Welfare state

From Mises Wiki, the global repository of classical-liberal thought
Jump to: navigation, search

Welfare state is a concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those unable to avail themselves of the minimal provisions for a good life. The general term may cover a variety of forms of economic and social organization.[1]


No matter how many private funds were set up, there were always going to be people beyond the reach of insurance, who were either too poor or too feckless to save for that rainy day. Their lot was a painfully hard one: dependence on private charity or the austere regime of the workhouse. By the later nineteenth century, however, a feeling began to grow that life’s losers deserved better. The seeds began to be planted of a new approach to the problem of risk - one that would ultimately grow into the welfare state. These state systems of insurance were designed to exploit the ultimate economy of scale, by covering literally every citizen from birth to death.

The first system of compulsory state health insurance and old age pensions was introduced in Germany. The aim of Otto von Bismarck’s social insurance legislation, as he himself put it in 1880, was ‘to engender in the great mass of the unpropertied the conservative state of mind that springs from the feeling of entitlement to a pension.’ In Bismarck’s view, ‘A man who has a pension for his old age is . . . much easier to deal with than a man without that prospect.’ To the surprise of his liberal opponents, Bismarck openly acknowledged that this was ‘a state-socialist idea! The generality must undertake to assist the unpropertied.’ But his motives were far from altruistic. ‘Whoever embraces this idea’, he observed, ‘will come to power.’ Britain followed the Bismarckian example in 1908, when the Liberal Chancellor of the Exchequer David Lloyd George introduced a modest and means-tested state pension for those over 70. A National Health Insurance Act followed in 1911. Though a man of the Left, Lloyd George shared Bismarck’s insight that such measures were vote-winners in a system of rapidly widening electoral franchises. The rich were outnumbered by the poor. When Lloyd George raised direct taxes to pay for the state pension, he relished the label that stuck to his 1909 budget: ‘The People’s Budget.’

The First World War expanded the scope of government activity in nearly every field. With German submarines sending no less than 7,759,000 gross tons of merchant shipping to the bottom of the ocean, there was clearly no way that war risk could be covered by the private marine insurers. The standard Lloyd’s policy had in fact already been modified (in 1898) to exclude ‘the consequences of hostilities or warlike operations’ (the so-called f.c.s. clause: ‘free of capture and seizure’). But even those policies that had been altered to remove that exclusion were cancelled when war broke out. The state stepped in, virtually nationalizing merchant shipping in the case of the United States, and (predictably) enabling insurance companies to claim that any damage to ships between 1914 and 1918 was a consequence of the war.

With the coming of peace, politicians in Britain also hastened to cushion the effects of demobilization on the labour market by introducing an Unemployment Insurance Scheme in 1920. This process repeated itself during and after the Second World War. The British version of social insurance was radically expanded under the terms of the 1942 Report of the Inter-Departmental Committee on Social Insurance and Allied Services, chaired by the economist William Beveridge, which recommended a broad assault on ‘Want, Disease, Ignorance, Squalor and Idleness’ through a variety of state schemes. In a March 1943 broadcast, Churchill summarized these as: ‘national compulsory insurance for all classes for all purposes from the cradle to the grave’; the abolition of unemployment by government policies which would ‘exercise a balancing influence upon development which can be turned on or off as circumstances require’; ‘a broadening field for State ownership and enterprise’; more publicly provided housing; reforms to public education and greatly expanded health and welfare services.

The arguments for state insurance extended beyond mere social equity. First, state insurance could step in where private insurers feared to tread. Second, universal and sometimes compulsory membership removed the need for expensive advertising and sales campaigns. Third, as one leading authority observed in the 1930s, ‘the larger numbers combined should form more stable averages for the statistical experience’. State insurance exploited economies of scale, in other words; so why not make it as comprehensive as possible?

In most combatant countries during World War II, the lesson was clear: the world was just too dangerous a place for private insurance markets to cope with. (Even in the United States, the federal government took over 90 per cent of the risk for war damage through the War Damage Corporation, one of the most profitable public sector entities in history for the obvious reason that no war damage befell the mainland United States.) With the best will in the world, individuals could not be expected to insure themselves against the US Air Force. The answer adopted more or less everywhere was for the government to take over, in effect to nationalize risk.

From now on, the welfare state would cover people against all the vagaries of modern life. If they were born sick, the state would pay. If they could not afford education, the state would pay. If they could not find work, the state would pay. If they were too ill to work, the state would pay. When they retired, the state would pay. And when they finally died, the state would pay their dependants.[2]

Costs of the welfare state

In private charities, administrative and other operating costs absorb, on average, one-third or less of each dollar donated, leaving the other two-thirds (or more) to be delivered to recipients.

In contrast, an average 70 cents of each dollar budgeted for government assistance goes not to the poor, but to the members of the welfare bureaucracy and others serving the poor.

In addition, the tax revenue is also not obtained costlessly. The time and effort necessary for citizens to comply with the tax laws are substantial, and since they have alternate uses in production, their value can be estimated. In addition, taxes reduce the incentives people have to use resources productively. They work, save and invest less than they they would if tax rates were lower, and ceteris paribus, this reduces total output and income. It was estimated that the total government and private sector cost of taxation amounts to 65 percent of net tax revenue. If that estimate is correct, and if it is also true that the administrative and other costs of government redistributive agencies absorb, say (to be charitable), only two-thirds of each dollar budgeted to them, then the cost of delivering each dollar of subsidy to a recipient is nearly five dollars worth.[3]


  1. "welfare state". Encyclopædia Britannica Online. 2012. Web. Referenced 2012-06-22.
  2. Niall Ferguson. The Ascent of Money, Chapter 4, p. 200-208. Published 2008, ISBN 9780141035482. Referenced 2012-06-23.
  3. James Rolph Edwards. The Costs of Public Income Redistribution and Private Charity (pdf), Journal of Libertarian Studies, Volume 21, No. 2 (Summer 2007): 3–20. Referenced 2013-03-29.