The productiveness of the welfare state

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.

Quote of the week: why progressive and interventionist policies prospered following World War Two

Here is another extract from the same chapter as last week’s, by Fabio Petri. These weekly quotes are not necessarily meant to be ‘classic’, nor even penned by the greatest economists in the history of the subject, though sometimes this may be the case. Rather, they make a point that I could not put better myself, and are thus worth posting.

Here the author accounts for the rise of forms of Keynesian interventionism, an effective welfare state in Western Europe, and full employment policies in the US following World War Two.

“One must wait for the Great Depression of the 1930s coupled with the danger of communism to see the hold of marginal theory and policy partly shaken: Keynes candidly admitted he wanted to save capitalism from itself in order to save it from communism, and here we have a strong reason for the general acceptance of his theory in spite of the immediate wave of criticisms, not entirely unjustified, moved against it by Henderson, Hicks, Meade and others. And the beautiful book by Armstrong, Glyn and Harrison, Capitalism since 1945, convincingly shows how at the end of WW2 the fear that the working class would turn communist was the reason for the concession of the welfare state in Western Europe and for a general acceptance, in the USA too, of the interventionist Keynesian state with a duty to maintain unemployment low.”

Fabio Petri (2023), Class struggle and hired prize-fighters, in J. Eatwell, P. Commendatore and N. Salvadori (eds.), Classical Economics, Keynes and Money, Abingdon: Routledge, p.57-8.

Big government, small government, and the fallacy of the growth dividend

Faster growth is not a precondition of improved funding for public goods and services alongside a smaller state. In fact, it will tend to increase the costs of public provision. There are political debates to be had and choices to be made regarding the size and role of the state under capitalism. Shrinking the state by cutting taxes and squeezing public services can easily become socially damaging, without any economic benefit to show for it. In fact, big government can enable a degree of economic dynamism.

In recent decades, particularly since the advent of Thatcher and Reagan, the political right in many countries has made the case for tax cuts and shrinking the state a totem of policy. This has been justified in various ways. Politically and philosophically, it is claimed that allowing people to keep more of their own money supports personal freedom and choice. Economically, it is argued that tax cuts will spur private enterprise and economic growth through providing greater incentives for money-making, and that everyone will thereby be better off if the economy is larger, even if inequality is greater. Those at the top will gain more, but those lower down the scale will gain too, even if by much less. This is the professed nature of ‘trickle-down economics’.

It is also sometimes argued, in defence of policies which aim to reduce public expenditure, that the higher taxes needed to fund that spending cannot be afforded as they will stifle growth. Faster growth must come first, and increased spending on public goods and services like health, education, welfare and infrastructure can only come later, when they can be ‘afforded’, and in such a way that the ‘burden’ of taxation and public spending is kept to a minimum. This can be termed the ‘growth dividend’, in which only faster growth will allow greater public spending.

For rich countries like the US and UK, this is mostly nonsense. Comparing the share of tax and public spending in overall GDP across rich countries suggests that the size of government measured in this way is mostly a political choice. Of course it does have economic effects, but blanket arguments for shrinking the state, or indeed growing it, without a proper discussion of the role of the state in the economy and society, are highly misleading.

Many Middle Ways – the essence and importance of the mixed economy

All economies are mixed economies, whether they are capitalist, and even if they are socialist. This understanding makes for a relatively nuanced analysis in political economy. Marx was something of a purist in his own analysis of economic systems. He argued that each system would inevitably evolve to the next, from feudalism to capitalism to socialism to communism, that it would do so from within and that it contained the seeds of each subsequent stage of development. So for example, capitalism might contain some state owned companies, which would show the way towards state socialism, with markets and private property largely abolished. For Marx this evolutionary process, whether it was carried out through reform or revolution, was inevitable. But things have not quite turned out the way he hoped and predicted. Communist states have been transformed into capitalist ones, however imperfectly, and Marxists have continued, ad infinitum, to describe our situation as ‘late capitalism’, implying that it will soon be overturned, perhaps in hope more than anything else.

Geoffrey Hodgson on liberal solidarity and reforming capitalism

Here is another extract from Geoffrey Hodgson’s thoroughly compelling 2019 book Is Socialism Feasible? Towards an Alternative Future. The passage is taken from the introduction (p.18-20) and summarises what the author sees as the only genuine alternative to nationalism or socialism. I have great sympathy for his argument that what he calls a society of liberal solidarity requires a deeply reformed capitalism, but capitalism nonetheless:

“While the term social democracy was originally embraced by Marxists and other socialists, generally it has a different interpretation today. Social democracy now refers to a form of market economy, with democracy, a welfare state and some redistributive taxation of income and wealth.

