Economics

Why Welfare and Redistribution Saves Capitalism from Itself

Rich countries share wealth and create economic security

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By Steve Roth

There’s a curious fact about the wealth and growth of nations that you rarely see mentioned: No country has ever joined the modern, high-productivity, rich-country club without massive doses of redistribution, and universal government programs for social support and financial security. Not one. Ever.

You can get a rough feel for the scale of those programs here (the OECD countries pretty much constitute the “rich-country club”):

graph

There are a zillion other measures you could plot, but they paint roughly the same picture. In this measure, the richest countries all devote fifteen to thirty percent of GDP to social spending. As Bruce Bartlett pointed out recently, Germany — a darned “conservative” country that is thriving today, and which rode out our recent economic Great Whatever better than almost any other country — started building its welfare state more than 150 years ago.

Now contrast these countries to all the countries that have eschewed those freedom-sapping, serf-ifying government programs, and that have emerged as thriving, prosperous utopias of liberty.

Name one.

Why hasn’t it happened? Not even once.

If countries like that were in fact so economically efficient, shouldn’t we expect to have seen at least one of them emerge, and surge ahead of all the rest — outcompeting all the others, in a very Darwinian sense? Isn’t that the prediction that libertarians and conservatives are making? How can we explain the complete and abject failure of those predictions?

An explanation is perhaps not far to find. Market capitalism — especially modern “holding-company capitalism,” in which corporations own corporations which own corporations, ad infinitum — inevitably concentrates wealth and income into fewer and fewer hands. It’s just the nature of the beast. Along with its immense, world-changing, manifest benefits, market capitalism labors under that inescapable burden.

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Then add an Econ 101 notion that is pretty much universally accepted, because it’s strongly supported by theory, empirics, and just plain sensible intuition: decreasing marginal propensity to spend. A poorer person is more likely to spend an extra dollar (in wealth or income) than a richer person. Because: the “utility” (or just benefit) purchased by that extra dollar is so much higher for the poorer person. The fourth ice cream cone, iPhone, or Lamborghini just isn’t as enjoyable as the first. So greater concentration into a few hands means less spending — in economic terms, lower “velocity,” or turnover, of wealth.

And less spending means less production. Because Q: why do people and firms produce things? A: Because lots of people spend money to buy them. How many iPhones would Apple have sold if all our wealth were concentrated in a few hands? (Over the last year, by the way, Apple has sold circa 10 million devices. To get a feel for that: they’ve been producing about twenty devices per minute, one every three seconds, during every minute of every day — all pretty much on demand.)

Absent the redistribution and government programs that rich countries provide, market capitalism strangles itself, through concentration, with insufficient demand to drive — to “incentivize” — its own masterful engine of production. Absent those programs, countries never make it into the the rich-country club.

Nobody would claim that those programs are sufficient to make a modern country rich. That would be silly. But based on the bare facts over the last century or two, it seems safe to say that they are necessary.

Or to put it another way, and bring it right home to America: The New Deal saved capitalism from itself. Marx was very wrong on the politics of things, but he was very right about capitalism’s fatal flaw. But: he was also wrong about the “fatal” part. FDR proved him wrong. The New Deal showed that capitalist countries could overcome the “concentration” curse. Using a host of government programs, it resurrected the mighty American market engine from the depths of The Great Depression, and over three or four decades delivered the greatest burst of growth, productivity, and prosperity that this country — and this world — has ever seen.

How did that happen? The New Deal shared the wealth in manifold and diverse manners, using a plethora of government programs, rules, and institutions.

“Share the wealth” is a phrase that is very anathema to libertarians and free-market conservatives. But sharing — pretty much the defining act of of altruism and cooperation — lies at the very heart of humanity’s success as a species. Cooperation, altruism, and sharing are what got us to the top of the food chain. (We’re not talking here about the techno-utopians’ faux-“sharing economy,” in which you “share” your car and driving services — in return for money. We have another word for that: we call it trade.)

Competition is widely fetishized as a cure for all ills, but its adherents fail to realize its fundamental (and undeniable) virtue: it creates incentives for groups to cooperate.

