1088 Budapest, Rákóczi út 5.; Tel: (36 1) 381 23 47; E-mail: Ez az e-mail-cím a szpemrobotok elleni védelem alatt áll. Megtekintéséhez engedélyeznie kell a JavaScript használatát.
Schriftenreihe des Europa Institutes Budapest, Band 19:17–23.


The Welfare State; Crisis and Solutions


Throughout Western Europe the welfare state has emerged after World War II. Less advanced state socialist Central and Eastern Europe also created its much poorer but yet generous welfare institutions. During the 1990s, nevertheless, both welfare systems were challenged. Several politicians and scholars are speaking about an unsolvable crisis and ringing the death-knell of the welfare state.

Among the causes of the crisis two factors are being usually mentioned; one is the murderous, world-wide economic competition compelling every country to participate in a globalized free-trade, which demands the reduction of social spending for better competitiveness. The other major cause usually being mentioned is the change in demography; this concerns the general decline of the number of people, the overall increase in life expectancy, – reaching between 76–78 years– rapidly increasing the number of old folks who are no longer productive and significantly reducing the ratio of the productive, active population. It is asserted that this process places increasingly intolerable burdens on society that it is unable to assume. If current demographic trends continued, expenditures paid to pensioners, for example, will double during the next two decades.

An additional problem is presented by the significant increase of the number of immigrants and the layers of society in poverty. All these generate increased social expenses and reinforcing tendencies to exclude them from society; in Western Europe about 50 million people lived on less than half of the average income level. In the former socialist states, busily adjusting to the market economy, the number of people excluded from society is especially shocking, reaching one-third to one-half of the population of various countries.


Emergence of the Welfare State

In order to examine the reasons for the questioning of the concept of the welfare state, let us examine the circumstances of its birth and characteristics. The roots of this type of state go back to the end of the 19th century. Bismarck, the “iron chancellor” of Germany, had quickly realized during his struggle against Social Democracy that its suppression backfired and gradually turned the Social Democratic Party into the largest political organization in his state. He wanted to take the wind out of the sails of the social democrats by expropriating the party’s welfare program; this was the origin of the world’s first compulsory health insurance system introduced in 1883 in Germany. It was followed by the introduction of compulsory industrial accident-insurance in 1884, and the establishment of the world’s first system of pensions and disability insurance in 1889. All these were not the result of the recognition of citizen’s rights, but of the effort to undermine the mass-appeal of social democracy and was aimed exclusively at industrial workers.

Yet the international impact of these policies proved to be striking. The Swedish king established a committee in 1884 for the purpose of studying the German system, and his example was imitated the following year by Denmark. Between 1891 and 1913, health and accident-insurance by the state have been introduced in all Scandinavian countries and later a system of old-age pensions has also been created. In these countries welfare legislation was extended to cover the entire population.

However, the real development of the welfare state has gained speed during the Great Depression and the years of World War II. The depression created hitherto unknown depths of misery and large pools of unemployment, and forced the developed Western democracies into competition with the supporters of extreme right- and left-wing populism. In the United States where welfare institutions had been unknown until then, President Franklin D. Roosevelt declared; “Democracies must prove that their governments are willing to take responsibility for the social security of their peoples.” Consequently, he introduced the institution of “social security.” But the first true welfare state had come into existence in Sweden under the leadership of the Social Democratic government, in 1932.

World War II has given a great further impetus to the realization of the principles of social solidarity. The American writer, John Steinbeck, working in Europe during the war as a military correspondent, reported in 1943 that “simple people have learned a great deal...they want to be liberated from the slavery of wants, they want to have the state ensure that their children will have schools and their families have health insurance after their return from the fronts.” The West European welfare state has emerged from the experiences of social solidarity during the war and the misery of the 1930’s and 1940’s. The expression of the “welfare state” was coined by British Archbishop Temple, who contrasted the “welfare” commitment of the Democracies to the system of “warfare” of dictatorships the latter of which was based on coercion and war.

The first comprehensive plan for welfare laws had been developed by Lord William Beveradge, a member of the conservative cabinet of Winston Churchill, in a famous report issued in 1942; “The goal of military victory,” he stated, “is that we should be living in a better world than before. We must be liberated from wants.” The report stated that every citizen should be able to receive free medical care; families must receive child support; the older generation should be able to obtain pensions providing them with a secure existence.

This was the origin of the introduction of all-encompassing welfare legislation between 1945 and 1948, realizing the plans provided by the Beveridge committee. This was a time in Great Britain when food was still being rationed and the population was still experiencing hard times. Thomas Humphrey Marshall, nevertheless, formulated the principles of “social citizenship” in a lecture at Cambridge University in 1949, in which he declared that individual and political freedom, followed by social security, were the rights of citizenship.

Similar welfare institutions were introduced in Belgium, France, Switzerland and West Germany. These states reformulated the rights of citizens which now included the right to welfare support. The sphere of entitlements has been continuously expanded, paid vacations grew ever longer, working time was continuously shortened, free education, free health care and pensions became citizen’s rights. At the same time, retraining became free, maternity leave was granted for women after giving birth, rents were subsidized and many other benefits were provided. (State socialism has followed this precedent, albeit it had fewer resources for the purpose.)

