From public finance to public economics

Abstract

The emergence of the expression of ‘public economics’ marked an epistemological rupture in the economic discourse about the state. The local problems and national intellectual traditions that had shaped the centuries-old field of public finance were cast aside in favour of new problems and new methods. From the 1970s onward, public economics became an integrated international field defined by a methodological approach embodied in general equilibrium. Mathematics and optimisation changed the nature of the questions considered. After briefly outlining the historic constitution of the field of public finance and how it was transformed in the middle of the twentieth century, we explain how a new economic theory of public expenditures emerged with one foot in the old public finance and one foot in the new public economics. We then hint at how the integration of risk into economic theory unexpectedly transformed the way economists conceptualised the public sector. Last, we consider how the maximisation of social welfare functions exhibiting a trade-off between equity and efficiency replaced principles of taxation.

Keywords:

• Public economics
• public finance
• Richard A. Musgrave
• James M. Buchanan
• John Rawls
• optimal taxation
• risk

JEL codes:

• B21
• B40
• D81
• H20

Acknowledgment

The authors are grateful to the contributors of this special issue for sparking new questions and suggesting lines of inquiry which we trace in this concluding paper. It is much better than it would have been without the wise counsel of Beatrice Cherrier, Roger Backhouse, and Steven Medema. The conclusions drawn here are tentative and will hopefully be refined by further research on the history of public economics.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Offentlig Økonomikk was first published in Norwegian in 1962.

2 The conference was organised in Biarritz by the International Economic Association, of which Paul Samuelson was at the time president.

3 Kolm (1987, 8183; 2010) claimed incorrectly that his lecture notes, in French, were printed in 1964 before the translation of Johansen’s book, making him the inventor of the label ‘public economics’. However, he seemed to have forgotten the use made by his mentor and thesis supervisor, Divisia (see also Hauchecorne 2018).

4 Public finance specialists had studied traffic congestion, the pricing of public services, cost sharing amongst levels of government and other issues that fell at one point under the umbrella of urban economics, on which see Kuehn, 2023; and Cherrier and Rebours 2023.

5 A similar disciplinary position was occupied in Italy by the Scienza delle finanze (on which see Buchanan 2001[1960], Fausto and De Bonis, 2003, and Silvestri, 2023).

6 This is despite that Smith’s maxim could also lay support to the benefit principle, as Seligman (1908, 164) and others have pointed out.

7 In other words, income is defined as consumption plus gains in net worth whether they are realised or not. It includes, for instance, owner-occupied imputed rent.

8 https://www.irwincollier.com/harvard-undergraduate-public-finance-reading-list-and-semester-exams-burbank-and-musgrave-1938-1939/

9 Several abrupt personnel changes in public finance at Chicago left Buchanan to write his dissertation on fiscal federalism under the newly hired Roy E. Blough (Johnson 2014a; Mitch 2016). Buchanan seemed little influenced by Blough, although they would have agreed on the general point that acceptable standards of justice in taxation were necessary for the functioning of economic and political organisations (Blough 1944a, 24).

10 Simons died in 1946. His Federal Tax Reform was published posthumously in 1950. However, drafts had been circulating since at least as early as 1944.

11 Following the First World War, the Commission on the British Income Tax (1920) and the Colwyn Committee (1927) both took up problems of the definition of income and provided some of the earliest empirical estimates of the tax burden; their method and findings influenced both Blough, Shoup, and Newcomer (1937) and Colm and Tarasov (1940).

12 “If utility is defined as that quantity the mathematical expectation of which is maximized by an individual making choices involving risk, then to maximize the aggregate of such utility over the population is equivalent to choosing that distribution of income which such an individual would select were he asked which of various variants of the economy he would like to become a member of, assuming that once he selects a given economy with a given distribution of income he has an equal chance of landing in the shoes of each member of it” (Vickrey 1945, 329).

13 Both Vickrey’s (1945) and Harsanyi’s (1955) papers would be cited as precursors to the public economics literature of the 1970s, breaking away from the new welfare constraints and operating a return to utilitarianism (Sandmo 2015). They received many citations since their authors each received an economics Nobel in the 1990s, but citations to either of them were quite esoteric after their publication. According to Google scholar, Vickrey’s paper was cited only 22 times and Harsanyi’s only 45 times before 1971.

14 https://www.jct.gov/CMSPages/GetFile.aspx?guid=e8c41b1f-d45a-4911-8ca8-9e90eb607693. On the Revenue Act of 1951, see also Miller, 1952.

15 Bank of England, A Millenium of macoeconomic data, A27, https://www.bankofengland.co.uk/statistics/research-datasets. White House, Office of Management and Budget, Historical Tables, Table 2.1, https://obamawhitehouse.archives.gov/omb/budget/Historicals

16 Bishop (1968) later pointed out Musgrave’s misinterpretation.

17 Note that this general framework started with a social welfare function whereas in the 1951 Treasury memo, Samuelson restricted himself to the framework of Ramsey of a single utility function, even if he had already defined the concept of the social welfare function in his Foundations in 1947. Whether Ramsey’s utility referred to a representative agent or something like a social welfare function is subject to interpretation. In any case, Ramsey’s function was likely interpreted as the former by postwar economists (Duarte 2009).

18 By the middle of the decade, Atkinson remarked to Samuelson “about once a month, I get someone suggesting to me that it would be very nice if the Journal of Public Economics could publish your famous US Treasury memorandum on the Ramsey problem” (1976). A.B. Atkinson to Paul A. Samuelson, 25 May 1976. PASP, Duke University, Box 143, cited by Roger Backhouse who has generously shared with us a draft chapter of the second volume of his biography of Samuelson. Samuelson’s memo was finally published in 1986.

19 The equity/efficiency tradeoff is explicit in Diamond and Mirrlees (1971a): “The optimal redistribution by this method occurs when there is a balance between the equity improvements and the efficiency losses from further taxation.” The expression is also used by Cooter and Helpman (1974), Sandmo (1976), Atkinson and Stiglitz (1976), and Stern (1976).

20 As Rawls put it in a letter to Buchanan: “people focus on risk aversion and maximin far too much and seem unaware of the main features of the theory [of justice]” (Rawls to Buchanan, 25 February, 1975, James M. Buchanan Papers, Box 84 George Mason University Libraries).

21 In Rawls’s theory, a solution could be to include leisure in the index of primary goods upon which different social positions were compared, a suggestion which Rawls (1974) supported, while also challenging whether the very idea of natural ability could be well defined considering that talents were socially constructed.

22 Buchanan to Musgrave, 29 January 1975. James M. Buchanan Papers, Box 66, Folder 10, George Mason University Libraries.

23 Among recent contributions, see Cherrier (2017), Cherrier and Fleury (2017), Backhouse and Cherrier (2017), Cherrier and Rebours (2023); but also, Teixeira (2000), Panhans and Singleton (2017), Panhans (2018), Dupont-Kieffer et al. (2021), and Banzhaf (2023).