June 2011)
The Welfare State in the Making
─ Beveridge and Keynes ─
Toshiaki Hirai （Sophia University, Tokyo)
The social system of the postwar UK is often referred to as ‘Keynes=Beveridge System’1 after Keynes, who brought on the ‘Keynesian Revolution’ in the field of economic theory and policy with his General Theory, and Beveridge, who laid the foundations of the social security system with the Beveridge Report. As will be seen, Keynes and Beveridge endeavored in close collaboration to see their ideals implemented in the 1940s2, earning the whole-hearted support of young economists and officials.
In this paper we will examine the Beveridge Report in the making and thereafter, paying special attention to how Keynes and others contributed to the completion and realization of the Beveridge Plan.
The paper runs as follows. Firstly, we briefly examine how Keynes evaluated the market society. The direction in which anyone might hope to see the market society transformed (if at all) will depend upon his/her social philosophy. Secondly, we take a look at a number of social security acts passed in the inter-war period that paved the way, after which, thirdly, we consider the Beveridge Report in the making. Finally, we come to the Beveridge Report (December 1942), and the [White Paper] on Social Security (September 1944) — a modified version of the Beveridge Report.
1. Social Philosophy
A. Keynes’s New Liberalism
Keynes’s view of the market society3 is referred to as the ‘New Liberalism’. This is a social philosophy which maintains that the state can and must play a positive role in market economy performance, in antithesis to (classical) liberalism, which insists on laissez-faire, attributing poverty to individuals’ responsibility.
It should be noted that the New Liberalism had not been advocated or entertained by Keynes alone: — indeed, it was prevalent among views of the market economy, although Keynes was a leader of this current of thought in the inter-war Britain, as can be seen by his activities in the ‘Liberal Summer School’.
Confining our attention to the main economists in Cambridge, we can definitely state that all of them lined up on the side of the New Liberalism (Keynes, Robertson, and Henderson), or at any rate quite close to it (Hawtrey and Pigou), as far as social philosophy is concerned.4
It is widely known a heated controversy arose over economic theory between Keynes and his fellow-economists, and in particular Pigou, who came under fire as representative of the ‘classical school’ in the General Theory, Robertson, who increasingly showed theoretical antagonism towards Keynes after the Treatise, Hawtrey, famous for the ‘Treasury View’ which Keynes attacked, Henderson, who crossed swords with Keynes over the employment policy in the 1940s, and so forth.
Theoretically speaking, these differences between the scholars concerned are clearly recognizable, although we should stress at the same time how greatly Keynes was influenced by, among others, Robertson and Hawtrey in the course of theoretical development from A Tract on Monetary Reform, through the Treatise, to the General Theory.5
The ‘Keynesian Revolution’ left the theories of Keynes’s contemporaries quite in the shade, and their social philosophies have remained in virtual oblivion to this day.
The Keynesian Revolution opened the right path to the development of macroeconomics, but it also caused two misunderstandings. One is that Keynes’s contemporaries’ theories were regarded as pertaining to classical economics, although in actual fact some of them such as Robertson and Hawtrey, did pioneer a new way to macroeconomics. In this respect, in extending our investigation beyond the Cambridge School we need to ascertain just how much Wicksell’s theory of cumulative process influenced Keynes and his contemporaries, including Mises, Hayek, Lindahl, Myrdal and others.6 The second misconception is that the social philosophies of Keynes’s contemporaries were considered to be in contradiction to Keynes’s. This is far from the truth. As far as theories of Keynes’s contemporaries are concerned, several, if not many, studies have been continuously made. Social philosophies of Keynes’s contemporaries have, however, been completely neglected, so it is hardly surprising if it is widely but mistakenly believe that Keynes’s fellow-economists held to the laissez-faire philosophy.
As for Keynes7, he was critical of the view that the market society should be left to the market itself (Laissez-Faire), although he appreciated the efficiency afforded by the market society. He welcomed the growth of semi-autonomous organizations ─ those occupying a position between individuals and the state ─ within the market society, and allowing for state intervention, if necessary, to an extent that does not sacrifice the freedom of individuals. His stance was a halfway house between ‘a complete laissez-faire system’ and ‘a socialist system run by the direction of the state’.
It should be noted that as compared with his position in the 1920s, the 1930-40s saw Keynes showing more sympathy with the ethical aspect of the market society, stressing the importance of social security and social justice. Above all, Keynes was an economist who contributed to the theoretical analysis of unemployment, and pursued an economic policy designed to alleviate the problem.
B. Beveridge’s Changed Stance
As for Beveridge, his stance changed several times throughout his life. In the 1900-1910s he was greatly involved with the problem of poverty and unemployment, empirically analyzing it, and greatly contributed, as will be seen below, to several social insurance laws. At that time he considered the government as composed of ‘an impartial, benevolent, educated élite’.
But in the 1920s he put less and less confidence on the ‘government-inspired social reforms. Harris (1977) summed up Beveridge’s stance as follows:
“As his faith in the processes of government waned, he turned more and more to … economics … as the tool that would solve the problems of society, and for a time in the late 1920s and early 1930s a belief in the laws of the ‘free market’ seems to have at least partially displaced his earlier belief in a benevolent administrative state. This faith in free market economics was in turn shattered by certain historical events of the 1930s, and Beveridge went through a period of prolonged political uncertainty --- during which he once again began to think in terms of central government planning for comprehensive social reform” (pp.311-312).
It should be noted, therefore, that Beveridge lost his interest in social welfare, so the development of social reform which has been made in the 1920s had nothing to do with Beveridge. This is of crucial importance. What he tried to master was economics advocated by Robbins who was greatly influenced by Hayek. Although it is Austrian economics based on free market mechanism, it is difficult to regard it as orthodox economics, for it was the most sophisticated economics based on Austrian theory of roundabout production together with Wicksellian theory of cumulative process.