Only a tiny handful of species, out of millions that have evolved over 4.5 billion years, have developed eusociality and widespread, large-group altruism. It’s really hard (unlikely) for it to evolve, because in-group selection among competitors — undercutting the group for individual benefit — is such a powerful, dominant, contrary evolutionary force. Eusociality exists among a number of insect species, some crustaceans, and just a few mammal species — mole-rats, and notably, humans.

And humans have turned that dial to eleven (see Ultrasociality).  Maybe because of our capacity for language, humans have developed as the globe-dominating eusocial species, sharing on a scale of millions and billions of individuals. The 21% of GDP that the average rich country shares via social spending is only one roughly measured expression of that reality.

Some wise souls will certainly point to another universal human activity — trade — as the greater driver of human success. I, for one, would not contest that. But hey: people trade in (and with) every country. Very few of those countries have joined the club.

As labor productivity spirals ever-upward — producing ever-more goods with less and less human labor — and as an ever-greater slice goes to owners 0f things versus doers of things, it gets harder for humans to lay claim to those goods merely through the sweat of their brows and the content of their character. Absent those widespread or universal claims to a decent slice of the pie — and the widespread iPhone-buying power that results — the machinery of market capitalism loses its necessary fuel, sputters, and grinds ever slower (than it could or would otherwise).

Happily, we know the solution to that problem. It’s the same solution that has delivered unto us the bounty and prosperity that rich countries enjoy today.

To put it simply: Yes. Prosperity requires a welfare state.

Or to put it another way: Widespread prosperity both causes and is greater prosperity.


Note from the author: I need to reply proleptically to the inevitable objections that always come up: Singapore and Hong Kong — city-states with populations of the Detroit and Philadelphia metro areas, respectively.

Circa ninety percent of Singapore residents live in government-built housing. Employees and employers make compulsory contributions to a government-run comprehensive savings plan (“Provident Funds”) — 34.5% of earnings for most prime-age workers — to fund their retirement, healthcare, and housing. The health care system is based on a nationalized health insurance plan, and includes both subsidies and price controls. Hong Kong is a protected trading area operating under the authority of external nations — Britain, then China. Like Singapore, it has its Mandatory Provident Fund, other social support programs, and free public health care.

I’ll leave it to my gentle readers to do the math on those “countries.”

Update: Just out from this author, check out the latest figures on growth and prosperity in big-government Europe versus small-government U.S.


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  • Derryl Hermanutz

    It’s always astonishing how supply-siders think producing more goods makes us wealthier, when in reality it is the ability of people who want those goods to buy the goods that makes us wealthier. Production of goods “for sale” is pointless without a sufficient market of people whose demand is backed up with money to buy what they want. And as Steve Roth points out, as work is mechanized and less workers produce more goods, trying to distribute the outputs only to people who earn incomes by contributing to production of the outputs, is just arithmetically illiterate. JS Mill, and Marx, both recognized this consequence of industrialization when they published in 1848. Moving forward, a welfare state and/or a basic income — funded with money that is issued debt-free by governments — will become increasingly necessary in order for producers to sell their outputs.

    • Derryl, I love how you put this: “trying to distribute the outputs only to people who earn incomes by contributing to production of the outputs, is just arithmetically illiterate.”

      It puts across how that work-based distribution of our collective production is in a very real sense, and to some greater or lesser extent, just arbitrary. Whoever was lucky enough to have a good job this quarter. Or was not unlucky enough to lose their job.

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  • TheBrett

    Is there ever of an inequality-driven slow-down? I remember that being debated – certainly inequality has exploded in, say, China at the same time as the state has had enormous economic growth and wage growth. And the US had rapidly rising inequality in the 1990s at the same time as rising wages.and 4% RGDP growth.

    • Kaleberg

      The US economy in the late 19th century was in a long term depression, because wages were stagnant. It wasn’t until the government stimulus of The Great War (WWI) that the US started to see real economic growth, and that prosperity was limited by lack of redistribution. The economy crashed in the early 1930s and took decades of stimulus to rebuild.

