Back to William Beveridge requires a commitment to true full employment

I have been digging back in time and re-reading Unemployment: a problem of industry by William Beveridge (published 1909). Beveridge is most known for his 1944 book – Full Employment in a Free Society and the related Social Insurance and Allied Services – (1942 aka the Beveridge Report). The point is that to understand the motivation for the Beveridge Report you also have to appreciate the earlier document and the role that it played in labour history in the UK (and elsewhere). Why am I considering this? The British Labour Party is appealing to the 1942 Report as a motivation to introduce radical reform to the British welfare system. They think that by attacking the most disadvantaged citizens in Britain at a time when unemployment is so high and poverty is rising that they will gain some traction with the electorate. The word despicable comes to mind. However, it is clear they are just remaining faithful to their earlier corrupt past.

The UK Guardian Op Ed (January 2, 2012) – A William Beveridge for this century’s welfare state – by British Labour MP Liam Byrne suggests that the modern Labour Party should become “radical reformers once again” citing the example set by William Beveridge in the 1940s when he chaired a 1941 committee “to rationalise Britain’s system of social insurance”.

Byrne is the shadow Work and Pensions Secretary. He is referring to the Social Insurance and Allied Services Report noted in the Introduction.

As the British National Archives notes:

The Beveridge Report was a dense and lengthy document, as can be seen from its contents page. Nevertheless, when it was published, in the middle of the Second World War, it caught the public’s imagination – it gave people hope of a better life after the war. The report was to provide the basis of the Labour government’s postwar welfare legislation.

You can also read a BBC Item on the Beveridge Report.

Byrne writes that in looking back to “Beveridge’s hugely popular first principles” the British Labour Party should “apply them anew to the challenges of 21st century Britain”.

He considers “work” first:

Beveridge’s system was built on the idea of full employment. For him, “idleness” was an evil every bit as insidious as disease or squalor. So he would have been horrified at the long-term unemployment breaking out all over Britain, with over a million young people without work, and appalled at the spiralling cost of benefits. He would scarcely have believed housing benefit alone is costing the UK over £20bn a year. That is simply too high.

Beveridge would have wanted determined action from government to get communities working once again, not least to bring down that benefits bill to help pay down the national debt. He wanted a responsible government taking determined action to create work, but a responsible workforce too. He would have wanted reform that was tough-minded, and asked everyone to work hard to find a job. He would have worried about the ways that his system had skewed social behaviour because he intended benefits to help people who had their earning power interrupted because of illness, industrial injury or the capriciousness of the trade cycle. He never foresaw unearned support as desirable.

The emphasis that Liam Byrne wants us to place on this is the notion that the provision of unemployment benefits should be (in Beveridge’s words) “conditional upon attendance at a work or training centre” or “something for something”.

He also claims that the Labour Party should provide “reward for those who are desperately trying to do the right thing, saving for the future and trying to build a stable, secure home. Right now, these families are offered too little reward and incentive – in social housing and long-term savings – for the kind of behaviour that is the bedrock of a decent society”.

So the unemployed and welfare recipients are not giving enough back and those that Byrne thinks are giving are not getting enough because they are “supporting” (in this neo-liberal style rhetoric) the welfare recipients.

He wants social security in Britain to change.

More explanation of his motivation was provided in the UK Guardian article (January 2, 2012) – Labour urges radical rethink on welfare.

That article reports that:

Labour is calling for a radical rethink of the welfare state, arguing that the benefits system has betrayed its founding principles and “skewed social behaviour” … that the ballooning of the system has provided support that is unearned, and mislaid the original ideal of providing help to those that contribute.

Labour apparently want to “recast the welfare state to meet the original intentions of its founder, William Beveridge” with the restoration of the “contributory principle … restored … so there is a clearer link between what people put in and what they receive”.

Apparently, Byrne believes that “most voters, including traditional Labour supporters, still want a tough line on welfare”. He also has been studying “schemes in Australia and the US, and is inclined toward requiring the unemployed to work after a fixed period”.

I would add that the labour market changes over the last 20 years in Australia have undermined the welfare system. A major OECD report came out in 2001 endorsing the Australian government’s supply-side approach – OECD (2001) Innovations in Labour Market Policies, The Australian Way, Organisation for Economic Co-operation and Development, Paris – which concluded that Australia has lead the way in introducing “market-type mechanisms into job-broking and related employment services” (Page 11).

The OECD concludes that in terms of labour market policies Australia “has been among the OECD countries complying best” (Page 14) with the OECD 1994 Jobs Strategy. It is tangential to this blog – but the evidence doesn’t support the OECD’s conclusion. Australia’s Work for the Dole scheme is poorly conceived and the Government has admitted is just a “compliance program” forcing workers to work for their miserable (below poverty-line) unemployment benefit.

The point of all this is that the Beveridge Report which defined the modern welfare state in Britain (Australia, New Zealand, Canada etc) was cast in a time when the prevailing macroeconomics paradigm was very different. It was also the result of a long struggle about the right to work (which I will come back to).

So if British Labour really wants to recast its welfare policy then it has to start by recasting its macroeconomic policy.

Beveridge was writing immediately after the Great Depression which only really ended when government spending associated with the prosecution of the Second World War accelerated.

The Great Depression taught us that, in the absence of government intervention, capitalist economies are prone to lengthy periods of unemployment, the Second World War experience proved that full employment could be maintained with appropriate use of budget deficits.

The employment growth following the Great Depression was in direct response to the spending needs that accompanied the onset of the War rather than the failed Neoclassical remedies that had been tried during the 1930s. The problem that had to be addressed by governments at War’s end was to find a way to translate the fully employed War economy with extensive civil controls and loss of liberty into a fully employed peacetime model.

That was the context that Beveridge was working within.

The Post World War 2 economic and social settlement in most Western countries was based on three main pillars. First, the Economic Pillar was defined by an unambiguous commitment to full employment.

Second, the Redistributive Pillar was designed to ameliorate market outcomes and defined much of the equity intervention by government. It recognised that the free market was amoral and intervention in the form of income support and wage setting norms was a necessary part of a sophisticated society.

Third, the Collective Pillar provided the philosophical underpinning for the Full Employment framework and was based on the intrinsic rights of citizenship. We accept that our depiction is a stylisation and that there were many individual nuances in particular countries over the period considered.

William Beveridge’s work in the 1940 (noted above) was entirely consistent with the emerging Keynesian orthodoxy of the time, which saw unemployment as a systemic failure in demand and moved the focus away from an emphasis on the ascriptive characteristics of the unemployed and the prevailing wage levels.

Beveridge (1944, 123-135) said that:

The ultimate responsibility for seeing that outlay as a whole … is sufficient to set up a demand for all the labour seeking employment, must be taken by the State.

Welfare support for the unemployed was conceived as short-term support rather than a permanent source of income support. It was taken for granted that the state would use its fiscal policy capacity to ensure there were enough jobs available.

Governments used a range of fiscal and monetary measures to stabilise the economy in the face of fluctuations in private sector spending and were typically in deficit.

However, while both private and public employment growth was relatively strong during the Post War period up until the mid 1970s, the major reason that the economy was able to sustain full employment was that it maintained a buffer of jobs that were always available, and which provided easy employment access to the least skilled workers in the labour force.

Some of these jobs, such as process work in factories, were available in the private sector. However, the public sector also offered many buffer jobs that sustained workers with a range of skills through hard times. In some cases, these jobs provided permanent work for the low skilled and otherwise disadvantaged workers.

Importantly, the economies that avoided the plunge into high unemployment in the 1970s maintained what Paul Ormerod in his 1994 book The Death of Economics described as (Page 203):

… sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified.

Paul Ormerod also said that employment of this type may not satisfy narrow Neoclassical efficiency benchmarks, but notes that societies with a high degree of social cohesion and a high valuation on collective will have been willing to broaden their concept of costs and benefits of resource usage to ensure everyone has access to paid employment opportunities.

He argued (page 203) that countries like Japan, Austria, Norway, and Switzerland were able to maintain this capacity because each exhibited:

… a high degree of shared social values, of what may be termed social cohesion, a characteristic of almost all societies in which unemployment has remained low for long periods of time.

This is why a central aspect of Modern Monetary Theory (MMT) suggests that the return to full employment and price stability requires the reintroduction of this buffer stock capacity (the Job Guarantee).

The full employment commitment (the Economic Pillar) was buttressed by the development of the Welfare State, which defined the state’s obligation to provide security to all citizens. Citizenship meant that society had a collective responsibility to ensure that the well-being of the population was a high priority.

That concept replaced the dichotomy that had been constructed previously between the deserving and undeserving poor. The Redistributive Pillar recognised that the mixed economy (with a large market-component) would deliver poor outcomes to some citizens, principally via unemployment.

Extensive transfer payments programs were designed to provide income support to disadvantaged individuals and groups. But this support was – as noted – considered to be ephemeral given the commitment to full employment.

Underpinning the Welfare State and the economic commitment to full employment was a sophisticated concept of citizenship (the Collective Pillar). The rights of citizenship meant that individuals had access to the distribution system (via transfer payments) independent of market outcomes. Furthermore, a professional public sector provided standardised services at an equivalent level to all citizens as a right of citizenship. These included the public sector employment services, public health and education systems, legal aid and a range of other services.

So if Mr Liam Byrne wants to radically alter the current welfare system in Britain in the spirit of William Beveridge then he better study history some more and persuade his party that it has to radically rethink its economic position – including cutting deficits when unemployment is high and private demand is so low.

To really understand Beveridge though it is useful to take a little step back in time to see where all this sits.

In 1906, the “radical liberal” Winston Churchill stated that the State should become an employer of last resort. In a speech – Liberalism and Socialism – delivered by Churchill on October 11, 1906 (at the St. Andrew’s Hall, Glasgow) we read:

No view of society can possibly be complete which does not comprise within its scope both collective organisation and individual incentive. The whole tendency of civilisation is, however, towards the multiplication of the collective functions of society. The ever-growing complications of civilisation create for us new services which have to be undertaken by the State, and create for us an expansion of the existing services. There is a growing feeling, which I entirely share, against allowing those services which are in the nature of monopolies to pass into private hands. There is a pretty steady determination, which I am convinced will become effective in the present Parliament, to intercept all future unearned increment which may arise from the increase in the speculative value of the land. There will be an ever-widening area of municipal enterprise. I go farther; I should like to see the State embark on various novel and adventurous experiments … I am of opinion that the State should increasingly assume the position of the reserve employer of labour. I am very sorry we have not got the railways of this country in our hands. We may do something better with the canals, and we are all agreed, every one in this hall who belongs to the Progressive Party, that the State must increasingly and earnestly concern itself with the care of the sick and the aged, and, above all, of the children.

I look forward to the universal establishment of minimum standards of life and labour, and their progressive elevation as the increasing energies of production may permit. I do not think that Liberalism in any circumstances can cut itself off from this fertile field of social effort, and I would recommend you not to be scared in discussing any of these proposals, just because some old woman comes along and tells you they are Socialistic. If you take my advice, you will judge each case on its merits. Where you find that State enterprise is likely to be ineffective, then utilise private enterprises, and do not grudge them their profits.

So a very clear statement that a liberal politics should include novel and adventurous state experiments (he used afforestation as an example) and that the state (the Government) should ensure that they provide enough jobs for all.

That is, Winston Churchill was an early supporter of a Job Guarantee, which if you are familiar with the great debates in liberalism should disabuse you of the notion that the concept of employer buffer stocks is an idea dominated by “left-leaning, socialist” types.

The neo-liberals of today are nothing like the liberals of yesteryear.

Interestingly, a Cambridge University historian found that Churchill borrowed some of his biggest ideas from HG Wells.

Evidently, the liberal-leaning (rather than socialist-leaning) H.G. Wells’ A Modern Utopia provided many phrases that were borrowed by Churchill, who was considered in his younger years to be a radical liberal. For example:

Wells wrote: “The State will stand at the back of the economic struggle as the reserve employer of Labour.” Churchill said: “The State should increasingly assume the position of the reserve employer of labour.

That is an interesting strand of research that is lateral to today’s topic.

It is clear that within a few years, Churchill was being persuaded to abandon his ideas about state reserve employer functions.

By 1909, William Beveridge’s liberal statement – Unemployment: a problem of industry – was not supportive of such a state function. You can download the Full Version (pdf) which is 18 mgs.

If it wasn’t a holiday period I would have asked Victor Quirk to write this given his recently completed PhD covered some of this material and he has an almost encylopeadic memory of all this stuff.

But in his 1909 book, William Beveridge denies that unemployment arises from a failure of aggregate demand (that is, a systemic failure). Rather:

The positive conclusion is that there are specific imperfections of adjustment between the demand for labour and the supply of labour, and that these give rise to a real and considerable problem of unemployment … A rising demand for labour will be no cure for unemployment.

So he was claiming that mass unemployment was a structural problem.

In Chapter IX – “PRINCIPLES OF FUTURE POLICY”, Beveridge outlined his response to a growing call in Britain for a “Right to Work” act which would embody in legislation the capacity that the state should provide enough work to ensure there was only frictional unemployment. That is, consistent with even the liberal view held by Churchill in 1906 that the state should be the “reserve employer”.

He reasserted his view that “Unemployment is a question not of the scale of industry but of its organisation, not of the volume of the demand for labour but of its changes and fluctuations”.

He then considered the proposed “Right to Work Bill” proposed by the Independent Labour Party (ILP).

The ILP emerged out of 1889 London dock workers strike and the resulting surge in trade union membership which allowed the latter to support the development of a working class political movement. The trade unions sponsored several members of parliament (paid their wages). The ILP was formed in 1892 and its first leader was James Keir Hardie.

It was a mixture of disenchanted liberals, pro-worker members and some socialists.

Under Hardie, the ILP championed the right to work as a response to the problems that persistent unemployment created. There was a lot of political agitation in the next decade in support of this view.

Here is a 1904 statement by Keir Hardie – The unemployed problem with some suggestions for solving it – that outlines his commitment to public sector job creation.

The conservatives (liberals) – fearing that the working class was becoming to powerful – introduced the Unemployed Workman’s Act 1905, which allowed for some public works to be provided in local areas where unemployment was high. Churchill’s comments above are consistent with this development.

The liberals regained office in the landslide 1906 election in part because of the work done by Liberal Herbert Gladstone to shore up a collaboration with the Labour group. He was a vocal supporter of public works as a solution to unemployment. Once elected the Liberal Government voted to deploy local government rate revenue to fund expanded public works.

Some of the Liberals were uncomfortable with this development and wanting to distance themselves from the socialists (that had helped them gain office). Their minister for local government (the ministry charged with implementing the public works program) undermined the expansion – all sorts of ruses were used to buy time.

The Labour parliamentarians insisted that the Government should implement the policies set out in the 1905 Act. Finally in 1907, the annual conference of the ILP proposed their own “Right to Work Bill” which would establish a “central unemployment committee” engaged with the responsibility for planning major public works designed to eliminate unemployment.

The Bill amounted to a commitment to a Job Guarantee. The proposed Bill divided the Liberals – with Winston Churchill and Lloyd George prominent supporters of it. They saw it not only in economic efficiency terms but also political terms – it would undermine the growing socialist threat.

The Liberals leader – Herbert Asquith – opposed it but realised that the Government had to come up with some alternative that would assuage the growing demands for a solution to the unemployment problem. Unemployment was around 9 per cent in Britain at this time.

Enter William Beveridge and his 1909 study noted above. In response to the “Right to Work Bill” this is what Beveridge said:

The paradox has to be faced that the creation or provision of work is the one thing that is no remedy for unemployment. It may palliate immediate distress. It may increase general prosperity. It may cause unemployment for a while to be forgotten. It does not banish disorganisation from the State.

It may, however, be said that if the problem is that of maintaining reserves of labour to meet fluctuations, then the simplest and surest solution is to be found just through one of the proposals now ruled out as irrelevant. Let new industries (afforestation, land reclamation and many more be created, not indeed for their own sakes but as reservoirs of labour, as the sources of an elastic demand able to expand and contract instantaneously as the demand in the rest of the labour market contracts and expands. Let there stand ready, for every workman to turn to in moments of idleness, some useful work to be done for the community, some employment by which he may live till he can return to his usual avocation once more. This or something like it appears to be the aim of the Unemployed Workmen Bill of 1908 the “Right to Work” Bill of the Labour Party. Might not this or something like it be reached by increasing the powers and making inexhaustible the resources of the authorities already established by the Unemployed Workmen Act of 1905?

He claimed there were three main criticisms of this approach. I won’t discuss them today because they are germane to the aim of the blog. But you can be assured that they are the standard points made by conservatives against such schemes. When I do come back to them (another day) I will show why the claims are invalid and mainly ideological in nature.

The point is that once you claim that unemployment cannot be solved by providing jobs – or that such provision will undermine the capacity of the private sector to make adjustments (changing industry composition etc) then the only policy response was to improve the efficiency of the “matching process” as new jobs emerge.

So Beveridge claimed that the Government should not support any “Right to Work” bill but should take a two-prong approach to unemployment.

1. Reduce the misery of the unemployment by introducing a system of contributory unemployment insurance.

2. Create labour exchanges (“employment services”) which would help employers who were creating work to find employees.

Both proposals explicitly headed off the debate about the right to work.

The historical record shows that the Labour Party (under the leadership of Ramsay Macdonald) abandoned the Right to Work Bill proposal and supported the Beveridge options that the Liberals had adopted.

Why would they have done that? In 1909, there was a significant House of Lords ruling – The Osborne Judgment 1909 – which stated that it was illegal for “trade unions to collect a levy for political purposes, specifically, to fund the infant Labour Party’s organisational and electoral efforts”.

The judgement was in response to a petition by a Liberal Party supporting trade unionist who was avowedly anti-socialist. He wanted to stop the growing socialist influence in the ILP and which were the main proponents of the “Right to Work Bill”.

The reality was that without the trade union support of their wages, the Labour MPs were unable to serve (lack of income).

Meanwhile, the Osborne Judgement of December 1909 provoked outrage in Parliament and in the country, until it was reversed by the Trade Union Act 1913. But for the purposes of our discussion it was very damaging to the right to work movement.

The Labour Party MPS at the time the Bill was put were bought off by the Liberal Party who promised to introduce legislation requiring the state pay MP salaries. The Labour Party thus sold out to the conservatives in return for personal gain.

Conclusion

There is more in this long history regarding the right to work but time has run out today.

The point is that by the end of the Great Depression, Beveridge had changed his tune somewhat and while he still proposed contributory unemployment insurance schemes as a palliative to unemployment he also realised that the Keynesian onslaught had rendered much of the points raised in the earlier “right to work” debates invalid.

The concerns about how the government could afford such public works schemes were allayed as economists embraced the work of Keynes and started to appreciate the positive role that fiscal policy could play in maintaining full employment.

While there might be fluctuations from full employment which would require some income support schemes to act as a safety net, the deviations from full employment would always be short-lived and so the “cost” problem was downplayed.

If British Labour is now serious about returning to the immediate Post Second War period then it has to do it wholeheartedly.

Its neo-liberal macroeconomic policy does not sit with the welfare policies proposed by Beveridge in the early 1940s.

That is enough for today!