Manalo, Patricia Jane M.

FIN 3209-2
BSBA FM 3-2 Prof. Ragrciel Manalo

Reflection Paper on Module 1 Chapter 2 – The Development of Public

Finance Institutions
A. Ancient Finance: The Slave Societies
B. Medieval Public Finance: Feudalism
C. The Breakdown of Feudalism Beginnings of Capitalism
1. The Rise of Central Government
2. Beginning of Capitalism
a. Mercantilism
b. Cameralism
c. Physiocracy
D. Capitalism: Public Finance and Free Enterprise
1. Adam Smith
2. David Ricardo
3. John Stuart Mill
4. Adolf Wagner
E. The Crisis of Capitalism: Keynesian Public Finance
F. The Marxist Challenge: Socialist Public Finance
1. Marxism
2. Basic Features of Socialist Public Finance

A. Ancient Finance: The Slave Societies

- The lecturer discussed that Public Finance traces its roots to the inception of
the State, emerging from the fundamental need to safeguard and enhance
societal well-being. With the establishment of governance structures, including
the government, populace, defined territory, and sovereignty, the State sought
to fulfill its mandate of protection and welfare promotion. Public Finance
emerged as a mechanism to sustain the state's functions and advance societal
objectives by managing government revenues and expenditures. This
discipline within economics addresses the intricate interplay between fiscal
policies, public spending, and their broader economic ramifications, thereby
serving as a cornerstone for effective governance and societal progress.
Ancient Public Finance operated within constrained parameters due to the
limited scope and functions of the slave states of that era. Predominantly
focused on war efforts, state financing primarily allocated resources towards
military expenditures, with revenues derived from war-related activities such as
plunder, war chests, fines, and tributes extracted from conquered territories.
 Taxation, comparatively sparse, was typically reserved for times of crisis. The
ancient Greek and Roman slave states laid the groundwork for rudimentary
mechanisms of accountability within Public Finance, aligning financial practices
with the state's core activities and perceived duties. Rooted in the pillars of
slavery and warfare, the financial frameworks of antiquity were intricately
intertwined with the structure and priorities of the state.

B. Medieval Public Finance: Feudalism

- In this topic, during the Middle Ages, Medieval Public Finance evolved in
tandem with shifts in the political landscape, marked by the weakening of
central Monarchies, the rise of Feudalism, and the eventual emergence of
limited Monarchies. These changes unfolded gradually, resulting in diverse yet
overlapping systems of political authority with varied economic, social, and
cultural implications across European states. While some basic concepts from
Ancient Public Finance persisted, the complexities of medieval governance
necessitated significant adaptations in financial institutions, including taxation
structures and public expenditure. Accounting and auditing practices began to
take shape, and public borrowing became institutionalized to manage
increasing government expenses, resembling early forms of debt
management. Amidst these developments, Feudalism emerged as the most
influential factor shaping medieval Public Finance. Feudalism can be
understood as an economic structure centered on land ownership, involving
reciprocal obligations between the king, lords, and vassals. Within this
framework, nobles in Western Europe during the High Middle Ages engaged in
a contractual system of political and military ties, wherein lords and kings
granted lands (known as fiefs) and labor in exchange for military and political
allegiance from their vassals.

C. The Breakdown of Feudalism Beginnings of Capitalism

1. The Rise of Central Government

- The evolution of Public Finance on a national scale unfolded alongside the

ascent of centralized governments, necessitating the expansion and
rationalization of national finances to meet the demands of robust central
administrations. Increasing government expenditures prompted post-feudal
states to seek additional revenues, resulting in a resurgence of fiscal authority
for central governments. This resurgence spurred the broadening of traditional
national taxes and the introduction of new levies. With the decline of agriculture,
revenue streams shifted towards trade, prompting kings to impose taxes on
commercial activities and movable assets. Officials assessed the value of these
assets, and individuals typically paid a fixed percentage, often around 10%, to
the monarch. This transition ushered in the creation of novel tax mechanisms.
 The post-feudal era saw the introduction of numerous taxes, some inherited
from feudal systems but expanded in both scope and form to accommodate
evolving economic structures. The resurgence of central governments
following the decline of the feudal era sparked significant transformations in
Public Finance Institutions. With the Income Tax emerging as a predominant
source of national revenue, alongside the introduction of various indirect taxes,
a principle emphasizing consent before taxation was ingrained into the tax
framework. Evolving methods of accounting and bookkeeping were tailored to
accommodate the necessity for a standardized taxation system, while the
formalization of audit institutions witnessed a notable ascent to meet
heightened demands for accountability. Concurrently, public borrowing
emerged as a pivotal activity within the realm of Public Finance, reflecting the
evolving dynamics of fiscal management in response to changing governance
structures and societal needs.

