The Welfare State And The State Of Welfare: From Beveridge to IDS

Introduction

It was recently the 70th anniversary of William Beveridge’s famous report on the welfare of the UK people (‘Report of the Inter-Departmental Committee on Social Insurance and Allied Services’).

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In it he identified five ‘Giant Evils’ in society: squalor, ignorance, want, idleness and disease. After seven decades the United Kingdom now has a ‘welfare state’ based loosely on the recommendations within this report. On all sides of political debate, from ‘left’ to ‘right’, from statist to libertarian, the welfare state can be seen to have fallen short of the ideals for which it was established. This article focuses on the changes to the welfare ‘benefits’ system that were proposed, implemented and subsequently evolved in the interim period.

The Report

The report’s initial objective was to “survey … the existing national schemes of social insurance” that were available at the time and “to make recommendations”. Existing schemes, surely not? Weren’t people left to die in the streets before the founding of the welfare state, that’s what I was taught at school? Well, surprisingly not; the survey documents considerable legislation. Over the preceding 45 years, beginning with the Workmen’s Compensation Act of 1897, there was a plethora of legislation designed to make certain insurances compulsory. The above act was initially limited to a small number of occupations but was extended in 1906 to cover all, with compulsory health insurance beginning in 1912. Similarly unemployment insurance began for a small number of industries in 1912 but extended in 1920. The Pensions Act came into force in 1908 giving a non-contributory pension to all over 70; this was added to in 1925 by contributory pensions, which also covered widows and orphans. The Unemployment Act of 1934 replaced several earlier unemployment insurance schemes and introduced a national Unemployment Assistance service. Adding to this huge growth in social insurance were medical services, disability assistance, child welfare services (including pre-school), death and ‘other contingencies’. These services were mainly funded by life assurance companies, friendly societies and trade unions.

The report’s authors found the existing landscape “impressive”: it showed “that provision for most of the many varieties of need through interruption of earnings and other causes that may arise in modern industrial communities has already been made in Britain on a scale not surpassed and hardly rivalled in any other country of the world“. The only areas of social care that the committee could fault were healthcare, funerals and maternity. However where they did rail against the existing array of systems was its organisation: “a complex of disconnected administrative organs, proceeding on different principles, found invaluable service but at a cost in money and trouble and anomalous treatment of identical problems for which there is no justification” (as if voluntary interaction needs ‘justification’). They concluded: “It is not open to question that, by closer co-ordination, the existing social services could be made at once more beneficial and more intelligible to those whom they serve and more economical in their administration.” Anyone who has dealt with the Department for Work and Pensions, with its lack of communication and coordination, would question that we’ve made that much progress under a state-centralised system in 70 years. The claim of improved efficiency by providing insurance services through the state is laughable; you don’t need to know about Friedman’s Law to recognise this.

Beveridge and his committee, through the bureaucrats’ rose-tinted spectacles of war, and its necessity to have central control over the economy, saw this wide range of services and suppliers as inefficient, wasteful and uncoordinated. They wanted to impose order: a centralised, government-led system.

Three Guiding Principles of Recommendations

The first principle argued that whilst there had been a working system of social services in the past they should not be afraid to be revolutionary, not evolutionary: “Now, when the war is abolishing landmarks of every kind, is the opportunity for using experience in a clear field. A revolutionary moment in the world’s history is a time for revolutions, not patching.” The destruction of war was used as a lens to see the future, to promote a brave new world.

The second principle was that “social insurance should be treated as one part only of a comprehensive policy of social progress.” Yet again, this is evidence that their aspiration was to design and engineer a new society based on their ideals.

The third principle was that social security must be achieved by a “co-operation between the State and the individual”. The State should “offer security for service and contribution”. (Benjamin Franklin is often quoted as saying: “Those who would give up essential liberty to purchase a little temporary safety, deserve neither liberty nor safety”). This Faustian pact with the ‘State’ required more than just service and contribution though. Amusingly the current critics of Workfare, a system that requires unemployment benefits’ recipients to work ‘for free’ (i.e. for their benefits), would abhor the controls and limits in place in the early welfare state. Most interestingly the third principle goes on to say “The State in organising social security should not stifle incentive, opportunity, responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.” This is shocking in its short-sightedness: the private market in social insurance was quickly destroyed by the implementation of the welfare state, with almost everyone expectant of, and becoming quickly reliant on, the state benefits. After 70 years the current system has inherent traps that even Iain Duncan-Smith’s planned far-reaching reforms, designed to ensure that work will pay, will not resolve. It has systematically achieved the end of personal responsibility over 70 years, in the same way that the universality of the NHS has discouraged primary health care over its lifetime. Fabians and other socialists should have the bravery and honesty to admit this, as a few already have, rather than continue to defend the indefensible.

