Topic Seven

Lectures 13&14

Oct.31-Nov.2                                       Political Economy





The study of political economy shows:


1. The nature of states and economies in industrial countries, particularly through the form of the welfare state.

2. Modern reforms of the state resulting from the impact of neo-liberalism.

3. The relationship between, state, and the new economy, particularly the impact of technology.

4. The continued importance of social democratic thinking on modern states.


The role of the state in the economy takes on two main forms: the social state (the welfare role) and the economic state (the reproduction role). In the first, controversies exist over the role of the state as provider and in the second, its role as manager.






The state in industrial countries evolved from the aristocratic state to the capitalist state under the challenge of liberalism seeking political rights and the supremacy of parliament over the monarchy. This struggle was mainly concentrated in the period from the 1680's (the Glorious revolution) to the 1850's. The state further evolved into the welfare state under the challenge of workers= movements from the 1870's seeking the right to vote but importantly, social and economic rights under capitalism.


The welfare state is one that adopts a philosophy of social responsibility on the part of society, acting through the state, for the care or welfare of those members, who by circumstances, are unable to provide a standard of care for themselves that meets the minimal standards of a civilized society. Ideologically, it represents a struggle between the capitalist ideal of profitability and the socialist ideal of justice for the less fortunate and those whose circumstances result from capitalist exploitation of society. Politically, the welfare state represents the impact of trade unions, labour and socialist parties, and working class voters and those of the more disadvantaged socio-economic classes of society during the high point of their politically influence from the 1870's to the Second World War, and even after.


Schemes were developed to provide state welfare, mainly for occupational injuries, old age, sickness and unemployment. These are forms of social insurance and together, made up the social security programmes of welfare states. Some welfare states have gone further to provide free or subsidised education for certain age groups, family allowances for children and health care in the public sector. Some countries like Germany and Sweden are among the top of those that provide more or less comprehensive welfare services, while others, like Britain and the United States have been at the lower end. A country like Japan, having a different culture and social institutional character than western countries, has been able to provide welfare through cohesive and strong family units and through companies which have a stronger bond with workers, than it does through the state.


The welfare state in the industrial countries emerged between 1880 and 1950. Since the 1980s, the neo-liberal impact of the Reagan and Thatcher governments on welfare states as bureaucratic, inefficient and costly have led to reforms of welfare states but not their abolition. The major change has been to shift the provision of welfare away from the state alone to other providers in society such as the market, civil society and the family. It is to create a welfare society in which the state continues to play an important role. An OECD report puts this in perspective: ANew relationships between action by the state and private action must be thought; new agents for welfare and well-being developed; the responsibilities of individuals for themselves and others reinforced. It is in this sense that the emergence of the Welfare Society is both inevitable and desirable.@ (Kuhnle, 2000: 9).


The changes in the idea of the welfare state represent a major ideological shift and a pragmatic adjustment to economic realities, that the state=s strong role in providing welfare is not a good role and that voluntary organisations and market competition might provide better quality and more efficient service delivery.


The welfare state has also been criticized as undermining individual initiative and economic prosperity by creating a culture or syndrome of dependency on the state.


Theories of state crisis.


The 1970's and 1980's saw a number of theories trying to explain a crisis of the state in industrial countries. A number of countries were experiencing higher unemployment, higher inflation and slower economic growth. At different times in the 1970's, 1980's and early 1990's, capitalist industrial economies experienced economic recessions. The economic boom of post-war economic recovery had lasted from 1945 to 1968.


The radical, leftist criticism argued that societal demands on the state were so great that states suffered from an >overload= of demands (crisis of governability) relative to their fiscal capacity to meet those demands (fiscal crisis) leading to popular dissatisfaction (crisis of legitimacy). One problem at the heart of this was the politics of adversarialism (crisis of liberal democracy) caused by electoral and party competition which continuously raised public expectations as parties went after votes but demand overload and fiscal limits on spending meant that these expectations could never be satisfied. These crises were symptomatic of the underlying contradiction in capitalism - the need for popular social legitimacy which was costly and the need for profitability and the accumulation of wealth, which the cost of the state welfare undermined.


The conservative, rightist critique of the state was that it had become inefficient, undermined individual initiative, provided costly and poor quality services and that the welfare state=s aim of equality and justice, would be better provided through the market and non-state institutions.


A third critique was a structural one - that globalization required each state and economy (because the cost of the state had to be paid for out of the economy) to be more competitive by reducing costs and increasing efficiency as the bases for greater international competitiveness.


Despite these criticisms and expectations of a drastic decline in the welfare state, the 1980s and 1990s have seen that, Aalthough there have been cuts and adjustments of benefits in many social security schemes in European countries, the overall governmental expenditure effort has increased in absolute terms.@ (Kuhnle and Alestalo, p.10). The reason, as postulated by Kuhnle and Alestalo, (pp.10-11) is that as societies become richer and markets become more diverse, states and individuals have more resources to provide more welfare but also people have more choice as clients to go to market or family providers of welfare rather than relying on the state. So there is more welfare, not less.


But there are other reasons why the welfare state has been so resilient and able to resist neo-liberal retrenchment.


- as the populations of industrial countries age and birth rates decline through lower fertility, more demands are put on state and society for health, pensions and social care for the aged.


- as family structures change from nuclear families to more single-parent households, including the rising incidence of young, unwed mothers, families rely more on other agents of society for care, such as child allowances and government support for education of both parent and child;


- as the second industrial revolution changes the job market demanding more skills in technology and as companies >downsize= for more efficiency, losses of jobs and retraining needs require support for those affected by unemployment, even if its is temporary.


- in democratic societies, state elites run electoral risks by removing social supports to which members of society have become attached, neither do they want to be seen as uncaring and insensitive.


For such reasons, modified welfare states have remained despite neo-liberal movements aimed at  privatisation, deregulation, reduced public expenditure on welfare and attacks on trade unions, social policies, and social democracy.


Welfare states in Europe.

Welfare states are strongest in the Scandinavian social democracies, like Sweden, Norway, Denmark, Finland and Iceland. In the 1990's social expenditure per capita actually increased by between 15 and 20 percent. They have universal child allowance schemes, maternity benefits, leave for parents of new borns, sickness and unemployment insurance, universal pension schemes.


Their high levels of welfare owes to the fact that there has remained a widespread political consensus on the part of the electorates and political elites on state welfare, including the conservative and social democratic parties, supported by new left movements and parties such as women=s movements and green parties. For example, because of economic problems the long-ruling Social Democratic Party of Sweden was replaced by a conservative government between 1991 and 1994. But despite the fact that Sweden=s SDP maintained one of the highest income tax systems in the world, it was voted back into power to maintain but reform the welfare state.


The welfare state remains stronger in Europe than the US and Britain because the impact of new left movements like Green parties and the continued influence of more traditional leftist parties like reformed socialist and communist parties has been greater. It is only in the 2000 campaign that a Green party presidential candidate has emerged for the first time in the US and there are no such parties in the UK.


Furthermore, conservative Christian parties in Europe are more sympathetic to welfarism than those in the US and Britain. In Europe, these parties are often Catholic while in the US and Britain Christian movements are Protestant ( and not strong in Britain). Protestant movements stress individualism ( as a reaction to the traditional domination of the Catholic dogma over people=s lives), while Catholic movements stress the interests of the community of believers. So, the Christian People=s Party in Norway, for example, is concerned about care for the elderly, increased minimum pensions and allowances for families with children.


In all of the Nordic countries, there have been strong social democratic parties. But the societies and parties have come around to the position that families and markets must take more responsibility for welfare through individual initiatives to work. This position is stronger among the conservative parties. The major issues of the parties have been how to maintain a high and acceptable level of welfare while keeping inflation down, keeping taxation to manageable levels, keeping a productive balance between social expenditure and investments in markets, maintaining individual incentives while providing welfare supports.


The welfare system in America.


American welfare came later than that of Europe and came after the widespread poverty caused by the Great Depression of the 1930's. Up to that time there was a fairly well supported socialist party whose candidate would compete in presidential elections. That party has claimed that many of its programmes were quietly incorporated into that of the Democratic party, after which the party went into decline.

American welfare consists of a social security system for the aged and disabled, fairly similar to that of Europe; Medicare, or medical care for the aged; unemployment insurance; poverty programmes, mainly for female-headed households with dependent children.


The American system is different from the Scandinavian system in two respects. First, the Scandinavian system is universal, that is, social programmes cover the entire population regardless of their income levels or ability to pay. The American system is selective. It provides for those who make contributions to these schemes. For instance, some 40 million Americans have no health insurance at all and the Clinton Administration has tried, unsuccessfully, to introduce a universal health care system in the US.


The second difference is that because of the federal nature of the American system and the greater influence of corporate lobbies, the welfare system is fragmented. This has opened the system to the influence of wealthy doctors in the American Medical Association to block attempts at >socialised medicine= in favour of private practice, racist interests in Southern states wanting to block welfare supports to Blacks, and conservatives wishing to end support for single-parent families which, they say, encourages sex outside of marriage and undermines family values. In effect, whereas the Scandinavian system is uniform, the American system is fragmented with each state having special rules about who qualifies for welfare.


The result is that there is greater poverty in the United States. The US has the highest rate of poverty among the aged population of all the industrial countries. Less of the unemployed receive support. Only 1 percent of the federal budget goes towards allowances for children. (Castles, 107-108).  In the mid-1980's, 54 percent of single-parent families lived in severe poverty in the US compared to 6 percent in the Netherlands and 7 percent in Sweden.  At present,  two-thirds of women over 55 years (female aged) live in poverty in the US. To the extent that poverty is related to crime, the US has over half the prison population of the industrial countries and 14 times greater than the average for the Scandinavian countries. (Rothstein, 218).


The reformed welfare state.


Industrial states have incorporated market means of service provision into their systems in order to >marketize the state.= This is the ultimate impact of neo-liberal thinking and the main concession made to that thinking. For example, in health care the Dutch have reformed their system so that while the payment of health insurance by employees, employers and the state is still mandatory, the state is no longer the sole provider of doctor=s and hospital care. Private insurance companies offer plans for medical care that is partly provided by the private medical system.


One of the lasting legacies of Thatcherite and Reaganist neo-liberalism is how it has changed the attitude towards the state. The political and ideological debate about the value of welfare, individual responsibility and the obligations of the state to the disadvantaged has changed. It is now accepted that the state can rely and should rely more on market principles rather than purely administrative designs in its offering of services. Out of this a market model of the state has emerged.


The economic state.


Industrial states went through the 1980's conscious of concerns about the state arising from a new economic realism. One aspect was the concern with high tax and spending policies to support the welfare state. Another was globalization which required greater economic competitiveness and less expensive state systems along with the growth of the European Union and its liberalizing effects on national state policies. A third was technology and then need for the state to build a new kind of economy with the new computer and other technologies available.


This has given rise to a new market model of the state. Ideally, the goal is to make government work better for less, that is, to do everything smarter, better, faster and cheaper. It would do so by (1) seeking market, rather than administrative solutions, and (2) making increasing use of information systems technology to expedite operations ( e-mail, video conferencing, database management, imaging, geographic information systems). In these ways, governments could improve productivity and save personnel time.


Using health care and education as examples, the market model of the state:


(1) should be applied to service providers (health care through competitive hospital costs, school costs and performance) not through policy agencies (ministries) or regulatory agencies (medical associations).


(2) should feature, wherever possible, competition between public and private sectors (public and private hospitals, schools), competition among private firms vying for public contracts (construction, catering, equipment, furnishing), competition among public agencies (public hospitals and schools themselves), and competition among governmental units to provide services to internal customers (government departments for roads, electricity, professionals).


(3) should provide managed or regulated markets (rather than pure markets) by which government retains the (democratic) authority and responsibility to make the rules and formulate the policies so that state administration and market principles work in conjunction.


(4) where market-oriented governmental programmes become decentralised, competitive and responsive to changing conditions; empower customers to make choices between state and private providers; link resources directly to results; and allow governments to use incentives strategically.


