The Emergence of the
Welfare State
FROM LAISSEZ-FAIRE TO MODERN LIBERAL ECONOMICS
Modern Liberalism Welfare States
A welfare state is a government that looked out for the welfare
of its citizens.
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This meant providing economic support through food
programs, financial assistance, subsidized housing, and
many other publicly owned and funded programs and
industries.
This is definitely not classical liberalism – where is the freedom
(from government intervention)?
Welfare states are based on limited application of the
principles of collectivism - ideas of moderate government
intervention to look out for citizens, particularly vulnerable
citizens during hard times. It starts with capitalism but embraces
some of the collectivist principles that allow people to maintain
at least a minimum standard of living.
Mixed
Economy
As governments began to
intervene in the economy to
provide this support - through
taxation, publicly-owned
property, and wealth
redistribution - many
economies could no longer
claim to be purely capitalist.
Many economies were now
mixed economies; still largely
capitalist but featuring
moderate, modern liberal
government intervention and
control in various parts of the
economy.
Welfare State
These states are based on the modern
liberal application of principles of
collectivism in balance with principles of
individualism – thus becoming moderate
(middle):
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Equality of outcome - cooperation and
collective interest
Equitable (fair)distribution of wealth economic equality and public property
Public responsibility for the less fortunate
- collective responsibility
The state provides freedom from worry
about the bare necessities for its citizens
by providing a social safety net –
something that can catch them if they
fall between the cracks.
The Social Safety Net
Some
examples of this safety net in action are:

Cash transfers - programs like Employment Insurance in
Canada whereby the unemployed can draw on emergency
funds, paid for by taxpayers (working people) for a limited
time, to afford the necessities when they’re in between jobs.

Food programs - programs like food banks, food stamp /
coupon programs, or subsidies for families that have a hard
time affording food.

Public healthcare and education – programs that provide
taxpayer funded, (nearly-) universal health insurance and
public education, are key to our Canadian identity.

Few of us can say we don’t sometimes need a safety net …
Progressive Taxation

How do they afford these programs??? Through
higher taxes!

Progressive taxation is common in welfare states.
This is a policy whereby higher wage earners pay
more taxes (a higher % of their income) than do
lower wage earners.

The more government intervention present, the
stronger the welfare state, and the further left on
the spectrum the state is (don’t forget –
governments change – so there are shifts left and
right depending on the policies of the government
in power!)

More centrist welfare states feature mixed
economies, while very interventionist, left- leaning
(but still democratic) welfare states are known as
democratic socialism (Bernie Sanders represents
this position on the spectrum with his 95% taxation
rate proposed for all billionaires!)
So how did
we get
here?
To the
Delorian!
SET IT TO THE ROARING
TWENTIES!
The Roaring Twenties – “Unfettered Capitalism”
Ever watch the “Party Scene” from Great Gatsby?
Now THAT’S excess wealth! Freedom at its finest!

The United States was the richest
country in the world (resources &
population).

After the war, the U.S.A. became
wealthy by mass producing
consumer goods like radios and
cars (no longer needed to support
the war effort!)

The USA also became the
breadbasket for Europe during WWI
– a major exporter of grain
products.

Factory workers were paid well,
which meant they were now able
to spend money on all those
consumer goods.
But this was only the
beginning … of the end …

As the ‘20s progressed, more and more working people were buying shares (pieces of
ownership in) of companies “on margin” or “on time” (credit) and these shares rose in value
or price.

Factories were producing more goods than people could buy; therefore, the supply of
goods was much greater than the demand. According to capitalism, that must mean
prices will drop …

After the war ended, America continued to produce large amounts of grain. When France
began producing grain again, the market became flooded and the price of grain
plummeted (supply & demand at work again!). People began selling off their stocks to try to
recoup their losses.
The Stock Market Crash of 1929

In 1929 share prices were rising but profits for
companies began to decline.

By September and October, the market was
fluctuating wildly

On October 24th of 1929, panic selling of
shares forced the value of shares to drop
drastically.

By October 29th, the market crashed.

The stock market crash brought an end to
prosperity in the U.S.A.

Wall Street Crash Video
“Run on the Bank”
Everyone wants to
withdraw their
money, but the bank
can’t cover all these
requests at once. The
result:
• Massive loss of
savings
• Loss of consumer
confidence
Other Causes of The Great Depression

Demand for goods could not keep up with supply

Droughts

Wages did not increase to match inflation

Farmers went bankrupt

Banks failed

Factories closed

Increase in unemployment

High rate of corporate fraud
• GDP – Gross Domestic Product dropped by
35% (a measure of the wealth of a nation on
a per person, per year basis) - shows how
much economy shrunk
• Unemployment reached 32%!! (what is it in
Alberta right now?)
• Men unable to provide for their families –
there are no jobs to be found!
• WHY?
• unregulated business - people pursued their
SELF-INTEREST to make profits
• unregulated banking - LAISSEZ-FAIRE –
(privately-owned) banks were lending more
money that they had assets to cover (9:1
ratio). They were trying to make money, not
protect consumers!
• Overwhelming consumer confidence:
business was booming so people shopped
to practice their economic freedom; they
borrowed (then owed) and invested large
sums of money.
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Conditions were much the same in Canada.

Angry farmers dubbed horse-drawn automobiles
the “Bennett Buggy” after Prime Minister
Richard (R.B) Bennett.

By 1931, unemployed people were
lining up in breadlines since there was
no unemployment insurance.
Countries used protective tariffs in an
attempt to protect domestic industry,
so global trade declined.
By 1932, 12 million people in the US
were unemployed.
President Herbert Hoover feared that
assistance from the government would
make citizens reliant and unable to
stand on their own two feet.
In 1932, the American people voted for
Franklin D. Roosevelt as president on a
platform of government intervention to
get the USA out of the Depression.
How do
you stop
the cycle?
Who is/should be to blame?
Who will/should help?
Role of Government – security and stability?
Crisis can lead to extreme responses
(e.g. Communism or Fascism)
Hyperinflation in Germany 1919-1923
(at end of WW1)
Hyperinflation: inflation that is very high or "out of control“; a
condition in which prices increase rapidly as a currency loses its
value.
Example of bad government intervention
–poor monetary policy: unchecked increase in money supply
(printed more paper money without a growing economy to back
up its value!!)
Between 1919 and 1923, the price of a loaf of
bread increased from 26 pfennigs to 80 billion Mark!!
•
Authoritarian systems: provide simple
solutions to complex problems
Example
Fascism & Communism both tried to
provide what they felt people (and the
economy) needed
“People’s
of government planning to
create jobs and stimulate the German
economy (1937)
Car”
One man had a solution:
John Maynard Keynes

He proposed a solution to this problem through
the regulation of government spending, taxation,
the regulation of the interest rates and production
of money.

In doing so, governments could regulate
consumer demand, thus regulating the economy.

BUT – this is a pretty big shift left from the market
economy and capitalism!
John Maynard Keynes:
A British economist who
developed the theory known as
“Demand Side Economics” or
“Keynesian Economics” in
response to Great Depression
Demand Side
Economics
Fiscal Policy
FISCAL POLICY INVOLVES GOVERNMENT
SPENDING - ON PUBLIC INDUSTRY,
INFRASTRUCTURE, AND SOCIAL SAFETY NET
PROGRAMS - AND TAXATION.
DECREASED PUBLIC SPENDING AND HIGHER
TAXATION DURING BOOM TIMES MEANS FEWER
PUBLIC JOBS / SOCIAL PROGRAMS AND MORE
INCOME TAKEN FROM CITIZENS BY THE STATE IN
TAXES. THIS DECREASES AVAILABLE CASH FOR
SPENDING AND INVESTMENT AND COOLS A
STRONG ECONOMY TO PREVENT IT FROM
OVERHEATING. KEYNES CALLED THIS
“TIGHTENING THE BELT”.
INCREASED PUBLIC SPENDING AND LOWER
TAXATION DURING ‘BUST’ TIMES MEANS MORE
PUBLIC JOBS / SOCIAL PROGRAMS AND LESS
INCOME TAKEN FROM CITIZENS BY THE STATE IN
TAXES. THIS INCREASES AVAILABLE CASH FOR
SPENDING AND INVESTMENT AND STIMULATES A
WEAK ECONOMY TO PREVENT IT FROM SINKING
TOO DEEPLY INTO RECESSION. KEYNES CALLED
THIS “PRIMING THE PUMP”.
DEMAND SIDE
ECONOMICS
MONETARY
POLICY
Monetary policy is a little more complicated. It
relies on government controlling interest rates.
The higher the prime interest rate - which banks
use to determine their own interest rates - the
more expensive it is to borrow money, and the
more worthwhile it is to invest that money.
During boom times, increasing interest rates
means borrowing money is more expensive. This
means people are disincentivized to borrow, and
therefore have less money to spend. High interest
rates also encourage people to invest their
money, as they will earn more on their
investments.
During bust times, decreasing interest rates
means borrowing money is less expensive. This
means people are incentivized to borrow, and
therefore have more money to spend. Low
interest rates also discourage people to invest
their money, as they will earn less on their
investments.
Keynes wanted to
“flatten the curve”
(not that one!)
- preferred the
gentle slopes of the
--- line instead of
the peaks and
valleys of the
Boom/Bust cycle.
So … let’s review …
During Boom/Expansion,
take money away…

