Societies: facts and challenges
Inleiding
Inhoud:
1) Setting the scene
2) When markets fail
3) The magic of averages
4) Mind the gap
5) A safety net for all
6) Varieties of welfare states
7) The welfare state in flux
8) Children in the welfare state
9) Work and unemployment in the welfare state
10) Illness and disability in the welfare state
11) Ageing in the welfare state
12) Towards a new social contract?
Positive vs normative
Positive (descriptive) analysis adresses factual questions
- If we raise minimum wage, how would that affect employment?
Normative (perspective) analysis adresses questions that involve value
- Is society better off with a higher minimum wage?
Setting the scene (lecture 1)
A conceptual framework
THREE BASIC INSTITUTIONS
Societies
Multilevel structure:
- Local society
- Regional society
- National society
- Supranational society (EU)
- Global society
Members: membership of a society or citizenship consists of 3 parts:
- Civil rights = individual freedom (freedom of speech)
- Political rights = participate in the exercise of political power (universal suffrage)
- Social rights = live life of a civilized being (protection against poverty)
Societies form basic (social) institutions: three basic institutions:
- The family
- The firm
- The government
History of homo sapiens
Australopithecus afarensis —> homo erectus —> homo sapiens
Brain larger, jaw and teeth smaller
Basic institution 1. The family:
Why? To create new members, to pool resources, to collaborate, …
Families are organized in an informel way
Cognitive revolution:
,70.000 years ago homo sapiens develops language
—> opens new possibilities:
- Collaboration in larger groups
- Creation of imagination
- Sharing myths, beliefs, legends, … —> development of culture and religions
- Exchange and trade
The market
The members of a society engage in exchange, on the market. Most markets rely on sellers
offering their goods or services to buyers in exchange for money.
Exchange is essential, money not
Case of Romito 2
Earliest known dwarf, 11.000 years ago (male, 17-20 years old and 120cm tall)
- Suffered from compromised mobility, restricted forearm extension and could not have conformed
to the normative demands of his community
- Received care at different stages of his life
Agricultural revolution (10.000 years ago)
Homo sapiens develops farming and agriculture —> increases food production per square meter
—> Larger societies —> social hierarchies (and inequality) emerge
Basic institution 2. The government
Larger societies —> more formal organisation
Some members of the society ar given the power to rule over others
Important functions: create and enforce laws + collect and spend taxes
Babylonian legal text: Codex of Hammurabi (1776 BC)
175: if a state slave or the slave of a freed man marry the daughter of a free man, and children are
born, the master of the slave shall have no right to enslave the children of the free
196: If a man put out the eye of another man, his eye shall be put out
236: rent boat, sailor careless, and boat wrecked or goes aground —> new boat as compensation
Taxes in Ancient Egypt: “But when the crop comes in, give a fifth of it to Pharaoh. The other four-
fifths you may keep as seed for the fields and as food for yourselves and your households and
your children” (Genesis 47:24)
Industrial Revolution 1800
Homo sapiens invents the steam engine —> productivity increases and urbanization
Societies are deeply transformed
Basic institution 3. The firm
- Profit maximizing firms
- Firms need capital and labour to produce goods
- Social relation between employer and employee changes: labour conditions worsen , uncertain
living conditions and inequality + property increase
- Commodification of human labour
Commodification = transformation of things into commodities that are sold on the market
Marxist notion: after industrial revolution individuals need to sell their labour to stay out of poverty
Economic growth
GDP = groos domestic product, a metric of a society’s total economic output (added value)
GDP per capita
,Three basic institutions and the market
Firms need production means(=capital and labour) to produce goods
Families own production means and want to consume goods
Room for exchanges on the market: market for goods, labour and capital
The government regulates exchange and enforces contracts
Free self-regulating market = market without regulation by the government
Basic institution: overview
Families: informal, non-profit and private
Government: formal, non-profit and public
Firms: formal, profit and private
Civil society = voluntary associations, non profit organisations, charities: formal, non-profit and
private
BASIC STRUCTURE OF A SOCIETY
The basic structure of a society describes how tasks, rights and duties, and advantages of social
cooperation are divided between the members of the society and the basic institutions.
