The Welfare State Will Wither Away

The supposed beneficiaries of the modern welfare state are increasingly disgruntled. A director of London's Institute for Economic Affairs reports on the forces that, he predicts, will bring about fundamental change.


The accepted wisdom today among welfare state enthusiasts and advocates is that the dire state of the welfare state—and they do at last recognize that something is going wrong with the welfare state—is a result of the slowdown in economic growth in Europe. This notion, however, belies a topsy-turvy relationship between economic growth and state welfare.

These thinkers made the common mistake of supposing that state welfare depends directly on economic growth, national income, and therefore tax revenue: the richer the country, the more it can spend on welfare. This was true 50 years ago when the state welfare system redistributed income from rich to poor. Today it is largely and increasingly a vast depot for the collection of tax and its return largely to the same taxpayers in services or cash, minus the cost of public administration. It is not a Robin Hood policy but a superfluous mechanism for sending coals to Newcastle.

The true relationship is that the higher the national income, the less should be spent on state welfare because as the national income grows so do personal incomes. People could then pay for welfare services in the market without the intervention of the state. The welfare system is in crisis for reasons far more fundamental than the temporary recession in European economic growth. The crisis is not temporary but permanent.

The welfare state was initiated in 1881 by Otto von Bismarck and Kaiser Wilhelm I. Ostensibly, the purpose was to protect industrial workers by providing social insurance against loss of income caused by accidents or old age. In reality, it was to defuse political disaffection and gain electoral support from voters supporting the Social Democrats. As in Britain under Disraeli, the motives were the economics of politics to win votes as well as the politics of compassion to help the underdog—Realpolitik as well as pity.

In Britain, in most parts of Western Europe, and around the world, the welfare state has grown into a virtual state monopoly on education and medicine, subsidized government housing, largely tax-financed state pensions, partly or largely tax-subsidized "social" insurance against interruption of earnings, tax-financed local government services from meals-on-wheels and home helps to day care centers and evening classes in basketry for middle-income housewives. It has developed from compassion to collectivism.

The welfare state is now increasingly enforced by coercion because it has outgrown the epoch in which low incomes ("primary poverty") and the alleged incapacity of the working class to learn the use of money ("secondary poverty") provided the excuse for statist-minded politicians of left, right, and center to use the state to provide social benefits in kind rather than in cash.


But the escape from the welfare state has begun, certainly in Britain and to varying degrees in other countries. General market forces are increasingly asserting themselves and will facilitate the process. On the side of demand, there are several such market forces.

First, as incomes rise, more individuals down the incomes scale will demand, and be able to pay for, better education, medicine, housing, pensions, etc., than the state aims or claims (but fails) to supply "equally" out of tax revenues. Individual "contracting out" in Britain is spreading despite double payment, once for state welfare not used and second for the privately provided services. It is spreading desultorily in education, where it is still only 5 percent; lately more strongly in medical care, growing to 7.5 percent; gradually in housing, where there is now 55 percent owner occupation, still a long way behind 80 percent in New Zealand; and intermittently in pensions, where 50 percent of employees have contracted out of state graduated pensions (the "basic" pension is compulsory).

Rising incomes also enable the family to reassert the affection of blood relationship, which has long been disfavored or even repressed by the welfare state but which is increasingly rejecting impersonal or tardy state welfare. (British queues for elective surgery are the longest in the world outside the Communist countries.) William Beveridge, father of the British welfare state, himself foresaw the family as the rock on which the welfare state might one day founder.

Another demand-side factor is the emancipation and emergence of women. More than men, they sense the power derived from choice between competing suppliers in household shopping, and resistance will arise over the contrast between consumers who are sovereign in everyday consumption but supplicants in monopoly state welfare.

Finally, there is an emerging understanding that production and distribution of state welfare is decided by "voice" in "representative" bodies (parent-teacher associations, etc.) that are unrepresentative because they favor the loud-voiced and disfavor the mild-voiced. Parents or patients are not heard unless they can exercise the power of exit—to the market at home or overseas. "Loyalty" to the state institution will not prevail over affection in the family.

