Capital Budgeting and the Allocation of Resources

Abstract

One must agree with Mr. Jesse Burkhead' that among contemporary policymakers there is a strong inclination to reject the logic of dynamic fiscal policy and to accept the balanced budget as a guiding principle. The scholarly literature is guilty of no such cultural lag. An excursion in contemporary economic journals reveals no denial of the efficacy and desirability of public deficit as an offset to depressed private investment anticipations. Dynamic, compensatory or functional fiscal policy, call it what you will, in some form or another is the contemporary fiscal orthodoxy of economists. Perhaps because it is the orthodoxy, it no longer is the subject of much scholarly conjecture. The period from 1938 to 1941 abounded in comment concerning the consequences of public debt, and related formulations of fiscal theory and policy dictates. Since World War II, however, even those economists who contributed most importantly to the discussion apparently judge that the topic has been explored adequately, and have moved on to other contemporary issues. The scholarly appraisal ended short of its logical conclusion. The discussion has influenced profoundly our thinking about anti-cyclical policy. It has not considered adequately the relation of public debt to the allocation of resources among alternative uses in an economy in which cyclical fluctuations are mild because of effective use of anti-cyclical monetary and fiscal tools. The allocative aspects of public debt creation were a central interest in early economic speculations concerning public finance. Adam Smith, Jean-Baptiste Say, and Ricardo opposed government deficits principally because they considered them likely to shut off the private economy from capital funds. Although Lauderdale and Malthus took positions similar to those of recent compensatory theorists, in the literature of 1780-1840 public deficits typically were held to be inappropriate instruments of policy because they were thought to cause inefficient allocation of resources. There was no recant of this doctrine between 1840 and 1930. John Stuart Mill defended public debt relative to some types of private debt, reflecting his sensitivity to the less material consumer needs, which he advised frequently best could be satisfied through public action. But Mill had few supporters in this regard.2 Bastable's comment is representative: