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Commentary :: Social Welfare
The Welfare State in Crisis
30 Oct 2017
Since 2008, crisis was the defining political theme. "No one should be fooled about the majority will of the population regarding taming world finance capitalism. The system could only be bailed out from collapse with taxpayer guarantees" (Habermas). Many governments concocted austerity packages and cut social services and tax subsidies.

By Philipp Kramp

[This reading sample of the 2012 Masters thesis is translated abridged from the German on the Internet,]

1. Introduction

Since 2008, the world has held its breadth through the financial crisis, the economic crisis, and the euro crisis. Crisis was the defining political theme in the last years. Its global significance and effect were highlighted.

“No one should be fooled about the majority will of the population regarding taming wild finance capitalism. For the first time in the history of capitalism, the spine of the finance market driven world economic system could only be bailed out from collapse with taxpayer guarantees. This fact that capitalism could no longer reproduce itself with its own steam has become firmly fixed in the consciousness of citizen s who must blame themselves for the system failure.” (Habermas, 2010)

To combat the crisis and rescue the economic system, the states had to step in with their authority and use vast capital resources. They reacted to the crisis with enormous economic programs as in a classical Keynesian investment policy (1). This should help generate economic growth and contribute to bridging the missing private enterprise demand. An enormously increased public indebtedness resulted.

“Governments were passing emergency budgets with deficit spending to kick-start the economy […] The financial crisis was replaced by the European budget crisis and governments across Europe started to cut back the public sector to placate the financial markets which caused the problem in the first place” [Hermann 2010].

To cushion this high indebtedness, many governments concocted austerity packages and cut social services and tax subsidies. This study explores this connection between economic crisis and cuts in the welfare state. The connection is not direct. Rather pressure is exerted on the social state by the higher state indebtedness.

Keynesian investment policy broke through the “fiscal regime of austerity.” (2) Stabilizing the demand of the economy and costly bank bailout measures stabilizing the financial sector were central. These factors put the strained national budget under additional consolidation pressure together with lower tax revenues resulting from higher unemployment, lower employment and business bankruptcies. Some states have problems raising funds on the financial markets including Greece. To remedy this problem austerity measures (3) are urged to reestablish the trust of the financial markets in the solvency of states. States still facing serious pressure in accessing the capital market resolved more savings.

“The contours of a third phase have become apparent now that budgetary constraints are forcing political actors to make tough choices and introduce austerity policies. […] Cutbacks of social expenditures are entering the agenda but how this will play out remains to be seen” [Barbara 2011].

This study asks the question “What influence did the economic-, financial- and euro-crisis have on the welfare state?” A significant development or dismantling of the welfare state during the economic crisis is expected.

The hypothesis for this study is “Cuts will occur in all welfare states. The size of the cuts will depend on the shock of the political economy by the economic crisis.”

Several methodological problems could not be faded out in the study. The globalized economy, particularly in the sector of financial management, is impacted by national events. Nation-state developments can have an international influence. Reforms of the nation state can also occur for ideological reasons, for instance after a change of government. This change of government happened in all the case studies. No claim to completeness can be made here. The economic crisis never ended. A possible state bankruptcy or bank insolvency in Spain is discussed publically. That kind of development can change many conclusions.

A comparative case study is constructed for verifying or falsifying hypotheses… Germany, the United Kingdom (4) and Greece are chosen as case studies. All three are intensely impacted by the economic crisis. Different conclusions are reached in every country…

2. The Welfare State

The welfare state is defined and its importance within the nation state explained. Past challenges to the welfare state are addressed. Discussion on the “crisis” of the welfare state of the last years is summarized with the themes: demography, globalization, unemployment, new social risks and Europeanization.

2.1 Definition

There is no generally acknowledged definition for the term “welfare state.” Two problems encounter us. First, the term welfare state is used synonymously with other terms like social state, social policy, social question, the worker theme, social reform, social market economy, social constitutional state, the system of social security and the common English terms social security and welfare policy. [Koppe 2008]

The substantive analysis of this term is the second problem. What partial social areas should be counted as the welfare state? There is no uniform opinion and no generally valid definition. Rather all the authors define the welfare state independently…

State expenditures are the main expenditures of the welfare state but not the only ones. Rather the state is the most important welfare state producer. Churches, welfare associations, enterprises and professional groups are other welfare producers. This diversity is extremely flawed as Peter Starke explains:

“Expenditure is but one indicator of policy change, and a problematic one […]. For example, social expenditure rates could increase in times of economic crisis as a consequence of more unemployed people claiming benefits while policies do not change at all” [Starke 2011].

Thus the quantitative size of the welfare state could change without the social benefits being reduced. This happens for example when social services are taken or the amount of the GDP grows or shrivels. The term welfare state must be understood qualitatively.

Some of the terms are certainly substantively identical. In this study, I emphasize the terms welfare state, social state, social policy and the social security system.

Gerhard Backer defines social policy as follows:

“These are measures, benefits, and services that aim at preventing the genesis of social risks and problems, creating the prerequisites for citizens managing social problems, offsetting the effects of social problems and improving the situation of individuals or groups” {Backer 2008}.

Social policy is not static. Social policy reacts to social problems and is socially defined or social conflicts over distribution. The underlying picture of social justice changes and rests on the social-normative definitions of freedom, security, and equality. The idea of social justice encompasses social problems and the social-political measures for remedying the problem [Backer 2008]. “As a social arrangement, a social state is subject to the dynamic of changing power constellations, parliamentary majorities and general moods” [Butterwegge 2012].

Welfare state and social state are mostly used alternatively. (7) Their definition is based on the definition of social policy. In Backer’s view:

“Social policy consists of a multitude of measures, benefits, and services provided or offered by different institutions, organizations, and actors. This total complex can be described as a social state or welfare state” [Backer 2008].

The welfare state includes both legal norms and institutions commissioned with carrying out social policy. The term is also an “expression for the active creative role assumed by the democratic state in economic and social life and characterizes […] a type of society that joins a developed free enterprise-capitalist economy with the principle of social balancing.” The term welfare state is a double-edged concept. On one side, it is the status quo of all norms, regulations, and institutions in social policy, the totality of social policy and simultaneously a normatively charged picture of the nexus of social policy and the capitalist economy. The second can be assumed since we move exclusively in capitalist systems in the case studies.

The social security system or the “system of social security describes the institutional framework for social policy. The term refers to the totality of all institutions of the social state” [Butterwegge 2012]. Correspondingly, welfare state describes the institutional plane (social security system) and the substantive plane of social policy. (9)

2.2 The Meaning of the Welfare State

The importance of the welfare state within society, its tasks and influences is also contested. A hundred years discussion about the welfare state and changes in viewpoints underlie the welfare state.

For the German debate, Alfred Mueller-Armack is considered one of the fundamental authors… Social policy and market economy are compatible since the market economy is not “an anti-social order serving the interests of the economically strong” [Mueller-Arnack 1947]. According to Mueller-Armack, social policy should only bring about a shift of purchasing power. The expenditures for social policy must be first acquired by the capitalist economy. The welfare state is the result of a successful market economy and is financed by that economy.

Karl Polanyi understands social policy differently. With the industrial revolution, the effects of the market penetrate the depths of society. All goods, services, productions etc. are subject to the market. The triumphant advance of capitalism and the market is accompanied by the development of state institutions and regulations and thus of the welfare state. “Society protected itself against the perils inherent in a self-regulating market system” {Polanyi 1965}. According to Polanyi, the welfare state has the task of protecting society from the market and its exploitation.

In his 1929 work, Edward Hermann sees the development of the welfare state in the working class which was its impetus. The rise of capitalism was the trigger for the development of the social state. The welfare state is the counterpart of capitalism delimited from it and a protective mechanism of workers against capitalism. Capitalism accepts the welfare state even if as a foreign body but as a production necessity so it does not ruin itself. With that, the welfare state leads a conservative-revolutionary double existence. It ensures the status quo and simultaneously undermines capitalism.

Three opposing theories exist on the formation of the welfare state: the power resource approach, functionalism, and institutionalism.

The power resources approach starts from the political hierarchy of power and the representation of the working class in the nation state… Functionalism sees an answer to the socio-economic changes of that time in the development of the welfare state. Industrialization made necessary the formation of social states. The breaking of family structures required a new provision for the sick, pensioners, and the unemployed. Social policy grows out of an economic pressure…

Institutionalism represented by Karl Polanyi sees the formation of the welfare state connected with the newly created political institutions. A political transformation also accompanied industrialization. Parliaments, the central state, and bureaucracies arose… The introduction of bureaucracy made possible the introduction of social states” [Koppe 2008].

On principle, these theories are not in opposition. For example, the rise of the capitalist production method led to the formation of the working class. The power resources approach emphasizes this. But the capitalist production mode also led to the socio-economic change of this time described by functionalism. Structural changes like the genesis of democratic parliaments of nation states also accompanied the genesis of the working class. Institutionalism puts this in the center.

In a summarizing way, Christoph Butterwegge describes the importance of social policy within a capitalist system.

“Social policy is Sisyphus work because it never reaches its final goal – establishing equal development possibilities for all members of society – but has partial successes again and again in the creation of social justice that would not otherwise arise… Social state intervention aims at necessary corrections of primary income distribution so no one is endangered by the consequences of the private pursuit of gain in his or her physical existence, personal development, and socio-cultural development” [Butterwegge 2012].

2.3 The classification of welfare states

The most important model for classifying welfare states comes from Goran Esping-Andersen… In his book “The Three Worlds of Welfare Capitalism,” he distinguishes two basic characteristics that help in classifying welfare states: decommodification and stratification. Under the term decommodification, he subsumes the independence of workers from the market, the question how independent is the person from the market, and how little is he forced to sell his labor power on the market [Esping-Andersen 1990]. Stratification describes the development of a class structure and how this is promoted or broken through by the welfare state.

“The welfare state is not just a mechanism that intervenes in and possibly corrects the structure of inequality. It is a system of stratification in its own right. It is an active force in ordering social relations” [Ibid 1990]… Welfare states are not uniform but react differently to influences on account of their different construction. (12)

2.4 The Past Challenges to Welfare States

In the 1970s, the worldwide oil crisis and the subsequent trifling economic growth put the financial basis of the social state increasingly in question. “In recent years, the welfare state has become a major political concern” [Pierson 2006]. This refers especially to globalization, the demographic development of society, the aging of society, the high unemployment, Europeanization, the changed social structure and the related new social risks…

2.4.1 Globalization

The process of globalization puts the whole welfare state under pressure, it is argued. Businesses are not the only ones in competition. Rather states find themselves in a permanent rivalry over the best locational conditions. Capital and labor are regarded as fleeting and can be shifted globally at any time. The size of the social state and the performance level affect the overall economic costs. Goods production is more expensive to organize in countries with developed welfare states [Backer 2008].

This pressure results from the international opening of societies and economies. The consequences can be observed in Sweden for example. Sweden has had to battle increasing capital flight abroad and declining investments after the liberalization of its economic system. This led to the eroding of the “nation al social pact” prompting both leftist and right-wing political forces to make cuts in the social state [Esping-Andersen 1996].

This competition between the states and the subsequent adaptation pressures on welfare states causes a “race-to-the-bottom,” a race for the lowest social standards and the lowest spending for the social state. This cannot be empirically proven but can be understood in individual examples [Pierson 2006].

2.4.2 Demography

Low fertility rates, the number of births per woman and higher life expectancy are the causes for the problem of the increasing average aging of society. (13)

Two problems result for the social state [Pierson 2006]. Firstly, the health expenses for the increasing number of persons who are 75 and older are higher. On average, they are 2.5 times the expenses of a person between 65 and 75…

Esping-Andersen concludes that the problem of low fertility rates can be solved politically, referring to Scandinavian countries:

“The demographic burden is subject to political management. […] The aging problem depends mainly on births. […] Female employment and fertility are record-high in Scandinavia. The welfare state makes a decisive difference because female employment is possible with fertility if social services and liberal provisions for leave are available” [Esping-Andersen 1996].

2.4.3 Unemployment

Unemployment is a financial burden for the welfare state in two regards. On one side, funds are needed to finance persons in unemployment and on the other side persons without work cannot contribute to the social security systems…

2.4.4 Europeanization

Europeanization is a challenge for the production of welfare and not generally for the welfare state. The production of welfare was mainly a nation-state affair alongside family, church, and company participation. The increasing discussion of a European social model and incursions of European legislation in nation-state social policy are firstly defined negatively through the common freedoms that reduce possibilities of nation-state social policy [Jepsen 2005]. At the same time, there are fears that an increasing expansion of the EU and the tariff-, commodity-, service-, personal- and capital freedom between the EU member countries will also trigger a race-to-the-bottom [Kuist 2004].

