Book III

BOOK III THEORY OF THE STATE-ECONOMY Meyer, Prinzipien der gerechten Besteuerung, 1884; Sax, Grundelg'llng der theM'. Staats1birtschaft, 1887; and, Die Progressivsteuer, Z. f. V., vol. I; Pierson. Grond beginselen der Staatshuishoudkunde, 2nd ed., 1886; and, Leerbock der Staatsh4JA.skoudkunde, 1890; Cohen Stuart, Bijdrage tot de tkeorie der pro'gres sieve inkomsten belasting, 1889; Wieser, Der naturliche lVert, 1889; Edgeworth, The Pure Theory of Taxation, Econ. Journal, vol. VII; MannsUidt, Finanzbedarf una. Wirtschaftsleben, 1922; Pigou, Economics of Welfare, 1920; Lindahl, Der Gerechtigke';,t der Besteuerung, 1918; see in this connection, Lehrbuch der Finanzwissenschaft by Lotz (1917), Foldes (1920), and Eheberg (19th ed. 19'22) . In the "Theory of the State Economy" it will not be necessary for us to con cern ourselves with the duties devolving upon the state within the limits of the social economy. So far as these problems are susceptible to theoretical exposi tion, we have discussed them in the preceding part of this book. Here we shall describe exclusively. those characteristics by which the economy of the state is to be distinguished from private economy. To some extent the classicists neglected these problems. Their object was to eliminate the state as much as possible from the social economy. Nevertheless, the theory of the revenues and ex penditures of the state necessarily affords an opportunity to explain the special forms of public economy in the narrow field here indicated. But even in this respect, their investigations were not searching. The advocates of protective tariffs later found it necessary to turn in the pursuit of other inquiries to an examination of the theory of state economy. Friederich List actually did so.

Even stronger inducements have existed for the modern economists who turn over to the state tasks of much enlarged scope. But little has been accomplished so far to advance the theory of state economy. Most that is brought forward develops in the exposition of public finance. Finally, a more modern theoretical tendency has ~prung from the theory of taxation. The bibliography, which precedes'this section, mentions only the foremost treatises of the latter group. Beyond these, we confine ourselves merely to mentioning the systematic presenta tion of the science of public finance, laying particular stress on the name of A. Wagner. [See also his Grundlegung, and his article Staat in the Hwndworter buch der Staatswi8senschaft.] § 78. THE PUBLIC ECONOMIC PROCESS Oollective empenditures and thew classification-Public economy, an economy of empenditures-The nature 01 the receipts in the public economy.

The economy of the state is often popularly characterized as the "state's housekeeping." By this term we apply to the whole of the public economy a manner of thought derived from a single part of the private economy. In the same way, nearly all scientific attempts 419 420 SOCIAL ECONOMICS to explain the nature of the public economy start from a method of observation which reduces the phenomena to the familiar ideas of private economy. In the classical theory, the economic relation of the state to its citizens was regarded as that of an exchange in which taxes are paid as a remuneration for administrative' services. Mod ern theories look upon the ,activities of the state as a special sort of production, an immateriaf'kind, which is aided by impalpable capital funds to call intobel'~g the intangible products of peace and legal security. Such views only serve to obscure the nature of the public economy.

Essentially it is not to be distinguished in concept from the private economy. Both have an hl,e.ntical basis and pursue the same. end; both serve the purpose. of tl;lrning to the greatest possible usefulness the commodities that are found in the economic quantitative relation. But the state in its economy has unique means of power placed at' its disposal. It is therefore faced with unique' tasks and travels its own peculiar course. The types()f public economic income of which the science of finance treats ,are entirely unknown to private economy and are in no way related either to exchange or to production. The supposition that a tax is in the nature of a payment for immaterial products is in noway suited to become the basis ofa theory of taxa tion, for the principles observed in levying 'taxes have nothing in com mon with the law of price. There are different economic processes for the state, for communi ties and for other self-administrative bodies. The municipalities in their management are more nearly akin to private economy but they are too dependent on the particular forms which self-administration takes in the various states to be adequately described in a general theoretical exposition. However, we may not evade the duty of describing' the typical state economy. If this is not done, no theory of social economy is complete nor could it supply the necessary theo retical bases for the science of finance and the administrative policy 1 toward the social economy.

