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National Health Insurance and the Welfare State, Part 1


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After the experiences of the totalitarian states in the 20th century, logic suggests that the world would have learned the lesson that every growth in state power-every extension of government control in social and economic affairs-threatens the liberty of the people. The alternative is always and ultimately a choice between the freedom of voluntary association among the citizens of a community and the coercing dictates of the political authority. Whether those coercing dictates originate in the commands of a tyrant who usurps power through military force or through the democratic procedures of election and debated legislation, the end result is the same: the state takes upon itself the right to determine what social relationships will be permitted to exist among the members of the society.

The Clinton administration is now proposing to extend those political dictates in the form of national health insurance, which in earlier days was referred to more honestly as socialized medicine. In spite of the failure, disappointment and increasing costliness of every attempt by the state to politicize the services that normally are or should be provided on the basis of free, voluntary and private contract in the market, it appears likely that health insurance and medical care will soon be under the tutelage of the American government.

The drive for socialized medicine is not occurring in an ideological vacuum. It is another step in the trend of ideas that have dominated the world for more than a century. It is a trend founded in the belief that the individual is neither strong enough nor intelligent enough to plan his own affairs and to bear the primary responsibility for his own circumstances-and that the state has the wisdom and capability to manage the individual’s affairs better than the individual himself.


It is useful to understand the origin of ideas and policies to have a better perspective on what they mean and to where they may lead.

The modern welfare state and the implementation of socialized health care arose in 19th-century Germany, during the reign of Kaiser Wilhelm II and the administration of Chancellor Otto von Bismarck. In the 1870s, the Social Democratic Party had acquired increasing support among the German electorate and threatened to obtain a majority in the Reichstag, the German Parliament. The democratic triumph of Germany’s socialist party seemed likely in the near future. The German monarchy and the conservative parties realized that something had to be done to deflect support away from the socialists and back to the established order.

Thus, the Kaiser sponsored welfare-statist legislation that was enacted by the Reichstag. Bismarck had this tactical goal in mind: the masses would shift their support from the radical program of the socialist movement to a renewed allegiance for the monarchy and the political status quo.

But it would be a mistake to interpret the birth of welfare-statism purely as a cynical political pragmatism. It was also argued for on the basis of “the social good” and a higher conception of human liberty than a mere protection of life, liberty and property by the state. The proponents of this view were known as the German Historical School, a leading member of which was Gustav von Schmoller of the University of Berlin. They rejected radical or Marxian socialism and advocated what they called state socialism. William H. Dawson, in his sympathetic exposition, Bismarck and State Socialism (1890), explained the difference:

“Socialism would abolish the existing political order altogether, while State Socialism would use the State for the accomplishment of great economic and social purposes, especially restoring to it the function, which Frederick the Great held to be the principle business of the State, of ‘holding the balance’ between classes and parties.”

Bismarckian state socialism meant to save the established order from revolutionary upheaval and societal disintegration by admitting many of the criticisms that socialists made against a market economy-exploitation of the workers by employers, self-interested behavior that fails to serve the general welfare, poverty of the many in the midst of material riches enjoyed by the few-and by introducing a series of interventionist and welfarist policies that were to improve the economic lot of the masses while saving what was good and worth preserving in the traditional social order.

As von Schmoller expressed it, state socialism proposed “the reestablishment of a friendly relationship between social classes, the removal or modification of injustice, with the introduction of a social legislation which promotes progress and guarantees the moral and material elevation of the lower and middle classes.”

The German Historical School and the state socialists also rejected the “orthodox” laissez-faire economics of the classical economists and classical liberals. Rather, they insisted, as William Dawson explained it, “No department of economic activity should on principle be closed to the State; whether it should or not participate, side by side with private enterprise, is a matter of expediency and public interest. . . . The jurisdiction of government is a matter not of principle but of expediency.” For the German Historical School, state socialism offered the middle ground between a radical individualism that desired for the state to do nothing and a radical socialism that desired the state to do everything. “State Socialism is the mean between these directions of thought; in it the two extremes meet.”

And it offered the German people a higher “freedom”-a freedom of security and protection from the vicissitudes of life-that the purely “negative” freedoms of classical liberalism failed to provide. This was explained by Frederic C. Howe (an American intellectual who played a leading role in the Progressive movement and later served in Franklin Roosevelt’s New Deal) in his book Socialized Germany (1915):

“In the mind of the Germans the functions of the state are not susceptible of abstract, a priori deductions. Each proposal must be decided by the time and the conditions. If it seems advisable for the state to own an industry it should proceed to own it; if it is wise to curb any class or interest it should be curbed. Expediency or opportunism is the rule of statesmanship, not abstraction as to the philosophic nature of the state. . . . There is almost no dissent to the assumption of state supremacy, of subordination of the individual, of the necessity for personal and class sacrifice to the Fatherland. . . . The individual exists for the state, not the state for the individual. . . . This paternalism does not necessarily mean less freedom to the individual than that which prevails in America or England. It is rather a different kind of freedom. . . . State socialism in Germany is of two kinds: first, productive socialism, and second, distributive socialism. One means the increase in the amount of wealth [through the use of government-sponsored cartels, state monopolies, protective tariffs and export subsidies] and the other its juster distribution. . . . Of the two the latter is more important

. . . . First in the list of such [distributive] activities are the social insurance schemes which distribute to the community the burdens of sickness, old age, accident, and invalidity. These in themselves have freed millions of men and women from fear of the future, from loss of self-respect, and have kept them as producing members of the community.”

While Howe admitted that these programs were combined in Germany with monarchical paternalism and autocracy, and with a sacrifice of many of the personal freedoms that Americans take for granted, he stated that “these sacrifices are not a necessary part of state socialism. The institutions which Germany has developed, and the efficiency that has been achieved are in no way inconsistent with democracy.” And it was these social-welfare programs that made Germany, despite German militarism in the First World War, “a pathfinder in social reform.”

The German welfare state

As a result, beginning in the 1880s, Imperial Germany implemented the main governmental programs that we today call the welfare state: unemployment insurance, old-age pensions, health insurance, workers’ compensation, workplace health and safety regulations, and many others. These, in fact, were the lasting contributions of Otto von Bismarck, the Iron Chancellor, who espoused “blood and iron.” In the words of Melchior Palyi, in his volume Compulsory Medical Care and The Welfare State (1949),

“Bismarck’s role in modern history is rarely spoken of now-a-days. Undoubtedly, his political and administrative ‘genius’ has shaped history down to our times. . . . When, on January 1, 1884, his compulsory sickness scheme went into operation it literally started a new era-a new age in the history of Welfarism.”

And as German economist Walter Sulzbach expressed it in his monograph German Experience with Social Insurance (1947),

“Bismarck’s fame is mainly based on his diplomatic and military successes and on the founding of the German Empire under Prussian leadership. Of all that nothing remains: The Kaiser is gone, the Reich is gone. . . . In domestic policy he failed to stop the Social Democrats. . . . [B]ut the idea of compulsory social insurance which neither he nor his contemporaries considered even remotely his principle achievement took roots and spread. It has been adopted by many countries, and its expansion continues.”

Nineteenth-century Imperial Germany, therefore, was the starting point and the inspiration for the “social” liberalism-the state socialism-that triumphed over classical liberalism in the 20th century. But besides being an intellectual inspiration for the global growth of the welfare state, it also provided an example of the consequences that would follow once the state undertook the task of provision and supervision of national health insurance. And that experience is worth looking at in some detail.

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    Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).