The Vicious Cycle of Social Security

My admiration for economists is limited. The solemnity of their pronouncements is seldom matched by the accuracy of their forecasts. Much of what they say seems to fall into one of two categories: error or banality. I was in a taxi once when I overheard an eminent economist on the radio, who had occupied several of the most important and powerful positions in the economic world, both academic and governmental, give his assessment of the situation after a precipitous fall in the stock market: there might, he said, be a recession, or there might not; but if there were one, it might be either long or short, deep or shallow—or, of course, something in between the two. I had worked all that out for myself.

But of course it would be quite wrong cavalierly to dismiss the study of a subject that has occupied so many brilliant minds for so long, and the only economist whom I have ever known well, Peter Bauer, was brilliant. He was also charming.

He was of Hungarian origin. He arrived in England in 1934, aged nineteen, speaking little English. He wanted to study at Cambridge, and it is surely a credit to the openness of minds of academics of that era that, though impoverished, he was accepted. It is almost inconceivable that such a thing could happen today. No doubt our society is “fairer” today, at least in the formal sense that everyone follows algorithms, but at a cost of rigidity and suppression of creative risk.

Bauer was fond of telling me that after he had completed his first degree—with brilliant success, of course, having among other things achieved a mastery of English that is evident in his prose—he went to his tutor to ask whether he could or should progress to a PhD.

“Well, Bauer,” said his tutor, “there are two kinds of people: those who are not good enough for a PhD and those who are too good. Which are you?”

In those days also the absence of a doctorate did not preclude an academic career: the fetishism of intellectual rites de passage, procedural outcomes and formal qualification had not yet colonised the academic world like a computer virus. Bauer went on to a very distinguished career, a chair at the London School of Economics and a lifetime fellowship of his college, Caius.

In his field, development economics, he was regarded as something of a gadfly, opposing the orthodoxies of his time with a combination of elementary principle, clear logic, historical knowledge and empirical evidence. It has been suggested that he never became as well-known or celebrated as he deserved because he wrote so clearly that any tolerably intelligent and well-educated person could understand what he was saying. There is no prestige in intelligibility.

The orthodoxy, if I may so put it, that he spent much of his life combatting was the following: poor and undeveloped countries are poor and undeveloped because the people in them lack the capital necessary to invest, and therefore the government has to take over decision-making and resource allocation for development to occur. It can find the necessary funds for investment only by forced saving—in essence, taxation of production by peasants or other small producers—or by infusions of foreign aid. Without central direction, poor and undeveloped countries must stagnate in a vicious cycle of poverty.

Against this Bauer urged some very simple considerations. First, a lack of money was not the cause of poverty; it was poverty. Second, if there were really a vicious circle of poverty, as inescapable as the whirlpool of Charybdis, we should still be in the caves. Third, it was a matter of observable fact that very poor peasants in South-East Asia and West Africa had made wise and quite long-term investments in rubber and cocoa trees when the opportunity arose and some semblance of the rule of law obtained. And you didn’t have to stay very long in Africa to observe the wasteful and frequently absurd misallocation of funds by governments according to political rather than to economic criteria: airports without passengers, factories in out-of-the-way places with staff but no output, and so forth.

Combined with the doctrine of the vicious cycle of poverty was the rather strange idea that what needed explanation was not wealth but poverty, as if wealth were the original or natural condition of mankind from which much of the human race, especially in Africa, had since mysteriously declined. The answer to this conundrum was, of course, exploitation: the wealth of nations was founded on the plunder of other nations. Thus foreign aid was not only a precondition of the economic advancement of poor countries, it was also a form of restitution for past economic injustices.

Peter Bauer was perhaps best known for his opposition to foreign aid, which, he said, was not only neither a necessary nor sufficient condition of economic development, but had serious adverse consequences, not merely for the donor countries but (especially) for the recipient ones. (He always denied having made the famous remark often attributed to him, that foreign aid was the means by which poor people in rich countries gave money to rich people in poor countries.) Although by the end of his life he was widely believed to have won the intellectual argument, having in the meantime been widely condemned for the meanness of his spirit for denying relief to the damned of the earth, doing so had strangely little effect upon actual government policy. In politics the relationship between truth and conduct is complex and contorted; and the British government, for example, has treated its foreign aid budget as sacrosanct no matter the economic situation of the country. Let the heavens fall so long as foreign aid goes on.

