘the distribution of those taxes which are applied to common purposes, the bene­fits whereof cannot be allocated to particular classes of citizens’ (Edgeworth 1925, ii: 103). A principle of justice is thus required. His approach marks a crucial stage in the transition towards a welfare economics view of public finance, rather than using a special set of tax maxims such as those laid down by Adam Smith.

Not surprisingly, Edgeworth (1925, ii: 102-103) argued along neo-con- tractarian lines that the utilitarian arrangement would be accepted by indi­viduals who are uncertain of their own prospects and take an equal a priori view of the probabilities. He suggested that

each party may reflect that, in the long run of various cases...of all the principles of distribution which would afford him now a greater, now a smaller proportion of the sum-total utility obtainable.

Having established the use of utilitarianism as a principle of distribution justice, Edgeworth (ibid.: 103) succinctly argued that maximisation of total net utility reduces to the condition that the total disutility should be a mini­mum, and hence the marginal disutility of each taxpayer should be the same.

The implication is that if all individuals have the same cardinal utility func­tion, after-tax incomes would be equalised. Edgeworth also recognised that if there is considerable dispersion of pre-tax incomes relative to the total amount of tax to be raised, where there is, ‘not enough tax to go round' (ibid.), the equi-marginal condition cannot be fully satisfied unless there is a “negative income tax” which raises the incomes of the poorest individuals to a common level. Thus, ‘the acme of socialism is for a moment sighted' (ibid.: 104). However, Edgeworth immediately considered the practical limitations to such high progressive taxation. The following quotation illustrates one of his favou­rite metaphors, his respect for Henry Sidgwick, his attitude to authority, his views on utilitarianism and the applicability of pure theory, and of course his unmistakable style:

In this misty and precipitous region let us take Professor Sidgwick as our chief guide. He best has contemplated the crowning height of the utilitarian first principle, from which the steps of a sublime deduction lead to the high table­land of equality; but he also discerns the enormous interposing chasms which deter practical wisdom from moving directly towards that ideal (ibid.).

Among the various limitations, Edgeworth noted differences in individual utility functions, population effects, the disincentives to work, growth of cul­ture and knowledge, savings, and of course the problem of evasion.

Edgeworth's survey of the pure theory of international values contributed to a change of emphasis in the approach to trade theory, despite the fact that it contained few original analytical contributions.

The fundamental principle of international trade is that general theory...the Theory of Exchange. which. constitutes “the kernel” of most of the chief problems in economics. It is a corollary of the general theory that all the parties to a bargain look to gain by it. This is the generalised statement of the theory of comparative cost (ibid.: 6).

Thus the gains from trade are analogous to the gains from exchange in simple barter. Hence, trade theory is one more application of the general method of Mathematical Psychics. In directly applying the theory of exchange to that of trade, Edgeworth was content to use community indifference curves without clearly specifying how aggregation might be carried out. He said only that, ‘By combining properly the utility curves for all the individuals, we obtain what may be called a collective utility curve' (ibid.: 293-294).

One of Edgeworth's criticisms of Mill (1848) was that the latter took as his measure of the gain from trade the change in the ratio of exchange of exports against imports. Thus Mill in this case ‘confounds “final” with integral utility' (ibid.: 22). The same point had in fact been made by Jevons (1957: 154-156). However, Edgeworth, while preferring total utility, admitted that Mill was not otherwise led to serious error in using his own measure.

Edgeworth's survey was wide-ranging, though for later developments the most interesting parts are concerned with his elucidation of Mill's ‘recogni­tion of the case in which an impediment may be beneficial—or an improve­ment prejudicial—to one of the countries' (Edgeworth 1925, ii: 19). These cases would now be discussed under the headings of “optimal tariff” and “immiserising growth”.

Edgeworth did not support the use of such tariffs in practice. He acknowl­edged the possibility of retaliation. Also, for one nation to benefit itself at the expense of others ‘is contrary to the highest morality... But in an abstract study upon the motion of projectiles in vacuo, I do not think it necessary to enlarge upon the horrors of war' (ibid.: 17, fn. 5). The ‘highest morality' was, of course, the principle of utilitarianism.

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