National Insurance or Ponzi Scheme?

One of the recommendations was that pensions should be introduced to all citizens “without means test by stages over a transition period of twenty years, while providing immediate assistance pensions for persons requiring them.” This was a real insurance scheme, with contributions accruing over time and payouts reflecting the amount paid in; this is unlike the current scheme which pays the current beneficiaries not from their ‘contributions’, nor from the current contributors, but from debt borrowed against the next generation’s contributions. The current system is a Ponzi scheme, a fraudulent and fundamentally dishonest approach, not the genuine insurance scheme recommended by the report’s authors.

Social Security

The proposed scheme of social security had “six fundamental principles: flat rate of subsistence benefit; flat rate of contribution; unification of administrative responsibility; adequacy of benefit; comprehensiveness; and classification.”

Note two key points: ‘subsistence benefit’ and ‘flat rate of contribution’.

The population was to be divided into four main classes of working age and two others below and above working age:

  1. Employees (employed under a contract of service).
  2. Others gainfully employed, including employers, traders and independent workers.
  3. Housewives (married women of working age).
  4. Others of working age not gainfully employed.
  5. Below working age.
  6. Retired above working age.

Classes VI would receive pensions and class V would receive children’s allowances “paid from the National Exchequer in respect of all children when the responsible parent is in receipt of insurance benefit or pension.” Note that children’s allowance was only paid to the children of those on another form of benefit! This would cause uproar if proposed now and contradicts the principle of universality that many believe has existed in the welfare state from the start.

Contributions from classes I, II and IV were to be via a stamp on a single insurance document; class I would require the employer to pay a contribution too, as well as acting as the unpaid tax collector for the employees’ contributions towards the Exchequer. Interestingly contributions were to be “higher for men than for women so as to secure benefits for class III.” New mothers were provided for by a “maternity grant, housewives who take paid work will receive maternity benefit for thirteen weeks to enable them to give up working before and after childbirth.”

Beveridge was against means-testing due to the high marginal tax rates it caused, which discourage work.

Shortcomings

The idea of a centralised system of social insurance comes from socialist ideology, a dogma that the state can better organise, via its inherent bureaucracy, a comprehensive insurance scheme across all of the economy. It wasn’t proposed to replace a failing system, for self-evidently it wasn’t failing, but to fill a few gaps and counter the inefficiencies of the private sector. To design this system with this goal in mind allowed its architects the ability to shape society in the mould they wanted – a Fabian socialist society.

Beveridge’s report was imperfect in many ways, not least in recognising the changes in society towards the family. The evolving role of women in leading and running households, necessary during both wars, and the societal changes in the inter-war period, meant that women’s role in the family had forever changed. However Beveridge still had a very Victorian view of the family.

Beveridge was also a eugenicist, like many fellow Fabians. He believed that while men who could not work should be supported by the state they should suffer “complete and permanent loss of all citizen rights — including not only the franchise but civil freedom and fatherhood.” Can you imagine the furore if a current government minister suggested the loss of franchise for those on benefits? Or worse, limiting their ability to have children? Sadly this is the natural and obvious conclusion of a planned socialistic society, whether socialists recognise this or not.

While Beveridge may be considered to have good intent, to create a comprehensive efficient system of social insurance, he inadvertently created a system that would maintain and increase poverty, entrapping generations in benefits, teaching children that the state, and only the state, can always provide for them.

Outcomes of the current system

There was a major problem with Beveridge’s report: it was written during the middle of World War 2 when Britain was operating (reasonably successfully) a command and control economy, with full employment. He recognised this fundamental flaw and subsequently authored (though this was disputed by Hayek) a book on the issue: ‘Full Employment In A Free Society’ (1944), in which he proposes radical socialist changes from Keynesian ‘priming’ of the economy during periods of low demand, to introducing of wage arbitration to keep down workers’ wage inflation.

