The welfare state

Material pro gido por derechos do autor
•
Stanford University Press
Stanford, California
C> 1987, 1993 Nicbolas Barr
Originating publisber: Weidenfeld and
Nicolson, The Orion Publishing Group, l..ondon
First published in the U.S.A. by
Stanford Uníversity Press, 1987
Secood edition publlsbed 1993
Printed inGreat Britain
Clotb ISBN 0-8047-2206-4
Paper ISBN 0-8047-220
LC93-83252
This book is printed on acid-free paper

Material protcgi lo por derechos de autor
Contents
üst of Tables x1
List of Figures xii
Preface lo tbe Second Edition xiii
PART 1 CONCEPIS
1 lntroduction 3
1 The Approach 3
2 The Welfare State: Definition and Objectives 6
2 Tbe Hlstorlcal Background 13
1 Early Days 13
2 The Liberal Refonns 17
3 Thc First World War and tbc lnter-War Period in Britain 22
4 lnter-War Poverty Relief in the USA 27
S Thc Second World War and lts Aftcnnath 31
6 Recent Developments in Britain and the USA 34
7 Concluding lssues: From the Past to the Present 40
3 Polltlcal Tbeory: Social Justlca and the State 44
1 Theories of Society 44
2 Libenarian Views 46
3 Liberal Theories of Society 48
4 Collectivist Yicws 54
S lmplications for the Role of the State 59
Appendix: Non-Technical Sumrnary of Chapter 3 66
4 Ec:onomic Theory 1: State lnterventlon 70
1 Tbe Fonnal Sto!cUm:of thc Problcm 70
2 Why Economic Efficiency ls One of the Airns of Policy 72
3 lntervention for Reasons of Efficiency 79
4 lntervention for Reasons of Social Justice 86
5 Public Choice and Goverrunent Failure 93
6 From Theory Towards Policy: The lssue of Privatisation 95

viii Contents
7 Conc1usion: Economic and Politica1 Theory 99
Appcndix: Non-Tcchnical Summary of Chapter 4 JOS
5 Economle Theory 2:lnsurance 111
1 lntroduction 111
2 Thc Demand for lnsurancc 112
3 The Supp1y Side 116
4 The lnsurance Market as a Whole: Private and Social lnsurance 123
Appcndix: Non-Technical Summary of Chapter S 129
6 Problema of Deflnltlon and Measuremtot 132
1 Measuring Welfare 132
2 Poverty 139
3 lnequality 1: lndividuals and Families 146
4 lnequa1ity 2: Aggregate Measures 152
Appendix: Non-Technica1 Summary of Chapter 6 164
PA8T 2 CASH BENEIDS
7 Flnandng the WeHare State 169
1 The Structure of the UK Government Accounts 169
2 Cash Benetits 175
3 Benefi.ts in Kind 180
4 Assessing the Welfare State 182
8 Contrlbutory Benefits 1: Unemployment. Slckness and
Dlsabll!ty 188
1 lntroduction and lnstitutions )88
2 Theoretical Arguments for State lntervention 194
3 Assessment of the National lnsurance System 200
9 Contributory Benefits 2:Retirement Pensions 208
1 lntroductioo aod Iostitutioos 208
2 Methods of Organising Pensions 212
3 Efficiency Arguments for State lntervcntion 217
4 Social Justice 224
S Assessment of National Insurance Retirement Pensjogs 227
10 Non-Contrlbutory Beneflta 239
1 lntroduction and lnstitutions 239

Contents IX
2 Theoretical Arguments for State Intervention 244
3 Assessment of Non-Contributory Benefits 245
11 Strategies for Reform 263
1 Approaches to lncome Suppon 263
2 The Negative lneome Tax Approach 264
3 The 'Back to Beveridge' Approach 277
4 Mixed Strategies 281
S Conclusion: Cash Benefits 282
PART 3 BENEms INKJND
12 Healtb Cara 289
1 lntroduction to Bencfits in Kind 289
2 Aims 291
3 Methods 294
4 Assessment of the British System of Health Care 310
5 Refuon 326
6 Conclusion; Health Carc 332
13 Educatlon 336
1 lntroduction 336
2 Aims 337
3 Methods 343
4 Assessment of !he British Educational System 350
S Reform 365
6 Conclusion: Education 375
14 Houslng 378
1 lntroduction 378
2 Ajms 379
3 Metho.ds 383
4 Assessment of British Housing Institutions 392
5 Rcfoon 414
6 Conclusion: Housing 420
PART 4 EPILOGUE
15 Conch,.lon 427
1 Argumcnts for a Wclfare Statc 427
2 Broader Perspcctives 434

Material pro egido por derechos d autor
x Contents
Glossary 438
References 445
Subject Index 482
Author Index 491

Tables
Table 4.1 An overview of public and prívate provision 96
Table 4.2 Public and prívate provision: a more complete view 97
Table S.1 Gross and nc:t insuranoe premiums, and net income in good and bad
yc:ars 113
Table 6.1 Poverty and inequality in two difl'erent societies 142
Table 6.2 Values of the Atltinson inequality rnc:asure for the UK, the Netberlands
and West Gmnany IS9
Table 7.1 lncome and expenditure of central and local governmc:nt, UK, 1992/93
(est.) 172
Table 7.2 Gross national product and spending by central a.nd local govemmc:nt,
UK, 1920, 1948 and 1992193 176
Table 7.3 Nationa1 insurance contribution rates, 1992/93 177
Table 7.4 Account of the Nationa11nsurance Fund, Great Brítain, 1992193
(est.) 179
Table 7.S Cash bc:nefits, UK, 1992/93 (est.) 181
Table 8.1 Main national insurance bc:nc:fit rates, 1992/93 193
Table 9.1 Financing a Pay-As-You-Go pension scheme in tbe presence of inJlation
and growth 21S
Table 9.2 Output and consumption with worlcforces of different si= 221
Table 10.1 lncome support rates, 1992/93 241
Table 10.2 Distribution of bc:nefit expenditure by income decile, UK, 198S 258
Table 11.1 Hypotbetical efl'ect of negat.ive income tax oo tax rates 269
Table 12.1 Health, UK, 1992/93 (est.) 312
Table 13.1 Educatioo and science, UK, 1992193 (est.) 3S2
Table 14.1 Public expenditure oo housing, UK, 1992/93 (est.) 39S
Table 14.2 Public expenditure (more broadly defined) on bousing, UK, 1992/93
(est.) 396
Table 14.3 Mortgage interest tax relief and subsidies for local authoríty housing
by level of pre-tax income, 197417S 402
Table 14.4 Household tc:nures by socioeconomic group, Great Brítain, 1978 413

Figures
Figure 1.1 Ovcrvicw of thc wclfarc state, UK, 1992193 (cst.) 9
Figure 3.1 Thc optimal distributioo of iocome uoder utilitariaoism 49
Figure 4.1 Parcto optimal output: the simple case 73
Figure 4.2 A simple general equilibrium represeotation of Pareto optimal
output 73
Figure 4.3 The Edgeworth box (distribution) 74
Figure 4.4 The I0$5 resulting from marginal cost pricing under incrcasing retums
to scale 83
Figure 4.5 Redistribution in casb and kind 83
Figure 5.1 Thc demand for insurance by a rational risk-averse individual 113
Figure 5.2 Elfects of adverse selection on a competitive equilibrium 120
Figure 6.1 Povcrty and inequality 142
Figure 6.2 The cost of maiotaining an 'equivalen!' standard of living for dilferent
families 1S1
Figure 6.3 The Lorenz curve 1SS
Figure 6.4 Lorenz curves for thc UK, thc Ncthcrlands and West Gerrnany 1S6
Figure 7.1 Partía!equilibrium incidence of a subsidy 183
Figure 9.1 Live births per 1000 populatioo, 1940-84 219
Figure 10.1 Stylised n:presentation of tbe budget constraiot under income
support 248
Figure 10.2 Cumulative distribution of expenditwe on pensions by iocome decile,
UK, 198S 259
Figure 11.1 The cost of negative incomc tax 265
Figure 11.2 The redistributive elfects of negative income tax 271
Figure 12.1 The elfects of consumer ignorance oo individual demaod for hcalth
careleducation 296
Figure 12.2 A simple ruarkct for hcalth care 299
Figure 12.3 Dilfereoces in the costs and benefits of hcalth careleducatioo by
socioeconomic group 325
Figure 13.1 A simple human capital model of the individual decisioo to invcst in
bcalth careleducation 340
Figure 14.1 Efficiency io the bousing market 380
Figure 14.2 A simple stock-adjustment mode1 of the bousiog rnarket 384
Figure 14.3 Thc cffect of n:nt control on the quality of housing 408

Preface to the Second Edition
lbe friendly reception the first edition received was very gratifying. and 1
regret that it has taken so long till the appearance of the second. Much has
happened in the intcrvening ycars both in Britain and elscwhere, particularly
in the formerly Communist countries (one reason why the second edition
has not appeared till now is that 1 spent two ycars with the World Banlc
working on the design of social safety nets in central and eastem Europe
and the former Soviet Union).
lbe dcmisc of Marxism faces thosc countries with the problem of
the appropriate division of responsibility betwccn the state and the
private sector - the central theme of this book. The cconomic argument
and strategic policy conclusions remain the same as in the first
edition: that the welfare statc (i.e. income support, health care, education
and housing), quite apan from its distributional and other objectives,
has a major efficiency role. To the extcnt that this is so, it is no longcr
public involvcment per se which is controversia!, but only its precise
form and the choice of its distributional objectives. It is therefore not
surprising. as discusscd in Chapter 1S, that the welfare state weathered
the storm of the 1980s in Britain and America intact and, in many ways,
strengthened.
Throughout the book, the main arguments are contrasted with thosc
arising from dilferent pcrspectives, espccially from socialists and from
libenarians like Hayek and Friedrnan. lbe debate with the latter is particularly
fruitful. lbe diffe¡:ence betwcen their views and a liberal defence
of the welfare state rests less on ideology than on cconomic theory.
SpecificaJly, information problems, which are largcly left out of account in
most libcnarian writing. are crucial to establishing the welfare state's
cfficiency role.
Though the book is written spccifically for cconomics spccialists, the
nccds of a diverse rcadership are kept in mind.lbe early theoretical chaptcrs
(assume a working lcnowledgc of intermediate microcconomic theory.
To help readcrs with little cconomics, each of these chapters has a nontechnical
appendix, with the aid of which the rest of the book should, for
thc most pan, be intelligible. AJgebra is uscd where necessary to pin down
sorne important concepts preciscly, but the results are always explaincd
verbally so that the cquations can be skipped by thosc who are prepared
to talce their conclusions on trust. This book is thus accessible to rcaders
in related academic arcas (e.g. social administration, public policy and

