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The essence of the modern welfare state lies in the institutional commitment to reconcile equity issues with the efficient operation of markets in industrial and post-industrial capitalist societies. Since capitalism institutionally relies on the free competition of autonomous agents in markets to achieve economic efficiency, the unfettered operation of competitive forces is unlikely to result in an egalitarian distribution of economic well-being in society given an unequal distribution of wealth and resources, economies of scale in production, significant transaction costs and imperfect information regarding prices and preferences among economic agents. As an institutional antidote, modern welfare states have developed various policy instruments to realign distributional and efficiency concerns, and to institutionally organize social solidarity in complex and heterogeneous societies.
Historically, the foundations of the modern welfare state emerged in late nineteenth century Europe when governments responded to social upheaval generated by the transition to full-fledged industrial economies. From the introduction of public health and pension insurance in Bismarckian Germany in the 1880s onwards, governments began to recognize the need for institutional mechanisms that ensured mass participation in economic growth generated by technological progress and an intensified transition to the capitalist mode of production. From their roots in the social integration of the working class, modern welfare states have considerably expanded their scope and objectives, and nowadays consist of a broad array of policies and programs – ranging from traditional public assistance to social insurance through pension, health care and unemployment insurance, to service provision to the elderly, families or the unemployed, and a tax system raising the financial means necessary to fund these various instruments of government intervention – that aim to secure adequate standards of living, broadly defined, for an encompassing majority of the population.
However, while similar programs exist in most of today’s most advanced economies, different power constellations and historical trajectories have led to variation in the structure and generosity of welfare state institutions in the western world. Due to strong labor movements and a long history of social-democratic governance, Scandinavian countries feature particularly extensive welfare states that combine universalist transfer systems with encompassing public service systems and a large public sector to provide these. In contrast, Catholic social policy and predominantly conservative governments have created Continental European welfare states that are typically more bent towards regulation, prefer social insurance to universal transfer systems and are weaker on public service provision than their Scandinavian counterparts. In comparison, the interventionist role of welfare programs is traditionally more limited in the USA, and, after significant rollbacks during the 1980s, Britain, Australia, and New Zealand, but also in most post-communist countries of Eastern Europe.
The welfare state constitutes a veritable intervention into private agents’ economic decision-making, and significantly affects the structure of economic incentives and constraints in society. Transfers that compensate for social risk alter the nexus between market income and household standards of living, government subsidies and service provision deliberately alter price structures in the education, health and care sector, as well as households’ market power by providing information, legal services and regulation. There is widespread consensus about the fact that welfare state institutions generate a considerable amount of economic redistribution vertically (from the wealthy to the poor), horizontally (between different groups in society, e.g. from households without children to families with dependent children) and intertemporally (across individual life courses). Besides, important equity effects also result from the redistribution of educational opportunity through public education, stipends and public job training programs. On the other hand, unless properly designed, the availability of benefits as well as the progressive income taxes required to fund welfare state programs could create economic disincentives that reduce economic activity, undermine economic growth and hence question the long-term viability of the welfare state. Finally, the public provision or subsidization of education, health care and social services has created demand for these services, thus providing employment opportunities for women and integrating traditionally female occupations into the formal labor market.
- Barr, N. (1998) The Economics of the Welfare State, 3rd edn. Oxford University Press, Oxford.
- Esping-Andersen, (1990) The Three Worlds of Welfare Capitalism. Polity Press, Cambridge.
- Goodin, R. E., Headey, B., Muffels, R. & Dirven, H.-J. (1999) The Real Worlds of Welfare Capitalism. Cambridge University Press, Cambridge.