Different societies have a different basic structure
Capitalist state
Private ownership of production means
Free exchanges on the market allocate production means (using prices)
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,
but from their regard to their own interest.” (Adam Smith, 1776)
Social state
Collective ownership of production means
Centralized allocation of production means through planning
“From each according to his ability, to each according to his needs” (Karl Marx, 1875)
Cold War … an beyond: socialist states have shown to be less productive in history
Welfare state
A society with a capitalist basic structure in which government power is used to modify the play of
market forces. Utopian basic structures in between socialism and capitalism
Government power is used in four directions:
- Correct market failures and provide public services (lecture 2)
- Cover social risks (lecture 3)
- Reduce inequalities (lecture 4)
- Mitigate poverty (lecture 5)
History
Roots back in the 19th century. Most developed countries, welfare states emerged after WOII
Currently emerging in other countries (China, Brazil, …)
Size
Currently some countries spend up to 30% of GDP on social spending
OECD average: 19% (in 2015): old age 7%, Health 5.3%, Family 2%, Incapacity related 1.9%, …
Bekijk grafieken!
Three conceptions of the welfare state:
1) Welfare for the poor (OCMW)
2) Social insurance, social rights, social services (sociale zekerheid)
3) Set of socio-economic policies by the government (labour market policies)
Varieties of welfare states:
Conservative (corporatist) welfare state: central role for the family (Belgium, Germany, …)
,Social democratic welfare state: central role for the government (Sweden, Denmark, …)
Liberal welfare state: Central role for the firm (United States, United Kingdom, …)
Welfare state and the market
Structural interpretation of the welfare state as a response to societal problems created by
unregulated market capitalism. Welfare as a damage-limiting, problem solving device.
Critiques:
Progressive (left): ameliorative approach, but no radical cure is offered to underlying problems
Conservatives (right): too generous, too expansive, demoralizes recipients
Welfare state and power
The welfare state is a product of interest conflicts, class struggle and class alliances
The welfare state as a result of working-class power achieved through organisation by labour
unions or left parties.
SOCIAL CONTRACT
A hypothetical contract between the citizens of the society which desires its basic structure
Founding fathers of the social contract: Hobbes, Locke, Rousseau
Hobbes: has a state authority over an individual?
Locke: is property legitimate?
Rousseau: sovereignty should be in the hands of the people
In congress, July 4, 1776. A declaration by the representatives of the United States of America, in
general congress assembled. We hold these truths to be self-evident, that all men are created
equal, that they are endowed by their creator with certain unalienable rights, that among these are
life, liberty and the pursuit of happiness. That to secure these right, governments are instituted
among men, deriving their just powers from the consent of the governed.
Social contract with overlapping generations:
Social contracts are negotiated and re-negotiated by “real people” from overlapping generations
Renegations:
- Normal times: piecemeal adjustments
- Turning point: deep revision
CORE CONCEPTS Lecture 1
Multilevel structure
Civil, political, and social rights
Social institutions
Family
Firm
Government
Market
Commodification
GDP per capita
Self-regulating market
Civil society
Basic structure of society
Capitalist, socialist, welfare state
Social contract
When the markets fail (lecture 2)
Markets failures and public provided goods
,WHEN DO SELF-REGULATING MARKETS WORK?
The libertarianism ideal of a self-regulating market
Libertarianism = political philosophy that takes liberty as a central value and argues that any
government intervention is (morally) wrong ≉ liberalism
Problem of the social scientist: how can we imagine such a counterfactual society?
We build a model of a society that allows the study of a counterfactual:
- We start from a benchmark case
- We make five assumptions in the benchmark case
Assumptions:
1) Individuals have perfect information
2) Individuals are rational and have perfect will-power
3) Markets are perfectly competitive
4) Markets are complete
5) There are no public goods, no externalities
The invisible hand
First Welfare Theorem. In the benchmark case, free exchange on a self-regulating market leads to
a Pareto efficient outcome. An outcome is Pareto efficient when it is impossible to make anyone
better off without making someone else worse off.
Is the benchmark realistic? No, in reality there are market failures
MARKET FAILURES
Assumption 1. Individuals have perfect information
In het benchmark case, individuals need perfect information about price and quality
Prices are not always clear and Quality is often unclear
Asymmetric information: markets for lemons
In a used-car market there are two types of cars: bad cars(“lemons”) and good cars
Seller wants to sell lemons and keep the good cars. Buyers don’t know wether the car is a lemon,
but anticipate low quality (otherwise the seller wouldn’t sell the car). This drives the prices of u
used car down and reduces the number of good cars owners willing to sell.
—> adverse selection: good cars can disappear from the market completely
George Akerlof won Nobel Prize in 2001
Government role 1. Improve information
Government regulates information on products
(European Union plays an important role)
Assumption 2. Individuals are rational and have perfect will-power
(Rational for an economist means consistent)
Lessons from psychology and behavioral economics
—> Real individuals are not always rational
Framing (choice depends on how it is presented): does the doctor explain first the benefits or the
risks of a treatment?
