Chapter 5: The Legacy of Bismarck
The modern state is largely a mechanism for transferring funds from one person to another. What we economists call public goods are provided by the state but are now only a part of it. The United States is not as far along in this procedure as many other countries, but in our case the federal government pays out in various types of transfers a signiﬁcant percent of the amount it collects in taxes. Most of the European countries are even more dominated by the legacy of Bismarck. The reason I refer to this as his legacy is because he invented the modern Social Security system. Charitable payments by the state have of course a long history, but the particular system we now use was introduced by Bismarck. It is ironic that he introduced it in an eﬀort to defeat the socialists in an election. It failed. Today the elaborate social security system is almost the deﬁnition of socialism since direct government management of the economy is currently very unfashionable and either gone or being slowly eliminated wherever it previously existed. I would like to think that this is a permanent situation since the Bismarckian income transfer system does not necessarily greatly injure the economy in the way a planned economy would. Unfortunately, prediction is diﬃcult and in addition the Bismarckian system does injure the economy but not in the same way. The activities of the Bismarckian welfare state can be roughly divided into three categories. The...
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