The Political Economy of the Welfare State

Thomas Wilson, Dorothy J. Wilson

• Publisher: Routledge
• Year: 2021
• eBook ISBN: 9781000478181
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

In the early 1980s, the welfare state, for too long regarded as a notable contribution to the establishment of a humane social order, had over the previous decade come under increasing attack. Some of its critics, especially in the UK and the USA, maintained that it had failed to deal satisfactorily with the problem of poverty. Others held that it was over-elaborate, created a psychology of dependence and imposed costs that needed to be reduced as part of a policy of general economic recovery. In a number of countries, cuts had already been imposed or were now contemplated.

In this situation it was crucially important to direct attention once more to the basic objectives of the various welfare services from a systematic and comparative standpoint. Originally published in 1982, the authors of this book, one an economist and the other a specialist in social administration, subjected these aims to rigorous analysis and discuss the underlying issues of social philosophy. They then attempt to assess the various methods adopted for their attainment in Britain and comment on those adopted in the USA and in some continental European countries. Although the authors reject the more extreme assertion that the welfare state has been a failure, they point to the need to relate some of the policies followed more clearly to the basic objectives. A number of proposals for reform are put forward which would imply some change of emphasis and should permit a simplification of existing over-complex arrangements.

Chapter 1 The Welfare State: Its Meaning and its Development

The Importance of the Welfare State

The title of this book – The Political Economy of the Welfare State – requires at the outset some explanation and comment. The familiar expression ‘welfare state’ came into general colloquial use about half a century ago. Although its boundaries have not been firmly and clearly delineated and are drawn rather more widely by some commentators than by others, there is no doubt or disagreement about its central territories. These include, first, the various social security transfer payments: retirement pensions, widows pensions, invalidity pensions, unemployment pay, sickness benefit, child benefits and so on. Secondly, there are the benefits in kind from the health service and the personal social services. The third category is state-financed education. Fourthly, some of the subsidies provided by government are usually included, such as the subsidization of school meals or of the rents of public housing. There are various other subsidies that would not normally be included, such as those given to agriculture or other particular industries, but the boundary becomes hard to discern. Some people would wish to include, for example, subsidies for industrial development in the less prosperous areas; others would not. The subsidization of public transport is another debatable case. The uncertainty increases when we turn to the fifth category: special tax allowances or ‘tax-expenditures’, as they are now, somewhat misleadingly, called. Such allowances may be substitutes for cash grants, although the effects will not usually be identical. Thus families may be helped by means of child benefits or by means of tax allowances for children. Or, to take another example, it will not do to confine attention to rent subsidies to the neglect of allowances against the mortgages of owner-occupiers. With tax allowances, as with subsidies, there are borderline cases. To quote from two authors who have devoted detailed attention to the subject: ‘The choice of the term "tax expenditure" indicates that, because they are not inherent in the structure of the tax, these reliefs are equivalent in terms of revenue foregone to direct government expenditure and should be judged by the same criterion.’¹ What, however, is meant by ‘inherent in the structure’? Who determines what is ‘inherent’?

It would, however, betray a lack of proportion, to become too closely preoccupied at this stage with borderline problems. Even if attention is confined to what we have described as the central areas, the massive quantitative importance of the welfare state is apparent. That this is so can be seen by directing attention in the first instance to personal incomes before tax and the sources from which these incomes are derived. In all developed countries much the most important source is employment, which usually accounts for 70-75 per cent. Social security transfer payments contribute a substantial proportion, ranging from over a tenth in the USA to almost a fifth in some European countries. For Britain the figure in 1979 was 12.5 per cent. It is of some interest to observe that these benefits represented a larger proportion of personal income than did income from property (which is here taken to include the imputed rental value of owner-occupied houses). For the USA the social transfers were roughly equal to property incomes, a fact which may not be widely known. In some Continental European countries total welfare benefits were quite substantially larger than property incomes. Dividend payments – which in Marxist terminology may be described as ‘distributed surplus value’ – were only one part of income from property and were very much smaller than social transfers. Indeed, social transfers were about four times the amount of dividend payments in both the UK and the USA in the late 1970s and early 1980s. The distribution of dividends is still rather unequal even after allowing for pension funds, whereas everyone, or virtually everyone, will be able to claim social benefits at one time or another in the course of his life. Nevertheless, these comparisons illustrate the need to exercise care in applying the term ‘capitalist’. In particular, the use of such expressions as ‘social security in the capitalist economy’ can be misleading and had better be avoided.

The figures given above are for cash transfers only. If public expenditure on the health services and on education is added to the transfer payments and the total expressed as a fraction of gross national product, it comes to about a quarter for the UK. For a number of Continental European countries the fraction is substantially larger. For the USA it is about a fifth.

