Are economic differentiation just and welfare state sustainability compatible?

While differentiation is inevitable in the development of economies and societies, the sustainability of welfare states requires that welfare systems be designed so that they do not undermine economic dynamism. A “help those who help themselves” approach to welfare financing and spending is necessary, and moral hazard must be avoided.

 

While concentration or concentration of economic resources and activities is a natural part of the development of economies and societies, it is likely to result in imbalances. For example, the more developed an economy and society becomes, the more resources can be concentrated in the hands of the hardest working economic agents, which can lead to a more unequal distribution of wealth. However, Henry Sidgwick believed that such a distribution based on economic differentiation, i.e., rewarding people according to their performance, is just.
So, does this mean that we shouldn’t care about those who are left behind in the differentiation paradigm, the so-called “less fortunate”? The answer is not only “no,” but we shouldn’t. Adam Smith’s “compassion and benevolence” and John Rawls’ “care for those members of the community who are most in need” are moral imperatives that are essential for the survival of the social community. As such, it is unthinkable to imagine a state without welfare policies.
The degree of government intervention in the welfare of its citizens has varied with time and circumstance. Emerging as an antithesis to the wartime state in Nazi Germany, the welfare state was solidified by the Beveridge Report in 1942 as the concept of the state taking responsibility for the welfare of individuals from “cradle to grave.” In other words, the welfare state is a form of state intervention aimed at ensuring a minimum income for the general population, providing a social safety net, and ensuring the best possible social services. After World War II, industrialized countries suffered from welfare sickness due to excessive welfare spending during the confrontation with socialist countries, and as a result, the concept of the welfare state has declined significantly in recent years. However, Nordic countries with high national incomes still maintain high levels of welfare. In the end, it can be said that the degree of welfare depends on the economic strength of a country.
We should now be concerned not with the level of welfare, but with what kind of welfare system is sustainable, and perhaps the answer can be found in Henry Sidgwick’s economic differentiation mentioned earlier. Even if we start with a strong economy and move towards a welfare state, if welfare is implemented in a way that denies the basic principle of differentiation that drives progress, it is possible that the economy itself will stagnate, undermining the sustainability of the welfare state. This possibility can manifest itself in two ways.
First, if welfare is financed through excessive taxation of those who work to support themselves, the principle of differentiation is undermined and the dynamism of economic and social development is weakened. Second, if welfare spending is based on supporting those who are “in the shadows,” moral hazard can occur. If a healthy labor force is supported just because they are in the shadows, not only will they be more likely to stay in the shadows, but it will also cause another form of moral hazard, whereby those who are relatively well off will fall into the shadows.
Therefore, in order to maintain the dynamism of the economy and still function as a welfare state, the following approach is very useful: the way welfare is financed should not be so high as to reverse discriminate against those who are trying to help themselves, and the fundamental purpose of the welfare system should be to move people from the negative to the positive. In other words, welfare spending should be directed more towards those who are trying to become “helpers of themselves” so that they can be put on a path of self-help.