A critical appraisal of the theories of government expenditure growth

Seminar Paper, 2002

11 Pages, Grade: 1,7 (A-)


Table of Contents

1 Introduction
1.1 Topic and purpose of the paper
1.2 Structure

2 Economic models and theories
2.1 General criticism of economic models and theories
2.2 Characteristics of a “good” theory

3 Criticism of theories explaining government expenditure growth
3.1 Wagner’s “law”
3.2 Musgrave’s hypotheses
3.3 Peacock and Wiseman’s displacement effect
3.4 Meltzer and Richard’s median voter hypothesis
3.5 Baumol’s model of unbalanced growth
3.6 Brown and Jackson’s microeconomic model
3.7 The role of bureaucrats and interest groups

4 Summary and Conclusion


1 Introduction

1.1 Topic and purpose of the paper

Explaining the phenomenon of the growth of government expenditure has always been a wide field in the science of Public Finance. The aim of those theories is not only to explain govern­ment growth but also to find solutions in order to distribute public expenses more efficiently and to derive the “optimal” size of the government, finally. Before using these models and theories as a tool and vehicle one has to ask whether those theories are applicable in reality at all, be­cause each theory has shortcomings and deficits which might lead to incorrect results and wrong decisions. The purpose of this paper is to reveal and discuss the most important criti­cism and to show that there does not exist a perfect theory which might explain govern­ment growth.

1.2 Structure

After having discussed general problems of economic models, the main argu­ments and cri­tiques against each specific theory are presented in Chapter 3. The paper con­cludes with a summary and offers a possible solution how to deal with the problems that arise when theories of government growth are used in practice.

2 Economic models and theories

2.1 General criticism of economic models and theories

Economic models simplify the real world in order to make the model manageable. Conse­quently, the result of a model can differ from actual economic conditions because not all vari­ables and parameters which might be of importance in reality can be covered by a model simultane­ously. Thus, the result of a theory is often too general and gives, if at all, only a com­mon trend that is to be expected. Moreover, theories often contain “ceteris paribus” condi­tions which might help understanding single relationships between specific variables but which disregard the fact that economies are very complex and consist of more than two vari­ables or levels which influence economic outputs and results. Finally, economic models are often tailored for only one specific market or economy – this limitation has to be taken into account.

2.2 Characteristics of a “good” theory

Firstly, a theory should be consistent itself. Contradictions within the assumptions lead to wrong results and make the theory unreliable and worthless (Stanlake 1989: 6).

Secondly, assumptions which are made in order to simplify the complex reality should be plausi­ble and realistic. Besides, a good theory should “survive” empirical examinations. These sta­tistical tests signal­ize, if the theory reflects the reality and if it is able to predict certain fu­ture develop­ments which is an important task of a theory. Thus, critics of theories often use empirical evi­dence in order to justify their critique and to reveal the shortcomings of the exam­ined model.

3 Criticism of theories explaining government expenditure growth

3.1 Wagner’s “law”

Wagner’s law, which states an existing relationship between the growth of an industrializing economy and the simultaneous faster growth of the public sector and the government (Herber 1979: 294), was the first theory empirically tested (Bird 1971: 1). It is of fundamental impor­tance and represents the basis for many government growth theories (Gemmell 1993: 103). However, several critiques and comments on this theory have been expressed in the past:

Firstly, due to the fact that the theory was developed in Germany at the end of the 19th century, it only is applicable in economies similar to Germany where rising income was observed as a result of industrialisation. The underlying conditions such as rising per capita income, technologi­cal and institutional change and democratization (Bird 1971: 3) therefore limit the possibility of testing the law empirically (Gemmell 1993: 110). Besides, the German origin of this theory and the resulting limited access for non-German speaking economists often contrib­uted to misunderstandings and difficulties for scientists applying this law (Gemmell 1993: 108).

Secondly, instead of providing a positive theory, the “law” only includes Wagner’s own, subjec­tive and normative assumptions: Wagner reveals his opinion on what ought to happen to an economy when it is industrialized (Seeber & Dockel 1978: 341). Consequently, although Wagner claims his “law” being a positive theory, he implicitly employs a normative ap­proach using simple statements which weakens the arguments of his theory if analysed criti­cally (Bird 1971: 3).

A third fundamental critique is the fact that Wagner did not include the impact of wars on public expenditure (Gemmell 1993: 111). This lack of war-related expenses can be excused due to the fact that Wagner developed this theory at the end of the 19th century under the optimis­tic assumption that fewer wars would occur in the future which unfortunately was not the case during the following 20th century (Bird 1971: 4).

Furthermore, the “organic”, self-determining view of the state, which is not the dominating theory in most Western nations has been criticised a lot (Herber 1979: 299). According to Wagner, the state represents a superior individual who makes decisions without paying atten­tion to the individual human beings that actually form the state. Wagner thus completely ig­nores the relation­ship between individual preferences and government actions (Bird 1971: 3-4) which is a strong simplification and thus a major shortcoming of his theory.

Despite these shortcomings, Wagner’s “law” could be observed and proven in many econo­mies. It is of fundamental importance and many theories are based on this approach.

3.2 Musgrave’s hypotheses

Based on Wagner’s theory, Musgrave also observes the changing role of the public sector during the development process and therefore relies on structural factors in order to explain government growth (Gemmell 1993: 103-107). According to Musgrave, economies situated in an early development stage are faced with a high demand of public capital formation in order to install a basic infrastructure etc. At later development phases, institutions for private capital for­mation become more developed and therefore the share of public expenditure may decrease (Musgrave 1969: 76-77). Despite the fact that this theory is quite plausible, it has one strong limitation which Musgrave admits himself: While the stages-of-development approach is indubita­bly applicable in early development phases, the size of public expenditure cannot be clearly predicted in later stages. It need not always be the case that the share of the public sec­tor further decreases during later stages. Due to the fact of changing private consumption pat­terns because of rising per capita income during the late industrialization stages, it is possible that the public share rises again in order to meet the growing demand of public goods such as education, infrastructure, social security, health systems etc. It thus depends on the stage of income and on the individual needs of the citizens if the public share rises or declines (Mus­grave 1969: 77). Hence, Musgrave “remains ambivalent” (Gemmell 1993: 7) concerning which tendency of public expenditure will dominate at late development stages.

Furthermore, it is also often impossible to define one single stage of development for a particu­lar economy. Especially in developing countries, several stages can be observed simultane­ously: Whereas in urban centres the economy might be placed in a later stage of develop­ment, rural areas are still often far behind and are situated in early stages (Black et al. 1999: 90). Thus, one cannot predict or derive the development of the public share due to the variety of several stages within one economy.


Excerpt out of 11 pages


A critical appraisal of the theories of government expenditure growth
Stellenbosch Universitiy  (Economics)
Public Finance
1,7 (A-)
Catalog Number
ISBN (eBook)
File size
361 KB
Public, Finance
Quote paper
Eckhard Scharmer (Author), 2002, A critical appraisal of the theories of government expenditure growth, Munich, GRIN Verlag, https://www.grin.com/document/16172


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