Intl Journal of Public Administration

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Welfare State: From Dream to Reality

Risto Harisalo & John McInerney

To cite this article: Risto Harisalo & John McInerney (2008) Welfare State: From Dream to Reality,
Intl Journal of Public Administration, 31:10-11, 1303-1326, DOI: 10.1080/01900690801973501

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Intl Journal of Public Administration, 31: 1303–1326, 2008
Copyright © Taylor & Francis Group, LLC
ISSN 0190-0692 print / 1532-4265 online
DOI: 10.1080/01900690801973501

Welfare State: From Dream to Reality

1532-4265
0190-0692
LPAD
Intl Journal of Public Administration,
Administration Vol. 31, No. 10-11, Jun 2008: pp. 0–0

Risto Harisalo
Welfare State
Harisalo and McInerney

Department of Managerial Studies, University of Tampere, Tampere, Finland

John McInerney
Irish Management Institute, Dublin, Ireland

Abstract: It is customary to defend and develop the welfare state by appealing to

benevolent dreams and expectations and to exclude analysis on what really happens
when popular plans are turned into action. The article shows that there are serious
problems in every welfare dimension; public services, public regulation, financial
transfers, and intergovernmental relations. The purpose of the article is to uncover
what these problems are and to demonstrate how they could be solved. If they go
unsolved, they provoke criticism which weakens the legitimacy and trust in public
authorities.

Keywords: welfare state, welfare society, public services, public regulation, financial
transfers, local authorities, intergovernmental relations, public policy

THE QUESTION

Is the welfare state delivering on its promises? Does it employ proper

methods and tools in appropriate ways? Is it really possible to judge the
activities of welfare state actions by their outcomes? These are the questions
to which we try to find answers in this article. In other words, it is our pur-
pose to identify problems serious enough to impede or even reduce general
welfare levels through the current provision practices of welfare services
management.
These are not unimportant questions, though they can be unpleasant ones.
This is because dealing with them may question the arguments by which the
welfare state is justified: and, also the ways it carries out its policies. Usually,
people’s needs, wants, and expectations dominate their views of the welfare

Address correspondence to Risto Harisalo, Department of Managerial Studies,

P.O. Box 33014 University of Tampere, Tampere, Finland; E-mail: risto.harisalo@uta.fi
1304 Harisalo and McInerney

state and its services, while they ignore the need for critical evaluation of
those services.
In researching issues with potentially negative effects on general welfare
we rely on what we call critical institutional analysis.[1] Critical in our method
means that presenting evidence alone may not be convincing without theoretical
interpretation,[2] and institutional directs our attention to organizational struc-
tures, practices, and processes which may pattern, guide, or even undo the
political goals and hopes of policy makers and citizens.[3]
Critical institutional analysis has three particular advantages compared to
traditional welfare analysis. First, it holds that expressed preferences are not
necessarily identical to true preferences; second, aggregation of individual
preferences may be inefficient and imperfectly translated into outcomes or
decisions; and third, on the normative side, the utilitarian standard for the
identification of public interest as the sum of individual interests could be
inappropriate.[4]
Critical institutional analysis allows us, for instance, to question the
means by which welfare policy problems have been discovered, defined, and
resolved. It urges us to bring to the fore issues, which directly or indirectly
affect policy making, but are seen by neither the general public nor the policy
experts. It allows us to make use of both empirical and qualitative (subjective)
material.
Traditional welfare research usually emphasizes empirical data on
welfare finance, personnel, and organization from which it derives its
scientific status. By doing this it may have become too tautological when
requiring researchers to use empirical data it has itself been creating.
Thus, qualitative data as weak signals, insights, and interpretations may
enhance analysis, and such qualitative data cannot be discarded as mere
anecdotal opinion. The value of this approach can be measured in terms of
how it can redirect empirical research, invigorate policy analysis, and
inform public debate.
In traditional welfare research it is typical to appeal to public opinion
favoring new or increased investments in welfare programs in order to resolve
critical questions and observations. However, with this approach it is easy to
forget that people want to have more of many things, especially when they do
not have to pay for them at the point of consumption or to give up any other
things in return. While it is reasonable to be aware of public opinion, such
opinion alone should not automatically justify new policy initiatives and
programs.

