Specific contributions: von Stein’s influence on the science of administration, the doctrine of a rational tax system and the mapping out of rules for public debt
If we look up ‘Stein, Lorenz von’ in the first edition of the Dictionary of Political Economy (Palgrave, 1899, p. 474), we find an article by J.K. Ingram in which emphasis is placed on the fact that von Stein always stressed the close links between ‘philosophy, law and economics’ and that ‘he and R.
von Mohl are regarded as the creators of the modern science of administration’. Von Stein's treatises on the science of administration are appraised in similar terms in the relevant German jurisprudential literature of the past 30 years (Forsthoff, 1972; Schnur, 1978). Owing to their excessive period specificity, however, von Stein’s reflections are largely irrelevant to an economically viable science of administration of the type that is reflected at the end of the twentieth century in the nisus towards new public management. None the less, we now propose to deal briefly with his doctrine of social monarchy (von Stein, 1855, pp. 9ff.), not only for historical reasons, but also because the doctrine in question probably had political repercussions.In order to understand the doctrine of social monarchy, we have to bear in mind the fact that, in the wake of the French Revolution and the subsequent uprisings, all the royal houses then reigning in Europe were in mortal fear of further revolutions. If, in such a situation, an economist was aware that with respect to economic development there was a fundamental identity of interest between the ruler and his subjects,4 the obvious thing was to search for other potential identities of interest which might be exploited in the interest of social and economic development. Von Stein perceived such a possibility in the reconciliation of the antagonisms between the propertied and the non- propertied classes and between the state (the prince) and society at large (the working population). The basic idea is brilliantly simple.
In order to avoid class warfare and stabilize his dominion, the king has to offer both classes something that only he can offer: he has to offer the non-propertied class a minimum amount of social security and at least some career prospects, and he has to offer the propertied class the assurance that they will not be dispossessed as a result of a class struggle. Von Stein used the catch-phrase ‘social monarchy’ to propagate social measures aimed at facilitating the attainment of such an objective and protecting the vested interests of all those concerned. Similar reflections presumably contributed to a not inconsiderable extent to the fact that in the late nineteenth century, Bismarck effected social reforms which were then universally acclaimed as exemplary and which really did have a stabilizing effect. In the juristic literature, these reflections about social reforms were developed further and took solid shape in the idea that the state had an obligation to provide welfare services. Some jurists believed that this obligation ought to be enshrined in the constitution, and later on the obligation in question actually was enshrined in the German constitution. However, under the entirely different conditions prevailing in the twentieth century, this has resulted in a welfarist tendency whose effects are becoming increasingly destabilizing. This trend is no longer an expression of the law and economics approach. In actual fact, it is a manifestation of law without economics.Like many nineteenth-century specialists in public finance, von Stein initially considered the state’s responsibilities and expenditure as elements of the science of government in the narrower sense. This system of ideas is set against the theory of revenue as the theory of public finance in the narrower sense. In the first edition of von Stein’s manual on public finance (von Stein, 1860), for instance, the disquisition on government expenditure constitutes the first part of the science of government, the discussion of the state budget makes up the second part, and the commentary on public revenue and the appropriate fiscal administration forms the third part of the science of government in the wider sense, as well as the theory of public finance proper.
It was only in the fifth edition of his manual on public finance (von Stein, 1885/ 86) that he abandoned the distinction between the theory of public finance in the narrower sense and the theory of government in the narrower sense. It was no longer possible to draw such a distinction because modern states, unlike the budgets of medieval principalities, are not interested in revenue as such. Their main concern is (or should be) to perform duties which are in the interest of every citizen. What such duties require is not the raising of revenues as such, but rather the raising of revenues for the purpose of performing these duties.This basic idea, which is implicit in the first edition of the manual on public finance, informs von Stein’s theory of a ‘rational tax system'. In von Stein’s view, such a system must fulfil two main conditions. First, it must comprise a large number of taxes which are levied at all the appropriate points in the economic process, and it must be organized in such a way that the capacity for forming real and human capital is preserved. In other words, nobody should be obliged to draw on his capital reserves in order to pay tax. Second, it is important to ensure that a substantial proportion of tax revenue is used ‘productively’, as von Stein puts it. In other words, the capital in question is to be employed for ‘directly productive’ (that is profitable) investments or for indirectly productive activities such as the development of the physical infrastructure, health care or the formation of human capital. It is not proposed to go into the minutiae of von Stein’s theory of an economically oriented system of tax laws. His reflections revolved around the special difficulties attendant on an economy whose national product was still largely generated by day labourers, on the one hand, and by non-bookkeeping farmers, artisans and small businesses, on the other.5
Much of von Stein’s taxation theory is now of purely historical interest and can only be recommended to readers whose curiosity is whetted by the prospect of discovering in tax legislation a mirror of nineteenth-century trade and industry.
