Theories on Public Debt

Mark Glenn Villamor

Rolando Langurayan, Jr.

By PresenterMedia.com
Pre-classical Views

• Mercantilist Doctrine: The economists had

favorable attitude towards public debt as they had
great faith in the role of the state in economic
activities.
• Sir James Stuart (1712-1790) discussed the subject
of public debt in his book Principles of Political
Economy (1767) “the effect of public borrowing on
national debt is to augment the permanent income
of the country out of stagnating money and
balance of trade.
Classical Views
• Leading figures were David Hume (1711-1776),
Adam Smith (1723-1790) and David Ricardo (1772-
1823). However, Ricardo was considered the
greatest representative of the classical school.
• They rejected the option of public loans. In their
view, all government expenditures were wasteful
and unproductive; hence, public debt resulted in
the destruction of capital.
Classical Views

Thomas Malthus (1766-1834) was the great dissenter

in the classical tradition; however, he conceded that
public debt contributed to the evils resulting from
changes in the value of money and that it would be
desirable gradually to diminish the debt, and more
especially to discourage its growth in the future.
Classical Views

John Stuart Mill (1806-1873), on the other hand,

claimed that “the public debt has a double burden,
one which is borne by the current generation of
laborers because resources which would otherwise be
used to support laborers are withdrawn from private
employment, and one which is shifted forward to
future generations because of the taxes required for
the interest payments.
Classical Views

Jean-Baptiste Say (1767-1832), another classical

thinker, observed that “there is a grand distinction
between an individual borrower and a borrowing
government, that, in general the former borrows
capital for the purpose of beneficial employment, the
latter for the purpose of barren consumption and
expenditure. He also believed that the burden of debt
would be shifted among a great number of successive
years.
Classical Views

• Other notable figures were H.C. Adams, Charles

Francis Bastable (1855-1945), and Pierre Paul
Leroy- Beaulie (1843-1916).
• Adams was of the view that debt creation involves
no sacrifices on the part of lenders. “A loan calls
for no immediate payment from the people… The
lenders are satisfied since they have secured a
good investment.”
Classical Views
• Bastable stated that public debt is only one form of
credit in general and is governed by the same
principles which control private credit. He also
drew a distinction between the loan and the tax.
“A loan is voluntary and supplied by willing givers;
taxation is levied on the willing and unwilling
alike…”
• Beaulie refuted the 18th century ideas on public
debt. He criticized the classicists also for their
failure to see that public expenditure can be
productive.
Classical Views
• Beaulie refuted the 18th century ideas on public
debt. He criticized the classicists also for their
failure to see that public expenditure can be
productive. He argues “a loan will be useful or
harmful to the society in general depending on
whether the state preserves and usefully employs
the proceeds or waste and destroys the capital.
Modern View

What led to the modern theory of public debt?

_________________

What was the primary initiator?

_________________
Modern View
Answers:

The Great Depression of the 1930s

General Theory of Employment Interest and Money
(1936) by Lord John Maynard Keynes (1883-1946).
Modern View
• Ultimately, the book became the bible of the
“Keynesian revolution” which changed the role of
public borrowing forever.
• According to this theory, a huge public debt is a
national asset rather than a liability and that
continuous deficit spending is essential to the
economic prosperity of the nation. Keynes held
the view that increase in public debt through
multiplier effect would raise the national income.
Modern View

Keynes authorized government to borrow

for all purposes s that effective demand in the
economy may increase and thus employment and
output may also increase. In fact, he drew no
demarcation line between productive and
unproductive expenditures for the purpose of
borrowing as the classicals did. For Keynes, borrowing
for consumption will be as desirable as borrowing for
investment in productive goods because consumption
expenditure will induce investment to rise.
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