xiv Preface to the Secorul Edition
political economy) and to professionals in such fields as medicine and
education. Familiarity with British institutions is not essential; they are
described in separate sections which can be consulted as desired. The
importan!arguments do not depend on institutional lmowledge and should
thcrcfore make sense to readcrs in (or from) other countries. Thc principies
developed are applicable to all industrialised economies and, to a large
extent, also to transition economies. Where possible, examples and parallels
from other countries are given.
Though the main thrust of the argument has not changed, there are a
number of significan!changes from the first edition. Chapter 1 contains a
new section on the objectives of the welfare state. The theoretical discussion
is strengthened by new sections in Chapter 4 on public choice and govemment
failure, and on the boundary between the market and the state, and
in Chapter S by a new section on social insurance, and by extended
discussion of the problems caused by asymmetric infonnation.
Policy analysis includes discussion of three major UK developments:
the 1988 social security reforms; reform of the National Health Service
in the aftermath of the 1989 White Paper; and changes to school and
university education under the 1988 Education Reform Act. In addition,
the analysis of targeting in Chapter 1O has been extended, and there
is a new section assessing the arguments for child benefit. Chapters 12
and 13 on bealth carc and education have been completcly reorganised.
Chapters 12, 13 and 14 now discuss health care, education and housing,
respective)y, and all have a common structure. Alongside discussion of
ongoing refonns, the chapters include additional material on intemational
comparison of health care systems and a new section on the reform of
higher education, including discussion of student loan schemes. The References
have been brought up to date, and expanded to include more
intemational material.
Readers in a burry can find the major arguments in Chapters 1 and 1S,
plus the concluding sections of Chapter 4 (economic tbeory), Chapter 11
(cash benefits), and Chapters 12, 13 and 14 (bealth care, education and
housing, respectively). Readers in less of a hurry may want to look
at a number of other books and articles which are, in many ways, companion
volumes. My colleague, Howard Glennerster's (1992) book sets
out the detailed finances of the welfare state. Barr and Whynes (1993)
invites a range of authors to cover the welfare state from a variety of
different perspectives. Barr (1992) sets the arguments in a broader OECD
context.
My thanks are due to all the colleagues and friends who hclped with the
first edition. My specific thanks for help with this revision (without implicating
thcm in crrors which remain) are to Howard Glennerster and John
Hills, to AJan Thompson for guiding me through the morass of UK cash
benefit institutions, and to Martín and Peggy Baer for letting me share their

Preface to the Second Edition xv
rural idyU for a gCIOd part of tbe writing. My greatcst debt is to Gill, for
ber support and encouragement, and for tolerating tbe sound of tbe
nocturnal keyboard in hotels throughout central and eastem Europe.
Nicho/as Barr
November 1992

Part 1
Concepts

Chapter 1
lntroduction
(The duties of the state arel ...first ... that of protecting the society
from the violence and invasion of other independent societies; . ..
second ... that of protecting, as far as possible, every member of the
society from the injustice or oppression of every other member of it;
.. . third . .. that of erecting and maintaining those publick institutions
and those publick workswhich. though they may be in the highest degree
advantageous to a great society. are of such a nature. that the profit
could never repay the expence to any individual or small number of
individuals. (Adam Smith, 1776.]
1 The Approach
1.1 The Central Argument
One of the wellsprings of this book was the exuberant insistence of various
of my students and colleagues that economics appeared largely irrelevant
to major issues of social policy. They had a point, and this book is an attempt
to remedy their grievances and to assert the importance of economics. To
help with the former 1 try to relate economic theory to different notions of
social justice and to the historical development of the welfare state. In
attempting the latter, two results stand out. First, the welfare state is not a
subject apart, but one which fits very naturally into the framework of
economic analysis. Second, the theoretical arguments support the existence
of the welfare state not only for the familiar equity reasons but also very
much in efficiency terms. This. it turns out. is an arca in which economic
theory is capable of strong results which can justify the general idea of the
welfare state to a surprising extent without resort to ideology.
Given the size of the subject, this book of necessity is an attempt to paint
a broad canvas in the hope that readers, even if they do not accept all the
answers, will at least be directed to the right battleground. The book
addresses two broad questions: what theoretical arguments can justify tbe
existence of the various parts of the wclfare state in a modem industrialised

4 ConCI!pts
economy; and, given these arguments of principie, how sensible (or
otherwise) are the specific arrangements in Britain and in other countries?
The approach is best illustrated by two questions which permeate throughout:
l . What are the aims of policy?
2. By what methods are those aims best achieved?
Question 1 is very broad ranging.There is general agreement that the major
aims of policy in Westem societies include efficiency in the use of resources;
their distribution in accordance with equity or justice; and the preservation
of individual freedom.These aims, howcver, can be defined in diffcrent ways,
and may be accorded different weights. To a utilitarian, 1 thc aim of policy
is to maximise total welfare; to Rawls the aim is social justice, defined in a
particular way; libertarians make their main aim individual freedom, and
socialists their prime concem equality. Beveridgc's goal was the conqucst
of what he called the five giants of Want, Disease, lgnorance, Squalor and
ldlcness. Harold Macmillan once remarked that a just society should contain
both a safety net and a ladder. The answer to question 1 is explicitly
normative and largely ideological. The objectives of the wclfarc state are
discussed in more detail in section 2.2.
In contras!,it is argued that once question 1 has been answered, question
2 is not ideologica/ but technical, i.e. it raises a positive issuc. Wbcthcr a
given aim should be pursued by market allocation or by public provision
depends on which of these methods more nearly achievcs the chosen aim.
Market allocation is neither 'good' nor 'bad' - it is useful in sorne instances
(e.g. prívate markets for food in Britain are effective in achieving the aim
that peoplc should not starve); but in others (it is argued in Chapter 12
that hcalth care is onc) the market mechanism works less well, and a system
with substantial state intervention can be argued to be more efficient and
jusi. Similarly, public provision is neither good nor bad, but useful in sorne
cases, less so in others. One of the questions throughout is which method
is the more useful in different arcas of the welfare state.
The distinction between aints and methods is fundamental, and bears
reinforcement. Consider two central questions which all societies faoe:
• How much redistribution (of income, wealth, power, etc.) should there
be?
• How should the economy best be run (i.e. the market system, central
planning, or a mixed economy)?
The first question is clearly ideological and normative; it is an aims question
and so properly the subject of political debate. But once that question has
been answered, the second question is vcry largcly one of mcthod (i.c. a
1 Utilitllrian.ism aod other theori.es or socidy. includin¡ thote of Rawb: aod libertariao and aoc:ialist writm.
are discussed io Chapter 3.

lntroduction S
positive issue) and more properly the subject of technical than political
discussion. This approach is explained in detail in Chapters 3 and 4, and
summarised in the concluding section of Chapter 4.
1.2 Organisation of the Book
Part 1 sets the scene, starting in Chapter 2 with a discussion of the historical
development of the welfare state in Britain, including sorne comparison
with other countries, particularly the USA.The next three chapters are the
theoretical heart of the book: Chapter 3 discusses various definitions of
social justice and their different implications for the welfare state; Chapter
4 sets out the economic theory of state intervention and Chapter S the
theory of insurance.Chapter 6 discusses problems of definition and measurement.
To belp readers who are diffident about their theoretical background,
each of the conceptual chapters (3, 4, S and 6) has a non-technical Appendix
which summarises the essential material; and tecbnical terms are explained
in the Glossary.
Three major threads are developed in Part 1 which run through the rest
of the book: the social welfare maximisation problem; altemative definitions
of social justice; and measurement problems. The social welfare maximisation
problem (set out in Cbapter 4) is the conventional starting point
for economic theory. An importan!theorem states that under appropriate
assumptions a competitive market equilibrium will allocate resources
efficiently. lt is argued that, where these conditions hold, the role of the
state, if any, is limited to income redistribution; conversely, where these
conditions fail, there may be efficiency grounds for intervention in a variety
of forms. The second major theme is social justice. The definition chosen
will determine the weights assigned to different individuals, with major
implications for the form and extent of intervention, e.g. wbether people
with no income shouJd be supported at subsistence. or at sorne higher leve!.
The third thread, discussed in Chapter 6, concems problems of definition
and measurement. Many variables are hard to define and, once defined,
hard to measure. A crucial and recurren!difficulty is that utility (see the
Glossary) is not measurable. This makes it bard both to measure living
standards and to compare them. Costs or benefits may also be hard to
measure.
As far as possible each chapter in Parts 2 and 3 has a similar layout to
clarify tbe structure of the argumeot. Each chapter discusses in tum: the
aims of policy; the methods by whicb they might be achieved, i.e. the
theoretical argumeots about intervention for reasons of efficiency and
social justice; as.sessment in the light of this theoretical discussioo of the
appropriateness (or otherwise) of the British and other systems, including
discussion of the empirical literature; and reform.

6 Concepts
Part 2 analyses cash transfers. Chapter 7 briefty describes the finances of
the welfare state. Chapter 8 looks at unemployment. sickness and disability
benefits, Chapter 9 at rctirement pensions and Chapter 1O at non-contributory
benefits, in each case starting with the theory and thcn assessing
the practice. Chapter 11 considers a variety of refonn strategies. Part 3
discusses provision in kind. Chapter 12 looks at health care, analysing the
theoretical arguments for public production and aUocation, assessing the
effectiveness of tbe UK national bealth service in comparison with systems
in other countries, and discussing altemative ways in which hea1th care
might be organised. Chapters 13 and 14 cover similar ground for education
and housing, respectively.
The conclusions of tbe book are summarised in Chapter 15. Readers in
a burry can get an idea of the book's approacb and its main conclusions
by reading Chapter 1S and the concluding sections of Cbapters 4 (economic
and political tbeory), 11 (income support), and 12, 13 and 14 (bealtb care,
education and housing, respectively).
2 The WeHare State:Definition and Objectives
2.1 Defining the Welfare State
We shall see in Chapter 6 that importan!concepts like poverty and equa1ity
of opportunity are hard, if not impossible, to define in principie, and even
harder to measurc. The concept of the welfarc state similar1y defies precise
definition, and no attempt is made to offer one (see the Further Reading).
Even Richard Titmuss (1958) ducked the problem - that book is called
Ersays on 'The Welfare State' (bis quotes). As he later put it, '1am no more
enamoured today of the indefinable abstraction "The Welfare State" than
1 was sorne twenty years ago when ... the tenn acquired an intemational
as well as a national popularity' (1968, p. 124). Three arcas of complication
stand out.
Welfore derives from many sources in addition to state octivity: individual
welfare derives not only, nor necessari1y primarily, from state institutions,
but from at 1east four sources.
• The labour morket is arguably the most importan!, first through wage
income. Full employment is a major componen!of welfare broadly
defined. High levels of employment and rising labour productivity over
the post-war period were at least as much an equa1ising force as redistribution.
In addition to wage incomc, firms (individually or on an
industry-wide basis. voluotarily or under legal compulsion) provide occupational
welfore in the face of sickness, injury and retirement.
• Private provision includes voluntary private insurance and individual
savmg.

