Public Finance

§ 1. State outlay, like that of the individual, may be distinguished into normal or ‘ordinary,’ and abnormal or ‘extraordinary.’ These terms almost explain themselves, but may be thus contrasted. Normal expenditure is that which recurs at stated periods and in a regular manner; it is accordingly capable of being estimated and provided for. Extraordinary expenditure has to be made at indefinite times and for uncertain amounts, and it cannot be reckoned for with any approach to accuracy. The distinction is not always applied in the same way,
*129 and indeed the boundary line is not to be quite sharply drawn. Most heads of outlay vary from time to time, and any increase may so far be regarded as extraordinary, the ‘ordinary’ charges being those that, like the English Civil List, are fixed for a long term. In practice, however, very close estimates can be made of probable expenditure, small increases in some directions being compensated by savings in others.
*130 To use the distinction to the best advantage, we shall confine it to marking the difference between the usual expenditure and unanticipated extra demands, arising in most cases from fresh calls on the State. We should describe the usual annual expenditure on military and naval forces, the cost of justice and education, as normal or ‘ordinary.’ The cost of a war, or expenditure for the relief of distress in a sudden emergency, is, on the other hand, plainly ‘extraordinary’ or abnormal. No French financier could have foreseen the burdens that the Franco-German war of 1870-1 would impose on his country; nor, though the probability of disturbance was recognised in the United States for some years before the Civil War, could there be any calculation of its expense.
*131 Even after the outbreak of a war the difficulty of forecasting expenditure is very great. The first estimate by the Chancellor of the Exchequer for the expense of the South African War was £10,000,000, part of which would, he held, be recovered. Eighteen months later, he announced that the cost incurred up to that date reached £150,000,000. In like manner it is not open to the English Government to provide beforehand for Irish distress, or for Indian administrators to say whether their finances will be disturbed by famine. War and—in backward countries—distress approaching to famine are events that do recur, and though it is not possible to forecast their effects on public expenditure for short periods, they ought to be taken into account in the general financial scheme. The famine fund of the Indian Government was a recognition of the correctness of this principle, and though the cost of war does not admit of the same mode of treatment, it is sound policy to reduce liabilities in time of peace, so as to secure some relief in the extraordinary charge in the time of war.
*132

It thus appears that, by taking a sufficiently lengthy period into consideration, the separation between normal and abnormal outlay may be so attenuated as almost to disappear. The conception is a vague one. ‘It indicates,’ as Cohn remarks, ‘an undeveloped stage of economic thought,’
*133 to be replaced by the more careful estimation of the future. State economy expands both in bulk and duration. The expenditure of
e.g. England under the Tudors was likely to show ‘extraordinary,’
i.e. unusual, elements in matters that are at present well within the prevision of the Chancellor of the Exchequer. When the outlay is measured by thousands, a variation in hundreds is serious; but when it reaches millions, changes of thousands are trifling, besides being balanced through savings in some other parts of expenditure. There is also in modern States a greater facility for foreseeing and, so to say, ‘discounting’ the future. The refined financial mechanism by which public borrowing is carried out enables ‘extraordinary’ expenditure for a short period to be transformed into ‘ordinary’ expenditure for a long one.

Still, the development just noted does not remove completely the dividing-line between the two classes of expenditure. We shall find later on
*134 that both on financial and political grounds it is eminently desirable to have the estimates and results of national finance set forth fully and in unity at short intervals, usually in practice annually. But during such a period it must sometimes happen that the amount to be paid out of the National Exchequer will be much above the average, and it follows as a matter of course that the expenditure is then ‘abnormal.’ What modern finance can accomplish is to secure a more even distribution of the pressure.

Another point for consideration is found in the fact that what is at first extraordinary may soon become ordinary expenditure. At the outbreak of war the cost of the army and fleet will be greatly increased, giving rise to abnormal outlay, but after a time, say after the first year, a probable estimate of the expenses to be incurred in the prosecution of the war will not be so difficult. The financial history of England affords several illustrations. During the century and a quarter from 1688 to 1815 there were the following war periods: 1688-1697, 1702-1713, 1718-1721, 1739-1748, 1756-1763, 1776-1783, 1793-1802, 1803-1815. At the commencement of each period expenditure was greatly increased, but when the state of hostility became a settled one, it was possible for, and therefore incumbent on, the Minister in charge of the finances to present the outlay on war as part of the ordinary expenditure. Under such conditions the charge for war became the normal charge of an abnormal period.

