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The Welfare State and a Human Future

The welfare state was derided as Bolshevism. "The welfare state ultimately broke down in the failure of social democracy. Businessmen succeeded in avoiding union and state distribution policy through increased rates of inflation. Instead of checking the autonomy of capital, distribution policy was abandoned for combating inflation."
The Welfare State and a Human Future

By Karl Unger

[The struggle against the welfare state has nothing to do with economic rationality but rather with a sound class instinct. Blackenburg and Schui explain this in their excellent book on neoliberalism. This article published November 5, 2002 in: junge Welt is translated from the German on the World Wide Web,

The situation is dramatic and the perspectives are depressing: evisceration in the social treasuries, rising mass unemployment and a growth of the economy that isn't real growth. The generation of Brandt, Kreisky and associates with their so-called welfare state, nothing but a kind of western Stalinism, is responsible for the immense state deficit. Its consequence is a deformed person, not only a deeply indebted and blocked state that the modern social democrats must now strenuously deregulate.

Blair and Schroder are self-critical and admit their parties are responsible. "We have too often put aside the values important to citizens like personal achievement and success, entrepreneurial spirit, personal responsibility and public spirit - behind universal security orientation." The so-called leading thinker Bodo Hombach knows: "Any job is better than none! Work, even poorly paid work, is more conducive to dignity than any luxuriant social transfer. That is pure neoliberalism. For twenty years, this ideology amid all detail criticism was regarded as a practical prescription without alternative for mastering economic problems. What is most amazing is that its propagandists still pursue the welfare state branded by them as a dead dog with enormous expense driven by hatred. Do they believe that the world cannot be different than it is because modern capitalism is the result of human evolution? Or given the instability and crisis proclivity of the capitalist world system, do they fear that they could end up like the neoclassical economists? For decades, these economists proved "scientifically" the superiority of capitalism to land finally as useless duffers in the political offside. Both theories are different in many regards though they have a common basic position. Economic measures are most efficient under the conditions of private property, the market and free competition, they insist. Therefore the state has to keep away from economic activities.

The 1929 Worldwide Economic Crisis

The result of this blind faith in market forces was the Great Depression. For decades people accustomed themselves to the upswings and downswings of the capitalist economy like the weather. However what happened in 1929 was experienced as a disaster. At the height of the crisis, unemployment in Great Britain and the US rose to 22 and 27 percent. The index of industrial production (1928=100) fell in Germany to 58.5 and in the US to 52.3. Everything offered by the economists (and this sounds familiar), cuts in wages and reduced state expenditures only aggravated the disaster. These crisis-intensifying prescriptions were based on the assumption that lack of capital prevents investments and economic growth. What the British economist Joan Robinson described as characteristic for neoclassicism is also true for neoliberalism. "`Saving', `waiting' and `renouncing' are the sources of national wealth. For individuals and the whole economy, renunciation on consumption is a means for accumulating riches. This viewpoint was more an ideology than an economic theory and gave moral justification for ownership income. Pensioners (stock- and fund-owners) had a right to compensation for noble self-sacrifice so all their assets would not be consumed."

However capital shortage was only typical and a cause of unemployment in the period of incomplete industrialization. Before the First World War, labor productivity resulted in a great output of goods through the process of capitalist accumulation extending over a century. When social conditions prevent increased mass consumption, the barrier to development of the system is the lack of demand for consumer goods, not deficient capital, as Blankenburg and Schui explain. John Maynard Keynes opposed the discovery that "under-consumption" was the cause of the worldwide economic crisis to the dominant economic theory. The strategy of economic growth that he developed in the "General Theory" inevitably led to rejecting saving and renouncing as counter-productive.

Joan Robinson summarized Keynes' central conclusion as follows: "An economy suffering in deficient effective demand cannot apply the productive equipment and present labor force who would like to work if they had the opportunity. Therefore investments and consumption are not alternatives. Present consumption should not be sacrificed to expand future riches. Expansion of wealth (since investments are accelerated) should lead to more consumption. Abstention from consumption only increases unemployment without encouraging investing." Consumption includes private and governmental expenditures. Still one must have money to spend money. A redistribution policy is necessary that aims at raising private and state revenues through increased taxable profits.

Such a redistribution policy was not possible in the late thirties when Keynesian economic policy was first practiced in the US and Europe. Profits fell owing to the worldwide economic crisis so entrepreneurs had little readiness for investment. State deficits were a political way out. Demand was created with these deficits. "The social plague typical for western civilization today", unemployment, was removed, as the conservative Times described. That economic problems could be solved through the intervention of the state was an essential experience like the triumph over fascism for a generation to whom the opposite was preached for decades. "In countries occupied by the Germans, the prestige of the left in general and the communist parties in particular rose on account of its role in the resistance. In England and the United States, the general perception of a national emergency and the goal pursued in common contributed to an atmosphere where the striving for private profit appeared very antiquated and immoral. If the state could deal with the problems of war planning, it could also certainly plan peace. The prestige of state intervention and the confidence that this intervention in peace could prevent the return of an economic disaster were strongly confirmed by this experience."

This social climate after the Second World War led to maintenance of a "high employment level" as the most important goal of government in Great Britain. The modern welfare state arose. However it already carried the seed of its downfall in itself. The deficit policy was only inadequately replaced by a state distribution policy since the social democrats sought to avoid the inescapable social conflicts.