By contrast, von Stein’s theory of public debt comprises ideas which even today would be worth pondering. He refined and elaborated these ideas in the various editions of his manual on public finance, and people still quote a maxim which can be found in somewhat different forms in the second to fourth editions of this work. In the third edition, the aphorism in question reads as follows: ‘A state with no national debt either does too little for its future or demands too much from its present’ (von Stein, 1875, p. 716). In this apophthegm, the author is referring to intergenerative externalities, and he says he would like them to be internalized by pay-as-you-use financing aided by overseas borrowing. The sentence under discussion is absent from the fifth edition of the manual on public finance, and much more space (the entire fourth volume) is now given over to the theory of public debt, which is treated in a much more subtly differentiated manner. If one wishes to bring von Stein’s main ideas into relief, one must bear in mind that from an economic viewpoint it is pointless to consider borrowing activities in isolation since decisions concerning public sector borrowing must always be placed in relationship to three things, namely the budget, the balance of payments and the development of an economy’s production potential.6As far as the budget is concerned, it is essential to bear in mind that, from a technical viewpoint, the budget, as a whole, is always balanced. If a debt is contracted, an offsetting entry therefore has to be made opposite it. In the present instance, we may distinguish three cases, which are denoted by different terms in the literature:
1. If the contracting of a loan is set against an increase in government expenditure, one speaks of deficit spending or the budgetary effect of public debt.
2. If, on the other hand, borrowing serves to reduce taxes and the volume of expenditure remains unchanged, one speaks of a deficit without spending or a tax-debt differential effect.
3. If debt category i is replaced by debt category j and the volume of expenditure remains unaltered, there is a debt-debt differential effect. The means whereby such an effect is produced is described as debt management.
In order to bring such budgetary questions into sharper focus, von Stein sets up rules whose main purpose is to produce desirable budgetary effects and ensure proper debt management. When we look at the balance of payments, it is important to draw a distinction between domestic and overseas borrowing. In so doing, one should not consider those who subscribe to a loan, but the effects on the balance of payments on current account. If, as in the wake of German reunification, state indebtedness leads to a current account deficit, the home country seeks to encourage present consumption and/ or present investment by borrowing goods and factors from other countries, thereby burdening future generations with liabilities to foreign countries. Domestic borrowing may also be a burden on future generations if, for instance, capital borrowed by the government squeezes out private investments and is used by the state for purposes of consumption, but this is not always necessarily the case.
When von Stein analyses these problems associated with the balance of payments, the focus of his analysis is on overseas borrowing. This kind of borrowing, he says, is characteristic of the German Lander, where there is fierce competition between different locations, and factors can move freely across open borders. In France and England, by contrast, domestic borrowing is the rule, owing to natural barriers to mobility and the way in which loans are traditionally handled by banks or administrative bodies.
Turning now to the development of the production potential, we have to draw a distinction between two types of effects: (1) the cyclical effects of the public debt on the capacity utilization rate of a given production potential, and (2) growth effects on the development of this potential.
Unlike John Maynard Keynes, von Stein here takes growth effects as his focus of attention. In his analysis of the various types of public debt, an analysis tailored to the situation in German Lander in the nineteenth century, von Stein maps out allocation- and distribution-oriented borrowing rules designed to ensure that this financing instrument is always used correctly. The maxims in question may be described as reproductivity, pension, burden-sharing and interest cost-minimization rules.The ultimate aim of the reproductivity rule is the best possible utilization of capital throughout the world. Let us suppose there are good grounds for believing that a backward country will yield above-average returns on investment if an appropriate policy is implemented. In such a case, the reproductivity rule requires that the state in question should speed up the development of its infrastructure by borrowing abroad. It is, however, crucially important that the borrowed capital should not be used for purposes of consumption, but solely for purposes of investment. This utilization may be either ‘directly productive’ (so-called ‘profitable investments’) or ‘indirectly productive’ (that is, likely to raise the productivity of private investments by creating better infrastructural conditions). According to this rule, borrowing is only justified if it leads sooner or later to an increase in production potential which boosts tax revenue to such an extent that tax receipts are sufficiently high to cover the cost of servicing the loan. In such circumstances, the debt service can be ‘reproduced’, so that the debt might, so to speak, be said to finance itself.
