F. Hayek, We need to avoid confusing support of the poor with social justice

Even at the beginning stage of “social insurance” in Germany in the 1880s, individuals were not merely required to make provision against those risks which, if they did not, the state would have to provide for, but were compelled to obtain this protection through a unitary organization run by the government. Although the inspiration for the new type of organization came from the institutions created by the workers on their own initiative, particularly in England, and although where such institutions had also sprung up in Germany—notably in the field of sickness insurance—they were allowed to continue, it was decided that wherever new developments were necessary, as in the provision for old age, industrial accidents, disability, dependents, and unemployment, these should take the form of a unified organization which would be the sole provider of these services and to which all those to be protected had to belong.

“Social insurance” thus from the beginning meant not merely compulsory insurance but compulsory membership in a unitary organization controlled by the state. The chief justification for this decision, at one time widely contested but now usually accepted as irrevocable, was the presumed greater efficiency and administrative convenience (i.e., economy) of such a unitary organization. It was often claimed that this was the only way to assure sufficient provision at a single stroke for all those in need.

There is an element of truth in this argument, but it is not conclusive. It is probably true that, at any given moment, a unified organization designed by the best experts that authority can select will be the most efficient that can be created. But it is not likely to remain so for long if it is made the only starting point for all future developments and if those initially put in charge also become the sole judges of what changes are necessary. It is an error to believe that the best or cheapest way of doing anything can, in the long run, be secured by advance design rather than by the constant re- evaluation of available resources. The principle that all sheltered monopolies become inefficient in the course of time applies here as much as elsewhere.

True, if we want at any time to make sure that we achieve as quickly as we can all that is definitely known to be possible, the deliberate organization of all the resources to be devoted to that end is the best way. In the field of social security, to rely on the gradual evolution of suitable institutions would undoubtedly mean that some individual needs which a centralized organization would at once care for might for some time get inadequate attention. To the impatient reformer, who will be satisfied with nothing short of the immediate abolition of all avoidable evils, the creation of a single apparatus with full powers to do what can be done now appears therefore as the only appropriate method. In the long run, however, the price we have to pay for this, even in terms of the achievement in a particular field, may be very high. If we commit ourselves to a single comprehensive organization because its immediate coverage is greater, we may well prevent the evolution of other organizations whose eventual contribution to welfare might have been greater. If initially it was chiefly efficiency that was stressed in support of the single compulsory organization, there were other considerations clearly also present in the minds of its advocates from the beginning. There are, in fact, two distinct, though connected, aims which a governmental organization with coercive powers can achieve but which are beyond the reach of any agency operating on business lines. A private agency can offer only specific services based on contract, that is, it can provide only for a need which will arise independently of the deliberate action of the beneficiary and which can be ascertained by objective criteria; and it can provide in this manner only for foreseeable needs. However far we extend any system of true insurance, the beneficiary will never get more than satisfaction of a contractual claim—i.e., he will not get whatever he may be judged to need according to his circumstances.

A monopolistic government service, on the other hand, can act on the principle of allocation according to need, irrespective of contractual claim. Only such an agency with discretionary powers will be in a position to give individuals whatever they “ought” to have, or make them do whatever they “ought” to do to achieve a uniform “social standard.” It will also be in a position— and this is the second chief point—to redistribute income among persons or groups as seems desirable. Though all insurance involves a pooling of risks, private competitive insurance can never effect a deliberate transfer of income from one previously designated group of people to another.

Such a redistribution of income has today become the chief purpose of what is still called social “insurance”—a misnomer even in the early days of these schemes. When in 1935 the United States introduced the scheme, the term “insurance” was retained—by “a stroke of promotional genius”— simply to make it more palatable. From the beginning, it had little to do with insurance and has since lost whatever resemblance to insurance it may ever have had. The same is now true of most of those countries which originally started with something more closely akin to insurance.

Though a redistribution of incomes was never the avowed initial purpose of the apparatus of social security, it has now become the actual and admitted aim everywhere. No system of monopolistic compulsory insurance has resisted this transformation into something quite different, an instrument for the compulsory redistribution of income. The ethics of such a system, in which it is not a majority of givers who determine what should be given to the unfortunate few, but a majority of takers who decide what they will take from a wealthier minority, will occupy us in the next chapter. At the moment we are concerned only with the process by which an apparatus originally meant to relieve poverty is generally being turned into a tool of egalitarian redistribution.

It is as a means of socializing income, of creating a sort of household state which allocates benefits in money or in kind to those who are thought to be most deserving, that the welfare state has for many become the substitute for old- fashioned socialism. Seen as an alternative to the now discredited method of directly steering production, the technique of the welfare state, which attempts to bring about a “just distribution” by handing out income in such proportions and forms as it sees fit, is indeed merely a new method of pursuing the old aims of socialism. The reason why it has come to be so much more widely accepted than the older socialism is that it was at first regularly presented as though it were no more than an efficient method of providing for the specially needy. But the acceptance of this seemingly reasonable proposal for a welfare organization was then interpreted as a commitment to something very different.

It was mainly through decisions that seemed to most people to concern minor technical issues, where the essential distinctions were often deliberately obscured by an assiduous and skilful propaganda, that the transformation was effected. It is essential that we become clearly aware of the line that separates a state of affairs in which the community accepts the duty of preventing destitution and of providing a minimum level of welfare from that in which it assumes the power to determine the “just” position of everybody and allocates to each what it thinks he deserves. Freedom is critically threatened when the government is given exclusive powers to provide certain services—powers which, in order to achieve its purpose it must use for the discretionary coercion of individuals.