wagner's hypothesis notes

Analysis of Public Expenditure Growth: 3 Theories

This article throws light upon the top three theories for the analysis of public expenditure growth. The theories are:

Theory # 1. Wagner’s Hypothesis :

Adolf Wagner a noted German political economist (1835-1917) pro­pounded an empirical law to analyses and explains the trend in the growth of public expenditure. Wagner argued that a functional, cause and effect relationship exists between the growth of an industrializing economy and the relative growth of its public sector.

According to Wagner, relative growth of the government sector is an inherent characteristic of industrializing economies. He illustrates this with the examples of Great Britain, U.S.A, France, Germany and Japan. He came to the conclusion that as per capita income and output increases in industrializing nations, the public sectors of these na­tions necessarily grow as a proportion of total economic activity.

Wagner hypothesized a functional relationship between industrial­ization and the relative importance of public sector activity. He then set out to test his hypothesis by examining the industrialization process in various European countries and Japan. His observations led to what is now called as Wagner’s Law of Increasing State Activity.

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Statement of the Hypothesis :

The German Economist Adolf Wagner, systematically observed the historical facts of increasing expenditure activities of public authori­ties particularly of Germany, He then tried to explain the cause of growth in public expenditure in terms of his famous “Law of Increas­ing State Activities”.

According to Wagner there are inherent ten­dencies for the activities of different layers of a government (such as center and state) to increase both intensively and extensively.

Wagner presented his law in the following words “Comprehensive compari­sons of different countries and different times show that among pro­gressive people, with which we alone are concerned an increase regularly takes place in the activity of both the central and the local governments. This increase is both extensive and intensive. The central and local governments constantly undertake new functions, while they perform both old and new functions more efficiently and completely.”

Wagner’s law of increasing state activities is a universal truth in recent years. It is a fact that economic growth of a country has always been accompanied by increasing state activities and hence increasing public expenditure.

Empirical evidence indicates the hy­pothesis of continuous upward trend in government activities. F.S. Nitty made an empirical study of the expenditure trend of public authorities of varying countries of the world, and concluded with empirical evidence that Wagner’s law was not only applicable to Germany but to various governments which differ widely from each other.

Nitty states all kinds of government, irrespective of their layers (say central, state or local) intensions (peaceful or warlike) and size etc., had shown similar tendencies towards increasing public expen­diture.

Wagner’s law was based upon historical facts. His law was ap­plicable to modern progressive governments only in which the state was interested in expanding the public sector of the economy. Wagner observed that there was a persistent tendency towards an ‘exten­sive’ and ‘intensive’ increase in the functions of the state.

Intensive increase means expansion of traditional functions of the state on a large scale. Extensive increase relates to coverage of new welfare functions.

According to Wagner’s law, the expenditure of public authorizes has a continuous increasing trend due to three reasons, they are:

a. Expansion of Traditional Functions :

Traditional functions mainly include defence, administration of justice, maintenance of law and order and provision of social overheads. The coverage and variety of such functions have gradually increased.

Defence expenditure has expanded rapidly because of a change in military arts and sciences. In modern times military activities has become sophisticated. From simple aggression, the modern warfare shifted to prevention of attack and use of sophisticated weapons.

Defence outlays on men, materials and maintenance have been on a rising trend in modern times. Similar is the case with expenditure on internal protection and administration. Increasing areas of admin­istration and spread of government machinery with expertise have become more and more expensive.

b. Coverage of New Functions :

Secondly the activities of the state were increasing in their cover­age. Traditionally the state activities were limited to only defence, justice, law and order, maintenance of the states over heads etc. But with the growing awareness of its responsibilities to the society, the governments started expanding its activities in the field of vari­ous welfare measures to enrich the cultural life of the society.

Along with this new welfare programmes were designed to provide social security to the people. This required increasing government expen­diture on education, public health, low cost housing, subsidized pro­vision of food, agricultural inputs, old age pension, sickness benefit etc.

c. Expanding Sphere of Public Goods :

Almost all modern democratic governments have increasingly rec­ognized the need to provide and expand the sphere of public goods.

The need and necessity to provide social and merit goods through budgetary allocation was increasingly recognized by the modern state. The state was trying to shift the composition of national prod­uct more in favor of public goods.

As a result state activities ex­panded to areas like irrigation and flood control projects, construc­tion and maintenance of public parks, provision of education and health care facilities, creation of economic overhead capital etc., Provision of these public goods and merit goods means heavy in­vestment in public enterprises.

Apart from the above mentioned factors, Wagner also examined the forces that operate on both the demand and supply side of public sector activity and explained how they interact. Changing produc­tion and marketing arrangements of public sector activity affect and are affected by social organizations in different ways.