2. Beginning of Capitalism

- Since the 15th century, the feudal system gradually eroded as individualism
surged, leading craftsmen and merchants to disregard communal restraints.
The onset of Capitalism witnessed a series of transformative developments:
factories proliferated, technological innovations burgeoned, trade flourished,
and the expansion of goods and services paralleled population growth.
Factories were established to cater to mass consumer demands, while
technological advancements facilitated exploration for raw materials and food
resources in distant lands. Commercial trade surged alongside the
establishment of colonies, resulting in heightened wealth accumulation and a
corresponding surge in domestic market demands. These changes
necessitated the evolution of new political and social systems capable of
accommodating the expanding scope and complexities of modern life.

a. Mercantilism

o Mercantilism, practiced by European states from the 16th to 18th

centuries, encapsulated a set of protectionist and monetary policies
aimed at fostering national enrichment through trade and manufacturing,
prioritizing urban industry over rural agriculture. This economic doctrine
extended beyond mere trade strategies, encompassing various policies
spanning from the decline of the Middle Ages to the rise of laissez-faire
capitalism. It emphasized state intervention in economic affairs,
strategic accumulation of wealth through exports, colonization, and the
establishment of colonies to secure valuable resources and markets.
Mercantilism laid the groundwork for the transition to modern economic
 systems, profoundly shaping the trajectory of global commerce and
governance.

b. Cameralism

o Cameralism, prevalent during the 17th and 18th centuries in Germany

and Austria, advocated for economic self-sufficiency and efficient
administration under absolutist monarchs. It encompassed a range of
disciplines including public finance, administration of order, and
economic policy, aiming to balance state control and societal interests.
Analogous to modern economic policies, Cameralism's components
align with objectives, tools, and institutional frameworks. While often
associated with German Mercantilism, Cameralism diverged by
prioritizing efficient administration and technological progress over strict
trade regulations, emphasizing the development of national resources
and the welfare of the populace.

c. Physiocracy

o Physiocracy, originating in 18th century France, marked the first scientific

school of economics, asserting that government policies should not
impede natural economic laws and identifying land as the primary
source of wealth. François Quesnay, a French economist, championed
this doctrine, emphasizing that economic processes adhere to natural
law and that land-based products hold monetary value crucial for state
finances. Physiocrats advocated for a single direct tax on land-rent
income, derived from agricultural production, as the basis for stable
taxation, believing that agricultural surplus provided the most reliable
revenue. They critiqued Mercantilism for its economic regulations and
focus on manufacturing and foreign trade, advocating instead for
freedom in labor and commerce. Additionally, Physiocrats argued
against aristocratic involvement in state affairs, proposing professional
bureaucracies to reduce taxation needs and minimize government
bureaucracy. They contended that a small government and equitable tax
structure were essential for economic prosperity.

D. Capitalism: Public Finance and Free Enterprise

- Capitalism is a socio-economic system characterized by private ownership of

the means of production and the principle of free enterprise, minimizing
government intervention in favor of market forces. In this system, governmental
functions are limited to essential services such as public works, defense, and
education, while other services are provided by the private sector. The onset
 of the Industrial Revolution propelled North America and Western Europe from
agrarian economies to industrial powerhouses, creating a working class
employed in factories and accelerating production through technological
innovations. However, this transition also brought about challenges such as
widespread poverty, crime, and disease, particularly in rapidly growing urban
centers where overcrowded and harsh working conditions prevailed,
highlighting the complexities and social disruptions associated with capitalist
development.

1. Adam Smith

- The first economist who provided economic ideas now prevalent in the
industrialized countries and less developed countries (LDCs) is Adam Smith.
"Classical economics" stems from the ideas pioneered by Adam Smith,
particularly in his seminal work "An Inquiry into the Causes of the Wealth of
Nations" published in 1776, which laid the groundwork for the Classical School
of Economic Theory. Smith's exploration of rational self-interest within a free-
market framework became a cornerstone of economic thought, emphasizing
how it fosters economic prosperity. Despite misconceptions about Smith's
focus on individualism, his early works also addressed ethical considerations
and the role of charity in society, highlighting the multidimensional nature of his
economic philosophy.

2. David Ricardo

- The next economist is David Ricardo, he was an influential English political

economist who also served as a member of the Parliament of Great Britain and
Ireland. Alongside figures like Thomas Malthus, Adam Smith, and James Mill,
he played a significant role in classical economics. He contributed extensively
to the development of modern fiscal administration concepts and practices and
was an early advocate of the Quantity Theory of Money or Monetarism.
Notably, his Theory of Distribution of Tax Burden laid the groundwork for
principles of equality and uniformity in taxation, emphasizing the importance of
a progressive tax structure. He believed that taxes used to support
unproductive laborers detracted from productive industry, advocating for
efficiency in government expenditure.

