Briefly Explain Wagner's hypothesis and Peacock Wiseman hypothesis.

Briefly Explain Wagner’s hypothesis and Peacock Wiseman hypothesis.

Critically examine Wagner’s hypothesis.

Critically examine the Peacock-Wiseman hypothesis with regard to Public Expenditure.

Ans.

Adolph Wagner Hypothesis

Adolph Wagner, a famous German fiscal theorist believed that there is a functional cause and effect relationship between the growth of an economy and the relative growth of public sector. Presenting his famous ‘Law of the increase of State Activities”. Adolph Wagner writes, Comprehensive comparisons of different countries and different times show that among progressive people, with which alone we are concerned, an increase regularly takes place in the activity of both the central and local governments. This increase is both extensive and intensive; the central and local governments constantly undertake new functions, while they perform both old and new functions more efficiently and completely”. According to Wagner, relative growth of the government sector was an inherent characteristic of industrialising economies. He not only mentioned the United Kingdom which more or less had completed her industrial revolution before Wagner’s time but also nations such as the USA, France, Germany and Japan whose industrial revolutions were contemporary to Wagners life. Wagner’s hypothesis of increasing State activity holds that as per capita income and output increase in the in astrial nations, the public sector of these nations necessarily grows as a proportion to total economic activity. Wagner has divided public expenditure into two parts – (a) expenditure for internal and external security, (b) culture and welfare which implies health, transport, education, banking and the like; “Expenditure for external security would increase in a growing economy as the nature of use of force by the State from simple aggression to prevention of attack and use of sophisticated. weapons. Similarly, the expenditure for internal security would increase due to greater friction between economic units and urban people.

This has been shown in Fig. The real per capita income has been shown on the X-axis and the real per capita output of public goods has been shown on the 7-axis.

Line A1 represents a situation in which the public sector maintains a constant proportion of the total economic production of society overtime. In other words, while the real per capita income increases due to the economic development of the country, the real per capita output of public goods remains at the constant develop of the country, the real per Capita output of public goods remains at the constant proportion of total economic activity. The constant proportion line_may now be used as a reference point to the graphical representation of Wagner’s law as shown by the line A2, again along with the line A2, the proportion of the total resources devoted to the output of public goods, expanding over time.

Criticism of the Theory

Wagner’s hypothesis was widely criticised by noted economists such as Allan Peacock and Jack Wiseman on the following grounds:

1. It lacks Inter-disciplinary Relationship : No doubt, it deals with inter disciplinary phenomenon but basically it lacks essentially inter-disciplinary relationship in its analytical framework. Other sciences like political science, economics and sociology must be evolved in any theory of public expenditure. Such type of theories must consider cultural characteristics of a society. Therefore, it deals with the casual conditions described by Wagner, which constitute all the primary determinants of a relatively expanding public sector during the course of industrialisation and economic growth.

2. Not Comprehensive Analysis: Although Wagner’s hypothesis possesses the accumulating and explaining of the crucial historical facts, it lacks a comprehensive analytical framework.

3. Not Acceptable to Western Countries: Wagner’s version is based on an organic self-determining theory of the State which is not, however, at least accepted in most countries.

4. It Ignores the Influences of War: Wagner’s hypothesis ignores the influence of war on government’s spending activities which play a vital role in the public expenditure in modern times.

Peacock-Wiseman Hypothesis: This hypothesis of the growth of public expenditure was advanced by Peacock and Jack Wiseman in the study of public expenditure in Great Britain during the period 1890-1955. It stress the time pattern of public spending trends and highlights the fact that the increase in public expenditure does not follow any smooth and continuous trend but the increase in public expenditure occurred in step-like manner or in jerks. During this phase, some social or other disturbance takes place which shows the need of increased expenditure as the existing public revenue could not meet the situation. However, the approach of the hypothesis is made of three seperate concepts.

1. Displacement effect, 2. Inspection effect, 3. Concentration effect. Peacock and Wiseman observed that the relative growth of the public sector in the Great Britain followed a discrete step-like pattern rather than a continuous growth pattern. The government’s fiscal activities have risen step by step to successive new higher level during the span of seven decades. Most of the upward steps in taxing and spending have taken place during period of major social disturbances. This has created a ‘displacement effect by which the previous lower tax and expenditure are replaced by new and higher budgetary levels. After the social disturbance has ended, the newly emerged level of tax tolerance makes the society willing to support a higher level of public expenditure since the society realises that they are capable of carrying a heavier tax burden than it previously had. In this way, the public expenditure and revenue get stabilised at a new level and still another disturbance occurs to cause a displacement effect. Thus, the social disturbance ends that no strong motivation exists which may compel the society to return to the old lower level of taxation. The higher government revenues are used instead, to support a permanently higher level of public sector allocation.

This displacement, effect does not require that the new higher growth of expenditure should continue with the same expenditure pattern that was created by the social disturbance. In this way, the increased expenditures are partly direct result of disturbance while other, expenditures frequently involve the expansion of government into new areas of economic activity. For instance war and other social disturbances frequently force people and their government to find out the solution of problems which previously had been neglected. This is known as Inspection Effect”.

Thirdly Peacock and Wiseman also described a ‘concentration effect’ which refers to the apparent tendency for central government economic activity to grow faster than that of the state and local governments when a society is experiencing economic growth. Actually concentration effect’ is closely related with the political set-up of the country.

In short, Peacock-Wiseman thesis of government spending trend is more convincing then Wagner’s hypothesis. It does not claim to be an immutable economic law or principle but tries to point out some pivotal characteristics of the growth pattern in the industrial set-up. Here, it must be remembered that there is natural course of advancement and structural changes in the economy which in turn leads to constant and systematic expansion in the public expenditure. Similarly, urbanisation, population expansion and awareness of the civil rights coupled with an awareness of State government towards duties lead to an upward movement of public expenditure. In this manner, this hypothesis is still a description of a particular tendency and does not isolate all the relevant causes at work.