lntroduction 7
• Voluntary welfare arises both within the family and outsidc, whcre people
gjve time free or at a below-market price, or make voluntary cbaritable
donations in other forms.
• The state intervenes by providing cash benefits and bcnefits in kind. In
addition, it contributcs througb various tax concessions to the finance of
occupational and prívate provision.
.Modes of delivery are also diverse. Thougb a service may be funded by
the state, it does not follow that it must necessarily be publicly produced.
The state can produce a service itself and supply it to recipients at no
charge (e.g. bealth care under the National Health Service); or it can pay
for individuals to consume goods produced in the prívate sector (e.g. free
drugs under the National Health Service); or it can give individuals money
(either explicitly or in tbe form of tax relief) to make their own purchases
(e.g. tax relief in sorne countries for private medica! insurance premiums).
The issue of 'privatisation', as we sball see in Chapter 4:6, is much more
complex than is recognised in most public discussion.
The buundaries of the welfare state are not we/1 defined: though thc state's
role should not be exaggerated, neither should it be understated. Sorne
typically excluded expenditure (e.g. public health and environmental policies)
is very súnilar in purpose to activities which are included.
Welfare is thus a mosaic, with diversity botb in its source and in the
manner of its delivery. Neverthcless the state, througb various levels of
govemment, is much the most importan!single agency involved in Britain,
and in most industrialised countries (for a survey of the welfare state in ten
OECD countries, see Barr (1992)). Througbout the book the term 'welfare
state' is used as a shorthand for the state's activities in four broad arcas:
cash benefits; health care; education; and food, housing and other welfare
services (Larnpman. 1984, Ch. 1).
In broad terms the wclfare state today comprises cash bcncfits and
benefits in kind. The latter embrace a wide range of activities, including
education, medica!care and more general forms of care for the infim1, the
mentally and physically bandicapped, and children in need of protection.
Cash benefits have two major components.
l. Social insurance is awarded without an income or wealth test (see the
Glos. ry), generally on the basis of (a) previous contributions and (b) the
occurrence of a specified contingency, sucb as unemployment or bcing
above a specified age.
2. Non-contributory benefits are of two sorts. 'Universal' benefits are
awarded on the basis of a specified contingency, without either a contributions
or an income test. There is no convenient shorthand for this type
of benefit: such benefits are often referred to (Gordon, 1988, p. 37) as
'universal' and, reluctantly, I shall follow that usage. Major examples in
Britain are child benefit and the National Health Service (discussed in

8 Concepts
Chapters 10 and 12, respective1y). Social assistonce is awarded on the basis
of an income test. It is generally a benefit of last resort, designed to he1p
individuals and families who are in poverty, whether as an exceptional
emergency, or because they are not covered by social insurance, or as a
supp1ement to social insurance.
In practice the Britisb wclfare state can be ta.ken to comprise, at a
mínimum, the publicly provided benefits (representing about 23.5 per
cent of gross domestic product) shown in Figure 1.1, together with the
contributions wbich pay for them.Cash benefits foUow the pattern described
above. National insurance is payable to people with an adequate contributions
record; benefits covcr, inter alia, unemployment, sickness (sbortand
long-tcrm) and retirement, of wbicb the last (not far sbort of 20 per
cent of social spending) is much the largest. Non-contributory bencfits
include cbild benefit (a weeldy casb payment to thc parent or guardian of
every cbild), and income support (paid on the basis of a means test to those
with little or no otber income). Tbc major benefits in kiod are the National
Hcalth Service (23.5 per cent of total social speoding), education
(approximately 21.6 per cent), and housing (6 per cent, plus substantial
additional expenditure on cash assistance with housing costs).
2.2 The Objectives of the Welfare State
Tbe objectives of social institutions, as i11 any otber arca of cconomic policy,
are efficiency, equity aod administrative fcasibility. In this context, however,
it is useful to adopt a more detailed categorisation.
EflideDcy has at least three aspects.
l. Macro efficíency: the efficient fraction of GDP should be devoted to
the totality of welfare-state institutions, e.g. policy should seek to avoid
distortions which lead to cost explosions.
2. Micro efficiency: policy should ensure the efficient divisioo of total
welfare-state resources between the differeot cash benefits, different types
of medica!treatment, and differeot kiods of education.
3. Incentives: where institutions are publicly funded, their finance and the
construction of bencfits should minimise adverse effects (a) on labour supply
and employment, and (b) on saving.
Soppordng UYIDg staDclanls, the secood strategic aim, has at Ieast three
compooents.
4. Poverty relief no individuaVhousehold should fall below a mínimum
standard of living. As discussed in Chapter 6, therc is no analytically
satisfactory way of defining a poverty line, so that the definition of the
mínimum standard is largely normative. Once the poverty line has been
decided, the effectiveness of the system is measured by statistics relating to

1
T01'Al
GDP'
(6JI.OI>n
1
PUBLIC SPENDINGb
í2.8.Sbo
WELFAR STATE
(148-Sb<l (IDO%)
1
SOCIAL SECURITY BF.NEFITS IN KIND
BENEATs< OS.9bo ISI. I
02.9bo (49.) 1
1 1
NATIONAL INSURANCE NON-CONTRIBUTORY NHS EOUCATION HOUSING
06.6bn BENEFTTS 04.9bo 02. 1bo !9.01>n
(24.6<¡) .00.6bn (2J..S<¡) (21.6<¡) (6. )
(20,6<¡)
1 1
Retirement lnvaltdit f SKkness1 U
nemptoymm
t Othcr
IAComc
Child
Various
Howtna Olhrr
Pen: oiond Suppon Benefit Diublcmono Benefit
llenefit>J
!28.01>n !S.7bo (l.lbo (1.5bo (0.4bo (13.0bn !6.01>n (4.2bo (4.6bn U.8bo
(18.8t - ) (3.811>) (0.7'1>) (). ) (0.3'*>1 (8.7'*> ) (4. ) (2.81) (3.1%) (1.9'*> 1
;::
a
a "
"'·
g.
a.
g"'
:::r
5I
a.
o-""
Figure Ll Onrview of IM welfare stalt, UK, 1992/J {tst. )
Soun:ea: UK (1992j.Tab2.1); UK (1992e, Table 1); UK (1992e, Table 1); UK (1992d, Tables 1 and 2); UK (1992b, Figme 82); UK (1992f,
lntroductory Table and Table 9.4); UK (1992g, Figure 1.03 and Appeodix 3); UK {1992h, Tables 1.1 and 12.2).
Notes: 'EstimaiA:d figure.
'lncludes cunen!and capital speoding and debt interest.
'Figug Uter !han sum of its pans beca use expenditure in Northem lland and on adminiJtration has been included.
•1nc1udes widows' bendlt.
'lnvalidity bendlt and induttrial disablement and death bendlts.
'Excludes statutory sick pay.
•At!Cldanc:e aUowanc:e. iovalid care aUowanc:e. sev= disablemeot aUowanc:e, mobility aUowanc:e. disability living allowana: and disability
workins allowaru:e.

10 Concepts
how numy people are below the poverty line ('headcount' measures), by
how muc/1 ('poverty gap' mcasures), and for lww long (i.e. life-cycle and
intergenerational malters) (see Atkinson, 1987b; Fostcr, 1984).
5. Jnsurance: no one should face an unexpected and unacceptably large
drop in their living standard. This is a major objective of unemployment
benefits and most health-related benefits. Its success is measured by the
rcplacement ratio, which shows a person's income when on benefit in
comparison with his or hcr previous income.
6. lncome smoothing: institutions should enable individuals to reallocate
consumption over their lifetime. As discussed in Chapter 9, individuals can
redistribute from themselves at one stage in the life cycle to themselves at
another (an actuaria) private pension scheme); or such redistribution could
be notional (an unfunded state pension scheme which embodies an intergenerational
social contrae!(Samuelson, 1958)). Alternatively, there could
be tax-funded provision, with no prctence of individual contributions, to
groups whose stage in the life cycle suggests that they are likely to be
financially constrained (e.g. benefits for families with young children).
Objectives 5 and 6 are ditferent aspects of the broader aim of economic
security. Objective 5 concems unexpected reductions in living standards (i.e.
it is mainly an insurance objective); objective 6 concems predictable faUs in
income (i.e. it is more a savings objective). 8oth objectives therefore have
an efficiency as well as an equity dimension.
Tbe reductlon of inequallty, in contras!, is almost entirely an equity issue.
7. Vertical equity: the system should redistribute towards
individuals/families with lower incomes. This aim is contentious. Al! incometested
benefits contribute to it to a greatcr or lesscr cxtent; so, second, do
non-mcans-tested benefits whose recipients disproportionately have lower
incomes (e.g. the UK llat-rate pension). A third form of redistribution
arises where the benefit formula favours lower-income individuals. ' Free'
provision of a tax-funded service (e.g. health care in Britain) is also generally
redistributivc.
The success or othcrwise of benefits in reducing inequality is assessed by
inspection over time of aggregate inequality measures, though with all the
caveats noted in Chapter 6.
8. Horizontal equily: ditferences in benefits should take account of age,
family sizc, etc., and differences in medica) treatment should rcllect only
factors which are regarded as relevan!(e.g. whether or not the patient has
dependants), but not irrelevant factors like race.
Social integratlon So far the objectives have been conventional economic
ones. Sorne commentators include broader social goals.
9. Dignit y: cash benefits and health care should be delivered so as to
preserve individual dignity and without unnecessary stigma (Meade, 1978,

lntroduction 11
p. 269). Beveridge emphasised the importance of contributions in this
context:
The popularity of compulsory social insurance today is established, and for good
reason; by compulsory insurance, ... the individual can feel assured that (hisl
needs will be met ...; by paying ... a contribution, he can feel that he is getting
security not as a charity but as a right. IBeveridge Report (U K, 19421. para. 296.1
10. Social solidarily: cash bencfits and hcalth care should foster social
solidarity, a frequently stated goal in mainland Europe. So far as possible,
benefits should depend on criteria which are unrelated to socioeconomic
status. Retirement pensions are an example; so is medical care in many
countries. Additionally, benefits should be high enough and health care
good enough to allow recipients to participatc fully in the lifc of the society
in which thcy livc - an aim which relates closcly to thc objectivc of povcrty
rclief.
AdmiolstratiYe feasibillty has two aspects.
11. lntelligibility: the system should be simple, easy to undcrstand and as
cbeap to administer as possible.
12. Absence of abuse: benefits should be as little open to abuse as possible.
Problems of definition aod measurcmcnt abound. Efficiency objectives 1-3
have precise analytical dcfinitions, but measurement problems, particularly
the incidence of taxes, contributions and benefits, make it.difficult to assess
how far thcy are achieved. How do we define a poverty line in objectivc 4;
and how Jargc a drop in living standard is 'unacceptable' (objectivc 5)? The
appropriate extent of vertical redistribution and a workable definition of
horizontal equity (objectives 7 and 8) have occupied economists, pbilosopbers
and political theorists almost since the dawn of time, and have
plagued policy-makers at least since the British Poor Law Act of 1601.
Evcn 'equality' is difficult to define unambiguously (Okun, 1975, Ch. 3),
especiaUy in the context of benefits in kind like health care (Le Grand, 1982,
Ch. 2). Conccpts like 'dignity', 'stigma' and 'social solidarity' (objectives 9
and 10) are hard to define and raise major measurement problems. Writers
likc Hayek (1976) argue in addition that the term 'social solidarity' is devoid
of meaning, and that its pursuit is both pointlcss and dangerous. Thesc
problems are discussed in sorne detail in Chaptcrs 3-6.
Even were thesc problems assumed away, a second sct of difficulties
arises, in that sorne objectives are inherently in conllict and others may be.
The trade-olf between efficiency and distributional objectives, and between
horizontal equity and administrative simplicity, are no lcss intractable for
their familiarity. Other objectives conflict almos!by definition. lncome
smoothing implies that an individual with higher eamings should reccive
higher benefits, which sits uneasily with the requirement that benefits should
redistribute towards thosc with lower incomes, and with the objective that