It was Beveridge as a believer in free market system who vehemently opposed Keynes’s advocate for protectionism in 1932.
The catastrophic events which attacked the capitalist economy in the 1930s shattered Beveridge’s belief in free market system. “Beveridge’s vacillation between rival systems persisted for several years.” He was greatly influenced by the Webbs who insisted the superiority of the Soviet Russia over the capitalistic systems, though he disliked its political system. “By 1935 Beveridge had clearly moved a long way from the rather extreme free market position that he had adopted some years before. Moreover, in purely economic terms he seemed more inclined to favour a socialist model of planning than the mixture of state control and free enterprise prescribed by Roosevelt and Keynes” (p.328).
The publication both of Soviet Communism and of the General Theory intensified Beveridge’s sense of estrangement from current economic and political thought. Politically he sympathized with the Keynesian liberals, but found their economic policies not merely objectionable but virtually incomprehensible. … Conversely, he was impressed by the economic policies favoured by the Webbs, but found their politics totally unacceptable (331-332).
In 1937 Beveridge left LSE, and went to Oxford in “a mood of almost total pessimism about the possibility and even the desirability of radical social reform” (p.332).
Beveridge was unexpectedly able to enjoy a happy life at Oxford. As the war was approaching, however, his activities were greatly to change.
“Beveridge’s transformation from critic of welfare capitalism in the mid-1930s to its most archetypal exponent in the early 1940s must be directly related to the context of war” (p.365).
“From the start of the war Beveridge hoped that he himself would be recalled to Whitehall to take part in wartime government; and, in particular, he hoped that he might be placed in charge of either distribution of manpower or economic planning. For a long time, however, his hopes were doomed to disappointment. During the early months of war he bombarded government departments with offers of assistance, but all these offers were politely but firmly rejected” (pp.366-367).
“In July 1940 Ernest Bevin asked him to carry out a brief survey of the government’s wartime manpower requirements, and two months later Beveridge was appointed chairman of the Manpower Requirements committee of the Production Council. Neither of these posts was particularly important and neither of them carried executive responsibility, but they gave Beveridge a foothold in his chosen area of policy” (p.370).
Due to personal conflicts with Bevin, however, Beveridge was driven out of the Ministry of Labour, and was forced to accept to be “chairman to an interdepartmental inquiry that was about to be set up on co-ordination of social insurance” (p.376)
This was a devastating thing for Beveridge.
“He gradually became convinced that an inquiry into the social insurance system was potentially far more significant thatn it had seemed at first sight” (p.377).
For several months, he was still concerned with a plan of allocating manpower in the Army. “He put forward a system of ‘general enlistment’ by which men would enter the Army and then be allotted to regiments that had a special need for their skills” (p.377).
This plan met harsh criticism of the public and was finally dropped. “It was not until this stage --- May 1942--- that Beveridge turned his undivided attention to the problems of social insurance --- and, indirectly, to the much wider question of post-war social reform” (p.377).
Looking at Beveridge’s changed stance, it is very difficult to identify his social philosophy. But it is true that he, who started his carrier as social reformer, and was converted to be free market believer, again came to appear as a planner of the whole society. It is also true that he, who aspired to become planner of allocating manpower in the Central Government in the war economy, was forced to accept the post which he did not want. It is absolutely true, then, that he was to put the whole energy on drawing out the social insurance system in the committee he was to work as chairman far beyond the authorities permitted to the committee.
Beveridge’s social philosophy around this period is clearly expressed in “Reconstruction Problems: Five Giants on the Road” (June 1942), which will be explained later as an important manuscript leading up to the Beveridge Report.
Thus Keynes and Beveridge came to share a keen awareness of the issues, responding to the needs of the times and society. Working in close collaboration, they were to make a great contribution to the shaping of post-war society.8
Having said as much, we must also recognize a difference in the 1940s (it should be noted that Beveridge had been a free market believer in the 1920s and early 1930s) between the two in their degree of confidence in the market economy. This is clear from the difference in their stances on [the White Paper on] Employment Policy (1944), although both held it highly: Keynes thought it somewhat a pity that the role which private firms should play was not emphasized, while Beveridge complained that trust in the market economy was placed too much in relation to the conquest of ‘Filthiness’ and ‘Idleness’.9
2. Social Security Acts in the Inter-War Period
The Beveridge Report as well as [the White Paper on] Employment Policy (1944) played an epoch-making role in constructing the welfare state system (or the Keynes=Beveridge system) in the post-war UK. The essence of the Beveridge Report lies in unifying and systematizing social security acts which had been implemented step by step as from the beginning of the 20th century. Thus we need to look back to how the social security system evolved in the inter-war period.10
Prior to the first world war, ‘the Old Pension Act’ (1908) and ‘the National Insurance Act’ (1911, comprising health insurance and unemployment insurance) were brought into effect. Beveridge, the first director of the Labour Exchange (1909-1916), drafted the unemployment insurance system. Under ‘the Unemployment Insurance Act’ implemented in 1920, the number of insured persons increased from 3.75 to 11.10 million. The conditions rendering eligible for benefits were as follows:
(i) contributions for, at least, twelve weeks.
(ii) one week’s benefits against six weeks’ contributions.
(iii) fifteen weeks’ benefits, at most, in a year.
Beveridge also played an essential role in the constitution of this act. In February 1918, as chairperson of the sub-committee of war-time civil workers, the Ministry of Reconstruction, he recommended generalization of unemployment insurance, while in 1919, as a member of a Ministry of Labor committee, he collaborated on a plan to generalize unemployment insurance.
