Chapter 11 of 14

The Managed Herd: The Welfare State and Its Retreat

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The queue outside the Stationery Office

On 1 December 1942, in the middle of the Second World War, people in London queued outside His Majesty's Stationery Office to buy a government report. It was a long, dense document with an unpromising title: Social Insurance and Allied Services. Its author was William Beveridge, a sixty-three-year-old civil servant, economist and former director of the London School of Economics. Within weeks it had sold hundreds of thousands of copies, and a cheaper abridged version sold many more. Surveys found that the great majority of the British public had heard of it within a fortnight of its publication.

The Beveridge Report proposed that every citizen should be insured, from cradle to grave, against the main hazards of life: sickness, unemployment, old age, widowhood, injury at work. It identified five "giants" on the road to reconstruction after the war — Want, Disease, Ignorance, Squalor and Idleness — and set out a plan to attack the first of them, with the others to follow. Its tone was that of a man who knew he was writing at a turning point. "A revolutionary moment in the world's history," Beveridge wrote, "is a time for revolutions, not for patching."

Within six years, most of what he had proposed, and more, had become law. A Labour government elected in a landslide in 1945 introduced national insurance, family allowances, a vast programme of public housing, the nationalisation of coal, rail and electricity and, on 5 July 1948, a National Health Service that provided medical care to everyone, free at the point of use. Similar transformations took place, in different forms, across western Europe, Scandinavia, Australia, New Zealand and — more partially — North America.

The decades that followed produced the most dramatic reduction in inequality in the history of industrial societies. And then, from the late 1970s, it went into reverse. This chapter asks why the farm conceded so much, and how it took so much of it back.

The great compression

The economists Claudia Goldin and Robert Margo called it "the Great Compression". In the United States, according to the income statistics reconstructed by Thomas Piketty and Emmanuel Saez, the share of national income going to the richest one per cent of households had been around a fifth in the late 1920s. By the 1950s it had fallen to around a tenth, and it stayed close to that level until the late 1970s. The share of wealth held by the richest 0.1 per cent fell even further, from around a quarter in the late 1920s to well under a tenth by the late 1970s. In Britain, France, Sweden, Japan and much of the rest of the industrialised world, the pattern was similar, and often more pronounced.

The compression was built on several pillars. The first was taxation of the rich on a scale never seen before or since. The top rate of federal income tax in the United States reached 94 per cent in 1944 and remained at 91 per cent through most of the 1950s and at 70 per cent until 1981. In Britain, the top rate on earned income was 83 per cent in the late 1970s, and investment income could be taxed at up to 98 per cent. Estate and inheritance taxes made it much harder to pass great fortunes intact from one generation to the next.

The second pillar was organised labour. In the United States, the share of workers belonging to trade unions peaked at around a third in the mid-1950s. In Britain, union membership peaked at over thirteen million in 1979, more than half of all employees. In Scandinavia it was higher still. Unions bargained not only over wages but over pensions, health insurance, holidays and working conditions, and their strength set the standard for non-union workplaces too.

The third pillar was the welfare state itself: public pensions, unemployment insurance, health care, education and housing that did not depend on a person's ability to pay. The Danish sociologist Gøsta Esping-Andersen, in The Three Worlds of Welfare Capitalism (1990), gave this a precise name: decommodification. A welfare state decommodifies labour to the extent that it allows people to maintain a decent standard of living without having to sell their labour on the market — when they are ill, old, unemployed or caring for children. In the language of this book, the welfare state partly took down the fence that enclosure had built. It gave the landless worker something like the commons back: a resource, held in common, that made total dependence on a wage less total.

The fourth pillar was the restraint of finance. Under the Bretton Woods system described at the end of the last chapter, the movement of capital across borders was controlled, interest rates were held down, and banking was tightly regulated. In the United States, the Glass–Steagall Act of 1933 separated commercial from investment banking. Inflation in the 1970s eroded the real value of debts. For a generation, the rentier was not euthanised, as Keynes had hoped, but kept on a short leash.