The Imost instructive view of the structure of the public economy is obtained by starting with the expenditures of the state. Every activity of the state, whatever its kind, is accompanied by expenditure. In these disbursements, the entire system of state activity receives its economic expression. In surveying the expenditures of the state, economic theory will bear in mind its special object, and will not follow a division by administrative branches but rather an economic 1 VolkBwirtschaftspolitik.

THE 0 R Y 0 F STAT E - E CON 0 M Y 421 principle of classification. We propose to classify state expenses under two principal heads. In the (first group we bring together the outlays most nearly akin to the plHvate economy. These are the costs incurred for services which the nstate performs separately for individual people, in the same or nefirly the same manner as char acterizes private exchange. These al'<!' therefore services for which the state is entitled to demand a pricer or, at any rate an individual counterperformance. We shall referuto these expenditures as those which are personally distinguishable o:r, briefly, as personal outlays. They are to be distinguished from tke other groups of inseparable, collectively incurred expenses. The state incurs personal outlays in its purely· private economic enterprises. They arise in the same manner in the conduct of the postal service, the railroads and all other public undertakings main tained as a matter of administrative policy. In all these cases the state enters into an exchange with the parties receiving the service.

They pay a price covering the state's expenses just as they would to a private entrepreneur. It· makes no difference to our present pur pose that the state may at times adjust the payments required for such public services by methods that are at variance with those which a private entrepreneur would follow in seeking a price-advantage. Even when this happens, .the process initiated by the state does not differ essentially from the private economIc process. Therefore we do not need to go into its details. The state also incurs personal outlays for. numerous administrative functions, including those of the law, when the costs are incurred for performances that the state undertakes at the instance of an individual and in his particular interest, or that are called for by the culpable conduct of an individual. Such expenditures the state properly charges directly to the interested or culpable party by fees that are intended to cover official expenses wholly or in part. A ready illus tration is found in a civil process the court costs of which must be borne by the unsuccessful party. The litigants and judge do not meet as "parties to a market"; they do not effect an exchange. The fees therefore are not a price. They have only one characteristic in common with prices: they are for a performance rendered to an in dividual and necessitating individual chargeable costs. Although fees well merit explicit discussion in a systematic presentation of the science of finance, they are of no importance to our general theoretical pro blem. We shall not consider them further. All other administra tive expenditures induced by individuals but not recovered in fees, we include under collective expenditures.

422 SOCIAL ECONOMICS In the following. remarks we confine our attention exclusively to collective expenditures. These alone prepare us for the public eco nomic process on which our theoretical interest centers. They may themselves be divided in three subgroups according to the degree in which they approximate the nature of private economic expenditures. The first is comprised of .the expenses of economic administration. These are costs incurred for the protection and the advancement of the private economy, more particularly the economy of acquisition. In the broadest sense they would include the costs of· colonial or other wars entered upon for the sake of the national economy. They are . Inade with the same aim as private acquisitive outlays and their effect is to be observed in the amount of the private yields which they are in tended to assure or increase. The method followed in the private and public outlays does differ somewhat. The state itself does not in· this case produce goods. It merely renders assistance to their production by preparing the foundation through its administrative activity. The state leaves it to private effort to make a proper use of the institu tions or conditions which it establishes. Those national economic administrative expenditures particularly benefit the moneyed class :which draws the largest gains.

The second subgroup of collective expenditures are for domestic administration. Here again the administration of the law is to be included. Into this category fall the costs for the care of the poor and for the public welfare in general. Equally to be included are the expenses for social reforms that are not intended primarily to increase the social income but to improve the conditions of life for the masses. Finally the third subdivision embraces expenditures for the needs of the state in the narrowest sense: for its preservation, the main,tenance of domestic and foreign power and authority, the protection of prestige, the expenses of the representatives of public power and of the military establishment. In general this class includes expenses for "state necessities" that are often contrasted with the interests of the people in that the power and splendor of the state becomes an end in itself whereas in truth it may be justified only as it is indis pensable to and serves the welfare of the people.