But the other element of the new thrust is to apply information technology in the service of the state and economy. After a 25 year period of on and off  recession, the economies of the industrial countries have become stronger since the second half of the 1990's. There has been stronger and more sustained growth, lower inflation and higher employment. This has led to what some call, the Anew economy.@ It is argued that over the past decade, the economy has been fundamentally altered by the spread of computers, digital technology and globalisation. New developments in technology since the 1980's especially, have created a new round of productivity and growth domestically and internationally, and at the heart of this is technology, specifically the computer revolution and what the Americans call, the information superhighway.


The credit has been given to the computerization of business and society that is leading to a fundamentally new economy driven by information, research, knowledge and technology. Data shows that in 1977, 40 per cent of American businesses invested in computers. But by 1998, more than 80 per cent did. (Madrick, 1998: 43-44). Twice the number of workers use computers today than they did ten years ago. Computerized information technology makes an unprecedentedly large amount of information inexpensively and instantaneously accessible and this dramatically increases productivity.


The phenomenon is being compared to similar economic revolutions in history - the agricultural revolution that led to the development of settled populations and cities (the first wave), the industrial revolution that has led to modernisation (the second wave), and now the technological revolution in information (the third wave) or the second industrial revolution. The information revolution is being likened to the revolutionary impact that the harnessing of electrical power had a hundred years ago.


The information superhighway will allow business to relocate to some of the low cost geographic areas; the availability of inexpensive information will give more people with entrepreneurial ideas access to commercial markets; the Internet will become a vast commercial market that is more efficient than the old-fashioned shopping mall.


Information technology compresses space and time or distance and speed, and makes gobalisation possible. Globalisation is distinguished by information technology - fax, PCS, satellite, internet - along with the growth of human capital in this technology.


The state in the new economy.


The idea of >reinventing government= means making government structures more efficient and cost-effective. But is also means reinventing a role for government that is congruent with the new economy. Lester Thurow finds that a change is occurring among the governments of the industrial countries. He says, ALeaving behind the role of regulator or the function of controlling their national economies, governments are becoming platform builders that invest in infrastructure, education and research and development to allow their citizens to have the opportunity to earn world-class standards of living.@ (Annals, 2000, p.19).

This knowledge-based economy is transforming the role of the state in fundamental ways. The state as platform builder has to create a more educated workforce, more infrastructure to include an electronics infrastructure, the stability and economic framework to attract those companies with the technology and markets that can allow a country to compete globally.


The importance of technology was recognised by 1988 in the report of the Council of Academies of Engineering and Technological Sciences: AThe world is in the throes of a technological revolution that differs from the periodic waves of technical change that have marked the progress of industrial society since its origins 200 years ago.@ (Annals, 9). It affirms that the key technologies are the microelectronics-information technologies complex, the bio-technologies and the new materials science (like synthetics).


But in this new economy, mechanical technologies are not enough. Human resources -education, skills, innovative, imagination- are critical. Governments need to continue to develop technology (they are credited with developing the computer), apply it in government and business, use it to share more information, and develop an educated population able to use it.


The new economy therefore is:


1. A knowledge-based economy where research and development are crucial.

2. A computerized economy that uses speed and mass data about consumers and markets to increase productivity.

3. A globalised economy where rules of exchange of services and products are liberalised.

4. A transnational-dominant economy where transnational corporations control global markets, technology, research and expertise.

5. An economy with more flexible labour markets, that is, labour contracts where performance is linked to productivity rather than to fixed wages, time, and benefits.

6. A new governance, where government does things cheaper, faster, better, and smarter and so is less of a burden on the economy.

7. A new social system in which welfare is shared between state, market, family and non-profit organisations.


The Americans are crediting their present economic situation to the new economy.


- the economy is in the midst of probably the greatest expansion in 40 years.

- investments in high-tech industries is leading the way in capital investments.

- new jobs make unemployment stand at its lowest level in decades.

- inflation is low because of cheaper imports from abroad.

- the stock market is growing, especially in the newer electronic and computer industries.


Another indication of the importance of this new technology is that, whereas Henry Ford was the richest man in the world at the start of the century ( who invented the mass assembly system of production for Ford automobiles), at the end of the century, the richest man in the world is Bill Gates. Ownership of such natural resources as oil, gold and land, is relatively less important than controlling the computer market and, hence, the knowledge process. Gates is a symbol of this knowledge-based economy. 




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