The current dispute over capping benefit rises at 1% per annum is a classic example of how much the current system has diverged from Beveridge’s original concept: he would be horrified to think that benefits would rise faster than the wages of those in work; benefits were intended to be a short-term safety net to help people whilst unemployed, not as a permanent replacement to working wages. In fact Beveridge has specifically proposed that unemployment benefit be low so that it didn’t encourage ‘idleness’. The general shock from many of a phone call to Julie Hartley-Brewer’s LBC show, the caller typifying the state-sponsored unemployment that the welfare state has created, demonstrates that many in society don’t understand the dangers of widespread ‘idleness’.

Frank Field MP is renowned as an expert on the welfare system. He was appointed by Blair to “think the unthinkable” about welfare; when he did Blair fired him. The Labour Party wasn’t ready to slaughter its sacred cow and actually do anything about the issues facing the welfare system. Why not? Well many of those who would suffer most under the changes would be traditional Labour voters: political expediency and populism won out over ‘doing the right thing’, addressing the need to change a rapidly-failing system. This brings to mind the famous adage “a government which robs Peter to pay Paul can always depend on the support of Paul” (ironically from Fabian socialist George Bernard-Shaw).

I recently attended an excellent talk by Frank Field on Beveridge, his report and its implementation. Frank is forefront in the Labour Party in admitting that the current system isn’t fit for purpose, its unintended consequences causing as many problems as it resolves. He recounted the story of three young unemployed lads who arranged to attend his surgery to discuss their situation. After arriving 30 minutes late they proclaimed that they wouldn’t get out of bed for less than £300 per week. He pointed out that no one would employ them at that salary as they were effectively illiterate. As they became more heated in their discussion one of the lads leaned across the desk and asked “so you’d have us take immigrant jobs then?”, to which Frank replied “yes, I would!”

Conclusion

We have created a system whereby many indigenous British people of working age see a high marginal cost to legal employment, especially for low wage jobs. As many of these lower-paid jobs are still attractive to immigrants, who come here to work not claim benefits as many critics would believe, these low-paid roles are taken by immigrants who often pay a significant share of their earnings in tax to subsidise the indigenous claimants.

By distorting the labour market with the national minimum wage and the inherently dangerous and corrupt modern welfare state we have come to accept 1-2 million unemployed as the ‘natural level of unemployment’; this is the real price of the current welfare system; millions condemned to the poverty of ‘idleness’ as Beveridge called it.

By not implementing Beveridge’s recommendations as he intended, we have not just moved away from the full employment his system required, but been driven to artificially high unemployment by the very system which was adopted in his name. This system is now unsustainable and will draw heavier on the economy as the population ages, and worse, while generations of children grow up with no working role model in their family.

Any rational person must see that the welfare state, as it exists now, does not represent the aims and ideals of its founders. As a mechanism to protect the unfortunate and promote opportunity it can only be seen to have failed. Put simply, is not fit for purpose.

No libertarian wants poverty or unemployment, despite what our critics think. While socialists won the moral debate how to resolve these issues in 1942, due to many of them within the intelligentsia at the time, their approach has failed and been seen to fail. It’s time for libertarians to reiterate the market as the natural solution to poverty and unemployment. The free market is the only welfare. The welfare state is dead; let us now improve the state of welfare. Without the state.

David Friedman: Law And The State

The third of David Friedman’s evening lectures was hosted by the Adam Smith Institute and held at the National Liberal Club. The irony of the venue and the current state of liberalism in the UK was not lost on the attendees. It was introduced by Eamonn Butler, Director of the ASI, and very well attended – about 130 attendees in total.

Private Property

David Friedman started the talk with a discussion of private property and the old falsehood: that private property only exists because of the state. He used territorialism predating the human race, and not specific to our species, as the proof of this falsehood.

He challenged us with a puzzle: how did we get out of the Hobbesian state of nature? Why do we behave in a peaceful way? He went on to discuss commitment strategies that are mutually recognised by all involved. This approach exists without the state (and his example of parking your car in snow-bound Chicago is very collaborative, with anarchistic overtones). He suggested that he thinks of rights as a behavioural category.

Contracts

His next area of discussion was contracts and the challenge: how do you enforce contracts without governments?

Friedman used as an example Imperial China ceding the island of Formosa (now commonly known as Taiwan) to Japan. Chinese law had no contract or civil law. What we would regard as breaches of contract were treated as criminal (cheating or swindling); they were reported to a magistrate and then pursued as a criminal matter, if the magistrate could be bothered. This resulted in very complex contract interactions. (See his online article for more information here).