When I read Peter Bauer’s essay “Foreign Aid and Its Hydra-Headed Rationalization”, published in 1981, I could not help but think of the parallels between foreign aid and the aid that we give to our own internal Third Worlds, so to speak, that exist in most Western countries in the rotting centres of their cities or in their disintegrating suburbs, where whole populations live on subventions provided by the state, and which remain in relative poverty compared to the rest of the citizenry. These subventions never seem to rescue them from their relative poverty, this domestic equivalent of foreign aid, but that doesn’t matter: nothing succeeds in politics, or at least in policy, like failure, because failure calls forth the need for more of the same.

The internal equivalent of foreign aid is social security. At the beginning of his essay, Bauer objects to the word aid, for (he asks) who can possibly object to aid for the less fortunate? The use of the very word precludes proper examination of both the presuppositions on which it is granted and its actual effects. The choice of vocabulary matters, psychologically if not in strict logic.

In like fashion, who can be against social security, the sheltering of people from misfortunes not of their own making? A person who is thrown out of work in times of rising unemployment or because of severe illness can hardly be held responsible for his own enforced idleness, and indeed may well have been an exemplary worker. It is surely right that he and his family should not suffer immediate hardship or penury because of his bad luck. (Let us overlook the question of how such social insurance or security is best arranged.)

But that is certainly not all there is to social security as it is at present practised in most Western countries. In fact, social security does not conduce to security in at least some of the usual meanings of the word. In most Western countries, for example, criminality has risen pari passu with the extension of social security. The most insecure parts of any city, the areas in which the citizen is most likely to feel (and actually to be) unsafe, and for both his person and his property to be under threat, are precisely those in which there are the highest numbers of people in receipt of, and dependent on, social security. This does not prove by itself that social security causes crime—correlation is not causation—but there is at least sufficiently plausible a connection that people might wonder whether social security really conduces to security. Apparent security of income is not security tout court, but the use of the word security cuts short any thought about this matter because we are all in favour of security.

Bauer tells us that most foreign aid is granted to its recipients without conditions. He cites the United Nations Declaration on the Establishment of a New International Economic Order, passed at the Sixth Special Session of the General Assembly in 1974:

Every country has the right to adopt the economic and social system that it deems to be most appropriate for its own development and not to be subjected to discrimination of any kind [for example, and especially, in the granting of foreign aid] as a result.

“It is often suggested,” wrote Bauer, “that to impose conditions on the recipients would amount to blackmail, as if those who give money are the blackmailers, not those who receive it.” There is an analogous situation with social security, at least in some Western countries, in which the donors require nothing of the recipients except that they continue to breathe and fill forms from time to time, certainly not that they should spend their money wisely and conduct themselves wisely so that they can emerge from their poverty. The only connection between what the recipients receive and how they behave is that, in general, the worse they behave the more they get, because by behaving badly they create more urgent needs for themselves and their children. There would be a considerable outcry—discrimination!—if the government were to impose behavioural conditions on the recipients, though to provide an income without doing so has unsurprising demoralising results. When recently in Britain the government tried to place a ceiling on the amount of social security a family could receive, the cry went up that this would harm the children who were already dependent on subventions. A child thus becomes an instrument of blackmail: either you give me money, or my child suffers.

“Insistence on the need for external donations,” writes Bauer of foreign aid:

obscures the necessity for the people of the Third World themselves to develop the faculties and to adopt the attitudes and conduct required for sustained material progress.

It not only obscures it, it discourages it, in so far as necessity is the mother of a great proportion of human effort. “Aid pauperises the recipients,” writes Bauer; and even in small matters, it is observable that people who are dependent on public subvention for practically everything—from their food and clothing to their heating and lighting, from the education of their children to their provision for old age, from their housing to their health care—lose the faculty of any activity other than the search for further assistance. They expect, and seek, public assistance even in such matters as clearing the litter from their front yard. This is the equivalent of the politicisation of life that Bauer pointed out was one of the consequences of foreign aid. Effort goes not into constructive activity, but into extracting favours from those in control. There is a certain perverted entrepreneurialism in all this: the dependent develop ingenious methods of lying and deceit to extract extra benefits to which rules do not entitle them. This is not so merely in isolated cases, but it becomes a mass phenomenon and a normal part of character.

“The most familiar arguments” for foreign aid, says Bauer:

are that aid is indispensable for development; that it relieves poverty; that it is an instrument for international redistribution of income; that it is restitution for misconduct; that it serves the interests of the donors.

Cognate, though of course not identical, considerations are put forward in support of social security.

Social security is supposed to supposed to offer opportunities to the poor (relatively poor, that is) that they would not otherwise have. Without social security, they would have no opportunity for education and could not raise themselves up. But the overall effects of social security (at least as practised in the English-speaking world) do not seem to have had the desired effect. Like foreign aid for nations, social security has been neither a necessary nor a sufficient condition for the advance of groups of people. A recent survey in Britain, for example, that broke down household wealth by religious affiliation rather than by class and occupation, found that the richest households were first the Jews and then the Sikhs. Both started out overwhelmingly as poor immigrants; their ascent to prosperity had nothing whatever to do with social security.

In the United States recently, Senator Elizabeth Warren unwittingly said something very revealing in her attack on Dr Carson, the Secretary of Housing: she said the position of blacks in the United States had not improved in the last fifty years. But this was precisely the era during which they received more social security than ever before; and in so far as their absolute situation has improved (life expectancy, and so on), this is because there has been a global tendency in that direction, almost irrespective of the social system. Only the Russians, among major countries, have managed to buck the trend.

Poverty has not been relieved by social security, for more than one reason, the first of them definitional. In many countries in which social security is important, poverty is now defined as an income less than 60 per cent of the median income. On this definition, no increase in wealth, no matter how great, could reduce poverty unless it also reduced inequality in income; by the same token, a decrease in every single person’s income, provided only that the reduction affected the rich disproportionately, could actually decrease poverty while making everyone poorer. Unless, then, social security is set about 60 per cent of the median income, it cannot reduce poverty, however large social security payments might be in absolute terms.

Writing of foreign aid, Bauer says, “The reduction or elimination of international income differences is [a] widely canvassed objective” of foreign aid. So it is of advocates of social security. But social security in materially advanced societies is unlikely to reduce poverty even on measures of poverty that do not rely on equality of income. Whatever criterion is chosen as a measure of poverty, it will not be a level below that of the poorest section of society; but social security, at least as currently practised in countries like Britain, encourages people to live in the kind of behavioural squalor that inhibits either the creation or accumulation of wealth, and remain at the poorest level.

(Here, in fairness, it must be added that social security usually goes along with a great deal of economic regulation that makes entry into business more difficult and expensive, if it does not altogether prohibit it. Bauer was always at pains to stress that very poor people could nevertheless find or accumulate sufficient capital to invest on their own account. But the greater the regulation, the more capital needed to start anything; and it is probably true that someone in Britain would come to the attention of the authorities more quickly and seriously by setting up an unauthorised stall in the street than by breaking into a car in the same place. Parisian taxi drivers of African origin have told me that they will soon return to Africa because there is more freedom—by which they meant economic freedom—there.)

As Bauer says that a sense of guilt, or at least a desire to express and exhibit one’s guilt (and thereby be seen as a moral person), acts to justify foreign aid irrespective of its actual consequences, a sense of guilt that our societies are unequal underlies our attachment to social security, as if really they should be equal; and there is no denying the fact that some people are, through no merit of their own, born to easier circumstances and an easier path through life than others, and that they generally end up better off in more ways than one than people less fortunately born. Increasingly with the search for what Thomas Sowell calls cosmic justice, the distinction between fairness and justice is not made; as equity has come to mean equality, so justice has come to mean fairness. Thus policy—in this case, social security—must repair what circumstances have wrought; and the virtue lies in the attempt rather than in the result.

As foreign aid is atonement for past colonialism (even for those countries that had no, or very few, colonies), so social security is atonement for the atrocious conditions of the industrial revolution. We are more concerned to right the wrongs of the past than to examine our own shortcomings.

Bauer tells us with regard to foreign aid:

The longer the period over which a policy has been pursued and the greater its costs, the more difficult it becomes effectively to call into question the principles behind the policy. The difficulty is aggravated when the prolonged pursuit of the policy has created formidable vested interests … International wealth transfers cannot therefore be terminated soon.

Surely this must be so with social security as well. Not only are millions of people dependent on it in the most obvious way, but so is a substantial apparatus to oversee it. In some British towns, the administration of poverty is now the largest industry, and those at the head of it are the local elite. The history of subsidies is always the same: first you accustom people to them, then you use the fact that their withdrawal is painful to justify both their institution in the first place and their continuation.