Has the crisis of the welfare state been exaggerated?
An inquiry using a risk-management paradigm.
by
Juraj Draxler
Assessment paper
Course: States We’re In
Term: Autumn 2004
Tutor: Dr Simon Parker
Abstract
Welfare state is an evergreen topic of academic and public debates. It affects all citizens, as beneficiaries or contributors. The discussion is bound to be ideologically charged, since welfare policies almost inevitably involve some kind of redistribution.
In such context, the word “crisis” pops up easily. Welfare mechanisms are sets of static rules, and as economy and society evolve there will always come up a misfit either between what is effective now and what was effective before, or between the public’s view of what was justified yesterday and what is justified today.
This paper offers to use the state as a focal point for analysis, by using the paradigm of the welfare state as a risk-management mechanism of the nation-state. The paper develops the paradigm by tracing the origins of the welfare state in the growing need of developing capitalism to provide for its own stability and viability by limiting risks that individuals face, and which would impede cooperation. Without safety nets provided by the state, the capitalist society would fail to develop in the way we know it today.
This functionalist concept is meant to be a useful shorthand for the relationship of mutual dependency of the sphere of production and the sphere of governance. It shifts the focus from both the questions of efficiency of individual welfare mechanisms and the questions of social justice. Instead, the attention is squarely on the demand for the welfare state, over time and both at an individual and societal level.
In order to answer the question given in the title, what follows is an investigation into the composition and nature of risks that individuals face today, and analysis of the nature of modern, post-industrial, post-Fordist state. The paper concludes that as both the risks and the state, i.e. the whole reference framework, are changing fundamentally, it does not make sense to speak of welfare state crisis. Rather, the paper tries to make it evident that while a demand for state management of risks remains strong, a modified set of social contracts is needed to form a ‘new welfare state’.
Contents
1Introduction…3
2The risk-management paradigm…7
3Welfare state – a historical perspective
3.1 From warfare to welfare state…9
3.2 Keynesian economics…11
3.3Fordist and post-Fordist economy…14
4Welfare state – contemporary challenges
4.1Modern society and risk management…17
4.2Example: pension system…19
4.3What lies ahead…22
5 Conclusion…23
1 Introduction
When one talks of “welfare state crisis” it is usually in connection with the strains on public finances that have been besetting Western economies since 1970s.[1] Yet the conflation of welfare state with fiscal redistribution is not a fortunate one. This accounting approach leads to the simplistic notion that if “the welfare state becomes too big” it is necessary to roll it back. This is something that neoconservatives have peddled since 1980s, using the logic of enterprise behaviour: if costs are rising, try to slash them. However, this is a fallacy of composition. What works at the individual level does not work for the society as a whole.[2]
We need to realize two things. First, modern society is a web of dependencies. Today’s economy does not consist of individuals toiling their plots of land to squeeze out an assured, if meager, living. It is precisely the lifting of the burden of everyday defence of one’s chances of survival from the individual’s shoulders that makes extensive cooperation possible. We rely, for example, on a process of endless innovation so that we can have ever-increasing productivity. However, innovation is tied with risk-taking. Similarly, re-location in search of a job is risk-taking. Capital investment is risk-taking.
Some of the risks are dealt with through legal arrangements that implicitly transfer risks to larger segments of the society – limited liability partnership is the most notable example. Some of the risks are insurable. But some, those connected with ‘common shocks’, are not.[3]
This leads directly to the second point. State role in managing certain risks is irreplaceable. Only the state can effectively guarantee a society-wide safety net for citizens. This safety net, or, rather, a complex of nets, has become known as the “welfare state”. It is possible to allow a purely private provision of welfare services with the state taking solely the role of the regulator, but this role is crucial.
These two observations are the basis of the analytical approach of this paper. An economist might want to measure efficiency of various welfare mechanisms. A political philosopher’s concern is to come up with theories of justice based on some assumptions about what human beings are and what is good for them. A political science analysis of the welfare state, however, should be concerned with describing the context. It should be historical and institutional, identifying the stable structures that are the welfare state and describing them in a model that makes it possible to account for past developments and which allows for some degree of prognostication.
Therefore, a paradigm is needed that would make it possible to immediately identify the power relations that determine how the welfare state behaves and changes. In order to satisfy these criteria, this paper adopts the view of the welfare state as a unique risk management system of the nation-state. What is meant by this, in short, is the fact that in a modern society, individuals face a certain set of common risks which only the state can manage effectively and therefore promote overall economic efficiency and social stability.