The pension rule is distributively oriented and emphasizes the state’s responsibility for integration and insurance. When managing the national debt, the administration is to take into consideration the fact that citizens want sound investment opportunities, particularly in view of their old age pensions. In order to take account of this need, the government should therefore ensure that the national debt consists partly of liabilities due to domestic borrowing. The national debt should, moreover, be denominated, made negotiable and promoted by price support operations.
The burden-sharing rule relates to the internalization of intergenerative externalities. This objective is to be attained by pay-as-you-use financing of long-term investments to improve the infrastructure by means of overseas borrowing. The second to fourth editions of von Stein’s manual on public finance contain an embryonic form of this rule, namely the aforementioned judgement on a state without a national debt.
The interest cost-minimization rule aims - as the name suggests - at minimizing the state’s interest costs. Von Stein says that the interest rate at which a state can run up debts depends, among other things, on how other countries judge its creditworthiness. He adds that its position in the international rating order is influenced to a very large extent by the regularity of its administration, the terms of an issue and the redemption commitments. The public character of the budget is of the utmost importance, and so are a sensible organization of the fiscal system and the conscious fostering of investors’ confidence. In order to reinforce this confidence, von Stein proposes, among other things, the setting up of a State Loan Commission. This is not supposed to be responsible for debt management in the modern sense. It is a sort of Council of Economic Experts whose incumbent duty is to decide whether a plan to borrow capital is legitimate in the sense of the reproductivity rule, and whether the state is in a position to service the loan. Even today it would be desirable to set up such a body in order to ensure that state borrowing is limited to a sustainable level. A State Loan Commission could form part of a practicable public sector borrowing system (Funke, 1995).
These are all proposals for the construction of a legal framework for national debt. They seem eminently worthy of consideration at a time when European and even global locational competition has taken on new dimensions because of the sharp decline in transport and transactions costs. At any rate, there is little doubt that competition is now much fiercer than when von Stein mapped out his rules, which were geared to the needs of small open countries competing for capital and labour some 150 years ago.
From what has been said about von Stein’s work in general and his manual on public finance in particular, it should be clear that his way of thought can be aptly described as a European law and economics approach. He sought to establish a kind of efficiency-oriented law, though the term ‘efficiency’, as has already been pointed out, must not be misapprehended as a sort of Pareto-optimum, but viewed rather as a species of evolutional efficiency geared towards the kind of dynamism on which Schumpeter laid primary stress. Von Stein, moreover, was a pioneer in the comparative analysis of legal structures designed to find out optimal solutions to given economic problems.
Notes
1. See Schmidt (1956) and Taschke (1985) for these and other biographical details.
2. Schleswig-Holstein remained part of Denmark until it was reconquered in 1864-65.
3. The other main distinctive feature was von Stein’s pursuit of dynamic efficiency.
4. This identity of interest was described by the cameralists and by our comparison with the situation of mafiosi ‘ruling’ undisputed claims.
5. A good impression of von Stein’s general position on taxation is conveyed by an extract from the fifth edition of his manual on public finance. This extract was translated from German by Jacques Kahane and published in Musgrave and Peacock’s (1967) Classics in the Theory of Public Finance. An in-depth analysis of von Stein’s taxation theory can be found in Heilmann (1984).
6. What now follows is a summary of ideas set forth in Grossekettler (1990). The relevant references and illustrative quotations can be found in the same article.
References
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Stein, L. von (1842), Der Socialismus und Kommunismus des heutigen Frankreichs. Ein Beitrag zur Zeitgeschichte (socialism and communism in France today), Leipzig: Wigand.
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Stein, L. von (1855), Das Konigtum, die Republik und die Souverdnitdt der franzosischen Gesellschaft seit der Februarrevolution 1848 (Geschichte der Socialen Bewegung in Frankreich von 1789 bis auf unsere Tage, 3. Band) (kingdom, republic and sovereignty in France), third volume of ‘History of the Social Movement in France’, 2nd edn, Leipzig: Wigand.
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Stein, L. von (1884), Die Verwaltungslehre [Science of Administration], Stuttgart: Cotta.
Stein, L. von (1885/86), Lehrbuch derFinanzwissenschaft. Mit specieller Vergleichung Englands, Frankreichs, Deutschlands, Oesterreichs, Italiens, RuBlands und anderer Lander, 5., neubearbeitete Auflage [Manual on Public Finance], 5th edn, Leipzig: Brockhaus.
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