Keynesian Welfare State: Social Security and Economic Policy

The Keynesian Welfare State

Social Security is one of the aspects of what has been called the welfare state. The welfare state is the set of public institutions that provide assistance to citizens to improve their quality of life and reduce social inequalities. Workers are paid directly: a monetary compensation paid by the employer.

Functions and Regulations of the Welfare State

Some authors consider other functions of the welfare state to include the regulation of working conditions and the protection of public welfare. Typical functions are:

• Labor and workplace safety: hygiene and safety in factories and workplaces.
• Environmental regulation: oversight of the environmental impact of industries.
• Quality and consumer protection: ensuring the quality of goods and services for consumers.

From a contractarian perspective, the welfare state is the institutional expression of the unequal contract of the capitalist economy itself. One of the main features of the welfare state is the recognition of the role of unions, both in the regulation of wages and in the shaping and training of public policies.

This model of state had a strong expansion in the 1960s. In 1929 there was a severe global economic crisis; until then economic policy had been dominated by liberal ideas. Keynes showed that the crisis was due to the unrestricted play of market forces. Keynes considered that the crisis could continue indefinitely if the state did nothing to correct it. The state must increase its own expenditure—for example, by investing in public works. Such investment will generate a chain of employers and employees, money, products, and services. This state investment can be multiplied to achieve full employment: both capital and available labor are mobilized.

Another model is that the state extends social security. In any case, the policies of the Keynesian welfare state encourage all sectors of society: workers obtain better real incomes and capitalists manage to increase effective demand. Even the state benefits through taxes by increasing consumption, corporate profits, and so on.

Criticism of the Welfare State

By the mid-1970s the Keynesian welfare state was in crisis. In developed countries production and employment decreased while inflation rose. The economic recession led to renewed interest in liberal ideas, now known as neoliberalism—a doctrine that proposes a return to classical liberal policies.

Neoliberal critics of the Keynesian welfare state argued that financing social spending with taxes discourages capital investment. One common argument is that employers must not only pay wages but also social security contributions, which increases the cost of labor. Another criticism is that increased social spending does not always translate into effective benefits for recipients.