Abnormal expenditure also frequently occurs in a somewhat different way, as in the case of durable public works or other improvements. It may be a part of state policy to erect extensive public buildings; to carry out a system of fortifications, of railroads, or canals; to drain and plant waste lands; to promote colonisation, or to develop an industry that requires the aid of fixed capital. Innumerable examples of such forms of expenditure are found in connexion with local government: the acquisition of the industries engaged in supplying large towns with water and light will at once occur. Outlay of this kind is, in mercantile phraseology, ‘chargeable to capital, not to revenue,’ and is clearly abnormal. The method almost invariably adopted is to meet the abnormal outlay by an abnormal receipt, viz. borrowing; or, to put the point in another way, to turn the extraordinary expense of a given year into the ordinary one of interest on debt.
*135

Much ingenious argument has been advanced in favour of borrowing for all such extraordinary expenditure, on the ground that it is in substance a creation or investment of capital, which is an asset to be placed against the new liability.
*136 The plausibility of this doctrine in its extreme form arises from failing to notice the different effects that may follow from different forms of state expenditure.

§ 2. For understanding the point it is necessary to separate state outlay into ‘productive’ and ‘unproductive,’ using these terms in the sense given to them by Adam Smith.
*137 The former does, in fact, secure a return in the shape of material goods possessing value, and it may be said that expenditure of this kind is admissible even by the aid of loans. The general category of productive expenditure will, however, be found to need further analysis. It is not at all difficult for the central and local governments to expend a great deal in obtaining articles that possess value but yet will not yield revenue. For instance, the many buildings existing in the United Kingdom for the meetings of legislative bodies, sovereign and subordinate—from the Houses of Parliament down to the smallest town-hall—are certainly embodiments of value, but do not, except in very rare cases, bring in a return. They are ‘consumers’ capital,’ and their cost must be supplied from other sources. In contrast to the foregoing are those forms of wealth that return a revenue by their use as ‘producers’ capital.’ Municipal gas and water works belong to this class; so do the Continental state railways. The policy of expenditure on such works is plainly to be judged, partly at least, as a question of investment. Public bodies may succeed in realising good value for their outlay. It is perhaps on the whole best to divide expenditure into ‘economic’ and ‘non-economic’ rather than into productive and non-productive; outlay for the purpose of securing future revenue being economic, while that which will not have this result is non-economic.
*138 The expediency of economic outlay is really a question closely connected with the formation of state property and the (so-called) private revenue, and has to be treated under that head.
*139 Non-economic outlay includes the procuring of material goods that are not productive capital, as well as the cost of those public services that take no tangible form. It may be, and often is, more necessary than pure economic expenditure, but it cannot be regarded as a creation of capital. National security and honour, the promotion of culture and education, may be better than wealth, but they are not wealth, and their cost is so far a deduction from the stock or accumulated wealth of the society. They belong to consumption, not to production, and the outlay on them has to be limited by economic considerations. Thus this case is closely parallel to that of the individual, whose expenses, for enjoyment, general education, &c., reduce his economic resources, and have to be limited by the amount of his income.

Some expenditure, both of individuals and of public bodies, may prove to be indirectly productive. What a person spends on recreation may so improve his health, both physical and mental, as to make his labour more efficient. The State may likewise, by its maintenance of a powerful army and navy, or an active police, increase the production of wealth, and in practice all public expenditure has this amongst other aims in view.
*140

§ 3. Though public and private expenditure have so many points of resemblance, there is one very important difference. The individual’s income is formed by the returns on his property and the reward of his exertions. Public income or revenue is to some extent composed of similar constituents, but in modern times it is mainly derived from contributions levied compulsorily on the members of the society: that is to say, state income or revenue is derivative, and is dependent on national income; local public revenue is in like manner derived from the revenue of the community in its locality.