12 Concepts
benefits should contribute to social solidarity. On one interpretation of
equity everyonc should receive benefits proportional to thcir past contributions,
but that, again, conflicts both with rcdistribution towards lowcr
incomcs and with social solidarity.Thc choice of objectives and of prioritics
between them is a fundamental normative issue.
Further Reading
The diversity of sourccs of welfare is discussed by Glennerster (1992,Cb.1). Titrnuss
(19S8) and Briggs (196Ia) attempt to define the welfare state; see also EspingAnderson
(1990). On tbe idea of wetfare see Robson (1976), Pinker (1979) and
Higgins (1981).

Chapter 2
The Historical Background
The principie of laissez-faire may be safely trusted to in soma things but
in many more it is wholly inapplicable;and to appeal to it on all occasions
savours more of the pol cy of a parrot than of a statesman or a
philosopher.(J. R. McCulloch,1848.1
The poverty of the poor is the chief cause of that weakness and
inefficiency which are the cause of their poverty.[Aifred Marshall,1S85.)
1 Earty Days
1.1 Poor Relief
Tbe British welfare state is neither the outcome of the Second World Wa.r
nor simply the creation of the post-war Labour government. lts roots are
ancient and complex. Christian charity to relieve poverty has gradually
(though even toda y not wholly) been taken over by state action. And state
activity has grown over the years from small scale to large; from local to
central; from pennissive to mandatory;and from piecemeal to comp!ex and
interrelated. From this tangle, however, four events stand out: the Poor
LAw Act of 1601 and the Poor LAw Amendment Act of 1834 were the main
legislative bases of poverty relief before the twentieth cent ury; the Liberal
reforms of 1906-14 represented a substantial departure from /aissez-faire
capitalism and so can be argued to fonn the basis of the welfare state; and
the post-war /egislatwn of 1944-8 set the scene for the welfare state as we
know it today.
lt should be clear that the question 'how did the welfare state come
about?' is vast, so discussion is limited in two important ways. No attempt
is rnade at complete coverage; the story is confined for the most part to the
Britisb experience, with only a sideways glance at other countries, notably
the USA. Tbe question is also controversial; 1 shall sketch out the major
arcas of hístorical dispute, but rnake no attempt at resolving them. The
chapter is organised chronologically, discussing seriotim the period up to

14 Conceprs
the end of the nineteenth century (section 1); the Liberal reforrns of 1906--
14 (section 2); British developments betwcen thc two World Wars (section
3); inter-war poverty relief in the USA (section 4); the Second World War
and its inunediate aftcnnath in Britain (section 5); and dcvclopmcnts since
1948 in Britain and the USA (section 6). Section 7 draws the threads
together by considering the forces wh.ich created the welfare state.
Among the early motives for public poor relief in Britain were the fear of
social disorder and chronic labour shortages in the years after the Black
Death of 1348-9. As a result, the state attempted, inrer alia, to control
wages and labour mobility in the Statute of Labourers 1351 and the Poor
Law Act 1388. Tudor lcgislation grcw away from this repressive and not
very effective regirne:
In 1576 the concept of 'setting the poor on work' was enshrined in statute law
where it was to remain for something like three and a hallcenturias. 11the ablebodied
required assistance they had to work forit.and in the 1576 Poor Reilef Act
JPs were instructed to provide a stock of raw materials on which beggars could
work in retum for the relief they received.(Fraser.1984,p.32.]
1be 1601 Poor Law Act, built on the 1576 Act, adopted a twofold approach:
each parish was required to assumc responsibility for its poor; and diffcrcnt
treatment was prescribed for three categories of pauper. The 'impotent
poor' (the old and the sick) were to be aocommodated in 'almshouses'; the
able-bodied were to be given work in a 'house of correction' (not at first a
residential workhouse); and those who refused to work were to be punished
in this 'house of correction'. The idea was that paupers not able to work
should be cared for and the able-bodied should be givcn work; neither
regimc was intcnded to be punitivc.
This arrangcment worked modcratcly well for nearly two hundred ycars;
but eventually its institutions, locally financed and adapted to a preindustrial
economy, carne under pressure from population growth, increased
social mobility, industrialisation and econom.ic fluctuations. By 1795 food
shortages and inflation resulting from war and bad harvests had spread
poverty from thc unemployed to thosc in work. giving risc to various local
initativcs, ootably thc Speenhamland system which supplemcntcd wages
with an 'allowance' bascd on the price of bread. The novelty of these
changes was that they extended aid to people in work. Poor relief, whether
under the Poor Law per se or under a local variant, carried less social
stigrna than it was later to acquirc.
Thcse arraogemcnts sooo carne under attack. Bentham believed tbat they
caused moral degcneracy amoog recipients. Malthus argucd that poor relicf
would cause excessive population growth, and Ricardo tbat it would dcpress
wages and thcreby exacerbate poverty. Possibly more importan!than thcse
theoretical arguments was the escalating cost of relief, partly due to rising

The Historica/ Background 15
prices (especially of bread), and also because of rising unemployment as
soldiers retumed from the Napoleonic wars. As a result the costs (which
were met from local revcnues) rose sbarply.
1be Poor Law Report and tbe Poor Law Amendment Act 1834 were
consequences of tbis pbilosopbical and financia!climate. A Royal Commission
was set up in 1832; its repon, wbicb was laissez-faire in tone (sec
the Glossary), was written by Nassau Senior and Edwin Chadwick, a former
secretary to Bentham. The intellectual background to the repon, and
particularly the position of the Classical economists on the Poor Law, is
often misunderstood. lt is true that Malthus and Ricardo, worried by
population growth and shocked by tbe earlier effect of the Poor Law,
advocated its gradual repeal. But it is no/ tbe case tbat Nassau Senior (who
was, according to Robbins, more in tbc mainstream of Classica.l thought)
was against poor relicf. In Senior's view, 'tbe great test whicb must be
applied to any projcct of state action in regard to relief is the question
whether itlws any tendency to increase that which it is proposed to diminish'
(Robbins, 1977, p. 128, bis emphasis). Thus.he supponed public provision
for orphans. the blind and the disabled. including provision of medica!
treatment and hospitals. He was not in favour of abolishing relief for the
able-bodied and their dependants, but insisted on the principie of 'less
eligibility', i.e. that relief should be limited to an amount and administered
in a manner wbich lefi the recipient worse off than the employed.
The Poor Law Report was entirely consisten!with this approach wheo it
argued that the new system sbould contain tbree elements (ofien referred
to as 'the Principies of 1834'): the notion of less eligibility. the workhouse
test, aod administrative centralisation. Less eligibility was the central doctrine
of 1834. lt was not intended to apply to the old or sick, but only to
the able-bodied whose indigence, it was argued, would be encouraged by
higher benefits.1 The workhouse test (i.e. relief cooditional u pon living in
the workhouse) was not a principie, but simply a meaos of enforciog less
eligibility. As far as possible, the workhouse would provide a standard of
living lower than that of the lowest worker. Additional restrictions were
imposed, including the strict segregation of husbands, wives and children.
The purpose -of centralisation was to avoid local corruption and incompetence;
to ensure uniformity; to eohance cost-effectiveoess; and to promote
labour mobility. Tbe difference between the 1601 Poor Law and the
Principies of 1834 is importan!. The former was inteoded to give work to
the able-bodied without stigma; the latter discouraged claims for relief by
making its receipt highly unpleasant and also stigmatising.
1R.eaden may note more tha.n a passin¡simila rity betwceo tbes.: ar¡u.mtnts of 1 SO ycars as;o, and thc: mort
n:ca1 debatea dilcus scd in sectioru 6 aod 7. Some tommenta: tors arJUt that part of thc Poor t.aw $pÍrit
penísU. e.g. thc ded.ine in u.nemploymtnt bmcfit rdativt: to other bendh.t m Britt.:i n in thr 1980s can bt
iatct¡>med u a .,... of kst di¡ibility.

16 Concepts
The Poor Law Amendment Act followed quicldy in the wake of the Poor
Law Repon. Despite controversy among historians it is now clear that,
though the intention of the Act was largely (though in imponant respects
not fully) lo implemenl the recommendations of the report, the effect of the
Acl in practice was less than appeared in principie. The Poor Law Commission
(in whom the powers of central government were vesled) was never
able to bend local administration of the Poor Law to its will, particularly
in respect of enforcing the workhouse test. But in other respects, it is
argued, the implementation of the Act had more unpleasant effects than
was i.ntended by its architects (see Bowley, 1937, Pt 11, Ch. 2). Many people
were forced to accept the harsh conditions of the workhouse, and many
others endured appalling privation to avoid it. Because of its very cruelty,
however, the system became over time a force for change, and thus the
1834 Act may be seen as one of thc roots of later developments.
1.2 Other Early Social Legislation
Nolwilhstanding the philosophical underpinnings of the Principies of 1834,
laissez-faire was increasingly eroded over the nineteenth cenlury, in three
arcas in particular: factory legislation, education, and public health. The
firsl Factory Act, passed in 1802, protected women and children by limiting
hours and rcgulating working conditions. Althorp's Factory Act of 1833
tighlened the rules and, probably of greater long-run imponance, appointed
four inspeclors to enforce its provisions. The latter was implicit acknowledgement
of the right of the state to regulate certain social conditions.
The role of lhe state in education staned more gradually (Fraser, 1984, Ch.
4; West, 1970). Most schools in the early nineleenth century were charitable
and reflecled the prevailing elhos of social deference, Christian morality
and voluntarism. The Sunday school movement had an imponant role in
teaching reading, often with the Bible as the only text. State intervention
staned in 1833 with a grant to Protestan!schools for school building, i.e.
as financial help for voluntarism, and from 1847 a grant was paid for a
limiled scheme of leacher training. As govemmenl involvement grcw, a
Royal Commission was established, though ils recommendations were
largely superseded by the Education Act 1870, which gave every child the
right (at least in principie) lo sorne form of schooling. School Boards were
empowered (but not compelled) to provide elementary education, financed
by a mixture of central and local revenues. The resulling system was a
compromise in which the new board schools coexisted with the voluntary
sector. Laler developments made elementary school attendance compulsory
between five and ten (Mundella's Education Act 1880) and vinually free
(the Fee Grant Act 1891).

1ñe Historical Background 17
Thus a process of gradual accretion over the nineteenth century led to a
system of pri.mary education which was compulsory and largely publicly
funded. Of the many explanations of these changes one in particular is a
recurring theme - the national efficiency argument, which justified state
involvement in education on the grounds that it made labour more productive,
thus contributing to economic growth. lt is also argued that the
1870 Act was encouraged by the extension of the franchise in 1867, creating
a need to educate the growing electorate.
The third breach in laissez-faire was in public health (Fraser, 1984, Ch. 3;
Finer, 1952, Chs 5, 7 and 8). In the first half of the nineteenth century,
urbanisation (largely the result of the industrial revolution) and population
growth caused cities to grow rapidly, leading to a housing shortage and,
connected with it, a sanitation problem. The poor in particular were affiicted
by typhus and tuberculosis; and a series of cholera epidemics, being waterborne,
attacked everyone, including the middle classes with thcir ready
access to water supplies.
This was the problem. The solution again involves Edwin Chadwick,
whose Report on the Sanitary Conditions of the Labouring Population of
Great Britain (UK, 1842) was remarkable for the high quality of its
statistical analysis. Chadwick originally advocated sewage disposal as a
public enterprise on thc grounds that ill-health, by causing poverty, added
to the cost of the Poor Law. Thc report, however, included wider grounds
for intervention. lts main recommendation (though based on a faulty theory
of thc transmission of cholera) was that sewage should be separated from
other water through the use of glazed pipes. The report met considerable
opposition, both technical and based on financia!, ideological and political
argurnents. As a result legislation was delayed, and initially inelfective.
After severa! false starts, the Public Health Act 1875 cstablished clear duties
for local authorities, and remained the basis of most public health activities
until 1936.
This, then, was the situation in the 1870s. The state was slowly becoming
involved in increasing arcas of social and economic Iife; but though the
Classical economists supported much of the new legislation, the prevailing
doctrine was still largely laissez-faire.
2 The Uberal Reforms2
2.1 The Origins of the Reforms
Tbe third major development was the period of the Liberal reforms between
1906 and 1914. Historians have debated at length this burst of activity so
•nm oecrion draws oo Hay (197S). See abo the Further Readin¡.

18 Concepls
much at variance with the ideology of the nineteenth-century Liberal Party.
Hay (1975) distioguishes three inlluences in particular which bistorians
regard as underlying the refonns: pressure from below; chaoged altitudes
to welfare provision; and institutional inlluences.
Pressure from below There is a measure of agreement that working-class
political pressure was one of the origins of the refonns, though the
relatioosbip is far from simple. If refonn was so popular, why was it not a
major election issue; and why the long lag between electoral refonn in 1867
and social reform in 1906-14? Pelling deals with the problem by denying
the prernise, arguing that working-class pressure was ncgligible:
The members of the working class as a whole, cynical about the character of
society as they knew it,were yet fearfulof changa which would more likely be for
the worse than for the better.They advanced into the twentieth century with little
expectationof socialimprovement being engineered by politicalmeans,andnone
at all of the 'welfare state' as we know it today.)1979,p. 18.)
Hobsbawm (1964) argues that it was only unorganised workers wbo opposed
rcform. Nor was working-class pressure necessarily importan!for all thc
rcforms.
Cbllnglng actitudes to welfare provision among the political élite arose inler
alia out of the national elliciency issue. The argument at its simples!was
that economic growth depended on a healthy, cducated workforce. In
dramatic contras!with the Principies of 1834, a speaker in Parliamentary
debate could argue:
The futura of the Empíre, the triumph of socialprogress and the freedom of the
British race depend not so much upon the strengthening of the Army as upon
fortifying the children of the State for the battle of lile. lHansard (Commons), 18
April1905,col. 539, quoted by Bruce.1972,pp. 152-J.I
The inftucnce of the national efficiency arguments is debatcd. At a mínimum
they made social reform politically respectable.
A second reason for greater acceptance of intervention was a changed
attitude towards poverty. The social surveys of Booth (1902) and Rowntree
(1901) and the study of the health of Bocr War recruits yieldcd much
cmpirical infonnation. The effects of thcse data on altitudes wcre complex;
they suggcstcd that povcrty was more widcspread than had been belicvcd,
and that not all poverty, even among the able-bodicd, was due to moral
defect. They also raised doubts about the effectiveness of private phi1-
anthropy.l
A third inlluence was the rise of collectivism. The 'Oid Liberalism', which
was opposed to state intervention, had twofold roots in the 'natural rights'

1ñe Historical Background 19
individualist phi1osophy of writers like Spencer (1884) and in utilitarianism.•
Betwccn 1860 and 1900, however, severa! philosophers, though in no
sense advocating collectivism, suggested that the traditional definition of
individual frccdom as absence of coercion was too narrow. It was argued
(e.g. Hobson, 1909, Pt ll, Ch. 10 that 'positive freedom' should include not
only economic freedom but also a measure of economic securiry.lt followed
that the state, in advancing individual frccdom, should adopt an active role
in social reforrn. This was the 'New Liberalism' (see Frccden, 1978).
In the context of these changing ideas the Gerrnan example became
important. Betwccn 1883 and 1889,largely as a counter to socialist agitation,
the German government under Bismarck had created a broad system of
social insurance, under which compulsory contributions gave entit1ement to
a system of guaranteed benefits, thereby removing the threat of the means
test and poor house. The scheme was investigated by Lloyd George, and
had a rnajor influence on the shape of the Nationa1 Insurance Act 1911
(discussed be1ow).
Institutiooal inftneoces on the reforms included pressure groups such as the
Friend1y Societies. which represented the idea of working-dass self-help. It
is also argued that bureaucracies like the civil service exerted an independent
inftuence. McDonagh (1960) describes a process whereby, as awareness of
a prob1em grew, a body of experts wou1d be set up to investigate. As a
result of its findings awareness of the prob1em increased, and so did the
volume of resources devoted to combatting it. Experts thus contributed not
only to the manner in which social problems were tackled, but also to the
range of issues regarded as the proper province of public policy.
The reforrns were central rather than local mainly because of the reluctance
of central government (despite severa! officia1 inquiries) to reform
local authority finance in the light of regional inequalities, and the failure
of local revenues to rise in step with expenditure.5 FinaUy, the reforrns were
outside the Poor Law partly because the latter was financed locally;
partly to sidestep the long-established vested interests of local Poor Law
institutions; and partly beca use of popular hostility towards the old system.
2.2 The New Measures
Whatever their causes (about which historians continue to argue) and
motives (discussed below), the reforms of 1906-14 were substantial by any
standards and particularly so in the context of the times. The new measures
concemed children, pensions, unemployment, health and fiscal po1icy.
"T'bc important d.istinction betwom • natural ó¡htJ and a utilitarian defmce or individual fracdonl il
at lea¡th in Olapter l. wbieb abo diJamcs tht i6cu or ooUu:ti.;lt writ<n.
'lb< ........, of my borrowcd copy o( Hay bu writta> •so whafs .,...q- in the mar¡in.

20 Concepts
OúJdml Tbe Education (Provision of Meals) Act 1906 pennitted (but did
not compel) local authorities to provide school meals for needy children;
the Education (Administrative Provisions) Act 1907 introduced medica!
inspection of school children; and the Cbildren Act 1908 made it a punishable
olfence for parents to neglect their children. Tbe motives for these
Acts were partly hurnanitarian and panly on national efficiency grounds.
Peosioas The Old Age Pensions Act 1908
introduced a new principie into social policy. Hitherto relief had been provided ...
from locBifunds and only alter a test of destitution. Now for the first time payments
were to be made, as of right, from national funds .. . within strict limits of age and
means, but with no test of actual destitution. [Bruce, 1972, p. 178, his emphasis.J
The Act introduced a non-contributory pension of five shillings (25 pence)
per week for people over 70 whose income was below í31 per year, thougb
it excluded previous recipients of Poor Law relief, and sorne people on
moral grounds.•
Uoemploymeot and mlnlmum wages Various earlier proposals to resolve
the growing prob1em of unemployment had met with little success (see
Harris, 1972). Any acceptable solution had to meet four criteria (Hay, 1975,
pp. .5(}-1). lt had to 'make the minimum alterations in thc nonnal worlcings
of the labour market lo satisfy individualists, economists and industrialists.'
Second, 'it ... had to be large1y seJf.financing in order to avoid unacceptable
increases in direct taxation or the reintroduction of tarilfs.' It bad to be
separate from the Poor Law to avoid the need to discriminate between the
'deserving' and 'undeserving' poor. Last1y, it had to be sufficiently attractive
to head off any socialist threat. The resulting package had three elcments:
voluntary labour cxchanges would assist the nonnal worlcing of the labour
market; there was to be a limited scheme of unemployment insurance;
and a Development Fund would finance counter-cyclical public works
expenditure, mainly by local authorities.
Thc scheme of unemployment insurance was limited: it applied only to a
narrow rangc of industries; only workers eaming less Iban í160 per year
were covered; and bencfits wcre low to discourage deliberate unemployment.
A variety of other industrial lcgis1ation, including the Trades Disputes Act
and tbe Workmcn's Compensation Act in 1906, and the Trade Boards Act
1909, gave the govemment limited power to set minimum wages. lt was
recognised that unemployment and sickncss were interrelated, so the
Nationallnsurance Act 1911 also contained health insurance.The combined
•HistOf)' is full of small anomaües. luJ ldditioD&I RUOO for the pensiocu kplation. 1000nlmto¡ l'dJiDI
(1979, p.11). was1a)lof the Trusury's pune sllinp (bocause oij the l<mporary lull in the naval
buildil>& """'·wbid> wuduc: to the destruc:tioo of Ruuian battlcshipo in the Ruuo-Japonesc War ... Thus
in a ocme it ..,.. AdnUral Toao. tbe mor ofTsushima. wbo laid the pounch•'Ork of Old AJe l'l:uliom aod
descrva to be mncmbeTcd as tbe arcbila:t of tbe Brililb Wdf11< SUte.'

