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The Illusion That's the Welfare State

Tibor R. Machan

Tibor R. Machan teaches philosophy at Auburn University, Alabama.

I write this essay in a small town near Gdansk, Poland, where I am lecturing for a week on political philosophy. On my way here I stopped over in Hamburg to visit with my mother and uncle and other family members. During this visit, there was lots of talk about current geopolitical and economic affairs. My uncle, mother, and I all hail from one of the formerly Communist countries, and it is fascinating to speculate on what will happen in our homeland and the other Eastern and Central European nations now that the Soviet empire has receded.

It is important to stress one thing—the East has experienced not so much socialism, let alone Communism, as a modern version of feudalism. By Marx’s own account, no move toward socialism was possible in greater Russia and the nations it colonized without either a prior capitalist stage or the conquest of the West. Barring such miraculous developments, these countries could only play at socialism, even in Marxist terms.

What in fact happened here was the revival of something akin to mercantilism: the vigorous practice of command economics. The main difference is that mercantilism didn’t denounce commerce, it merely made it public policy. In the command economy, in contrast, there is a theory that is used to guide the economy in a specific direction, namely, industrialization and anti-consumerism. The theoretically determined collective needs of society as a whole are to be served.

It is this kind of system that is to be blamed, whatever modern name is given it, for the incredible impoverishment of all these countries. It also may be blamed for throttling traditional ethnic and religious enmities that by now probably would have worked themselves into a more moderate tone. Instead Eastern Europe and the Soviet Union are just now experiencing what Western Europeans have largely gotten out of their systems and for which they have substituted a more-or-less liberal social order.

We may debate how best to explain recent events in Eastern Europe, and I have made my own efforts to do that. What is certain is that Poland, Hungary, Romania, and the rest are poor, as is, of course, the Soviet Union. This state of deprivation had been engineered until recently with the aid of a somewhat plausible Big Lie: that the West is a major military threat. Modern communication technology blew that barefaced deception out of the water. So the political economy of austerity that command economies generate no longer could be shoved down people’s throats. Thus the recent market-oriented revolution throughout the region.

But what now? In the course of my discussions with relatives, my cousin Nicola argued that the East needs to transform its command system into a welfare state. Her motives had more to do with a sense of justice and compassion than with economic analysis. Nevertheless, she gave expression to ideas that are being avidly considered among Eastern Europeans, mostly in response to the advice of Western experts sent there by labor unions, governments, and academic institutions. Most of these are trying to persuade Eastern European and Soviet authorities to establish a welfare state, or what is referred to in Europe as social democracy, as a substitute for the discredited command economy.

Social democracy amounts to the kind of order in which the bulk of the social problems of a country, including those arising in the economy, education, arts, sciences, agriculture, industry, and technology, are managed by means of democratic discussion and, ultimately, a vote. In the United States, this kind of order is the democratic welfare state, although those who wish to increase its scope refer to it as economic democracy or even democratic socialism. It is generally believed, at least by those who aren’t mere opportunists interested in political and economic power, that such a system would be more just and kind than a purely free market.


A Benign Alternative?

The arguments put forward are the usual ones maintaining that capitalism is callous, heartless, mean, and neglects some of the essential elements of a decent society. The free market is supposedly too individualistic and discourages community service; it thrives too much on competition and too little on cooperation. The welfare state is alleged to be the more humane system, and in the wake of the evident unworkability of the command economy, a democratically administered socialism is submitted as the preferred alternative.

This message is being sent toward the East by many, and only a few are holding out for pure capitalism. Yet even among those who support a radical turn toward the free market, the most prominent and heeded are those who assert that the need for pure capitalism is only temporary. Once a country becomes economically solvent, they argue, the welfare state may well be the more benign alternative.

Janos Kornai, Hungary’s foremost economist, who also teaches at Harvard University, suggests this in his book, The Road to a Free Economy (W. W. Norton, 1990). He points out that the only workable solution to Eastern European woes is an immediate switch to a free market system throughout the entire region. No welfare state is possible in these societies, since unlike most Western countries where the welfare state has been established, these nations lack the resources to sustain welfarism.

To clarify Kornai’s argument, it may be useful to draw an analogy. Kornai seems to be saying that welfarism seriously debilitates a society, much as disease weakens a living being. The welfare state is unhealthy, certainly economically, but even politically. Still, people may be willing to put up with some drain on their productivity, and indeed may flourish in the face of heavy taxation, so long as they have a good shot at becoming prosperous and retain a hope of making further progress.

Not all ailments knock out an organism; some merely produce a setback. If the basic system of private property and free trade isn’t abolished, welfare states can be tolerated. As in the case of certain physical ailments, the welfare state need not be immediately disabling. Yet, as with such nonfatal ailments, the welfare state is in constant need of extra support—a permanent crutch, as it were.

In the former Soviet bloc, the patients have no strength left. They must go on a disciplined regime of recuperation and cannot afford to be dragged down by the parasite of welfarism. But what about after substantial recovery?

What is crucial is that the welfare state—the likely economic outcome of economic democracy—can carry on only while there is a source of extra strength. A good example is deficit spending, which is often a consequence of welfare programs. It subjects people, including yet unborn ones, to involuntary obligations to produce over and above their wants and needs sometime in the future. And for a while most of us will put up with this, on top of our own personal debts and liabilities.


Lessons from the Laffer Curve

But as the Laffer Curve proposes, one can tax people for only so long, to only a certain extent. If each year one is taxed just a bit more, and one can, with increased effort, recover these losses, the system can last for a while. But since the welfare state tends to be perpetual and constantly expanding, there is an unavoidable result: It cannot last.

It is important to remember that personally chosen charity to those in temporary need doesn’t function this way. If left to individuals and voluntary groups, responding to an emergency doesn’t create a constant drag on the system. Moreover, in privately responding to such emergencies there is better knowledge of who needs and deserves support, where the help will do the most good, and so on. As with moral advice, so with moral support (even of the economic variety): knowledge of details is essential.

In many robust Western economies—getting less and less robust each year, however—the Laffer Curve thesis has not yet seen its full impact. After all, human beings used to endure much worse abuse than the welfare state imposes on them. They have survived—with some degree of health and well-being—slavery, serfdom, dictatorships, tyrannies, fascism, and even socialism. The welfare state may appear to be a mild example of political and economic misguidance and injustice. And it makes some people feel good about themselves, even as it frees them from personal moral responsibilities by imposing a share-and-share-alike policy on their communities.

We have a great opportunity for the West to learn from the experiences of the East. Unfortunately, however, many intelligent people have become skeptics and will follow their wishes more readily than the products of logical analysis. Such analysis produced, for example, the conclusion that socialism cannot create economic well-being. Ludwig von Mises and, later, F. A. Hayek demonstrated through elaborate logical and conceptual economic reasoning that the system will fail. Mises did this in his book Socialism published as far back as the 1920s, followed by Hayek’s initial scholarly development of the idea and his more popular statement in The Road to Serfdom.

Unfortunately, there is such extensive anti-rationalism in Western intellectual circles that these scientific proofs tend to be widely ignored, and only major human tragedies seem to be heeded sufficiently to alter a course of action motivated by wishful thinking. Thus, perhaps if Eastern European societies follow Janos Kornai’s advice and implement a fully free market system—not the hodgepodge mixed system we find in France, Germany, England, Japan, and the United States—it may demonstrate with factual, historical examples that welfarism is a false ideal.

Sadly, millions of people are unwilling to give genuine capitalism a chance, perhaps in part because they have become so comfortable in this halfway house of the welfare state that they are scared to leave it behind. So the East may be prevented from really fixing its problems, even though many know that without a true free market they will linger in economic and cultural malaise.

Maybe, though, we won’t need to find out by historical example how much of a failure the welfare state is. Maybe there are enough tough-minded folks in the East, such as the Russian citizen who was recently quoted in The New York Times: “Now there are no owners. Nothing belongs to anybody. And from that simple fact come all the problems.”

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