This connexion of public and national revenue has been recognised from the earliest days of finance: it is to it that we owe in great measure the commercial policy of Europe in the sixteenth and seventeenth centuries. The Physiocrats also accepted it, as Quesnay’s famous maxim ‘
pauvres paysans, pauvre royaume; pauvre royaume, pauvre roi‘ shows. It is an essential doctrine of modern theory, though there is not perfect agreement on the question whether it is on ‘net’ or ‘gross’ national revenue that state income depends.
*141 There can be no doubt that a small nation, with little accumulated wealth, cannot adopt the same scale of outlay as a larger and wealthier one, and one of the rules of good finance is to observe moderation in the demands of the State on its citizens. Beyond this general precept no definite result has been reached. Some writers have suggested a percentage limit for state outlay. Justi regards 16 per cent. as the average, 25 per cent. as excessive. Hock states 15 per cent. as the upper limit. Leroy-Beaulieu, who confines his discussion to the amount of taxation, arranges the charge on national income for state ends in grades: 5 per cent. he thinks light, between 5 and 10 per cent. moderate, over the latter figure heavy, and when 15 to 16 per cent. is reached it is almost impossible to increase it.
*142 Any attempt to settle once for all the proper proportion of public expenditure to national income is necessarily vitiated by the different elements to be taken into account; such as (1) the purpose of the outlay; if it has an economic end a larger amount may be taken, since it is expected to yield a direct return, and even if not for economic ends, no decision can be made until the urgency of the want is known. A nation engaged in a conflict perhaps involving its national existence is justified in expenditure that would in ordinary times be imprudent. (2) The amount of the national income is also a factor to be considered. Expenditure requiring 10 per cent. of the annual income of India would be much more burdensome than if 30 per cent. were to be required in England or the United States. (3) The distribution and the forms of wealth, though less in importance, have some effect on spending power. The bounds of outlay in any given case can only be ascertained by trial, though it is plain that the agreement of the writers referred to above supports the belief that 15 per cent. of the national income is too large an amount to appropriate for state objects, unless in very exceptional cases.

§ 4. Other methods of measuring the proper amount of state expenditure are still more doubtful. We might take the proportion to area as a guide, were it not for the fact that the extreme differences in the value of land in different countries, as also the varying proportions that other forms of wealth bear to land, make this test fallacious. The amount of accumulated wealth, as estimated in modern statistical inquiries,
*143 might be used, but we shall find that income (not property) is the fund out of which in ordinary cases expenditure has to be met, and the relation of income to property varies. A very commonly used index is the charge per head of population, though for this purpose it is far inferior even to the amount of property. An attempt to measure the comparative pressure caused by expenditure in India and in the Australasian Colonies, based on taking the charge per head, would give the astonishing result that it was about nineteen-fold heavier in the latter.
*144

Such considerations lead to the belief—which indeed ought to be obvious—that there is no mechanical mode of judging the sufficiency or the legitimacy of public expenditure, a belief that is strengthened by remembering that local expenditure must be added to that of the central government before the full pressure can be known, and that a series of complicated calculations is needed to apportion the combined charges over the several districts.

Fortunately the question of expenditure in all its forms does not present itself as a single problem. It would be quite hopeless to attempt to prepare a budget of outlay for any country without the aid of the material collected during previous experience. The great mass of expenditure is taken as settled, and it is only the particular changes for each year that have to be weighed in order to estimate their probable advantage. This method of treatment simplifies the issues very much. In the language of modern economists, it is ‘final’ rather than ‘total’ expenditure that needs the financier’s attention.
*145

§ 5. The usual form that deliberation has to take is that of considering the advisability of increased expenditure. Theoretically it is of course equally possible to debate the benefits of retrenchment, but in nearly all modern States outlay is steadily increasing. The older doctrines of economy and frugality have disappeared, and in nearly every direction proposals for new exertions on the part of the State are put forward.
*146

First as to the facts: we may take a few typical examples. English expenditure in 1833 was 48¾ millions, in 1898-9 it was over 108 millions, or an increase of nearly 60 millions. But as 1833 marks the lowest point of English general expenditure, it will be fairer to take another set of examples given by Mr. Gladstone.