The Historical Background 21
package was financed by a weekly contribution of 9d, of which 4d was paid
by the worker, the rest by the employer.
Healtb Whereas unemployment insurance, according to Hay, was largely
the result of working-class pressure, health insurance arose more from
considerations of national efficiency. Prior to 1911 there were voluntary
hospitals for those who could atrord to subscribe to them; for others Poor
Law hospitals otrered free and (for the most part) non-stigmatising health
care (Abel Smith, 1964, Ch. 15). The 1911 Act did little to change these
arrangements. Cover was extended only to the breadwinner, who was
entitled to a sickness (i.e. cash) benefit, free medical treatment and drugs
from a panel doctor, and access to a sanatorium.
Fiscal poUcy The fiscal controversies of the period concemed taritrs (which
are not the issue here), and progressive income tax.The tra<litional economic
argument was that taxation should be based on the principie of 'equal
sacrifice' (implying a poli tax), or of 'equi-proportional sacrifice' (implying
a proportional tax). 8oth approaches ruled out redistribution through the
tax system. By tbe tum ofthe century, bowever, there was limited support for
redistn"bution through tax-financed public expenditure. Edgeworth justified
progressive taxation by appeal to the ' least aggregate sacrifice' pri.nciple
under which marginal rather than total sacrifice was to be equalised. Equal
marginal sacrifice plus the assumption of diminishing marginal utility of
income together imply progressive taxation.
A ditrerent line of argument by people like Hobson (1908) was that
monopoly elements resulted in a sub-optimal income distribution, lea<ling
to underconsumption. By thus attributing unemployment to underconsumption
wbich could be remedied by income redistribution Hobson
foreshadowed Keynes sorne thirty years before the publication of The
General Theory. Others, notably socialists, saw progressive taxation as an
issue of social justice, a subject to which we retum in Chapter 3.
A brief assusmeat In assessing the reforrns two hotly debated issues arise:
what was their motive (discussed in section 7.1); and were they particularly
radical? It can be argued (Marsh, 1980, p. 17) that the virtuaUy simultaneous
introduction of old age pensions, unemployment insurance, sickness benefits
and progressive taxation, supported by the interventionist philosophy of
the New Liberalism, constituted a fundamental break with earlier economic
and political doctrines.
However, a eloser look at the individual programmes gives a less clear
answer. The pension scheme, albeit non-contributory, was to sorne extent
means-tested, and applied only to individuals over 70 who had never
received poor relief and were not excluded on moral grounds. Its main
purpose, it can be argued, was to improve national competitiveness by
weeding out inefficient labour (the national efficiency argument again).

22 Concepts
Unemployment insurance was based in part on a weekly employee contribulion
of 4d (i.e. lurnp-sum and therefore regressive), and applied only
lo a few relatively skilled workers in sorne ind ustries. Sickness benefits were
financed by the same contribution, wilh similar coverage; and the health
care benefits applied only to the breadwinner. It can be argued, therefore,
that the refonns were relatively minor and with limited coverage; and that
only the pension scheme was substantially redislributive from rich lo poor.
The New Liberalism, from this viewpoint, was not very new; it still accepted
capilalism unquestioningly, and in that sense was only a reinterprelalion of
the Old Liberalism. As we sball see in section 4, strikingly similar issues
arise in considering the novelty (or otherwise) ofthe 1935 US Social Security
Act.
Nor, in conclusion,were the Liberal refonns in any way unique.Germany,
as we have seen, had introduced social insurance in the 1880s, motivated
in part by fears of social unrest. New ZeaJand introduced non-contributory
pensions in 1898, ínter afia for reasons of national efficiency, in the face of
increased intemational competition on an economy highly dependent on its
exports. By 1908 Denmark, Ireland, Austria, Czechoslovakia and Australia
also had sociallegislation of sorne sort (Pechman el al., 1968, Appendix C;
and for more general international comparison Kaim-Caudle, 1973). The
Liberal refonns, tbough one of the earlier examples of nationally organised
income support. were not the first; nor did they represent a major discontinuity
either with previous arrangements or with developments in other
countries.
3 The First World War and the lnter-War Period in Britain
3.1
Housing
In contrast with the eventful years belween 1906 and 1914 the period
thereafter was largely a time of stagnation in social policy, with the
important exception of housing. There were also rnajor changes in unemployment
insurance (section 3.2). In housing, probably more than any other
part of the welfare state, past policies, notably during and after the First
World War, have a crucial bearing on more recent institutions. Before 1914,
virtually all housing was provided by the private market. By and large the
system worked well for those who could afford it; but for lhe lowest income
groups, particularly in large cities, it led lo overcrowding and squalor
(Gauldie, 1974). In a strictly technical sense the bousing market cleared,
but policy-makers found thc result unacceptable both for reasons of public
bealth and public order, and for more charitable motives. Early legislation
had little effect, mainly because it imposed no duty on local authorities to
remedy poor housing. Though working-class housing conditions continued

28 Concepls
people outside almshouses, payments were very low; and many localities
gave benefits only in kind.
A detailed explanation of why these arrangements changed sharply in the
1930s lies outside the scope of tbis chapter and is, in any case, a matter of
controversy. 1 sball do no more tban set out the main questions. First, wby
did income support at a national leve! begin in tbe USA later than in
almost any other industrialised country11 and, moreover, at a leve!whicb
by intemational standards was low? 12 The arguments are complex (for an
overview see Higgins, 1981, Ch. 4). Most writers concentrate on one or
more of tbree sets of factors: the infiuence of ideology (see section 7.1); thc
cultural and política! beterogeneity of the USA (Gronbjerg el al., 1978;
Katznelson, 1978); and tbe influence of pressure groups (Menscher, 1967;
Derthick, 1979; Wcaver, 1982, Ch. 4).
A second question is why the 1930s legislation took tbc shape it did. To
a minor extent it was inftuenced by the experience of otber countries,
notably Britain, Germany, France,Sweden and Canada.Considerably more
important was the desire to bcad off more radical proposals. Douglas (1925)
advocated a system of family allowances for dependants. The Townsend
Plan in the carly 1930s called for a monthly pension of $150 for everyone
over sixty. Simultaneously, Huey Long was pursuing bis populist campaign
to 'share our wcalth'.The Social Security Act 1935 was in part 'a compromise
measure to bluot the political appeal of the enormously expensive and
essentially unworkablc Townsend Plan' (Pccbman el al., 1968, p. 32).
Why, finally, did reform occur when it did? Wcll before the 1930s,
pressures for change were emerging out of various long-run developments,
notably technologica1 innovation, the decline of the family farm and
decreasing average household size (see Wilensky and Lebeaux, 1965, pp.
341-8). However, the crisis of the 1930s brougbt developments to a hcad.
As unemployment mounted after 1929, local expenditure on relief rapidly
outstripped declining tax revenues; and emergency assistance by states ran
into similar problems, so that federal participation became inevitable. Under
Title 1 of the Emergency Relief and Construction Act 1932, $300 million in
federal funds was made available for loans to states to belp in their relief
cfforts.n
" By 1930, 27 <OW>tries bad public oc:llemcs or pu>my rdid o( ...,.sort. Amoa¡ indUJtriali>oc l oountries
ooly No,. ,ay. lapon and Switzerlaod .urted la ter thao che USA (P<dunan "ol.• 1968.Appmdix C).
"Why. lo we a oooccpl finl devtlopcd by Wokluky and l..d>eaux (1965) and sumequently adopted by
other writen ("" Hiuim. 1981. pp.41-5 ). did che USA adopta rtsiduol modd o/ W<lfan:? We rttum lo
tbis iuue in ICdion 7.1.
"Repaymeol o/ lilac 1oam wu neotually ,...;ved.

4.2 The SocialSecurity Act 1935
Between 1933 and 193S the federal government played an increasing financia!
and adminislrative role.Tbe Civilian Conservalion Corps, the Public Works
Adminislralion, and lhe Federal Civil Works Adminislration organised
public works; the Federal Surplus Relief Corporation distribuled surplus
commodities lo the needy;and the Federal Emergency Relief Administralion
supervised federal grants to states for unemployment relief. This 1ast had
the greatest impact, both at tbe time and through its inftuence on subsequent
legislation. Tbe use of federal funds gave federal govemment a measure of
inftuence over the stale programmes, in particular on benefit levels and
administration, and these features were carried over into the permanenl
legislation.14
1be 1935 Sod•l Seauity Act created what, for the USA, was a broadranging
scbeme. lt established two major insurance schemes and three major
forros of assistance, administered by a new Social Security Board whose
powers and duties were set out in Title VII of the Act.u
Federal Old Age Benefits (Tille 10 were financed by contributions from
employees and employers uoder Tille VIII and, as originally eovisaged,
were to be ruo largely on actuarial lines with respect to bolh benefit levels
and financing (as we shall see shortly, neither resolve was effected).
Federal assistance to states for unemployment compensation was granted
under Title 111, financed by taxes levied on employers under Tille IX. Unl.ike
the pension scheme, which was federal, uoemployment insurance was
organised by states, whicb had wide discretion over the precise form of
their arrangements. Tbough the scheme (being insurance) provided no
benefits for individuals currently out of work, this was much the most
conuoversial part of the Act, many employers being bitterly opposed to
any forro of unemployment compensalion. Nevertheless, by 1937 all the
states and terrilories had such a scheme.
Old Age Assistance (Tille I) provided for means-tested cash paymeots to
the elderly through federal grants to states with approved schemes. It was
envisaged that costs would decline as the insurance benefits under Tille 11
became payable. By 1940, S1 jurisdictions offered OId Age Assistance.16
Aid lo the Blind (Title X) provided federal grants to a pproved state plans
of aid to the needy blind. By 1940, 43 states qualified for federal funds.
Aid to Dependent Children (Tille IV) paid federal grants to stales giving
cash assislance to famílies with needy children 'under the age of 16 [or
under the age of 18 if found by the Stale agency to be regularly attending
"For futtbet clelails of lhc emcraency progaauncs, ,.. US Federal EmaiU'<t Rdief Admini•ltatioo
(1942).and US Naciooal Resowccs and Plan.WB.¡ oard (1942. pp. 26-7).
"For lhc wordin¡ o( lhc A<:t iudl,,.. Social S«urity A<:t, 14 AuJUSI 193$, ch. 531, 49 Stalui<S al Larp
620, ot lor an cdil<d ....000. SI<VCllS (1970, pp. 167-80).
"Th< 48 cootinentalllalel. plus Wubínctoo OC, Alaua aod Hawaii.