The results were felt in daily life. According to calculations by the Economic Policy Institute, between 1948 and 1979 the productivity of the American economy — the output produced per hour of work — roughly doubled, and the hourly compensation of a typical worker rose almost as fast. Growth was shared. A factory worker could buy a house, a car and a holiday, send his children to college and retire on a pension. This was the era that many people in the rich world still think of as normal. In the long history of the farm, it was the least normal period of all.

What decommodification looked like

Statistics of income shares can make the compression sound abstract. For the people who lived through it, it was concrete.

In Britain, the National Health Service meant that for the first time in history, a working-class family could see a doctor, have a baby in hospital or get a pair of spectacles without worrying about the bill. In the first months of the service, demand for dentures and glasses was so great that the government was taken by surprise: millions of people had simply gone without. Public housing was built on an enormous scale. In 1953 Harold Macmillan, as the Conservative housing minister, met his party's target of building 300,000 new homes in a single year — a reminder that, for a generation, even the parties of the right accepted the post-war settlement.

In the United States, the Servicemen's Readjustment Act of 1944 — the GI Bill — paid for the education or vocational training of nearly eight million veterans of the Second World War, more than two million of them at colleges and universities, and guaranteed loans that helped millions to buy homes. Social Security, created in 1935 and expanded repeatedly in the following decades, transformed old age. In 1959, when the government began to measure poverty systematically, more than a third of Americans aged sixty-five and over were poor. After the expansion of Social Security benefits and the creation of Medicare, the public health insurance programme for the elderly, in 1965, the poverty rate among older Americans fell to around a tenth, where it has broadly remained.

These were not marginal changes. They altered the basic terms on which ordinary people lived. A worker who knew that illness would not bankrupt her, that old age would not mean destitution, and that her children could go to school and perhaps to university, was a worker with more room to refuse a bad job, to join a union, to complain. That was precisely what made the welfare state so valuable to those who depended on it — and, as we will see, what made some of those at the top so keen to reshape it.

Why did the farm concede?

Why did the owners of the farm accept this? They did not do so willingly. The historian Walter Scheidel, whose "Four Horsemen" we met in Chapter 1, argues that the compression was produced above all by the two world wars — and that it would not have happened without them.

Mass-mobilisation warfare levelled societies in several ways at once. It destroyed physical capital — factories, buildings, ships — which belonged mostly to the rich. It wiped out foreign investments, through expropriation and default. It brought inflation, which eroded the value of bonds and savings held by the wealthy. It required enormous tax revenues, which could only come from the rich and from a broader income tax. And it required the participation of the whole population — as soldiers, munitions workers and civilians enduring bombing and rationing — which gave ordinary people a powerful claim on the society for which they were being asked to fight and die. The welfare states of the 1940s were, in large part, the price paid by the elites of the warring nations for the cooperation of the 99%.

The second force was fear of revolution. The Russian Revolution of 1917 had shown that the farm could be seized and its owners destroyed. Throughout the period from 1917 to the 1980s, communist parties and movements, and the Soviet Union itself, presented a real alternative — however grim in practice — to Western capitalism. In 1943, during a debate in the House of Commons on the Beveridge Report, the young Conservative MP Quintin Hogg put the point bluntly: "If you do not give the people social reform, they are going to give you social revolution." Bismarck had reasoned the same way in the 1880s, as we saw in Chapter 9. So, in their way, had the Mesopotamian kings who cancelled debts.

The third force was the Great Depression, which discredited the old economic orthodoxy and the business elites associated with it. In the United States, Franklin Roosevelt's New Deal created social security, unemployment insurance, federal labour protections and the right to form unions. Roosevelt attacked the "economic royalists" who opposed him, and in a speech at Madison Square Garden in 1936 declared of the forces of organised money: "They are unanimous in their hate for me — and I welcome their hatred." Yet he also presented himself, accurately, as the man who saved American capitalism from itself.

