What are the appropriate objectives of welfare policy in the modern economy and state

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Andrew Nutter Economics Mr. Jobblings

amfn2@cam.ac.uk 08/08/18

What are the appropriate objectives of welfare policy in the modern

economy and state”

In today’s modern economy and state, the public often sees welfare, and in particular the Welfare State, as narrowly as the National Health Service. For the purpose of uncovering the modern objectives of welfare policy, I believe it is important to go far beyond this interpretation to find the fundamental notions that have moulded “welfare” provision into its present shape and form. The first question one can ask is what is really meant by welfare. At the most basic level, the dictionary would see it as;

Well-doing or well-being in any respect; the enjoyment of health and the common blessings of life; exemption from any evil or calamity; prosperity; happiness.”1
According to this definition, welfare is clearly a state of existence which individuals and society as a whole should aim for, but as with any ideal, remains subjective and individual. One man’s happiness cannot be measured nor can it be a reached by every other individual in society given the same set of constraints. There are more important implications for this when we consider welfare provision as a duty for the government, i.e. welfare changing from a subjective individualistic notion to a moral social obligation. Most modern liberal societies place considerable value on the notions of freedom and liberty. If the rights of the individual are central to liberty, as defined by an editorial in the Economist, that “men and women are entitled to live their lives as they choose […] provided their choices do not harm others”, are government obligations always compatible with this form of liberty? Such a definition of liberty inevitably fosters a moral relativism which, instead of being compatible with the moral burden of welfare policy, actually threatens to loosen social bonds. It was this kind of laissez-faire concept of liberalism that Thatcherism swore by and allowed the Conservative government to be so hostile to substantial government intervention and the Welfare State. The other rival concept of liberty is also individualist, but holds that individuals need and seek close ties with others. It emphasises the bonds of mutual identification found in people and creates the possibility and the need for individuals to take the welfare of others into account. This definition, contrary to the previous one, therefore “allows” the government to maintain a level of welfare, by relieving poverty for example, while maintaining individual liberty. This notion of liberty is in perfect harmony with the new government as exemplified by Tony Blair stating at a party conference “I tell you, a decent society is not based on rights. It is based on duty. Our duty to each other”. On the other hand, the downside to the definition is that it can tend towards an oppressive moral absolutism, thereby damaging the running of a democracy.

The reason I think it is important to set out the basics of the notion of welfare in such detail is that it directly affects both how the welfare state is perceived politically and how welfare policy is implemented. Indeed, different governments may pursue objectives according to which definition of liberty they fundamentally believe in and, due to the rapidly changing socio-economic environment, it is relevant to many modern states and economies.

Before discussing the modern objectives of welfare policy, it is just as important to establish the framework and primary objectives of the Welfare State as is inherited by all British governments. The Welfare State, if it is to be defined, is often assimilated with William Beveridge and the after-war period. In fact, defining it with this constraint is pointless if older versions of welfare provision such as the Poor Law Act of 1601 and ancient Christian charity are taken into consideration. Instead, we can say that a Welfare State is just a means of increasing welfare for those in need and what must be looked at are the aims and methods of improving welfare. Historically though, the Beveridge report was a best seller not because it offered something uniquely new, but rather because it identified issues which affected most of British society in the after war period. In the report, Beveridge declared war on the five giant evils of Want, Disease, Ignorance, Squalor and Idleness. The solutions to remedy these evils where considered novel as they replaced the old and haphazard methods with a coherent strategy embracing social insurance, family allowance, national assistance and the National Health Service.

Why was this strategy implemented and, just as importantly, did it embody the fundamental objectives of welfare policy? There are, I believe, four distinct aspects we can look at to justify such a Welfare state, some moral and some purely economic; these are the humanitarian explanation, the full employment assumption, the popular and comforting nature of the package and the efficiency argument.