The above conditions for benefits were not, in fact, fully implemented due to a rapid increase in the number of unemployed persons as a result of deterioration in the British economy from 1921 on, but were either were either waived or mitigated up to 1931. A large amount of public financial aid to the unemployed was given in the form of ‘prolonged’ unemployment benefits throughout the 1920s, as a result of which the ratio which the New Poor Law occupies was to decrease rapidly.11
As unemployment rapidly increased the unemployment insurance fund dwindled equally fast. The measures taken to deal with this situation were the ‘Unemployment Insurance (National Thrift) Decree’ No.1 and No.2. In No.1 it was decided that the contributions should increase by 50 percent, while the benefits should decrease by 10 percent, and that the benefits should be provided up to a maximum of 26 weeks. In No.2 ‘transitory benefits’, to be provided by the State, were introduced with the aim of alleviating the impact of No.1. Thus public pecuniary aid to the unemployed was made up of the unemployment insurance benefits, transitory benefits, and the public assistance (by the New Poor Law).
The ‘transitory benefits’, however, provided for would-be beneficiaries to take a ‘need test’, which roused strong resistance from the general public. In order to deal with this situation the ‘Unemployment Act’ was enacted in 1934. The Act is composed of Section 1, ‘Unemployment’ and Section 2, ‘Unemployment Assistance’. In Section 1, managerial regulations for the Unemployment Fund by the ‘Unemployment Insurance Act Committee’ are stipulated (Beveridge was appointed as a chairman), and the conditions rendering eligible for benefits made somewhat less stringent. In Section 2, the ‘Unemployment Assistance Committee’ is instituted. Unemployment assistance is provided by the State, and requires the family applying for it to take a ‘family’ means test. This increasing recourse to assessment in unemployment assistance, however, met with a fiercely angry reaction from the public, and in 1935 the ‘Suspension Act’ −which allowed beneficiaries to choose the higher between transitory benefits and unemployment assistance −came to be instituted. Furthermore with the ‘Need Decision Act’ introduced in 1941 the ‘family’ means test gave way to an ‘individual’ means test.
Such was the background to the creation of the ‘Beveridge Committee’.
3. ‘The Beveridge Report’ in the Making12
― Support from Keynes and His Circle
In June 1941 the Portfolio Secretary Greenwood declared in the House of Commons that an inter-departmental committee was to be set up, having Beveridge as a chairman (hereafter the Beveridge Committee), in response to pressure from the TUC and a number of MPs. The aim of the Beveridge Committee was to look into the situation of social insurance and allied services in the UK, and to recommend some administrative improvements.
The Committee had finished its investigations by September, and Beveridge, set about taking serious steps towards drawing up a comprehensive social security plan. However, this put the civil servants brought in from various departments to sit on the Committee in an awkward position, for it meant going far beyond the task assigned them. The ultimate solution, reached on the initiative of the Treasury, was to reorganize the Committee in such a way that the final report should be signed only by the chairman while the members should work cooperatively as technical advisers.
In December 1941 Beveridge drew up an outline of the proposal, ‘Some Fundamental Problems of the Social Security’. He asked the Economic Section for advice concerning its economic aspects, including, among others, the employers’ contributions.
The Economic Section13 is an economic advisory department, which came to play a leading role in the reconstruction of the post-war economic system, with Meade playing the pivotal role. In response to a request by Jukes, the (first) director of the Economic Section in February 1941, Meade addressed four crucial problems ─ unemployment, social security, the industrial structure, and world trade and finance ─ which the post-war Britain had to tackle. Thereafter Meade with the support of Lionel Robbins14, the (second) director, was to make an outstanding contribution to policy making in the Economic Section. And many policy proposals by the Economic Section were to be adopted as official policies of the British government, exerting a great influence on the direction in which the post-war British economy and society should be moving.15
Of the four problems mentioned above, it is the social security problem that we are concerned with this paper. For this problematic area, and for unemployment, Keynes, who had worked as an adviser to the Chancellor of Exchequer since 1940, provided the Economic Section with economic theory and policy, together with his committed support.
In March 1942 Beveridge sent Keynes two memoranda ‘outlining the heads of a possible scheme and the problems it would solve and his list of principal questions’ (JMK.XXVII, p.203), while also asking for advice, especially on their financial aspect ─ and these, indeed, are the first documents to show the backbone of the Beveridge Report: ‘Several Fundamental Problems of the Social Security’ (11 Dec. 1941) and ‘The Social Security Standard and the Poverty Problem’ (16 Jan. 1942).16
Keynes, as will be seen from a letter dated 17 March, earnestly endorsed the Beveridge Plan from the outset.17
I have read your Memoranda, which leave me in a state of wild enthusiasm for your general scheme. I think it a vast constructive reform of real importance and am relieved to find that it is so financially possible (JMK.27, p.204).18
Keynes had the opportunity to read a document on the economic aspect of the Beveridge Plan by Meade of the Economic Section. His comments in a letter (dated 8 May) to Meade can be summarized as follows:
(1) Although I agree to your view that the contributory system is theoretically inferior to the tax system, it is still important, at this early stage of the Plan, as a method of avoiding a heavy burden on the budget.
(2) I am doubtful of the effect of your policy of promoting consumption as a means of conquering the depression.
(3) I am in complete agreement with the ‘dismissal tax’19 which Beveridge advocates.
(4) Although I recognize a theoretical advantage in your proposal to the effect that contributions should be varied accordingly as the economic situation changes, I am doubtful of its effect.