Collective expenditures are collective. in that they employ common means under unified direction for services that. accrue to individuals indiscriminately. They are not so much collective in the sense that they serve collective needs, properly speaking. In the main the econ omy of the state caters to general or widespread individual needs, the same ones it should be noted to which private economies cater, THE 0 R Y ,0 F S TAT E - E CON 0 M Y 423 starting with the need of food and other physical means of subsist ence up to the highest cultured needs, intellectual, resthetic. or moral. These needs are served by the private economies in that the latter make possible their direct economic satisfaction or by means of pro duction or acquisition provide the economic agencies of their satisfac tion. Public economy serves these needs by such accompanying and controlling activity on the part of the state as is required to protect social and economic life from dangers and to advance its well-being by acts that are beyond the power of individuals. The individual protects himself against minor dangers; several persons may jointly agree to stand together. For example, by insurance the harmful after-effects of loss may be neutralized. In the same way that insur ing a dwelling does not satisfy a special "need of insurance" but arises from the same personal need that originally demanded· the possession of a house, the activity of the great protective association of the state is directed, not to a special collective need of protection, but to the same needs of life that are met by economic goods in the possession of indil'iduals.

Even the expenditures for the narrower needs of the state do not meets the needs of the state, as such,but the personal needs of its citizens. When one speaks of the requirements to the existence of the state, it is in the more general sense of the word need, a meaning from which at the beginning of our study we distinguished the nar rower economic concept of need. The so-called subsistence needs of the state are not like those of the individual directed to the consump tion of means of satisfaction. They do not strive for satiety and are therefore not subject to Gossen's law. They are such as the "need" to possess and wield power or to possess and enjoy liberty. Their goal is the independence of the citizens in everyone of the acts which the state performs for the satisfaction of physical or intellectual needs. From this exposition it follows that the character of the economy of the state differs from that of the private household or of private acquisition. It differs from that of the household in that in all essen tials it is directed not to the immediate satisfaction of needs, but to the protection and advancement of these satisfactions. From acquisi tive economy, especially production, it is distinguished by the fact that of itself it does not bring forth productive yields. It is true that in the economic administration of the state there are created certain material values, such as streets and highways, whose technical prepara tion and control of use are similar to those of products turned out in private production. But it must not be overlooked that also with 424 SOCIAL ECONOMICS these values, because they are dedicated to a. public use, it is not intended that they shall bring forth direct. gains for the state but that they shall manifest their virtue in' furthering yields in the private economics. The products that are thus turned out by private agencies are not in any technical sense also products of the governmental ad ministration. There is a markedcesura between national economic administration and production that is indicated by distinct methods of valuation that are followed in the two.

The remaining activity of the state, directed to the establishment or protection of moral values, is even more sharply and significantly separated from private economic production. It is only metaphori cally that one may speak of it as immaterial production. Only figuratively can one refer to peace, legal security and other valuable conditions of life, in whose shaping and protection the state is in strumental, as immaterial products. Strictly this is no more allow able than to speak, of a statesman or military leader as a producer. The means ,placed at their disposal, the corps of officials and the armies, are not controllable material values like the material goods of which the producer disposes, noris it possible technically to separate effective value and inherent value as in productive labor. The con duct of war, the dispensation of justice .and the administration of law are just as much preparatory to future national life as they are part of the present.

The closest analogy to the process of state economy in the forms of private economy is to be found in that of an association in the interest of whose members a common enterprise is undertaken and common expenses are incurred. Like such an association the state economy is essentially an economy of common expenditures. As such the state economy is closely akin to the private household and to this extent the designation of the state's housekeeping which is popularly used, ,is well cho.sen. Neither the state nor the association provides from its own economy an income to meet expenses; both are expenditure economies and are confined to the collection of dues or contributions from their memberswho meet the assessments from their private in comes. The state does not have an independent income. The contributions of its citizens· constitute a special form of derived income. Owing to its sovereign power, the state can provide for the compulsory col lection of the contributions for which it calls; but it cannot make arbitrary use, of these sovereign rights ,any more than in any other field. In the model economic state, that we presuppose in theoretical enquiry, there is an economic apportionment among its citizens of the THE 0 R Y 0 F S TAT E - E CON 0 M Y 425 compulsory contributions. Their assessment is an important func tion in the state's economic process. We shall have to discuss it in some detail and show how it should be done in order to conform to the economic principle~ § 79. VALUE IN THE ECONOMY OF THE STATE The state's computation of eaJcnange-value-Use-value in the state economy The state's appraisal of sO'cialinterests-Partial value and total value--List's theory of productive forces.

