The Growth of the Public Sector and Inflation Pressure

It may be convenient in a theory of inflation to disregard the influence of the public sector or ‘to assume it away altogether because we have no theory of government expenditure’, as Domar has suggested originally in the context of the theory of economic growth [1] and because our theories of government income hardly go beyond the consequences of techniques used in taxation. But this probably is a more severe restriction for a theory of inflation than for the explanation of almost any other economic phenomenon. Regarding antiinflation policy this would also imply disregarding some of the most important policy instruments. On the contrary, I believe therefore that Schumpeter was right when insisting that fiscal policy and practice were of supreme importance for the development not just of national economies but also of human civilisation and of human behaviour, and that there were only very few exceptions to this rule [2]. Because the public sectors of most industrial economies have grown faster than their G.N.P. during the last decades, this may be even more true today than when Schumpeter wrote his article.