In response, on 12 May Robbins and Meade met with Keynes for lengthy discussion of Beveridge’s Social Policy Plan. As a result, the Economic Section’s Plan was revised. On reading it, Keynes now came round to approving Meade’s idea of changing contributions20 with the changing economic situation. Meade sent Keynes a letter (dated 17 June) together with the final version of the Economic Section Document on the economic aspect of the Social Security Plan, developing further his idea of variable contributions.
In June Beveridge wrote an important document, ‘The Reconstruction Problems: Five Giants on the Road’, which was submitted to Jowitt’s ‘Advisory Council on the Internal Problems’. Here Beveridge argued that, of the Five Giants, ‘Pauperism’, ‘Disease’ and ‘Ignorance’ were now to be conquered, while ‘Filthiness’ and ‘Idleness’ could not be conquered in the market economy context, so that ‘Planning by the State’ including the nationalization of land and certain key industries, would be necessitated.21 Here the social philosophy peculiar to Beveridge emerges in all evidence.22
On 24 June the Beveridge Committee discussed the final version of the Economic Section document. Meade wrote a letter to Keynes, asking for comments. The main subject concerned the budget, revealing the difference between Meade and the Treasury.
Meade’s main argument runs as follows:
(i) While the Treasury is pessimistic on the prospective revenues and is critical of the Meade plan from this point of view, its reasoning is not entirely sound (among other things, the Treasury misses the point that an increase in gross national expenditure brings about an autonomous increase in indirect tax through the increase in individual consumption).
(ii) There is a good case for highly progressive income tax and somewhat modestly progressive capital levy.
(iii) Priority should go to the ‘socialization of property’23 (e.g. the confiscation of national debt, and the nationalization of the railways, the agricultural lands and the public utilities) aimed at securing the revenues required for the large-scale public expenditure.
In his letter to Hopkins (dated 30 June), Keynes refers to an estimate of the postwar national income: on the optimistic side Keynes=Stone, forecasted a national income of 6500 ∓200 million pounds for 1946 with an increase of 100 million pounds every year subsequently,24 while Henderson, on the pessimistic side, estimated even 6300 million pounds to be too high.
The estimated national income was thereafter a major divisive issue, for it made a big difference to the estimated revenue and, therefore, to the resources available to the social security area.
On the Beveridge Plan Keynes commented as follows:
From among the total budget of 680 million pounds, 310 million pounds comes from the contributions of the employer and employed, 270 million pounds from the state contribution (from which the family allowances are to be provided), so that, on balance, 100 million pounds run short. Therefore, if pensions could be saved by the same amount, the burden on the Revenue is confined only to the family allowances, and the Beveridge Plan would find itself very persuasive.
As for the variable contributions plan mentioned above, Meade worked out an even more detailed version which he sent to Keynes together with his plan for using ‘deferred income tax credits’ for the post-war period (this is also conceived as a demand-stabilizing policy).25 Following Hopkins’ suggestion, however, the former plan came to be separated from the Beveridge Plan.
On 30 June Hopkins asked Beveridge to check the wider fiscal implications of the Beveridge Plan in relation to the Recovery. There followed a discussion between Beveridge and Keynes, the result of which Keynes reported to Hopkins in a letter (dated 7 July). The points worth noting are as follows:
(i) Beveridge agrees to set up an un-official committee on the ‘social security budget’ (which was to be the fourth section of the Beveridge Report) with the purpose of making the whole plan financially feasible.
(ii) Beveridge does not object to confining children allowances to those after the first child.
(iii) Beveridge does not object to making pensions (which occupy two thirds of the Beveridge Plan) much lower.
(iv) Beveridge agrees to the ‘funding principle’, to the effect that pensions should not be provided to those who have made no contributions, and/or need no pensions.
Beveridge then wrote a letter to Hopkins saying that he would like to revise the fourth section of his plan, and in fact he sent a revised version to various ministries concerned.
At this point, however, Hopkins circulated a memorandum to the effect that the resources should come from the general taxation rather than the ‘funding principle’ as a fiction.
Responding to Hopkins’ motion, on 20 July Keynes tried to persuade Hopkins with a letter. As already seen in discussion with Meade, Keynes agreed with Hopkins about the ‘contributions versus taxation’ problem. He admitted that the contributory system was a fiction, and since it was a poll tax in nature there was a possibility that the revenue thus procured might not suffice. Nevertheless, argued Keynes, it had some advantageous points as a fiction ― (i) it should be naturally regarded as production costs; (ii) we should value the established fact that the public has accepted it as reasonable.
Keynes went on to hammer out an idea, the ‘Extra-Budget Fund’ either managed or supported by the State. He emphasized that the Fund should be financially self-sufficient and would be needed accordingly as the socialization of the economy proceeded.26 He also put forward an idea that the budget should be divided into the ‘ordinary budget’ which should be kept balanced, and the ‘capital budget’ which should be variable depending on the employment situation, and that the social security budget should pertain to one item in the capital budget.
In his letter to Hopkins, furthermore, Keynes went as far as mentioning a reform plan for the income tax, and concluded with the remark that if this was not accepted, “we had better keep the current contributory system”.
Surprised at Keynes’s income tax reform plan, Hopkins eventually returned to the ‘contributory principle’.27
The above-mentioned un-official committee for discussion of the financial aspect of the Beveridge Plan was to be composed of Keynes, Robbins and Epps (the director, the Actuarial Statistical Bureau), and the letters conserved by Keynes show the course the discussion took among the committee members for two weeks, the first meeting being held on 10 August.
