By Juan J. Paz and Miño Cepeda on March 1, 2021
The Canadian-American economist John K. Galbraith (1908-2006) had an outstanding academic and public influence in his time (professor at Harvard, advisor to John F. Kennedy, etc.) and left numerous works that sought to adjust economic theory to historical realities, which led to counterposing his thought to the dogmas of the market. One of his lesser-known books is Economics in Perspective: A Critical History (1989), in which he devotes a special section to the “welfare state”.
The antecedents are to be found in Germany and Great Britain. During the time of Otto von Bismarck (1815-1898), in order to prevent a social revolt arising from workers’ struggles and their strong trade unionism, laws were passed introducing insurance for industrial accidents, illness, old age and invalidity. In Britain, the aim was different, as it was to mitigate the rigors of nineteenth-century capitalism, so the same insurances were introduced in 1911, along with income tax and, above all, the pioneering unemployment insurance.
By the 1920s in the US, this background weighed heavily. A group of politicians, economists and academics spearheaded social reforms through the “Wisconsin Plan”, which proposed tariffs for public utilities, limiting bank lending rates, supporting the labor movement, introducing income taxation and a state unemployment benefit system, which were first adopted as Wisconsin state policies and transformed into national policies during Franklin D. Roosevelt’s New Deal in the 1930s. The “welfare state” in the US translated into a system of subsidies for the elderly, children of low-income families, unemployment benefits, retirement pensions, direct taxation, higher wages, job diversification, housing for low-income families, vocational training, investments and state regulations. This beneficial and positive experience served as a basis for the theoretical formulations of John M. Keynes (1883-1946), who emphasized demand capacities, state action and economic policy orientations.
More than the reactions of the “orthodox” economists, the Wisconsin Plan and the New Deal were attacked from the “business world”, which is the diplomatic term used by Galbraith not to speak directly of businessmen. Industrialists complained about “unemployment insurance”; manufacturers warned of the coming “final domination of socialism”; A. P. Sloan Jr. (General Motors) asserted “the dangers are insight”; J. L. Donnelly (Illinois manufacturers) declared that it would destroy “initiative, discourage thrift and stifle individual responsibility”; C. Denby Jr. (lawyers) argued “at one time or another it will bring about the inevitable abandonment of private capitalism”; A. M. Schlesinger Jr. (New York): “with unemployment insurance, no one would work; with old-age and survivors’ insurance, no one would save”; J. Taber (New York): “never in the history of the world has a measure been advocated … designed to eliminate all possibility for the employer to create jobs”; and G. P. Chandler (Ohio Commerce) went so far as to say, with singular historical fantasy, that the fall of Rome was due to measures of this kind.
Since its inception, the “welfare state” has been under recurrent attack. The end of this system, as Joseph Stiglitz insistently points out in his book Progressive Capitalism (2020), came with the government of Ronald Reagan (1981-1989), who eliminated the path of welfare and enthroned neoliberalism as the new economic paradigm of a world that immediately fell into globalization in the face of the collapse of Soviet socialism. Stiglitz highlights, in detail, the social collapse in the US and the rise of privilege and the concentration of wealth in the hands of an elite, as a consequence of returning to the dogmas of the “free market”.
In Latin America, the paths to building welfare states have been permanently blocked. The first breakthrough was the Mexican Revolution, whose 1917 Constitution inaugurated fundamental social and labor rights, which spread throughout the region at different rates, in accordance with the rise of the working classes. Since the 1920s, more under the influence of the social ideology that emerged in Mexico, as well as the socialist principles that spread in the wake of the Russian Revolution (1917), various governments (in Ecuador those of the Julian Revolution, 1925-1931) initiated the first foundations of social economies; and the classic “populisms”, since the 1930s, were, in essence, continuations of this type of economy, aimed at creating welfare states under Latin American conditions. They were even efforts to defeat the pre-capitalist oligarchic regimes and at the same time promote capitalist modernization. The resistance and reactions of the traditional oligarchies (landowners, merchants and bankers) were always present and prevented the strengthening and continuity of the construction of social economies.
Paradoxically, during the 1960s and 1970s, both as a result of the initial US “Alliance for Progress” program and the advance of the “developmentalist” theses of the time (often confused with “Keynesianism”), in many Latin American countries the oligarchic regime was definitively overcome and the industrial capitalist path was affirmed. This process preserved some theoretical conquests in terms of labor rights or social security, although the cold war policies against “communism” and “Castroism” also served to repress social movements and affect the historical conquests of the workers.
The change of era also came to the region with the “Reaganite revolution”. Neoliberalism, as an economic ideology and with its technical dogmas, spread throughout Latin America thanks to the take-off of private business interests, conservative governments and the continent-wide oversight of the US and financial and regulatory institutions such as the IMF. The final two decades of the twentieth century produced the historic breakdown of any progress in the construction of welfare states. This construction was taken up again by the cycle of progressive governments during the first three decades of the 21st century, which was literally swept away again by the conservative governments that succeeded them, as has been the case in Ecuador since 2017.
There is enough historical material in terms of studies, books, statistics and economic and social data to evaluate the results and progress made at different times by the two competing models in the region: social economies or business economies. There is no possibility of denying that, in these same historical terms, Latin America has always achieved better living and working conditions with social economies. But, as Galbraith pointed out in his “old” book on economic history, the “free market rhetoric”, turned into theological dogma, is based on a “technical escape from reality”, which fails to understand that what ultimately prevails is governmental conservatism, as well as economic and political power based on private interests in both the US and Latin America. But it is worth clarifying, once again, that in our region it is the interests of business elites who have not completely rid themselves of the oligarchic mentality inherited from the pre-capitalist era, so that today they hide behind their “neo-liberalism”, old slogans of social domination and labor exploitation that guarantee their power.
Source: America Latina en Movimiento, translation Resumen Latinoamericano, North America bureau