‘The gross expenditure of the State was in 1842-3 £55,223,000, and the local expenditure in the three kingdoms was £13,224,000, making a total in round numbers of £68,500,000. In 1853-4 the total state expenditure was £55,769,000, or very nearly the same amount as in 1842-3, and the local expenditure £15,819,000; making together in round numbers £71,500,000, instead of the £68,500,000 which was the amount in 1842-3. In the year 1859-60 the gross state expenditure had grown from £55,769,000, which it was in 1853, to £70,123,000. The local expenditure, no doubt actuated by a spirit of honourable rivalry, had increased in the same period from £15,819,000, which it was in 1853, to at least £17,458,000, and probably something more; the total expenditure for the year 1859-60 thus reached £87,697,000 [?]. Accordingly it appears that in the eleven years from 1842-3 to 1853-4 the expenditure of the country under the two comprehensive heads which I have mentioned increased at the rate of 4½ per cent., nearly the whole of the increase being local; while in the six years which have elapsed between 1853 and 1859 it became much more mercurial, and increased at the rate of 22½ per cent., by far the larger part and greater rate of increase being now imperial.’
*147

To complete the illustration, we may state that for the year 1879-80 the national expenditure had risen to £82,184,000 (or, deducting the imperial contributions for local purposes, which came to £3,396,000, £78,788,000), and the local expenditure to £61,174,000, making a total of £139,962,000,
e.g. an increase over 1859-60 of almost 60 per cent.; that in 1889-90 the national expenditure was £86,083,000, and the local expenditure £67,120,000, giving a total outlay of £153,203,000 (or, deducting imperial contributions to the amount of £2,470,000, £150,733,000), being an increase of 82¼ millions over the expenditure of 1842-3,
i.e. 120 per cent.; and finally, as already shown, that in 1898-9 the national expenditure was £108,150,000 and the local £79,300,000,
i.e., a total of £187,450,000, or an increase of 25 per cent. over the expenditure of 1889-90.

France presents a similar movement. In 1820 the general expenditure was 906 million francs, by 1860 it had reached 2,084 million francs, or much over double; more precisely, 130 per cent. The expenditure for 1899 exceeded 3,589 million francs, or a growth since 1860 of over 72 per cent.
*148

The Italian expenditure of 1861 was 812 million lire: the estimate for 1901-2 is 1,728 million lire, an increase of 916 million lire, giving a growth in 40 years of 112 per cent.

The Prussian budget in 1849 was 282 million marks; in 1865 it had grown to nearly 507 million marks. Since the formation of the North German Confederation (1866) and the German Empire (1871) the increase has continued, the actual expenditure in 1889-90 was 1,831 million marks, and the estimates for 1902-3, 2,350 million marks. The Prussian Budget for 1901 is 2,614 million marks.
*149

The smaller German States exhibit like features. Bavaria spent 32 million marks in 1819-20; the expenditure for 1889 was 260 million marks, and the estimated expenditure for 1893 came to 306 million marks.

In Austria, Russia, and even in small States like Belgium, we find the same general tendency towards increased outlay. In the last-mentioned country, whose administration has been well conducted, the expenditure in 1835 was 87 million francs; for 1890 it was 417 million francs, making almost a five-fold increase. For 1900 the expenditure was estimated at 451 million francs.

So well established is the general fact of increasing outlay—and whoever doubts it need only run over the examples just given—that even conservative writers on finance, such as Roscher and Umpfenbach, lay it down as a general law of progress;
*150 and they explain it by reference to the increasing demands made by society on the modern State. ‘What judgment should we pass,’ asks the former, ‘on a government that, after the manner of the Middle Ages, did not trouble itself about the health, mental training, maintenance, or enriching of the people?’ And so far there is no doubt that the intensifying of state duties is one cause of the almost universal increase. In previous chapters we have seen how the cost of defence, of administration, and the minor needs of civilisation have gone to swell the growing totals of modern budgets, and in each case special causes have appeared that went far to explain the final result.

