The primary tenets of classical public finance have been largely derived from Book V of Adam Smiths The

Wealth of Nations. In the book, Smith discussion of equality originates primarily from the ability to pay and benefit approaches to general taxation (OBrien 288). On this basis there developed an extensive framework of ideas and concepts which pertain with the taxable capacity of a country, and the most appropriate or rational tax base, and the pragmatic forms of elementary taxation. Classic public finance recognizes four generic sources of state revenues: taxation, debt creation (debt financing), property ownership, and state enterprise (OBrien 288). Earlier economists were quite apprehensive of the scope or extent of classical public finance because they believed that the function of the state was simply to raise revenues by imposing taxes to cover public expenses (Backhaus 612). There were considerable disagreements among economists as to the relevance of state ownership of property in raising revenues. Prominent economists such as James Mill and David Ricardo believed that state ownership of land was a necessary element in encouraging private investments (OBrien 289). With the emergence of nation-states, public debt became a major concern of public finance (Kagan et al. 185). True, public finance was obviously an important possibility, but it could never constitute a major source of state revenue (OBrien 289). However, from the 1930s onwards, public debt (or debt financing) became the economizing source of state revenues, as economists developed more sophisticated means of appropriating and managing outstanding debts, without incurring additional risks or inviting more uncertainties. The third major element of classical public finance is tax finance. Smith argued that tax finance is generally based on the four maxims of taxation: equality, certainty, convenience, and economy of collection (OBrien 289). Buchanan argues that the economics of tax finance is based on changes in individual behavior with respect to the confluence of macroeconomic variables (234). The satisfaction of public wants is associated with the development of state-led financial initiatives. State enterprise is the fourth general source of state revenue. The concept of state enterprising is as old as time itself. The state can be viewed as a business entity, with the capability to manufacture and distribute goods and services, and the ability to impute differential benefits on public goods

(OBrien 290). Classical economists were quite apprehensive of this approach as the state is found to be an inefficient producer and distributor of nonpublic goods (Classificatory Note 163). Nevertheless Smith and other classical economists believe that the state is an effective provider of public goods (examples of public goods are national defense, roads, harbors, and public utilities). There are two major elements (which are often contradictory) of classical public finance: the benefit approach and the ability-to-pay approach. Benefit approach is also called the quid pro quo approach. Here the taxpayer pays for the benefits he receives from state protection and other state services. Such an approach takes the distribution of income as necessarily given, and has its generic roots in the idea of a social contract (OBrien 290; Daza 35). The ability-to-pay approach, on the other hand, separates revenue raising from expenditure, and denies the possibility of imputing benefit to a public good without profusely taking into consideration its intended cost (OBrien 292). The primary difference between Keynesian public finance and classical public finance is its treatment of price. In the former, price is assumed to be inflexible in the short-run while in the latter, price is assumed to be flexible both in the short-run and the long-run. Another important difference is their treatment of expenditure. In the former, actual expenditure is plotted over planned expenditure. In the latter, expenditure is assumed to be a function of time, resource endowment, and technology Works Cited Backhaus, Jurgen. Old or New Public Finance? A Plea for the Tried and True. Public Finance Review 30(6): 612-645. Buchanan, James. The Theory of Public Finance. London: London Publishing House, 1961. Classificatory Note on the Theory of Public Finance. The Canadian Journal of Economics and Political Science III (2): 163-190. Daza, Jose Rigoberto. Finance and Theory of Knowledge. International Research Journal of Finance and Economics 15, 2008: 31-43. Kagan, Donald et al. Western Heritage. New York: Macmillan Publishing Company, 1989. OBrien, Denis Patrick. The Classical Economists Revisited. Princeton University Press, 2004.