30 Concepts
school) ... dcprived of parental support or care by rcasoo of the death,
cootinued abscoce from the home, or physical iocapacity of a parcot'. 17 By
1949, 42 jurisdictions had scbemes of this sort wbich qualified for federal
funds.11
Tbe 1939 amendmeots to tbe Social Security Act stressed its welfare
objectives and broadened its scope.Tbe strict actuaria!principies ofthe 1935
legislation were diluted; insuraoce beoefits became payablc to depcndants of
aged recipients, and to widows and children of workers covcrcd by thc
schemc; payments wcrc to bcgin in 1940 ratbcr than 1942; bencfits were
tied to average earnings over a mínimum period, thus brcaking the link
with lifetime contributions; and the earnings test prescribed by the 1935
Act was slightly liberalised before the first benefits were paid.19 Tbe financial
basis of the scheme also changcd.Tbe intention of accumulating an actuaria!
fund was abandoned, and benefits for the elderly and their dcpendants paid
almost entircly out of currcnt contributions (i.e. thc scheme was organised
on a 'pay-as-you-go' rather than a 'funded' basis, an issue discussed al
leogth in Chapter 9).
A brief assessment To a grcater extent than the Liberal reforms, the
Social Security Act can be criticised as in certain respectS timid. Tbe Act,
admittedly, was an improvement on earlier arrangements: the rangc of
benefits was broader, the age requirements for retirement more liberal, and
the eligibility restrictions on residence and citizenship less stringent; and
bencfits were paid in cash, this being a condition of the federal contribution
to state schemes.
In importan!respects, however, 'the ... Act may be rcasonably rcgarded
as a conservative legislative solution to a difficult and explosive problem'
(Pechman et al., 1968, p. 32). First, though the federal government eosured
some uniformity, statc programmcs still varied widely in terms of bcnefit
levels and eligibility requirements. Second , the insurance arrangements were
severely constrained: in 1940 only about 60 per cent of workers were
covered; benefits were intended originally to bear a fairly simple relationship
to contributions, thus ruling out any substantial redistribution (though tbis
aspect was relaxcd somewhat by the 1939 amendments); and the insurance
benefits were subject to an earnings test. Third, tbe assistance measurcs
were categorical, i.e. they granted aid only to individuals falling into one
of the thrce categories, aged, blind, or dependent child, since it was felt tbat
only these groups should ever require assistance during times of high
employment.
"Social Sccurity Act 19JS, lítk IV, soctioo 406(a). Pbrue ío bn<:kets ldded by ao ameodment ío 19)9.
"A funller eí&bt ma(AWU. Coone<tiout. lllínois, Kcntuety, MissWíppi. Nevada, Soulh Daltota aDCI
Teust operatcd J<bem<s without federal funds (US Natíonal Resouroes and Pbnnin& Board, 1942. p. Sl).
"Th<se ch.luges wm: bat<d oo n:commendatíons in US Advisory Couneíl oa Social Sccurity (19)8). wbícb
rontaíos valuable bacteround ínrorma1ioo. For dctaíb o( 111< kJÍSiatíY< history, ""' My<n (196S, Ch.4)
or. more: bridly, l'l:chman <1 al. (1968, Appendíx 81.

Further Reading
Good general texts on the historical development of tbe British welfare state are
Bruce (1972), Fraser (1984), Marshall (1975) and Thane (1982). For a shorter
account, see Glennersler (1990). Conlemporary discussion of 1be 'New Liberalism'
can be found in Hobson (1909); for recenl analysis of economic and political thoughl
al lhe time, see Robbins (1977) and Freeden (1978). For a brief inlroduction lo
early poor n:lief, see Rose (1972); on lbe principie of laissez-fai.rr, Taylor (1972);
and on the Liberal n:fomu, Hay (1975) (brief) or Gilbert (1973) (compendious).
The early debates on unemploymenl are detailed in Harris (1972) and a history of
health care prior lo 1948 in Abe!Smilh (1964). A brief official historical accounl is
given in UK (1985d, Ch. 3).
The origins of the modem welfare state are discussed explicitly by Harris (1977)
(a magisterial biography of Beveridge) and Titmuss (1958) (who stresses the inftuence
of tbe Second World War). The Beveridge proposals are conlained in UK (1942)
and !hose for lhe National Health Service in UK (1944a). Detailed hislorical
stalistics for lhe UK from 1855 to 1965 can be found in Feinslein (1972). For thc
modcm inslilulions, see ToUey (1991). Glcnncrsler (1990) assesses tbe posl-war
dcvelopment of the Brilish welfare stale. For a detailed account of thc British
welfare stale since the mid-1970s. see HiUs (1990).
For contemporary accounts of US developments in the 1930s, see Douglas (1939),
US Federal Emergency Re1ief Administration (1942) and US National Resources
and Planning Board (1942). For retrospective analysis, see Allllleyer (1966), Scbottland
(1963) or Witte (1962); and for 1ater debates, Tobin (1968) and US (1969) (a
remarkab1e document). Details of US legislation are given in S1evens (1970).
For dilfering interpretations of the origins of the welfare slale, including discussion
of the theory of convergence, see Higgins (1981, Ch. 4) and Misbra (1981, Ch. 3)
for a summary; and for specific views, Wilensky and Lebeaux (1965) and Rimlinger
(1971). A more general intemational comparison is given in Kaim-Caudle (1973).
For a compendious summary of instilutions intemationaUy, see US Department of
Health and Human Services (1989).

Chapter 3
Political Theory: Social
Justice and the State,
The fundamental issue [of the welfare statelis not economic. lt is moral
...The issue is the responsibility of people to manage their own affairs
...lsit not the case that while adutls manage incomes children
receive pocket money? The operation of the welfare state tends to
reduce the status of adults to that of children. [Lord Bauer,1983.1
[The) major evil [of paternalistic programs) is their effect on the fabric of
our society. They weaken the family;reduce theincentive to work. save
and innovate; reduce the accumulation of capital;andlimti our freedom.
These are the fundamental standards by which they should be judged.
[Milton Friedman,1980.1
Tradtiionalsocialism was largely concerned with the evils of traditional
capitalism.and wtih the need for its ovenhrow.But today traditoi nal
capitalism has been reformed and modified almost out of existence,and
it is with a quite different form of society that socialists must now
concern themselves. [Anthony Crosland.1956.1
1 Theories of Society
A society is a co-operative venture for the mutual advantage of its members.
lt generaUy contains both an identity of interests and conflicts of interest
between indiv duals and groups. The institutions of any society (e.g. its
constitution, Jaws and social processes) have a profound inftuence on a
person's 'life chances'. The purpose of a theory of society is to offer
principies which enab e us to choose between different social arrangements.
In analysing the welfare state it is helpfulto distinguish three broad types
of theory: libertarian; liberal;and collectivist.
Libertarians (discussed in section 2) are inmany ways the direct descendants
' Readen with a U.rul<d bactaround in political theory ao find th< aist of th< ar¡urneot in tb< Appeodix
to this c:hapter.

Social Justice and the Sta/e 45
of the 'Oid Liberalism' of the nineteenth century (Chapter 2:1.1 and 2:2.1)
although, as we sball see, there are important differences between 'natural
rights'and 'empirical' libertarians.The former (e.g. Nozick) arguc that state
intervention is morally wrong except in very limited circumstances. The
latter, including writers like Hayek and Friedman, are the modem inheritors
of the Oassical liberal tradition;2 they argue against state intervention not
on moral grounds, but because it will reduce total welfare. 8oth groups
analyse society in terms of its individual members (as opposed to the group
or social class); give heavy weight to individual freedom; and strongly
support private property and the market mechanism. As a result, the state's
role vis-a-vis taxation and redistribution is severely circumscribed.
liberal theories (section 3) are the modero inheritors ofthe 'New Liberalism'
(Chapter 2:2.1). They find their philosophy in utilitarianism (section 3.1)
and in writers like Rawls (section 3.2); their policy advocates in people like
Beveridge, Keynes and Galbraitb; and their practitioners in politicians like
Harold Macrnillan and Jobo Kennedy.The theory has three crucial features.
First, societies are analysed in terms of their individual members. Second,
'private property in the means of production, distribution and exchange (is]
a contingent matter rather than an essential part of the doctrine' (Barry,
1973, p. 166), i.e. the treatment of prívate property is explicitly regarded
not as an end in itself, but as a means towards tbe achievement of policy
goals. FinaUy, liberal theories contain 'a principie of distribution which
could, suitably interpreted and with certain factual assumptions, have
egalitarian implications' (ibid.), i.e. in certain circumstances income redistribution
is an appropriate function of the state. This book, as Chapter 4
will amplify, is firmly in the liberal tradition.
CoiJectlrist theories, too, are varied. Marxist theory (section 4.2) draws its
pbilosophy from Marx and its policies from writers like Laski, Strachey
and Miliband. The theory sees industrial society as consisting of social
classes, defined narrowly in terms of their relation to the means of production.
Private property has only a limited role, and the allocation and
distribution of resources in accordance witb individual need is a primary
concem of the state. Fahian socialists (section 4.1) present an intermediate
case. They derive their philosophy from writers like Tawney, and find
their policy advocates in, for example, Crosland and Titmuss, and their
practitioners in politicians like Qement Attlee. Though sharing to sorne
extent the egalitarian aims of Marxists, their analysis and methods have
mucb in cornmon with liberal thinking.
1Tbcte il a cont'U:Jin& ambipity ln tbe ux of the word 'liberal'. la tbe nioetoc:Dth oeatu.ry it was UICd as a
labd for tawe:{olu lhinket1 like llnltham and Nwau Se!úor (Chapt<r 2:1.1): and tnday a writ<rke
Fricdtna.n.. in ca.D.in& hirmt.tr a libaal, iJ using the letm in the samr way. 1 shall, throu¡hout. rerer to such
wrilen u tiberl&rians. and uae tbe t<rm' beral' in the ...,.deaeribcd below.