The state is guided like any other entrepreneur in its purely private economic undertakings entirely by value in exchange. It would be an error to make calculations on any other basis than that adopted by any private owner governed by rational economic prin ciple. If the conditions of the worker are bad, the state should surely be the first to set an example of reform by improving conditions in its industries, just as the enlightened absolutist governments set the first example in improving conditions of life for the peasantry on the state domain. In acting as a private entrepreneur the state should also bear in mind its duties as state and avoid increasing its revenues by means which as the state it must condemn and oppose. Thus the exchange-value computation of the state is illumined by a ray of purer social valuation. Public enterprises like the postal service and railroads are acquisi tive undertakings conducted by the state for administrative considera tions. Therefore they may suitably be referred to as administrative enterprises. They have become administrative institutions without losing their character as enterprises. In these undertakings too the accounts are kept ona basis of exchange-value but they must be interpreted in the light of administrative interest. The immediate purpose of retaining public control is to prevent monopolistic exploita tion by private capital. Unless other considerations arise, the state is not called upon to depart from the exchange-value computation; the service and prices should be such as would result from a well regulated competition.

Frequently these administrative enterprises are operated with other than the directly obvious aims. For example, the postal service carries the mail of the state gratuitously. It frequently happens that even the public is not charged a price that returns the customary net earnings; the charges may actually result in an undisguised loss. In such cases the intention is to increase production and trade. Such SOCIAL ECONOMICS an adjustment of rates may be made even when the desired increase of the social income will not result for many years. Finally it is observed a rate of this sort is maintained for certain groups or local ities even when it becomes obvious that the districts affected can never be stimulated to an increased remunerative traffic. The first of these conditions is of no theoretical importance. The last two are treated in the succeeding exposition of national economic administration.

At this point we shall consider only services rendered at a perma nent loss. Examples are found in a city railway that establishes reduced rates, that leave. no profit to the railway, for workers who travel in the early morning hours; in an additional service above that following from the general postal rate, that is established for a remote district with stagnating traffic and results in loss. In these cases the exchange-value computation is affected by a social valuation that is foreign to the market place. The price in the market is a compound of need and ability to pay. The private entrepreneur who supplies the market never provides for the need as such; he caters exclusively to the effective demand. But the administrative enter prises under consideration undertake to serve a need which may lack adequate power to pay. They do so because the need to be served , is sufficiently important to be cared for under any circumstances.

They do not calculate by exchange-value but by the use-value which a unified economic society would follow according to the laws of the simple economy. In contrast with the administrative undertaking,! the national eco nomic administration 1 does not calculate by exchange-value. It is not adjusted to gains. ,Excepting fees and other income from in terested parties, it offers its services gratuitously. A street that produces no yield has no exchange-yield value. Not being intended for sale, it has no exchange-value either. It possesses public economic use-value by virtue of its service in the national economic process. To be sure this public economic use-value is supported by the private value that inheres in the road for those who use it. Roads and all other instruments of the national administration would be without value to the public economy if they were not suited for use and were devoid of personal value for everybody. In the main the national economic administration· must be adjusted to result in the highest possible net monetary earnings for the private economics. It would 1 Trans. note: The contrast is between Unternehmung and Verwaltung, between the conduct of a business by government and the determination of the frame work in which all business functions.

THE 0 R YO F STATE-ECONOMY 427 be entirely inconsistent for a state that accepts the private constitu tion of the economy as sound to reject the valuations that its citizens set by the standard of market prices. I t is only exceptionally that the state in the common interest, in order to support its judgments of value, takes active measures to supplement or reetify private eeonomi~ ex~hange-values. As is the case with the state enterprise, the state in its economic administration seeks especially to serve those needs that are deserving of consideration but are not supported by an adequate purchasing power. When a state places an embargo on the export of grain after a crop failure, its decision is not governed by considerations of exchange-value but wholly by those of the use-value in the simple economy. This use value is determined by the principles of the public economy on the basis of the need as such without regard to recompense. The state in such a case sets the needs of the poorer citizens, who cannot compete with greater buying power of foreigners, above the profits that might be realized in exchange by the producers, exporters and transportation companies.