The first section of this paper elaborates on epistemological advantages of this approach. Then, a brief historical exposition will outline the justification for the paradigm. The main focus of this analysis is on defining how risks and the state are changing today. The introduction into the concepts of Fordist and post-Fordist society will create a framework for this. The paper will then examine how this shift affects both the nature of the state itself and the composition and nature of risks that individuals face. The overall objective is to provide a positivistic account that allows for a certain degree of prognostication by isolating key elements of the welfare state and placing them in a reference framework that allows for a dynamic analysis.
2 The risk-management paradigm
Every social institution can be viewed, first, as a channel for actors’ need to form a stable relationship in order to provide for their own interests, and, secondly, as a building bloc for the society. Thus it must make sense at the individual as well as aggregate level.[4]
The concept of ‘risk’ makes it possible to integrate social and economic perspectives, as well as individual and aggregate level of analysis. A disruption of individual livelihoods can add up to translate into the disruption of societal structures.
This creates a unifying outlook – there is no distinction between a social justice concept and economic interests. For our analysis, theories of social justice are seen as mechanisms of risk management.[5]
The risk-management perspective grounds the welfare discourse in a material base, while the focus on ‘state’ provides a historical dimension.
This is important, since it allows to avoid the usual problem with welfare state analyses, which is that they are heavily dependent on the particular model that the observer relies on. These models are rather static (Esping-Andersen 2002: 6).[6]
It helps to start by thinking what, functionally, actually is the welfare state. Robert E. Goodinspeaksof two characteristics that define the welfare state. First, “the welfare state intervenes (a) in a market economy (b) to meet certain people’s basic needs (c) through relatively direct means.” Secondly, “the welfare state is a system of compulsory, collective, and largely nondiscretionary welfare provision.” (1988:11-12)
And what does ‘nation-state’, the second term of our concept, mean? A state, to use the traditional Weberian way of defining it, is centralized decision-making, territorially bounded and with a monopoly of the use of violence. But what about the ‘nation’ component? It is usually stressed that a nation-state is a political entity that is culturally homogeneous enough that it differentiates itself from its surroundings. But the nation-state can also be defined as such an entity, where the central power takes control of some of the core institutions shaping citizens’ lives, namely education, healthcare (not only by direct provision, but also by setting standards, for example for hygiene or food labeling) and welfare (also in the wide sense of the word, by promoting business activity as well as regulating labour practices). As we can see, here, the state becomes almost coterminous with welfare state, and this is not accidental, as we will see in the next section, which describes welfare provision as raison d’être of modern state.
3 Welfare state – a historical perspective
3.1From warfare to welfare states
“Who says welfare state says nation state” (Giddens 1994:137). When Bismarck set out to create the first version of a comprehensive social security net, his aim, he said, was to “bribe the working classes, or… to win them over, to regard the state as a social institution existing for their sake and interested in their welfare”[7]. On a systemic level, the welfare state is exactly that: a tool that cements the nation-state, thus providing the crucial centripetal force to balance the workings of the economy. While the early capitalist era was producing a visibly polarized society, the main clusters of which were the capital-owning bourgeoisie and the labour-providing proletarians, the nation state was a stabilizing element, an organizing principle for the whole socio-economic system. This, arguably, is still the case today, although we tend to realize it much less after having had progressive taxation, social security system and redistribution for a long time.
And, sure enough, the 19th century was the period of conscious and frantic nation-building. Compulsory education had already been introduced in some continental European states during the period of absolutism. Mass armies were now bringing together workers and peasants from faraway corners of new states, a heterogeneous bunch speaking a motley of dialect, and turning them into citizens with a sense of unity and certain discipline. Elaborate pageants such as public celebrations of monarchs’ birthdays or great exhibitions, were helping to create ‘publics’ – the spheres of homogenized attention focused on topics that concerned the whole ‘nation’. Widening suffrage expressed the fact that feudal-era concepts of legitimacy based on tradition and ‘divine rights’ were no longer tenable. Bureaucratic machines were introduced to provide impartial and stable backbone of nation-states.
Previously, in the era of limited productivity gains, the surest way to gain resources was to dig up treasures or to win them through war. In the beginning of modernity, states funded great explorations and hoarded gold in order to build armies to wage incessant wars – as expressed in the mercantilist theory and the attendant regime. By 19th century, however, in the West this “warfare state” was giving way to capitalist, industrializing nation-states. The state’s “gaze” was turning inward.
The 19th century reforms were, then, mostly designed to complement the market (education) or provide for the victims of “market failures” (unemployment benefits).