They are given:

i. Factors that affect both demand and supply of public expenditure activities:

(a) Per capital income and wealth exert a positive impact on the demand as well as cost of government services.

(b) Coupled with this rate of growth of population and density also affect the demand for public goods such as transport, communication, hospitals etc., in addition to the cost of supply of these services.

ii. Factors affecting the demand side of public expenditure activities. The major factors under this category are:

(a) Urbanization and industrialization.

(b) Structure and composition of the population which deter­mine the demand for educational facilities, old age pension, old age homes etc.

(c) Specialization of labour and centralization of administration in both private and public activities.

iii. Factors affecting the supply side of public expenditure activities. On the supply side, the major factors affecting public sector activities are:

(a) Changing scale of production of government activities.

(b) Quality of production.

(c) Intergovernmental grants.

Obviously the functional relationships Wagner sought to trace are complex. Adolf Wagner believed that increased public expendi­ture was the natural result of economic growth and the continued pressure for social progress.

Wagner held that the income elasticity of government services is greater than unity. In other words public expenditure will increase faster than the increase in per capita in­come of the people.

Graphic Presentation of the Wagner Hypothesis :

The modern formulation of Wagner’s law is that “as per capita in­come rises in industrializing nations, their public sector will grow in relative importance” (Bird, 1971, p.2). The Wagner’s hypothesis of increasing state activity is illustrated in Figure No.3.1.

In this graph the real per capital output of public goods (PG) is measured on the vertical axis and real per capita income (Y) is mea­sured on the horizontal axis.

Time is an important third dimension implicit in the graph, because the growth in the real per capita output of public goods and in real per capita income is realistically as­sumed to take place on a historical basis over an extended period of time. Line PG 1 represents a circumstance in which the public sec­tor maintains a constant proportion of the total economic production of the society over time.

In other words, as real per capita income increases, due to economic development of the society, the real per capita output of public goods remains at the same proportion of total economic activity. The constant proportion line, PG 1 , can be used as a reference point to the graphical presentation of Wagner hypoth­esis as depicted by the line PG 2 .

All along the PG 2 the proportion of resources devoted to the output of public goods is expanding overtime.

The implication of Wagner’s law can be stated in the following equations. When the real per capita output of public goods remains at the same proportion of total economic activity, i.e. PG 1 , the equa­tion is

PGa/Ya = PGo/Yo

In other words the income elasticity of expenditure for public goods (Ye) is elastic.

Wagner’s hypothesis provides the most suitable frame work for explaining economic factors, as the most important determinant of a relatively expanding public sector during industrialization and eco­nomic growth.

The functional relationships, Wagner sought to trace are complex. Wagner believed that increased public expenditure was the natural result of economic growth and the continued pressure for social progress.

Criticism of Wagner’s Hypothesis :

Although the Wagner hypothesis has many attributes, it also has ‘several defects. Wagner’s law of increasing state activity was criti­cized by Allan. T. Feacock and Jack Wiseman on the following grounds:

i. Wagner’s hypothesis deals with inter-disciplinary phenomenon. But it lacks interdisciplinary approach in its analytical frame­work.

ii. Lacks comprehensiveness in analysis Wagner’s law lacks comprehensiveness. Political science, eco­nomics and sociology are among the several disciplines to be incorporated in any theory of public expenditure. The Wagner’s hypothesis excludes all these characteristics.

iii. It is based on an organic self-determining theory of the state, which is not the prevailing theory of the state in most western countries.

iv. The theory ignores the influence of war on governmental spend­ing, and

v. It stresses a long term trend of public economic activity, which tend to overlook the significant ‘time pattern’ or process of pub­lic expenditure growth.

Theory # 2. Peacock and Wiseman Hypothesis :

Another hypothesis regarding the growth of public expenditure was put forth by Peacock and Wiseman, in their empirical study of public expenditure in U.K. for the period 1890-1955.

Peacock and Wiseman emphasize the time pattern of public spending trends rather than striving for a genuine positive theory of public sector growth. The main thesis of the authors is that public expenditure does not increase in a smooth and continuous manner, but in jumps and jerks or step like fashion. Their analysis involves three related ele­ments.

These are displacement, inspection and concentration ef­fects. Using empirical data for the British economy after 1890, Wiseman and Peacock observe that the relative growth of the public sector in the United Kingdom has followed a discrete step like pat­tern rather than a continuous growth pattern.

During the period under study they found that, government fiscal activities, in the country have risen step by step to successive new plateaus. Moreover the absolute and relative increases (steps upward) in taxing and spend­ing activities by the British government have generally taken place during periods of major social disturbance or crisis such as war or depression.