For the first meeting Keynes worked out the proposal, ‘the Social Security Plan’, the purpose of which was to examine to what extent the Beveridge Plan could be split so as to be financially feasible until net national income had sufficiently increased. According to Keynes, it was possible to save 350 million pounds by: (a) postponing immediate application to those who do not belong to the employed class; (b) holding back immediate increase in insurance benefits and unemployment benefits; (c) restraining immediate increase in pensions; and (d) reducing children’s allowances. The contributions by the Treasury would then amount to no more than 111 million pounds (or, adding 100 million pounds as the cost of services for non-contributions [additional pensions, unemployment assistance and children’s allowances], 211 million pounds).
Beveridge’s response in the first meeting was as follows:
He opposed (a), arguing that immediate application should be made beyond the current insured persons. With regard to (b), he agreed to a ceiling of 25 shillings. Coming to (c), he found the Keynes proposal too low, but agreed to a reduction in pensions. Finally, in response to (d), he agreed with excluding the first child, but opposed a reduction in the rate of benefits, insisting, rather, on an increase.
Beveridge, furthermore, proposed the contributions of eight shillings rather than Keynes’s proposal of six shillings. The unofficial committee argued that the contributions of eight shillings would be extremely difficult to implement, and cause political unpopularity. In response, Beveridge argued that higher benefits should be made dependent on higher contributions, and that the rights of those who have not so far contributed should be reasonably restricted.
Although the unofficial committee argued that excluding the first child would bring about political instability, Beveridge insisted on the exclusion.
It was on the pensions plan that most of the discussion. The unofficial committee judged that the Beveridge plan would mean maximum expenditure and minimum national satisfaction: the plan made no provision for those who did not pay contributions, which would create a sense of unfairness between those who paid the contributions at present and those who would be paying the contributions in the future. Thus it became an important point between the two sides to examine what the future level of pensions for those who had paid the contributions should be.
Taking the above into account, Beveridge wrote ‘Several Problems of Pensions’ (19 August). This document is valued as showing ‘Beveridge’s idea of pensions, which comes to occupy an essential place in the final report, is almost established around this period.’28
On 21 August Keynes had a talk with Beveridge, who had added various changes to his plan in order to lighten the initial financial cost. Keynes thought that further revision would be required, but Beveridge would not change his mind as to the following four points:
(1) immediate incorporation of the whole population
(2) a high level for children’s allowances
(3) contractual rights to a level of pensions increasing with time
(4) a retirement clause29
24 August saw further talk between the unofficial committee and Beveridge. Keynes judged the concessions that had by now been made in modification of the initial Beveridge truly appreciable, and anticipated no great difficulty in terms of finance.
Having made these points, Keynes’s principal criticisms run as follows:
(i) The plan that a person who becomes eligible for pensions will get the first year’s pension over his entire life is politically unstable.
(ii)Eight shillings was too much for children’s allowances: by reducing the sum, they could also be applied to the first child.
The final discussion between Keynes and Beveridge with Robbins present was held on 12 October, with three main points:
(i) Calculations were based on the lower forecast price level (25 percent higher than that in 1938. Keynes estimates 35 percent higher). 25 percent should not be emphasized.
(ii) The rate at which the pension increases every two years should not be stated. (Beveridge agreed on this point, remarking that “the essence of my proposal lies in clearly distinguishing the benefits which comes from the contributions made so far and the temporary benefits which do not”.
(iii) Eight shillings were too much for children’s allowances.
Keynes went on to make the following comments on the additional cost which the Beveridge Plan incurred for the Treasury. On the one hand, he observed, certain factors could help reduce it, namely:
(i) An increase in the income tax.
(ii) Five-shillings children’s allowances.
(iii) Socialization of the medical professionals, and the impossibility of the immediate implementation of the health services for the whole population.
On the other hand, the factors he saw as contributing to increase it were:
(iv) Restriction of the Plan to the class who are currently making contributions, due to the administrative and legislative reasons.
(iv) Deletion of the ‘retirement clause’.
Keynes’s overall evaluation of the financial aspect of the Beveridge Plan ran thus: although the finance of the Plan essentially depends on an increased rate of the contributions as socially acceptable, the proposed rates (four shillings for the employed, and three shillings and three pence for the employer) are very reasonable, and make the Plan which covers such a wide area feasible with a very modest financial burden to the Treasury.
Having remarked that the Beveridge Plan, covering such a vast wide area, was so beautifully worked out that the public would be persuaded, Keynes recommended the following practical measures:
It is desirable for the quite new characteristics of this Plan to be postponed: (i) the benefits and contributions are extended not only the class currently paying but to the whole nation; (ii) immediate socialization of the medical professionals.
For the moment efforts had better be concentrated on a wide-scale simplification of the ordinary business, which is the easier option, and yet important.
On 14 October Keynes wrote to Beveridge in warmly approving tones:
After reading this further installment of your Report, I feel confirmed in the feeling I expressed the other day, that it is a grand document. You can scarcely expect it will be adopted just as it stands, but is seems to me that you have got it into an extremely workable shape, and I should hope that the major and more essential parts of it might be adopted substantially as you have conceived them (JMK.27, p.255).
As is clear from the above, Keynes appreciated the Beveridge Plan very highly, and spared no effort to persuade the Treasury. He suggested various ideas to Beveridge that could help implementation of the Plan on a stand-alone basis, and summed up the financial aspect of the final version of the Plan thus: there is no other plan which can be more cheaply run than the Beveridge Plan over the two decades from now on, so that it is of great help to the government budget, which is placed under stringent conditions. Although the cost of the Beveridge Plan will be on the increase thereafter, it will not be so burdensome because the national economy will certainly grow.
On 1 December 1942, after several revisions through the above discussions, the Beveridge Report was announced.