Monetary Policy:
Increasing interest rates means borrowing
money is more expensive. This means people
are less likely to borrow, and therefore have less
money to spend.

Fiscal Policy:
Decreased public spending and higher
taxation means less public jobs / social
programs and more income taken from citizens
by the state in taxes.
During Bust/Recession, Add more money…

Monetary Policy:
Decreasing interest rates means borrowing money is less
expensive. This means people are incentivized to
borrow, and therefore have more money to spend.

Fiscal Policy:
Increased public spending and lower taxation means
more public jobs / social programs and less income
taken from citizens by the state in taxes. This increases
available cash for spending and stimulates a weak
economy
prosperity
FISCAL POLICY
Increase government $
FISCAL POLICY
depression
Decrease government $
Decrease taxes
Increase taxes
MONETARY POLICY
MONETARY POLICY
Increase $ supply
Decrease $ supply
Decrease interest rates
Increase interest rates
Deficit financing
Pg. 146-147
Government spending Cycle (deficit financing)
Government
will go into
debt (years of
accumulated deficits),
however will hopefully save
money when times are
good, so should balance
out. Why might a govt not
cut spending though when
times are good?
Roosevelt and the
New Deal
President Franklin D. Roosevelt (FDR) was one of the
first to implement Keynesian economics to try to pull
the US out of the Depression
Roosevelt put forth an idea known as the New Deal,
and he implemented policies that changed the way
the American government interacted with its people
forever:
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Relief: Direct financial help to those in need
Recovery: Policies intended to fix the economy
and create jobs to put people back to work
Reform: Programs designed to regulate the
economy to prevent conditions in the future
that could create another Depression
New Deal explained in 3 minutes
Rise of the Welfare State

The New Deal certainly didn’t end the Depression, but it definitely helped. By the
time World War II broke out, unemployment in the US had dropped by 10%.

The Second World War, in its own way, proved Keynesian principles to be effective
as well. Governments used deficit financing through the sale of patriotic war bonds
to put millions to work building guns, tanks, and bombs to battle the Nazis.

By the time the War was over, the Great Depression was too - and Keynes and his
supporters argued that if we could win the war, why couldn’t we “Win the Peace”?

Democracies all across the western world agreed, and many implemented
comprehensive welfare states over the next several decades.
Rise of the Welfare State - Canada
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Almost 2 years after Roosevelt implement the New Deal in the US, Canadian
Conservative PM R.B. Bennett announced a similar program in Canada.
Seen as “too little, too late”, he was defeated in the 1935 election and
replaced by Liberal PM W.L. MacKenzie King. Although some programs and
changes were implemented, many were struck down under judicial as
‘unconstitutional’ and outside federal jurisdiction.
It wasn’t until after WW2 that Keynes’ ideas were widely embraced in
Canada:
Established near universal public health insurance
Developed an unemployment insurance program
Created a national old age pensions for senior Canadians to draw on in their
twilight years
Established progressive taxation to pay for these various social programs
Created many public industries like the CBC (1936)
Founded the Bank of Canada (1934) to regulate interest rates and currency
in Canada
By the 70s, Canada was a truly modern liberal state, with elements of
collectivism embedded within our still largely capitalist system.
Review Video