World War I provided more momentum, now that working classes had seen how much the state had relied on their mobilization, and economies had become more centralized due to war effort. In Britain, for example, the government now extended its reach to extensive housing support, to make Britain, in the words Lloyd George “a fit country for heroes to live in”.[8]
But there was, as yet, no sense that welfare provision could be directly related with economic success. This changed with the advent of “Keynesian economics”.
3.2Keynesian economics
In his 1936 treatise The General Theory of Employment, Interest and Money John Maynard Keynes argued that markets could never achieve full employment on their own. He provided a coherent theoretic justification for the state to step in to smooth the troughs in the business cycles. This should be achieved through “built-in” stabilizers that would inject money into the economy at the time of falling demand. Keynes did not talk extensively of social security system, but it soon became clear that unemployment benefits fit in well with this scheme. So, the welfare state became part of, rather than a supplement, to state macroeconomic management. Post-war welfare states started offering “a form of retirement insurance traditionally available only to civil servants and a minority of private sector workers through their employers” (Myles 2002:159). And it provided for a heightened sense of cohesion“a social arrangement with apparently few costs and many benefits which included maintaining social stability and fostering a sense of national community and solidarity” (Mishra 1984: 5).
This is why actors of different ideological persuasions joined eagerly in promoting it. For many on the Left, socialism became welfarism, fiscal redistribution taking place of common means of ownership. New Liberals, like Beveridge, had wanted the welfare state to supplement the market, and it worked. Conservative parties were happy to see the strengthening of the state, which the system entailed, and they, just like the liberals, appreciated the social peace.
The necessity of welfare state provisions was briefly discussed from time to time, most notably in 1950s, when there was a sense that growing affluence would make state welfare provision superfluous (Mishra 1984: 2). But the legitimacy of welfare state was not seriously challenged during the first three post-war decades, which saw economic growth unparalleled in history, accompanied by universal welfare gains.
Then, several phenomena brought up a sense of crisis. First came the stagflation of 1970s, which put the efficacy of Keynesian demand management economics in doubt. Traditional measures seemed to be speeding up inflation without helping employment. And with unemployment high, social expenditures increased. Second, towards the end of the 20th century, publics across the developed world had become increasingly aware of the demographic pressure on the welfare state.[9]Thirdly, there are growing fears that globalization puts pressure on the tax bases of developed economies, with the threat that states will be forced to engage in competitive lowering of tax rates, the ‘race to the bottom’, in order to prevent capital flight in the world of highly permeable boundaries. The recent spate of tentative tax cuts in Western Europe has been paralleled by radical moves away from progressive taxation in Eastern Europe – by January 2005, Estonia, Latvia, Lithuania, Romania, Russia, Serbia and Slovakia have flat-rate income tax.
This reflects the fact that, fourthly, as a response to the problems of the prevalent economic measures, but also as result of new technology and management techniques, neoliberal thinking has made inroads into the traditional consensus of mixed economies and the welfare state.[10] While the monetarist alternative to Keynesianism proved unpalatable to most governments (especially after the high cost flirtation with it of the U.S. Federal Reserve Board under Paul Voelcker in 1979-82), the ‘Washington consensus’ of 1990s came to be a powerful policy-forming regime. The French socialist government of Lionel Jospin in 1990s privatized more fervently than its conservative predecessor, and World Bank (WB) blueprints for economic reforms are widely followed, not least in the case of pension reforms, where a 1996 WB document was used as a crib especially in the post-Communist economies. Keynesianism in its core sense, of state manipulation of aggregate demand through money supply, however, is still practiced.[11]
And, fifth aspect, the structure of economies and of production was changing. In 1970s, Daniel Bell laid down his prognosis for a ‘post-industrial’ society, based on knowledge and information technology, increased role of skilled and flexible labour, and the rise of the importance of services.[12] Other similar concepts, following the notion that changes in the production mode deeply affect the social sphere, were proposed. Authors such as Jessop (1994: 14), have used the label Fordism, with its assembly line connotations, to describe the way the economy and, by extension, the society, was organized in the developed world, throughout most of the 20th century.
The insights connected with this concept fit well with the notion of welfare states as nation-states’ risk management mechanisms, and it is worthwile to elaborate on them.
3.3Fordist and post-Fordist economy
In general terms, Fordism is “based upon the dominance of mass production and mass consumption (especially of consumer goods) and massified, semi-skilled labour.” It is characterized by an “increased role for both large scale capital and organized labour”, which is reflected in the importance of collective bargaining. Geopolitically, it was formed under the leading role of the US in international economy, and framed by a free trade consensus and stable exchange rates (Hoggett 1994: 96-7, emphasis added). Politically, the Fordist state had been characterized by a left-right cleavage (attenuated by the consensus on the need to build and sustain a welfare state).