This version of social democracy is close ideologically to the wing of Anglo-American liberalism that rejected atomistic individualism and supported a welfare state. This stream of liberal thinking goes back to Thomas Paine and was developed by John A. Hobson, David Lloyd George, John Dewey, John Maynard Keynes, William Beveridge and Michael Polanyi. I use the alternative term liberal solidarity to describe this line of thought. Liberal solidarity criticizes the atomistic individualism that promotes the self-seeking individual. It advocates a greatly reformed capitalism, with democratic government, reduced inequality, sustainable growth and a viable welfare state.

Socialism is incompatible with these goals. From the 1840s, socialism has been associated with large-scale public ownership and central planning of the economy. All experiments with this kind of big socialism have moved towards dictatorship. This is no accident. The outcome is a consequence of the centralization of politico-economic power.

In some imagined, fictional appearance, socialism might seem superior. But in both theory and practice, socialism does not provide a viable and attractive alternative. At least for the foreseeable future, we need to work toward greater solidarity and less inequality within capitalism. We can also experiment with elements of small socialism within this market economy, particularly by the development of numerous, autonomous worker cooperatives.

Ultimately, the promotion of small socialism within a capitalist economy is the only feasible socialist option that is consistent with democracy and freedom. I applaud experiments in that direction. But I underline the word ‘experiment’. It all depends on what works. No one form of organization or ownership works best in all possible circumstances. Hence any support for (small) socialism must be pragmatic and conditional within a mixed economy.

Supporting a mixed economy means that common ownership is no longer the solution to all problems. It becomes neither an end in itself nor a supreme maxim. Socialism as part of a mixture must be subject to higher principles (which are not themselves socialist) governing the mixture itself. One principle might be the experimental and evolutionary pursuit of diversity. Any practical socialism along these lines should arguably become subservient to some version of pluralistic and democratic liberalism in pursuit of human flourishing and solidarity.

Marxists are fond of posing the choice: ‘socialism or barbarism?’ I argue…that, at least in its heavily statist forms, socialism itself brings a measure of barbarism. Another danger is of nationalist and autocratic capitalism. The progressive alternative is a reformed, liberal-democratic capitalism, with a welfare state and effective measures to reduce inequality. The true choice is between liberal-democratic capitalism, on the one hand, and forms of nationalism, big socialism and barbarism, on the other.”

The benefits of an experimental mixed economy

Geoffrey Hodgson, an institutionalist economist who I have cited often on this blog, has for some time been a highly intelligent critic of traditional socialism and its advocates. His answer to the question posed by the title of his recent book, from the which the quote below is taken, is ‘no’, or at least that “a humane big socialism is an unattainable and unrealistic utopia” and will fail to achieve and sustain its goals. Here he is with a constructive argument on the mixed capitalist economy:

“There never has been a pure capitalism, where everything is a commodity, and there never will be. Not only are there unavoidable missing markets, but also the state legal system is necessary to constitute those markets that exist. Furthermore, experience tells us that capitalism, at its most productive and dynamic, involves synergetic cooperation between public and private institutions. The impressive vigour of several capitalist economies shows that, while markets are necessary for economic innovation and vitality, modern economies also benefit from some economic intervention by the state.

The basic functions of the state in a capitalist economy include national defence, law and order, enforcing contracts and protecting property. Without further state intervention, education and healthcare will be confined only to those that can afford them, and then society as a whole will not benefit from their positive externalities. With a minimal state, economic inequalities within capitalism are likely to become greater, with the growth of a large and only partially employable underclass. Poverty and destitution would coexist alongside environmental degradation. Unless people have food, healthcare and adequate education, then they cannot be players on the labour market and the market cannot work to resolve these problems. Substantial public intervention is necessary to make the market system work.

This applies also to the regulation of monopoly, the provision of essential information, and the general regulation of the rules of the game in the capitalist system, including the regulation of finance, which provides its life-blood. The state intervenes to a degree in these areas in most capitalist countries, but to different extents and with varying measures of success.

Evidence in the more dynamic capitalist economies suggests that the state often takes the role of a major strategic leader. It may set priorities, support strategic sectors, promote innovation, coordinate interconnected initiatives, and provide and process vital information. But the evidence also shows that such interventions do not always work, or they have strong downsides as well as upsides. Again it is necessary to experiment and to learn from experience.