These kinds of changed fiscal situation cause the previ­ous lower tax and expenditure levels to be replaced by new, higher, budgetary levels. This movement from the older level of expenditure and taxation to a new and higher level is called the displacement effect after the social disturbance has ended; the new level of tax is tolerated by the society.

The emerged new levels of tax tolerance make the society willing to support higher levels of public expendi­ture. In other words the lax threshold has increased. Thus there is no strong motivation to return to the lower pre-crisis level of taxation.

Over the secular period, 1890 -1955, this displacement procedure occurred several times in Great Britain. Thus when the major social disturbance ends, no strong motivation exists for the society to re­turn to the lower pre-disturbance level.

The higher government rev­enues are used to support permanently higher levels of public sector allocation. Figure No. 3.2 clearly shows the displacement effect, as explained by Wiseman and Peacock.

Figure No. 3.2 demonstrates the displacement effect, tax threshold behavior. Time (years) is measured along the hori­zontal axis, while public sector revenues (mostly taxes) and public expenditures as a percentage of gross national product are mea­sured along the vertical axis.

The figure reveals that as the social disturbance cause a relative expansion of the public sector, the dis­placement effect which occurs helps to explain the time pattern by which the government growth takes place. This displacement effect does not require that the new higher plateau of expenditure, con­tinue the same expenditure composition that was created by the social disturbance.

Some of the increased expenditures like debt interest are the direct results of the social disturbance.

While other expenditures arose as a result of technological development and expansion of government activity into new areas. For instance, war and ‘other social disturbance, frequently force the people and their government to find out a lasting solution to the long standing and pending problems, which were previously neglected.

This is known as “inspection effect”. Inspection effect is the inadequacy of revenue in comparison with the ‘required’ public expenditure.

In addition to the displacement and inspection effect, Peacock and Wiseman, also give narration about a concentration (scale) ef­fect. It refers to the apparent tendency for the central government economic activity to become an increasing proportion of total public sector economic activity, when a society is experiencing economic growth.

This occurs, because central government has to initiate a number of measures to sustain higher economic activity. Since each major disturbance leads to a situation in which, the central govern­ment assuming a larger proportion of the total national economic activity, the net result is “the concentration effect”.

Wiseman – Peacock hypothesis appears to be quite relevant. At the outlet, the hypothesis looks quite convincing. It emphasizes jerks and jumps in public expenditure, on account of unusual and abnormal situations.

According to Prof. Aronson, for Peacock and Wiseman expenditure growth is sporadic rather than constant and revenues create their own expenditures. However, we must not for­get the fact that, an account of the advance of the economy and the structural changes therein, there are constant and regular increments in public expenditure and revenue.

Public expenditure has a ten­dency to grow on account of a systematic expansion of government activities, both in terms of intensity and quality.

The regular and dynamic changes in state activity and public spending caused by macro variables like population growth, urbanization, awareness of civic rights on the part of citizens and political and social commit­ments on the part of democratic governments voted to power are major factors giving a big push to upward trend in public expenditure.

However, the influences of these factors on government spending were not systematically analyzed by Wiseman and Peacock in their hy­pothesis. However, Bernard. P. Herber sincerely argues that the Peacock – Wiesman hypothesis of governmental spending trends, is much more modest in what it intend to explain than in Wagner’s hypothesis.

The fact is that, both the Wagner’s and Peacock. Wiseman narrations contribute a lot in understanding the process of public sector growth in industrialized nations.

Theory # 3. Colin Clark’s Critical Limit Hypothesis :

Another hypothesis relating to the growth of public expenditure is provided by Colin Clark. The hypothesis is basically concerned with the tolerance level of taxation. It was developed by Colin Clark im­mediately after the Second World War.

The hypothesis draws conclu­sion from the empirical data drawn from several western countries for inter-war period. Clark wants to point out that in an economy; inflation emerges when the share of the government sector, as mea­sured in terms of taxes and other receipts, exceeds 25 per cent of the aggregated economic activity in the country.

When public ex­penditure reaches 25 percent of the total economic activity or aggre­gate amount of expenditure in the country, the tax payers, ability to pay more tax is exhausted. Public expenditure beyond this limit, means, disincentive to producers and fall in production due to taxa­tion beyond tolerance level.

The hypothesis rest upon the following two institutional factors:

(a) When tax collection by government exceeds the critical limit of 25 percent of gross national product, the income earners are badly affected by reduced incentives and decrease in their pro­ductivity. They produce less than what they are capable of do­ing. This leads to a reduced supply. In short, taxation beyond the critical limit, adversely affect the incentive to produce and invest.

