TheGermanRoots
Musgrave’s dissertation, defended at Harvard in 1937, synthesised different traditions in public finance. He attempted to reconceptualise the burden of taxation as a net burden to account for the positive effect of governmental expenditures.
Musgrave put forward a ‘rational model of the public economy’ composed of rules to be followed by the budget planner. For Musgrave, the public economy and the market economy were particular economies, part of the larger national economy. This way of conceptualising economic relations had been typical of nineteenth-century German thought and went back at least to Karl Heinrich Rau (on which see Tribe 1988, 195). It found a very developed expression in Gustav Schmoller’s fin de siecle exposition. For Schmoller, the national economy (Volkswirtfchaft) related to the collective, like the nation, society, or the state (Schmoller 1900, 10). He saw the national economy as a system of economic relations dominated by the spirit of the people and embedded in the social (gesellschaftlichen) life (Schmoller 1900, 18-19). In other words, the national economy was structured by the institutions of the whole community.What could constitute the model for the public economy? In his dissertation, Musgrave (1937, 76) suggested that the public economy was ‘the economy of the community’. This point had been made by Hans Ritschl whose 1931 book Musgrave (1937) was discussed at length. Ritschl defended a community-based view of the state, but for an economic and fiscal theory, distancing himself from nineteenth-century idealistic philosophy. He argued that ‘the principle of social cohesion in the State is not that of society, but of community’ (Ritschl 1931, 234). Ritschl explicitly borrowed Ferdinand Tonnies’s conception of community (Gemeinschaft) and used it as a basis for his theory of the state. In his famous essay, Tonnies (1887) contrasted the organic kin-based relationships of the community with the artificial and interest-based interactions of the society (Gesellschaft).
The natural bond of love in a family was progressively extended to communities of places, such as neighbourhoods and towns, but they were of a structurally different kind from the instrumental interactions of individuals in civil society. For Ritschl, the community of reference for an economic theory of the state was, unsurprisingly, the nation. Musgrave always repudiated the organic view of the state (see 1937, 49; 1959, 87).[113] Yet, through this German literature, he was exposed early on to radically different conceptions of the relations between individuals, society, community, and the state from the mainstream British and American ones.Musgrave’s (1937, 73) model of the public household aimed at achieving ‘optimum satisfaction of wants with given scarce resources’. Once again, the idea that the purpose of an economy is to satisfy wants was commonplace in German economics by the middle of the nineteenth century (Tribe 1988, 149). Following Emil Sax (1924), Musgrave assumed that there were individual wants and ‘social wants proper’. From the point of view of the state, both types of wants had to be homogenised in order to plan public expenditures. For Musgrave, optimal planning required that wants be satisfied in the order of their intensity. Moreover, the public economy being a complement to the market economy, the planner had to arrange fiscal processes to minimise disturbances with the satisfaction of wants by the market (Musgrave 1937, 76). The ‘social wants proper’, or collective wants, posed for Musgrave the problem of calculating the benefits that individuals derived from public expenditures because benefits could not be divided.
Rau was one of the first modern exponents of the idea that economic activity is first and foremost a matter of satisfying human needs by the consumption of material goods. By extension, he also postulated that the state had its own needs, the satisfaction of which became the object of the public economy (∂ffentliche Wirthschaftslehre, or Staatswirthschaftslehre) (Rau 1837, 2).
Towards the end of the century, Adolph Wagner refined the argument by postulating communal needs (Gemeinbedurfnisse) rather than needs of the state. Communal needs were differentiated from simple individual needs, but in the end, they were also felt by individuals. They resulted from the social nature of human life (Wagner 1892, 270 ff.). Some arose from the conditions of life in natural communities, while others resulted from life in larger groups. Examples of such communal goods were public hygiene facilities and transportation infrastructure, especially as urban density increased with the division of labour. Wagner argued that communal provision of these goods had to be achieved by coercive organisations like the state or local authorities because the market could not satisfy them properly. Wagner observed a secular growth in public expenditures that reflected the political and social evolution of western nations. The state was thereby partaking in a civilisation process by providing goods and services that promoted the physical, moral, intellectual, and religious interests of the nation (Wagner 1892, 369). Hence, for Wagner, the explanation of collective wants mostly followed the history of communities.The ‘communal needs’ of Wagner and the ‘collective needs’ of Sax were called social needs by Musgrave (1937). Besides, Musgrave remarked that governments were also providing goods to satisfy individual wants that were considered especially important from a social point of view (336, 348). In order to compare the benefits of public expenditures for the satisfaction of individual and social wants, one had to assume a ‘common denominator’ and allow for the construction of a ‘social value scale’ (349).
Thus, Musgrave’s economic model of the state adopted a social point of view, one that was not reducible to the summation of individual values. The construction of a social value scale to prioritise public expenditures required a comparison of the social urgency of different individual needs.
Following Arthur Cecil Pigou (1932), Musgrave adopted an objective conception of social welfare that did not shy away from interpersonal comparisons of welfare, at least as a ‘working hypothesis’: ‘The capacity to enjoy benefits is after all but part of the general nature of “man”. It being the generally accepted procedure to define certain general characteristics of men, there is no reason why no typical degree of intensity for the enjoyment of benefits could be assumed’ (Musgrave 1937, 274 n. 2).[114] Musgrave assumed that the economist and the budget planner could rely on social and political knowledge about the national community to which the model would be applied. Information about socially important needs was not something that can be directly found in the world. It required a thorough sociological analysis:The sociological problem of the theory of the model economy in turn consists of explaining how and according to what standards this system of relative wants is formulated: Its actual content will at any given time depend upon the entire complex of cultural, political and social forces prevailing. No consideration can here be given to this aspect of the problem, but it is to be emphasised that even in the theory of the model economy the sociological sector of the problem forms an essential part. (77)
In a Weberian frame of mind, Musgrave argued that political factors can explain a deviation of actual practices from the rational model, such as traditionally oriented action:
Public Economy... is in its rational execution limited by a variety of institutional factors: historical, though on economic grounds ‘unrational’ institutions are maintained for the sake of tradition; the conduct of the revenue-expenditure process is affected by constitutional rules concerning the power to tax or the power to spend in certain fields of government endeavour, et cetera. (71)
To put it differently, in his dissertation, Musgrave did not provide a welfarist account of the revenue-expenditure process of the public economy.
He did not think that a universal mapping of individual subjective preferences into a social value scale (later named social welfare function) could in itself determine which goods should be provided by the state, to whom they should be made available, nor who should pay for them. Methodologically, politicians took decisions in a given institutional setting, they had their own agency and they made judgements based on qualitative social information.In his first paper, published twelve years after Musgrave’s dissertation, James M. Buchanan (1949) argued that fiscal theories could be classified as either ‘organismic’ or ‘individualistic’. According to Buchanan, an individualistic theory of the state could not accept vague terms such as ‘social welfare’. Only an organismic approach could assume that the state was a separate decision-making unit. Musgrave’s approach avoided this strict dichotomy since it rejected any organic view and assumed that the community was composed of individuals the welfare of whom was the ultimate objective of policy, yet it relied on social value scales. In these social scales, stress should be put on the social basis.
In a nutshell, with the teaching he received in Munich and in Heidelberg, as well as with the literature he engaged with while working on his dissertation at Harvard, Musgrave was receptive to the importance of the social dimension of life, how it played out historically, and how it impacted economic questions. To some extent, it reflected on his conceptualisation of the problem of the public budget, although the concrete implications were not spelled out in his dissertation.
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