And the fourth force was organisation. None of these concessions was simply handed down. Trade unions, labour and social democratic parties, and movements of the unemployed, veterans, tenants and farmers had built up their power over decades. When the wars and the Depression shook the farm, they were ready to take advantage. As Robert Brenner's argument about the late Middle Ages suggested in Chapter 5, a shock helps the herd only where the herd is organised.

The managed herd

There is another way of looking at the welfare state, and it is less flattering to all sides.

From the point of view of the farm's owners, a healthy, educated, adequately housed workforce was more productive than a sick, illiterate and desperate one. Consumers with secure incomes bought the cars, refrigerators and televisions that the new mass-production industries made; Henry Ford had raised his workers' pay to five dollars a day in 1914 partly to reduce turnover and partly, so the story went, so that they could afford his cars. Workers with pensions, mortgages and a stake in the system were less likely to listen to revolutionaries. In this sense, the welfare state was not only a breakout. It was also better animal husbandry.

The most famous example of the bargain was the "Treaty of Detroit". In 1950 General Motors and the United Auto Workers signed a five-year contract that gave GM's workers regular wage increases, automatic cost-of-living adjustments, pensions and health insurance — in return for labour peace and the union's acceptance of management's right to run the business. Fortune magazine commented that GM might have paid a billion for peace, but it got a bargain. Three years earlier, Congress had passed the Taft–Hartley Act over President Truman's veto, which restricted many union tactics, allowed states to pass "right-to-work" laws and required union officials to swear that they were not communists. The herd was to be well fed, but kept within the fence.

The compression also had its own fences inside it. The Social Security Act of 1935 and the National Labor Relations Act initially excluded agricultural and domestic workers — categories that, in the American South, consisted disproportionately of Black workers. The political scientist Ira Katznelson, in When Affirmative Action Was White (2005), argued that Southern Democrats in Congress shaped these exclusions deliberately; other scholars have argued that administrative difficulties played a larger part. The GI Bill, which sent millions of veterans to college and helped them buy homes after the Second World War, was administered locally in ways that often excluded Black veterans, and, as we saw in Chapter 10, federal mortgage insurance was largely denied to Black neighbourhoods. The welfare states of Europe were built on a model of the male breadwinner that left many women dependent on their husbands' entitlements. And several of the countries building generous welfare states at home were simultaneously fighting brutal wars to keep their colonies, from Kenya to Algeria to Indochina.

The great compression was real. But it was a compression within a fence that still ran along lines of race, sex and nation.

The line the farm would not cross

The clearest indication of where the owners drew their line came, appropriately, from the country that had gone furthest.

By the 1970s Sweden had one of the most egalitarian societies in the world, with powerful unions, high taxes and comprehensive welfare. But ownership of Swedish industry remained highly concentrated in a few great family holdings. In 1976 the union economist Rudolf Meidner proposed a plan to change that. Under the Meidner plan, large companies would be required each year to issue new shares, equivalent to a portion of their profits, to "wage-earner funds" controlled by the unions. Over a period of decades, the funds would gradually acquire a large share of the ownership of Swedish industry. It would, in effect, have transferred the ownership of the farm, slowly and peacefully, to the people who worked it.

The response of Swedish business was ferocious. Employers' organisations launched a massive campaign against the plan, funding think tanks and publications and, on 4 October 1983, organising a demonstration in Stockholm that drew some seventy-five thousand people — one of the largest in Swedish history, and one of very few anywhere in the world to be organised by employers. The Social Democratic government introduced a much diluted version of the funds in 1984. A conservative government abolished them in 1991–92.

Wages, pensions and health care, the owners would negotiate. Ownership itself they would not.

The counter-story

Meanwhile, a new story was being prepared.

In 1944, the Austrian economist Friedrich Hayek published The Road to Serfdom, arguing that economic planning and the expansion of the state, however well intentioned, led inevitably towards totalitarianism. In April 1947 Hayek convened a meeting of economists, philosophers and journalists at the Swiss resort of Mont Pèlerin to defend and renew the principles of the free market against the rising tide of planning and welfare. The Mont Pelerin Society, which included the young Chicago economist Milton Friedman, became the seed of a long intellectual project. For decades its ideas were marginal. Its members were patient.

