Welfare vs. Privatization: the Truth Starts Here

Part of the "Critiques of Libertarianism" site.

Last updated 10/25/07.

A review of The Economics of the Welfare State (Nicholas Barr, 1998) by Ian Montgomerie (iadmontg@uwaterloo.ca)

Let me begin this review with the recommendation: this book is the ultimate resource for a clear, non-polemic analysis of the welfare state. If you really want to learn about the ins and outs of welfare and privatization - and I mean _really_ learn - this is the book you want. You could read any five other books about welfare economics, income inequity, and social policy without getting as thorough an examination as this book contains. If you want to learn about the ins and outs of privatization and the welfare state, what works and what doesn't (and why), look no further. I have never read, nor even heard of, a more thorough treatment - which is remarkable considering that this book is accessible to any intelligent reader with a bit of patience.

"The Economics of the Welfare State" is commonly used as a textbook for upper year undergraduate and introductory graduate courses in economics. This does not, however, mean that you actually need to have such an economic background to understand it. This 415 page text starts from the beginning, covering all of the economic theory and politucal background you need to understand the contents. In my opinion, it would help to have taken a course in introductory microeconomics before reading this book. That isn't strictly necessary, though, I just think it's helpful in order to understand such serious economic ideas without too much head-scratching. In fact, the book has simplified summaries of the theory chapters for "non-technical" readers, and suggestions of what you should read, depending on your interests, if you don't want to read the whole thing.

The author warns that you may have to take some stuff on faith if you skip the theory, but trust me, you can because it's rock solid.

Oh yes, and while this may be a book on economics, you won't find very many equations in it. And every single one of them can safely be skipped without really hurting the general reader's understanding of the book. This isn't an abstract work, either - Britain is used as the major case study, with many comparisons to other countries such as the US. Specific institutions and policies are described and evaluated, with direct application to real-world political debates. Every bit of theory in the book is directly applied to relevant, detailed examples. The author intends to educate, rather than to pursuade, so the issues are considered in light of multiple ideological perspectives. After describing the major views on the welfare state, all the way from libertarianism through to socialism, Barr points out the relevance of his major points to the perspectives of these various groups.

Basically, this book is written like a (good) textbook, and as such is rather dry but also very informative and extremely well-structured. Currently in its third edition, it has been refined to make sure it is up to date and covers all of the relevant issues. It is not a book I would recommend to someone who wants a quick or easy read, or a political perspective dished up ready to eat. But for any intelligent person comfortable with basic economic ideas, who wants to really learn about all the major issues underlying the welfare state, I heartily recommend it. It starts with a historical background of the twentieth century, primarily in Britain, and moves on through a tour of the major political ideologies and the economic theory which serves as a background for the rest of the book. After about 160 pages of that stuff, it moves on to detailed coverage of specific areas of the welfare state. It covers cash benefits and income transfers of all kinds, health care, education, and housing. All of these are covered in great detail, and various recommendations for reform are described and evaluated.

This is a good book for people interested in evaluating just about any political orientation. It uses clear, well-justified arguments to demonstrate that market failure in many important areas is unambiguous, and that government intervention may not only be superior in principle, but often is superior in the real world. It considers these issues from different perspectives, making it clear that concerns for economic efficiency and social equity may lead to different conclusions. That doesn't mean that it leaves everyone's opinions unscathed, though. Libertarian views on the optimality of the market in providing for social welfare are utterly annihlated. Many socially important situations are identified where market failure is essentially guaranteed. Many conservative arguments for the inefficiency of the welfare state are trashed.

For example, the US health care system is described in no uncertain terms as expensive, inefficient, and struggling under (private) regulation. This is quantified precisely. A detailed example of an efficient and lightweight government system, the National Health Service in the UK, is presented and it is clearly explained why the US health care system has the problems that it does. Most Americans might be surprised to learn that the NHS has an order of magnitude less administrative overhead than the US system, a miniscule 2.9%. There are serious concerns that the NHS does not have enough bureaucrats, because a bit more management might more than pay for itself in increased efficiency.

The author makes no bones about shooting down all unsubstantiated arguments, not just conservative ones. He clearly demolishes a lot of liberal and socialist arguments that some services should be provided by government - if the market really is more efficient at producing something that one wants to guarantee, the government should usually pay for it, not produce it. He considers many situations, such as housing, where the historical use of subsidy and regulation rather than outright income transfers appears to be economically inefficient and inequitable. Barr also explains how some policies designed to decrease inequality can actually increase it. He describes the university system in the UK as regressive, that is, promoting inequality. While it is paid for by all and free to all, in practice the rich are much more likely to actually attend university. Those wishing to promote social equality would do best to read these arguments, so that they can avoid supporting measures destined to backfire. He even demonstrates that some major political arguments have been over trivialities. He explains how the differences between "pay as you go" social insurance schemes and those funded by one's own previous contributions are actually not all that great, contrary to much of the debate about Social Security in the US.

In conclusion, if you want to think about privatization and welfare using Real Economics rather than platitudes, ideology, and rhetoric, read this book. This isn't a popularization or a book written by someone with a political axe to grind, it's a textbook and a mainstream one at that. On a more personal note, if you're tired of listening to socialists claim that the government should produce everything in sight to maximize equality, read this book and learn why they're wrong. If you're tired of listening to conservatives and libertarians tell you that privatization will always increase efficiency and produce more wealth, and claim that economics backs them up, read this book and learn why they're wrong. If you're one of those people who thinks Milton Friedman or Friedrich Hayek had the last word on the welfare state - or who fears that they did - then you really need to read this book. You'll start to feel like everyone else who talks about these issues is bringing a butterknife to a gunfight.

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