Figures such as these for income and expenditure convey some impression of the importance of the welfare state in modern Western societies – without, it must be said, conveying any suggestion that these proportions are, by some as yet undisclosed measure, either too high or too low. But there should be no further need, for the moment, to labour the point that the purposes of these large programmes and the manner of their implementation warrant close attention from social scientists.

These topics are, of course, of central interest to students of social administration, a subject that, by its very nature, needs to draw upon a number of disciplines, of which economics is one, though obviously not the only one. There may be some justification for suspecting that the contribution of economics has received too little attention from those whose special field is social administration, though there are notable exceptions. It is necessary to add that in so far as this is the case, part of the explanation must be sought in the comparative neglect of the welfare state by economists themselves. Of course, the neglect has been far from complete, and again there have been outstanding exceptions. Nevertheless, it is undeniable that the welfare state has been accorded a somewhat peripheral position in the work of the profession as a whole. Fortunately, the situation has been changing and improving over the past decade or so, with a gradually swelling stream of books and articles in Britain and a much more substantial flow in the USA. Indeed, this is now a growth area in economics. The needed shift of emphasis has begun, and we can expect the balance to be gradually redressed. Even so, a perusal of textbooks and syllabuses would suggest that the welfare state is still widely regarded as a specialised topic within the special field of public finance, too near the edge of the subject to require close attention from most students of economics.

There are, no doubt, various reasons for the limited attention that has been devoted to the welfare state by economists, but it can scarcely be doubted that one reason has been a reluctance to become entangled in the moral issues and the matters of public controversy with which this subject abounds. Do not welfare services involve some redistribution of income? And is it not the case that the problems thus raised entail moral issues of a kind that scientists, in their professional role, should be most careful to avoid? Now, it is indeed important that expressions of opinion on political and moral issues should not be disguised as the firm conclusions of scientific inquiry. It does not follow, however, that the positive study of the welfare state need, for this reason, be neglected, and this in itself is an expansive and difficult area of investigation. Moreover, it is not really sensible to assert that normative policy recommendations should be resolutely ignored by scientific investigators on the ground that such recommendations embody basic moral value judgements that are not, by their nature, susceptible to scientific treatment. For the value judgements, though present, are almost always to be found in a setting of assertion and assumption about the facts of a particular situation. Let us, at this stage, define a difference of opinion reflecting different basic value judgements as one that would emerge if two people who held precisely the same opinions about the facts of some particular situation nevertheless put forward different recommendations as to what should be done. Differences of opinion and conflicting recommendations about policy may, however, reflect not any such difference in basic value judgements, but rather different views about the facts themselves. It is of the utmost importance to determine the extent to which this is so. For a conflict of basic values means that it is ‘thy blood or mine’² – and that is a position that should not be reached prematurely and perhaps unnecessarily! Admittedly, the facts, including the factual consequences of some recommended policy, are often exceedingly hard to assess, and differences in basic value judgements may then be reflected in different interpretations given to the uncertain facts. To be warned is to some extent to be forearmed. At all events, the welfare state should not be neglected by social scientists simply because moral issues are involved. For if they do not use their specialised knowledge to disentangle the factual propositions from the moral judgements and to pronounce professionally upon the former, it must be asked how this task of elucidation can ever be properly carried out.

Economists who turn their attention to recommendations relating to the welfare state are thus obliged to sort out the basic value judgements and to treat them with proper circumspection. In doing so, they have to study the facts relating to this particular field of social activity, including the political processes by which objectives are determined and the administrative means used for their achievement. It is in order to suggest considerations such as these that we have chosen to use the older term ‘political economy’ rather than ‘economics’ in the title of this book.

Let us now attempt to identify the common characteristics of those public services that are usually grouped together as constituting the welfare state. These services can be described as providing benefits in cash or in kind to identifiable individuals which can not be regarded as payments for current contributions to national output. This is only a provisional definition, which must now be teased out.

It should be observed that the benefits are said to be received by particular individuals and are different in this respect from such public goods as the preservation of law and order or from defence against foreign aggressors. A public good, as strictly defined, has two characteristics: first, it is impossible to exclude a person from the benefits conferred on the ground that he has not paid specifically for these benefits as one pays for food or clothing on the market; secondly, the receipt of benefits does not entail rivalry between different beneficiaries, for the benefits received by some people are not reduced when others also receive them. National defence is perhaps the most important example. A lighthouse is another: there is no way of excluding ships in the area from seeing the light, and the fact that one ship sees it does not prevent another from doing so. As Dorfman has put it: ‘There are certain goods that have the peculiarity that once they are available no one can be precluded from enjoying them.’³ As these are goods for which a charge cannot be made through the market, they must be financed from the compulsory levies of the tax collector. Obviously, such public goods are intended to contribute to welfare but, as defined in this sense, cannot properly be included as part of the welfare state, for the definition of the welfare state given above makes common usage explicit by referring to benefits accruing to ‘identifiable individuals’.