Real individuals suffer from bounded will-power
Nudge = particular way to present the choice that alter’s people behavior in a predictable way
without restricting options (Richard Thaler won Nobel Prize in 2017)
Example: advertising for COVID vaccination, 4 different texts —> attendance percentages differ
Government role 2. Nudge decision making
Governments can nudge individuals by thinking carefully about the framing of decisions
- Place of chocolate bar in resto
- Organ domination
- Tax compliance
,- Boosting vaccination rates, …
Behavioral insights team in UK and many other countries
—> Raises ethical questions: “Libertarian paternalism”
Assumption 3. Markets are perfectly competitive
In a perfectly competitive market, there are many buyers and sellers, each accounting for a small
fraction of the overall demand or supply of the good. Buyers and sellers are price takers, taking the
market price as given in deciding how much to buy or sell
—> no monopoly, no monopsony and no oligopoly + free entry in the market
Government role 3. Anti-trust policies
Governments can break monopolies (assure free entry)
Government forbid firms to monopolize markets
Monopolize markets:
- Predatory pricing: pricing below cost to drive a less financially strong rival out of the market by
making it incur losses
- Exclusive contracts: signing of contracts with buyers or suppliers that commit them not to deal
with a rival
- Bundling: selling a monopolized good only in conjunction with a competitively-supplied product
to prevent customers from buying the competitive product from rivals
Assumption 4. Markets are complete
Lecture 3
Assumption 5. There are no public goods, no externalities
Characteristics of a public good:
- Non-rival: if more than one person can use it at the same time
- Non-excludable: if there is no way to prevent a person from consuming it
A private good = rival and excludable
There are also hybrid goods
Government role 5a. Provide public goods
If left to the market, we see low level of production of public goods. Government provide public
goods: public infrastructure, defense, … and subsidize goods with public good characteristics:
parks, libraries, …
A free rider = a person that contributes little or nothing to a public good while benefitting from
others’ contributions
Externality: when en action affects someone else
Negative externality when an action harms someone else (pollution)
Positive externality when an action benefits someone else (education)
Private cost: the cost for the individual that makes the decision
External cost: the harm that a negative externality imposes on others
Social cost: private cost + external cost
—> when a consumption or production activity creates an externality, the outcome will not be
efficient
Example: nitrogen-gate in Flanders
Farmers (and traffic) emit too much nitrogen into vulnerable nature
A similar case let stopped 18000 building projects in the Netherlands in 2019 and lead to a
reduction of the maximum speed on highways
,Positive externality: external benefits to others = the benefit that a positive externality creates for
others —> When a consumption or production activity creates an externality, the outcome will not
be efficient
Government role 5b. Dealing with externalities
Negative externality:
Policies that support or create markets (traceable emission permits)
Quantity controls (emission standard)
(Pigouvian) taxes: increase the price to the social cost by a tax that equals the external cost (taxes
on flights)
Positive externality:
Subsidize goods (education, health, child care)
Provide goods or services (COVID vaccination)
OVERVIEW
Assumptions:
1) Individuals have perfect information
2) Individuals are rational and have perfect will-power
3) Markets are perfectly competitive
4) Markets are complete
5) There are no public goods, no externalities
When the conditions of the benchmark case are fulfilled, the market alone is efficient (First Welfare
Theorem). When the conditions of the benchmark case are not fulfilled, governments may step in
to regulate, finance, or provide goods and services
PUBLICY FUNDED SOCIAL SERVICES
Decommodification = the withdrawal of things (goods, services, labour) from the market, so that
they are not longer seen as a commodity —> concept created by Esping-Anderson
Example: create possibilities for individuals to stay out of poverty without having to sell labour
—> reduction of (labour) market dependency
Publicly provided education, health care are examples of decommodification
Public spending on education (% of GDP) + spending on tertiary education (% of GDP)
Bekijk grafieken!