      • TheBrett

        That’s an oversimplification. They had two really bad depressions in the 1870s and 1890s, but gross national product went up on average in the late 19th century.

        • Kaleberg

          It is an oversimplification, but there was surprisingly low growth from 1873 until around 1896 when compared with the dynamic economies before and after. The GNP grew, but more slowly. (Interestingly, more recent estimates of total factor productivity for that era have been revised upwards by a number of economists, so something was happening, much as in the 1930s.)

    • Derryl Hermanutz

      Inequality and wages can both grow as long as total debt is growing fast enough. You have to begin by recognizing that we do not use government-issued fiat money. We use bank-issued credit/debt money. Banks issue credit-money in the form of bank deposits, which are our primary form of spendable money. In both the US and China, inequality and wages rose together during periods when total credit/debt was rising rapidly. In China, bank lending of newly created bank deposits adds investment spending into the equation. Much of the investment added capacity into the exports manufacturing sector. Chinese workers and suppliers earn the spending as wages and profits. Chinese spend some of their wages and save a lot. So debt-funded investment increases employment and wages and household savings. Meanwhile exporters are getting rich selling boatloads of consumer goods that Americans buy with their credit cards (debt-funded consumption). Chinese inequality increases, even though ordinary Chinese are earning and saving more money (getting richer). The bloom comes off the rose when the time comes to repay the debt; e.g. like the 2008 banking collapse. The Chinese government owns the Chinese money and banking system, so China is not doomed to the inevitabilities of banker arithmetic. Rather than let debtors default, the government can tell the bankers to keep lending the debtors more money to keep them in business hiring the Chinese economy. Read Steve Keen for an arithmetically literate explanation of the effects that changes in the direction of total debt (increasing, flat, decreasing) cause on the direction of GDP growth.

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  • Who is this author? He’s grossly economic illiterate. Simply read The Myth of the Robber Barons to understand how wrong he is. Governments create monopolies; they’re impossible without govt collusion. He wants to take voluntary-paid money from people like Elon Musk, to give to the most powerful .00017% of the USA (Congress), who have absolutely no liability nor involvement in the creation of the money they acquire. If they waste it on wars and welfare queens, at most they risk losing their next election.

    • Mankind Global Media
    • DDestroyer

      lmao, this is ironic

      “the author is grossly economic illiterate”

      “monopolies are impossible without government”

      • Yeah haha you’re economic illiterate as well if you didn’t get that. The government – a monopoly on force – is required to establish monopolies such as the taxi monopoly, that uses the police to restrict competitors such as Uber and Lyft in some cities. Without the use of the government monopoly on force, no company can create a monopoly (i.e. prevent competition from arising).

        • DDestroyer

          you’re a fucking idiot

          • Dan Laub

            Ad hominem attacks -the last resort in a debate.

          • DDestroyer

            Great though when the debate is a waste of time. Government force is not the only barrier to entry and monopolies arise from any one or more of a set of market conditions such as high barrier to entry in terms of capital costs, large externalities, high transaction costs, and leverage/advantage of capital and scale.

    • The Great Depression would not have happened except for the First World War. In the US the Depression was a post-war continuation of Federal assault on labor that began as the run-up to the US entry.

      If there were no sanctions vs. IWW or Espionage Act; no roundup of socialists and there would have been no Great Depression in the US. The Depression was an all-out class war it was fought with thrift vs. the leveraged speculators and their financiers. The struggle was almost won by labor and would have been if not for Munich. Big business was reeling — Roosevelt’s policies were business bailouts — but the government needed the corporations to build the planes, tanks and ships needed to fight the Axis. Business got the mother of all mega-bailouts (with borrowed money) while labor got the right to organize.

      The Depression ended in 1948 when TV became widespread. Workers were convinced by the little man in the box it was okay to spend money they didn’t have on crap they didn’t need to impress people who hated them (the bosses). TV gave the bosses the most effective means to feed everyone lies, to co-opt organized labor while beguiling workers with aspirations to riches. Add computers to just-in-time management and US labor was destroyed.

      BTW: Musk is supported by government funds, his operation is a Ponzi scheme, like Clarence Hatry’s during the 1920s. He is also a contradiction: he claims to create cars that don’t pollute while building rockets that create more pollution than all his cars together can save.

