Explain Displacement Effect hypothesis of Peacock and Wiseman as a determinant of public expenditure.

Displacement Effect Hypothesis of Peacock and Wiseman

The Displacement Effect Hypothesis, proposed by Alan Peacock and Jack Wiseman, is a theory that seeks to explain the determinants of public expenditure, particularly in the context of government growth and the expansion of the public sector. According to this hypothesis, major increases in public spending are often triggered by external events, specifically those that create a perceived threat to national security or societal well-being.

Peacock and Wiseman argue that during times of crisis, such as wars or other existential threats, there is an increased demand for public services and intervention. Governments respond by expanding their role and increasing public expenditure to address the crisis. However, once the crisis is resolved, the public sector tends to retain a larger share of resources and authority, leading to a "displacement" of resources from the private sector to the public sector.

In essence, the Displacement Effect Hypothesis suggests that external shocks or crises create a justification for increased government spending, and even after the crisis has subsided, the expanded public sector persists. This hypothesis provides insights into the dynamics of government growth and the factors that contribute to the long-term expansion of public expenditure beyond the immediate needs of a crisis situation.