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Welfare State in Existential Crisis

Lesedauer: 12 Minuten

Can we escape the Black Hole of Redistribution?

(Lecture given at Bratislava, March 26, 2018)

A welfare state is a social system in which the government assumes responsibility for the well-being of citizens by providing people with resources such as housing, health care, education, and employment.

I offer the following 10 theses for discussion. The first seven I have presented in the past, but the last three are new and I am looking forward to your reaction to those especially.

Thesis 1

Democracy and the welfare state cannot be sustainably combined in the long run.

Democracy can only be sustainably practiced in a state that limits its own jurisdiction. Above all, such state must constrain the permissible tax burden, debt burden, tax progression and the degree of state-organised redistribution. It is important to note, that redistribution without any limitation will end in a vicious circle. The so called needy ask for more and more and the increasing tax burden leeds to less productivity. The crisis of redistribution is not a consequence of some ideological and party-political considerations and do not arise solely from financial constraints. Instead, it is a consequence of the logic of collective decisions. When those fail, they threaten the very existence of an organised society.

The welfare state is not just “too expensive” or “unaffordable”. It actually leads to a complete collapse of the political and social fabric.

A well organised society should be based on mutual trust and not on coercion and control.

If we want to preserve the rule of law, welfare state must be dismantled and rebuilt.

The trouble is that this “orderly withdrawal” is very difficult to obtain democratically, especially if majority of voters are in the receiving group.

When you reach a dead-end, the only way forward is to go back. At least for one or two steps and than to try to change to a new direction

Thesis 2

As a redistributor of wealth, the state can never be fair.

The state is often considered a “Bulwark of Justice” – in the sense that it is expected to be “just” to all its citizens, treating them all equally. At best, this goal can be achieved in the fields of public order and the judiciary. In all other areas, the political promise of being “just” results in never-ending dissatisfaction, which in turn leads to never-ending boundless demands and expectations. This is the vicious cycle of disappointment and frustration. In the end, it undermines the confidence in the functioning of the state as a Bulwark of Order.

The promise of distributive justice cannot be fulfilled. Fiscally speaking, it will turn, sooner or later, into a “Black Hole”.

Thesis 3

In the long run, redistribution reduces the standard of living, is environmentally unfriendly and antisocial.

It is true that the purchasing power of the economically weaker members of a redistribution club is increased when the state taxes away high incomes and high wealth and redistributes them. The general use of resources can even increase disproportionately more since the redistributed funds send false signals. The “income” they generate is unrelated to economic performance. This creates a problem. If your economic well-being is purely dependent on political distributers and redistributers and outside of your personal influence performance, you lose your dignity and self-worth as a sensible person. Being a client of a welfare state is incompatible with freedom. It should have the status of a shunned exception and the majority should strive to prevent it from happening.

Any funds channelled away for redistributive social policy will reduce investment in venture capital, hindering and delaying technological progress so vital for the environment and for increasing standard of living for everyone.

Thesis 4

The financial crisis of the welfare state is symptom of a deeper crisis.

The real crisis of the welfare state is not primarily financial, but cultural. It is the crisis of total exhaustion from political promises that can no longer be fulfilled, from delegating so many tasks to the state in the vain hope that maybe, one day in the future, it will be able to fulfil them all. Yet this very compulsion disturbs and destroys any hope of reliance on preparedness, spontaneity, reciprocity, and voluntary cooperation, the only long-term guarantors of sustainable social behaviour. Such behaviour can only emerge and exist on the basis of proven cultural and social traditions which continue to renew and adapt themselves to the changing world without any coercion by the state.

Thesis 5

In today’s world, welfare state redistribution has infiltrated almost all state activity. As a first step, its general perception must be recast as a limited task of the state. As a second step, its practice must be transformed into a targeted aid for those who are in need indeed.

The planned state economy is today discredited worldwide. And yet it seems to continue to play an increasingly significant and dominating role in the realm of public services in market economies and mixed economies alike. Even academics and politicians will on one hand admit that planned economy does not work in the long run because it is unable to create and implement innovations, yet on the other hand the same academics and politicians will plead for clinging to state solutions. Education or health care are prime examples. Yet it is precisely these two areas that are particularly diverse and viable, and can only be state-planned at the cost of great losses of quality. For those of us who are convinced that planned economy cannot satisfactorily solve problems sustainably (i.e. without cost explosion), the only way is to gradually dissociate education and health care from the shackles of state planning and transform them into a user-financed model, perhaps combined with targeted specific assistance. Health policy, education policy and redistributive social policies must be divorced from one another. Why should planned economy miraculously work in areas in need of innovation and governed by the most diverse personal and societal preferences, if state planning cannot even produce and distribute decent consumer goods and simple services such as transport and telecommunications?

Thesis 6

To serve the interests of both the needy and the helpers, social assistance must always meet the following three conditions:

1) It must be a supplement, i.e. exist as an exception and not the rule.
2) It must be constrained in time
3) It must be interpersonal – exist as a relationship between two actual human beings, perhaps under the auspices of non-central local forms the helping organization.

Redistribution and social policies have been an integral part of the political system for decades and even for centuries. In democracies they cannot be abolished overnight. First they must be capped, then pruned and finally put on a sustainable basis.

The fundamental problem is redistribution has inflated social policy in the war-torn and crisis-ridden 20th century (perhaps with some partial justification) to such an extent that it now exceeds the financial means of the system and physically just cannot continue in its present form. What was once an exception has over time become the rule and such rule simply cannot be financed.

In light of this prognosis, some are advocating a total exit from redistribution and a return of social policy back to privately provided care. That may be a correct course of action in theory, but the fly in the ointment is that such demands are not compatible with the general consensus, and therefore stand no chance of being implemented in a democracy.

Thesis 7

The welfare state is not in a bottleneck. It is in a dead end.

In a bottleneck, a “more of the same” strategy is useful. In a dead end, a “more of the same” strategy is a recipe for a disaster. It leads to senseless exhaustion of all strength. The only thing that helps is a turn-around, search of new, untried solutions. In some cases this must involve a return to the old way of doing things.

In a dead end you have to turn back and change the direction, the whole method. Large part of political failures and crises in history arose from treating all issues as bottlenecks and failure to recognize dead ends needing real change. Politics often speaks of the need for a change, but it is rarely done.

Thesis 8

A free society needs diverse, overlapping elites and a political system that is constrained, controllable with the power to recall politicians, and built up from competing small entities.

One should be careful with the term “elite”, originally meaning “selected”. Every society needs elites in the sense of a vanguard who experiment with new forms of living together, with new products and services, and also with the risk of constantly making new mistakes.

Technology is nature experimenting with humans. Politics is humans experimenting with humans. In such experiments, humans must not feel as victims of themselves. They must play the role of discoverers, inventors, and lifelong entrepreneurs. They must have the courage to keep actively influencing the course of the world, without becoming too presumptuous and overconfident. Such individuals belong to the elite. The smaller the experiment, the greater chance of success (which can then be copied) and the smaller the risk of failure with large number of victims. But even failed experiments can serve as teachable moments – perhaps even more so than the successful ones – but the size of the experiment must always keep the number of victims low.

But liberals should always use the word “elite” in the plural. And perhaps in the realm of politics the term should not be used at all – paradoxically, since that’s where its modern use was born. There are elites in all general walks of life – in the economy, in culture, in civil society, in sport. But in politics their competences should be fundamentally curtailed, and the actual individuals must be exchangeable if they do not do their job. That is the great advantage of democracy, according to Karl Popper. The task of politics is not to be creative and innovative, but to protect optimally the rights and freedoms and property of citizens, and to keep down government expenditures and taxes.

Thesis 9

The welfare state is an attempt through egalitarian social policies to overcome feudal inequality of the three estates, and the industrial revolution inequality between the rich and poor.

(Neo-) Marxists have not been the first to propose that modernity is an attempt to overcome the ancient and medieval three-estates society and the class divisions of the industrial age. Already Plato tri-sected society into Rulers (the philosophers), Soldiers (the keepers of order, both inward and outward), and Producers (the free and non-free workers providing livelihood for everyone). This division is in fact even richer and more nuanced than the dialectical juxtaposition between The Leaders and The Followers, or between The Exploiters and The Exploited in Karl Marx. From a liberal point of view, too, we need to overcome and reshape the notion of a dialectic between the chosen (or democratically elected) leaders or elites on the one hand and the followers (the dominant majority) on the other.

In the Middle Ages, the tri-section of society morphed into the three-estate society: the Armed estate (the nobility), the Learned estate (the clergy) and the Sustenance estate (farmers and craftsmen).

As usual, the Swiss experience differed in this respect from the rest of the European continent. The Swiss were a special case – the tri-section of society has never been very pronounced. It is very illustrative to consider why, so allow me this little Case Study under Thesis 9.

(Case Study:) Why The Swiss never developed powerful aristocracy and clergy

The Third estate – the productive Sustenance estate in Switzerland, the mediaeval farmers and craftsmen, given the nature of the threat they were facing and given the geographical specifics of Alpine valleys they inhabited, decided to both arm themselves and to defend themselves. Such step immediately made the whole Armed estate quite redundant. In fact, a lot of the time they were defending themselves from the encroachments of foreign nobility. As a result there has never been any influential aristocracy in Switzerland.

This had further consequences. With no aristocracy in place, there was not really anybody with whom the clergy could gang up against the third estate, the farmers. Meanwhile in the rest of Europe, the higher clerical circles were usually descended from the nobility and often therefore represented their interests. At the very least they defended the whole social structure of three estates quite religiously…

It is quite symbolic that to this day the most popular card game in Switzerland is one that only the Swiss could have invented. It is called “Jass” and according to its rules, the Farmer card (the Jack – hence the name of the game “Jass”) trumps the King.

Another quite characteristically Swiss undertaking is Heinrich Pestalozzi’s attempt in his “Investigations” to diagnose the various “states” of a person through the lens of the three estates. He sees humans as being at the same time “an animal” (homo oeconomicus), “a citizen” (homo politicus) and a “God’s child” (homo religiosus). The task of education is then to train “Head, Heart and Hand” in such a way that no dominant estate emerge. The system strives to build independent individuals who may be quite unequal from one another but who are all equally legitimate, who coordinate activities with each other without inherited or politically established hierarchies and who divide their work by mutual consent.

The old estates-based society can thus be overcome if all three estates are integrated within the autonomous individual. This process also forms the basis of the “militia principle” according to which “politics” is not delegated to a specialized professional group. No political class exists, everybody is a little bit of a politician.

Thesis 10

The welfare state is gradually bringing about a new tri-section of society which is laid over the ideological fabric of political parties.

Today we can see around us a new division into a three-class society, based on the triangle of redistribution:

1. Redistribution Burden Bearers (the rich and the efficient) = tax payers,
2. Redistribution Beneficiaries (disincentivised welfare recipients), = tax eaters
3. Redistribution Bureaucracy, becoming bigger and ever more powerful, eventually consuming itself a considerable part of the redistributed budget. = professional redistributors

I consider it my duty to point out that this new three-tier society is also not sustainable. Sooner or later, it is going to fail for the same reasons as the medieval three-estates society: it will run out of consensus, or run out of money, or both.

The true elites in this tripartite division would be those that do not fit in; the creative dissidents and the spontaneously helpful people who would defend themselves against the wave of the new estates-based society. Such people form an economic and socio-cultural entrepreneurship milieu that demands not only a significantly different politics, but above all “less” politics and “less state”. Today, however, these groups are thwarted by the bureaucratic redistribution machinery (and by media power so often associated with state power) because these true elites disturb the mainstream.

This is the most serious and most underestimated problem: the state and the bureaucratic social industry destroys private goodwill and private care – by making them redundant. This the worst of all evils: people are gradually “weaned off” their humanity and creativity.

This may sound paradoxical, but the forced redistribution hurts least the highly taxed, the net contributors who are coercively financing the whole redistribution. This is because it would take a lot of redistributive expropriation (probably more than half of the income) to stop them being economically active, saving and investing. Many become even more productive when hit with expropriation. And though they may suffer from high and progressive taxation, they also indirectly benefit from it, since the recipients of redistributed funds become politically more “submissive” and can also consume more as a result of redistribution. Thus redistribution can bring some good news to the Burden Bearers, many of whom are producers and service providers. That is what makes redistribution popular not only among the left-wing statists, but also among those who benefit from additional purchasing power by the obedient consumer/retiree/sheep.

Whom does redistribution hurt the most? Again, this may sound paradoxical, but it hurts most the soul and mind of the redistribution Beneficiaries. They are denied the opportunity to stand on their own, it disincentivises them, excludes them from the labour market and turns them into economic and political clients / slaves of the redistribution machinery. The redistribution beneficiaries, whom we can call “state pensioners” in a broad sense, may always want more and more, but they never make a revolution about it. The way forward is to put an end to the maze of labour market regulations and wage structures set in stone, and entice these slaves towards making good money by fulfilling various tasks for which there would be much demand in the absence of regulations and professional licensing. The new internet-based Economy 2.0 offers one possible way, by matching individual buyers and sellers of goods and services without the sclerotic infrastructure of the old economy. This good money will help “bribe” people out of the old regulated system where redistributive benefits were paid regardless of individual initiative and where the only way of advancing was to push for more redistribution.

It is clear that the third group, i.e. the redistribution bureaucracy (or should we say redistribution industry) have no motive to criticize the system as long as it is not completely bankrupt. It keeps them employed. The many intellectuals belonging to this group keep using all means to “prove” that there is no alternative. They try everything possible and impossible to postpone the death of this unsustainable flawed system by increasing debt, through monetary policy tricks and/or by shifting the burden onto future generations.

Various redistribution officials serve at the same time as dispensers and supervisors of redistribution. Since they are paid – directly or indirectly – by the state, they are also beneficiaries of the welfare state, and therefore they constantly also demand “more funds” and “more state”.

The age-old question “who supervises the supervisors?” is particularly appropriate in the case of redistribution. And we also need to ask, “Who puts the brakes on the appointed brakers who are in no way interested in braking?” The image of a Black Hole comes to mind once again..

So what can we do about it? We probably cannot terminate redistribution abruptly. The system so far has already sufficiently corrupted interpersonal and intra-family helpfulness that any sudden end could be quite catastrophic. Instead, let us first start restricting the number of those who are now vitally dependent. All according to the motto “We want to continue to help as a political community, but only to those who really need it. We will not let them down, but the really needy never make the majority of people.”

A practical “rule of thumb” of social policy could be as follows: Social assistance becomes a “black hole” at a point where more than 10 percent of the population are treated as social cases, i.e. when “poverty” status is no longer really an exception to the rule. At present, more than half of the voting population is financially dependent on the state. Then the majority principle in a democracy becomes politically corrupt and the financial brakes cannot work when individuals are both beneficiaries and burden bearers at the same time. Too much forced redistribution ultimately destroys the majority principle.

Being charitable means I use my own resources to help others. Being welfare state means “first I forcibly take away someone’s money and then I do (or at least I try to do) something good with other people’s money (and keep some of the money for myself, for surely such service must be done “professionally” and not out of the warmth of my heart)”. That is the very opposite of charity. That is kleptocracy and state-funded social industry. In the long run, the so-called welfare state destroys not only both, the welfare and the state, but also displaces spontaneous and private interpersonal helpfulness in the local or chosen community.

That is the opposite of the Judeo-Christian concept of charity. But every cloud has a silver lining, and so does this one: Fortunately, this concept of charity will never be completely eradicated, because being charitable – even in the middle of the destructive welfare state – brings to the practitioners at least immaterial benefits. It is not true, that charity is the opposite of rational economic behaviour. In the long run the «homo oeconomicus cultivatus» will be on the winner side, and a society based on mutual consent will be more successful than a society based on coercive redistribution.

There is famous prayer written by the American theologian Reinhold Niebuhr (1892-1971). Sometimes it is called The Serenity Prayer:

God, grant me the Serenity to accept the things I cannot change, Courage to change the things I can, and wisdom to know the difference.

If we change it to bottlenecks and dead ends, the prayer should read as follows:

God, give me the Energy to fight with more power and perseverance in bottleneck situations, Courage to turn back in dead-ends, and the wisdom to know the difference.


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