In a guest post, Diederik Boertien argues that conservative welfare regimes might reduce inequality by being less complex and less risky – making it simpler to make good choices about the future.
People differ in their abilities to exploit the opportunities that society offers them. Some people manage to get the best doctors, get their children into to the best schools or know how to minimize the tax they have to pay. Other people have a good eye for investments in the future; they know which skills to acquire or how to start up a business that provides services or products that are demanded. Probably a very significant part of inequality is caused not just by differences in productivity or deliberate choice but also by differences in the ability to make the choices that maximize a persons’ welfare given their innate talents and preferences. Or to say it differently, due to differential abilities in exploiting the opportunities that a social structure provides.
In this post I will argue that this source of inequality is often ignored when thinking about ideal welfare models and how including this sheds a different light on, for instance, ‘third way’ thinking and the ‘flexicurity’ model.
Reducing inequality through social structure
If one aims to reduce inequality that arises due to differences in the abilities to exploit social structures, one could intend to reduce the pay-offs of making the right decisions. The clearest examples are wage compression and income redistribution. Another way to go would be to look at how complex societal structures are and how difficult and risky it is to make the right choices that lead to maximum pay-offs for individuals given their abilities and preferences. If it is very clear what choices people have to make in order to maximize their welfare given their talents and preferences, inequalities due to differences in the ability to exploit social structures will be low.
These two distinct ways of looking at how to deal with inequality are reflected in the different academic bodies of literature about inequality. Sociological and economic research often focuses on what determines differences in behaviour between people and how this affects inequality. Comparative social policy research often takes the behaviour of people as a given and looks at how to minimize rewards for different behaviours. But little emphasis on how policies influence the behaviour of people is likely to flaw thinking about how the ideal welfare regime looks like.
Welfare regimes and inequality-generating choices
In recent decades influential attempts have been made to create the ideal welfare regime model by combining elements of social-democratic and liberal ideals, like ‘third way’ thinking and the ‘flexicurity model’. The ‘flexicurity’ model, for instance, combines a flexible labour market with high benefits for individuals when moving within the labour market. When combining only these two ideologies in order to create an ideal welfare model, one is likely to overlook how policies affect how difficult it becomes for people to make the decisions that would maximize their personal welfare.
What are the factors that determine to what extent a society minimize inequalities due to differences in abilities to exploit social structures? The factors that come to mind first are risk and complexity. It is generally known that risk-averseness is a cause for the different extents to which people invest in their future. And it is clear that the need for intellect and information (social capital) becomes greater the more complex a society is, and therefore the pay-offs for differences in talent and connections become bigger.
Risk is greatest when investments that have to be made are costly and when future pay-offs are unsure. Complexity is greatest when a lot of factors have to be taken into account when making a decision and when the future influence of these factors cannot be readily determined. Thus, both risk and complexity increase when societies change fast and dramatically.
The advantages of institutionalized societies
I believe that highly institutionalized societies reduce inequality by reducing risk and complexity within a social structure.
By institutionalization, I mean the extent to which there exist rules and norms about how to behave in certain situations or how to attain certain outcomes. Highly institutionalized societies are expected to change slowly given the “stickiness” of institutions. Institutionalized settings can give security about future pay-offs of investments and therefore reduce the risks and complexity one has to take into account when making decisions. Beyond this, institutions may establish rules and norms, which clarify the way people should operate in order to attain certain outcomes.
For example, the ‘Varieties of Capitalism’ approach has shown how institutionalized settings make it easier for people to acquire skills that remain relevant over large periods of time. In a rapidly changing market, one does not know which vocational skills will be demanded in the future; and if it is more difficult to determine which skills are relevant in the future, inequality in skill acquisition will be greater.
Institutions can also put restrictions on access to information or social positions and certain skills are needed to find and understand the rules and norms that apply. Not all institutionalized settings are therefore likely to make taking the right decisions easier. But when putting nuance on this claim it seems to me relatively plausible: “a highly institutionalized environment characterized by accessibility and transparency reduces the inequality that results from differences in the ability of people to exploit social structures”.
The relevance of ‘the three worlds of welfare capitalism’
The last decades of research on welfare regimes has shown us that there are at least three “worlds of welfare capitalism”. Most ideal welfare regimes combine social-democratic and liberal ideas. The conservative world of welfare capitalism is often seen as a “social status-conserving” regime, while its distinct direct effects on inequality and efficiency are not always put forward. If we just concentrate on finding the right mix between social-democratic and liberal ideals, we might overlook the benefits of institutionalized social structures by which the conservative world of welfare capitalism is characterized.
If one thinks from this perspective about the model of ‘flexicurity’ its possible weaknesses become more apparent. High benefits when experiencing unfortunate events can make people less risk-averse. But at the same time, aiming to reduce all rigidity within a labour market is likely to increase complexity. People therefore might be likely to invest in their future, but are less likely to make the right investments. If complexity increases risk, the positive effect of benefits on taking risks might also be counteracted when removing the institutionalization of the labour market.
This also shows how free markets can make people more dependent. A free market changes rapidly and more extremely than a regulated market within a highly institutionalized setting. More institutionalized markets might reduce complexity and risk and therewith enable people to make the right decisions themselves.
The argument outlined before leaves out many important considerations and factors. But, I hope I could show that it is worth to start taking into consideration the effects policies have on decision-making of individuals. By putting forward a hypothesis about institutionalization and its effects on inequality I hope to provide a starting point for a discussion in that direction. When doing so, insights from behavioural economists might be helpful, who also attempt to address the question: How do certain settings make it more likely for people to make the choices that would maximize their personal welfare?
Note: This is an idea I am not working on right now, but if someone has ideas and would be interested in doing a paper on this with me, I’d be more than happy to. Just drop me a mail. Also, thanks to Ben and Brendan for their useful comments on an earlier draft of the post.