This use-value of the state economy in its administration makes in common with private economic exchange-value the presupposition to which we referred in the theory of the simple economy as the universal hypothesis of economy, i. e., that the economy is carried on by separable quantities of goods and labor. The use-value of the public economy is a partial value whose standard is derived from the partial utility of the last available unit. In numerous fields outside of economic administration, however, this partial utility does not serve the purposes of the state. This is true whenever the public economic process is of a sort to forbid the assumption of partial disposition. Such is the case when the forces of the community are to be enlisted as a whole and the total effects appraised. This cannot be done, as it is fora yield of com modities, bya summation of partial values. Even in the national economic administration, although on the whole it is adjusted to partial-value computation, there are exceptions. Thus in determining whether a state shall become industrial or agricultural it is not suffi cient to estimate the yields that may be expected from greater in dustrial or agricultural effort. It is also necessary to consider the effect of each system on the conlposition of the population, its health, the military resources of the state and other like interests of great im portance. The lnarginallaw is not respected in these cases; valuations are established beside which the derived partial value measured from the marginal use is small. The primary interests of society. dictate the 428 SOCIAL ECONOMICS point of view; the sum total of the public interests is evaluated, in whose behalf the common force is to be exerted.

For the individual goods and labors that are used in the interest of the public the computation by partial value is not discarded by follow ing this rule. The weapons and all other munitions, stores of food stuffs collected for the eventuality of war, buildings and ships are paid for individually at the marginal value. Similarly army officers and state officials are paid at a rate following in the main the marginal law of the market. The almost parsimonious care to which the war office is held because of its enormous aggregate expenditures, restrains it in individual cases strictly to the law of marginal value. But by the side of the appraisals and extending beyond them is one of the military interests of the state as a whole. This is imperative. It starts with the effect which a display of military power may have on the sovereignty of the state. The pecuniary sacrifices that its citizens are supposed to bear for purposes of public defense derive their standard from this total valuation. In view of this, compulsory mili tary service is imposed on all citizens capable of bearing arms, while the people are burdened with other oppressive obligations that must be assumed in the event of war. If universal military service were wrongfully taken advantage of for dynastic wars, it would be an in tolerable drain upon the forces of a people, far more iniquitous than the worst exploitation by entrepreneurs. Confined to national de fense, it rests upon a social valuation of the state's interest that attaches such importance to military service, that the state im poses it on all its citizens. This is done despite the fact that the men are thus barred from peaceful occupations. It is the latter which are most highly appraised on the market basis of exchange value.

The· greatest divergence of social valuation by the state· and private exchange-value is in regard to the personal appraisal of workers. The entrepreneur looks upon wage-labor as nothing more nor less than an instrument of realizing expected profits. Economically he regards the worker as merely a party supplying wage labor. The entre preneur pays him nothing more than the marginal value of his labor. However, the state would not be justified to content itself with a valuation which actually implies that the worker is nothing more than a tool to the realization of pecuniary gains. The state cannot consent to any interpretation by. which a fellow worker in social production is at an unsocial disadvantage when the yields are dis tributed. The state must bear in mind the dignity which clothes the laborer as a man and as a member of human society with all the THE 0 R Y ,0 F S TAT E - E CON 0 M Y 429 claims of man upon this life. It does not follow from these premises that the state will wish to subvert society and the civil' code and to make war upon a distribution of yield which follows the valuations of the market. Nevertheless the state will feel it a duty to provide as far as may lie in its power the public means of· protecting the life values of the laboring class. It will couple with this the further aim of seeing that the workers are qualified to bring into action forces that promise appropriate rewards for their labors.

There has been but little inquiry into the theory of public economic value. The most important effort along this line was probably made by Friederich List in his "Theory of Productive Forces" which he opposes to the "Theory of Value" of the English school.! In this theory List intended merely to present the theoretical foundations of his national protective policy. But the form in which he states it is general; it is a universal theory of public economic value which he develops to suit his particular purpose. According to List the state does not calculate by private exchange values like an entrepreneur. Its sole aim is the development of national protective forces. The sacrifices which the state incurs primarily in exchange value will later bring bountiful rewards. The state should proceed precisely as does a father who ensures the welfare of his sons to better purpose by defraying costs of education to prepare them as well as may be for their tasks rather than by setting. them to practical work at the earliest pos sible moment and turning their work to account in the market. The very il lustration which List uses in an attempt to show the contrast between exchange value and productive forces furnishes the proof that there is no contrast. The father who has his sons educated in the most approved manner in order that they may later earn higher incomes calculates on the basis of an exchange value d,e duced from the productive forces expected at a later day. Every entrepreneur calculates in precisely this manner when he makes up his mind to operate at a loss for a longer or a shorter period. In this respect there is no essential dif..