We should not separate this process form the impact of the cold war. Beside economic and military competition, there was also a welfare competition between the two parallel world systems confronting each other. The West, by creating “capitalism with a human face,” competed with the principles of equality proclaimed by state socialism and, since the latter was installed in poor states, it competed successfully with its rival. Compared to social expenses before the war, welfare expenses in Italy increased by 14 times, in France six, and in Sweden seven times by 1957. In Western Europe as a whole the states spent four times as much on welfare than before the war. At least between 40-50 % of national income was spent on welfare-related expenses.

The welfare state attempted to achieve social equality by introducing high taxes and redistributing wealth. As a consequence of free welfare entitlements and progressive taxation, income differences were significantly reduced; for instance, in Sweden and Denmark, 5 % of the population in the highest income brackets had received 27–28 % of total incomes in 1939; by 1964, this was reduced to 17–18 %. In Great Britain similar income groups received 30 % of the total income before the war. Their share was reduced to 19 % by the 1960s. One-fifth to one-fourth of individual consumption was financed by the state budgets through the redistribution of income.

We have to answer three important questions after having briefly summarized the historic rise of the welfare state:

– 1. Is it true that the “luxury” of the welfare state can be sustained only by rich countries and, even there, only at times of great prosperity?

– 2. Does the assumption of social expenses by the community or the state decreases the competitive edge of the welfare state?

– 3. Does the operation of the welfare state, furthering the tendencies of equalization, impacts exactly those strata of society who are the pillars of accumulation on account of their higher income, and thus puts a break on the possibility of further economic growth?


The functions of the welfare state and its impact on economic growth

Concerning the first question, even the short historical review makes it quite clear that the historical process leading to the emergence of the welfare state had began at the time when the respective states struggled with economic depression and war. At the end of the 19th century when Germany introduced basic welfare legislation, she had an average of $ 3,000 per capita GDP at comparable 1991 prices. Sweden had a GDP of $ 3,000–5,000 between 1932 and 1939, at the time when welfare institutions were introduced. Western Europe as whole had $ 5,000–7,000 per capita income between 1950 and 1960, when the welfare state was universally established. The states of the Mediterranean region and Central- and Eastern Europe had lagged somewhat behind; they had anywhere between $2,000 and $7,000 per capita income between 1950 and 1973. This meant – since we are talking about comparable prices – that they were in a similar income zone as Sweden, West Germany and Western Europe in the 1950’s when the welfare state was created. In this sense, therefore, we can hardly speak of a premature birth of the East European welfare state, or that the region’s states could not afford such luxuries.

The second question, weather the assumption of social burdens has retarded economic growth, requires a similarly quantitative analysis. It is very suggestive from this point of view to compare the United States of America with Western Europe. The USA did not build up a welfare state, and increased per capita income by 60 % between 1950 and 1973, while Western Europe increased it by two-and-a-half times, or three times as much as the US. Between 1950 and the turn of the millennium the USA achieved economic growth of 286 %, while Western Europe had 390 % growth in the same time period. These facts, therefore, disprove arguments supporting the myth that the welfare state retards economic growth.

The third question is especially interesting; namely, whether the state that taxes the well-to-do and redistributes income, a state that promotes policies for income equality, faces economic drawbacks? In answering this question, I rely on the researches of Nicholas Barr whose results were recently published. He separated two fundamental functions of the welfare state in an ingenious way. He called the process by which the state took funds away from the rich and gave them to the poor the “Robin Hood function,” while he called the other activities of the welfare state the “piggy bank function.” The latter is a redistributive function but not among the various social strata, but within the life cycles of individual citizens. This means that the state takes away funds from individual citizens in order to finance certain welfare institutions to return the amount to the same citizens. For instance, in order to secure pensions, the state takes away funds from citizens at the time of their midlife cycle and returns the money at a later time. In financing free education, the state proceeds in a similar way; it takes funds from citizens in midlife but it returns the funds at a later stage in life for the next generation’s education. This latter function may be considered to be a process by which the citizen places his funds in a “piggy bank,” and takes them out when necessary. According to the calculations of Jane Falkingham and John Hills, two-thirds of the funds used by the British welfare state are acquired through income-redistribution within the individual’s life cycle, – in other words, from enforced savings– while the “Robin Hood function” consumes only one-third of the expenses. This ratio may be considered valid for the entire region of Western Europe.

The political opponents of state intervention and the welfare state – Ronald Reagan, Margaret Thatcher, George W. Bush, to mention the best known opponents of such policies – have asserted and continue to assert that instead of paternalistic intervention, these issues must be treated as a private matter and trust the independent judgment of people to handle their own affairs. However, the individual cannot plan for decades ahead and does not possess the appropriate information for his decisions. The risk is too great and there are a lot of uncertain factors influencing long-term decisions. The privatization of welfare institutions, including the establishment of private schools, private health insurance and pensions, will inevitably lead to fall out of wide strata from the protective nets of welfare who will be excluded from society. The supporters of such policies argue that this is a private matter, and these people should have been more foresighted. However, it is not really a private matter, since the homeless would also have to be taken to hospitals when sick, their children must go to school, etc., and in the final count, other forms of social care would be necessary.

