The Theory of Public Finance (1959) and the Cold War Era
After teaching as an instructor for a few years at Harvard, Musgrave was recruited in 1941 by the research department of the Federal Reserve, where he spent the war years. In the 1950s, he wrote his magnum opus while at the University of Michigan.
At the same time, he participated in fiscal expertise missions in Colombia and in Germany, as well as providing behind-the-scenes advice on tax policy to Democratic presidential candidate Adlai Stevenson. This practical experience must have influenced his views of public finance problems, although it is hard to measure its impact in The Theory of Public Finance, which he completed in 1958. Musgrave wanted to move back to the East Coast, and a few months after the publication of his book, he accepted a position at Johns Hopkins, where he stayed for a brief time before moving to Princeton and then back to Harvard in 1965.The intellectual space for criticising methodological individualism and the norm of consumer sovereignty was very limited in the United States during the cold war. Ideas of social planning and community-belonging would have been suspicious to many economists. Already during the Second World War, Friedrich Hayek had argued that invoking communal needs could only be a means for the ruling elite to impose their preferences on the community (Hayek 1944, 106). While organic visions of society were especially unpopular in the post-war period, economists, among other intellectuals, could appeal to a broad liberal consensus (Forrester 2019, xx).
The spectrum of social and psychological foundations for economic theory narrowed, thanks in part to the rise of mathematical formalism. Arrow's impossibility theorem frontally attacked the idea that an extended society could produce a rational social choice that would be compatible with (his reading of) the normative principles of liberalism.
His framing of the problem already reduced social choice to a mechanical aggregation of individual preferences, casting out any conception of a ‘shared social world' (Amadae 2003, 119). A few years later, Buchanan and Tullock (1962, 19 ff.) argued that the self-interested model of human agency should be applied in all spheres of life, in particular in regard to political decision-making. Even if Buchanan and Tullock's radical individualism did not convince all economists in the 1960s, they contributed to the demise of thick conceptions of political agency in social sciences. In the 1960s, the Vietnam war, racial unrest, and student protests brought to light increasing cultural divisions in American society (Cherrier and Fleury 2017). Appealing to shared values would increasingly sound optimistic, if not disconnected from the real world. The cumulative effect of these cold war economic theories was to put forward a reduced vision of the polity as a mechanical aggregation of individual self-centred preferences. In other words, with respect to the ideal types of Tonnies (1887), the cold war rational choice view of man was the triumph of Gesellschaft over Gemeinschaft and its conceptual extension to all collective life.In this context, it is not surprising that Musgrave did not refer to a substantial notion of community throughout the major part of his career. Without a broad consensus on values, it is difficult to talk convincingly about the importance of community life. Yet, I show how an implicit idea of a community, or society, was still central to his specific approach to public finance. I focus on his Theory (1959) because it is the theoretical matrix through which we can read Musgrave’s work from the 1950s to the end of this life. As a grand synthesis of different traditions, Musgrave’s Theory combined elements of New Welfare Economics with utilitarian calculus (old welfare) and other norms of liberal democracy. The three branches of Musgrave’s theory of the budget have something to do with the notion of community.
First, the stabilisation branch, which dealt with fiscal policy to guarantee full employment, price stability, and growth, conceptualised the economy using a Keynesian framework. It dealt with macroeconomic aggregates that were not reducible to individual variables. Variables such as the propensity to consume were attributes of a national community.[115]
Second, the redistribution function of the budget was meaningless without at least an implicit understanding of a community of reference. The conceptual separation of public goods allocation and income redistribution allowed Musgrave to demarcate the legitimate application of two funding principles. Contrary to what he argued in his dissertation, Musgrave now held that social (public) goods could be provided according to individual demand, thereby respecting the benefit principle.
Third, the distribution branch secured the socially desired distribution of income by taxing individuals according to their ability-to-pay. For Musgrave, there was no optimum level of redistribution; it depended on the ‘accepted mores’ in the society of reference and how they were revealed in the political process. In other words, redistribution was not Pareto- improving and the government planners had to make decisions on the distribution of the tax burden based on their understanding of the social views held by the citizens. Musgrave discussed at length different interpretations of the idea of equity. According to his own terminology, justice in taxation required horizontal equity, that is, everyone must be treated equally by the taxman irrespective of how his/her ability was measured. If income was the accretion index, then it meant treating individuals irrespective of the sources of their income.[116] In addition, the budget planner needed to implement an interpretation of vertical equity, that is, how differently unequal incomes would be treated. In other words, it must provide arguments for the proportionality or the level of progressivity of the fiscal structure.
