The idea for this volume stems from the observation that, somewhere between the literatures of political science and social policy, there is an unexplored territory where federalism and the welfare state meet, a no man's land without even a conceptual map to guide us. Hic sunt leones! is the warning etched on the uncharted regions of ancient maps, but for us it serves as enticement, an invitation to explore the unknown.

In some OECD federal nations almost one-third of the GDP is tied up in the welfare state, but scholars of the state and federalism typically ignore the welfare constituent of this spending and focus their attention almost entirely on non-welfare public agendas. For these political scientists, the state is always spelled with a capital S, and welfare, if mentioned at all, with lower-case w. As the majority shareholder of public expenditures at the federal level, the welfare state is not just a passive recipient of federalism's multi-tiered policy-making, but a key player in shaping those policies and, indeed, in shaping the functioning of the federal structure itself. Its size, its indispensability, and the large segment of the voting population it affects make the welfare state a force to be reckoned with. In many instances, it also provides a mechanism for coping with problems the normal federal process has no means of dealing with, as was so clearly demonstrated in the process of German reunification.

We began by questioning the widely held premise of econometric research that federalism is generally inimical to the growth of the welfare state in all countries and in all eras. Employing a qualitative comparative approach that Peter Hall calls ‘systematic process analysis’, we derived our hypotheses concerning federalism's effects on welfare state development from theories of fiscal federalism and political institutionalism. According to theories of actor-centred institutionalism, institutions create opportunity structures for political action by shaping actor constellations, actor preferences and the modes of their interaction. Exploiting these institutionally pre-configured opportunities for public policy-making, then, depends on a number of contextual variables. We have used middle-range theories of the determinants of welfare state development to predict the power of these contextual factors to impede or enhance our eight hypothesized effects (table 1.8).

We have also argued that the time dependence of institutional effects should be taken into account. The reasons were several. First, as shown in the path dependency literature, iterative political decision-making involves a sequential process in which earlier decisions strongly influence the trajectory of subsequent policy development. Second, the impact of federalism on social policy is contingent upon the stage of welfare state development, that is, whether social policy is in the process of initiation and expansion, or whether it is undergoing retrenchment.

Evaluating the effects of federalism

The development of American social policy appears peculiar when compared with a stylized, Eurocentric model of the welfare state. As many scholars have noted, the United States lagged behind other industrialized states in the development of social policy. The US safety net remains incomplete, most notably in the absence of universal health coverage. Benefits provided publicly elsewhere are provided privately, through employers, albeit with public regulation and subsidies. Even the language of social policy is distinctive in the US, where ‘welfare’ and ‘social security’ are used to refer to specific programmes rather than to invoke broader concepts and values.

The United States is a federal system, and it has been one longer than any of the other nations discussed in this volume. Is it federalism, then, that has prevented the development of a more extensive welfare state? For Nathan Glazer, the answer is yes: ‘Federalism’, he says, inevitably meant ‘that there were going to be far fewer national policies in the sphere of social protection in the USA’. Yet many scholars have invoked other factors to explain the limits of American social policy. These include the weakness of the labour movement; the absence of a socialist party; winner-take-all plurality elections, which inhibited the rise of new parties that might have proposed more extensive social policies than the Democrats or Republicans; the occupational and geographic mobility of the working class; the resistance of the South to policies that might disturb its paternalistic labour system; and ethnic and racial divisions among the potential beneficiaries of an American welfare state.

Introduction

Considerations of systematic coverage apart, there are a number of reasons why a comparative study of the impact of federalism on the development of the welfare state might wish to dwell on the Australian case. Perhaps the most important is that the Australian case seems to exemplify all of the key hypotheses identified in the theoretical literature linking these phenomena. If the basic hypothesis linking federalism to the ‘old politics’ of the welfare state is that federal institutions hinder welfare state expansion, Australia appears to fit the bill rather well. With the exception of a decade or so of radical experimentation immediately after federation, the story of the Australian welfare state in the first half of the twentieth century is one of the late adoption of schemes increasingly common elsewhere and, after World War Two, of levels of expenditure that are consistently towards the bottom of international league tables.

Since the early 1980s, however, things appear to have changed. In the ‘silver age’ of welfare state development, Australia has been hailed as one of the few OECD countries to combine measurable success in economic performance with a significant improvement in welfare provision. On the surface, this seems to fit with the ‘new politics’ notion of federal institutions exercising a ‘ratchet effect’ on expenditure development, making it difficult for political forces opposed to statist intervention to obtain the leverage required to reverse existing policies.

The ideal that all citizens share responsibility for the welfare of their fellows, and the impulse to unite in federations have, on occasions, been historically conjoined. The founding myth of Swiss federalism, as recounted in Schiller's Wilhelm Tell, literally makes solidarity ‘in danger or distress’ a proviso for membership in a budding thirteenth-century federation.

Federalism and social policy

Recent comparative welfare state research has acknowledged the importance of state structures in explaining cross-national variation in both the level and the dynamics of social policy formation.