FRAMEWORK OF WELFARE CREATING INSTITUTIONS

At the heart of welfare provision there are questions about what makes the
state a welfare state and how public welfare can be understood and defined.
Welfare State 1305

Historically, many states in spite of their differences in functional nature,

political life, constitutions, and public organizations have tried to underline
their political authority and legitimacy, in particular, by promising their
citizens better welfare provision than other states.
Questions which should be addressed include the following: What must a
state do or avoid doing to earn itself the status of a welfare state? How much
exclusive social power must the state have in order to be a welfare state? Can
open societies provide for their citizens more welfare than closed ones or vice
versa? Can we be sure that such states which steer and control people’s behavior
and choices are welfare states? If the state allows more room for the market
economy to grow and develop spontaneously, does it mean that it has then
abandoned the ideal of welfare state?
Also, it is difficult to define the core concept of welfare. It may be possible
to argue that getting help from the state constitutes welfare for an individual,
but then we must ask is it really correct to call only public help welfare and
exclude other means of assistance from the definition. It is reasonable to say
that welfare is giving needy people assistance by which they can solve their
problems but it is much more difficult to say when, how much, and for how
long assistance should be provided. Are rich societies closer to being real
welfare states than poor ones? Does equality of outcomes serve welfare better
than equality of opportunities?
It is interesting to see how little thinking there has been about constitu-
tional structures and functions of the welfare state and the content of welfare.
There have probably been more practical actions undertaken, than critical
evaluative thinking about the welfare state. Action alone has justified goals,
means, and the desire to alleviate people’s sufferings and put things right for
them, at the expense of careful deliberation of the benefits and limitations of
public welfare policies.
Our view is that the state has four major institutional tools available to
promote its purposes. These are: services, regulation, financial transfers,
and delegation to local government. The state is responsible for a great
variety of services provided for citizens. Principally these include health,
education, social services, recreation, culture, and traffic among other
things. The state plans and tries to create environmental conditions conduc-
tive to business prosperity in the light of prevailing domestic and global
circumstances. For example, it provides information and forecasts with
many different interest groups. In practice, it is nearly impossible to char-
acterize and classify exhaustively all such public services because there are
so many of them.
The state has the monopoly right to provide some of these services. In
some services it allows private providers to compete with it for the customers’
favor. The state can have different roles in service provision: for example,
planning, financing, and producing. Probably the main focus of research and
public debate so far has been principally on public services.
1306 Harisalo and McInerney

Regulation is the second inevitable area of state involvement. All states

regulate social activities and conditions to a certain extent. Traditionally the
state provided society with a judicial framework within which people, groups,
and businesses promoted their own objectives. The nature of regulation can be
either neutral or focused: the former emphasizes equality of all citizens before
the law preventing possible positive or negative privileges. The state makes
use of focused regulation to promote certain political objectives with an
emphasis on either positive or negative privileges.
Financial transfers are the third area of state involvement. It is acceptable
that the state supports financially those citizens and groups enduring certain
problems or adverse conditions. Redistribution based on progressive taxation
is another way to describe these transfers which serve, for instance, low-
income groups, the aged, families with children, and single parent families.
Over time the number of financial transfers has increased and has come to
cover many different groups, needs, and purposes. Some of them are need-
based and some are more general. Many financial transfers, as well as public
services are today deemed as subjective rights.
Local government is the fourth area of the state apparatus we consider.
The state can choose to delegate the provision of services, regulation, and
transfers to municipalities. Local government has assumed an important role
in providing welfare to citizens and society: it has to carry out both its own
and governmental responsibilities. This situation has intensified the debate
about the proper roles of local authorities and of central government. Should
the state favor centralization or decentralization? Figure 1 depicts the core
areas of the state.
In critically analyzing these institutional areas we make use of the logic
of cause and effect. This means that we first identify the basic purpose of each
of the four areas. Then we begin to trace how their purposes have been turned
into practice by government and what kind of problems it may have brought
about for general welfare. We suppose that in spite of its ability to make
things right, government can also spawn problems which deserve to be recog-
nized and corrected.[5] Finally, after having defined the main problems and
issues in each of the four areas we try to show how they could be solved.