Before collecting these, it may be well to correct to some extent the impression that increasing figures of outlay are apt to produce. Leroy-Beaulieu remarks
*151 that one cause of the general increase is to be found in the depreciation of the precious metals. As expenditure is estimated in terms of money, any change in the value of the circulating medium should be taken into account, and the application of some test as to the reduced purchasing power of money would considerably alter the figures for the earlier part of the period that we have taken,
i.e. from 1820 to 1870, but for the last thirty years the correction would act in the other direction. Increases in outlay since 1873 would certainly mean more than the amount as measured in money, so that we cannot place much stress on this part of the explanation of increase. Another element is, however, important. In most countries population is growing, and national income grows with it; and in the exceptional cases where, as in France, population is stationary, income is increasing. It is not, therefore, certain that the proportion of public outlay to national income has become greater. Moreover—and this is the most important consideration—the extension of the economic activity of the State in certain directions has been accompanied by a passage of special industries from private to public management. As a necessary consequence, public expenditure and income are both increased without the real pressure on the people becoming greater. It may be that in this tendency there lies, in Roscher’s phrase, ‘
ein communistischer Zug,‘ and it is plain that the transfer in this manner of all industries means the establishment of socialism pure and simple. But apart from its economic reactions, a writer on finance is not entitled to absolutely condemn this movement. His duty is, however, to point out that comparison between the expenditure of a State with large industrial enterprises in its charge and one without them is illegitimate unless due correction is made. To take a simple illustration, it is plain that if the State purchased the English railways, and the accounts entered into the national budget (as they should), both expenditure and income would be largely increased. This has actually happened in Prussia, and explains a large part of the increased outlay in that country.
*152

Notwithstanding these extenuations, there has been, we believe, an increase in expenditure that is not balanced by receipts from the property of the State, and this larger outlay may be attributed to the following causes:—

(1) The cost of war and preparation for war. We need not repeat the details already given on this subject,
*153 but we ought to emphasise the general fact. The annual military and naval expenditure of Europe approaches £300,000,000, and the disturbance to industry, the apprehension of hostilities, and above all the interest on debts incurred for the most part for the purpose of war, considerably increase the burden.
*154 As if to enable us to judge of its effects, a test case has been provided in the condition of the United States, which further shows that it is not war, but the necessity of constant readiness for it, that affects most injuriously the economic interests of nations.
*155

(2) A second cause is to be found in the extension of administrative action. To maintain a large staff of competent officials considerable outlay is needed, much of it necessarily wasteful. It may be that a great deal of official work does with advantage to society what men are too busy or too careless to do for themselves. Perhaps also it checks some moral and social evils, but, financially speaking, it is undoubtedly costly, and if the end could be otherwise gained it would be an economic benefit.

To these causes many would add a third—the progress of democracy.
*156 It is argued that a widely extended suffrage lowers the standard of legislatures, and that under the influence of socialistic ideas the expenses of the State are increased. There is probably some truth in this doctrine. The ‘new radicalism’ is not desirous of economy in expenditure,
*157 and it may be freely conceded that ‘democratic finance’ is remarkable for its disregard of principles and its utter incapacity to measure financial forces; but on the whole it cannot be said that Russian finance, which is certainly not democratic, is much superior in these respects. Nor is it plain that English finance before the Reform Act of 1832 was worthy of commendation. The socialistic element which has an injurious effect on finance is not an essential part of modern democracy. The technical administration of revenue and expenditure is also likely to suffer while under the control of an untrained democracy. But allowing all this, the real enemy of sound finance is ignorance on the part both of rulers and ruled, and this is unfortunately too common under all forms of government.

§ 6. Any discussion of public expenditure that neglected to notice its influence on national and social economy would be incomplete. The State, through its central and local organs, is by far the greatest purchaser of goods and employer of services: it can in this way powerfully influence prices and wages, and through that influence affect the distribution of wealth. The sum of £150,000,000 annually disbursed (after allowing for the amount that goes as interest on loans, which operate on the money market) must both by its great amount and its changed direction alter the structure of the British national industries. Demand for commodities determines the direction that production will take, and consequently the form of labour in many cases depends on the policy of the State; so also do the rates of remuneration and the conditions of employment.
*158 The economic systems of Germany and the United States owe their different features largely to the special direction of state activity in each country. The technical arrangements for the supply of commodities for public requirements are a serious consideration for administrators, owing to their ulterior effects. Government manufacture is liable to the evils of expense and inferiority in quality of products, but the alternative method of purchase in the open market, necessarily carried out through agents, is not free from similar evils. In particular, the result of giving contracts at the lowest tender has been vehemently assailed by reformers as tending to lower wages.
*159 The direct employment of services or labour by the State gives rise to further complications. Hiring on the ordinary system and at the market rate is impossible in the case of the higher officials, while for military and naval services special conditions of engagement are needed. The great extent and variety of the general Civil Service make the determination of its proper remuneration a question of much difficulty. To avoid the political evils that short tenure—as in the American system—causes, its members ought to be permanently employed. Permanence in state service soon affects private employers, who will have to give either like security of tenure or better pay.
*160 In every part of national life this influence of state expenditure is felt, and is becoming greater.
*161