Introduction

In the course of the twentieth century few western nations have experienced political upheaval on the scale of that in Austria. The country's political transformation – involving phases of democratic (1918–33/34), pre-fascist (1934–38) and national-socialist rule (1938–45) – from an economically backward, multi-ethnic superpower to a small democracy at the centre of Europe has corresponded in economic terms with its rise to a position as one of the world's richest nations. While the fate of federalism lay at these political crossroads, the welfare state established under the Habsburg monarchy survived these periods of political upheaval relatively unscathed.

The example of Austria is of particular interest for a comparative analysis of the relationship between federalism and the welfare state because, alongside Germany, it is recognized as being a pioneer of state social policy. This, along with its high government spending and public social expenditure as a percentage of GDP, seems at first glance to flout the hypothesis advanced by Brennan and Buchanan that the Leviathan is bridled by a federal state structure. However, this is only an apparent contradiction, since Austria only adopted a federal political structure in 1920, when social insurance programmes launched in the context of an authoritarian but decentralized unitary state had already been in existence for some time.

In this chapter, I explore certain dynamic properties of the economic systems of industrial/service market economies. For foraging and agricultural economic systems, we could only gain general insights into the processes of systemic change, primarily with regard to the change in the focus of production. In contrast, for industrial/service economic systems, we can begin to explore other aspects of their evolution over time. The first half of this chapter focuses on these systemic change in the past and the second half, on systemic change in the future.

Changes in both the economies and the economic systems of the OECD nations have accelerated. In the two centuries between 1500 and 1700, the average per capita GDP of the nations composing my OECD sample grew 30 percent; in the two decades between 1980 and 2000, 51 percent. Many have commented on this increase in economic growth; many fewer have noted a similar acceleration of change in the economic institutions and systems of the same nations. This neglect of systemic change arises both from our lack of theory about such matters and from the lack of detailed empirical studies on the impact of technology and other exogenous factors on the formation and development of institutions.

The rapid institutional and systemic changes in recent years allow us to explore some critical aspect of the process. In particular, we can look for four different types of systemic change.

In this chapter, I speak of Marxist regimes rather than socialist or communist governments because the Marxist ideal may have pointed toward socialism, but many of these regimes fell far short of such a goal. Indeed, as I note herein, some so-called capitalist nations achieved certain Marxist goals to a greater extent than some so-called socialist nations.

Marxist economic systems were created and sustained by authoritarian governments that, on the basis of a particular ideology, formed in many countries economic institutions quite different from those found in market economies. As I argue, even though these Marxist economic systems rose and fell primarily for political, not economic, reasons, it is useful to survey them, both to determine how much an ideology can influence a system and how their divergence from a market economic system affected their economic performance. The results also provide some indication of the viability of economic systems different from those examined in the previous two chapters.

My analysis is based on the assumption that the impact of the ideology, rather than the authoritarianism per se, was more important for determining the way these economies functioned. Of course, Marxism in its Leninist garb has few uses for democracy. Indeed, most leaders in Marxist regimes argued that some type of autocracy or dictatorship is necessary to carry out the radical institutional changes they had in mind, even though they knew that some changes had severely adverse economic consequences, at least in the short and middle run.

In this chapter, I show that agricultural societies featured four quite distinct economic systems. Each system had readily understandable organizing principles that were unrelated in large part to a variety of environmental, social, and political factors that many have alleged to be important. Despite the great differences between agricultural and foraging economies, most of these general conclusions about their economic systems are similar. On a more specific level, however, their differences were striking. The agriculturalists had a much higher average level of economic development than the foragers and the defining characteristics of their economic systems were also quite different. Moreover, in contrast to the apparent lack of influence of the foraging economic systems on a possible transition to agriculture, the type of agricultural economic system had an important impact on a possible transition to an industry/service economy, a topic discussed in the next chapter.

In the following analysis, I first discuss the sample and the criteria for defining an agricultural economic system. Then, I carry out a cluster analysis to determine the types of systems and examine the most important features of each. An important finding is that the complementarities between different economic institutions and organizations were less strong than in foraging and industrial/service economies, so that the individual societies with the same economic system were dissimilar in some important respects. Finally, I examine the degree to which the four types of economic systems were – or were not – related to various environmental, social, and political variables.

Although economic historians have intensely discussed the ultimate causes of the industrial revolution for more than a century, they have found little agreement. Was it differential population growth that changed the land-labor ratio and wages? Or the modernization of traditional rural society by land enclosures? Or the growth of foreign trade through colonial expansion? Or the overthrow of absolutist regimes and the reduction of uncertainty of property rights? Or the rise in urbanization and literacy? Or the increase in a nation's economic infrastructure?

It is not my intention to deal in this chapter with the industrial revolution in its entirety but rather to focus on one small part of the issue. In the previous chapter, I touched briefly on certain aspects of the systemic change of agricultural economic systems. In this chapter, I explore at greater length a critical aspect of these dynamic systemic elements: namely, the extent to which, in past centuries, the type of agricultural economic system aided or hindered the transformation to an industrial/service economy. Thus, many of the issues raised previously – for instance, the impact of the growth of the Atlantic trade – cannot be handled. The role of intermediaries between the farmers and the urban sector – for instance, small shopkeepers, traveling merchants, and financiers – is also left undiscussed. Nevertheless, we cannot avoid facing certain problems arising from the complexity of the causal connections between agriculture and manufacturing and the difficulties in pinning down the multifaceted nature of industrialization.