The humanitarian explanation is by far the most subjective of the four and is probably the only one to have existed from the very beginning of welfare provision. It is subjective because an individual’s level of consideration for fellow human beings varies greatly and is always going to be affected by history, society, religion, level of development etc… One can nevertheless recognise a minimum “level” of compassion felt by the vast majority of society towards fellow citizens; people dying of starvation or epidemics whilst the basic standard of living included a car, television and dishwasher, for example, would be unacceptable to most. Although there is no analytically satisfactory way of calculating the minimum standard of living, economists and social scientists use the normative term “poverty line” to define it. Welfare policy should therefore support standards of living by attempting to ensure that no one fell below the poverty line. Another aspect of the humanitarian explanation for welfare provision is whether or not this poverty line is dynamic and relative. I.e. whether or not the poverty line increases in line with economic growth and whether or not equity is an issue. If the poverty line increases proportionally to growth, then the poverty line would be measuring relative poverty, what most people would consider enough to live a just about bearable life, and not absolute poverty, the bare minimum to survive. Most modern capitalist economies have indeed almost eradicated absolute poverty, but generated substantial relative poverty. The last aspect of this explanation is the social cohesion and integration objective of welfare policy. How should the dignity of the recipient be taken into account? Although we have moved a long way since the advocated use of “correction houses” to shame and stigmatise the recipients under the Poor Law Act of 1601, it is important to strike a balance between culturing dependency and maintaining or even reinforcing social cohesion. Many commentators, including Beveridge, emphasised the broader social nature and objectives of policy; “the individual […] can feel that he is getting security not as a charity but as a right”. (1942 Beveridge Report)

The second aspect capable of justifying the 1950’s Welfare State is more a historic one based on the economic environment at the time, and in particular, employment levels. The Beveridge Report needed the tremendous planning power transferred to the State during the Second World War to make three assumptions: that a scheme of family allowances would be set up; that there would be a comprehensive health care service; and, crucially, that the state would maintain full employment. This last assumption was expressed at a time of when the reconstruction of the whole economy was necessary and hence high levels of employment were insured. Moreover, government used Keynesian demand management policies based on the assumption that consistent economic growth would preclude high unemployment.

The third aspect is the acceptance of such a Welfare State by the electorate. The package was both popular and comforting to a society ravaged by war and the memory of the hardship of the 1930’s. The Government would paternalistically offer insurance in the form of a safety net to prevent or attenuate such hardship. Opposition was confined, with certain members of Churchill’s cabinet fearing the practical implications of the Beveridge Report; Kingsley Wood, the chancellor, begged Churchill to delay publication on the ground that Beveridge’s scheme involved an “impracticable financial commitment”. But the momentum of Beveridge’s claim and the public reception of these ideas shaped the Welfare State into something sacred which has survived for more than 50 years. In Beveridge’s humble words; “Beveridge is not the name of a man; it is the name of a way of life, and not only for Britain but for the whole civilised world.”

The final argument is a purely economic one; that welfare provision increases total social welfare by using resources more efficiently. If the economy can be visualised as a production possibility curve, it is assumed market imperfections create inefficiency, leading to a final production point within the boundary. The labour market is one such imperfect market and the unemployment, and in particular structural unemployment, generated as a result can be seen as wasted human potential. The provision of merit goods, such as education and health, can also be argued for along the lines of efficiency. The provision of education, left to the free market, would be insufficient and have moral implications if wealthy children where disproportionately represented. Giving education to every child, free at point of delivery, not only solves the equity issue; it also increases the value of human capital and carries long term benefits by generating a more productive workforce.

We have now looked at the basic notion of welfare and analysed the foundations of welfare policy both through a critical historical context and through an overview of the fundamental objectives of policy. We are now intellectually armed to look at how welfare policy has had to adapt and how it is straining under new conditions.
The mid 70’s where the acid test for the Welfare State, with stagflation and rising unemployment putting enormous pressure on the welfare budget. The 1944 employment White Paper committed the government to employ counter cyclical demand management. When this failed to reduce unemployment and inflation, the Keynesian orthodoxy was smashed and supply side policy, under the guise of Monetarism, made a strong comeback. In contrast to the 1944 paper, the 1985 employment White Paper argued that unemployment should be tackled by reducing inflation, through wage restraint and through improving the supply side of the labour market. This dramatic change in ideology immediately clashed with the fundamental assumption of full employment in the early version of the Welfare State. Monetarism eventually succeeded in reigning in inflation and returning the economy to trend growth, but unemployment levels have remained historically high since then. Also, new concerns have been emerging over the years linked to an ageing population and the spiralling cost of new health provision and pension. On the whole, the system devised when most people lived in nuclear families, supported by a sole breadwinner with a job for life, seems unsuited to a world of one-parent families, job insecurity and higher unemployment. Change is thus necessary, but have the aims of welfare policy in a modern state and economy changed from the fundamental objectives of Beveridge’s Welfare State? Or is it the methods to reach these objectives which have changed?

