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The Inherent Limitations of the Welfare State


Excerpted from A Humane Economy: The Social Framework of the Free Market, translated and with an introduction by Marianne Cowan, published by Henry Regnery Company, from the chapter entitled "Welfare State and Chronic Inflation."


Wilhelm Roepke

 Author Notes

German economist and political philosopher, author of The Social Crisis of Our Time, The Moral Foundations of Civil Society, A Humane Economy (1957), and other works. Roepke fought against the rise of National Socialism in Germany after World War I, publishing damning criticism of its dishonesty and its political consolidation, and eventually had to flee from Germany. A free-market economist of the Austrian school, Roepke wrote extensively about the ethical foundations of a market-based social order. His contributions to the reconstruction of Germany after World War II helped it evolve into one of the world's most successful nations, and his ideas - with those of von Mises, Hayek, and others - are central to modern conservative philosophy.

Books by Wilhelm Roepke
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Economics of the Free Society
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The Social Crisis of Our Time
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Two Essays by Wilhelm Roepke
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 Essay - 1/1/1957

Communism is no immediate danger to the countries of the free Western world, nor does the specter of totalitarianism rear its ugly head among us, however great may be the threat of slow internal corruption and unscrupulous attack from outside. Neither a fully planned economy and general socialization nor the totalitarian state which necessarily goes with both are purposes for which the broad masses of the electorate can be successfully roused. What threatens the structure of our economy and society from within is something else: chronic diseases, spreading secretly and thereby all the more malignant. Their causes are hard to discover and their true nature is concealed from the superficial or thoughtless observer; they tempt individuals and groups with immediate advantages, while their fatal consequences take a long time to manifest themselves and are widely dispersed. This is precisely why these diseases are so greatly to be feared.

Among these slowly spreading cancers of our Western economy and society, two stand out: the apparently irresistible advance of the welfare state and the erosion of the value of money, which is called creeping inflation. There is a close link between the two through their common causes and mutual reinforcement. Both start slowly, but after a while the pace quickens until the deterioration is hard to arrest, and this multiplies the danger. If people knew what awaits them at the end, they would perhaps stop in good time. But the trouble is -- and here we link up directly with the preceding chapter -- that it is extraordinarily difficult to make the voice of reason heard while there is still time. Social demagogues use the promises of the welfare state and inflationary policy to seduce the masses, and it is hard to warn people convincingly of the price ultimately to be paid by all. All the more reason for those who take a more sober and longer view to redouble their efforts to undeceive the others, regardless of violent attacks from social demagogues, who are none too particular in their choice of means, and from the officials of the welfare state itself.

Another characteristic common to the welfare state and chronic inflation is that both show, clearly and alarmingly, how the political forces referred to in the preceding chapter undermine the foundations of a free and productive economy and society. Both are the outcome of mass opinions, mass claims, mass emotions, and mass passions, and both are directed by these forces against property, law, social differentiation, tradition, continuity, and common interest. Both [the welfare state and inflation] turn the state and the ballot into means for advancing one part of the community at the expense of the others in the direction in which the majority of voters push by means of their sheer weight. Both are an expression of the dissolution of firm moral principles which were formerly accepted as self-evident.

There are, however, considerable differences between the welfare state and chronic inflation. Against inflation, the only proper attitude is one of resolute and indignant rejection; the slightest qualification of this attitude is wrong. But the concept of the welfare state encompasses much that cannot simply be rejected out of hand. Our concern, therefore, is not simply to condemn the welfare state as such but to determine its limits and dangers. We must observe the maxim put forward in the preceding chapter, namely, that the economist who is anxious to live up to his responsibilities must be careful which side he supports.

There can be no doubt that the time when the welfare state stood in need of our assistance and advocacy has passed. There is no likelihood that the indispensable minimum of government-organized security will be lacking in this era of mass democracy, robust social powers, unleashed egalitarianism, and almost habitual "robbery by the ballot." On the other hand, it is very likely indeed that this minimum may be dangerously exceeded, to the detriment of the people, the health of society, and the strength of our economy. There need be no hesitation, therefore, about which side we should support with whatever strength we may possess. It is the limits and dangers of the welfare state which require our critical attention, rather than its increasingly doubtful blessings.

A remarkable change has certainly taken place in all countries since 1945. The words "Beveridge Plan" should suffice to recall the time, more than a decade ago, when many circles enthusiastically welcomed the idea which found in the Beveridge Plan its most interesting expression. [1] Laymen and experts alike thought then that the postwar future belonged to such a "welfare state." In fact, keen efforts were made everywhere, and most of all in countries exclusively or largely dominated by socialist influences, to create such a state of guaranteed security and income equalization. Additional impetus was lent to this development by mistaken forecasts, which gave rise to the fear of a great wave of unemployment after the war.

The enthusiasm has been dissipated everywhere, even in Great Britain and the Scandinavian countries. The ideal of the welfare state has given way to its everyday practice. Disillusionment and disappointment, even misgivings and bitterness, are spreading, and critical voices are raised which are not to be ignored.[2] Few people can still close their eyes to the contrast between the extraordinary successes of a social and economic order relying on the regulating and stimulating forces of the market and free enterprise, on the one hand, and on the other the results of a continuous redistribution of income and wealth for the sake of equality. It is a contrast which is intolerable in the long run. One or the other will have to yield -- the free society and economy or the modern welfare state. To use the words of another distinguished British economist, Lionel Robbins, a man who weighs his words carefully, "the free society is not to be built on envy." [3]

The strange thing is that this bloated welfare state of ours is really an anachronism. Organized public assistance for the economically weak originated and had significance in a definite period of economic and social history, the period between the preindustrial and today's advanced industrial society, when the old social pattern dissolved and the individual, deprived of its support, became a helpless proletarian. Thus a vacuum was created and there was a need for relief and assistance which could hardly have been met adequately without public funds, private charity notwithstanding. The paradox is that today the modern welfare state carries to an excess the system of government-organized mass relief precisely at a moment when the economically advanced countries have largely emerged from that transition period and when, therefore, the potentialities of voluntary self-help by the individual or group are greatly enhanced.

Government-organized relief for the masses is simply the crutch of a society crippled by proletarianism, an expedient adapted to the economic and moral immaturity of the classes which emerged from the decomposition of the old social order. This expedient was necessary as long as most factory workers were too poor to help themselves, too paralyzed by their proletarian position to be provident, and too disconnected from the old social fabric to rely on the solidarity and help of genuine small communities. It can be dispensed with in the degree in which we may hope to overcome that inglorious period of proletarianization and rootlessness.

In so far, then, as the advanced countries have emerged from that phase and can count upon a normal degree of individual providence, the principle of the welfare state has outlived its necessity. It is difficult to understand why the welfare state grows so exuberantly just now when it has lost much of its urgency. People regard as progress something which surely derives its origin and meaning from the conditions of a now all but finished transition period of economic and social development. They forget that if we are to take respect for human personality seriously, we ought, on the contrary, to measure progress by the degree to which the broad masses of the people can today be expected to provide for themselves out of their own means and on their own responsibility, through saving and insurance and the manifold forms of voluntary group aid. Only this is ultimately proper to free and mature men; they should not constantly look to the government for help which in the last resort can be paid for only out of the taxpayers' pockets or by the restrictions which the devaluation of money forces upon its victims.

Are we to call it progress if we continuously increase the number of people to be treated as economic minors and therefore to remain under the tutelage of the state? Is it not, on the contrary, progress if the broad masses of the people come of age economically, thanks to their rising incomes, and become responsible for themselves so that we can cut down the welfare state instead of inflating it more and more? If government-organized mass relief is the crutch of a society crippled by proletarianism and enmassment, then we should direct all our efforts to being able to do without this crutch. This is true progress, from whatever point of view we look at it. It can be measured by our success in steadily widening the area of individual and voluntary group providence at the expense of compulsory public providence. In the same measure we shall also overcome proletarianization and enmassment and the overriding danger of degrading man into an obedient domestic animal in the state's giant stables, into which we are being herded and more or less well fed.

The objection is sometimes raised against this viewpoint that while it is true that economic improvement has lessened the masses' need for public help, the loosening of family ties has increased these needs. It cannot be denied that family ties have loosened. But we may ask whether the masses' need for help has not been far more diminished by higher incomes than increased by the loosening of family ties. Secondly, we may observe that there is no reason at all why we should simply accept the dissolution of family and family solidarity. A short time ago, a member of the House of Commons movingly described her father's plight in order to prove how inadequate the welfare state still is. But this is not proof of the urgency of public help; it is merely an alarming sign of the disappearance of natural feelings in the welfare state. In fact, the lady in question received the only proper answer when another member of Parliament told her that she should be ashamed if her father was not adequately looked after by his own daughter.

The modern welfare state, which appears an anachronism in the light of these reflections, would be incomprehensible if we failed to consider that it has changed its meaning. Its essential purpose is no longer to help the weak and needy, whose shoulders are not strong enough for the burden of life and its vicissitudes. This purpose is receding and, indeed, frequently to the detriment of the neediest. Today's welfare state is not simply an improved version of the old institutions of social insurance and public assistance. In an increasing number of countries it has become the tool of a social revolution aiming at the greatest possible equality of income and wealth. The dominating motive is no longer compassion but envy. [4]

Taking has become at least as important as giving. In the absence of a sufficient number of genuinely needy people, they have to be invented, so that the leveling down of wealth to a normal average, which satisfies social grievances, can be justified by moralistic phrasemaking. The language of the old paternal government is still current and so are its categories, but all this is becoming a screen that hides the new crusade against anything which dares exceed the average, be it in income, wealth, or performance. The aim of this social revolution is not achieved until everything has been reduced to one level, and the remaining small differences give even greater cause for social resentment; on the other hand, it is impossible to imagine a situation in which social resentment finds nothing to fasten on any more. In these circumstances there can be no foreseeable end to this development as long as the fatuous social philosophy which underlies the modern welfare state is not recognized and rejected as one of the great errors of our time. [5] The increasingly obvious ill effects of the welfare state, which include chronic inflation, should help to bring us to our senses.

Several approaches are possible in trying to define more closely the revolutionary change of which the welfare state is an expression. We could say, for example, that it is the outcome of a three-stage development during the last one hundred years, beginning with the stage of individual relief graded according to genuine needs, passing through public social insurance, and ending up in today's stage of universal, all encompassing security. Another interpretation is related to the first. It is that the first stage was one of assistance and was designed to be self-liquidating as soon as possible; this was followed by the idea that government help should become a permanent institution, though a selective one, to be drawn upon only in well-defined cases. The last stage is that of today's revolutionary principle, which turns the state into an income pump, working day and night, with tubes and valves, with suction and pressure flows, just as its inventor Lord Beveridge described it more than ten years ago.

Whichever way we look at it, the revolutionary character of the most recent phase of the development is obvious. A whole world divides a state which occasionally rescues some unfortunate individual from destitution from another state where, in the name of economic equality and to the accompaniment of the progressive blunting of individual responsibility, a sizable part of private income is constantly sucked into the pumping engine of the welfare state and diverted by it, with considerable friction losses. Everything into the same pot, everything out of the same pot -- this is becoming the ideal. As an astute British critic sarcasticaIIy puts it: "Everything must be free and equal-except progressive taxation out of which it is all financed." (Walter Hagenbuch, in Lloyd's Bank Review [July 1953], p. 16). [6]

The sound old conservative and philanthropic principle that even the poorest should have something to fall back on has changed into quite another: the spreading socialization of the use of income, resting on the leveling and state-idolizing theory that any expansion of social services for the masses is a milestone of progress. Since in this system genuine individual need, as ascertained from case to case, ceases to be the standard of relief, it so happens, as we have said, that the poorest and weakest are frequently the losers. The unmistakably collectivist character of the welfare state leads in the extreme case to what another British critic, Colm Borgan, has called the pocket-money state. It is a state which deprives people of the right to dispose freely of their income by taking it away from them in taxes and which, by compensation, and after deduction of the extraordinarily high administrative costs of the system, takes over the responsibility for the satisfaction of the more essential needs, either wholly (as in the case of education or medical care) or in part (as in the case of subsidized housing or food). What people eventually retain from their income is pocket money, to be spent on television or football pools.

A hundred years ago Heinrich Heine epitomized the ideal of an egalitarian and collectivist epicureanism in the following lines:

O sugar peas for all the world, Let pods yield up their marrow; The heavens above we gladly leave To angel and to sparrow. [7]

The "sugar peas for all the world" have come true, thanks to a socialization of life such as Heine would have abhorred, notwithstanding his theoretical flirtation with socialism. But whether they make up for what Heine irreverently describes as "the heavens above" is another and very doubtful question.

The situation which the leading welfare-state countries have already reached, and which others are aiming at, startlingly coincides with the famous vision which Alexis de Tocqueville, Heine's contemporary, saw in his mind's eye when he described the coming state in his classical work Democracy in America: "[The government] covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd." (Vol. II, Book IV, Chapter 6, p. 319.) A leading German socialist recently ventured to remark (in an article in the Deutsche Rundschau) that, thanks to the development of the welfare state, the "humanization of the state, " Pestalozzi's noble aim, was giving way, even this side of the Iron Curtain, to the "etalization of man."

So much for the revolutionary character of the modern welfare state. Its traces are ubiquitous. One of them is the apparently irresistible extension of public providence to ever wider classes who would certainly provide for themselves if left alone but are now put under the tutelage of the state. Equally striking is another peculiarity of the modern welfare state which is intimately connected with its nature. In the old days, public assistance was, as we noted, intended as a subsidiary and temporary substitute for people's own provision for themselves and as such was meant to safeguard only a certain minimum; nowadays, public services are increasingly becoming the rule, often with the hardly veiled intention of meeting maximal or, indeed, luxury standards. Nothing is, in any case, dearer to the hearts of the new ideologists of fiscal socialism than the highest possible taxation, and we can be certain that they feel no irresistible urge to economize in fields where they can confer blessings upon the broad masses of voters.

Perhaps we can make all of this even clearer if we illustrate the change with a few examples. A very fruitful field for this purpose is, again, housing policy. Almost all countries are familiar with this particular manifestation of the welfare state. The old and commendable principle that there are a few marginal problems on the housing market which justify a helping hand has been transformed beyond recognition. With the war and its consequences as a pretext, it has been replaced by a long-term policy of low rents, first at the expense of the politically weak minority of landlords, who are thus to all intents and purposes expropriated in some countries; then at the expense of the taxpayers, who, of course, largely coincide with the subsidized tenants, so that they pay in taxes what they save in rent; and then at the expense of the tenants of non-subsidized new buildings, whose rents are pushed up by the system of rent control; and finally at the expense of the nation's capital stock. We have reached the point where it seems odd even to ask why everybody should not, as used to be the rule, pay out of their own pocket the full cost price of their apartment just as they pay for their clothes.

Another very characteristic change has taken place in the equally important field of education. In many countries, the old and tested principle of helping gifted young people with scholarships, but for the rest expecting parents to make a contribution to the cost of their children's higher education, has been replaced by the ideal of a public and uniform system of education that is free at all levels and thereby completely socialized. One hardly dares put forward the notion that there is nothing wrong in expecting parents normally to make a sacrifice for their children's education. The consequences of this kind of educational Jacobinism are becoming ever more visible, and they may eventually lead to a swing in public opinion. In Great Britain, where the development has gone furthest, parents who are prepared to make personal sacrifices in order to offer their children a better education than they receive free in the state's school machine are suspected of not having the right "social" attitude. Again one might ask why it should be proper and natural to pay all the expenses of an automobile out of one's own pocket but shift the expenses onto the state, that is, onto the taxpayer and hence possibly back onto oneself, in the case of the education of one's children; but, as in other cases, the very question is heretical and a sign of reprehensible views. [8]

As a last important example, let us take the admittedly difficult one of medical services. The road from old-style social policy to the modern welfare state can again be clearly traced. The original principle that the economically weakest should be relieved of the risk of costly operations or prolonged sickness has gradually changed in our generation to something entirely different. Step by step, health services have been socialized, the British National Health Service being the summit this side of the Iron Curtain; the exception has become the rule and the assistance granted for genuine needs has been transformed into a permanent system.

In this manner we are getting further and further from the rule that people who can provide for themselves in other respects should, in principle, also provide in their private budget for sickness, relying, if they wish, on insurance as an institution invented for the risks of the unforeseeable. This should at any rate be regarded as the sound and normal principle appropriate to a market economy, and it should find the widest possible application. The situation into which compulsory health insurance has got in the majority of the Western industrial countries urgently suggests that we should remind ourselves of this principle. Compulsory health insurance itself is seriously ill nearly everywhere, and a recovery must be sought in the following principal ways: first, compulsory insurance should be limited to those classes for whom the risk of sickness constitutes a serious burden and who are not easily amenable to voluntary insurance; secondly, we should encourage all those manifold forms of decentralized assistance for which Switzerland may be held up as a model; and thirdly, we should introduce into all systems of sickness insurance universal and sizable individual cost contributions which can easily be adjusted in cases of hardship. [9]

Let us now try to assess the significance of this welfare state for modern civilization, society, economy, and public life. Naturally, we can do no more than stress a few salient points.

We begin with a circumstance that is of particular importance in view of all the misgivings already mentioned and still to be mentioned. The dangers of the welfare state are the more serious because there is nothing in its nature to limit it from within. On the contrary, it has the opposite and very vigorous tendency to go on expanding. All the more is it necessary to impose limits from without and to keep a sharp and critical eye on it. By its continuous expansion, the welfare state tries to cover more and more uncertainties of life and ever wider circles of the population, but it also tends to increase its burdens; and the reason why this is so dangerous is that while expansion is easy and tempting, any repeal of a measure later recognized as hasty is difficult and ultimately politically unfeasible.

It is hard to imagine that Great Britain would have set up the National Health Service in its present far-reaching form if people had realized in advance how it would work out, or even if some questions, which now appear elementary, had been raised and thought through in time. [10] It is equally hard to imagine how this venture could be undone today and so people try to make the best of it. But any further step along the road to the welfare state should be considered with the utmost caution, with a very clear view of the consequences and in the knowledge that, like the reduction of the minimum voting age, it is normally irreversible.

The welfare state not only lacks automatic brakes and not only gathers impetus as it moves along, it also moves along a one-way street in which it is, to all intents and purposes -- impossible or, at any rate, exceedingly difficult to turn back. What is more, this road undoubtedly leads to a situation where the center of gravity of society shifts upwards, away from genuine communities, small, human, and warm, to the center of impersonal public administration and the impersonal mass organizations flanking it. This implies growing centralization of decision and responsibility and growing collectivization of the individual's welfare and design for life.

The effects of this development should be examined carefully in all respects. So far we have been able to rely on the reactions of individuals who know that they must assume responsibility for certain risks; but we must be clear in our minds that the welfare state, by shifting the center of gravity of decision and responsibility upwards, weakens or distorts these reactions. What is the effect on production if individuals are relieved of the consequences of bad performance but at the same time also deprived of incentives for good performance, especially performance entailing some risk? What is the effect on such important decisions as those relating to saving and investment? What happens to the birth rate, which in the past was limited, to some extent, by the fact that the individual remained responsible for his own family, whatever its size, whereas now he is relieved of that responsibility or even allowed to cash in on procreation? These are some of the questions which every unprejudiced person ought to ask today.

The individual and his sense of responsibility constitute the secret mainspring of society, and this mainspring is in danger of slackening if the welfare state's leveling machine lessens both the positive effects of better performance and the negative ones of worse performance. It is not surprising that some observers, including no less a man than Field Marshal Montgomery, should begin to wonder whether the overgrown welfare state is not well on the way to undermining the moral and social health of the nation which succumbs to its temptations. Something of this kind must have been in Goethe's mind when, two years before the French Revolution, he wrote this prophetic sentence: "I must say, I believe that humanism will eventually prevail; but I am afraid that at the same time the world will become a huge hospital, with everyone nursing his neighbor." (Italienische Reise II, Naples, May 27, 1787.)

Nor must we pass over in silence another question, which has already been put in all seriousness and which, indeed, can hardly be evaded. It is the question of whether the crushing costs of the welfare state, which can no longer be reduced without political inconvenience, are not one of the major factors impairing the free world's resolution and the strength of its military defense against the Communist empire and thus forcing the West to concentrate more and more on nuclear defense. To be sure, this does not prevent precisely those who sympathize most with the welfare state from wanting to snatch from the West even this last desperate weapon which the welfare state has left it.

The past's extreme individualism is not least to blame for the reversal which has brought about the opposite extreme, the modern welfare state. It is surely the mark of a sound society that the center of gravity of decision and responsibility lies midway between the two extremes of individual and state, within genuine and small communities, of which the most indispensable, primary, and natural is the family. And surely it is our task to encourage the development of the great variety of small and medium communities and thereby of group assistance within circles which still have room for voluntary action, a sense of responsibility, and human contact and which avoid the cold impersonality of mass social services.

The modern welfare state is, without any doubt, an answer to the disintegration of genuine communities during the last one hundred years. This disintegration is one of the worst legacies the past has left us, whether we call it mass civilization, proletarianization, or any other name. But it is the wrong answer. I said this more than ten years ago, when it was the essence of my criticism of the Beveridge Plan. Far from curing this disease of our civilization, the welfare state alleviates a few symptoms of the disease at the cost of its gradual aggravation and eventual incurability. It is, for instance, a lamentable misunderstanding of the problem to permit the family-allowance funds to absorb into the state's income-pumping system even the family itself.

There is worse to come. If the modern state increasingly takes it upon itself to hand out welfare and security on all sides -- first to the advantage of one group, then of another -- it must degenerate into an institution which fosters moral disintegration and prepares its own eventual doom. We are again reminded of Frederic Bastiat's malicious definition; the modern state fits it more and more closely. It also confirms Dean Inga, who pessimistically regarded politics as the art of conjuring money out of the pockets of the opposite party into those of one's own party and making a living thereby.

The morally edifying character of a policy which robs Peter in order to pay Paul cannot be said to be immediately obvious. But it degenerates into an absurd two-way pumping of money when the state robs nearly everybody and pays nearly everybody, so that no one knows in the end whether he has gained or lost in the game. It would also be well not to bring in morality when social grievances and ruthless pressure-group politics end up in claims to the well-earned income and property of others, and hence in the confiscatory taxation with which we have all become familiar.

It is true, of course, that people do not always realize that when they turn to the state for the fulfillment of their wishes their claims can be satisfied only at the expense of others. We have met the underlying sophism before. It rests on the habit of regarding the state as a kind of fourth dimension, without stopping to think that its till has to be filled by the taxpayers as a whole. A money claim on the state is always an indirect claim on somebody else, whose taxes contribute to the sum demanded; it is a mere transfer of purchasing power through the medium of the state and its compulsory powers. It is astonishing for how long this natural and simple fact can be obscured by the modern welfare state.

The more widely the principle of the welfare state is applied, the closer comes the moment when the giant pumping engine turns out to be a deception for everybody and becomes an end in itself, which eventually serves no one except the mechanics who make a living out of its manipulation, namely, bureaucrats. They naturally have an interest in obscuring the facts. There is, however, one circumstance which should help us to understand how this deception can be worked for so long; it is the fact that few things have contributed more to the most recent development of the welfare state than the concept, born of the Great Depression, that society was immensely rich but that its wealth remained potential as long as monetary circulation was faulty, and could be transformed into actual wealth by increasing effective demand. The wealth so liberated from its slumbers would then be justly distributed by the welfare state. At the same time -- and this is one of the most popular conclusions drawn from the Keynesian doctrine -- this redistribution of income would increase mass consumption and reduce saving and would thus be the best means of insuring full employment and keeping the welfare state's springs flowing.

It was the depression of the thirties which fostered this faith in a sort of self-financing of the comprehensive welfare state, another kind of "fourth dimension"; and it is this faith alone which can explain the recklessness with which the problem of the cost of the welfare state has been neglected for so long.

Today the time of illusions is past. It has become clear, and it is widely said, especially in Great Britain, [11] that if one seriously wants to put the welfare state into practice, one has to use taxation to stir up income distribution at all levels and has to draw even on the lowest income groups to help finance the cost. The burden of the system of mass social services, which the state enforces, can no longer be borne by the higher incomes alone but must be placed on the shoulders of those same masses whose interests the system is to serve. This means that to a large extent the money is conjured from people's right pocket into their left, with a detour via the treasury and the enormous friction losses entailed thereby. It has become clear now that, under the spell of the "poverty amidst plenty" illusion, people overestimated the potential wealth even in the most favorable case. It has also become clear that there is a price to be paid in the form of the costs of ever more powerful state machinery, of a blunting of the will to work and of individual responsibility, and of the dreary grayness of a society in which vexation at the top and envy at the bottom choke civic sense, public spirit, creative leisure, neighborliness, generosity, and genuine community. What to remains is the pumping engine of Leviathan, the insatiable modern state.

The utmost limit of the welfare state, then, lies at that point where its pumping engine begins to deceive everybody. Some nations have already reached this point. One may ask the heretical question of whether everyone would not be better off if the welfare state were dismantled, except for an indispensable minimum, and if the money thus saved were left to non-governmental forms of social services. [12] The question gains in urgency by the fact that there are legitimate doubts about whether the enormous tax burden, to which the commitments of the welfare state contribute decisively, is in the long run at all compatible with a free economic order and whether it can continue without permanent inflationary pressure.

Another very grave aspect of this development generally receives but scant attention. It is that fashionable social phraseology is apt to obscure the fact that the direct or indirect compulsion inherent in the welfare state tends to politicize social security. The consequences are obvious. Security from the risks of life is at the mercy of both the state's bureaucracy and political strife. Thus our so richly paradoxical age praises as progress that which, in fact, enhances the power of the national state. The more we appeal to the solidarity of people of the same nationality or domicile and the more we fuse them into a "national community" in which money is transferred backwards and forwards, the more perfectly shall we "nationalize" man to the detriment of a free international community of peoples and their solidarity.

In the nineteenth century, Ernest Renan could still define a nation as a "plebiscite de tous les jours"; now we are approaching the day when we can define it as a pension fund, a compulsory insurance scheme in which passport and certificate of residence are a free insurance policy, an income pump de tous les jours. Saving and private insurance are forms of provision against risks which belong to the area of economic rationality, the market, private law, and freedom. They are not bounded by national frontiers. The field of private investment and insurance is the whole world; but national social security falls into the area of politics, collectivist organization, public law, and compulsion and therefore locks people in behind the bars of the national state. Social services whose backbone in the state's compulsion are, strictly speaking, national services, and social insurance is nothing but national insurance -- unless, of course, we think of a world state, where Germans, Italians, Argentineans, and Ethiopians join in a world pension fund.

The list of the welfare state's paradoxes and illusions is not yet exhausted. A further circumstance deserves mention. Very many people imagine that taxation of the higher income brackets merely implies restriction of luxury spending and that the purchasing power skimmed off from above is channeled into "social" purposes down below. This is an elementary error. It is quite obvious that larger incomes (and larger wealth) have so far mainly been spent for purposes which are in the interests of all. They serve functions which society cannot do without in any circumstances. Capital formation, investment, cultural expenditure, charity, and patronage of the arts may be mentioned among many others. If a sufficient number of people are wealthy and if they are dispersed, then it is possible for a man like Alexander von Humboldt to pay out of his own pocket for scientific ventures of value to everyone or for Justus von Liebig to finance his own research. Then it is possible, too, that there should be private teachers' posts and thousands of other rungs on the ladder on which the gifted can climb and the very variety of which makes it much more likely that some help will be forthcoming somewhere, whereas in the modern welfare state their fate depends upon the decision of one single official or upon the chances of one single examination. [13]

If, then, the higher income groups are crushed by progressive taxation, it is obvious that some of their functions will have to be dropped and, since they are indispensable, taken over by the state -- even if it is only the maintenance of some historic monument which used to be private property. To this extent, at any rate, the purchasing power taken from above is not at the disposal of the welfare state. It must be reserved for the purpose of paying, with public funds, for private services made impossible by taxation. This nullifies the aim of the welfare state. If the welfare state should claim any merit for educating, say, a genius like Gauss at public expense, the answer is that in the actual case of Gauss the task was discharged excellently and quite unbureaucratically, not only by the Duke of Brunswick, but also by a lot of others who would today be prevented from doing so by the welfare state's taxation or would, at any rate, be left with little incentive or inclination to spend their money in this way.

In this case, then, the upper income groups' loss of purchasing power is not matched by any gain on the part of the lower income groups. The benefit goes not to the masses but to the state, which waxes in power and influence. At the same time, a powerful stimulus is given to modern state absolutism, with its centralization of decisions on very important matters, such as capital formation, investment, education, scientific research, art, and politics. What used to be personal and voluntary service is today at best state service, centralized, impersonal, compulsory, crudely stereotyped, and bought at the price of curtailed freedom.

Inevitably, such socialization of income uses for socially important functions must make a country's moral climate oppressive. Kindliness, honorary office, generosity, quiet conversation, otium cum dignitate, everything which Burke calls by the now familiar name of the unbought graces of life -- all of that suffocates under the stranglehold of the state. Everything -- paradoxically in a welfare state -- is commercialized, everything an object of calculation, everything forced through the state's money-income pump. Hardly anything is done on a honorary basis any more because few can afford it; civic sense and public spirit are transformed into vexation at the top and envy at the bottom. In these circumstances everything that is done is done professionally and for money. There is a narrower margin of income available for free gifts, voluntary sacrifice, a cultivated way of life, and a certain breadth of spending, and for this reason the climate is not congenial to munificence, diversity, good taste, community, and public spirit. Civilization is blighted.

This is one of the roots of the leaden boredom which -- as we have had occasion to note earlier -- seems to be a distinguishing feature of the advanced welfare state. Another root of this evil is closely connected. It is that the welfare state, contrary to its proclaimed aim, tends to petrify the economic and social stratification and may impede rather than facilitate movement between classes. Severe taxation, especially in the form of steeply progressive income taxes, must surely hit those incomes most which are high enough to allow for the accumulation of wealth and the assumption of business risks. [14] Is this not bound (for a number of other reasons, too, which this is not the place to discuss) to make it more difficult to set up new businesses and to acquire property? Does this not imply that it is becoming much harder for anybody to work himself up above the broad, low plain of propertyless income earners? And does it not also become far less attractive even to try to do so, especially since the welfare state itself takes care of a sort of comfortable stall -- feeding of the domesticated masses? Is this not bound to work to the benefit precisely of existing large firms? At the same time, life in such a country becomes about as exciting and entertaining as a game of cards in which the winnings are equally divided between the partners at the end. It seems a hopeless undertaking in these circumstances to try to raise oneself economically or socially, unless one chooses to go into administration, whether public or in the big associations. It is the officials who increasingly become the pillars and beneficiaries of this system, not excluding the growing number of functionaries in the multiplying and spreading international organizations.

In this respect, then, we may ask whether the out-and-out welfare state does not counteract one of its own major purposes. The same question arises in another context. Like the welfare state's claim that it loosens class stratification, its claim to be an instrument of equality is very doubtful. While it certainly does work towards equality in the sense discussed so far, it does not do so in another, a crucial and wholly desirable sense. The continual compulsory redistribution of income undoubtedly furthers material equality. But at what price? This policy inevitably implies a growing concentration of power in the hands of the administration which directs the income flow, and this no less inevitably implies growing inequality in the distribution of power. Would anyone deny that the distribution of this non-material good, power, is incomparably more important than the distribution of material goods, since the former is decisive for men's freedom and unfreedom?

To say this is to say no less than that the modern welfare state, in the dimensions to which it has grown or threatens to grow, is most probably the principal form of the subjection of people to the state in the non-Communist world. The welfare state does not solve, or solves only partially, the problems which it is intended to solve; on the contrary, it makes them less susceptible to serious and genuine solutions. By contrast, it causes the power of the state to assume giant proportions "until each nation is reduced to nothing better than a flock of timid and industrious working animals, of which the government is the shepherd." It forces us to accept the idea that Tocqueville's vision has every chance of coming true now, after a hundred years.


  1. An extensive discussion of the Beveridge Plan is to be found in my book Civitas Humana (London, 1948), 142-148. In his Full Employment in a Free Society (London, 1944), the creator of this famous plan, by means of which Great Britain became the model of the welfare state, subsequently contributed much to complementing the egalitarian ideology of the welfare state with the ideology of inflationary "full employment." See the pertinent critique of this second Beveridge plan in Henry C. Simons, "The Beveridge Program: An Unsympathetic Interpretation," Journal of Political Economy (September, 1945), reprinted in Economic Policy for a Free Society, 277-312; Lionel Robbins, The Economist in the Twentieth Century (London, 1954), 18-40. Both critics come to the correct conclusion, now confirmed by facts, that the full-employment policy advocated by Beveridge must result in inflation. It is much to Lord Beveridge's credit that he himself later repeatedly and frankly criticized the development which his first plan set in motion. In his later book Voluntary Action (London, 1948), for instance, he took occasion to place voluntary group aid in its proper light. However, he seems never to have realized how great a part he played in the development he criticized. Not long ago, he frankly declared in a lecture that inflation was destroying the savings which he had set aside for his own old age; it may therefore happen, he said, that he would liver longer than he could afford to. But he does not seem to have grasped that a large part of the responsibility for this inflation, which erodes his savings and threatens his carefree remaining years, belongs to his own creation, the welfare state, together with overfull employment, also a subject of his praise. He appears as the pathetic figure of a man who does not know that he himself sawed off the branch on which he sat.
  2. Colin Clark, Welfare and Taxation (Oxford, 1954); A.C. Pigou, "Some Aspects of the Welfare State," Diogenes (July, 1954); Bertrand de Jouvenel, The Ethics of Redistribution (Cambridge, 1951); Hans Willgerodt, "Die Krisis der sozialen Sicherheit und das Lohnproblem," ORDO, Jahrbuch fur die Ordnung von Wirtschaft und Gesellschaft (1955), 145-87.
  3. Lionel Robbins, "Freedom and Order," in Economics and Public Policy (Washington, 1955), 152. A few lines earlier, Robbins says: "In a society in which incentive and allocation depend on private enterprise and the market, a continuous redistribution of income and property in the interests of a pattern of equality, or something approximating to equality, is almost a contradiction in terms."
  4. Helmut Schoeck, "Das Problem des Neides in der Massendemokratie," in Masse und Demokratie, 239-72.
  5. "The hatred that men bear to privilege increases in proportion as privileges become fewer and less considerable, so that democratic passions would seem to burn most fiercely just when they have least fuel. I have already given the reason for this phenomenon. When all conditions are unequal, no inequality is so great as to offend the eye, whereas the slightest dissimilarity is odious in the midst of general uniformity; the more complete this uniformity is, the more insupportable the sight of such a difference becomes. Hence it is natural that the love of equality should constantly increase together with equality itself and that it should grow by what it feeds on. This never dying, ever kindling hatred which sets a democratic people against the smallest privileges is peculiarly favorable to the gradual concentration of all political rights in the hands of the representative of the state alone. The sovereign, being necessarily and incontestably above all citizens, does not excite their envy, and each of them thinks that he strips his equals of the prerogatives that he concedes to the crown." (Alexis de Tocqueville, Democracy in America, Vol. II, Book IV, Chapter 3, p.295. My italics.)
  6. A discussion of the demand for equality and all of its consequences is to be found in my earlier book Mass und Mitte, 65-75. I still subscribe to that critique, as well as to my serious misgivings about that subtle and therefore most tempting form of equality which goes by the name of equality of opportunity. The arguments I put forward then would seem to be convincing enough, in particular the argument that it would be completely arbitrary to aim at equality of opportunity only in material matters susceptible to the leveling action of the state, while inequality must be accepted in other fields -- unequal health, unequal intelligence, unequal character. If, therefore, opportunities are to be really the same, the material conditions(the income and wealth of the child's parents) must be measured out in such doses that they add up with the non-material and nonequalizable conditions to "equal opportunity." Suppose a child has poor health but his parents can, at least, equip him with better material conditions for the struggle of life. Now what possible justification is there in depriving him even of these? Should not the others be glad to have inherited a healthy stomach, a sound heart, or nerves of steel? How is all that to be calculated? In this light the incessant redistribution which strict equality of opportunity presupposes looks even more outrageous than it does in any case. Furthermore, if it is just that a man may own private property -- and the advocates of equality of opportunity fortunately do not go so far as to deny it -- why should it be unjust that his children benefit by it? I may do anything I like with my income and wealth -- I may build a house, buy a television set, acquire a luxury car, travel around the world -- only one thing I may not do, namely, give my children the best and most careful education. For the rest, we shall see in the next chapter that the claim for equality of opportunity corresponds to an extreme ideal of liberalism according to which a continuous race of all for everything is desirable. The question arises: by what right is this race to stop at national frontiers?
  7. Heinrich Heine, Deutschland, Kaput I. It should be obvious that the collective utilitarianism and epicureanism of the welfare state ideology is closely connected with the disappearance of belief in transcendence and immortality. Cf. Aloys Wenzl, Unsterblichkeit (Bern, 1951).