David then moved on to cyberspace and how difficult it is to enforce contract law; but as he pointed out there are ways:

Two basic mechanisms:

Firstly he mentioned the ‘discipline of constant dealing’ – if you deal with someone frequently enough then you trust them. If they cheat you then you won’t do business with them again.

Secondly he covered reputational interests. As an example he suggested a vendor that may offer “money back, no questions asked”. If they broke this contractual commitment then the mechanism to resolve this is ‘informational enforcement’ – that is letting others know that you beach your commitments – effectively reputational enforcement.

Other private contractual mechanisms do exist, such as arbitration, which is commonly used in the UK and USA, or deposits, which are effectively holding something of value hostage, for example in escrow.

Law in general

David’s last area for discussion was law in general, that is tort etc.

Friedman stated that a good deal of what is really ‘law’ happens outside the state. e.g. contracts, American Arbitration Service, legal interpretation, a system of norms, etc. He then briefly discussed a number of examples of societies with their own private law, such as the Amish (basically anarchists), Saga-era Iceland and Somali law, which is similar to Iceland.

He also mentioned self-enforced law, such as laws being produced on the free market. This is an interesting area for further discussion.

The State

David then discussed the state and its shortcomings where law is concerned. He described a ‘simple-minded explanation’ of why democracy works (for the state, that is, not for the general populace). The voter has such a low marginal benefit for keeping track of politicians, there is little incentive for individual to monitor them (one in several million chance your vote makes a difference). Where the incentive and ability to compare private systems is possible, this is not the case for public systems; therefore laws under a competitive market are inherently better.

As he stated “we as libertarians believe liberty works” and so we believe that private laws will generally be more libertarian. So, for example, if the people who want to ban heroin can outbid those who want to use heroin then it will be banned; but in a libertarian world this is unlikely to happen.

Friedman then said “I reject the Whig theory of history, that institutions get better over time” and asked the question: “is child protection better under state law?” Children are a difficult case in politics as kids generally have no property or votes.

David mentioned his paper ‘Making sense of English law enforcement in the 18th century‘ as in this period there only existed civil law – the prosecutor was the party offended against. Between 1830-1870 this system changed from no public prosecutors, via paid constables (for the first time) and statutes.

Questions

At the end David answered a few questions, one of which was from Brian Micklethwaite. He asked whether David was still happy with his most famous book Machinery of Freedom. David said “Generally yes”, though he cited a conversation he had subsequent to James Buchanan‘s review on the topic ‘who pays for capital punishment’. In this section he thinks he now has stronger answers to back his position.

The link for the video to this session is available here.

David Friedman on Market Failure: An Argument Both For and Against Government

The second of David Friedman’s recent lectures in London was called ‘Market Failure: An Argument Both For and Against Government‘ and was held at the Institute of Economic Affairs on Tuesday the 15th January.

David started by clarifying what he believed was a market failure, as in his view many commonly held examples are incorrect.

Again, as with the previous lecture, Friedman described how resorting to using the state in certain market failure circumstances would be the best course of action if the state was a ‘perfectly wise and benevolent regulator’. As he points out there is however a shortage of perfectly wise and benevolent regulators. He then elaborated on this point with his hypothesis, and supporting evidence for it, that the state itself is a form of market failure. The one thing that protects from market failures, he said, is property rights.

David stated that politicians have insecure political ‘property rights’ as their tenure is limited by the next election. They therefore always care about short-term effects, that is changes that can be effected before the next election; anything beyond that is significantly less important as it may not be their responsibility. To win the next election they have to appeal to people now, on current delivery, not with promises of wealth in the future (note this ‘time value’ of political delivery is the same effect as used in calculating interest-based decisions, such as return-on-investment and pricing of options).

Friedman also covered his view that tariffs transfer wealth from disperse to concentrated groups. He saw that this transfer in wealth via government tariffs and other taxes is an endemic market failure of the political market. He reiterated his view (and his father’s) that on balance government causes more problems than it solve, even with extreme examples such as poverty. To support this claim he mentioned a few example mechanisms that make overall poverty worse: minimum wage laws, immigration controls and other barriers to entry (e.g. licences).

At this point David mentioned the old protectionists favourite metric: the balance of payments deficit. As he pointed out “you can build cars in Detroit or grow them in Iowa: send wheat off on ship into pacific and it comes back with Honda cars on them”.

As with all three of David Friedman’s London talks during his visit it was interesting and informative; in addition David’s love of classic mythology and historical examples of successful libertarian societies are used to illustrate his talks.