Matthew effect: “For to everyone who has will more be given, and he will have abundance; but
from him who has not, even what he has was will be taken away” (Matthew 25:29)
- Spending on public services such as education goes more than proportionally to higher social
classes —> process of cumulative inequalities (founding father: Herman Deleeck)
Final reflection 1: government failure
Also governments can fail: political inference, bureaucratie, overstaffing, corruption, …
—> The efficiency gain from government intervention has to be weighted against the losses due to
government failures
Social insurance (lecture 3)
The magic of averages
,“In the main, these relief measures are supported by insurance contributions of the unemployed, of
the employers, and of the state. I have before described them as, in principle, the application of the
magic of averages to the rescue of millions” (Churchill 1932)
The benchmark case may be Pareto efficient, there also can be a lot of insecurity, uncertainty, risk
—> we introduce risk in our “model”
RISK AND UNCERTAINTY
State of nature: one possible way in which events relevant to risky decision can unfold
Probability (p): measure of the likelihood that a state of nature will occur
- Risk: the probability of events is known
- Uncertainty: the probability of events is not known
Pay-off: what do you get in each state of nature
Expected pay-off: weighted average of all the possible pay-offs
Good state Bad state
Probability 50% 50%
Pay-off 1000 100
Expected pay-off = 0.5 x 1000 + 0.5 x 100 = 550
Good state Bade state Certainty
Probability 50% 50% Probability 100%
Pay-off 1000 100 Pay-off 550
The certain expected pay-off is smaller —> only when you are sufficiently risk averse, you prefer
the certain situation above the uncertain
Loss: difference in pay-off between good and bad sate
Central question: how can we smooth pay-offs and reduce the loss —> transfer pay-off from good
state to bad state
REMEMBER FROM LECTURE 1
Three basic institutions:
- Family: informel, non-profit, private —> informel insurance
- Firms: formel, profit, private —> private insurance
- Government: formel, non-profit, public —> social insurance
Self insurance
Precautionary saving: save some money in the good state and use these savings in the bad state
Rule of Elizabeth Warren: needs 50%, wants 30%, saving 20%
% of people who are unable to face unexpected expenses —> bekijk grafiek!
INFORMAL INSURANCE
What if saving is not possible?
- (Reciprocal) cash transfers: I help you (when you are in the bas state and I am in the good state)
and vice versa
- Rotating Savings and Credit Association (ROSCA): members of the ROSCA pool their money
into a common fund that is withdrawn by a single membre each cycle —> popular in developing
countries or other contexts without banking (islamic law)
Self insurance / informel insurance
,Self insurance can only work well: when the probability of being in a bad state is small, the losses
in the bad state are small and when there is capital market (that allows saving and borrowing)
Informal insurance can only work well: when the probability of being in a bad state is small, the
losses in the bad state are small and there is no systemic risk
PRIVATE INSURANCE
= contract offered by a private company that reduces the loss (differences in pay-off between good
and bad state). What you get in the (private) insurance contract:
Benefit (B): the pay-off received from the insurance company in the bad state
- Full insurance: the promised benefit equals the loss
- Partial insurance: the promised benefit is less than the loss
Insurance premium (𝞹): amount of money the policyholder pays for the insurance policy
𝞹 = (1 + 𝜶) x p x B
𝜶 = “loading” that the insurance company adds to cover costs, …
p = probability
B = benefit
Bekijk berekeningen!
When does private insurance work?
1) Individual independent risks, not systemic risk: when there is a systemic risk (a common shock)
the private insurance company needs to pay all benefits at once (financial crisis)
2) Risk, not uncertainty: probabilities must be known, otherwise insurance company can not
compute the premium (no insurance for events far in the future)
3) Risk, not uncertainty: the probability of the bad state should be smaller than 1 —> imagine that
the bad state is certain (p = 1) —> 𝞹 = (1 + 𝜶) x p x B —> this premium would be as large (or
even larger) as the benefit.
Example: pre-existing conditions: you won’t find a health insurance when your sick. “Republicans
will totally protect people with Pre-Existing Conditions. Democrats will not! Vote Republican.”
Donald Trump
, 4) No adverse selection: there should be no asymmetric information about the probability of the
bad state. Imagine that there are high risk and low risk people —> private insurance company
may not known to which type customer belongs, and sets premium in between
—> Low risk people don’t want to pay that premium, which increases the chance that a customer is
a high risk person, the premium increases further and, in the end, there is no cover for low risks
(Asymmetric information means that one party has more information than the other)
5) No moral hazard: the probability of the bad state (p) should be exogenous (not manipulated by
costumer) —> when people are insured, they behave less carefully (p goes up) especially
when there is a low emotional cost (wear no seatbelt, have less healthy lifestyle, …) If the p
goes up, the premium has to go up as well.
Solutions: deductible (you pay first X€ yourself) and co-insurance (you pay X% yourself)
SOCIAL INSURANCE
= backbone of most developed welfare states (1/3 of government spending in Belgium)
Remember industrial revolution —> commodification and urbanization —> sociale insurance as
instrument to pool risks and smooth income streams.
Original focus on so-called old risks, related to the labour market:
- Unemployment
- Disability, injury
- Old age
Otto Von Bismarck introduced social insurance for risks in labour market (1900 Germany)
Lord Beveridge wrote the “Beveridge report” in 1942, Social insurance for all citizens:
- Premium through taxes
- Benefits do not depend on wage
Social insurance in the US: Roosevelt’s new deal:
Social insurance vs private insurance
similarities:
- eligibility: based on the payment of a premium
- benefits: are related to an event (an accident)
Main differences:
- Compulsory membership
- Level of premium
