Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism

Explanation

Alan T. Peacock and Jack Wiseman conducted a study of the behaviour of government expenditure in the UK for the period 1890 to 1955. Their study was based on Wagner’s hypothesis of increasing state activity.

The study analyses the time pattern of public expenditure. It explains some important characteristics of the growth of the public sector. It is argued that growth in public expenditure involved spurts of growth followed by long static periods rather than a smooth and continuous growth pattern, i.e. in a step-like pattern coinciding with social crises and wars.

They explain the hypothesis with the help of three types of effects through which public expenditure increases: displacement, inspection and concentration effect.

The displacement effect is explained by comparing public expenditure in times of peace and times of social disturbances as they see that the expenditure cannot be the same at these two times. They were of the view that the government likes to increase its expenditure as it has to take care of society’s welfare. Besides, some disturbances at times may also lead to an increased need for government expenditure, which may not be met from existing public revenue. However, the fact that citizens do not like to pay taxes puts a constraint on government spending.

The government expenditure is constrained by what they call a ‘tolerable level of taxation’, which remains quite stable during times of peace. With the growth in national income, tax revenue would also grow at a constant ‘tolerable’ tax rate. It enables the public expenditure to grow gradually.

This gradual trend is disturbed by social crises such as wars, famines or other economic problems during which higher taxes also become acceptable to society as the government needs higher public revenue to meet unanticipated expenditures. The relative expansion in government activity at times of social disturbances displaces the previous level of government expenditure, which they termed as the displacement effect.

They also argued that this displaced public expenditure does not fall back to the original level, i.e. it remains displaced at this level even after the crisis. Peacock and Wiseman argued that an increase in public expenditure does not tend to be smooth and continuous rather it increases in a jerk or step-like fashion.

The Inspection Effect takes place when people observe and accept the greater social spending required to fulfil social needs during the crisis. It happens as society realizes that it carries a new, higher tax burden. In other words, new levels of tax tolerance emerge.

The Concentration (scale) Effect is the tendency for central government economic activity to become an increasing proportion of the total public sector economic activity during times of economic growth of a society.

Gupta (1967) subjected the displacement hypothesis to empirical testing in the case of five countries and found an upward displacement, confirming the validity of the hypothesis. Dada and Adesina (2013) attempted to examine the validity of the Peacock-Wiseman hypothesis in the case of government expenditure and revenue in Nigeria, covering the period 1961 to 2010. It was found that the hypothesis holds in the short run as well as the long run. Government spending induced the growth of public revenue during the reference period.

Graphic Presentation of Hypothesis

In the Figure, the step-like pattern of growth of public sector revenue and expenditures in Great Britain during the period 1890 to 1955. Government fiscal activities rise step by step to successive new plateaus, and this spurt of growth is followed by a long static period. The steps indicate the periods of major social disturbance. After every step, a new, higher tax and expenditure level displaces the old, lower levels.

Criticism

Peacock-Wiseman hypothesis recognized the importance of public expenditure during social crises. Still, it has failed to explain the limit after which an economic problem can be qualified as a ‘social crisis’.

Read More in: Theory of Public Finance

1. Public Finance: Meaning, Nature & Scope
2. Role of Government in Economy
3. Role of Government in Mixed Economy: Public & Private Sector
4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
7. Concept of Market Failure and Functions of Government
8. Market Failure and Functions of Government: Decreasing Costs
9. Market Failure and Functions of Government: Externalities
10. Market Failure and Functions of Government: Public Goods
11. Future Market: Meaning, Role & Uncertainty
12. Concept of Information Asymmetry
13. Theory of Second Best: Concept & Explanation
14. Problem of Allocation of Resources: Public & Private Mechanisms
15. Preferences: Meaning, Types & Problems of Preference Revelation
16. Preference Aggregation & Its Mechanism
17. Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
18. Economic Theory of Democracy: Concept & Explanation
19. Politico Eco Bureaucracy: Concept & Explanation
20. Rent-Seeking and Directly Unproductive Profit-Seeking Activities
21. Rationale for Public Goods: Concept & Explanation
22. Benefit Theory or Voluntary Exchange Theory
23. Lindahl Model: Concept, Equilibrium & Limitations
24. Bowen Model: Concept, Advantages & Limitations
25. Samuelson’s Model of Public Expenditure
26. Musgrave’s Model of Public Expenditures
27. Demand Revealing Schemes for Public Goods
28. Vickery-Clarke-Groves Mechanism
29. Groves-Ledyard Mechanism
30. Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
31. Theory of Club Goods
32. Keynesian Principles of Stabilization Policy
33. Difference Between Keynesian Economic Thought and Others
34. Role of Expectations and Uncertainty in Formulating Stabilization Policy
35. Intertemporal Markets Efficiency & Failure
36. Liquidity Preference Theory
37. Diamond-Dybvig Banking Model
38. Preference Shocks, Adverse Selection & Central Bank
39. Equilibrium Deposit Contract
40. Social Goods and Its Effect on Stabilization Policy
41. Effect of Infrastructural Facilities on Stabilization Policy
42. Effect of Distributional Inequality on Stabilization Policy
43. Effect of Regional Imbalances on Stabilization Policy
44. Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
45. Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
46. Public Expenditure: Concept, Objectives, & Public vs Private Expenditure
47. Pure Theory of Public Expenditure
48. Structure & Growth of Public Expenditure in India
49. Trends, Lessons & Priorities in Public Expenditure in India
50. Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
51. Performance Based Budgeting and Zero Based Budgeting
52. Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
53. Tax System and Its Principles
54. Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
55. Ability to Pay and Benefits Received Principle of Taxation
56. Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
57. Deadweight Loss of Taxation: Causes, Measurement & Example
58. Concept of Equity & Efficiency in Economics
59. Trade-Off Between Equity and Efficiency: Meaning & Example
60. Theory of Measurement of Dead Weight Loss
61. Double Taxation: Meaning, Desirability, Forms & Solution
62. Solution to Problem of Double Taxation: Intra-Country & International
63. Double Taxation Avoidance Agreement (DTAA) and Indian Policy
64. Classical View on Public Debt
65. Compensatory Aspect of Public Debt Policy
66. Public Debt or Borrowings: Concept, Need, Sources & Types
67. Concept of Public Debt or Public Borrowings
68. Need for Public Debt or Public Borrowing
69. Sources of Public Debt
70. Classification of Public Debt
71. Burden of Public Debt: Meaning, Types & Explanation
72. Debt Through Created Money or Deficit Financing
73. Public Debt (Public Borrowings) and Inflation (Price Level)
74. Crowding Out of Private Investment and Activity
75. Principle of Public Debt Management and Debt Repayment