46 Concepts
In practic:e the theories blur into each other like the colours of the rainbow -
but it is useful for exposition to talk about them as separate entities,
especially wben contrasting their implieations for policy (section 5). Nevertheless,
their differences and similarities are complex, and involve subtleties
well beyond the scope of one brief chapter. The purpose here is limited to
sketching the ideological debate only in outline. Knowledgeable readers
will, 1 hope, be forgiving.
2 Libertarian Views
It is necessary to retum briefty to nineteenth-century debates (Chapter 2:1.1
and 2:2.1). The ideology of laissez-faire derived from two quite distinct sets
ofphilosophical arguments. When modero writers like Hayek and Friedman
advocate free markets and private property, they follow Hume (1770),
Smith (1776), Bentharn (1789) and Mili (1863) in doing so on a utilirarian
or empirical basis, out of a belief that such institutions maximise total
welfare. Nozick, in contras!, follows Spencer (1884) by defending private
property on moral grounds, as a natural right (see Robbins, 1978, pp. 46 et
seq.). Though not completely watertight, the distinction between the two
views (exemplified by the first two quotes at the bead of the chapter) is
crucial to debates about policy (section 5), and so merits closer attention.
NataraJ rigbts Hbertarians To Nozick (1974) evcryone has the right to
distribute the rewards of his own labour. He calls this justice in holdings,
which has three elements. A person is entitled to a holding if he has acquired
it (a) through eamings (so-called justice in acquisition), or (b) through the
inheritance of wealth which was itself justly acquired Gustic:e in transfer).
Holdings which fall under neither principie cannot be justified, henc:e,
(e) govemment may redistribute holdings acquired iUegally (the principie
of rectification).
These propositions support the libertarian predilection for a minimalist
or 'nightwatchman' state with strictly circumscribed powers: the state can
provide one and only one public good, viz. the defenc:e of our person and
property, including the enforcement of contracts; but other than correcting
past wrongs it has no legitimate distributional role. Nozick regards taxation
as thefi (sinc:e it extracts from people money (legitimately acquired) which
they would otherwise have allocated in other ways), and also as slavery, in
that people are forced to spend part of their time working for govemment.
Empiriall Ubertarians Hayek's theory has three strands: the primacy of
individual freedom; the value of the market mechanisrn; and the assertion
that the pursuit of social justice is not only fruitlcss (because there is no
such thing) but actively harmful because it can (and, he argues, will) end
• Material pro gido por derechos do autor

Social Justice and the Sta/e 47
up destroying individualliberty. Freedom to Hayck (1960, Ch. 1) and other
libertarians is dcfined narrowly as absence of cocrcion or restraint; it
includes political liberty, free spccch and economic freedom. Coercion is
legitimate only in strictly limited cases, such as tbe protection of individual
liberty (ibid., Ch. 9). Individualism is tbe corollary of freedom, and the two
are interdependent;1 the pursuit of equality wiU reduce or destroy them
(Hayek, 1944).
To Hayek the market is bene6cial because it is efficient, and because it
protects individual freedom.
lit isl a procedure which has greatly improved the chances of all to have their
wants satisfied, but at the price of all individuals . .. incurring the risk of unmerited
failure.Wrth the acceptance of this procedure the rerompense of dffferent groups
and individuals becomes exempt from deliberare rontrol. lt is the only procedure
yet discovered in which information widety dispersad among millions of men can
be effectivety utilised for the benefit of all - and used by assuring to all an
individualliberty desirable for itself on ethical grounds.IHayek, 1976, pp.70-1, my
emphasis.J
Tbese advantages arise, aocording to Hayek, only if prices and wages are
allowed to act as signals to individuals as to where to direct their cfforts.
An individual's reward will be tbat which induces him to act in the common
good; it will often bear no relation to eitber bis individual merit or bis need.
Hayek's view of social justice contrasts sharply with that of Rawls.
Aocording to Hayek, a given circumstance (e.g. winning the pools, or dying
young) can be regarded as good or bad; but it can be described as just or
unjust 'only in so far as we hold someone responsible for bringing it about
or aUowing it to come about' (ibid., p. 31). Thus something isjust or unjust
only if il has been caused by the action or inaclion of an individual or
individuals.Tbe market, in contras!(ibid., pp. 64-5), is an impersonal force
like 'Nature', akin to an economic game with winners and losers, whose
outcome can be good or bad, but never just or unjust. To Hayek, therefore,
the whole notion of social justice is 'a quasi-religious superstition of the
kind wbich we should respectfully leave in peace so long as it merely makes
those bappy who hold it' (ibid., p. 66). However, 'the striving for [social
justice] will ... lead to tbe destruction of the indispensable environment in
wbicb the traditional moral values alone can flourish, namely personal
freedom' (ibid., p. 67). The reason is that
the more dependen! the position of individuals ... is seen to become on the
actions of government, the more they will insist that the governments aim at
sorne recognisable scheme of distributiva justice; and the more governments try
to realise sorne preconceived pattern of desirable distribution. the more they must
subject the position of the different individuals ... to their control. So long as the
'S..partículatly lb< nplaulion of indivldoalian in lúyet (1944, p. 44).

48 Concepts
belief in 'social justice• govems política/ action, this process must progressively
approach nearer and nearer to a totalitarian system. (ibid., p. 68, my emphasis.)
Friedman's views are broadly of the same stripe. His prima.ry value is
individual freedom. Hence
the scope of government must be limited. lts major function must be to protect
our freedom both from the enemiesoutside our gates and from our fellow-citizens:
to preserve law and order, to enforce private contracts, to foster competitiva
markets. Beyond this major function, government may enable us at times to
accomplish jointly what we would find it more difficult .. . to accomplish severally.
However, any such use of govemment is fraught with danger.We should not and
cannot avoid using govemment this way. But there should be a clear and larga
balance of advantages before we do. (1962, pp.2--'3.)
To Friedman and Hayek the state has no distributional role, other than
for oertain public . goods and for strictly limited measures to alleviate
destitution.
3 Uberal Theories of Society
3.1 Utilitarianism
The utilitarian arguments which form the basis of much of this book derive
from the 'New Liberalism' of the early twentieth century (Chapter 2:2.1),
whicb was itself finnly rooted in tbe nineteenth-century Classical tradition.
Thus modero utilitarians have common intellectual roots with empírica!
libertarians.
The utilitarian aim is to distribute goods so as to maximise tbe total
utility• ofthe members ofsociety.'Goods' are interpreted broadly to include
goods and servioes, rights, freedoms and political power. Maximising total
welfare has two aspects: goods must be produced and allocated efficiently
(discussed in Chapter 4); and they must be distributed in accordanoe with
equity (though not necessarily equally). The equitable distribution is shown
in Figure 3.1. Total income to be distributed is A.B. Individual A's marginal
utility (read from left to right) is shown by the line aa, and is assumed to
diminish as his income rises. Individual B's marginal utility, which declines
from right to left, is shown by the line bb.Total utility is maximised wben
income is shared equally; A's income is A C, and B's is BC.
•synooymousty. to m.a..Umise total happi.Deu or total wdfan:.

Social Justice and the State 49
a ¡.... .... b
Malcrial pro gido por derechos do autor
-
-
b• r-"' --
- -- b'
_.' r--- '
1
b _. 1 ..... a
1
1
A e D B
Figure 3.1 Tht optimal distributlon of /neo- undu utüitarlan/.rm
Utilitarianism can therefore justify redistributive activity by the state in
pursuit of an egalitarian outcome; but this result depends crucíally on two
conditions. First, A and B must have identical marginal utility of income
functions.) lf B's marginal utility is shown by b'b', thcn thc distribution
which maximises total wclfarc is uncqual, sincc A now has an incomc of
AD. Second, utilitarianism can fully specify the optimal distributíon only
where the utility of A and B can be measured cardinally.6
Various criticisms have beco rnade of thís approach. lt is asked whether
utility is capable of precise definition; whether interpersonal comparison of
utility has any meaning; and whose utility counts (e.g. future generations,
animals, etc.).These questíons are set to one síde to focus on the fundamental
criticism, namely that utilitarianísm can sanction injustice by justifying harm
to the least well-off íf this maximíses total utilíty. 'The trouble wíth
[utilitarianism] is that maximísing the sum of individual utilítíes ís supremely
unconcemed wíth the interpersonal distribution of that sum' (Sen, 1973, p.
16).
Formally, suppose that individual B in Figure 3.1 derives less pleasure
from lífe than A because he has major health problems. His marginal utility
is shown by the line b'b', and the optirnal distribution of goods by point D.
Thus B should receíve less income than A because of hís health problems.
Thís outcomc is criticised as beíng unjust.
' Strictly, ....,ol other (ltdWcol) condítioiU.,..-ry. •·11- that thc Wldetlyin& social 'Oifar< fUDCtion
is I)'IIVII<tric and coaca.. (... Chapte< 6:I.Z). For furtbcr diocuuion o( Paian utilitarianism and i ll
underlyin& UIUIIlpÚODS, occ Rowley and Ptacod< (197S, Cb.1).
•For thc ddlnition of ardiul utlli ty,...thc Olotsary.

50 Concepts
3.2 Rawls on Social Justice
Rawls in sorne ways is Nozick's liberal counterpart. Nozick is a natural
rights defender of liberty. For Rawls the natural right, and hence the
prime aim of institutions, is social justice: thus 'each person possesses an
inviolability founded on justice that even the welfare of society as a whole
cannot override' (1972, p. 2). Justice, to Rawls, has a twofold purpose:it
is desirable for its own sake on moral grounds; but also, and importantly,
institutions will survive only if they are perceived to be just. Rawls argues
that there exists a definition of justice which is both general (i.e. not specific
to any particular culture) and can be derived by a process which everyone
can agree is fair. The resulting principies deal with the distribution of
what Rawls calls 'primary goods', i.e. economic goods, and also position,
opportunity, skill, liberty and self-respect.
1be original positloo is Rawls' starting point. He assumes that each person
has goals which are facilitated by the possession of these primary goods,
and invites us to contemplate a group of rational individuals, each concemed
only with bis own self-intcrcst, coming togethcr to negotiate the principies
of justice. They are free agents in the negotiation, but they must abide by
the resulting principies. Rawls thus uses the convention of a social contraet.
In this situation no discussion between interested parties will yield
principies of justice which command universal acceptance. Rawls therefore
abstracts the negotiators from their own society by placing them behind a
veü of ignorance.They are assumed to be well-informed about the general
facts of the world - psychology, economics, sociology, etc. - but each is
deprived of al/ knowledge about himse/f. i.e. of his natural characteristics or
endowments, bis position in society, and the country or historical period
into wbich he is bom. The negotiators seek to advance their own interests,
but are unable to distinguish them from anyone else's.
The role of the veil of ignorance is best íllustrated by example. To
distance ourselves from personal interests we (i.e. citizens through our
elected representatives) may decide that aircraft hijackers' demands should
never be met, even if innocent lives are lost. We do this in order to save
even more lives in the long run; and we establ.ish this doctrine in advance
of the event (i.e. behind !he veil of ignorance) because if it were our personal
loved ones who were kidnapped we would be likely to do anything to save
them, irrespective of the possible consequenees for othcrs in the future.
The negotiators can consider any principie of justice, e.g. the just action
is that which is in the interests of the stronger; or that which ennobles the
species; or that which maximises total utility. According to Rawls, the
rational negotiator wiJI reject all these definitions because under each
he might systematically be underprivileged. The only rational choice is to
select principies in terms of what Rawls calls the 'maximin rule' wbich
maximises the position of the least well-off individual or group. The

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