The term ‘public goods’ may, however, be used more loosely to include goods that are publicly provided to individuals free of charge at the time of use, as though these goods were public goods in the narrow sense. Government-financed health services and educational services are familiar examples. These goods can be, and often have been, supplied through the market and sold like any other marketed commodity. In order to distinguish them from public goods, as strictly defined, Musgrave designated them merit goods,⁴ perhaps a confusing and somewhat emotive label which has now acquired wide currency. Unfortunately, it is not easy to hit upon a satisfactory alternative. Optional public goods might convey rather better the meaning that is intended, although this expression has already been adopted for another purpose that does not immediately concern us.⁵ We shall have to make do with quasi-public goods as a substitute for merit goods.

According to our definition, welfare benefits are not provided in return for any current contribution to production. This does not mean, of course, that no such contribution has been made in the past or that none will be made in the future. Indeed, it was a basic objective of the national insurance plan put forward in 1942 by the Beveridge Report, Social Insurance and Allied Services, that in the course of time people should, where possible, pay at least in part for what they received. But there are periods in the lives of most people when support is required beyond what they are currently receiving from production. Thus in childhood, in frail old age, in sickness and so on, it is not possible to earn by working, and income from property, if any, may be quite insufficient. In all societies provision for such support is made – in primitive tribal societies as well as in developed industrialised societies, in communist economies as well as in capitalist economies.

The source of these benefits varies and need not, of course, be the state itself. In less developed societies assistance is provided by the family, usually one that extends well beyond the nuclear family of parents and children. State welfare services now exist in many less developed countries but only on a restricted scale. Even in developed societies the role of the family is still, of course, crucially important in providing for children, although responsibility for the old has been shifted away from their families to a substantial extent. The part played by charities must also be kept in mind. It is a larger role than may be generally appreciated. Thus in 1975 registered charities in Britain had an income of over 4 per cent of GNP.⁶ It is true that part of this income was used for purposes other than the support of individuals, but it would seem reasonable to suppose that about 2 per cent of GNP was expended by charities for purposes similar to those associated in common usage with the welfare state – equivalent to about a sixth of the sum supplied as social security cash benefits. These private sources of assistance are not, therefore, to be neglected. It is, however, to benefits supplied by the state that our definition must, rather obviously, be confined.

The full range of receipts that could be covered by our provisional definition is clearly too wide to correspond to what is understood by the welfare state. Interest on the national debt is the most important of the cash transfers that must now be excluded. Moreover, although certain subsidies and tax allowances can be held to fall within its purview, others must be left out, as we have noted above. Some additional criteria are required to explain these inclusions and exclusions, and to these we must now turn.

One criterion that suggests itself immediately is that the benefits provided by the welfare state are designed to provide protection against poverty. That this is indeed a large part of the answer is undeniable, but it would be an oversimplification to leave it at that. For the welfare state, as it has evolved, goes far beyond what would be required to help those who, by any acceptable standard, would otherwise live in poverty. Many who receive welfare benefits in cash and kind could not possibly be described as people who would be poor in the absence of such benefits. This fact helps to explain why the disbursements under the welfare state are now so large. The reasons for this development can best be understood by tracing the main features of the history of the welfare state, which reveals how a number of different influences have been at work and are now reflected in its modern structure.

The Evolution of the Welfare State

The purpose of the earliest forms of state provision was to afford some protection against complete destitution. The Tudor poor law laid the responsibility for providing such relief on local justices of the peace, who interpreted these responsibilities in various ways and with differing degrees of generosity. It need scarcely be said that even at best this assistance was exceedingly meagre, although it is necessary to recall that the standard of living of the active population was also extremely low by modern standards. The new poor law of 1834 was designed to abolish outdoor relief, and assistance was subsequently to be confined to that provided by the parish workhouses. These grim institutions were regarded with fear, and the shame of being ‘on the parish’ strengthened the distaste for public charity that was to persist to modern times.

Relief of poverty, although on less demeaning terms, was still the objective when the Liberal Government introduced Britain’s first old-age pension scheme i...

Table of contents

• Cover
• Half-Title Page
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• Foreword
• Chapter 1 The Welfare State: Its Meaning and its Development
• Chapter 2 Welfare Economics, Political Economy and the Welfare State
• Chapter 3 The Cash Transfers: An Account of the Schemes
• Chapter 4 Poverty and Selectivity
• Chapter 5 Cash Benefits in a Changing Economy
• Chapter 6 The Welfare State and the Health Services
• Chapter 7 The Personal Social Services
• Chapter 8 Assessment and Recommendations
• Bibliography
• General Index
• Name Index