Since 1870 the growth in government spending has been a general trend in nearly all industrialised countries (Tanzi & Schuknecht 2000: 3). As this growth is not always welcomed and justified in terms of welfare and efficiency considerations economists deve loped a series of different theories seeking to explain this phenomenon. The objective of this paper is to give an appraisal of four theories of government expend iture growth and to provide an overview of the implications that are part of it.
Table of Contents
1 Introduction
1.1 Basic problem and objective of the study
1.2 Outline of the study
2 Macro models
2.1 Wagner’s “law”
2.1.1 Explanation and assumptions
2.1.2 Criticism and value of the theory
2.2 The Peacock - Wiseman hypothesis
2.2.1 Explanation and assumptions
2.2.2 Criticism and value of the theory
3 Micro models
3.1 Baumol’s model of unbalanced productivity growth
3.1.1 Explanation and assumptions
3.1.2 Criticism and value of the model
3.2 Leviathan model
3.2.1 Explanation and assumptions
3.2.2 Criticism and value of the model
4 Conclusion and further implications
Objectives and Topics
The primary objective of this paper is to conduct a critical appraisal of four major economic theories regarding government expenditure growth. By examining both macro and micro models, the study aims to provide an overview of the mechanisms and factors that drive the persistent expansion of the public sector.
- Examination of macroeconomic models including Wagner’s "law" and the Peacock-Wiseman hypothesis.
- Analysis of microeconomic models, specifically Baumol’s model of unbalanced productivity growth and the Leviathan model.
- Evaluation of the theoretical assumptions and the validity of these models in modern economic contexts.
- Discussion of the challenges in measuring public sector productivity and the influence of political and institutional factors on budget growth.
Excerpt from the book
2.1.2 Criticism and value of the theory
A presumed organic view of the state is open to criticism by proponents of the mechanistic state model. The mechanistic view of the state emphasizes the individual which strives to create a state in a way that its personal interests are pursued best (Black et al. 1999: 88). Such an individual might get very soon to the point where it is not willing to accept higher taxes in order to finance further government’s expenditure.
Moreover, Wagner formulated his hypothesis after analysing countries in the era of industrialisation at the end of the 19th century. Not all assumptions he made can be transferred into the 20th or even the 21st century (Likierman 1988: 21). Lots of countries today are to be found in a process of post-industrialisation. The age of computers and worldwide networks did and do certainly bring dramatic technological changes, but instead of increasing governmental spending it is reasonable to argue that they tend to decrease number of employees and administrative work needed in the public sector.
Likierman (1988: 21) holds the view that Wagner’s “law” overstates the demand side for goods and services. The willingness or even the ability of the government to deliver additional services is not put to the question. No matter how big the existing size of the government might be, it will increase if income increases, thus efficiency considerations are not carried out.
Summary of Chapters
1 Introduction: This chapter defines the scope of the study, identifies the general trend of rising government spending since 1870, and outlines the four specific economic models to be analyzed.
2 Macro models: This section investigates the long-term trend of public expenditure through the lens of Wagner’s "law" and the Peacock-Wiseman hypothesis, focusing on aggregate economic factors.
3 Micro models: This chapter explores the decision-making behavior of institutions and individuals via Baumol’s model of unbalanced productivity and the Leviathan model to explain government growth.
4 Conclusion and further implications: The final section synthesizes the limitations of the analyzed models, acknowledging that reality involves a complex interplay of factors beyond these simplified theories.
Keywords
Public Finance, Government Expenditure, Wagner's Law, Peacock-Wiseman Hypothesis, Baumol's Model, Leviathan Model, Public Sector Growth, Macroeconomics, Microeconomics, Productivity Growth, Bureaucracy, Fiscal Policy, Rent-seeking, Displacement Effect
Frequently Asked Questions
What is the central focus of this research paper?
The paper provides a critical appraisal of four distinct economic theories that attempt to explain the phenomenon of government expenditure growth in industrialised countries.
Which specific macro models are discussed?
The paper analyzes Wagner’s "law," which links expenditure to economic output, and the Peacock-Wiseman hypothesis, which focuses on the impact of political crises and social upheavals.
What do the micro models contribute to the discussion?
The micro models, specifically Baumol’s model and the Leviathan model, focus on the behavior of individuals, institutions, and bureaucrats to explain the internal drivers of public sector expansion.
What is the main research objective?
The objective is to evaluate the plausibility, assumptions, and utility of these four theories in explaining why public sector spending tends to increase over time.
What methodology does the author employ?
The author performs a literature-based theoretical analysis, critically examining existing economic models and contrasting them with empirical observations and secondary source critiques.
What is the significance of the "displacement effect" in this context?
The displacement effect, a key component of the Peacock-Wiseman hypothesis, describes how social crises allow governments to raise taxes, leading to a permanent increase in public spending levels even after the crisis ends.
How does Baumol’s model explain public sector growth?
Baumol argues that the public sector consists of non-progressive, labor-intensive services where productivity improvements are limited, leading to rising unit costs and increased total expenditure.
What is the core argument of the Leviathan model regarding bureaucracy?
The Leviathan model posits that self-serving bureaucrats expand their departments and budgets to increase their own power, prestige, and status, often exploiting asymmetric information.
- Quote paper
- Marc Dominick (Author), 2002, A critical appraisal of the theories of government expenditure growth, Munich, GRIN Verlag, https://www.grin.com/document/44840
