The Voluntary-Exchange Theory of Public Finance: The Writings of the First Half of Twentieth Century and Pertinent Current Contents

In the Italian tradition public finance evolved from the following question: does the activity carried out by the State have, from an economic point of view, its own intrinsic “reason” or does it simply derive from the coercion exercised by some for their own purposes over others? This question divided the scholars into two schools of thought. The first is called “voluntary exchange theory” and it set forth that the State’s “reason” consisted in the common desire of the citizens (and in principle of all the citizens) to obtain the enjoyment of certain services. Technical reasons concerning the “indivisibility” of the enjoyment (i.e., for everybody or nobody) make the creation of public institutions necessary but these constitute the form and not the substance of the financial phenomenon. The voluntary exchange theory originated from Emil Sax’s pioneering studies of the late nineteenth century and developed through certain contributions of the Italian School which are mentioned in the essay. The fundamental issue, which Samuelson would clarify seventy years later, is that of the distribution. This theory, in fact, implicitly entails a theory of tax apportionment strictly connected to the Walrasian framework. Thus it somehow returned to the origins of public finance which originated as a theory of taxation. As any set of public expenditures (or a very high – infinite – number of sets) may prove to be socially justified if referred to an appropriate taxation system, the fundamental issue of public finance becomes once again a question of taxation or better yet of the distribution of welfare that a certain community deems appropriate.