2.4.5 New social risks

In the last years, the debate has focused on new risk groups of the welfare state.

“[The] shift from industrial to post-industrial economies and societies has led to new risk groups that did not belong to the traditional clientele of the postwar welfare state and yet are experiencing major welfare losses” [Bonoli 2006].

These problems arise through varied family structures and a change of the socio-economic status. Both working conditions and family relations have been de-standardized [ibid].

The essential point is the dissolution of a basic assumption of western welfare states that the large part of child-rearing and care for parents and grandparents is done by women within family structures. This has changed with the growing involvement of women in the labor market. That this task is increasingly accomplished by the state is accepted today in all welfare states [Pierson 2006].

At the same time, the structure of the labor market changed. The “Golden Age” of the welfare state was characterized by stable structures and “normal working conditions.” (17) In the past decades, there was an intensified expansion of part-time and limited employment. A claim is first possible after a certain time of participation in the labor market (with full-time employment)… The welfare state is insufficient in combating poverty, particularly the poverty of families and single parents with small children. (18)

The conservative welfare state seems to have great problems with the transformation into post-industrial societies. It can only adjust to changing life realities in a limited way with its orientation in the classical family system of the sole male wage-earner…

“With their […] much longer and […] more serious commitment to gender equity, questions of the life-work balance enabling women to participate fully in formal economic life have long been addressed” [Esping-Andersen 2002].

Altogether, these new social risks are additive and supplement the risks in several ways and should not be understood as a replacement of past challenges of the welfare state like sickness, old age, or unemployment [Pierson 2006].


(1) The economic school of Keynesianism, the compensation for lost economic power in times of economic crisis, is manifest in increasing state spending.

(2) according to Wolfgang Streeck

(3) The authors describe the bank bailouts and the Keynesian investment policy as the first two phases of the economic crisis.

(4) The name “United Kingdom” or the international abbreviation “UK” is used in German parlance, not “Great Britain.”

(7) The terms social state and welfare state are often used interchangeably [Butterwegge 2012].

(9) A leftist government leads to a different welfare state than a right-wing government over a long-time period.

(12) Transfer-financed pension systems are based in payments of employees directly to pensioners. In countries with capital-covered pension systems (every person provides for his or her own support through a capital fund as a pensioner), state subsidies are paid to pensioners or many pensioners depending on a tax-financed basic pension face similar problems.

(13) The authors of a study on fertility rates in Europe did not blame immigration or socio-economic factors for this change.

(17) A normal working relation is usually a dependent and unlimited work relation in full time.

(18) the poverty rate (household income below 60% of the median) in Germany 2010 was four-times as high for single parents (38.6%) than for couples with one child (9.6%) or two children (10.7%) and twice as high as with couples with three children (23.2%).

Excerpt. Karl Polanyi: The Great Transformation. Political and Economic Origins of Societies and Economic Systems. 1st edition, 1944

[This excerpt is translated from the German on the Internet.]

In “The Great Transformation,” Karl Polanyi criticized economic liberalism in the effects and concrete phenomena of the market economy. At the beginning, he describes the developments that paved the way for a self-regulating system and included the analysis of modern economists who in his view applied the wrong standards – namely free enterprise – to a restructuring like the enclosure in the times of the Tudors in England and later the Industrial Revolution, in a non-free enterprise system. Accordingly, the often very positive understanding of the market economy is based on a mis-interpretation of the English economic system. The enormous upswing that could be called a social “catastrophe” was set in motion with the Industrial Revolution and, according to Polanyi, entailed uprooting, exploitation, and materialization (capitalization). This represented a new institutional mechanism for which Western Europe was not prepared since no comparable system had existed up to then. The history of the 19th century was occupied with containing its failures.

The idea of a self-regulating system of the market first arose out of the phenomena of the market economy, the author continued. However a rethinking had to first take place in the heads of people – away from the motivation of livelihood to a motivation of profit. The danger or the system-immanent error of the market economy was the socially-endangering understanding of commercialization that transforms the natural and human substance of society into commodities through material production in the sense of profiteering or profit maximization. As a consequence, Polanyi sees an unavoidable disturbance of interpersonal relations and a threat to the natural human living space. He intimates the thesis of the rule of markets over society – the idea of self-regulation – and the changes in societies and with individuals when social reality is passed by and a utopia of economic liberalism is promulgated. Regulatory measures from the state and from the institutional side are the logical consequences and fulfill a function for the protection of society.


