Wagner's Law Essay

1964 WordsMay 17, 20148 Pages
WAGNER’S LAW INTRODUCTION:- The causality pattern between public expenditure and economic activity is one of the most controversial topics in Public Economics. Two different rather opposite views with valid arguments in favor of their hypothesis exist. Keynesian doctrine believes that causality runs from public expenditure to economic growth while Wagnerian thinks vice versa. Adolph Wagner, a German economist was the first, who, in 1883 in his classical book, Grundlegung der Politischen Okonomie, highlighted the existence of a positive correlation between economic activity and government spending. Wagner put forward three reasons in support of his hypothesis.  First, private activities would be substituted by public activities as countries go through the process of industrialization and modernization. as nations develop they experience increased complexity of legal relationships and communications, as a result of the immense division of labour that accrues with industrialization. Because of this, Wagner envisaged an enlarged role for the state in the form of public, regulatory and protective activity In particular, government expenditure on law and order and contractual enforcement would increase.  Second, Wagner predicted the expansion of ‘cultural and welfare’ expenditures based on the presumption that as income rises, society would demand more education, entertainment, a more equitable distribution of wealth and income, and generally more public services. Public Services were seen as normal goods, that is, their income elasticities of demand exceeded unity. Wagner cited education and culture as areas in which collective producers were more efficient than private producers. Wagner believed that cultural and educational needs are better served by the public sector rather than the private sector.  Third, in Wagner opinion ―natural monopolies are best

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