Wagner's law, also known as the law of increasing state activity, is the observation that public expenditure increases as national income rises. It is named after the German economist Adolph Wagner (1835–1917), who first observed the effect in his own country and then for other countries.

Industrialization

The principle is closely tied to industrialization. It predicts that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product: "The advent of modern industrial society will result in increasing political pressure for social progress and increased allowance for social consideration by industry."

Welfare states

Wagner's law suggests that welfare states evolves from free-market capitalism because the population votes for ever-increasing social services as income grows. In spite of some ambiguity, Wagner's statement in formal terms has been interpreted by Richard Musgrave as follows: "As progressive nations industrialize, the share of the public sector in the national economy grows continually. The increase in State Expenditure is needed because of three main reasons. Wagner himself identified these as (i) social activities of the state, (ii) administrative and protective actions, and (iii) welfare functions. The material below is an apparently much more generous interpretation of Wagner's original premise.

Empirical evidence

Evidence for Wagner's law has been mixed. A 1961 study by the British economists Alan T. Peacock and Jack Wiseman found that Wagner's Law aptly described public expenditure in the United Kingdom in the period between 1891 and 1955. They further stated: Other studies have likewise found a strong relationship between public expenditure and per-capita gross domestic product. Studies have tended to show support for Wagner's law in developing countries, though some have found only weak support. There have been a variety of studies testing Wagner's law in individual countries: