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Its growth is a mystery to modern economics, but it has deep evolutionary roots
The scope and scale of government in economic life is central to public policy debates. The most notable evolution was the tremendous growth of government in developed countries over the 20th century. The size of government, measured as tax revenue as a percentage of national income, has increased from less than 10 percent in the early 20th century. In France, Sweden, the United Kingdom, and the United States, tax rates were less than 10 percent until World War I, increased until about the late 1970s, and remained roughly stable thereafter (Table 1). Timing and final levels vary by country, with France and Sweden holding steady at around 50%, the US at around 30%, and the UK around 40%.
What is the government doing with more tax revenue than it could ever do? Until the early 20th century, most government spending in Europe was devoted to so-called luxury public goods, such as law and order, national defense, public administration, and basic infrastructure. In contrast, the growth of government over the 20th century in developed countries was almost entirely due to the growth of the social state, which also provided education and childcare support for the young, medical care for the sick, and retirement benefits for the elderly. provided. It is offered as a variety of income support programs for the disabled, unemployed, and poor (Figure 2). Essentially, the social state provides support to those who are unable to support themselves.
social species
Social states challenge standard economic models based on rational, self-interested individuals interacting through markets. In such a model, a rational individual in a market economy with functioning credit markets should be able to manage more or less on his or her own. Young people (or their parents) can borrow money to pay for their education if it is worth the investment. Health care is largely private, and people can buy insurance. Workers can save for retirement in anticipation of a decline in their ability to work as they age. Finally, people can withdraw from their savings whenever they face a temporary loss of income, such as job loss.
This financial dream will never become a reality for anyone but the wealthy elite who can afford to pay tutors to educate their children and family doctors to care for their health, and who can cover their retirement needs with their own wealth. It didn’t belong to me. The majority of the population lacked access to quality education and health care and had to continue working into old age or rely on their children for support. The modern social state thus extends to the entire population quality education, health, and retirement support that previously only the elite could afford. Broadly speaking, people in modern societies have chosen to socialize childcare and education for the young, medical care for the sick, and economic support for groups who are unable to work, such as the elderly, the disabled, and the unemployed. It seems so. Why is this so, and where does such socialization come from?
Despite the standard economic model, it is clear that humans are social beings. We act collaboratively and respect inequalities within groups such as families, workplaces, communities and nations. These social interactions have deep evolutionary roots and are not mediated by markets. Humans have evolved as a social species with an extraordinary ability to work and cooperate in groups and a high sensitivity to how the fruits of collaboration are distributed accordingly. At a high level, if modern social states care for the young, the sick, and the elderly, it is because early hunter-gatherer human societies already cared for them through community support. .
Evidence shows that success requires social solutions through social conditions.
poverty reduction
Does the modern social state work? Historically, mass education has always been state-driven, and in Prussia and the United States it was the first pillar of the development of the social state as early as the 19th century. And virtually everyone agrees that an educated workforce is essential for long-term economic development. Mass education is achieved through a combination of compulsory education and government funding. Government funding is needed because low- and moderate-income families cannot afford the high cost of a quality education. This provides opportunities for economic success for children from disadvantaged backgrounds. The experience of excruciating student debt and predatory for-profit schools in the United States shows that markets and the profit motive work much worse.
Modern healthcare is even more expensive than education in developed countries. Without government funding, only the wealthy would have access to health care. This is why universal health care, primarily funded by governments, is so far the only successful way to provide quality care to everyone, and this goal is extremely popular. It has contributed to continued increases in longevity in wealthier countries.
Numerous studies show that individuals are bad at saving for retirement on their own, or even building up a modest nest egg to weather a temporary drop in income. The social state organizes such savings through taxes and corresponding retirement and unemployment benefits. This social solution undoubtedly significantly reduces poverty in old age and unemployment, and has widespread public support.
backward logic
What does this mean for advice on economic policy? Economics assumes that humans are good at solving problems of education, retirement, and health insurance as individuals, but success depends on social conditions. Evidence shows that social solutions are needed. Standard economics reverses the logic. In other words, while the rise of large social states in the mid-20th century was accompanied by exceptionally fair growth in Western countries, we are concerned about the growth effects of large social states (Piketty 2020). That is, while society autonomously determines labor for the young and old through mass education and retirement benefits, and labor regulations for overworked workers, the social state reduces individuals’ motivation to work. I’m worried about letting it happen.
Today’s rapidly developing economies, such as China and India, also have increasing government size relative to GDP, but not as much as developed countries (Cancel and Others 2022). If this is true, it means that large swaths of the population in these countries will continue to be excluded from quality education, health care and retirement support, hindering broad-based economic growth and widely shared economic well-being. . .
The opinions expressed in articles and other materials are those of the authors. They do not necessarily reflect IMF policy.
References:
Chancel, Lucas, Thomas Piketty, Emmanuel Saez, Gabriel Zucman. 2022. World Inequality Report 2022. Cambridge, MA: Harvard University Press.
Piketty, Thomas. 2020. Capital and Ideology. Cambridge, MA: Harvard University Press.