In 1943, the Polish economist Michał Kalecki had published a short essay, "Political Aspects of Full Employment", that predicted with uncanny accuracy what would happen if governments kept unemployment permanently low. Business leaders, he argued, would come to oppose full employment, even though it raised profits, because under full employment "the sack" would cease to play its role as a disciplinary measure. Workers would become self-assured and insubordinate; strikes for higher wages and better conditions would multiply. Discipline in the factories and political stability, Kalecki wrote, are more appreciated by business leaders than profits. A political business cycle would follow, in which governments would periodically allow unemployment to rise to restore discipline.

By the late 1970s, many in business and politics had come to see the post-war settlement in just those terms. The 1970s were a decade of genuine economic crisis: the collapse of the Bretton Woods system, the oil price shocks of 1973 and 1979, "stagflation" — high inflation combined with high unemployment — and falling profit rates. Strikes were frequent and sometimes very large. To many on the right, the welfare state and the power of the unions were not the solution to the crisis but its cause.

In August 1971, the corporate lawyer Lewis Powell, two months before he was nominated to the Supreme Court, wrote a confidential memorandum to the United States Chamber of Commerce titled "Attack on American Free Enterprise System". Powell argued that American business was under assault from the universities, the media, the courts and the politicians, and that it had been too passive in defending itself. He called on business to organise: to fund scholars, think tanks and publications, to monitor textbooks and television, to take cases to the courts and to exert political power with determination. Whether or not his memo was the direct cause, the decade that followed saw exactly that mobilisation: the founding of the Business Roundtable in 1972 and the Heritage Foundation in 1973, the rapid growth of corporate lobbying in Washington and of business-funded political action committees. The political scientists Jacob Hacker and Paul Pierson, in Winner-Take-All Politics (2010), traced how this organised political power reshaped American economic policy over the following three decades.

None of this was a conspiracy. It was done openly, in published memos, public think tanks and registered lobbying. It was, in Adam Smith's sense, the people of the same trade meeting together — and this time, the conversation ended in a political programme.

The reversal

The programme was implemented from 1979 onwards. Paul Volcker's interest-rate shock, described in Chapter 10, broke inflation and, with it, much of the bargaining power of labour. In Britain, Margaret Thatcher's Conservative government, elected in May 1979, cut the top rate of income tax from 83 to 60 per cent in its first budget and later to 40 per cent, abolished exchange controls, privatised nationalised industries and council housing, and passed a series of laws restricting trade union activity. In the year-long miners' strike of 1984–85, the government defeated the most powerful union in the country. In the United States, Ronald Reagan, inaugurated in 1981, cut the top rate of income tax from 70 per cent to 50 and later to 28. In August 1981, when some thirteen thousand members of the air traffic controllers' union, PATCO, went on strike, Reagan fired more than eleven thousand of them and banned them from federal employment. Private employers took note.

The new governments presented their policies as economic necessity: "There is no alternative," as Thatcher put it. Some of those involved were later franker. In 1992, Alan Budd, who had been one of the government's chief economic advisers, suggested in a television interview that some in the government in the early 1980s may never have believed in the economic theory they were officially following, but saw that raising unemployment was a very good way of reducing the strength of the working classes. Budd made clear that this was his speculation about the motives of others. It is what Kalecki had predicted forty years before.

Over the following decades, the reversal spread. Financial markets were deregulated: London's "Big Bang" of 1986 and the effective repeal of Glass–Steagall in the United States in 1999 among them. Trade and capital flows were liberalised. Public assets were privatised across the world. And the parties of the centre-left, which had built the welfare states, adopted much of the new story. In 1996 Bill Clinton declared that "the era of big government is over" and signed a law that, in his words, would "end welfare as we know it". In 1998, Peter Mandelson, one of the architects of Britain's New Labour, said that the party was "intensely relaxed about people getting filthy rich", as long as they paid their taxes.