Here Musgrave followed the subtle refinements of the discussion on equality of sacrifice which culminated in Pigou (1928). Musgrave acknowledged the problematic nature of interpersonal comparisons of utility in the discussion on the fiscal burden as a sacrifice to share between members of the political community:This assumption is basic to a subjective view of the ability-to-pay doctrine. Yet it is an assumption generally rejected by the ‘new’ welfare economics. If such rejection is valid, the entire concept of equal sacrifice becomes so much nonsense and must be discarded - lock, stock, and barrel. I hesitate to go this far. While we cannot assume that the utility schedules of individuals are known, the new welfare economics may have gone too far in its categorical rejection of interpersonal utility comparisons. Such comparisons are made continuously, and in this sense have operational meaning. Surely, there is such a thing as utility from the receipt of income. Evidence on measurable characteristics of people - physical, mental or emotional - lends credence to the assumption that there is a fair degree of similarity among individuals living in a given society. (Musgrave 1959, 109)
As long as utility was a subjective attribute, it could hardly be compared between two individuals, but this epistemic problem was avoided if one postulated a ‘social value’. According to Musgrave, in a democracy, such values had to be ‘traced to the preferences of the individuals’ through a political mechanism such as majority, plurality, or point voting (109). In the 1950s, Musgrave was still using utilitarian tools. Therefore, as an objective measure of welfare, he reiterated the idea of his PhD thesis of a social utility of public expenditures schedule. Combined with a social disutility of taxes schedule, the two curves could, in theory, determine a socially optimum level of public expenditures and a corresponding distribution of the fiscal burden provided by the tax formula (based on the constructed social income utility schedule) (113).
Thus, in the 1950s, Musgrave’s theory of public goods was now welfarist according to the first definition, but it violated the second definition of welfarism to the extent that it relied on information beyond subjective ordinal preferences (see the introduction to this volume).Third, merit wants are better understood with respect to a community of reference. Although this fact was only explicitly acknowledged by Musgrave decades later, one can find hints of it in the first exposition of 1959. Musgrave argued that the allocation branch should generally provide public goods according to individual preferences following the benefit principle, but he conceded that not all public services respected consumers’ sovereignty: merit goods were ‘sensible’ exceptions to a ‘position of extreme individualism’ (1959,14). Musgrave suggested that a direct registering of individual preferences was not and should not be the political norm of democracy. One had to make room for the ‘role of leadership’: ‘While consumer sovereignty is the general rule, situations may arise, within the context of a democratic community, where an informed group is justified in imposing its decision upon others’ (14). In responding to Gerhard Colm’s criticism of his conversion to an individual preference-based view of social goods, Musgrave conceded that one should not forget the ‘political character of the budget process and the essentially social nature of its objectives’ (88).7 Musgrave recognised that individuals are influenced by their social environment when deciding which goods to support publicly:
[T]he voter’s attitudes and preferences may be conditioned by his image of the good society and by influences extending far beyond matters of his immediate environment. His choices may be determined by what he considers altruistic motivations rather than by the self-interest in the narrower sense that underlies typical consumer choices in the market. (88)
7 A German emigre who was influential in Washington policy circles, Colm rejected the Samuelson-Musgrave individualistic approach to social/collective goods.
In other words, Colm refused to conceptualise the government responsibilities in terms of individual benefits. Musgrave might have coined the concept of merit goods partially as a concession to the views of his senior colleague and friend. See Desmarais-Tremblay (2017a).Throughout these writings, Musgrave used community and society as synonyms. He had a modern understanding of the latter term influenced by Max Weber as a generic group of people sharing institutions, historically and geographically located. Moreover, the society was ultimately responsible for fiscal decisions which entailed a trade-off between efficiency and equity, for instance when choosing between different tax instruments (159). Musgrave added that the higher the social cohesion in a country, the less arbitrary such collective decisions by majority vote would be (128).
Upon reviewing Musgrave’s Theory which formed the matrix for his thinking throughout his career, we found an implicit use of collective notions that were not reducible to individuals, at least at the level of an economic theory of the government’s budget. Even if Musgrave did not yet argue for the importance of community belonging, his use of collective notions went beyond strict methodological individualism.
10.3