CLASSICS IN THE THEORY OF PUBLIC FINANCE Classics in the Theory of Public Finance Edited by Richard A. Musgrave and Alan T. Peacock M in association with the St. Martin9s Press Palgrave Macmillan o InI~mational Economic A~~ociarion 195K Softcover reprint of the hardcover 1st edition 1958 978-0-333-61355-9 All righ~ ~~rv~d. No reproducrion, copy or trammi~,ion of thi~ publication may be m3de without writt~n penni~,ion. No paragraph of thi~ publication may be reproduc~d, copied or tran~l11itted ~v~ with written I,....m,i~sion or in accordance with thr provi~ion~ of thr Copyright, De~ign~ and l'att'nI. Act 19RK, or under the temlS of any licence permitting limited copying i~ued by the Copyright Licen~ing Agency, 9() Tottenhall1 Court Road, London WlI' 9HE. Any penon who does my un3uthori.ed act in rdation to thi~ publication may be liable to criminal pra.ecution and civil cbim~ for damages. l'ubli~hed in Great Uritain by THE MACMILLAN PRESS LTD HOllndmill~, Ua~in~toke, Hal11p.hire RG21 2XS and London Compani~ and repr~nlariv~~ throughout the world A catalogue record for thi~ book i~ available from the Uritish Libnry. ISBN 978-1-349-23428-8 ISBN 978-1-349-23426-4 (eBook) DOI 10.1007/978-1-349-23426-4 Antony Rowe Ltd Chippenham, Wilt~hire fint edition 195R Reprinll"d 1961, 19M, 1967 (with new I'rl·f.,ce), 1994 (with new I,r .. f.,u) I'ubli~hed in th .. United Sl3te~ of Americ. by Scholarly and Reference Divi.ion, ST. MARTIN'S PRESS, INC., 175 Fifth Avenue, New York, N.Y. 11)(111l ISBN 978-0-312-12162-4 Library of Congr~' Cataloging-in-Publication Data CIa~,ic~ in the theory of public finance / edited by Richard A. Mu'gr:tve and Alan T. I'eacock. p. cm. Include~ bibliographical referrnc~ and index. ISBN 978-0-312-12162-4 I. Finance, Pllblic-tli~tory. I. Mu~ve, Richard Abel, 1910- II. Peacock, Abn T. 1922- 1IJ14l.C55 1994 336-<fc2() 94-115R CII' CONTENTS l'ag~ Preface VII Preface to the Fourth Impression Vlll Preface to the Fifth Impression IX Introduction RICHARD A. MUSGRAVE and ALAN T. PEACOCK xm Three Extracts on Public Finance ADOLPH WAGNER Contribution to the Theory of the Distribution of Public Expenditure MAFFEO PANTALEONI 16 On Taxation LORENZ VON STEIN 28 The Formation of the Prices of Public Goods UGO MAZZOLA 37 On Progressive Taxation ARNOLD JACOB COHEN STUART 48 A New Principle of Just Taxation KNUT WICKSELL 72 The Pure Theory of Taxation FRANCIS YSIDRO EDGEWORTH 119 The Fundamental Principles of a Pure Theory of Public Finance GIOVANNI MONTEMARTINI 137 On Taxation in General PAUL LEROY-BEAULIEU 152 On Public Needs ENRICO BARONE 165 Just Taxation - A Positive Solution ERIK LINDAHL 168 The Valuation Theory of Taxation EMIL SAX 177 A Theory of the Public Economy FRIEDRICH VON WIESER 190 A Sociological Approach to Problems of Public Finance RUDOLF GOLDSCHEID 202 Some Controversial Questions in the Theory of Taxation ERIK LINDAHL 214 Communal Economy and Market Economy HANS RITSCHL 233 Index of Names 243 PREFACE For some forty years, beginning about 1880, a lively debate on one of the central problems in welfare economics took place between Continental writers on public fmance. This problem was concerned with the optimum distribution of resources between the government and the private sector, and with the ideal means of taxing individuals so that resources could be put at the disposal of the state. The debate absorbed the energies of Austrian, French, German, and Swedish writers, and made the reputation on the con­ tinent of the Italian writers on public fmance. It would be interesting to speculate on the reasons for the neglect of these writers in the English-speaking world, were it not that so many other writers in the field of economic theory encountered similar treatment. We may be sure, however, that this neglect has meant that Anglo-Saxon economics has suffered in consequence. More­ over, this seems an appropriate moment to introduce some of this largely forgotten work, because controversy on welfare economics in English­ language journals has recently turned to the problem of the pricing of public goods, albeit rather belatedly. In the present volume, we cannot do more than provide a sample of the voluminous literature on the subject. However, it can be claimed that the writings of no important school of thought have been omitted. We have tried to assist the reader in the understanding of the evolution of the debate by means of an Introduction. The arrangement of material which seems best suited to clarify the pattern of the debate is a chronological one. It is true that this arrangement results in the placing of the work of Sax almost to the end of the period of debate instead of establishing his right to be one of the pioneers of