On the side of supply, too, market forces are countering the welfare state. First, technical innovation will facilitate escape from state education by sound and video tapes, etc. And state medicine will increasingly be replaced by "over-the-counter" self-medication, air-call (radio) doctors, etc.

Second, the longstanding emphasis in state welfare on technical economies of large-scale production, which created mammoth units in schools, universities, and hospitals, is yielding to a newer attachment to the economies of small-scale units. These offer a way of managing employees in times of strong trade unions when wage bargaining is run in each plant by local officials and shop stewards. In addition, small units run by local entrepreneurs (doctors, teachers, etc.) and in direct touch with consumers are more acceptable and more efficient than large units run by remote officials answerable to central government. Ministers who control finances ultimately decide policy, because there can be no local autonomy without local revenue.

Another powerful factor is widening markets—the Common Market, North Atlantic Market, Pacific Common Market, North-South trade, etc. This expansion will facilitate comparison of state and private welfare services and therefore incite escape from countries with inferior state welfare services to countries with superior private services. The larger the area and the more diverse its cultures, the more difficult centralized state welfare is to administer—except, of course, by increasing coercion. That is the logic of the British socialists' opposition to the Common Market, which makes international socialism, not least in welfare, less practicable.

The welfare state is a reversion to medieval and postmedieval mercantilism that contains the seeds of its own dissolution by aggrandizing man as producer over man as consumer, intensifying resistance to change, and generating xenophobia, stagnation, and decay. Europe urgently needs a new Eli Heckscher to document the welfare mercantilism of Europe.

Finally, tax rejection will deny the state the funds to supply welfare at expected rising standards. Tax avoidance and evasion have merged, blurring the distinction between legal/moral and illegal/immoral, into "avoision." Prof. Edgar Feige of the University of Wisconsin, now working in Europe, has estimated 27 percent tax rejection in the United States and 15 percent or more in Britain, which I think too low (the semiofficial British estimate is 7.5 percent).

In 1978, Prof. Gunnar Myrdal described his fellow Swedes as "a nation of cheats" in Ekonomisk Debatt. Some may be; many are perhaps more accurately described as "dissenters," in the English sense, or "dissidents," on the Soviet scene. This is the developing European "underground" against legalized confiscation. The head of the British Inland Revenue has publicly confessed that he pays his gardener in cash, thus acting as "accessory before the fact" to tax evasion. The British, Italians, Finns and Europeans generally, Americans, Australians, Asians and Africans, have been driven to dissent ("cheating") by over-government, not least in the welfare states. This is a truth that the willfully blind among conservatives, liberals, and socialists, politicians, academics, and clerics, will not see because it turns their gold to dross.

But I do not want to convey undue optimism about the demise of the welfare state. These market forces are, of course, resisted by politicians of all parties who enjoy power; by the bureaucrats, who defend their jobs; by sections of the middle class who like to run the welfare machine, who obtain lucrative employment, and who extract more than their "fair" share by superior cultural bargaining power; by trade unions of state welfare employees; by paternalistic academics (especially sociologists); and by the clerics (of most denominations) who think good intentions excuse bad performance.


Yet there are responses that can offset these obstructions. First, a coalition, or confederation, of allied vested interests is required. Producers of competing private services—employees, doctors, teachers, etc.—whose bargaining power would be strengthened by competition with the state from private employers, and consumers, who would have wider choice—these have a common interest in subduing the welfare state.

It will also be necessary to discredit the repute of the welfare state—which in principle is no less flawed than the political state per se. Its appeal to be compassionate is empty. In practice, it responds to power. In Britain, for example, the old and mentally ill have fared worst in the National Health Service; the articulate, best.

Its academic appeal as the only or best method of supplying welfare is fallacious. Its central dialectical flaw is that in its absence the market would have provided better welfare, as it was beginning to do in the 19th century before state education, medicine, housing, or pensions were introduced. Even income redistribution was occurring—within the individual lifetime by insurance, within the family by tax-encouraged covenants, within communities by charity, etc., so that socialization by taxation could by now have been far less extensive.

The political-electoral appeal of the welfare state has prostituted wholesome language: public (interest), national (insurance), social (services), community (housing). The welfare state makes false claims to provide not otherwise available public goods, but most state services are separable, personal services. It claims to establish minima for individuals, but in practice it yields to the bargaining power of organized pressure groups. It claims to create equality of access, but in reality access is determined by differences in cultural power that are impossible to remove—accent, character, temperament, family, social ambiance, occupational links, etc.