For more information on David Friedman’s views on market failure and how this can be dealt with without a government there is an interesting paper of his here.

I will put the link to the video live once it appears on the IEA’s website.

David Friedman on Global Warming and Externalities

The renowned economist David Friedman, author of Machinery Of Freedom, is currently on a European speaking tour. He is presenting three talks for three hosts on successive nights; I plan to attend all three (he’s been a hero of mine since I read the above book at University in the mid-1980s). The first talk was on ‘Global Warming’ and externalities.

David first talked about population growth and externalities associated with it, outlining the premise that although it has typically been thought to be a bad thing, due to the negative impacts brought by it, it also has positive impacts. As these positive impacts don’t often fit our mental model and preconceptions (prejudices) about population growth, we usual ignore them. His early economic work 40 years ago looked in detail at this issue and attempted to quantify the net positive and negative impacts. What he found was that most factors were impossible to quantify, or even sign (decide if they were positive or negative). This is hardly surprising given the complexity of the system and its variables; like forecasting weather and climate there are too many interacting variables that are themselves often unquantifiable (it’s worth reading James Gleick’s Chaos for more understanding on this).

So having established his premise that it is impossible to quantify the impacts involved in population growth, and therefore conclude whether it’s ‘good’ or ‘bad’, Friedman moved on to the main topic: global warming.

I am pleased to say that as someone with a science-based background (physics), David was more positive about the climate science research that many libertarians I know dispute. While he recognises that climate science does have a vested self-interest in provoking governments to spend more on research, he doesn’t seem to be in the Delingpolean camp that believes all climate scientists are Eco-socialists that want to resort to an imaginary idyllic agrarian economy of the Middle Ages. I disagree strongly with these tin-foil-hat-wearing conspiracy-theorists; maybe that’s because I come from a science-based background and am therefore more rational about this topic. Amusingly a couple of the said conspiracy-theorists were there and asked questions that indicated their prejudices; Friedman disappointed them by mostly not agreeing on their points.

David’s main points on global warming were:

  • Yes, the climate is warming, as climate scientists mainly agree;
  • Yes, one cause of this is carbon dioxide, though there are many causes (e.g. Water vapour) and not all are quantifiable in their impact;
  • Yes, many of these changes probably have anthropogenic causes;
  • Yes, there are many negative impacts of climate change, but there are many positive impacts which are often ignored in the calculations;
  • Yes, carbon taxes and carbon trading schemes can control some of the increase in carbon output, though there are many economic faults with these schemes that prevent them from working as planned.

One of the points David made will almost certainly have the Eco-warriors up in arms: that there are probably more positive impacts than negative impacts to a small increase (e.g. 3°C as IPCC suggests) in temperature over the next century. As he suggested the increase in habitable and productive arable land will almost certainly outweigh the land that becomes marginally less habitable or less productive for farming due to the distribution of land in the world. While this is obviously true I have a reservation about this. Due to chaotic fluctuations this transition may not be smooth: there could be catastrophic impacts to some areas, such as Bangladesh as he highlighted. His solution was to build dykes as successfully used in Holland starting over 2000 years ago (approximately 27% of the Netherlands is below sea level).

Whilst this may be difficult for poorer Bangladesh they do have a significant labour force so this isn’t insurmountable; also richer countries nearby may want to help fund this to prevent a considerable refugee problem. Another larger chaos-driven change that could occur due to a relatively minor rise in global temperatures is the movement of the Atlantic jet stream, which warms Western Europe.

There is a theory, yet unproven, that the ice melt from Greenland could alter the salinity of the North Atlantic sufficiently to move the jet stream south, thereby dramatically dropping the temperature in Europe and making much of the northern latitudes uninhabitable for all but the most hardy. The thought of hundreds of millions of relatively-wealthy Europeans becoming homeless in a short period would be catastrophic. Interestingly this scenario was proposed by influential science fiction author Stanley G. Weinbaum in his short story ‘Shifting Seas’ published in 1937; he rightly suggested it could provoke mass migrations and subsequent wars.

These issues were not answered during the session but do need to be included under the ‘low-risk/high-impact’ category that David referred to.

Sadly David did not have any magic solution to propose that would provide more effective controls over output pollutants, recognising that even in an anarcho-capitalist society that these externalities associated with public goods will always be problematic (e.g. due to free riders).

The session was video-recorded via the hosts, the Libertarian Alliance, and available to view here. Many of David’s works can be found on his website, including a downloadable copy of Machinery of Freedom.