The Theory of the Public Economy

It is common usage to speak of the public economy as the national household, or, as the case may be, the county household, city household, or generally the public household. The whole of public economy is thereby given a name taken from one single section of private economy. Similarly, whenever in the past economists tried to explain public economy, they nearly always used an approach based on the familiar concepts of private economy. Classical theory took the view that the economic relation between State and citizens is one of exchange, the citizens paying tax in exchange for public services. Nowadays it is fashionable to regard public activity as a special form of production: non-material production, supported by non-material capital, and designed to create the non-material goods of peace and rule of law. Such concepts do nothing but obscure the true nature of public economy. To be sure, public and private economy cannot be conceptually separated, both having common roots and common aims. Both have the purpose of maximizing the utility of scarce resources. But the means of power peculiar to the public economy present it with its own peculiar tasks, to be solved in its own peculiar ways. The forms of state revenue with which the theory of public finance is concerned are alien to private economy and have nothing to do either with exchange or production. The conception of tax as a price for non-material products is of no use as a basis for tax theory, because the principles involved in tax assessment have nothing in common with the law of price.