    • josluizsarmento

      Instead of explaining why your free-market utopia should work – everybody who isn’t an economic illiterate has heard that a thousand times – why don’t you stop wasting everybody’s time and mention one example of where it has worked? That would do the job nicely.

      Talking of Cuba, the USSR and North Korea doesn’t answer the author’s question and is grossly illogical in this context. The author is not claiming all forms of redistribution work every time: he is only claiming that a system without extensive redistribution can not work. If this sounds strange to you, it is probably because it is what we illiterates call a fact.

      I am happy, though, that you think liability is a good thing. That is what Adam Smith thought, too: he wanted limited liability corporations to be as few in number as possible, and heavily regulated in the public interest. That is also what Thomas Jefferson and George Washington thought: they wanted limited liability corporations to be forbidden from owning stock in one another. This should be enough liability for you.

      • The founders created the federal government as a very limited corporation, with voting power only held by shareholders (taxpayers). Since that’s been lost (diluted shares by expanding suffrage to non-taxpayers), the govt has morphed to become a *zero*-liability corporation. What should have happened naturally, the states growing into quasi independent nations on their own, akin to Europe, loosely joined by common constitutional principles, instead led to corporations growing to compete with the zero-liabilty corporation (the state). As long as the govt is zero-liability, I support corporations and states rights, to reduce the disparate power back to the level at which power matches liability (more locally).

        • josluizsarmento

          Of course corporations and states must have rights – but not unlimited rights. Specifically, they shouldn’t have rights to the detriment of real, flesh-and-blood persons. It is ludicrous to suggest the state is a zero-liability corporation in a world “in which corporations own corporations which own corporations, ad infinitum”, to quote from the article. If you, a living person, own stock in a corporation that owns another corporation and so on, you have far less control over the corporation at the end of the line – where actual goods and services are produced – than you have as a voter over the state. Adam Smith was right about this, and so were the Founders. You are just wrong, and your mindless condemnation of government is a very poor attempt at denying this even to yourself.

          • Simplifying the contrast down to economic control vs political, even Bill Gates has LESS control over the people in his state, than a random Senator has over his constituents. No CEO can force other people to buy a service. Senators can. No CEO can prohibit others from buying services from competition, but Senators and political leaders can. If the govt screws up and misspends $Trillions of our money, AT MOST the leaders can expect to lose their next election. There’s no refunds, no returns.

          • josluizsarmento

            Wrong again. It is the other way around: shareholders and stakeholders in Bill Gates’s ventures have a lote less control over Bill Gates’s decisions affecting their lives than a random Senator’s constituents over the Senator’s decisions. That is why Senators have to maintain offices near their constituents and conduct frequent City Hall meetings with them, and listen to them – or else. You are right they risk losing the next election, but this means they risk losing everything they have worked for all their lives.

            Bill Gates risks nothing at all from shareholders or stakeholders: all he needs to completely avoid accountability is a controlling share in a corporation that owns a controlling share in another corporation and so on down the line to the level where real business is conducted.

            The only freedom you seem to be concerned about – and this to the point of obsession – is the freedom to buy and sell. But real Humans, unlike the “Econs” posited by neoliberal dogma, need a lot more freedom than that. And this freedom to live, as distinct from the mere freedom to trade, is in far greater danger from limited liability corporations than from any government on Earth. As Adam Smith and the Founders understood very well but you, in your wilful obtuseness, don’t want to understand.

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  • Even in the US they have state owned industries (Amtrac), state owned economic resources (coal on Federal land), state owned assets (Hoover Dam, TVA) and state supported industries (military-industrial complex,SNAP). These provide employment (employer of last resort) and the market economy benefits from their existence. We still live in a world where governments still exercise considerable control over our key industries and resources.

  • X-7

    A guy who writes about econ and cites eusociality: Nice.
    And dig the tough, direct writing style / aesthetics as well.
    Fine work, Mr. Roth; thanks.