(b) On the other hand, even if the budget remains balanced, in­crease in government expenditure would constitute rising de­mand. Therefore inflation is generated from mal-adjustment be­tween demand and supply.

Even though Colin Clark’s critical minimum effort thesis is well accepted by the business community, its significance in the aca­demic circle is very limited. Colin Clark gave undue emphasis on his critical limit of 25 percent.

In the modern world a number of countries are incurring public expenditure much beyond their limit, without facing worse situation of inflationary pressure. Impact of budgetary spending on generation of inflationary situation; depend upon the manner and nature in which public expenditure is incurred.

Inflation is a complex economic phenomenon influenced and characterized by a number of mutually exclusive and inter-dependent factors. Hence we can only fairly conclude that in a marked economy, increasing state activity may create inflationary pressure.

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Growth of Public Sector

The role and importance of public expenditure is very important both in developed and developing countries. According to Adam Smith, government expenditures are made to supply goods and services that are advantageous to a great society, but the private sector would not supply those due to profitability concerns.

Adam Smith, in The Wealth of Nations , viewed that the expenditure should be restricted to:

• (a) Defense against foreign aggression;
• (b) law and order in view of the maintenance of internal peace and
• (c) public development work, specifically where the private sector is not ready to supply or supply is not as per requirement.

Besides these, the state expenditure is considered as unnecessary.

Economists explain that the government has to provide a number of facilities providing large societal benefits, but the provision of these facilities requires huge investment. The gestation period is also very high in such cases.

We use the term ‘public goods’ in the context of such goods which are provided by the government and provision which is not profitable for private enterprises because efficiency requires that these goods should be provided at a zero price. This is so because public goods are non-rival and non-excludable in consumption. It is either not possible or feasible to facilitate exclusion in the consumption of public goods.

In other words, due to feasibility reasons or cost concerns, one cannot limit the consumption of public goods to those who pay a price for them. Also, within limits, the consumption of a public good by some members of a society does not reduce the amount of it available to others. Common examples of pure public goods are defence, lighthouses, flood control, public fireworks, etc. Besides providing goods and services, government expenditures are also incurred on collective goods, transfer payments, subsidies, and tax provisions.

Further, expenditures of government are influenced by various interest groups, among which political parties and policymakers are more important as compared to other interest groups such as labour unions, trade associations, chambers of commerce, religion and occupational groups, military and bureaucracy, and even the unaffiliated citizens. The importance of these groups varies at different stages of the development of a society, from a traditional to a modern one.

Besides these interest groups, expenditures are also affected by the economic structure of a country as well as by sociological, geographic, demographic and technological factors. Nurkse has emphasized that the international demonstration effect also affects the government expenditures of poor countries.

In this context, there are two scholars who have provided views on the role and importance of increasing state activities in an economy:

• (i) Law of Increasing State Activity by Adolph Wagner
• (ii) Peacock-Wiseman Hypothesis by Alan T. Peacock and Jack Wiseman

Before explaining the laws, it is important to understand that these two theories are concerned only with resource-using public expenditure which is distinct from transfer payments. The distinction is caused mainly by the reasons for the growth of two types of expenditure. Resource-using public expenditure is related to public expenditure on goods and services and on domestic fixed capital formation, whereas transfer payments might grow due to quite different reasons.

Further, these two hypotheses are classified as macro models of the growth of resource-using public expenditure by Bailey (1995) as distinct from micro models of public expenditure growth. Macro models analyse the long-term growth of public expenditure, whereas micro models analyse the changes in particular components of public expenditure.

Wagner’s Law of Increasing State Activity

Explanation:.

In 1883, Adolph Wagner (1835-1917), a German political economist, based on his study of public expenditure in industrial nations, propounded a law called “The Law of Increasing State Activity”. Wagner’s law is classified as a positive theory of public expenditure. It emerged in response to the absolute as well as relative growth experienced by the Western world during the second half of the 19 th century and in the 20 th century.

Wagner opined that the economic development of a nation leads to an increase in the activities and functions of the government. He explains that in progressive societies, governments at central and local levels constantly undertake new functions while they also perform old functions, and this leads to a regular increase in the activity of the government. The aim of government activities is to satisfy the economic needs of the people more efficiently and more completely so that there is an increase, extensive as well as intensive, in such activities and hence public expenditure.

Therefore, public sectors in industrializing nations grow as a proportion of total economic activity with the increase in per capita income and output, i.e., the share of government expenditure in total output increases inevitably. Although Wagner has based his study on industrial nations but according to him, the law is equally applicable in the case of developing countries.