3. John Stuart Mill

- Then, John Stuart Mill was the preeminent English language philosopher of the
19th century, known for his naturalist, utilitarian, and liberal perspectives, which
merged Enlightenment ideals with emerging Romantic and historical
philosophies. His influential works, including "System of Logic" (1843), "On
 Liberty" (1859), and "Utilitarianism" (1861), reflect his commitment to empirical
reasoning and individual freedom. Regarding Public Finance, he emphasized
the correlation between state functions and public expenditures, advocating for
limited government intervention akin to Laissez-faire principles. Mill recognized
the market's efficiency in resource allocation but argued for state intervention
in income distribution. He supported inheritance taxation, trade protectionism,
regulation of work hours, and mandatory education as means to address
societal inequalities and promote social welfare.

4. Adolf Wagner

- The last economist that is being discussed is Adolf Wagner, He was a German
political economist, renowned for his significant contributions to public finance
and his role as a leading exponent of a particular social philosophy. Wagner's
law, known as "The Law of Increasing State Activity," posits that government
activities and functions expand as the economy develops, with public
expenditure tending to increase over time. He advocated for the state to
address wealth inequalities through fiscal measures, laying the groundwork for
the use of fiscal policies for distributive goals in modern times. While Wagner's
technical contributions to economics are noteworthy, his enduring influence
stems from his broader social philosophy and advocacy for an active role of the
state in addressing societal challenges.

E. The Crisis of Capitalism: Keynesian Public Finance

- Before the 1930s, the economic doctrines of classical economists like Adam
Smith and John Stuart Mill were widely accepted, advocating minimal
government intervention in the free enterprise system of capitalism. However,
the Great Depression of the 1930s challenged these beliefs, revealing that
economies could not always self-correct and achieve full employment without
government intervention. The failure of orthodox economic theories to address
the Depression's impact highlighted the shortcomings of laissez-faire
capitalism, as industrialized economies faced cyclical fluctuations, inflation,
stagnation, and recession. This crisis prompted a reevaluation of economic
principles, with many realizing the need for socialist reforms to counteract
economic downturns. Consequently, even the ruling class was compelled to
adopt interventionist measures contrary to the prevailing free market ideology,
reflecting a significant shift in economic thought and policy.

F. The Marxist Challenge: Socialist Public Finance

- The rapid spread of capitalism across Europe and the United States during the
industrial revolution fueled a surge in production and market expansion,
 accompanied by the exploitation of the working class, including women and
children, in harsh working conditions. Satirist Jonathan Swift famously criticized
this exploitation in England, even suggesting absurdly that children might be
consumed due to their excessive exploitation. Fierce competition led to the rise
of monopolies and conflicts over markets and resources. Against this backdrop,
communism emerged as a direct challenge to capitalist ideology, particularly
championed by Karl Marx, whose work "Das Kapital" countered Adam Smith's
"Wealth of Nations." Marx's ideas laid the groundwork for socialist public
finance, offering an alternative vision to the inequalities inherent in capitalism.

1. Marxism

- Marxism, developed by Karl Marx and Friedrich Engels in the 19th century,
serves as both a critique of capitalism and a blueprint for a socialist society,
emphasizing class struggle and collective ownership of production. In contrast,
socialism encompasses a broader political and economic ideology aiming to
minimize inequality and promote communal well-being through social
ownership and wealth redistribution. Marxism can be seen as a subset of
socialism, offering a specific analysis of capitalism and advocating for
revolutionary means to achieve socialist goals. The relationship between
Marxism and socialism shapes economic and political thought, influencing the
design and implementation of public finance systems in socialist societies,
where Marxist principles are applied practically to economic frameworks.
Marx's theory of surplus value elucidates how capitalists exploit workers by
extracting surplus value beyond their basic needs at the lowest possible cost,
often by extending labor hours or intensifying productivity. In response, workers
seek higher wages and better conditions, leading to inherent conflict between
the two classes. Marx posits that this struggle will ultimately necessitate
revolutionary action by the working class against the capitalist system, as they
confront various forces defending the status quo. He envisions communism as
the eventual outcome of this revolution, but acknowledges the transitional
period required for the transformation from capitalism to communism.

2. Basic Features of Socialist Public Finance

- The lecturer also discussed the three basic features of socialist public finance.
Firstly, the primacy of central planning in which central planning takes
precedence in socialist economies, with the state sector being the sole sector,
allowing for feasible and successful centralized planning. This feature has
made socialism appealing to many less developed countries (LDCs), which
have adopted economic planning mechanisms within their public
administrations. Consequently, socialist economies are often referred to as
Centrally Planned Economies (CPEs). Secondly, the role of taxation in
revenue-raising which tells that taxation plays a minor role in revenue-raising
compared to mixed economies, with state enterprises contributing substantially
to state revenue. In contrast, many public enterprises in mixed economies
operate at a loss. Thirdly, the budget deficits, unlike mixed economies where
budget deficits are common, socialist countries purportedly maintain surpluses
of revenue over expenditures, presenting a stark contrast in budget
management approaches.