Review

Reviewed Work(s): The Theory of Public Finance. by R. A. Musgrave

Review by: A. R. Prest
Source: The Economic Journal, Vol. 69, No. 276 (Dec., 1959), pp. 766-770
Published by: Wiley on behalf of the Royal Economic Society
Stable URL: https://www.jstor.org/stable/2227672
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 REVIEWS

The Theory of Public Finance. By R. A. MUSGRAVE. (New York and

London: McGraw-Hill, 1959. Pp. xvii + 628. 97s.)

MUSGRAVE's book has been long-awaited and long-heralded. Let it be

said at the beginning that it will immediately take its place as one of the
greatest works in its chosen field. In erudition, theoretical insight and
encyclopaedic knowledge it ranks with great treatises in other fields such as
Schumpeter on Business Cycles or The History of Economic Analysis. It would
seem that the author has been engaged on the work for twenty years; it is
quite safe to predict that it will be widely read twenty years from now, and
most probably a great deal longer.
Having paid tribute to the stature and intrinsic worth of the book, I
should like to work off my irritation straightaway about a minor but in-
furiating defect. There is an extremely large number of misprints in the
book, some of which are very minor (such as names of authors misquoted),
but some of which do affect the sense of the argument. It is understood that
many of these have now been spotted and are to be corrected in the second
edition (and there certainly will be a second edition), but in the meantime
it is quite impossible just to hand the book as it stands to any student. It
is simply astonishing that an author so well versed in the marginal principle
should have failed to apply it to himself. A very small additional effort
at the final manuscript or galley-proof stage would have brought in vast
gains in accuracy and clarity.
The title of this book is, for once, a close guide to the contents. Mus-
grave's approach is nakedly and unashamedly theoretical; he is concerned
with both normative and positive aspects of public finance, but has no
truck with such matters as institutional backgrounds, actual tax arrange-
ments and so on. Part I (" Statement of Issues ") and Part II (" The
Satisfaction of Public Wants ") are largely concerned with the normative
side. Musgrave argues that the budget of the public sector has three
branches-allocation, distribution and stabilisation. The most original
feature of this part is the distinction between two functions of the allocation
branch-the satisfaction of social wants (public goods which must be con-
sumed in equal quantities by all) and merit wants (the conventional
social/private discrepancies). A good deal of the subsequent argument
turns on this distinction. The benefit and ability to pay theories are then
critically examined; and both are rejected as being incomplete solutions
to the determination of the budget plan. The fundamental defect of the
benefit theory is characterised (p. 134) as being that it provides no way of
ascertaining the true benefits; and in the ability to pay case there is no

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 [DEC. 1959] MUSGRAVE: THE THEORY OF PUBLIC FINANCE 767

visible means of ascertaining social preferences (p. 134). In the end,

therefore, Musgrave argues that the provision of social wants, merit wants
and the determination of the income distribution pattern (and also the issues
of employment and price stability?) are matters to be resolved by voting
through ballot boxes rather than voting through purses. At the normative
level economics has something to say about avoiding excess burdens (Chapter
7) and the appropriate index of equality (Chapter 8) but precious little
else. A final chapter in Part II is an interesting but somewhat incongruous
excursion into national-income literature.
Part III (" Adjustments to Budget Policy: Classical Aspects ") deals
with the traditional positive problems: the relative effects of different tax
and expenditure systems on work effort, saving, relative prices and outputs,
investment and the distribution of income. Part IV (" Compensatory
Finance ") accounts for about one-third of the book. The author weaves
into the narrative some discussion of growth problems and a lengthy discus-
sion of the theory of debt policy as well as the subjects more usually covered
by this heading.
This very brief summary may give some idea of the width and depth of
the work. It may be most helpful now to use the remaining space to explore,
first, some of the book's outstanding merits and, second, some of the sins of
commission and omission.
The merit par excellence of this book is the high quality of the theoretical
reasoning. Without recourse to anything more than elementary mathe-
matics Musgrave succeeds in cutting through a vast amount of tangled top-
growth and sorting out the main stems of argument clearly and concisely.
Thus the excess burden of indirect taxation argument (pp. 140-55), the
effects of various taxes on the division of personal income between consump-
tion and saving (Chapter 12) and the ramifications of the balanced budget
multiplier theorem (pp. 432 ff.) are all set out so explicitly that there is no
longer any excuse for the old fallacies to crop up again. There are many
innovations in the book as well as solutions to old problems: a good example
is the insistence (e.g., pp. 243-6) on considering group reactions as well as
those of the representative individual. The essential point here is that if
we substitute a progressive income tax for a proportional tax we must look
at the relative changes in marginal and average rates for each income
group and the marginal rates of substitution of leisure for income for e
group separately if we are to have any hope of sorting out the answer.
It cannot be denied that the author's willingness, and indeed anxiety,
to explore these theoretical issues fully leads him to consider many unusual
and indeed queer cases (e.g., the " 57 varieties " of assumptions about the
possible shapes of marginal utility of leisure and marginal utility of income
curves in Chapter 11 and the manifold ways (Chapter 18) in which
compensatory tax adjustments may influence consumption). Although
one can have some reservations about the methods of treating these problem
No. 276.-VOL. LXIX. 3 D

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 768 THE ECONOMIC JOURNAI, [DEC.

children, there can be no question that it is extremely valuable to have the

answers all on tape, as it were.
To have explored some of these issues thoroughly would have been no
mean feat; to keep up the performance over 600 pages is an intellectual
achievement of great distinction.
If there were nothing to disagree about in a book of this length, it would
be a matter for condemnation of the author, or the reviewer, or both.
The first general point is really one of methodology. As it stands, the book
is likely to be found overwhelming by most readers. Case after case is
considered, every possibility is explored, no stone left unturned; and so it
is hardly surprising that one has no clear impression when one gets to the
end of which things are important, which results are the more likely and so
on. Fundamentally, I think, this springs from the author's predilection
for abstract theoretical reasoning and his reluctance to cite empirical
evidence. There is nothing wrong in being a tool-maker, especially when
the maker does clearly understand, as in this case, that his tools are meant
to be used. But it is surely reasonable to expect some indication about
whether any particular implement is likely to be in more general use than
others. Thus in Chapter 11 we have a long refined analysis about the
effects of taxes on incentives to work followed by a rather feeble single page
on secular evidence. There have been a number of recent inquiries on the
effects of taxation on incentives to work; discussion of these findings, their
merits and demerits, would surely have enriched the argument. Similarly
in Chapter 12 the point is (quite properly) made that the substitution of a
consumption tax for an income tax will be more favourable to saving, the
more is saving for the purpose- of accumulation than for future consumption.
But there is no word on which is or is likely to be the more realistic case.
Musgrave would, one feels, be a superlative general in a mopping-up
campaign remorselessly rounding up pockets of enemy resistance, but per-
haps not quite so outstanding leading the charge towards a single strong
point.
The second point is one of arrangement. Obviously the book has
grown piecemeal over the years and suffers some of the consequences. We
have already remarked on some incongruity in Part II. Similarly, it is
not entirely obvious why problems of growth should all be discussed in
Part IV on Compensatory Finance. Nor are topics always co-ordinated as
they should be. There is some overlapping discussion of effects of taxes on
the work/leisure choice and on the consumption/saving case in Part II
(Chapter 7) and Part III (Chapters 11 and 12). Capital-gains taxation,
business-income taxation and depreciation provisions are all discussed at
various stages. But it would need an extremely perspicacious reader to
divine that these problems hang together and that, for instance, the inclusion
of capital gains in the personal income tax net is to a large extent an alterna-
tive to the differential taxation of undistributed profits.

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 1959] MUSGRAVE: THE THEORY OF PUBLIC FINANCE 769

Thirdly, and perhaps inevitably, the book is unquestionably uneven.

