When it comes to Australian public discourse, the association of the Welfare State with the economic left is generally taken for granted. For those of us eager to avoid accusations of intellectual partisanship, it can be an attractive proposition to shirk our responsibilities as economic students and tacitly accept an assumption of incompatibility between prudent financial management and the ethos of the welfare system.
To do so not only disregards the spirit of inquiry essential to a discipline tasked with ensuring the economic health of our community, but also demonstrates a failure to recognise the role the Welfare State has performed in the survival and success of liberal democratic economic systems.
For those of you unfamiliar with it, the term Welfare State refers to those nations with a mixed market economy that deliberately devote economic resources to shielding workers and their dependents from the vagaries of markets. Although they differ substantially in their comprehensiveness and coverage, all democratic societies with developed economies incorporate features of the Welfare State.
So, how did the Welfare State develop as a feature of so many developed economies and why has it become an issue of such contestation?
Characterised by endemic poverty, unemployment and inequality, the Great Depression of the 1930s demonstrated the failures of then dominant economic thought. Its assertion of the inviolability of markets and its intellectual exclusion of institutional, political and behavioural economics prevented it from both characterising the collapse of the financial system and addressing it.
In this environment, Governments contended with the legitimate possibility that the intense material duress experienced by the bulk of the populace threatened to undermine both capitalism and democracy. By the 1930s, the economic strength of Germany and Italy appeared to validate Nazism and Fascism as the manner by which to create and maintain financial stability. Alternatively, the Soviet Union appealed to many as a sort of utopian society for the working individual.
In the United States, a confidant to Franklin Roosevelt declared ‘Mr President, if your program succeeds, you’ll be the greatest president in American history. If it fails, you will be the worst one’. ‘If it fails,’ the President responded, I’ll be the last one’. Indeed, one journalist described a general sense that ‘Capitalism itself was at the point of dissolution’.
Within this context, the contemporary Welfare State was conceived as a mechanism which improved the effectiveness of markets by balancing a commitment to dynamic economics whilst preserving social stability, cohesion and public support for capitalism. It recognised the ability of markets to price goods and services, encourage competition and efficiency but acknowledged the impacts of poverty and inequality and mitigated their socio-political consequences.
A feature rather than an accident of market economics, inequality is a particularly pervasive and destructive force within capitalism. This is by no means an endorsement of its complete eradication. Both theoretical and practical historical evidence demonstrate that the pursuit of perfect equality has disastrous implications for the economic wellbeing of the community whilst inequality in moderation can have positive impacts.
However, the severe level of inequality that is permitted without the redistribution that occurs within a functioning Welfare State is as damaging to economic and democratic health as perfect equality.
An analysis suggests that greater inequality results in markedly worse economic performance. The correlation between inequality and the inability of individuals to invest in education, their health and other productivity enhancing factors undermines the human capital of the labour force. ‘Squeezed’ by financial pressure, the reduction in demand for goods and services results in a decrease in production, unemployment and economic decline.
Amongst those who remain financially secure, the concentration of wealth provides an ability to unduly influence the policy development process. Actions which may be necessary for long-term economic development and stability are prevented due to their potential to impact the wealth of a select few.
Indeed, in his book Capital in the Twenty-First Century, Thomas Piketty highlights how attacks against the Welfare State and the tax system required to sustain it has ‘led to an explosion of very high incomes, which…increased the political influence of the beneficiaries’ to the extent that we are witnessing the re-emergence of ‘patrimonial capitalism’. In Piketty’s view, this ‘strangles’ the entrepreneurial and innovative influence of markets and is only comprehensively addressed through ‘state interventionism’ and ‘redistribution’.
More broadly, it’s essential to acknowledge that the architect of the British Welfare State, William Beveridge, cited liberalism as his guiding philosophical framework. Rather than enhancing the power of the state, Beveridge contented that Welfare States provided a means by which to ‘give ordinary people the security to pursue the lives they chose’. In providing protection from destitution, Welfare States ‘would bolster democratic support for free markets’.
As the experiences of the 1930s and 1940s fade further from our collective conscience, we seem resolved to forget the hard learnt lessons they provided. Attacks perpetrated by successive governments on the Welfare State and its associated progressive taxation system has created a degraded political and economic environment.
For the first time since the 1940s, young Australians face the prospect of having lower living standards than the preceding generation. We have witnessed the return of the poverty cycle, the reintroduction of insecure work and increased inequality. It is no surprise then that the faith of Australians in their economic and political institutions is appallingly, abysmally and unacceptably low.
Rather than continue the dismantling of our Welfare State, Australians must reaffirm their commitment to its comprehensive re-establishment. Naturally, new challenges require a reformed Welfare State, evolved from its 20th century precursor, but the essential lessons of history remain the same. Namely, that support for a dynamic market economy and a liberal democratic polity requires a full throated and vocal defence of the Welfare State and the progressive taxation system it requires.