Generally speaking, the primary objectives of welfare policy have not been radically changed in recent times. They still seek to support standards of living through the relief of poverty and to ensure the supply of vital social services such as the NHS and education. Changing times have instead modified the scope of some of the objectives and raised issues as to how the delivery mechanisms should operate.

The main concern of recent governments has been to trim the cost of welfare (roughly 20% of GDP), amounting to at least half of total government expenditure. The Conservatives in 1979 brought in a market oriented liberal ideology to “roll back the frontiers of the state” and such a high level of government intervention was deemed unfavourable to the optimal functioning of the economy. However, reforming the Welfare State with the aim to curtail its scope is a politically dangerous thing to do; hence the main aim of reforms being to make the system more effective. Welfare provision should therefore be provided using resources efficiently and the welfare created should obviously be greater than the opportunity cost of using those resources elsewhere. The modern state recognises the possibility of reaching these goals through the use of a combination of public and private provision. Pensions, for example, have three arguments in favour of the greater efficiency of private funded pensions over public ones; First, funding through public provision, even if ring-fenced, is always risky in the hands of politicians eager to raid the fund to finance current expenditure. Second, private schemes encourage innovation and efficiency among providers and thirdly, individuals funding their pensions out of accumulated savings rather than current taxes are encouraged to work harder.

One problem perceived by writers such as Rawls to emerge from this constant search for efficiency gains brings us back to the initial purpose of welfare provision, and in particular inequality reduction. At the simplest level, assume the result of policy was a Pareto improvement, one individual being better off as a result without making anyone worse off, do we need to worry if this individual is rich? If the individual were rich, then Rawls’ principles of social justice would oppose the policy on the grounds that it would be accentuating inequality. I do not believe such an argument is even necessary, as the purpose of government policy should always be to increase social welfare in the long run. Besides, the individuals new welfare could be shared, in the name of social justice, through taxation rather than lost altogether; the appropriate objectives of welfare policy must therefore be achieved in the most efficient manner.

The final difficulty in realising the objectives of welfare policy is the emergence of a relatively new culture of dependency. The complexity of the Welfare State has indeed created a series of unemployment and poverty traps where benefits can actually fall away at a higher rate than new income, removing any incentive for claimants to work. This is both a large cost to government and, returning to the efficiency argument, a great loss of human potential. Even disability benefits, which have quadrupled in real terms over the last 20 years, are under attack for cultivating dependency; many disabled still being capable of doing some sort of work. The newest objective for welfare policy in the UK is the Labour Government’s attempt to break the dependency by making benefits harder to qualify for and helping claimants into work. In this sense, and echoing Harold Macmillan’s intention, government is providing both a safety net and a ladder to reintegrate the unemployed into society.

To conclude, we have dissected welfare policy to reveal its fundamental components and shown how the history behind the British Welfare State steers some of the modern objectives of welfare provision. At the most basic level though, welfare policy is born out of a subjective notion of human compassion and an economic one of efficiency and utility maximisation.

Hence the objectives of welfare policy are to support standards of living through the relief of poverty, to ensure the supply of social services either not adequately or not at all provided by the market, to act as a mechanism to deliver social justice and equity and lastly, to promote social integration and cohesion. To be effective, these objectives must be reached in an economically efficient way, avoid dependency and preserve human dignity and individual freedoms.

In the last 20 years, the Welfare State has had to be adapted to cope with new demands and a rapidly changing socio-economic environment. The Labour party has promised to “think the unthinkable” and reform the Welfare State along the lines of its “third way” politics; i.e. not necessarily old socialist ideals of having an even stronger and all-encompassing Welfare State, but to a slimmer and even more effective system of “empowerment, not dependency”.

The modern state and economy of today is clearly one which promotes free markets and individual liberties whilst maintaining the original vision for welfare provision. The current Labour government is indeed implementing policies to reconcile these sometimes conflicting objectives, through packages such as the New Deal and private pension provision. The new objective for welfare policies which is slowly crystallising is the need to transfer the responsibility of welfare provision from the state to the individual; a sometimes harsh intention epitomised by Tony Blair’s vivid oxymoron, “Compassion with a hard edge”.

1 Source: Webster's Revised Unabridged Dictionary (1913) [web1913]

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