The great and increasing importance of state outlay does not, however, afford a presumption that the movement is advantageous. The current of modern sentiment runs as strongly at present in favour of state action as it did fifty years ago against it, but neither tendency can be its own justification; both have to be judged on the grounds of reason and experience. Some popular arguments for state expenditure may be at once dismissed. Perhaps the crudest is that which regards the State as affording employment, and imagines that if war and the other conditions which call for state services were to cease, there would be no field for the labour of those now employed as soldiers, policemen, and officials. This obvious fallacy arises from entirely overlooking the previous existence in private hands of the funds collected by the State as its income, and which would afford like employment, but on other lines: the best practical refutation is, however, found in the ease with which the enormous expenditure of the United States during the Civil War was reduced at its conclusion, and the military forces absorbed in various industrial employments.
*162 Expenditure of itself is plainly not a good; it has to be judged by its object,
i.e. by the benefits obtained in return for the sacrifices made. By taking this view we avoid the opposite fallacy that all state outlay is bad, or at all events that the less the expenditure the better. This doctrine, though accepted by Say and Ricardo,
*163 is palpably incorrect, since it takes no account of one of the two factors in the problem. It is not true that the cheapest article is the best, nor is ‘the cheapest State’ the most serviceable. That state organisation is the best and really the cheapest which, all elements of the question being taken into account, gives the greatest amount of benefit to its citizens and provides best for the future progress of the nation.

On the Classification and Guiding Maxims of Public Expenditure.

The rapid development of financial study in recent years has led to a careful examination of the more backward divisions of the subject, in order to bring them into scientific form. The theory of state expenditure has naturally attracted a large part of this fresh energy. The undue neglect of the earlier English and French writers
*164 has been replaced by rather elaborate critical discussion. But it is nevertheless true that the difficulties of the question have not by any means been removed. No one has as yet propounded a system of arrangement and a body of rules applicable to public expenditure which could claim to be of the same character and fundamental importance as those established for public revenue, and particularly for taxation. This failure is undoubtedly due to the peculiarities of the subject-matter, and is closely paralleled by, if not in a sense identical with, the case of the theory of consumption in Economics, as contrasted with that of production or distribution.

There is, however, some advantage to be obtained by considering the suggestions put forward by the able writers who have endeavoured to throw further light on the matter.

First, we may notice the ingenious development of a conception, presented in a less elaborate form by Cohn, which appears in Professor Plehn’s textbook.
*165 This system groups the several kinds of expenditure with reference to the benefit that they confer. From the great class of expenditure which confers ‘a common benefit on all citizens’ there is a transition through the intermediate forms of outlay that (1) are special, but treated as common, and (2) confer both special and common benefit to that class which confers ‘only a special benefit on individuals.’ There are thus four sections or heads of expenditure, each of which makes a separate category, and it is claimed that on this basis a satisfactory—and the only logical—classification can be established.
*166

At the first glance the arrangement appears to be convenient, but even a cursory study suffices to bring out its defects. Perhaps the most obvious is the immense difficulty of assigning the various items of outlay to the prescribed categories. May it not be truly said that all expenditure is for the public and general interest? Otherwise it should not exist. Again, it is impossible to exclude the element of special advantage, even in the case of the first class. There are surpluses of utility accruing to some individuals from the expenditure for national defence or internal security. Thus the four classes may be reduced to one—the third in order.
*167

Still more serious is the fact that the allotment will vary according to the views of the arranger. Expenditure that one writer would put under a particular head will be assigned a different place by another. The classification—to state the point definitely—rests on a
subjective rather than an
objective basis. This would seem, of itself, enough to condemn it as a scientific solution of the problem. Prof. Plehn, indeed, in his treatment of the contents of the different classes, supplies examples which support this criticism. Thus,
e.g. pensions as the recognition of service belong to class one, but when they are improperly bestowed they come under class two. How hopeless it would be to apply such a test the history of the English Pension List proves.
*168 In truth, the test of graduated benefit is as unsatisfactory as one of graduated disutility would be for taxation.