The welfare state claims to respect and represent personal and private wishes, but it lacks machinery for discovering individual preferences. It claims to avoid duplication and waste, but in practice the state creates waste and inflates costs by replacing direct (consumer) payment with indirect third-party (state) payment. It then drives escalating costs, notably in medical care and education, below the consumer optimum by controls over schools and hospitals, teachers and doctors, that suppress choice and competition.

Another task is to demonstrate the hidden social costs of the welfare state. It is irresponsible, denies choice, resists innovation, and politicizes all aspects of life. It fosters producer dominance by syndicalism/corporativism, trade union hegemony, bureaucratization, onerous taxation that inhibits incentive and output, corruption, and secrecy. And it incites social conflict.

The intellectual and empirical case against the welfare state must then be given a practical boost. Devices must be created for beginning the transfer of welfare services that are not public goods from the state to the market. Possible strategies include developing means testing; changing from benefits in kind to benefits in cash to create competitive markets, especially in education and medicine; charging for state services; desocialization ("privatization"); reintroducing the 19th-century doctrine of "less eligibility" in 20th-century form; and enabling the poor to pay for welfare in the market by a negative income tax, tax credits, and vouchers.

Finally, the opposition to market forces must be neutralized. Politicians will have to be disciplined. Constitutional reform could limit their legal powers to continue outdated and unwanted state welfare services by the power to tax and to exclude, to suppress or inhibit, private services. Their market power of monopoly must be limited by open markets (as now in UK medicine). The welfare bureaucrats and trade union employees will have to be remotivated by bonuses for winding up a welfare service or must be pensioned off or bought out—though at a market, not monopoly, price. Middle-class beneficiaries may have to be bought out by countervailing benefits, reduced taxes, or possibly other inducements. And the intellectual guns of the paternalist academics should be spiked by the central argument that there is no case for state monopoly in welfare on two grounds: If there is an a priori argument for state supply (on grounds of externalities, etc.) the case is only for experimentation; and the exclusion or inhibition of unpredictable innovation is too high a price to pay for state monopoly, whatever its hypothetical advantages.


In Britain, market forces are being followed at a safe distance by Conservative politicians who lead when they see their followers out in front. Labour, which has split at last by spawning the Social Democrats, and may split again into a Healey wing and a Bennite rump, will never govern again. The emerging working classes enjoying embourgeoisement will in time largely follow the Social Democrats who, as in Germany, will replace socialism with market orientation.

Significantly, one of their leaders, Dr. David Owen, former foreign secretary, has publicly talked of a "social market" in terms used by Ludwig Erhard and later by Sir Keith Joseph. And a doctrinal difference has opened up: supported by Roy Jenkins, formerly chancellor of the Exchequer and now back in Parliament. Owen has repudiated Mrs. Shirley Williams's lingering socialist aspiration to suppress private schooling—that is, a market in education.

For the Social Democrats to outlaw private education or medicine (the two largest services in kind in the British welfare state) would be, he says, "too great an infringement of personal liberty [and] against all international conventions on human rights." He is saying this not only as a Whiggish sentiment but also because he recognizes that the ordinary British people would not tolerate the suppression of choice in education and medicine. About 80 percent favor allowing people who wish to do so to contract out of state education and medicine, even though they themselves do not. Jo Grimond, the former Liberal leader whose party now collaborates with the Social Democrats, has said that Mrs. Williams's "addiction" to the abolition of independent education must be "struck out."

If 1881 to 1981 has been the century of the welfare state, beginning in Germany, 1981 to 1991 could be the first decade of its dissolution, beginning in Britain. Okonomisches Gesetz ultimately prevails over Macht, Eugen v. Bohm-Bawerk wrote in 1914. Time is on the side of the market, but escape from the state can be accelerated by market-oriented government.

Arthur Seldon is advisory director to the Institute of Economic Affairs in London, which he helped to build up from its modest beginning. He is an author of several books on free-market economy. This article is adapted, by permission, from an article in International Background.