Wagner views the relationship between the state and its citizens as such that the state exists independently of the individuals in society, but it has general responsibility for the economic and social welfare of society as a whole. According to him, a state performs three functions: providing administration and protection , ensuring stability and ensuring social and economic welfare of society .

According to Herber (1979), the hypothesis explains that “ a fundamental cause-and-effect relationship exists between the growth of an industrializing economy and the relative growth of its public sector…relative growth of the government sector is an inherent characteristic of industrializing economy ”. He further explains the hypothesis as efforts to find a predictable, long-run functional relationship between certain causal variables and relative public sector growth.

Graphic Presentation of Law:

Figure 1 shows the relative expansion of public sector economic activity over an extended period of time. On the horizontal and vertical axis, real per capita income (Y) and real per capita output of public goods (PG) are measured, respectively. PG 1 represents a constant proportional increase in the real per capita output of public goods with the increase in real per capita income, whereas PG 2 indicates that the public sector grows at an increasing rate. In other words, a proportional increase in the public sector is not constant but increases with the increase in total economic activity.

We now present some empirical evidence on the applicability of Wagner’s law. Goode (1986) analyses the growth of public expenditure for a period of 80 years (Table 1). He calculates the ratio of total government expenditures (of all levels of government) to GNP or GDP (in percent) in the case of five industrial countries at two points in time-1890 and 1970. The rising trends of government expenditures as a proportion of national income confirm the validity of Wagner’s law.

Referring to some current data on the growth of public expenditure in various countries as provided by the World Bank, Table 2 shows general government final consumption expenditure as a percentage of the country’s GDP for the period 1960-2012. It includes all current expenditures on goods and services (including compensation of employees), government, and most expenditures on national defence and security (excluding government military expenditures that are part of government capital formation). It is clear from the table that the general trend in most of the countries remained increasing.

Table 2: General Govt. Final Consumption Expenditure (% of GDP)

Wagner’s hypothesis is criticised in the context of the relationship between the state and its citizens as viewed by him. The law’s applicability at all times and to all societies is also questioned by Peacock and Wiseman. They have criticised Wagner’s hypothesis on three counts:

• The law is not applicable to all the western nations.
• As the law analyses long-term trends of public expenditure, it tends to ignore the process of growth of public expenditure.
• It does not analyse the effect of war on public expenditure.

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Wagner’s Law, Money and the Theory of Financial Crisis: Adolph Wagner’s Early Viennese Publications

• First Online: 29 July 2018

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• Günther Chaloupek 7  

Part of the book series: The European Heritage in Economics and the Social Sciences ((EHES,volume 21))

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Adolph Wagner’s first engagement as professional economist was with the commercial academy in Vienna where he lived from 1858 to 1863. During this period Wagner published several books and many articles in journals. Wagner’s research interest is devoted to two main subjects: state finances and monetary policy. In the book Die Ordnung des österreichischen Staatshaushaltes (1863) he first formulated the law which carries his name up to the present. He argues that correct classification of the various expenditure categories is conditional for a rational decision about financing alternatives, especially taxes versus credit. Also, Wagner’s book gives a detailed analysis of the debt problems of the Habsburg monarchy. – Wagner’s book Die Geld- und Credittheorie der Peel’schen Bankakte (1862) is perhaps the most important contribution to monetary theory from nineteenth century Germany. Much influenced by the writings of Thomas Tooke, Wagner was a follower of the Banking School, contributing interesting arguments to the debate about endogeneity of money. Wagner’s theory of financial crisis, developed around 1860, is a remarkable anticipation of modern crisis theories. With respect to economic policy, Wagner’s emphasis on the increasing active role of the state for the population’s economic welfare implied a rejection of liberal demands for an economic roll back of the state. In contrast, Wagner pleads for minimum regulation of the banking system.

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Modern Money Theory

Advances in the Post-Keynesian Analysis of Money and Finance

From its 6th edition, Rau’s textbook was published with revisions by Wagner. Wagner’s textbook Lehrbuch der politischen Ökonomie, Vol. I (1876) was published as the revised 9th edition of Rau ( 1826 ).

See the publication of the contributions to the 28th Heilbronn Symposion 2015 (Backhaus et al. 2016 ).

Therefore, Wagner also objected to regulations which keep the issue of bank notes in some fixed proportion to reserves. The latter was proposed by the representatives of the banking school as alternative to the Bank Act of 1844 (Kindleberger 1985 , p. 89) .

For a detailed account of Wagner’s two articles, especially of his statistical analysis, see Chaloupek ( 2016 ), p. 183ff.

