The Expansion of the Public Economy: A Comparative Analysis

TLDR

Governments in advanced capitalist nations have increasingly taken on roles as providers of social services, producers, economic managers, and capital investors, challenging the traditional market dominance. The study seeks to explain why certain countries have experienced a markedly larger expansion of the public economy compared to others. The authors analyze five explanatory factors—economic growth, reliance on indirect taxes, partisan politics, institutional structure, and international exposure—to account for the expansion of governmental activity. Using data from 18 nations, the study shows that public revenues now comprise one‑third to one‑half of GDP and discusses the implications of these findings.

Abstract

In spite of the traditional legitimacy accorded the market mechanism of the private sector in advanced capitalist nations, governments in those nations have become more influential as providers of social services and income supplements, producers of goods, managers of the economy, and investors of capital. And in order to finance these various activities the revenues of public authorities have increased dramatically–to a point where they are now equivalent to one-third to one-half of a nation's economic product. This growth in governmental activity in advanced capitalist society is examined by considering the causes, and some of the consequences, of the expansion of the public economy–defined, following Schumpeter's discussion of the “tax state,” in terms of the extractive role of government. The primary concern of this article is to discover why some nations have experienced a far greater rate of increase in recent years and, as a result, have a much larger public economy than other nations. Five types of explanation are elaborated to account for the growth of the scope of governmental activity: (1) the level and rate of growth in the economic product; (2) the degree to which the fiscal structure of a nation relies on indirect, or “invisible,” taxes; (3) politics–in particular the partisan composition of government and the frequency of electoral competition; (4) the institutional structure of government; and (5) the degree of exposure of the economy to the international marketplace. The article evaluates the five explanations with data for 18 nations, and concludes by discussing some implications of the analysis.