The state must also redistribute some wealth from the the ultra-rich, especially if capitalism is to retain legitimacy and popular support. A system that was built on the Enlightenment principle of equality under the law has helped to exacerbate inequalities in income and wealth on a massive scale…different capitalist countries have had different degrees of success in ameliorating this problem, and we need to learn from these comparative experiences.

While socialists have always advocated the reduction of inequalities of income and wealth, they have often been diverted by their uppermost doctrinal goal of public ownership. They regard massive inequality as unavoidable under capitalism, and hence the task of dealing with it has been postponed to the socialist future…Infeasible socialist doctrine has diverted our attention from building a better capitalism.”

Geoffrey Hodgson, Is Socialism Feasible? Towards an Alternative Future, Edward Elgar, p.161-2.

Joan Robinson on economics and the study of society

Apart from her voluminous academic writings, the Cambridge Keynesian economist Joan Robinson wrote several popular books. Freedom and Necessity – An Introduction to the Study of Society was published in 1970. Although some of it dates somewhat, there is plenty of interest and contemporary relevance that remains. Here are a few such extracts:

(From the preface) “It seems to me that an economic interpretation of history is an indispensable element in the study of society, but it is only one element. In layers below it lie geography, biology and psychology, and in layers above it the investigation of social and political relationships and the history of culture, law and religion.”

Some (political economy) thoughts on the response to Covid-19 – capitalism, socialism and the role of the state

The big state is back with a vengeance, if it ever went away. The apparent suddenness and rapid escalation of the spread of the coronavirus has called forth an almost equally rapid increase in the scope of state intervention in many nations. Countries that had spurned a move to state capitalism have suddenly found themselves having to embrace it.

Authoritarian state capitalist, though ostensibly communist, China, took a while to respond to the outbreak, but once it did, it acted forcibly and, for now at least, it seems to have stemmed the tide. But democratic Japan, South Korea and Taiwan seem also to have responded relatively effectively to the outbreak, at least compared with many other countries.

The UK government has so far pledged a massive fiscal programme of stimulus, including wage subsidies, bridging loans for firms, and at the time of writing is about to announce support for the self-employed as well. Private sector rail company franchises have been suspended in the wake of collapsing ticket sales. The health service has been promised whatever it needs financially to deal with the virus. Private firms are being asked to switch production to medical supplies as fast as possible. The post-crash decade of austerity was already somewhat at an end, but now it has been dramatically, inevitably put into reverse gear.

With a proper strategy, industrial change can deliver better jobs for all

Tim Page of the Trades Union Congress, in this short post summarising a recent TUC report, examines how a comprehensive industrial strategy led and coordinated by the state can help the regions of the UK successfully manage economic change. The report draws on case studies from Spain, Iceland and the Netherlands to illustrate how policies which bring together government, businesses, and unions can significantly improve outcomes in a changing economy.

A successful capitalist economy with growing output and productivity will generate a changing composition of that output and the associated employment over time, as new more productive industries expand and old less productive ones decline. This tends to create an uneven distribution of costs and benefits across the economy, so that in the absence of the right policies, particular regions can be left behind.

Emigration from declining regional economies to expanding ones tends to worsen outcomes in the former, as the more skilled and ambitious seek new opportunities. The declining region will lose their spending power, weakening local demand, as well as their potential skills. Those left behind are therefore likely to doubly suffer, as their local economy becomes locked into a spiral of decline, with reduced job opportunities and growing relative poverty.

While policy cannot totally prevent workers moving to find new work, it can encourage new industries to locate or emerge in declining areas with support for business, infrastructure and retraining, as well as reducing insecurity with a strong social safety net. In this way, regional and industrial policies which involve genuine social partnership can combine to increase new employment opportunities in poorer areas and prevent ever-widening regional inequality, which has proven to be a major problem for the UK in recent decades, compared with much of the rest of Northern Europe.

The state doing nothing, and leaving it all up to the individual, has failed the poorest regions of the UK. Similarly, the state doing everything, and replacing private employment with public sector employment, as happened under the last Labour administration, has proved all too vulnerable to a change of government. A more inclusive approach is now called for.

David Harvey on the limits to social democracy

Following on from yesterday’s post, here is part 2 of an interview with David Harvey with the Real News Network, where he discusses the limits of social democracy, as opposed to his views on the need for a socialist political economy.