ference between the computation of the entrepreneur and' that of the state. There is only this difference: the state can hold out for a longer period than even the richest entrepreneur would be willing or able to do. List's terminology is justified only in so far as the periods of time covered by the entrepreneur are of such short duration that the exchange values which are expected later may be ascertained with considerable certainty in advance. In this respect the posi tion of the state is quite different. A policy of protective tariffs must be made for extended periods. In this interval a thorough-going development of pro ductive forces is expected. These changes are so large and the period so long that there is no way to make an accurate determination of the future values in volved. For the present there is no other feasible procedure than to appraise the productive forces as such. It is a form of public economic use-value which List describes. It is a use-value of productive forces that evolve over long periods and for which the complimentary agents that are necessary to their fruition are lacking. Those points at which the contrast between exchange value and public economic use-value really lie concealed,. List has not touched upon at all.

1 The National System Of Political E,conomy, 7th ed., 1883, chap. XII.

430 SOCIAL ECONOMICS § 80. THE ECONOl-UC PRINCIPLE IN STATE ECONOMY The inaccessibility of computations of public ecanomic use-val-we and of the valuations of state interests-The economic plan of the State and the marginal law-Economic theory and the theory of taaJation. To the extent to which the state computes by exchange value in its private and administrative enterprises, it is obviously guided strictly by the economic principle like any other entrepreneur. The highest net yield is sought. This may be ascertained by a numerical com parison of the costs incurred and the utility secured. However, it is perfectly evident that there is no violation of economic principle if the state in these enterprises, rather than reckon by exchange value, in exceptional cases considers the simple social use-value. In every such instance the state would arrive at its decision with a view to that result which under the given conditions it regards as the highest possible.

From this reasoning it follows that the state in its national eco nomic administration obeys the economic principle even when it does not calculate directly by exchange value but by public economic use value. The latter also leads to the maximum utility. However, the indirect productivity of administrative institutions does not lend it self so readily or exactly to verification as does the direct productivity of a private enterprise after the regular working routine of the latter has once been entered upon. A manufactured article is the fully controlled resultant of productive means. It is quite feasible to calculate the precise gains to be expected from products for which certain costs have been incurred. The indirect advancement of in dustry which is anticipated from an administrative institution can never be foreseen with equal certainty; the private initiative of free entrepreneurs is an imponderable, though it may be the decisive factor in the problem. When the opportunities offered by the ad ministration are taken advantage of on a long and broad scale the results may be great. But it is quite within the range of possibilities that though the administration has done its best, the results lag behind and are meagre because private initiative fails to take advantage of the opportunities o'ffered.

If .one follows this train of thought from the· national economic administration into the broader fields of the state's activity that is animated by its estimation of the general social interest, it is evi dent that here also the economic principle as such maintains its validity. But its obedience to mathematical rule and expression is T 11 E 0 RY '0 F S TAT E - E CON 0 M Y 431 wholly lost. The state determines the numerical expression only for the partial values which it acquires at market prices: costs for the services of employees and purchases of supplies. These may be en tered item by item in official budgets and final accountings; but against these costs, no figure can ever be set for the total value of the effects of the state's administration, no figure which shall serve as a spur to its efforts and set the ultimate limit for the amount of its disbursements. Who would seek to give arithmetical expression to the "benefits" of a victorious war and to equate these numerically against its costs and other sacrifices! And yet when the existence of the state is endangered, national consciousness will sound a call to war.

