The Political Economy of Public Finance in Britain, 1767-1873

Published by EH.NET (October 2004)

Takuo Dome, The Political Economy of Public Finance in Britain, 1767-1873. London: Routledge, 2004. xii + 231 pp. $100 (hardback), ISBN: 0-415-33369-5.

Reviewed for EH.NET by Anthony Brewer, Department of Economics, University of Bristol.

Public finance has always been a major issue for economists — the full title of Ricardo’s Principles, for example, is The Principles of Political Economy and Taxation — but it is rarely given prominence in histories of economic thought. Takuo Dome of Osaka University has set out to make good the deficiency in this study of seven leading British writers from the late eighteenth and nineteenth centuries (Steuart, Smith, Bentham, Malthus, Ricardo, McCulloch and John Stuart Mill). After an introduction setting the context, there is a chapter explaining what each writer had to say about government spending, taxation and management of the public debt. The focus is on central government, largely excluding local spending and taxation, so (for example) the costs and application of the poor laws are only dealt with in passing.

A useful (if rather difficult to read) graph in the introduction reminds us that central government spending in Britain up to about 1850 consisted overwhelmingly (about 90 percent) of military spending and debt service (the debts being the result of earlier war spending). The business of the British state was war. As far as the economists were concerned, Adam Smith set the tone for the whole period by identifying three legitimate concerns of government: defense, law enforcement, and “certain public works and … institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain.” The last of these, however, should where possible be paid for by the beneficiaries and devolved to private or at least local management, while the central costs of law enforcement were in practice modest, so Smith’s maxims fit fairly well with the practice of government. Following Smith, most of the writers discussed here saw government spending as a necessary evil which diverted resources away from private saving and therefore reduced economic growth. Steuart and Malthus were the exceptions since both were worried about demand and thought that government spending could sometimes maintain demand by transferring income to those who were more likely to spend it. At the other end of the period John Stuart Mill was less worried about the effects of government spending on growth because Britain had redundant capital which was being sent abroad.

Smith also set the tone in discussions of taxation with four criteria: equality, certainty, convenience and economy. These were generally accepted, but different writers assigned different weights to them and reached quite different conclusions about the right way to distribute the burden of taxation “equally” or fairly. Tax incidence is clearly an important issue — where does the burden really fall? Smith thought that the main burden of all taxes would ultimately fall on rent. Ricardo’s rent theory led him to disagree — most taxes fall on profit (and hence damage economic growth), except that a tax on pure rent falls on landlords only, and a tax on luxuries falls on the consumers of luxuries. As McCulloch emphasized, and Ricardo accepted, a tax on pure rent was in practice impossible since the return on land could not in practice be separated from returns to past investment in improving the land. A great variety of taxes came under discussion and a great deal of the interest of the book is in tracing how different writers applied the growing body of economic theory to the resulting problems.

Debt service costs were a substantial part of public spending throughout the period, but most notably so during the forty years or so after the end of the Napoleonic wars. Around 1820, for example, about 10 percent of GNP was being transferred from taxpayers to holders of government debt. With a broadly Ricardian theory of tax incidence this was seen as lowering profit rates and probably reducing the growth rate (depending on one’s assumptions about the savings behavior of bondholders compared with others). A variety of proposals for reducing the debt were floated, though none could get around the basic problem — taxes were seen as a bad thing, the tax burden was seen as heavy already, but reducing the debt would pretty certainly have to be paid for by higher taxes. Even before the Napoleonic wars debt was an issue, if not perhaps quite so pressing. Dome is an excellent guide to the issues.

In a short review, it is hard to do justice to the detailed studies of specific writers and topics which are one the main strengths of this book. I can recommend it to anyone interested in classical economics, both to browse through in search of new insights and as a work to have on the shelf for future reference.

Anthony Brewer, Professor of the History of Economics at the University of Bristol, has written extensively about eighteenth and nineteenth century economics.