I do not mean to say that the inhumanity of long workdays and only two weeks of vacation time a year, will not lead to greater productivity and accumulation of wealth. I am not saying that free schooling and health insurance will cost the state less than if all these matters were taken care of by individual citizens. Of course not! But I seriously believe that a certain level of equality and security promoted by the welfare state is the force that creates a balanced internal market, which plays the role of inducing long-term growth. It is an economic common place that if social polarization was extreme, the greater the number of poor people and of those who are excluded from society, the more fragile and vulnerable the economy becomes, and long-term economic growth is stunted. Let me support this theory with a few data; the income of the upper 10 % of society in Japan, Korea and Sweden is, on average, eight times higher than those of the lowest 20 %. This difference in Germany, Holland and Great Britain is 9–10 times, in the USA the difference is 15 times, in Brazil it is 20 times, in Mexico and Venezuela 25 times. In fact, states where income equalization is in place, did not suffer disadvantages; they had even acquired certain advantages.

It is worthwhile to examine the situation in Western Europe as it had existed in 1973. In spite of the challenge of the welfare state, the fundamental welfare institutions did not encounter significant problems and in many cases their expenditures were even increased. In the Euro-zone of the European Union, (in eleven states) social welfare expenses increased 13 % per capita – in Ireland, the increase was 35 % – and expenses of child and family support jumped by 56 %. It is well known that, in the meantime, Ireland that had only 58 % of the average per capita income of the Union in 1973, has reached the level of the Union, and had even become one of the richest countries of Europe. In Italy and France welfare expenses increased by 31 and 25 %.


Is there a Crisis of the Welfare State?

The question may be raised; “is the European welfare state really in crisis?” I agree with the opinion according to which there is no crisis, there are only problems needing new solutions and these can be found. It is true that there is a need to trim some excessive entitlements that have reached the level of luxuries. One must also pay attention to demographic dangers and a solution must be found for them.

The criticism of the welfare state in our times is not really based on facts, but on political convictions founded on mythologies. One of these myths, based on some facts, has been that in 1973, at the time of a structural crisis, the USA could adjust to the transformation of the technical-structural demands faster and more successfully than advanced Europe. But this success was based on many factors, including an especially high economic productivity, a special social flexibility which had a historical tradition, and especially low wages in certain economic sectors, which were the consequence of continuing mass immigration. The neo-liberal school of economics declared all this to be the triumph of the free market, undisturbed by state intervention, and asserted that it was the only correct policy that must be followed.

The Austrian-British Friedrich Hayek, the archenemy of Keynesian economics, proclaimed his conviction that the only task of the state is to protect individual freedom, the freedom of the market and of competition – nothing more. For him, political freedom and a free market were inseparable preconditions of each other, and as he expressed this idea in the title of one of his books, state intervention “is a road to slavery.” The American Milton Friedman proclaimed in 1977 that the politics of the New Deal of Roosevelt was “the road leading away from a free society which, if it continued, America would lose its fight for freedom.” Friedman characterized the philosophy of the welfare state as a process sending the police to confiscate the money in the pockets of other people. Friedman suggested in a lecture that a very low flat rate of taxes of 16 % should be introduced for everyone, which would cover minimal state expenditures. This step should be accompanied by the privatization of almost all state functions, making families and individuals responsible for education, health insurance and pensions.

These views have been glorified by Nobel Prizes, which both Friedman and Hayek received in the 1970’s. Their political supporters have been busily implementing their suggestions. There has been an ardent competition in the world for deregulation beginning in the 1980’s. George Soros called the feverish political ideology of the deregulators “market fundamentalism,” which placed finance capital in the driver’s seat. Market mechanism and the profit motive, argued Soros, were expended into spheres of life where they had no justification to be. Perhaps it is surprising to have a multi-billionaire financial entrepreneur condemn politics and the medium in which he rose to prominence. “The supremacy of the market which is proclaimed with ideological fervor,” stated Joseph Stieglitz, the former chief economist of the World Bank, another Nobel Prize winning economist of Harvard University, “is a dangerous mistake.” Stieglitz considers the role of the state, its regulating activities, to be necessary, and believes that market mechanisms are unsuitable means for the solution of social problems.

However, for the market fundamentalists the welfare state is the source of troubles, an anomaly that has to be stopped. The concept of the crisis of the welfare state and the proposals for its discontinuation originate from such a world view. It is true that economic and social changes demand the rethinking and reform of several elements of welfare institutions, but this does not mean the questioning of their existence and the possibility of their adjustment. In my opinion, the welfare state is the greatest social achievement of the twentieth century.


Presentation delivered at the Europa Institut Budapest on March 17, 2003. The author is past president of the Hungarian Academy of Sciences and the ICHSC (International Committee of Historical Sciences).