The fence moves to the border

The reversal had another engine, which no single government controlled: globalisation.

From the 1980s onwards, the removal of controls on capital, the falling cost of shipping and communications, and the entry into the world economy of hundreds of millions of workers from China, India and the former Soviet bloc transformed the bargaining position of labour in the rich countries. Capital could now move almost anywhere in search of cheaper labour, lower taxes and laxer regulation. Workers, for the most part, could not. When the owners of a factory in Ohio or the English Midlands could credibly threaten to move production to Mexico or Guangdong, the unions' power to bargain shrank — whether or not the factory actually moved.

Some of it did. After China joined the World Trade Organization in 2001, imports of Chinese manufactured goods into the United States surged. The economists David Autor, David Dorn and Gordon Hanson, and their colleagues, estimated that this "China shock" accounted for the loss of around a million American manufacturing jobs between 1999 and 2011, and of perhaps two million jobs in all, concentrated in particular towns and regions that never recovered. Similar effects were felt across the industrial heartlands of Europe.

Governments also competed for mobile capital by cutting taxes on it. According to the OECD, the average statutory rate of corporate income tax across its member countries fell from around a third in 2000 to under a quarter two decades later, and a large share of multinational profits came to be booked in low-tax jurisdictions.

It is important to see the whole picture. Globalisation also helped to lift hundreds of millions of people, above all in China and the rest of East Asia, out of extreme poverty. The economist Branko Milanovic, whose work on pre-industrial "extraction ratios" we met in Chapter 1, and his colleague Christoph Lakner charted how global incomes changed between 1988 and 2008. Their famous "elephant curve" showed large gains for the emerging middle classes of Asia, and very large gains for the global top one per cent — but stagnation for the working and lower-middle classes of the rich countries. Those were precisely the people who had been the main beneficiaries of the great compression.

In the language of this book, globalisation moved the fence. In Chapter 1 I noted that a person's country of birth is the most important single fact determining what they will earn. In the age of globalisation, borders became one of the farm's most effective instruments: open to money and goods, closed to most people. Capital could graze anywhere. The herd stayed where it was born.

The results

The results show up in every series of statistics on the distribution of income and wealth.

In the United States, the share of pre-tax national income received by the richest one per cent roughly doubled between the late 1970s and the 2010s, returning to around a fifth — close to the levels of the 1920s. The share of wealth held by the richest 0.1 per cent rose, on Saez and Zucman's estimates, from around seven per cent in the late 1970s to around a fifth by the 2010s. In Britain, the share of income going to the top one per cent more than doubled from its low point in the late 1970s. The pattern was repeated, to varying degrees, across most of the rich world, with the English-speaking countries leading the way and continental Europe and Scandinavia following more cautiously.

The link between productivity and pay was broken. According to the Economic Policy Institute, between 1979 and 2019 the net productivity of the American economy grew by around 60 per cent, while the hourly compensation of a typical worker grew by around 16 per cent. Other economists, using different measures of pay and prices, find a smaller gap, and the size of the divergence is disputed. But nearly all agree that a growing share of the gains from growth went to the top. Pay for chief executives, meanwhile, soared. EPI calculates that the chief executives of the largest American firms were paid about 21 times as much as a typical worker in 1965, and about 290 times as much in 2023.

Trade union membership collapsed. In the United States, the share of workers in unions fell to around ten per cent, and in the private sector to around six. In Britain, membership fell from over thirteen million in 1979 to around six million. The bargaining power that had underpinned the compression was gone.

And the welfare state itself was reshaped. It was not abolished: in most rich countries, public spending on pensions and health care remained high, because the programmes were popular and the population was ageing. But benefits for the unemployed and the poor were cut, made conditional and increasingly surrounded by tests, sanctions and stigma. In the United Kingdom after 2010, a long programme of austerity cut welfare spending deeply; the United Nations Special Rapporteur on extreme poverty, Philip Alston, reported in 2018 that the cuts had inflicted great misery on ordinary people. The managed herd was being managed more tightly.

