The primary fact determining the public finances is the extent of the sphere of “the state,” meaning by the state the totality of political powers and functions in a community.  There are two typical ideals of a state, each with corresponding functions:  the ideal of the police state, and that of the social-industrial state.  In fact every system of government provides for the exercise of both functions in some measure.  The police function is primary.  All governments alike exercise it, but they differ most in respect to the degree in which they exercise the social-industrial functions.

Sec. 2. #The police function.# The police function is that of public defense and the maintenance of domestic order.  In family or patriarchal communities all share a common income and combine in the common defense, but self-preservation often has compelled such small communities to form a larger, stronger state for the common defense.  Public defense requires sacrifice of some independence on the part of the family and of the individual.  Personal service in the field gives place later in some measure to the payment of taxes, so that a regular income may permit the government to attain a more regular, continuing, and perfect organization of military forces.

As political unity and power grow, the citizens need less often protection against foreign foes, and they need more often, relatively, defense against the aggressions of some of their own countrymen.  The preservation of domestic order requires police, courts of justice, and other agencies.  The ideal of the anarchist to do without government is nowhere realized.  Everywhere there must be government to preserve peace and to protect property.  Unfortunately, this need grows with the growing density of population.  Crime increases when men swarm in great cities.  The courts which settle disputes between men, and which interpret their contracts, are agencies of peace, displacing physical contests.  To maintain and operate the various parts of the social machinery requires ever increasing governmental revenues.  From many causes government has, in modern times, grown increasingly costly.

Sec. 3. #Social and industrial functions.# The social and industrial functions of government seem naturally to grow out of the primary ones just mentioned.  In a democratic society, popular education is a necessity, as it appears that domestic order is not possible in a democratic state without intelligent citizens.  The system of public education has, in many states, expanded to include a publicly supported university as the dominant educational and scientific organ of the community.  Some industrial functions are performed by the government in connection with the primary needs.  Lighthouses are necessary to guide the navy, but they also serve to guide the merchant marine and to aid industry.  The post was established as an agent of political and military government to connect the ruler with the outposts (a fact the name post indicates), but the postal service has grown in every country to be a great industrial and social agency.  The consular service, originating in the political need of keeping official representatives in foreign lands, has become a valuable economic agency; consuls are commercial agents, advancing the business interests of their countries in all quarters of the globe.