Wagner systematically developed and presented his law in his later books Grundlegung der politischen Ökonomie ( 1892/94 ). For a brief overview see Priddat ( 1997 ), pp. 348ff, Grüske et al. ( 1991 ), p. 71ff, and the contribution of Reinhard Neck and Johannes Jaenicke in this volume.

Up to the twentieth century, lottery loans (some bonds, chosen by lot, carry a higher return) were in common usage as instruments of state finance, when governments did not hesitate to appeal to the gambling instincts of the population to raise credit. See Kindleberger ( 1985 , p. 179).

Wagner dealt with this problem in greater detail in his pamphlet Die Oesterreichische Valuta ( 1862b ).

Referring to Hansen ( 1957 ), Kindleberger ( 2000 ) mentions John Stuart Mill (extensively quoted by Wagner), John Mills and Alfred Marshall as early examples of financial crisis theory (p. 64). He also refers to Max Wirth ( 1890 )s, but does not take notice of Wagner’s contribution.

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Chaloupek, G. (2018). Wagner’s Law, Money and the Theory of Financial Crisis: Adolph Wagner’s Early Viennese Publications. In: Backhaus, J., Chaloupek, G., Frambach, H. (eds) Gustav von Schmoller and Adolph Wagner . The European Heritage in Economics and the Social Sciences, vol 21. Springer, Cham. https://doi.org/10.1007/978-3-319-78993-4_7

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Economic development and government spending: an exploration of wagner’s hypothesis during fifty years of growth in east asia.

1. Introduction

2. methodology, data, and the main results.

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3. Concluding Observations

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• 1 More recent studies also reach similar conclusions. In particular, support for the law is reported by Bojanic (2013) [ 2 ] for Bolivia; by Magazzino (2010) [ 3 ] for Italy; by Kumar, et al. (2012) [ 4 ] for New Zealand; by Ono (2014) [ 5 ] for Japan; and by Menyah and Wolde-Rufael (2013) [ 6 ] for Ethiopia. Similarly, Lamartina and Zaghini (2011) [ 7 ] and Magazzino (2012) [ 8 ] find support for the law using a panel data set on 23 OECD countries and the EU-27 countries, respectively. In contrast, lack of support for the law is reported by Babatunde (2011) [ 9 ] for Nigeria; by Wu and Lin (2012) [ 10 ] for Chinese provinces; and by Dogan and Tang (2006) [ 11 ] for five South East Asian economies. However, Narayan, et al. (2008) [ 12 ] report mixed evidence in support of the law using data on Chinese provinces.
• 2 As a referee points out, “Gregory-Hansen procedure is used when one fails to find cointegration with standard tests. There is no point in testing countries such as Japan and Korea, when a superior test shows that they are cointegrated.” While acknowledging the referee’s point of view, we report the results for the full set of countries for completeness.
• 3 A perceptive referee pointed out that “The use of the MTAR model is dubious because of the small sample, and it should not be used when cointegration has been established. It is unlikely that there is enough information in the data to capture asymmetric effects and standard procedure is to use MTAR when Engle-Granger (test) fails to show cointegration.” We concur with this assessment. Nevertheless, we believe these tests might provide additional insights for cases where the traditional tests fail to reject the null of no-cointegration.

© 2015 by the authors; licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/4.0/).

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Mohammadi, H.; Ram, R. Economic Development and Government Spending: An Exploration of Wagner’s Hypothesis during Fifty Years of Growth in East Asia. Economies 2015 , 3 , 150-160. https://doi.org/10.3390/economies3040150

Mohammadi H, Ram R. Economic Development and Government Spending: An Exploration of Wagner’s Hypothesis during Fifty Years of Growth in East Asia. Economies . 2015; 3(4):150-160. https://doi.org/10.3390/economies3040150

Mohammadi, Hassan, and Rati Ram. 2015. "Economic Development and Government Spending: An Exploration of Wagner’s Hypothesis during Fifty Years of Growth in East Asia" Economies 3, no. 4: 150-160. https://doi.org/10.3390/economies3040150

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Wagner’s Law versus Keynesian Hypothesis: Evidence from pre-WWII Greece Panoeconomicus 2013 Volume 60, Issue 4, Pages: 457-472, doi: 10.2298/PAN1304457A

2013, πανoeconomicus

With data of over a century, 1833-1938, this paper attempts, for the first time, to analyze the causal relationship between income and government spending in the Greek economy for such a long period; that is, to gain some insight into Wagner and Keynesian Hypotheses. The time period of the analysis represents a period of growth, industrialization and modernization of the economy, conditions which are conducive to Wagner’s Law but also to the Keynesian Hypothesis. The empirical analysis resorts to Autoregressive Distributed Lag (ARDL) Cointegration method and tests for the presence of possible structural breaks. The results reveal a positive and statistically significant long run causal effect running from economic performance towards the public size giving support to Wagner’s Law in Greece, whereas for the Keynesian hypothesis some doubts arise for specific time sub-periods.

Related Papers

Panoeconomicus

Persefoni Tsaliki

With data of over a century, 1833-1938, this paper attempts, for the first time, to analyze the causal relationship between income and government spending in the Greek economy for such a long period; that is, to gain some insight into Wagner and Keynesian Hypotheses. The time period of the analysis represents a period of growth, industrialization and modernization of the economy, conditions which are conducive to Wagner?s Law but also to the Keynesian Hypothesis. The empirical analysis resorts to Autoregressive Distributed Lag (ARDL) Cointegration method and tests for the presence of possible structural breaks. The results reveal a positive and statistically significant long run causal effect running from economic performance towards the public size giving support to Wagner?s Law in Greece, whereas for the Keynesian hypothesis some doubts arise for specific time sub-periods.

Dimitrios Paparas

In this paper we investigate the long-run relationship between national income and government spending by using Greek data from 1833 until 2010. We use 5 different formulations of Wagner’s law (the long run tendency for government expenditure to expand relative to economic growth) and find that empirical results are supportive for Wagner’s law. The data set span covers a period of almost 2 centuries; the long data set thus ensures the reliability of our results in terms of statistical and economic conclusions. Furthermore, the data set covers the early periods of development of the Greek economy, a period of growth, industrialisation and modernisation of the economy, conditions which should be conducive to Wagner’s law. Our analysis provides evidence of long run relationship between government spending and national income, while the Granger causality tests indicate that causality runs from the national income to spending. Moreover we include tests for structural changes to take into...

Christian Richter

In this paper we investigate the long-run relationship between national income and government spending by using Greek data from 1833 until 2010. We use 5 different formulations of Wagner’s law (the long run tendency for government expenditure to expand relative to economic growth) and find that empirical results are supportive for Wagner’s law. The data set span covers a period of almost 2 centuries; the long data set thus ensures the reliability of our results in terms of statistical and economic conclusions. Furthermore, the data set covers the early periods of development of the Greek economy, a period of growth, industrialisation and modernisation of the economy, conditions which should be conducive to Wagner’s law. Our analysis provides evidence of long run relationship between government spending and national income, while the Granger causality tests indicate that causality runs from the national income to spending. Moreover we include tests for structural changes to take into account regime changes that occur over time. Our empirical results are in accordance with other studies examined the validity of Wagner’s law in Greece and in other economies by using long data set.

Scientific Annals of Economics and Business

ÖZCAN KARAHAN

The direction of the causality relationship between public expenditures and economic growth is one of the most controversial issues of the literature, which also causes great disagreements in the design process of economic policies. There are two approaches to this subject, which are opposite each other and called “Wagner’s Law” and “Keynesian Hypothesis”. This paper aims to examine the validity of Wagner’s law and Keynesian proposition in Turkey using Autoregressive Distributed Lag (ARDL) model over the period of 1998-2016. The findings supported the “Keynesian Hypothesis”, which advocates a one-way causality relationship from public spending to national output. More specifically, the results of the study showed that the effect of public expenditures on economic growth was positive in the short term and negative in the long term. From an economic policy standpoint, it can be argued that policymakers can promote Turkish economic growth through expansionary fiscal policies in the sho...

Acta Oeconomica

constantinos katrakilidis

The purpose of this paper is the empirical testing of the relationship between economic growth and government spending and, at the same time, to determine the extent to which economic growth causes growth in government expenditures (Wagner’s law) or the other way around (Keynesian hypothesis). The econometric analysis, using data for the Greek economy covering the period 1958–2004 and based on recent developments in the theory of cointegrated processes, reveals a long-run equilibrium relationship between government expenditures and economic output. Furthermore, the analysis detects causal effects in both the short-run and long-run horizon running from government expenditures to the level of economic activity and vice versa.