The intensity-values of the interests to be protected are carefully appraised. Definite decisions are arrived at as soon as public opinion had agreed upon its verdict in the appraisal or sentiments. But throughout this process, numerical expressions for those things which are intensely felt cannot be found, are not sought and are considered of minor importance. Under other conditions to' be sure the conflict of opinion regarding political decisions arises largely from an uncer tainty as to their consequences. when numerical data are lacking. In any event the state's economic plan should be in harmony with the economic principle; less important interests should be kept in the background while the most vital ones allowed by the available means are assured. The. more abundant these means are, the larger will be the amounts brought forward from the common force and the greater the effects anticipated. The richer state can offer its citizens greater military protection; the poorer one must be content with a more modest military display. To this extent the plan of state econ omy even where' it is determined by aggregate valuations is controlled precisely like the economy which computes according to partial value and desires to extend the margin of use as far as possible.

When scheduling the plan for the state's expenditures, it is of particular importance that the state is bound to act as a protective association. The amount of its expenditures to meet this duty must therefore always depend upon the nature, degree and imminence of the danger against which it is to protect the people. A rushing tor rent requires more extensive precautionary measures than a quiet pool. During a period in which the great nations are pushing their armaments to the extreme and national passions and jealousies are inflamed it is not safe for any state unduly to curtail its military outlays. The poorer state will not set a standard of its military preparation only to accord with its economic power. It must also consider the general state of preparedness. Even a state whose 432 SOCIAL ECONOMICS wealth is declining' may feel compelled in times of danger to in crease its military budget.

Such conditions give rise to the much invoked rule that whereas in private economies expenditures have to be adjusted to the available income, in the case of the state income must be adjusted to expenses. As it is formulated, however, the rule has too broad a meaning. In its expenditures as well the state must be guided by the revenues which a dutiful observance of economic margins permits it to secure from the incomes of its citizens. These problems we shall presently discuss more fully. However, it is true that the state more frequently than the private citizens is under the necessity of suddenly and substantially increasing its necessary expenditures. The reason for doing so is to be found in the.. uniqueness of the economic task that faces the state. The principal problem of the private economy is the economic approval or disapproval of the needs to be satisfied and the acquisition of the required means. By its partial satisfactions and labors it is possible for this economy to adjust itself with a certain fluidity to the point indicated by Gossen's Law of Satiety through the marginal utility. But, as has just been shown, in so far as the public economy is serving the ends of a protective association, it is bound to accept the measure of its expenditures for the greater part from facts which are beyond its control. The increasing imminence of war may suddenly endanger national life and all its values for which, under the quiet conditions of peace, no consideration or fore sight was necessary.

Among other limitations that always bind the state in its tax policy is the condition of the private economies on which the state levies its compulsory contributions. Were all the citizens equally well to do, theory might be satisfied after it had established the simple rule that the rate of taxation is to be so determined as to create a single margin of use for the economy of the state and of the citizens. It would not be permissible for the state to lay claim for public purposes to means which might be used by private individuals to gr~ater ad vantage, and vice versa. However, the inequalities of wealth are so great that this rule is inadequate· to obtain an economic standard for the apportionment of the burdens of taxation among individuals. It is not part of the task of a gen eral economic theory to seek the complete solution of this principal problem of the theory of taxation. On the other hand our treatment of economic theory would not be exhaustive if it failed to set forth at least the general theoretical foundations required by the theory of taxation in the solutiOJl of the problem.

The two foremost principles of the equitable assessment of taxes, universality and uniformity, follow directly from the social value of the state. Its char acter would be destroyed if the state departed from the rule that all its mem bers are to be held to contribute for common purposes. Similarly it would be abolished were they to be so held according to an unequal standard. The problem THE 0 R Y 0 F S TAT E - E CON 0 M Y 433 of the theory of taxation consists in showing how the principle of uniformity is to be carried into effect in individual cases. In the development of the subject, the views of thinkers have undergone changes. The classical doctrine held that contributions should be graded according to the amount of the income. They should, as Adam Smith 1 says, be proportionate to the income which the citizens enjoy under the protection of the state. It is assumed that the performances of the administration will manifest themselves for all citizens in an increase of their personal income. This assumption may possibly conform to fact as re gards the national economic administration, but it does not by any means do so for all remaining state activities.