Another theory is given in the work of Prof. Adams, in which the functions of the State are regarded as, after due analysis, affording a clue to the law of public expenditure. Governmental functions may be analysed into three classes—protective, commercial, and developmental. This classification also permits the framing of general laws as to the relative movement of the different groups. The cost of the protective function will decline. while that of the commercial one will probably, and that of the developmental one will certainly, increase with the progress of society.
*169

In this case also the difficulty of determining the proper head to which the several concrete items of expense are to be assigned is encountered. There is no doubt that what some writers would describe as protective outlay others would call developmental. J. S. Mill showed long ago that there is no clear-cut line between the institutions and qualities that conduce to maintain order and those that promote progress,
*170 and in the same way expenditure for protection helps development. Commercial expenditure, again, is justifiable only as contributing to present well-being or future progress.
*171 An equally unsatisfactory feature of Prof. Adams’ discussion is found in the laws of movement which he formulates for the several classes. To lay down dogmatically that protective expenditure declines in the progress of society is hardly warranted by facts. If any proposition can be confidently laid down respecting the course of expenditure in the near future, it is that military and naval expenditure will increase more than in proportion to other outlay—a statement that will probably be as true of the United States as of the great European powers. Prof. Adams’, like Prof. Plehn’s, classification fails to present the characteristics of a grouping, logical and in accordance with fact.

More scientific than either of the preceding attempts is the treatment of public expenditure adopted by Prof. Nicholson in his recent treatise.
*172 After dwelling on the fact that expenditure must be regarded as co-ordinate with revenue, he classifies the forms of expenditure by reference to amount of revenue obtained in return for the services rendered. Thus the following classes may be distinguished: (1) expenditure without any direct return of revenue; (2) expenditure indirectly beneficial to revenue; (3) expenditure with partial direct return; (4) expenditure with full return or surplus profit.

Under this system the greater part of expenditure in every given State can be easily and conveniently grouped, but the difficulty remains that the dividing line is not always clearly marked,
e.g. there may be doubt as to the inclusion of a particular item under head (1) or (2). Still more important is the question whether the classification is one which brings out the really essential differences in different kinds of expenditure and places these separate groups in their proper relation. It must never be forgotten that public expenditure is one division of the social consumption or using of wealth, and has, therefore, to be treated on the same principles as other forms of consumption. But it would hardly be allowable to classify the forms of private consumption by reference to the amount of income obtained in connexion with each. We could not get beyond the broad division into ‘productive’ and ‘unproductive’ consumption, which is not very illuminating as to the real character of the many sections of private outlay.

In truth, the forms of public expenditure are determined by the various needs of the State, and thus it appears that the consideration of these several wants in their concrete manifestation is, so far as inquiry has yet gone, the most convenient and instructive way of discussing this class of financial problems. No ingenuity of analysis can remove the subject of public finance from the domain of Political Science, which, in turn, takes its starting point from the institutions and activities of the State.

Similar difficulties beset the framing of general canons of expenditure. Beyond the broad rule of aiming at the maximum result, it is not easy to reach any important conclusions by the deductive method. Nor does it seem probable that the canons of taxation can, as Prof. Nicholson believes, be employed as a guide in developing equally fundamental maxims for expenditure. There are, no doubt, certain common principles running through the whole public economy, as the laws of Supply and Demand affect most economic questions. In respect to expenditure there is, however, the influence of the needs of the society, which are in a sense extra-financial. This is the element of truth contained in the view of Leroy-Beaulieu and others, who refuse to include the question of expenditure in their treatment of finance.
*173

If scientific principles of expenditure are developed in the future, it will be by (
a) the use of the marginal doctrine applied to the last increments of outlay in each particular direction,
*174 and (
b) the more critical examination of the actual processes by which the public economy is carried on. At all events, a long time must elapse before any rules claiming the authority that the Smithian canons of taxation have acquired can be elaborated.