4. The Beveridge Report and
Social Insurance (Cmd 6550. September 1944)
A. The Beveridge Report
The main feature of the Beveridge Report is evident from Paragraph 17, which deals with social insurance against the discontinuity of earnings, and special expenditure on the occasions of birth, weddings, and death. This social insurance is stated to be founded on the following principles.
(i) equal minimum living cost benefits
(ii) equal contribution
(iii) unification of administrative responsibility
(iv) sufficient benefits (‘sufficiency principle’)
(v) comprehensiveness (exhaustiveness as to persons and necessity)
(vi) classification of the insured
The main purpose of the Beveridge Report is to eradicate ‘Pauperism’ by means of this social insurance as a principal tool, with ‘public assistance’ and ‘voluntary insurance’ as subordinate means. Thus it aimed at securing the ‘national minimum’ (the national minimum living standard) for the whole nation.30
The Beveridge Report’s main pillar is not relief by the State but ‘social insurance’ based on the ‘contributory principle’ (an equal contribution and an equal benefit). In fact ‘public assistance’ by the State is considered a special case, concerning those who cannot help themselves. In this case, therefore, the ‘Means Test’ based on the ‘inferior treatment principle’ is required.
Turning to the administrative organization, the Beveridge Plan is run on the stand-alone basis of the ‘Social Security Budget’. Its revenues come from the contributions by the employed, the employers and the State, while its expenditure is on various pensions and benefits. This point is stipulated in detail in Section 4, ‘The Social Security Budget’ and Appendix A, ‘The Finance of the Plan on the Social Insurance and Security Benefits’ (Memorandum by Epps, the Actuarial Statistics Bureau).31
Stating that ‘freedom from poverty is no more than one of the essential liberties of mankind and that any social security plan in the narrow meaning … takes for granted common social policies in many areas’ (Paragraph 409), the Beveridge Report emphasizes, as a precondition of social security, the implementation of children’s allowances, comprehensive health services and rehabilitation services, and the maintenance of employment (= the prevention of mass unemployment), the latter point receiving the greatest emphasis. The point is detailed in Section 6, ‘Social Security and Social Policy’.
Children’s allowances are paid to the parents for bringing up their children. The grounds for the necessity and importance of children’s allowances are mentioned as follows:
(i) No national minimum is guaranteed by the wage system alone.
(ii) In order to clarify the difference between the earnings got when a person is employed and those got when unemployed, they should be paid irrespective of when the parents are employed or unemployed.
(iii) They are important from the point of view of maintaining the population.
The Report declares that children’s allowances should be financed by tax, and 8 shillings should be provided for any child except for the first child.
Coming to comprehensive health services, a compulsory social insurance scheme that sets no limit on the income level is proposed (Paragraph 431). As to rehabilitation services, they should be provided until earning power be restored — at the maximum, from the medical to the rehabilitation stage.
For the maintenance of employment, Beveridge Report mentions the following reasons (Paragraph 440).
(i)The social security plan provides for unemployment benefits for a short period only.
(ii)With mass unemployment there is no longer any room for creating vacancies as the only satisfactory countermove against unemployment.
(iii)Labor accident, disease and the employment of the disabled depend on the state of the labor market.
(iv) As the income guaranteed by the social security plan is insufficient in amount, it is very important that the State should endeavor to give its nation reasonable opportunities for employment.
(v) If ‘extravagance’ is added, there is a danger that the cost of the social security plan will be too huge to sustain. Unemployment is the worst form of ‘extravagance’.
Here it point (iv) that receives the major emphasis in the Beveridge Report.
Finally, it should be noted that Meade’s idea of the variable contribution rate aimed at maintaining employment appears in Paragraph 442, and the ‘retirement clause’ in Paragraphs 244-249.
B. The White Paper on Social Insurance (1944b)
The Beveridge Report was enthusiastically welcomed by the public, as the sale of 100 thousand copies in a month and 256 thousand copies in a year amply demonstrates. By contrast, however, the government took a negative stance. The debate in the House of Commons on 16-18 February 1943 reached a high state of confusion as votes went both in favor of the government and against it.
It was in this state of affairs that Keynes wrote the draft for his speech in the House of Lords on 24 February. He stated that the debate was going on in the House of Commons without any alternative plan which did not put a heavier burden on the State than did the Beveridge Plan being proposed, and stressed that for the initial post-war period there existed no cheaper plan.
That the [Beveridge] Plan achieves its results at a low budgetary cost follows from one of its fundamental principles, namely that we collect to-day’s pension contributions from a working population larger than corresponds to the number of today’s pensioners (JMK.27, p.259).
On the other hand, the Plan would entail heavy financial costs in the future. Here, however, Keynes responded with his long-standing optimistic forecast: there was no problem, for the national income would then be growing at several times the rate of growth in the cost.32
Due to Treasury interference, however, the planned speech was never made.
An important point to note here is that the discussions on the social security system proceeded simultaneously and interactively with those on employment policy.33
Over the two issues, controversy waxed strong between the two camps, with Keynes, the Economic Section (Meade, Robbins, Stone, Chester), the cabinet ministers and high officials who supported them (Morrison [the Home Office], Dalton and Gaiteskill [the Board of Trade]) and Beveridge on one side, and the Treasury ministers and high officials (Wood, Hopkins and Eady) and Henderson on the other.