Figure 1. Core areas of the welfare state.

Welfare State 1307

We derive material for our reflection from theoretical discussion and

from empirical material on the achievements of welfare state. We seek the
signals, anomalies and problems which could undermine the welfare state’s
capability to carry out its functions, and which act as a counterforce to its
main purpose. We believe that this kind of research is valuable together with
traditional welfare research.

PUBLIC SERVICES AS WELFARE

Main Idea of Welfare Services

Modern states base their welfare service provision on a number of arguments,

the first of which is that the state must provide people with some services
regardless of their income, property, or place of abode: this is the argument for
equality. According to the second argument, at least some of these services are
so fundamental to people’s welfare that public organizations, the state and
local governments, must have exclusive responsibility to plan, finance, and
provide them. This is the argument for public monopoly, even if a service
cannot be held as pure public good. The third argument says that public
services must be financed by taxation in order to make sure that everyone
takes part in making the general welfare possible: this is the argument for
progressive taxation.
These three arguments speak for a teleological justification which seeks
to justify service provision in terms of what they accomplish.[6] It posits
political goals and compares the practicably attainable forms of government in
terms of how they provide for or will serve those goals.[7] With this justifica-
tion it is not a problem for government to ensure that people consume these
services for their own good.[8] In other words, the public goods argument
earns its legitimacy by providing people with services they want and need, but
which they cannot produce and consume themselves without government
help.[9]
Teleological argument derives its legitimacy from the need to avoid
excessive consumption causing unnecessary costs to society where parallel
private production is allowed. Ever since Karl Marx proposed this argument it
has been very popular among supporters of public services.[10] It is thought
that government alone can produce needed services in the most efficient ways
and save society from unnecessary costs.

Problems in Welfare Services

The arguments described above form a general framework for public service
provision. At first, there were probably no significant problems in this thinking
1308 Harisalo and McInerney

because people’s service needs were quite simple and focused: they wanted
basic level of education, health, and social security. But with the passage of
the time the range of services have significantly multiplied and diversified
and it is now nearly impossible to characterize them with one-dimensional
concepts. Despite these fundamental changes in welfare services, govern-
ment has been rather reluctant to consider them in complex and multi-
dimensional contexts.
Perhaps, one of the biggest difficulties with traditional service provision
is that governments have tried to do away with the price mechanism, partially
or totally, as a demand management tool and have not fully understood the
unavoidable consequences of this decision. In the open market a company
which raises the price of its product, expects the demand for it almost
certainly to decline; and, if the company lowers the price, it expects the
demand for its product will increase. Thus, the basic function of the price
mechanism is to direct and regulate demand and supply.
Therefore, government by excluding use of the price mechanism in its
welfare service provision is creating a serious problem for itself. When there
is no price payable for a public good at the point of consumption, it is highly
probable, that people’s demand will in time exceed government supply. This
means, in other words, that government—usually supported by service
providers—is the creator of the excessive demand from which it wanted to
save citizens by abandoning the use of the price mechanism. To solve this
issue government can do a number of things: regulate consumption,[11] priori-
tize service needs,[12] raise taxation,[13] increase efficiency,[14] and/or espouse
market tools.[15] By making use of any of them, or a combination of them,
government begins to retract from its original welfare ideas and principles.
The implementation of such policy options could spawn some unwanted
issues emerging within service organizations. Even a tentative public discus-
sion on regulation and prioritization may urge some service professionals to
promote them as part of their own ideas. An efficiency drive in welfare
service organizations, if not properly managed, will weaken motivation,
increase sick leave, and create tensions and conflicts between managers and
employees. Introducing market tools in public services management heightens
the ideological debate between politicians and administrators: greater taxation
of citizens or increased government borrowing is likely to undermine citizens’
confidence in service providers.
In addition to all of this, the exclusion of the use of the pricing mecha-
nism affects negatively the opportunities to develop public services further:
what is lost is the option to develop and adjust public services provision to
continuously changing conditions. Without it—the price mechanism—public
service managers are insensitive to changes in prices of the factors of produc-
tion and therefore they do not know whether they are using scarce resources as
productively as possible or not.
Welfare State 1309