Modern doctrine has departed from this early rule. It demands an incidence of taxation based on personal ability, a capacity which is measured either in the ability to payor in the magnitude of the sacrifice which the individual suffers in paying the tax. The present advanced point of view regards the payment of a tax levied upon a subsistence income as so oppressive that it should not be de manded under any circumstances. Assessments are considered unjust that make no allowance for the number of children in a family and other like circumstances that condition needs. Higher taxation for funded and for unfunded income is insisted upon as well as progressive taxation of higher incomes. It is possible that these doctrines go too far in what they advocate, that at least the ex penditure for economic administration should be covered as the earlier theory held strictly according to the amount of the income. However, it is not within our province at this time to enter into detailed inquiries of this sort. From the point of view of general economic theory we must offer a different kind of objec tion. We fail to discover among the criteria to which the modern doctrine ap peals the firm foundations of economic theory. Neither the ability to render services,2 taxpaying ability nor the sa'crifice involved are well settled concepts of economic theory. Therefore, so long as the theory of taxation supports its de mands by invoking these criteria only, it lacks connection with the general body of economic theory.

The concept of subjective value, personal value as we called it, supplies, the missing link for which we search. Each of the qualities which are here grouped together, ability to serve, to pay and sacrifice are fundamentally instances of the personal determination of value. The number of children and all other factors that determine needs are clearly to be recognized as moments of needs in the same way that the amount and the funding of income are ,moments of the distribution of income and property in the money economy. In the case of sub sistence incomes the condition is measured by the standards of the needs of ex~ istence. Where progressive taxation is demanded the higher level of the income is compared with the decreasing intensity of the needs as shown by Gossen's Law of Satiety and the marginal law. The ultimate basis for any progressive rate of taxation is to be found in the general scale of desires. According to this basis the personal value of the money unit is appreciably higher for the} first thousand than for the second and is hardly to be compared with the appraisal in the case of the 99th or IOOth thousand. Furthermore, the difference between the first and second thousand is appreciably greater than that between the 99th and lOOth. Thus, all tendencies of the modern policy of taxation find a firm theoretical basis in the concept and laws of economic value.

1 Wealth of Nations, Book V., Chap. II., 2 part 1. 2 Leistungsfiihigkeit.

434 SOCIAL ECONOMICS It is not the function of the state in any of its administrative branches to interfere with the private constitution of the economy. This is an historically tested social institution which the state is bound to accept. This holds also in the administration of taxes. The state should never so use its prerogative· of taxation as to eliminate existing inequalities of income and property; but in determining the contributions to be demanded of its citizens it should take into consideration the gradations of personal value that are the expression of in equalities of income and property. The plan of the state's management would offend economic principle were the private economies which are being as,sessed to be treated as units of equal wealth. A consideration of personal valuation in the assessment of taxes and progres sive taxation in particular has its prototype in a phenomenon of commercial exchange that was discussed in the case of a.monopoly of supply in connection with the doctrine of joint costs. It was seen that a monopolistic classification of the demand, popularly felt as exploitation, may at times be the only available method of sufficiently increasing the yield of a socially required enterprise to ensure its continued operation. Special reference was made to experiences in connection with the operation of railroads and canals. Had it not been for the rule to charge what the traffic will bear, many extensive enterprises could not have been carried through. A progressive tax is the application of the principle to the whole administration of the state. Precisely as the railroad tariff class ifies both travellers and merchandise in order to realize the large revenues that are required for the financial obligations of the road, just so a progressive rate classifies taxpayers in order to assess each according to his taxpaying ability.

It has become recognized that each must pay taxes according to the margin al lowed by his circumstances, if the public economic process is to be maintained. A .progressive tax-rate and· a consideration of personal wealth in a system of taxation are tkerefore logical applications to public economy of experiences practically tested in private economies. The heavy burdens falling upon financially weaker households, owing to the increased demands of modern public economy, can only be relieved by a policy that continuously undertakes so to assess the compulsory contributions of citizens that the more wealthy are taxed correspondingly higher. By such a distribution of taxes a public economy may obtain the widest possible extension of its boundaries without violating in any particular the limits drawn for private economy. Up to a certain point the modern state thus approaches the socially equalizing use-value computation of the simple economy. But it does this without offence to the spirit of the private constitution of the economy itself, for it refrains from interfering with private property as such and the historically transmitted in equality of its distribution. Modern policies of taxation do not seek to rectify the existing distribution of wealth. They are intended to do no more than adjust the incidence of the burden of taxation in accord with the distribution of wealth, so that the margin of use by the state economy may be extended through the larger contributions of those citizens whose incomes allow them a broader margin of use in their private economies.