Keynesian economic policy analysis and Beveridgean social insurance

Through John Maynard Keynes's pathbreaking analysis of the Great Depression, macroeconomics became the key economic policy guide for post-war welfare state innovation and expansion. In The General Theory of Employment, Interest and Money (1936), Keynes introduced a completely new brand of macroeconomic policy analysis that allowed democratic governments to assume political responsibility for achieving full employment and comprehensive social protection without affecting the primacy of the free market economy (Hall, 1989). Keynesian economics focused on the macro behaviour of economic systems as a whole rather than on the micro behaviour of individual actors (Keynes, 1936). Fundamental is the idea that much economic activity is governed by 'animal spirits', best understood as waves of optimism and pessimism (De Grauwe, 2008; see also Akerlof and Shiller, 2009). Left to their own devices, capitalist economies will therefore experience manias, followed by bouts of panic. Animal spirits grip investors and consumers, endogenously generating self-fulfilling prophesies with severe macro consequences for employment, output, and investment (De Grauwe, 2008). To curb such fluctuations, Keynes argued, the modern state must sail into the wind of these behavioural excesses: when the population over-spends, governments must over-save, and vice versa. Tools of countercyclical aggregate demand management such as discretionary monetary and fiscal policy were to be employed to help maintain economic and productive capacity. If monetary and fiscal policy proved insufficient to smooth the business cycle, the state should resort to increasing or decreasing its own expenditures, in part through the expansion of social welfare programmes. Welfare spending was considered inherently countercyclical, automatically compensating for recessionary declines and expansionary booms in private spending.

The most important reason why policymakers were willing to experiment with Keynesian demand management after 1945 is critically rooted in the traumatizing experiences with mass unemployment and deflation of the Great Depression (Temin, 1989). It should be remembered that for Keynes the key political objective was full employment (Skidelsky, 2009). Post-war policymakers, economists, and business elites agreed that the macro economy not only required domestic fiscal and monetary policy steering but that the goals of social and political stability were to be placed ahead of economic growth per se. In this respect Keynesian economics provided William Beveridge, one of the founding fathers of the universal welfare state, with a strong economic theory against which to rethink the role of the state in welfare provision. In his wartime report, Social Insurance and Allied Services (1942), Beveridge defined the function of the welfare state in terms of the fight against the 'Five Great Evils of Want, Disease, Idleness, Ignorance and Squalor'. In his second report, Full Employment in a Free Society (1944), 'freedom from idleness' was defined as the central purpose of the welfare state. The basic form of worker protection and security in the post-war decades became social insurance: the universal pooling of the social risks of unemployment and old age, for which private insurance would be inadequate. Workers contributed to social security, ensuring them future protection against the risks of cyclical and frictional unemployment through benefits that replaced a portion of their previous salary for a set period of time, usually long enough to cover them until labour demand increased. In other words, unemployment insurance was designed to support workers who lost their jobs, not to prepare them for new ones and help them reintegrate into the labour market. Of crucial importance is that Keynesian macroeconomic policy analysis allowed democratic governments to assume political responsibility for achieving full employment and comprehensive social protection without affecting the primacy of the free market economy (Hall, 1989; Scharpf, 1991). It should be emphasized that the original full employment objective both Keynes and Beveridge had in mind was defined in terms of full-time jobs for adult male workers only, for 48 hours a week, with 48 working weeks in a year, for a period of 48 years. Their conception of full employment assumed that women, as housewives, would care for young children, frail elderly, and other dependent groups. Post-war social policy innovation, in this respect, very much consolidated the traditional gender roles of male breadwinners and female caregivers. Over the 1960s, social security coverage expanded to most workers and their families. In many countries, secondary systems of unemployment assistance or social assistance were developed, which paid benefits, usually on a means-tested basis, to those who had inadequate contribution histories to be entitled to unemployment insurance and/or those who failed to find work before their regular benefit entitlement period expired (Barr, 1998, 2001). The post-war welfare state thus came to epitomize a tightly coupled policy repertoire, including protective labour market regulation and male-breadwinner social insurance, supported by monetary, fiscal, and industrial policies, designed to maintain adult male full employment.