As for the employment policy, the former camp eventually won the battle in terms of Employment Policy.34
With regard to social security policy, the Treasury, which continually complained of the proceedings of the Beveridge Committee, was naturally critical of the Beveridge Report.35
The Treasury tried to conceal the Beveridge Committee discussions from the outset, and sought to postpone announcement of the Beveridge Report until the end of the war. It is even said that the first draft of the Beveridge Report (July 1942) caused a kind of panic within the Treasury. It is also well-known that publication of the Beveridge Report, which was completed in September, was postponed until December because of the antagonism of a number of Conservative cabinet members who regarded it as ‘too revolutionary’ (Mouri, 1990, p.239).36
From this confusion, however, there emerged a government committee, constituted to examine the Beveridge Report with T. Phillips as a chairperson (hereafter the Phillips Committee), which was eventually to announce the White Paper on Social Insurance (1944b). Let us take a look at the proceedings of the Committee.
Most members of the Phillips Committee opposed ‘the minimum living cost insurance principle’, and the estimated cost given in the White Paper on Social Insurance came to 25 percent above the cost anticipated in the Beveridge Report. It was Chester of the Economic Section who, supporting the principle, argued that a divergence from it would incur a great cost to the government.
The Economic Section tried to give preference to the young over the pensioners. The majority of the members in the Committee, however, opposed this stance, as a result of which the White Paper on Social Insurance proposed a lower figure for children’s allowances (5 shillings), while higher pensions were recommended for those who had not paid sufficient contributions than in the Beveridge Report. Moreover, the ‘maintenance of employment’, which was emphasized in the Beveridge Report, was overlooked in the Committee.37
Nevertheless, the Phillips Committee adopted many other principles contained in the Beveridge Report (‘universalism’, ‘equal contribution principle’, ‘equal benefits principle’, ‘the establishment of the Social Security Ministry’, to mention but a few), which were to be incorporated in the White Paper on Social Insurance.
In the process of drafting Social Insurance (1944b), the above-mentioned choices ― rejection of the contributory principle, generous pension benefits, low children’s allowances, and so forth) ― were repeated. This is clear from Keynes’s letter to Gilbert and Hopkins (dated 15 May 1944), in which Keynes referred to a conversation with Chester who had worked as one of several secretaries for the Beveridge Committee. Keynes expressed his view as follows:
My own feeling is that so great a concession on pensions is lamentable. But I do not think it would prove easy for Beveridge or anyone else to criticise them on the ground that they go beyond the original Beveridge proposals. On the other hand I do feel that the inconsistency between the lavishness on pensions and the meanness on children’s allowances would prove very difficult indeed to defend. I also agree with him [Chester] that what amounts to the abandonment of the contributory principle leads us into uncharted seas (JMK.27, p.263).
1) It is also referred to as the ‘Postwar Consensus’ or ‘Butskellism’, after Butler (the Conservative Party) and Gaitskell (the Labor Party) who made great efforts to implement the ‘Keynes=Beveridge Sytem’. See Kavanagh, D. and Morris, P. (1994).
2) Prior to this period, however, they were hostile on three points: an overpopulation debate; a tariff problem; and the General Theory. See Dimand (1999).
3) See Hirai(1997-1999, Chapter 5).
4) This is the main theme of Hirai (2004). It should be noted that Robertson and Henderson, both of whom took part in the Liberal Summer School and the writing of Britain’s Industrial Future (1928), were in the same camp as Keynes as far as social or political philosophy is concerned. For this, see Freeden (1986, pp. 172-173). Furthermore, Hawtrey’s social philosophy is to a considerable degree similar to Keynes’s. For this, see Hawtrey (1926, p.216; 1944, pp. v-vi).
4) I dealt with this in Hirai (1997-1999, Chs.6-16).
5) Prior to Beveridge (1944), he regarded unemployment as a frictional and structural problem. He was recognized as an authority on it in pre-Keynesian British academic, popular and policy thinking. See Dimand (1999, p.236).
6) This is the main theme of Hirai (1997-1999, Ch.3).
7) On Keynes’s New Liberalism, see Clarke (1988, pp. 13-14, 78-80) who takes Keynes as a New Liberalist succeeding the New Liberalism of the Edwardian period; Freeden (1986) and Cranston (in Thirlwall ed., 1978) both of whom see Keynes as a ‘Centrist Liberalist’ who, differing from a New (or Left) Liberalist as placing no great faith in the State as the disinterested agent of the community, emphasizes the ideological difference between liberalism socialist/trade-unionist Labor party, and has less reflective, philosophical and synthetic mind’ (see Freeden, 1986, pp. 128-129, 12-14, and 171-172); and Skidelsky (1992, Chapter 7) who supports Freeden and Cranston subject to several qualifications. See also Fitzgibbons (1988, Chapter 9). Moggridge (1992, Chapter 18) maintains that Keynes’s political thought evolved from the New Liberalism in the 1920s to ‘Liberal Socialism’ in the 1930s and later. Peacock (in Crabtree and Thirlwall eds., 1993) describes Keynes as an ‘end-state’ liberalist, in contrast with the ‘contractarian (or ‘procedural’) liberal. Peacock seems to take Keynes in the context of the classical liberalism rather than that of the ‘New Liberalism’. See also Maloney (1985, pp. 159-161) in relation to Freeden’s (1978) evaluation of Hobson as the leader of the new liberal movement.
Concerning the New Liberalists of the Edwardian Period such as Hobson and Hobhouse, see Hobson(1938), Mouri(1990, Ch.2).
8) V. George refers to Keynes and Beveridge as ‘reluctant collectivists’. See Mouri (1990, p.219).
9) Robbins’ criticism of Beveridge (1944) has something to do with this point. Interestingly enough, Robbins worked as a research assistant for Beveridge (1909), and was later was one of several supervisors and examiners of Beveridge’s thesis (1930).
In terms of the political spectrum, we can array Beveridge, Keynes and Robbins from the left to the right. It should be noted that Robbins, too, was no traditional liberalist. See Robbins (1954) and Hirai (2003, note 21).