the application of utility analysis to public expenditure. However, we have preferred to print Sax's final thoughts on the subject and to discuss his earlier work in our Introduction. We feel also that our approach demands the inclusion of the famous dis­ cussion ofjustice and taxation by Edgeworth, although this is already available in English. The editors are indebted to many people who have helped in selecting and translating the essays here presented, and in permitting their reproduction. In particular, thanks are due to Professor James Buchanan of the University of Virginia, for his assistance in the Italian selections. Our only regret is that so much good material had to be omitted, reflecting no doubt the pains of social choice which are the basic subject of this volume. THE EDITORS PREFACE TO THE FOURTH IMPRESSION The first (1958) edition of this 'York was prepared mainly for specialists on the assumption that itwould provide the background to an important neglected field of'discussion in public finance. Since that date, the theory of public goods and its implications for public policy has become incorporated in the main body of the economic analysis of public fmance in the Anglo-Saxon literature. A glance at the footnotes of rome of the standard textbooks on public fmance indicates that this assembly of articles has not been in vain. Indeed, the first edition has already been reprinted twice, and now seems the appropriate time to make the work available as a paperback also. Probably the most influential part of this collection has been the theory of public expenditUre, which contains two closely related elements. The first is as a part of welfare economics: under what conditions, if any, can Pareto opti­ mality be achieved in an economic system in which some goods supplied are indivisible! This question has been considered very thoroughly in recent years with due attention paid to the earlier work ofWicksell and Lindahl in particular. The other strand of thought is concerned with the positive theory of the public sector: how can we use economic analysis in order to explain how the size and composition of the budget is actually determined! This is a much more difficult question to answer because it entails the development of a theory of collective action. While there is less evidence of fundamental thinking on this question in this work, it is perhaps of interest to note that, since it first appeared, Erik Lindahl in one of his last appearances in print, has offered some interesting observations on this second element exactly forty years after the appearance of Die Gerichtigkeit der Besteuerung (1). The essence of his contribution is an attempt to employ utility theory, as developed in his earlier work, to explain the size composition of the Swedish budget during the twentieth century. Lindahl also showed in this contribution that he was fully familiar with recent work outside Sweden which stemmed from his own earlier contributions. There is a lesson to be learnt from this when one considers how long it has taken for him and his contemporaries to receive the attention which was denied them in the past. THE EDITORS (1) "Omskatteprincipcrochskattepolitik", El!#nonli Politile Samluillt, Festkrift till Berti! Ohlins 6o-hsdag, Stockholm, 1959, pp. 151-171. .This paper is available: in an English translation by T. L. Johnston in l>ttmu~tiotuJI &otwmic Papns, No. 10, pp. 7-2.3. PREFACE TO THE FIFTH IMPRESSION Neither of the editors envisaged that, thirty-five years after the first appear­ ance of this work, the publishers would invite us to re-introduce it. Their reason must be that scholars and their students may still find it useful not simply to have the work in the nearest library but even on their book­ shelf. That being so, it is arguable whether a further preface is needed when the interest of those consulting the work presumably still lies in the classical literature rather than further commentary. Nevertheless, it may be of interest to consider how f.u Classics stands up to the tests set by the scope and method of public finance theory, as it is taught and practised today, for there have been major changes since we first compiled this collection. The first major change is that the teaching of public finance has become throughly integrated with the standard body of micro theory and relabelled "public economics". Following general practice in academic economics, much of the :malysis is presented in more rigorous and mathematical form, along with empirical testing by econometric methods. The remaking of incidence analysis in general equilibrium models offers a good example. The computer revolution has not stopped short of public finance.