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Bye-bye Bismarck

Mises Daily: Thursday, July 24, 2003 by

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Otto von BismarckImplementing social security systems and providing so-called welfare and social justice as governmental goals have become the outstanding features of the State since the late 19th century. 

Germany in particular is a case worth studying. This country was a pioneer in creating a comprehensive system of social policy, and it is now one of the prime examples where a maze of regulations and the fiscal burden that have come with this kind policy is paralyzing the economy. An historical analysis of the German welfare state also reveals the close link between the welfare and the warfare state. 

When Germany's Chancellor Otto von Bismarck conceived a system of social security for the industrial workers in the late 19th century he had a very clear objective in mind. Along with consolidating the geo-strategic position of the Reich, he set out to bring the industrial workers under the control of the State. Integrating the masses into the body of the newly formed unified German State was the objective, and a comprehensive social insurance system provided the means for obtaining this aim. 

Social policy was foremost national policy[1] and the social security system was primarily an instrument to lure the workers away from private and communitarian systems into the arms of the State. In the eyes of Bismarck it was the State that had created national unity and this agent was also needed in order to maintain the social unity by a system of mutual obligation between the State and its citizens. 

Originally, social security was set up to be specific as to its target, limited in depth, and light in terms of the financial burden for the productive sector of the economy. When the first steps were taken towards the establishment of a social security system in 1883 with the establishment of a health insurance system and with its expansion to cover old age, working place accidents and unemployment, the maximum contribution to social security was held to be no more than a total of six per cent of gross wages. 

Social security was meant to be restricted to the new class of the industrial workers. Regular old age pensions would be paid only to those of more than 70 years of age, and the pay-out would rarely be more than the subsistence level. 

But as foreseen early on by Adolph Wagner—who was one of the intellectual fathers of social policy and the author of the "law of increasing state activity"—the expansion of the state functions into the "social area" would change the character of the State and lead to a massive financial expansion of governmental activity.[2] He clearly foresaw also that the new "social epoch" would be the age of interventionism with governments actively "correcting" the capitalist process of production and distribution. 

While the practice and institutional forms vary from country to country, the idea that the State must protect and promote social justice and progress has become the paramount modern ideology around the globe. Following the footsteps of Bismarck, the construction of social policy systems has emerged as the distinctive feature of the modern State. 

Periods of war, depression and prosperity alike were the major propellants for the expansion of the system when social policy became the favorite means to offer the carrot along with the stick of more governmental control. Social policy ushered the way into the age of the unfettered growth of taxation, expenditures and bureaucracy making the modern welfare state inherently totalitarian.  

In accordance with its historical roots, social policy up to the present day has maintained its nationalistic aims, its paternalistic schemes, and its authoritarian practice. As such, social policy represents the modern complement to the traditional role of the State as an agency of warfare. Social security has served as a formidable instrument in the hands of governments to obtain popular loyalty and the allegiance of special groups. Under democratically elected governments and dictatorships alike, the temptation has been the same: expanding schemes of social security has been the effective instrument in search of political power and presumed legitimacy.

In Germany, it was first during World War I and its aftermath and later under the Third Reich in the 1930s when the welfare state experienced its greatest expansions. Under the national-socialist regime, in particular, the appeal to "social justice" and the expansion of the social security and protection systems flourished together with the build up of the warfare state. In the first couple of years of the dictatorship, social policy was one of the major legal projects of codification.[3] 

The systematization of social policy was so profound that almost all major bodies of law that rule Germany's current social security system can be traced back to their original formulation in the national-socialist era. While minor adaptations were made to be more adequate to the current needs, the original spirit of the social policy laws lives on with its roots in the class distinctions and the paternalistic-authoritarian schemes of the past.

Under the Third Reich, social policy measures were extended to protect and further ideologically defined standards of reproduction, health and the environment. The carrot of social policy served as the main means to facilitate the application of the stick of repression. It also happened in this period that the labor market came under almost complete control of the totalitarian State making the dismissal and hiring of personnel dependent on governmental permission (issued by the Labor Office or Arbeitsamt). 

Along with the privileges given to those employed by the State, the restrictions placed upon a free labor market continued to plague post-war Germany as soon as the era of full employment after the reconstruction period had come to an end in the 1970s. In modern democratic Germany, social issues in all their ramifications have dominated the political game bringing the relevant parties and interest groups together under the common ideological consensus of striving towards a fictitious so-called social balance. 

After favoring free-market policies during the early years of post-war reconstruction, it was as early as the late 1950s when the third wave of social policy expansion set in, this time as a result of Germany's prosperity and as a means to compete with the Socialist regimes during the Cold War era. Step by step from then on, social policy grew into a veritable avalanche, particularly in the 1970s. By explicitly adopting the criteria of "social progress" as a state function, almost each and every aspect of human existence became to be regarded as a social problem and a seemingly legitimate reason for state action to do good. 

Grown for over a period of more than a hundred years, the various branches of the obligatory social security system have put the entire population under intensive bureaucratic care. Social policy has become a labyrinth formed by laws and regulations, individual judicial decisions and cases of special considerations that make it impossible to determine who are the net payers or who are the net beneficiaries even in a crude way.[4] 

The coverage of old age, sickness and unemployment insurance, along with social aid, and disability insurance and with all the numerous special branches of social policy have turned Germany into an Eldorado for those seeking a free ride. Often described as "generous", the German social welfare system actually provides a plethora of incentives for intentionally becoming unemployed, seeking early retirement and fulfilling the necessary requirements in order to become eligible for social aid and disability payments. 

Germany's current state of the economy with persistently high unemployment, exorbitant wage costs and a drastically shrinking active population cries for a change, but it amounts to a gargantuan endeavor to reform a social welfare system which has grown into a veritable monster after having been fed and pampered by all political groups that have been in power in this country since the late 19th century. 

With the promotion of "social progress", the modern welfare state has dissolved all limits to government. Together with the traditional goals of protection and social justice, the extension to social progress has opened the way to all kinds of absurdities, abuses and interventions. 

With social policy becoming ever more comprehensive, it has turned into a severe and suffocating burden for the economy. The boon—however great or small it may have been in its early stages for a specific group—has turned into a massive plague. Now, the dismantling of the welfare state emerges as the major policy challenge of the 21st century. 


Antony Peter Mueller has recently assumed a new position as a professor of economics at the University of Caxias do Sul in Southern Brazil. He is also an adjunct scholar of the Ludwig von Mises Institute and a member of the Institut für Wirtschaftswissenschaft of  the University of Erlangen-Nuremberg in Germany. Antonypmueller@aol.com. See the author's article archive.

[1] Heimann, E.: Soziale Theorie des Kapitalismus. Theorie der Sozialpolitik, Tübingen 1929.

[2] Wagner, A.: Über sociale Finanz- und Steuerpolitik, in: Archiv für Soziale Gesetzgebung und Statistik, Vol. 4, Berlin 1891, pp. 1–81.

[3] Seidte, F. : Sozialpolitik im Dritten Reich 1933 bis 1938, München and Berlin 1938.

[4] Mueller, A. P.: Sozialpolitik und Wirtschaftsordnung, Frankfurt 1983, p. 141.