While the modern welfare state is generally supported by the political left, it is sometimes merely tolerated by the right. Simplistic critiques which decry “workshy” benefit recipients funded by the tax revenues drawn from “hard-working families” can be typical. A variety of schools of economic thought have historically deployed arguments that social spending is unproductive, a drain on the public purse, and a burden on the private, market-based sectors of the economy. But there are alternatives to this line of thinking, which argue that a well designed welfare state can not only reduce poverty, but also enhance the productivity of the economy and society as a whole. There is thus a potential win-win for progressive social policy and public spending more broadly. I consider these ideas below.
Classical political economy and Marx
A central line of argument in the thinking of classical political economists such as Adam Smith and David Ricardo was the distinction between productive and unproductive labour. The former produces profit, and the latter does not. Public spending, while perhaps necessary to the functioning of society, remained unproductive as it was not profit-making. Public employment was thus termed unproductive.
Marx, often considered the last of the classical economists, though in fact he was more their chief critic, continued this distinction, holding that only producers of surplus value, the source of profit, were productive. For Marx, only productive labour could produce surplus value, which was then appropriated by the capitalist class, proving the inevitable existence of exploitation in the production process.
The neoclassical school, which became dominant partly as a reaction against the Marxist and socialist direction that the classical school seemed to be heading in, held that labour, nature and capital, as the three factors of production, were all potential sources of income and wealth, and could therefore be productive. But public goods and services funded by taxes on the private sector, and outside the market, were still considered unproductive and a burden.
Some neoclassical authors did argue that public spending, if it supported private investment and efficiency, could be productive. Along Keynesian lines of thinking, it could also support income, particularly in a recession or depression. However the majority of the neoclassicals continued to hold that only the private sector could produce social wealth, and that taxes and public spending were a drain on enterprise.
Keynes himself, particularly in his magnum opus The General Theory, was largely focused on the role of aggregate demand in the determination of employment and economic performance, and the need for the government to play an active part in managing this. He was less concerned with the welfare state and the productiveness of social spending more generally.
The welfare state can enhance productivity
The development of the welfare state in much of Western Europe could be considered something of a social revolution. In broad terms, it aimed to provide a floor to the living standards of the lowest social classes. It justified government spending on housing, roads, railways and infrastructure more generally, as well as schools, hospitals and public offices. It provided education, national social security and public healthcare, and supported the incomes of the unemployed. It also led to increased public spending on research and development in order to boost innovation. Taken together, all of these were meant to sustain a healthy and productive workforce and an efficient economy as well as a more just society. In the long run, they could be seen as enhancing the performance of capitalism, both socially and economically, and making it more productive.
Modern economists such as Ha-Joon Chang have also argued that “big government” can make people more open to change, if their standard of living is supported in the case of job loss due to structural change in the economy, and they are given (subsidised) retraining for a potential new position. This could make workers in countries with more generous welfare spending such as Norway or Sweden more accepting of free trade and the change it provokes than workers in, say, the US, where welfare provision is relatively threadbare. Thus social insurance and social spending more generally can in this way support structural change and productivity growth under capitalism, and remove some of the objections to it.
If one accepts these arguments in favour of the productiveness of welfare spending and social policy more broadly, one can see that in a capitalist economy there is a symbiosis between the public and private sectors. Each supports the other. While clearly not all public spending plays a role in enhancing productiveness, and some can be wasteful, the same is true of private sector activity. Thus arguments which accept the duality of the public and private sectors working in combination, including a well designed welfare state, are needed to combat the dogmatism which dismisses either as inherently bad (or good) from whatever perspective, whether this draws on pro- or anti-market ideology.
Ha-Joon Chang (2011), 23 Things They Don’t Tell You About Capitalism, London: Penguin.
Cosimo Perrotta (2023), On the productiveness of welfare expenditures, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.74-83.