The rise and fall of community welfare

[Cross-posted at my personal blog http://johnhumphreys.com.au]

In the long and complicated debate about welfare systems, there is one element that I think is of particular interest and yet is under-appreciated and unknown to many people: community welfare societies.

By “community welfare” I do not mean private charity, or help from friends, or even social business. All of those are important and positive elements of civil society, but when talking of “community welfare” I mean the coming together of people into mutual societies where everybody contributes and everybody benefits. In effect, I mean a collection of non-government societies that work very much like a mini welfare state.

The first thing that needs to be remembered is that the government did not invent the welfare system. In the early 20th century it is true that there was no government welfare system. But there was a large and growing community welfare system that was relatively effective and efficient, and offered health care, sickness and disability benefits, an aged pension, a widow’s pension, and other forms of help. The government didn’t invent welfare, they nationalised it.

Unfortunately, the history of community welfare is unknown to many. The longest story and best data comes from England, where community welfare was mostly run through groups known as “friendly societies”. The first friendly societies started forming about 500 years ago (in the 16th century) as friends, neighbours and workmates going to the pub after work and putting away a bit of extra money into a group kitty. That money was then used if one of them (or a family member) fell ill or needed special help.

Over the following centuries friendly societies slowly grew, but it was in the 19th century that they became mainstream. By 1800 there were already over 7000 small societies which covered about 20% of the population, but over that century friendly societies grew in sophistication, services offered, and coverage of society. They began to join together into federations so that they could help people as they moved and so they could pool risk; they used actuaries to better calculate their financial position; they started investing and getting re-insurance; and they offered more products, including an aged pension and widows pension.

Significantly, friendly societies became increasingly popular so that by the end of the 19th century they covered about 50% of society, and by 1910 that coverage had expanded to 55% of English society. If the rate of growth had continued (and there is no reason to think otherwise) then community welfare would have expanded to near-universal coverage by the mid-late 20th century.

This is an amazing situation to consider: that we could have had a nearly universal welfare system now without government involvement.

Instead, the government decided to nationalise the welfare system. Around the beginning of the 20th century the western world slowly started shifting towards a government welfare system including greater government control of the health system and the introduction of government pensions. The friendly societies predicted that if the government took over their responsibilities, then people would no longer join the friendly societies – and they were right.

There are two things to specifically note about this story. First, the greatest era of community welfare was the same as the greatest era of free-market capitalism in the west. Far from being substitutes, free markets and voluntary community are compliments that work well together. It was government, not the market, that destroyed community welfare. Second, the government did not step in because nothing was being done, but they noticeably only stepped in once a majority of people had already voluntary chosen to join a community welfare society. Once again, the government didn’t lead society with a new and much-needed innovation; they followed society and only took over once community welfare was already popular and successful.

Since the beginning of the 20th century, government welfare has steadily expanded into new areas and continue to grow more expensive. By the mid-late 20th century, the government welfare system was almost universal. Government welfare now costs over $250 billion (about 23% of GDP), and friendly societies have all but disappeared.

One potential response to this change might be to insist that it doesn’t matter. So long as there is a welfare system, perhaps it doesn’t matter whether it is run by the community or run by the government. However, there are several reasons for believing that a community-based system may be better.

• One important element of community welfare that has not translated into government welfare is the social aspect. Friendly societies often put a high premium on friendship and social inclusion. When people joined the “Order of Foresters” friendly society they were told that the purpose was not just to help each other when times were tough, but also to come together in friendship and enjoy an active social life. When people were sick the friendly societies offered medical care and sick pay (much like the government welfare system) and they also arranged for another member of the society to regularly visit their sick friend. In these ways, community welfare enhanced social inclusion and social cohesion (what would now be called “social capital”), while the government welfare system seems to lead to social isolation.
• Community welfare groups also encouraged personal development among its members. Specifically, they taught the virtues of independence, compassion, tolerance, and responsible behaviour. This could be contrasted to the government welfare system which can lead to dependency (which can be inter-generational), a hand-out mentality, and sometimes can lead to anti-social behaviour. These differences may explain why community welfare fostered self-respect while government welfare can undermine a persons self-worth.
• Community welfare builds on our morality, teaching that we come together both to get help when we need it and also to help others when they need it. People volunteered their time because of their intrinsic motivation and because it was “the right thing to do”. In contrast, the government welfare system relies primarily on “mandated morality” and cash motivations, denying people a chance to develop their own moral compass.
• In the community system there were a range of different friendly societies offering slightly different services. This diversity allowed people to pick the system that was the best for their personal situation. This also allowed friendly societies to cater their solutions to the specific needs of their members, instead of using a centralised one-size-fits-all approach.
• The government welfare system suffers all the failings that are expected from a typical government monopoly, including excessive bureaucracy, lack of a “customer-focus”, an inability to innovate and cater to new or difficult circumstances, and a lack of an incentive to be efficient or effective. In contrast, community welfare societies had an incentive to constantly search for more effective solutions, quickly learn from other societies and from the mistakes of the past, quickly abandon bad approaches, careful guard against fraud or waste, and put a premium on fixing the underlying cause of a problem.
• In addition to all of the above social reasons, the government welfare system is also very costly to the broader economy. The actual tax & spending of $250 billion is not a loss to the economy, as it still goes to somebody who will use it for something. But the real cost of tax comes from the distortions it introduces to the economy by creating the wrong incentives. If the government wasn’t running welfare, the government would be able to abolish income tax, company tax and the GST, which would significantly improve the efficiency of the economy. Using a rough estimate of about 7% larger economy without that tax, that translates to an average wage increase of about $5000 per year, and an extra 200,000 jobs. Given that unemployment is the main driver of poverty (and social disadvantage), it may be that our government welfare system is creating as much poverty as it is addressing.
• In addition to the short term economic cost, the government welfare system may well be unsustainable in the long-run. Based on the Inter-Generational Report, current spending trends will require the government to grow by 5% of GDP in the next 40 years. Based on these trends, without drastic spending cuts or tax increases, the Australian government will be bankrupt in about 50-60 years.

It is easy to see why the government wanted to get involved in the welfare system. The community welfare societies were becoming increasingly popular and providing some important services. The great benefit of the government system is that they were able to mobilise more funds because they could simply raise money through tax. However, it is not clear that this advantage has been worth the many costs and it may be that the community welfare system would have achieved generally better results without the heavy price tag.

The welfare debate is sometimes wrongly framed as “for” or “against” welfare. But the real debate is not about whether to have a welfare system, but what sort of welfare system works best. The story of community welfare is a positive story of how people can come together to solve the social issues of their day, but it is also a sad story of how these voluntary groups can be crowded out and destroyed by a less effective government system. While the economic costs of government welfare are the most obvious, it may well be that the social consequences (dependence, loss of self-esteem, anti-social behaviour, outsourcing of morality, social isolation, loss of personalised solutions) are more important and provide a more powerful argument for reform.