The Concept of the Welfare State

For J. M. Keynes and economists like Michael Kalecki and Joan Robinson, the welfare state was not an ethical or moral affair but the only economic model that could guarantee the growth of modern capitalism. They showed that increased mass consumption leads to full employment. This is the economic core of the welfare state.

The profit of businessmen equals their expenses when aggregate economic demand and supply are balanced. The costs (wages, social security contributions and taxes) are deducted from output. Then a sum is left as profit that is identical with the investment- and consumption expenses of the capitalists. "This can be expressed in the proverbial formulation that workers spend what they earn and businessmen earn what they spend. When the expenses of both classes are so low that production possibilities are unused, only increased mass consumption remains as a last means for utilizing all production possibilities." The economy is stimulated in this situation of "under-consumption" when wages, social security contributions and taxes are raised at the cost of profits and the state spends its revenues for the well-being of citizens, for education, culture, social services and environmental protection. All this does not violate the basic principles and pecking order of capitalism.

Therefore the decisive question is: Does this redistribution policy lead to a decline of profits? This cannot logically be the case if the businessmen keep their expenses constant. On the contrary, "The aggregate economic output grows on account of increased mass consumption... Multiplier effects are manifest here. As increased goods of mass consumption are produced, employment rises along with income and demand so that the final production is greater than the increased demand." Thus the welfare state is not financed to the detriment of profits and investments. "Rather a demand gap is avoided through the distribution policy compensating for the drop in production and income. The material assurance of the welfare state consists of production or income
That would not have arisen if the distribution policy had not closed the demand gaps. Increased public consumption and the growth of labor productivity in developed capitalism should promote the general well-being, not for a loss in output and employment."

... and its Opponents

If the welfare state gives entrepreneurs additional profits, the question is raised why capital opposes the welfare state with its concentrated propaganda machine. Keynes explained this phenomena as the inability of "capitalist leaders" to distinguish between new measures for preserving capitalism and Bolshevism. Furthermore there are easier ways of coping with demand weakness than the distribution conflict. For example, the capitalist class could increase its consumption expenses. Another possibility for compensating the weakness of the domestic market is the policy of export-offensive practiced successfully for decades in West Germany. Lastly, business need not hostilely confront the state deficit policy as under Reagan and Kohl. Their struggle against the welfare state has nothing to do with economic rationality but with a sound class instinct.

"An essential characteristic of this concept is the general opinion and political understanding that the powers of the market and competition are not sufficient for reaching full employment and using labor productivity for a higher living standard. The policy that can accomplish this does not leave income distribution to competition and the effects on distribution from private ownership of the means of production but is governed by law and wage agreements. This does not only limit the autonomy of businessmen. The policy aims at increasing investment spending. In practice, this means aggregate economic investment planning."

It is only a short logical step to the public "appropriation of production goods" - naturally rejected by Keynes - the expropriation of the expropriators proclaimed by Karl Marx. The fear of businessmen about losing their control is nurtured by an increasing self-confidence of the workforce. "The welfare state whose extensive public consumption (better housing, more education and much more) and high level of employment (the disciplining moment of dismissal is lacking) leads to the undermining of the social position of the boss and the self-assurance and class consciousness of the workforce. On this foundation, processes can begin that ultimately lead to a disempowerment of businessmen. Therefore the greatest possible production, mass welfare and full employment should not be the goal."

The Misery of Social Democracy

The welfare state ultimately broke down in the failure of social democracy. Businessmen succeeded in avoiding union and state distribution policy through increased rates of inflation. Instead of checking the autonomy of capital, distribution policy was abandoned for combating inflation. World economist Helmut Schmidt discovered the rotten corpse of capital shortage and made a simple sentence into the mantra of the SPD (Socialist party in Germany): "The profits of today are the investments of tomorrow and the jobs of the day after tomorrow."

A deep gap yawns between theory and reality. Moderate wage agreements, declining taxable profits and growing subsidies for businessmen have not raised the investment rate in the long-term average. Rather they increased the state deficit without having positive effects on aggregate economic development. This policy was obviously successful in combating inflation. Lower growth with increasing unemployment led to a curbing of demand and thus narrowed the possibilities for price increases.

Schroder's "third way" sold as modernization of the welfare state has nothing to do with reformist ideas of a just society but is similar to the "open society" of neoliberalism. "The demonization of the welfare state as a parasitic institution promoting laziness and jumping-on-the-bandwagon occurs in the programmatic of the "third way". The original meaning of the welfare state as an institution harmonizing aggregate economic savings and investing amid the incapacity of private businessmen can no longer be recognized here. The "third way" also pursues the neoliberal project of de-politization. In its "just society", everyone is the creator of his or her happiness. Participation in the market is a matter of personal initiative. Everyone who is willing can find work if he or she only tries hard enough. The basic values of the neoliberal worldview - honesty, frugality, privacy and negative freedom (freedom from and not freedom for something) - have successfully repressed reformist values like solidarity, participation and emancipation. The silent community of "taxpayers", "shareholders" and "performers" replaced organized representation of interests and public debates."

[All quotations are from the excellent book by Herbert Schui and Stephanie Blankenburg, Neoliberalism, Hamburg 2002.]

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