See also Dimand (Pasinetti and Shefold, 1999, p.232):“Where Beveridge chiefly differed from the Webbs was in his belief that full employment could be maintained without massive coercion; where he differed from [G.D.H.] Cole was in his rejection of the view that it would require no coercion at all.”
Although ‘the maintenance of employment’ was a point Beveridge held to for many years, he expressed his allegiance to Keynes’s theory in Beveridge (1944) ─ which was greatly assisted by Kaldor. It is acknowledged that his conversion to Keynesianism can be found in the memorandum dated 8 September 1943, which was minuted by E. Shumacher (see Mouri (1990, p.279)). This should be a sudden change, judging from the fact that Beveridge (1909; 1930; 1937) had maintained that unemployment is, for the most part, frictional, seasonal and structural.
Incidentally, Hayek (1994) said that Beveridge was an amateur economist, always asking Robins and Hayek for advice on economic problems.
10) For the related description in the inter-war period, see Ohsawa(1990, the final chapter).
11) In passing, the ‘Contributory Pension Act’ was enacted in 1925.
12) This section is exclusively based on the material contained in JMK.27, Chapter 4, ‘The Beveridge Report’.
13) It was set up in December 1939. The ‘Stamp Survey’ (the principal members were Stamp, Henderson and Clay), which was organized in July 1939, split up into two institutions: the Economic Section and the ‘Central Statistical Office’. Both belonged to the War-time Cabinet Office. Concerning the Economic Section, the first director was Jukes (1939-41), the second Robbins (1941-45), and the third Meade (1946-47). For details, see Cairncross=Watts (1989).
14) Robbins described his duty in the Economic Section as showing a diplomatic presentation to the public, ministers and bureaucrats, and as expiating his wrong recommendations which he had made [this might indicate Robbins (1934)]. See Robbins (1971, pp.186-188).
15) To mention a few examples, Meade’s plan for employment policy was to occupy a central place in the White Paper on Employment Policy (1944), for which see Hirai (2003, Appendix 2); and his plan for commercial policy was to be adopted as an official plan of the Board of Trade in the fall of 1941. Meade was, moreover, a leading promoter of the ‘World Trade Organization’.
16) For the two memoranda, see Mouri (1990, pp.202-203) and Moggridge (1992, p.706).
17) As will be seen from the argument in How to Pay for the War (Keynes, 1940), Keynes was beginning to think of this point in time as a good opportunity for social reform (improvement in social justice). His proposal, under the principle of the ‘maintenance of sufficient minimum standard’, was the provision of ‘family allowances’ (5 shillings per week per child) and ‘a rationing of necessaries. This consideration was shared by Beveridge. For Keynes (1944), see Hirai (2003, Section 1 of Appendix 2).
A similar view can be recognized in ‘Prof. Keynes’s Memorandum on War Purpose’ (dated 13 January 1941), in which social security is mentioned as a top priority, and ‘Note on the Budget’ (JMK.27, pp.355-367) written in November 1941, in which Keynes expressed the view that the 1942 Budget should be compiled so that it could be termed the ‘Social Policy Budget’.
18) In this letter Keynes said that industrial insurance should be owed by the State (Beveridge, in contrast, maintained that it should be voluntary insurance).
19) Contributions charged to an employer who fired an employee. See JMK.27, p.205.
20) See Meade, “Variations in the Rate of Social Security Contributions as a Means of Stabilising the Demand for Labour” (Howson=Moggridge eds., 1988, pp.184-192) and “The Effect on Employment of a Change in the Employer’s Social Security Contribution (op. cit., pp.193-198).
21) See Mouri(1990, pp.204-205).
22) Beveridge valued the White Paper on Employment Policy highly, describing it as an epoch-making event in economic and political history. He showed some dissatisfaction, however, complaining that it underrated the pathology of unemployment caused by the ‘unplanned market economy’. This underestimation, said Beveridge, derived from an erroneous value judgment, regarding private firms as saintly, and from adherence to a balanced budget.
23) Although we see no reply from Keynes concerning this, he is surely critical of it. He recognized the significance of trusts and cartels, but clearly opposed nationalization per se. See Hirai (2003, pp.181-183).
24) For these estimates, see JMK.27, pp.280-298. Thereafter Keynes made an even more optimistic estimate. See JMK.27, pp.334-345.
25) This is an idea similar to the ‘deferred payments’ in Keynes (1940). See Hirai (2003, Section 1, Appendix 2).
26) Social Security together with the transport system and the Central Electricity Agency and so forth are considered among the experiments for the ‘socialisation of the economy’. Keynes had cherished the ‘socialisation of the economy’ and the necessity of its promotion since, at the latest, the 1920s.
27) The above correspondence between Hopkins and Keynes is also described in Cairncross=Watts(1989, p.90).
28) See Mouri(1990, p.206).
29) This is the rule to the effect that if a person who reaches the age eligible for pensions retires, a half of the pension which will increase thereafter should be deducted, while if he postpones retirement, he will get the amount in full.
30) The Beveridge Report mentions 23 items in Section 2, ‘Principal Points of Change Proposed and Their Reasons’.
31) As is evident from the argument in the previous section, this is where Keynes was most involved.
32) The manuscript of this speech concludes by pointing out ‘the deep moral and social problem of how we should organize the material affluence for yielding the fruits of good life’ (my italics).
33) On this, see Hirai (2003, Appendix 2).
34) The policy of varying social security contributions is approved there. Incidentally the former camp is on the Labor Party side, the latter on that of the Conservative Party.
35) Henderson argued against an imbalance of the ‘Social Security Fund’.
36) This is a statement by Harris.
37) This is pointed out in Mouri (1990, p.248).
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