The story: there is no alternative

The story that accompanied the reversal had several strands. The market was efficient and the state was not. Taxes on the rich discouraged the enterprise on which everyone's prosperity depended; cut them, and the benefits would "trickle down". Unions were selfish monopolies that protected insiders at the expense of everyone else. Globalisation was an irresistible force of nature to which every country must adapt. Welfare created dependency and destroyed initiative. And there was no alternative.

Thatcher gave the story its most quoted line in an interview with Woman's Own in 1987. "There is no such thing as society," she said. "There are individual men and women and there are families." Her full remarks were more nuanced than the famous phrase suggests; she went on to speak of people's obligations to their neighbours. But the phrase captured something essential about the new story. Collective provision was suspect; individual responsibility was everything. If you were poor, unemployed or in debt, the question was what you had done wrong.

In 1958, the British sociologist Michael Young had published a satirical novel, The Rise of the Meritocracy, set in a future Britain where social position was determined entirely by measured intelligence and effort. Young intended it as a warning: a society that sorted people by "merit" would produce a new elite convinced that it deserved its position, and a lower class stripped of any grounds for complaint. By the 1990s, the word he had coined had been adopted as an ideal by the very politicians he was warning against. In 2001, shortly before his death, Young wrote a newspaper article titled "Down with meritocracy", protesting that the leader of his own party, Tony Blair, was using it as a goal rather than a warning.

Breakouts in the retreat

The retreat did not go uncontested. In Britain in 1990, mass non-payment and a riot in London against the "poll tax" — a flat local tax on every adult, reminiscent of the tax that had sparked the rising of 1381 — helped to bring down Margaret Thatcher. In 1999, tens of thousands of trade unionists, environmentalists and others shut down the opening of the World Trade Organization's ministerial meeting in Seattle. In 2011, the Occupy movement, whose slogan "We are the 99%" gave this book its numbers, spread from New York to hundreds of cities. In November 2012, about two hundred fast-food workers in New York walked off the job to demand fifteen dollars an hour and the right to form a union; a decade later, the "Fight for $15" had helped to raise the minimum wage in many American states and cities, raising pay for millions of workers. Since 2018, waves of teachers' strikes, and in 2023 a successful strike by the United Auto Workers against all three major American car makers, suggested that the tide of union decline might be turning.

These were genuine victories. None of them reversed the great reversal. The conditions that had produced the compression — total war, the threat of revolution, a discredited elite and a highly organised working class — had passed. The question that Chapter 14 will ask is whether anything short of those catastrophes can shift the ratio again.

What the managed herd teaches

The fence of the post-war era was loosened: full employment, social insurance and public services gave working people an alternative to total dependence on the market — what Esping-Andersen called decommodification. From the late 1970s, it was tightened again by unemployment, weakened unions, conditional welfare and debt.

The feed shifted with it. During the compression, the gains from growing productivity were broadly shared; after 1979, a rising share flowed to profits, top salaries and the owners of capital.

The shepherds of the compression were the civil servants, economists and union leaders who managed the post-war settlement. The shepherds of the reversal were a new class of economists, think-tank scholars, central bankers and financial managers, many of them trained in the ideas of the Mont Pelerin Society.

The story changed from "we are all in this together" to "there is no alternative" — and, as Michael Young had feared, to the idea that those at the top had earned their place by merit.

The breakouts of the compression were the most successful in this book: they changed the ratio itself. But they depended on catastrophic circumstances, and when those passed, the farm proved able to recover much of what it had lost.

Bridge: the rise of the meritocracy

Michael Young's warning brings us to the subject of the next chapter. In every era of the farm, the most effective fence has been the one people build in their own heads. In the modern world, the most powerful version of that fence is not divine right or the natural slave, but the conviction — taught in schools and universities, broadcast by the media and absorbed by the winners and losers alike — that the rewards of society go to those who deserve them. In the next chapter we examine the invisible fence: media, education and the story of merit.