By Vera-Katja Pallenberg

[This reading sample of the 2011 Masters’ study is translated from the German on the Internet,]

A great reversal bringing several changes occurred in the German social state within the last decades.

First, I will give an introduction in this political system. In the course of this study, I will try to answer the questions: why a social science system is necessary and what are its advantages and disadvantages.

Then I will clarify the term social state through a definition. Afterwards, I will explore its historical origin and important tasks, functions, and goals.

Furthermore, I will discuss the limits and problems of the social state and especially the activating points of the social state in SGB11 and offer my own analysis.

1. A definition of the social state

The social state has the task of establishing a far-reaching social justice and ensuring the social security of its citizens. To accomplish this, the state intervenes in economic and social sequences of events and becomes a central structural element of modern society. The goals of reducing social inequality and protecting the socially weak have special importance here. Income security, health, housing, and education should be adapted to the sectors of the population and improved for the general public. Moreover, the state is obligated to socially ensure its citizens. This happens through various measures like for example monetary-, practical- and/or person-referring services of education, the public health system, and the social system. These measures must be financed through public funds or contributions to the security system. Creating a subsistence level enables every citizen to participate in the market through state support. These claims were codified in the German Basic Law in force for all Germany’s citizens. Every citizen of Germany has a legal claim that the contents of these laws are fulfilled. Otherwise, he or she can file an action for their fulfillment.

1.1 The historical genesis of the social state

The social state has its historical starting point in the social questions of the 19th century. These questions reveal great existing differences in individual- and class-specific situations in the lives of citizens, the dominance of a great social inequality within the population. This inequality was seen by the actors, judged as a disadvantage and converted into political demands. Thus the second question arose and arises and consists of many individual problems and social questions of early capitalism and the heyday of capitalism.

Besides the social question, another social question emerged for this epoch: the workers’ question of the early and of the heyday of capitalism (Neumann/ Schaper 2008). The equation of the workers’ question with the classical social question results on account of a strong dynamic of society. This represented the reaction to the industrialization processes of the late 18th century in the form of polarization of social classes. This question is marked by a double revolution in the sense of the industrial revolution and the middle-class political revolution.

The social state originated in the 19th century as a consequence of the industrial revolution and industrialization. A great growth in the population occurred through the many new jobs in the large cities since man y country-dwellers drew into the large cities to find work and earn more money. Through industrialization, many farmers and tradespersons lost their jobs since their labor was replaced by machines. The former traditional social security systems were not viable and a new system had to be developed to protect the multitude from hunger, exploitation, and sickness.

During industrialization, there was an extreme growth in the population. The labor markets did not take account of this development and offer enough jobs. The hourly wages were extremely low and many families suffered in miserable living conditions. Child labor to raise the family income was common and had a negative influence on wages alongside the many women pressing into the workforce.

Mining was one of the customary occupations in the 19th century. Children were employed here from age 8. The working conditions were extremely bad, as in job security, air and hygiene conditions, working hours, and so forth. The security regulations were inadequate so many workers were harmed by the wretched working conditions and the resulting accidents.

Workers were fired on the spot when they protested the low wages or did not want to work in the mines for other reasons. The job was quickly filled by a new worker. This was possible because there was no legal period of notice.

Housing conditions were unreasonable. The misery of the working class resulted from the mass settlement of the cities. [cf. Neumann/ Schaper 2008].

With his book “The Wealth of Nations,” Adam Smith urged abandoning mercantilism to make possible a free trade and a competitive market guaranteeing a development to the markets and businesspersons. This led to selfish businesses facing competition from other businesses and feeling pressure to “adjust” to the population.

However, the completely free market needed a higher or overriding state protection. This helped market actors who were too small and too weak and were liable to being excluded from the market. The protective state functions extended to creating worker protection laws that limited the work of children and youths and prohibited women’s work on Sundays and nights. Moreover, there were also regulations on limiting daily working hours to a maximum ten hours. The social security laws were created and introduced by the government that are still in effect today for improving the general situation of workers. [Neumann/ Schaper 2008].
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