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.