Cosimo Magazzino

"The relationship between public expenditure and aggregate income has long been debated in economic literature. According to Wagner, expenditure is an endogenous factor or an outcome. On the other hand, Keynes considered public expenditure as an exogenous factor to be used as a policy instrument to influence growth. “Augmented” version of Wagner’s Law, where public deficit appears as further explanatory variable, is also investigated. The aim of this paper is to assess empirical evidence of these hypotheses in EU-27, for the period 1970-2009. After a brief introduction, a survey of the economic literature on this issue is offered, before evaluating some specifications of “Wagner’s Law” due to several researchers. Few notes on the empirical evidence’ comparisons conclude the paper. "

ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS

Jeyhun Abbasov, PhD

The aim of this research is to test Wagner's law and Keynesian hypothesis in 9 Post-Soviet countries-and Ukraine. For this purpose, long-and short-run causality between real per capita GDP and real per capita government expenditures are estimated by employing ARDL modelling approach. Estimation results support validity of Wagner's law for Latvia, Lithuania, Uzbekistan, Georgia, Kyrgyz Republic and Ukraine, and validity of Keynesian hypothesis for Estonia, Uzbekistan, Azerbaijan, Kyrgyz Republic, and Moldova in the long-run. Meanwhile, research findings indicate strong bidirectional short-run causality in all countries except Lithuania and Kyrgyz Republic in the short-run.

Applied Economics

Omo Aregbeyen

Scottish Journal of Political Economy

Hany Eldemerdash

In this paper, we tested the Wagner’s Law against the Keynesian proposition for the Egyptian economy over the period of 1980-2012. After conducting theoretical and empirical literature, we used the Mann (1980) notation to test for the cointegration between government expenditure and GDP. Using ADF-breakpoint unit root test, Pesaran, Shin et al. (2001) bounds test for cointegration and ARDL model we estimated the long-run relationship between both variables. We found a cointegration between government expenditure and GDP with elasticity of the former to the latter equal 2.55 and the causality runs from the GDP to the government expenditure, which indicates that the Egyptian economy is Wagnerian. The paper provides some policy implication too.

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The Unique Burial of a Child of Early Scythian Time at the Cemetery of Saryg-Bulun (Tuva)

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Pages:  379-406

In 1988, the Tuvan Archaeological Expedition (led by M. E. Kilunovskaya and V. A. Semenov) discovered a unique burial of the early Iron Age at Saryg-Bulun in Central Tuva. There are two burial mounds of the Aldy-Bel culture dated by 7th century BC. Within the barrows, which adjoined one another, forming a figure-of-eight, there were discovered 7 burials, from which a representative collection of artifacts was recovered. Burial 5 was the most unique, it was found in a coffin made of a larch trunk, with a tightly closed lid. Due to the preservative properties of larch and lack of air access, the coffin contained a well-preserved mummy of a child with an accompanying set of grave goods. The interred individual retained the skin on his face and had a leather headdress painted with red pigment and a coat, sewn from jerboa fur. The coat was belted with a leather belt with bronze ornaments and buckles. Besides that, a leather quiver with arrows with the shafts decorated with painted ornaments, fully preserved battle pick and a bow were buried in the coffin. Unexpectedly, the full-genomic analysis, showed that the individual was female. This fact opens a new aspect in the study of the social history of the Scythian society and perhaps brings us back to the myth of the Amazons, discussed by Herodotus. Of course, this discovery is unique in its preservation for the Scythian culture of Tuva and requires careful study and conservation.

Keywords: Tuva, Early Iron Age, early Scythian period, Aldy-Bel culture, barrow, burial in the coffin, mummy, full genome sequencing, aDNA

Information about authors: Marina Kilunovskaya (Saint Petersburg, Russian Federation). Candidate of Historical Sciences. Institute for the History of Material Culture of the Russian Academy of Sciences. Dvortsovaya Emb., 18, Saint Petersburg, 191186, Russian Federation E-mail: [email protected] Vladimir Semenov (Saint Petersburg, Russian Federation). Candidate of Historical Sciences. Institute for the History of Material Culture of the Russian Academy of Sciences. Dvortsovaya Emb., 18, Saint Petersburg, 191186, Russian Federation E-mail: [email protected] Varvara Busova  (Moscow, Russian Federation).  (Saint Petersburg, Russian Federation). Institute for the History of Material Culture of the Russian Academy of Sciences.  Dvortsovaya Emb., 18, Saint Petersburg, 191186, Russian Federation E-mail:  [email protected] Kharis Mustafin  (Moscow, Russian Federation). Candidate of Technical Sciences. Moscow Institute of Physics and Technology.  Institutsky Lane, 9, Dolgoprudny, 141701, Moscow Oblast, Russian Federation E-mail:  [email protected] Irina Alborova  (Moscow, Russian Federation). Candidate of Biological Sciences. Moscow Institute of Physics and Technology.  Institutsky Lane, 9, Dolgoprudny, 141701, Moscow Oblast, Russian Federation E-mail:  [email protected] Alina Matzvai  (Moscow, Russian Federation). Moscow Institute of Physics and Technology.  Institutsky Lane, 9, Dolgoprudny, 141701, Moscow Oblast, Russian Federation E-mail:  [email protected]

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