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ON PUBLIC NEEDS By ENRICO BARONE ‘Translated from Italian* by J. Eros It is not easy to define the term public needs in an unequivocal manner. Nor can we get over the difficulty by making a distinction, as some do, between a general need (for example for bread) and a collective need (for example for internal security). Even if general needs and collective needs can be unequivocally defined, this does not solve the question of defining public needs because, in actual fact, it is not true that the economic activity of the State is designed to satisfy all collective needs and only collective needs. We shall call public needs those for which the State provides in any given country and at any given time. Economic reasons of utility and cost enter into the definition, but they are not the only reasons. Public needs so defined can be divided into two great categories: those which are, and those which are not susceptible of individual and specific demand and divisible supply. Railways and postal services fall into the first category, foreign defence and security into the second. The first category of public needs could also be satisfied by private enterprise, at prices which we shall call economic. prices, irrespective of whether they are due to competition, or are monopoly prices or agreed prices. For the second category of public needs, the State coercively distributes total cost among the various individuals. The distribution rests on income, and according to his income each individual then pays a political rather than an economic price. The political price is the rule for all those public needs which are not susceptible of specific individual demand and divisible supply. In between there are intermediate categories of public needs, the prices of which we shall call quasi-political. They are needs with individual and specific demand and divisible supply, but with a price which, without being political, is nevertheless not that economic price which a private entrepreneur would charge. In the case of quasi-political prices the State usually distributes among the consumers either the entire cost, but in a way which differs from the private entrepreneur's and is held to serve collective interests better; or else less than the entire cost is distributed among the consumers, because the State considers that by providing for this particular need in specific demand, it provides also for other needs which do not possess this characteristic. Quasi- political prices are, then, normally cither cost or below-cost prices. We can. speak of political prices (or taxes) for public needs which are not susceptible of specific individual demand and divisible supply; and of quasi-political prices for public needs for which there is specific individual demand. Quasi- * Preface to “Studi di economia finanziaria”, Giornale degli Economisti, April/May 1912. 166 BARONE political cost prices are mostly charged by public enterprises, or, as they are sometimes called, collective monopolies—since public enterprises often replace » private monopoly by a public one; below-cost quasi-politcal prices are exemplified by fees. ‘This classification is not perfect, as no classification can be perfect; not all the facts and not all the institutions of public finance fit into it. For example there is a tendency, especially in democratic countries, to establish political prices even for needs with specific individual demand and divisible supply, the object being to charge one section of the consumers with a higher price so as to relieve other consumers. Other examples of the imperfection of the above classification are that not all public enterprises or collective monopolies distribute the whole cost or only the cost among the consumers; that fees are not always below-cost quasi-political prices. Finally, under certain financial systems a whole series of special services with specific individual demand and divisible supply are furnished by the State at prices higher than cost. This is a special kind of taxation—the most illogical one—which represents a perversion of fees into taxes. Many of the taxes on the transfer of capital belong into this category. Nevertheless this classification is useful as a first approximation. Its division of the various ordinary revenues of the State is near enough to reality, and it also permits an effective analysis of the cases which do not fit into the classification here outlined. The most important of the public needs falling within the purview of the theory of public finance are those for which there is no specific individual demand and divisible supply (e.g. internal security). These needs are provided for by means of taxes, that is political prices. In the case of public needs with specific individual demand, the latter automatically determines the measure in which the need is to be satisfied or, in other words, the quantity of the service to be produced. In the absence of such specific individual demand, on the other hand, the problem of the extent of the public need becomes much more complicated. Ie is true that there is a school which believed it could give a simple solution of the problem; but it did not succeed, except through purely verbal generalizations. I have in mind the Austrian School, which thought it could apply to public needs as well the individual calculus of marginal utilities according to which the individual is supposed to allocate his income to various items of private consumption. This is one of the major misuses of the theory of marginal utility. ‘These writers say, in effect, that their assumptions hold for the limiting case and would be the more likely to come true the closer reality approached the limiting case. Let us discuss this point. Let us suppose that all members of society are called upon to decide; that they are all so well informed of the utility of public services that they are able to decide in full knowledge of the facts; and that they are all such perfect PUBLIC NEEDS 167 hedonists that they are willing not to withhold their contribution. On all these assumptions each member of society, according to his own appraisal of the utility of a public service, would be prepared to devote to ps part of his income to be withdrawn from his private consumption. | This would seem to amount to a determination, if not of the measun in which each single public need should be satisfied, at least of the ove extent of public needs. The distribution of public revenue between vari public needs would then constitute a second stage. 4 However, it is quite illusory to think of any such determinati i needs. No public finance system can rest on ey decreed catia contributions. There must be some principle of distribution of public expenditure according to incomes; the principle can be discussed and established by common agreement between the members of society, but once it is established it must be respected. Is it to be expected that this principle of distribution will be fulfilled by single contributions determined by individual evaluation, that is, by income portions allocated to public needs according to the criterion of maximum individual utility? That would be pure coincidence. The problem therefore seems to be overdetcrmined. Maximum individual utility in the allocation of income between public and private needs is incompatible with any pre-established principle for the distribution of the burden of taxation. If this be granted—and it must be granted—then the whole theoretical construction of the Austrian School falls to the ground. It does so even in the limiting case, which we have outlined above with all the hypotheses favourable to the theory which we have refuted; it falls, a fortiori if we leave this limiting case behind and come closer to reality. : Is the problem of the quantity of public services then in fact undetermined? Not so. The problem can be stated in the following terms. Private persons do not demand public goods. The size of the supply of public goods is determined by a majority (de facto or legal fiction) which makes decisions by direct vote or through delegation. This leads to the establishment of the burden of taxation, which will be distributed according to certain established principles and will fall more or less heavily upon the individuals as public services go on increasing. Every single individual must undergo such a burden. If the majority (expressed by direct vote or through delegation of powers) imposes too much on the single individual, there will be reactions designed once mote to reduce the burden of taxation to tolerable limits. Such reactions may take the form of fiscal fraud in the declaration of incomes; or of emigration of capital to countries where the burden of taxation is lighter—this is easier the greater the proportion of mobile capital is to the total; or of direct emigration of persons; or finally, they may take the extreme form of revolt or revolution, when a great number of people find the burden of taxation intolerable.