PUBLIC FINANCE. 1. Definition and Scope of Public Finance.— Governmental or ganization is necessary in any society which has passed beyond the lowest stage of social development, and in modern industrial states the functions and needs of the government are large and important. Public finance treats of the raising and application of the resources of the state. It analyzes the needs of the state and the means by which these needs may best be met, that is, it treats of public expenditure and public revenues. It also describes the methods by which these are determined upon and raised, which leads to a discussion of finan cial legislation and budgetary practice. And finally the subject of public credit, by which the orderly income of the state may be antici pated, is included by most writers as falling within the scope of public finances. This gives a fourfold division of the subject.
2. Public Expenditures.— It is practically impossible to lay down any principles govern ing public expenditures, since before we can do this a prior question has to be answered, namely, what are the proper functions of the state. The answers to this stretch all the way from the extreme individualism of Herbert Spencer, which would limit the duties of the state to the protection of life and property and the enforcement of contracts to the collec tivism of modern Socialists, who would enlarge the activities of the state to such an extent that they would absorb all private enterprise. We may, however, treat the question of public expenditure as a practical problem in each specific case, to be determinedon its merits without reference to any a priori theory.
Upon one point there is no difference of opinion: the tendency of public expenditures has shown a steady and universal tendency to increase. This has been true under central ized administration, as in France, or under decentralized governments, as in the German states; in large countries like Brazil or in small ones like Belgium; in democratic countries like Switzerland or despotic ones like Russia; in old countries like Greece or new ones like the United States. Part of the seeming increase, to be sure, may be accounted for by the growth of the population, the growth of money pay ments in lieu of payments in services or kind, the general advance in wealth and the decline in the value of money. But after making all these allowances there still remains a real increase to be accounted for, especially since the begin ning of the 19th century.
The direction of the growth of public ex penditures will become clearer if we distinguish three classes, namely, those for protection or defense, those involved in carrying on public works and those for the social welfare of the citizens. The first includes not only military expenditures, but also those for police, the courts and the preservation of domestic tran quillity. Some years ago Herbert Spencer laid down the dictum that as society advanced it would expend less for militarism and more for amelioration, but the former part of this state ment at least seems not to have been borne out by the facts. Responsible for this is the grow ing cost of modern armament. War is incred ibly expensive, the total money cost of the World War being estimated at about $186,000,000,000. Peace to-day costs the great modern powers more than the most expensive war of antiquity, and the greater the progress in invention the greater is the expense involved in replacing obsolete equipment with new. Even in a country as free from war as the United States has been in the last 50 years, over two-thirds of the Federal expenditures to-day are directly or indirectly attributable to war and preparation for war. Police and court and similar expenses probably show a tendency to decrease, and it is possible that the future may also see a decline in the expenditures for war, but no such tendency can now be predicted.
There is a decided tendency for the second group of functions to increase. The number and variety of services undertaken by the state is daily increasing, and there is constant pres sure from the citizens of all modern states that the government shall expand its functions still further. The post office, national railways, telegraph and telephone systems, municipal water, light and street car systems, are a few of the more important lines along which the state has entered the industrial field, while most governments own lands, forests and mines which they administer. As to whether these enterprises shall cause a corresponding increase in net expenditures or whether they will pay for themselves is a matter of public policy and administration. If managed on business prin ciples the growth of this group will have no effect in increasing the burden upon the tax payer.