There is no clear distinction in logic between unevenness in the sense of
spending too much time on one subject at the expense of another and
unevenness in the sense of one page being more difficult than another. As
the first is a matter of judgment and the second one of fact, one cannot be
dogmatic on this general point. Nevertheless, it does seem odd to find
some twenty pages on voting theory, drawing on, e.g., Arrow and Black,
but only four pages on Federal Finance without any reference to Wheare
or similar authorities. There are twenty-four highly compressed pages on
the effects of taxation on risk-bearing (Chapter 14) but no connected discus-
sion at all on the principles of minimising the costs of administering taxes.
A whole chapter (Chapter 15) deals with the complexities of price and
output adjustments by business firms to various taxes, but the overlapping
jurisdictions of income taxes across territorial frontiers and the problems
of property taxes scarcely get a mention. But, to repeat, matters of
opinion cannot readily be disentangled from matters of fact on such points
as these.
Finally, there are points at which Musgrave's analysis seems dubious or
obscure. This again is inevitable in a book of such proportions, but per-
haps one example may be given of each. On pp. 249-50 the author
argues that an equal yield proportional consumption tax is likely to induce
a larger amount of work effort than a proportional income tax, principally
because of group effects. It is argued that as the average propensity to
spend rises with income, the imposition of a proportional spendings tax
will be equivalent to substituting a regressive tax on income for a propor-
tional tax, and that therefore work incentives will be greater. However,
the problem is not one of the relation of marginal rates to average rates of
spendings tax but rather of that of marginal spendings tax rates to marginal
income tax rates. If one allows for the fact that the expenditure tax rate
must be greater than the equivalent income tax rate (by a factor depending
on the national savings ratio), the fact that tax on saving for future con-
sumption is postponed rather than abolished and the further point
that the marginal propensity to save is usually found to be fairly invariant
to income, the argument becomes much more open than appears from the
text.
As an example of obscurity, the discussion on p. 168 about the measure-
ment of depreciation in real terms may be cited. Quite apart from the
(obviously erroneous) transition from $ to million $ magnitudes and the
inadequacy of the statement that in times of inflation " original cost does
not permit the investor to recover the real cost of his outlay," the general
argument in terms of real value of net worth is not likely to be found
enlightening by many.
But compared with the intellectual achievement of incorporating all
these ideas and arguments within two covers, these criticisms are of small

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 770 THE ECONOMIC JOURNAL [DEC.

importance. The note on which one must end is that from now on anyone
interested in the theory of public finance can simply be told, " It's all in
Musgrave."
A. R. PREST
Christ's College,
Cambridge.

Theory and History. By LUDWIG VON MISES. (London: Jonathan Cape,

1958. Pp. ix + 384. 30s.)
THis new volume by Professor von Mises has the same texture and tone
as his earlier books on Human Action and Socialism. There are frequent cross-
references, and both the methods of argument and the conclusions are per-
fectly consistent. The defence of the liberal market economy and of
economics and " praxeology " as wertfrei intellectual studies with " unique
epistemological character " will be familiar to all his readers. The defence,
of course, is most frequently a scathing attack. Never can the market
economy have been handled so stridently or the history of ideas so brusquely.
The book is littered with adjectives such as " absurd," " preposterous," and
pernicious," and nouns such as " pseudo-economics," " fantasy " and
" slavery." Professor von Mises attacks Marx for refusing to argue with his
opponents and assuming that it was sufficient to unmask their bourgeois
background and thereby the necessarily " idealogical " character of their
doctrines. Nonetheless, he often follows this procedure himself. He
assumes that all who disagree with his version of liberal economics are
" driven by an idiosyncratic abhorrence of the market economy and its
political corollary " (p. 242), that all recent socialists base their hopes not
" upon the power of their arguments but upon the resentment, envy and
hatred of the masses " (p. 65), that Marxists " cling to historical materialism
and stubbornly refuse to listen to its critics because they want socialism for
emotional reasons " (p. 158), and that people who " support policies that aim
at the substitution of planning by an authority for autonomous planning by
each individual " are " longing for slavery " (p. 376). In a more restricted
context he claims that " it is only the passionate pro-socialist zeal of mathe-
matical pseudo-economists that transforms a purely analytical tool of
logical economics into a utopian image of the good and most desirable state
of affairs " (p. 367).
It is impossible to dismiss comments of this kind as disagreeable tricks of
style. There are other comments which betray a tendency to sweeping
generalisation as well as passionate feeling. " Marx misrepresented the
operation of the capitalist system in every respect" (p. 117). "What
prompted those who suggested the substitution of the social sciences for the
sciences of human action was, of course, a definite political program "

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