George Lennox Sharman Shackle · 1955
Shackle’s article, first published in 1947, is a theoretical account of fiscal action as a force acting on monetary demand and the supply of goods. It begins from the Keynesian enlargement of the Exchequer’s role: public finance can no longer be treated simply as the collection of enough revenue to meet legally authorized expenditure.
The Exchequer, in deciding the size, method and timing of its levies and disbursements, must nowadays be guided by two quite distinct sets of considerations.
The problem is therefore not whether “taxation” is deflationary or “spending” inflationary in the abstract. Shackle asks how a particular stream of receipts or payments, at a particular rate and in a particular institutional form, initially changes the relation between money entering goods markets and goods available for purchase. The object is an index of tendency, not a full prediction of the eventual macroeconomic outcome.
The first step in obtaining such knowledge is to define a measure of the tendency of an increase or decrease in the time-rate of some specific stream of government receipts or disbursements to raise or lower prices.
His central device is the distinction between deflative and inflative indices. For an imbursement, or payment to government, the relevant question is how much private expenditure on goods is reduced by the levy. For a disbursement, the relevant question is how much additional private demand is generated by the recipients, after allowing for taxes, saving, liquid balances, and any goods supplied to the market as a result of the expenditure. These indices describe the first “state of intentions” induced by a fiscal change, before later income changes and mutual adjustments have worked through the economy.
Shackle’s taxonomy of payments is especially important. Under heavy unemployment, payments to people who do not thereby add marketable goods—such as pensioners, public servants providing non-sale services, or builders of state monuments—tend to add purchasing power without a corresponding addition to goods supply. By contrast, payments to producers of goods or services resold to the public may enlarge supply as well as income, and can even be deflative if leakages into taxation or saving exceed the induced demand for the new output. At full employment, the same categories must be reconsidered, because additional government demand draws labour and goods away from private uses, altering wages, prices, and the public’s access to purchasable output.
The discussion of firms and profits serves the same compositional purpose. Shackle refuses to treat corporate taxation as a simple subtraction from demand. A tax on undistributed profits, a tax on dividends, or a reduction in such taxes may change dividends, retained liquid balances, investment, or shareholders’ consumption in different proportions.
By a firm’s disposable profit I mean its nominal profit less direct taxes on the undistributed part of this nominal profit.
This is why his analysis of excess profits and excess dividends taxation is conditional on business circumstances and behavioural response. In a depression, for example, a policy that leaves resources inside firms may be less expansionary than one that transfers income to shareholders with a high propensity to spend; in other circumstances, retained funds may finance investment or alter expectations. The fiscal label alone does not determine the direction of pressure on prices.
The article’s broader significance lies in its resistance to aggregate budget arithmetic. A deficit may finance marketable production, nonmarketable state services, transfers, or purchases that withdraw goods from private use; a surplus may be raised from consumption, saving, dividends, or retained profits. Each has a different immediate bearing on monetary demand relative to goods supply.
These indices do not, it is plain, measure the ultimate effect of each action of the Exchequer upon prices.
Shackle’s contribution is thus methodological: he offers a disciplined way to identify the initial thrust of a fiscal stream, while insisting that later effects require a fuller dynamic account of income, expectations, and interdependent responses.
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