  • assman35

    God its funny how this myth never dies. Capitalism does not need the welfare state to redistribute. It will happen automagically. Karl Marx predicted the death of the capitalism because it would immiserate the working class. NEVER HAPPENED. Why? Because the wages of the working class rose. And why did that happen? Because eventually there is just too much capital competing for too little labour…so wages go up. This is exactly what happened during the industrial revolution and will continue to happen today.

  • This is more of the same, more conventional industrial economics, there is nothing evolutionary about it. The demand is to keep the factories working around the clock by spending borrowed money, to have more live beyond their means.

    Living beyond means => more free lunches for investors => catering to investors and giving them free lunches is what economics is all about.

    Industrialization cannot be ‘fixed’ because wealth is not created by clever entrepreneurs, it is dug out of the ground. Not gold but water, oil & coal, top soil fertility, waste carrying capacity, biodiversity, forests & fisheries, strategic minerals including fertilizers … The more industrialization ‘works’ the faster the capital is consumed leaving nothing but waste and debts. There are no social programs that can undo that.

    • Fiona Ottley

      I agree with your concept of capital, but not the last sentence. Education in general and especially of women; improvements to health particularly those reducing child mortality; these are social programs that can reduce our capital consumption by reducing population growth. Reducing population growth alone will not solve all our problems, but it is a very important step in doing so. Have you seen any of the Gapminder presentations?

  • Captain Fluttershy

    It is very bad statistical analysis to see x and y correlates and then say “x must be the cause of y!” Perhaps both x and y have the same cause, or y is the cause of x. Off the top of my head, maybe high social spending and and wealth both arise from high trust, low corruption societies.
    Maybe social spending is high because the people are altruistic and low because the people aren’t.

  • Rusalka

    Sustainable man made system should mimic nature. Then, of course – sharing, not trading. In nature we can not trade with infants and old people. We just take care of them. But without it we won’t last as species. And won’t create a stable, safe environment to evolve.

  • Roboticist

    I started following Evonomics because I thought I might find people interested in the scientific investigation of Economic behavior. I was especially hoping to find people who had knowledge of Complexity Economics/Emergent Economics/Evolutionary Economics. Instead, I’m finding the same warmed-over superstitions propagated in the mainstream media. There don’t seem to be any Scientists here. There don’t seem to be any critical thinkers here. There doesn’t seem to be any real knowledge of Economics here. What a disappointment.

    This article is full of rhetorical fallacies. It draws conclusions without adequate supporting data and arguments. The comments are full of name-calling and almost no critical comment.

    Economics needs thinkers and Scientists, not blithering, batshit, time-wasters. The study of Economics is hard enough without the injection of random noise. Broad generalizations don’t lead to improvement.

    I particularly take offense at the sophomoric statement:

    “Now contrast these countries to all the countries that have eschewed those freedom-sapping, serf-ifying government programs, and that have emerged as thriving, prosperous utopias of liberty.

    Name one.

    Why hasn’t it happened? Not even once.

    If countries like that were in fact so economically efficient, shouldn’t we expect to have seen at least one of them emerge, and surge ahead of all the rest — outcompeting all the others, in a very Darwinian sense? Isn’t that the prediction that libertarians and conservatives are making? How can we explain the complete and abject failure of those predictions?”

    Just because it hasn’t happened does not mean that it couldn’t happen, or that the principle is wrong, and it certainly does NOT support the conclusion that government-supported welfare is desirable or necessary for “prosperity” (whatever THAT is!). It is entirely possible that providing the most goods and services for the most people requires some inefficiencies, redundancies, and waste. This is a characteristic of emergent behavior in complex systems, and Economists are now pretty much in agreement that Economics is evolutionary, emergent, and complex.

    Try reading a book instead of flapping your lips: https://www.amazon.com/Origin-Wealth-Remaking-Economics-Business/dp/1422121038

    Here is another as it relates to technology and environment: https://www.amazon.com/Out-Control-Biology-Machines-Economic/dp/0201483408/ref=sr_1_1?s=books&ie=UTF8&qid=1488265930&sr=1-1&keywords=kelly+out+of+control (This book is available online in pdf format and the data is updated fairly regularly.)