  8. Colm Brogan, The Educational Revolution (London, 1954), paints a vivid picture of Great Britain, which, for the time being, remains an extreme case. In the United States, "classes," as applied to education, is a make-believe, as in many other fields, since parents are free to send their children to private schools if they want them to have a better education than can be expected in the public schools. The only drawback is that this is far more expensive than the much-maligned school fees current in European countries for good public schools. We possess a vast documentation concerning the appalling deterioration of the educational level entailed by socialization of education. Another important factor is that if so many young people go to the universities, the non-academic groups of the population are continuously deprived of their most intelligent and enterprising elements (Erik R. von Kuehnelt-Leddihn, Freiheit oder Gleichheit? [Salzburg, 1953], 473) and family ties are disrupted. See also Note 1 to Chapter V of this volume.
  9. Hermann Levy, National Health Insurance: A Critical Study (London, 1944); M. Palyi, Compulsory Medical Care and the Welfare-State (Chicago, 1950); F. Roberts, The Cost of Health (London, 1952); Werner Bosch, Patient, Arzt, Kasse (Heidelberg, 1954); H. Birkhauser, "Der Arzt und der soziale Gedanke in der Medizin," Schweizerische Medizinische Wochenschrift, No. 5 (1956).
  10. Concerning the National Health Service, a distinguished British economist writes: "The important economic question about that scheme was this: if there is a service the demand for which at zero price is almost infinitely great, if no steps are taken to increase the supply, if the cost curve is rising rapidly, if every citizen is guaranteed by law the best possible medical service and if there is no obvious method of rationing, what will happen? I do not recall any British economist, before the event, asking these simple questions." (J. Jewkes, in Economics and Public Policy, 96) Compare this with the observation by M. Palyi (op. cit., 71): "The abolishment altogether of a compulsory sickness scheme, once established, even if bankrupt and unsatisfactory, is beyond imagination. It has never happened." A further testimony: "Enthusiasts for nationalized medicine never found themselves in competition with the enthusiasts for extended education, state subsidized housing, higher state pensions and benefits, and a dozen other schemes with a strong emotional and vote-catching appeal ... I believe that the contemporary and scientific conception of medicine cannot flourish fully and firmly where medicine has been socialized." (Colm Brogan, "The Price of Free Medicine," The Freeman [June, 1956]) Finally, a British physician confirms this view: "The cost to the country in money is easily expressed, understood, accepted, amended or rejected. The cost to the country in health and happiness which will result from the degradation of doctors is beyond our powers of comprehension." (Scott Edward, "Retreat from Responsibility," Time and Tide [October 10,1953])
  11. On the illusion of the welfare state, see Colin Clark, op. cit., and M.J. Bonn, "Paradoxien eines Wohlfahrtsstaates," Aussenpolitik (April, 1953).
  12. This is, among other things, what Colin Clark's proposals come to. Compare the following recent report from Belgium (Neu Zurcher Zeitung, No. 1209 [April 27, 1957]). The socialist Minister of Labor proposed, by means of the method now fashionable everywhere, to raise the income limit of compulsory state insurance and to merge the various private pension funds into a state fund. The result was a storm of indignation among the workers and trade-unions. The social charges of Belgian industry had risen twelve years from 25 per cent of the wage bill to 41 per cent, and the Belgian workers and employees decided that this was enough -- more than enough. They asked such awkward questions as whether there was still any reasonable relationship between the growing social contributions and actual services and whether there were no cheaper ways of obtaining old-age insurance.
  13. It is normal to deplore the fate of men like Winckelmann, Herder, Hebbel, Racine, and many others whose genius was handicapped by poverty but the point is that all of them succeeded in coming to the top, thanks to the diversified structure of society in their time. Encouragement and help were to be had in many places and from many people: the master of school, a princely patron, a secretarial post, a hospitable country mansion. In these circumstances there was a very high probability of being able to set one's foot on the rung of some ladder; at any rate, to say the least, this probability could well stand comparison with the likelihood that no genius will go unnoticed in the present welfare state. How the rise of talent was possible at that time in the most adverse circumstances is impressively seen in Winckelmann's life. (C. Justi, Winckelmann und seine Zeitgenossen [2nd ed., Leipzig, 1898], 1, 22 and 28)
  14. Many other biographies testify to the same thing. Take, for instance, the life of Scharnhorst, a tenant farmer's son from Hanover, who received tuition in mathematics from a retired major (this happened in my own village) and was sent to a small military college by the Count of Schaumburg-Lippe. One cannot help being both touched and astonished by the climbing feats of these men as they rose, from one foothold to the next, in society. It is not so certain that the socialized chairlift of the welfare state always achieves the same successes. In other respects, too, our age of the welfare state has little reason to consider itself so superior to the social hardships of the past. A little more modesty is indicated in relation to our forebears. Anyone who, like myself, has grown up in the simple conditions of a village can easily remember the time when the different classes stood together in a neighborly way, whereas today they are far removed from each other. The real inequality of men has not diminished but has increased during the last one hundred years. As an example, take Zelter, who started out as a builder's apprentice and ended up as a professor of music and close friend of Goethe without losing contact with his own milieu. "A life of this kind," Paulsen wrote as long ago as the end of the last century (Ein System der Ethik [2nd ed., Berlin, 1891], 727, "would be inconceivable today. Nowadays Zetter would have gone through secondary school and studied architecture, he would have learned to draw and calculate, would have taken mechanics and history of art, and he would have become an architect and officer of the reserve and would never have built a singe wall. He would have been an employer of masons, not their fellow and instructor. Or else he would have remained a mason and a fellow of masons, but then he would not have gained the friendship of a Geheimrat and minister, nor become a professor music."

  15. I entirely agree with the incisive criticism recently expressed by two distinguished contemporary economists: F.A. Hayek, "Progressive Taxation Reconsidered," in Mary Sennholz (ed), Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (New York, 1956), 265-84; Wright, op. cit., 94ff.

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