In this article we will discuss about the multiple theory of public household.
Economists have paid much attention to the formulation of theories that examine the problems of consumer households, business firms, trade unions and other decision making units in the economy.
However they have not made any serious attempt to develop a corresponding theory of the public economy. The problems of government finance and the way in which government finances should be organized and operated have not been subjected to careful examination. Prof. Richard A. Musgrave tries to find a solution to this problem through his multiple theory of public household.
The activities of the government and the economic policy or the principles that make for an efficient conduct of public budget are the basic concerns of what is called public finance or what Musgrave prefers to call public household. Thus prof. Musgrave observed that while operations of the public household involve money flows of receipts and expenditure, the basic problems are not issues of finance.
They are not concerned with money, liquidity or capital markets. Rather they are problems of resource allocation, the distribution of income, full employment and price level stability and growth.
Hence Prof. Musgrave considers the basic concern as an investigation into the principles of public economy; or more precisely, into those aspects of economic policy that arise in the operation of the public Budget.
Here rules and principles have to be framed for an efficient conduct of the activity of the public house hold. This involves determination of the optimal budget plan on the basis of initiality defined conditions and exploring the possibilities of achieving it, This we refer to as normative or optimal theory of the public household.
Normative theory helps us to know how the market reacts to the budgeting policy. Thus if we now the reactions of the market to various tax- expenditure policies, we can choose that policy which would bring optimal results.
Normative theory is different from the fiscal politics approach to the study of public finance. Under this approach, a theory is developed to explain why existing policies are pursued and to predict which policies will be pursued in the future.
Here also knowledge of market reaction to tax expenditure policies will help predicting change in policies that would be brought about by the reaction of market.
Under the normative theory there is always a norm or standard set in for government’s budget operation. Under this approach we set a model of what should be the ideal allocation of resources, the ideal distribution of income and the ideal level of income, which the tax- expenditure programme of government should strive to attain.
It may not be possible to achieve the ideal objective fully, but nearer to the goal, the better it is. We can then compare or contrast the actual budgetary exercise with the ideal model, and readily understand in which respect the actual fall short of the ideals.
We are then in a position to identify the particular defect or inefficiency in the operation of budget plan or in the framing of the budget itself. Corrective actions can then be suggested, and accordingly short comings can be overcome, so that the ideal theory is better pursued by the Budgetory operators.
Hence the existence of an ideal or normative principle before the budget planners is essential for the smooth and orderly conduct of the budget operations. Achievement of such an ideal situation will require most efficient use of economic resources and an art of perfection in framing and executing the plan.
Therefore it can be fairly stated that normative theory of public household has the potentiality of achieving the highest possible efficiency in the conduct of public household activities. But such projection is however difficult to attain in the real world situation.
To this extent, the normative theory remains an ideal prescription, which the government aspires to achieve, as far as possible.
Hence Musgrave observes “our normative model of public economy is not designed to be realized in the sense of describing what goes on in the capitals of the world. Rather it is designed to show what would go on if an optimal result were achieved. Nevertheless, our model is not without close relation, to social and economic institutions. The frame work of a normative theory of public economy itself depends upon the political and social values of the society that it serves, and the implementation of the optimal budget plan depends upon the functional relationships that prevail in the market sector of the economy”.
It is through the budget plan, that the normative ideals are to be achieved. The budget plan framed accordingly has three distinct objectives. They are the allocation objective, the distributional objective and the stabilization objective. Apart from this, the growth objective can be considered particularly for developing countries.
However realization of economic growth objective, require a number of interrelated fiscal actions, which are automatically pursued in the process of realizing the other three objectives. Hence growth objective need no separate analysis, different from the other three objectives.
Professor Richard A. Musgrave uses an interesting model for analyzing the government’s fiscal operation, keeping in view the ideal standards under the normative approach.
In this imaginary state, the responsibilities of the fiscal departments are of three broad categories:
(1) The use of fiscal instruments to secure adjustments in the allocation of resources between private and public goods,
(2) The use of fiscal instruments to secure proper adjustments in the distribution of income and wealth, and
(3) The use of fiscal instruments to secure economic stability and growth.
It is further assumed that each of these functions is performed by a particular branch of the imaginary fiscal department. These branches may be referred to respectively as the allocation Distribution and stabilization branches.
The task of the manager of allocation branch is to determine the ways by which resources can be rationality allocated.
That is to determine the provision for social goods or the process by which the mix of social goods is chosen. This provision may be termed the allocation function of budget policy.
The distribution branch of the budget has to determine the adjustment of the distribution of income and wealth to ensure conformance with what society consider a fair or just state of distribution. This may be termed the distribution function.
Whereas the stabilization branch must determine the needed fiscal action, which can secure full employment and price level stability.
It relates to the use of budget policy as a means of maintaining high employment, a reasonable degree of price level stability and an appropriate rate of economic growth with allowances for effects on trade and on the balance of payments this may be referred as stabilization function.
This budget policy is determined as the result of this three interdependent plans each of which involves different objectives and principles of action. These interdependent sub- budgets, when optimally planned may be consolidated together to provide a complete normative budget plan for the public household.
Here the basic problem is how to design budget policy, so that the pursuit of one goal does not void that of another.