In these circumstances, public service managers must rely on statistical

material, the value of which is much inferior to the information coming from a
price system at the point of consumption. Unlike information from a free price
system, statistical material on costs of public services are subject to multiple
interpretations, thus hindering service provision optimization through fine grained
adjustments.[16] Without the support of data from a free price mechanism, public
service professionals are likely to deal with all services alike, and are therefore
more or less unable to redeploy resources for optimal service results.
The inherent development logic of publicly provided services is derived
from the demand for equity. To serve this fundamental requirement, the
government must nationally coordinate and control the actions of public
service providers. It can succeed in this by standardizing the outputs, the
productive processes, and qualifications of personnel.[17] To succeed in
standardization government must centralize decision making and then
delegate it to service professionals. This is problematic in at least two ways.
First, in centralized coordination service developers usually concentrate
on the needs of median customers.[18] This may prevent them from providing
for people whom they should help and whose service needs are legitimate. If
they are not being helped, these citizens may question the rationality and
equity of public action. In the long-run, this situation could make people
extremely critical and intolerant of the state of public service provision.[19]
The second problem is the question on who are perceived as experts, and
is it possible to believe that they are capable of defining service needs for the
majority of people. Delegation of such decision making to professionals is
both an indispensable aid and an unremitting threat to rational calculation.[20]
There are many factors in decision making which may negatively affect
professionals’ calculations.[21] Although they are specialists, their rationality
is bounded which sets realistic limits on their capacity to define and solve
problems.[22] However, the deference to experts has increased their role in
deciding the development direction of provided services: this is called the
arrogance of the elites and betrayal of democracy.[23]
Monopoly behavior of private and public organizations is well analyzed
and reported.[24] All organizations in monopoly position are inclined to avoid
new opportunities, overlook customers’ needs and wishes, ignore costs of pro-
duction, and reward personnel more generously than their counterparts do in a
competitive market. For these reasons they are not optimizing the provision of
welfare as well as could be expected: monopoly position can produce welfare
losses which are difficult to trace and assess.
Public service providers get their income from government budgets. The
levels of budgets are decided on by political negotiations, in which the political
skills of negotiators could have more effect than rational need estimates of
service requirements. Negotiators can make use of different strategies in order
to raise their budgets.[25] Thus, it is often difficult for politicians to check the
correctness of administrative proposals for new or added appropriations.
1310 Harisalo and McInerney

These factors may help explain why it has proven difficult to curb the growth
of public expenditures. Many welfare states have run into debt in trying to
find new methods to finance their provision of welfare services in addition to
the progressive taxation method.
The last and often neglected problem with public services is that there
seems to be no unambiguous criteria by which public services are differenti-
ated from private ones. Sometimes the claim, of itself, seems to suffice to
make a service public.[26] Borderlines between public and private services
have been decided in political negotiations, rather than by paying attention to
objective criteria in deciding on service provision.[27] This practice explains in
part of the growth of public services.

Ways to Put Things Right in Welfare Services

It is possible to find ways to correct or ameliorate the problems which we have

described above. The first corrective measure is that of shifting authority from
administrative professionals to political decision makers.[28] It is not an
exaggeration to maintain that the latter have been more bystanders than real
power brokers in the welfare game. Theoretically, in a democracy it is up to
politicians to decide how scarce resources are to be allocated between compet-
itive claims: to succeed in this they must choose on whose side they want to
be—that of the community, or that of, the administration. The choice may
sound simple, but it must be made by politicians, if they wish to halt the
negative effects of excessive professionalism, elitism, and bureaucratization
in welfare organizations.
The second corrective measure is to reaffirm the need for an efficiency
focus in welfare service provision. It is a cliché to say that the economic
problem is to find the most efficient allocation of scarce resources in order to
best attain known goals.[29] This principle has long underpinned both manage-
ment thinking and development in welfare services. The greater prioritizing of
quality and of effectiveness issues has not removed resource allocation from
this primary position.
However, Hayek sees and defines the main economic problem differ-
ently. According to him, the fundamental problem is: how to secure the best
use of resources known to any of the members of the society, for ends whose
relative importance only these individuals know.[30] Thus, the relevant frame-
work for public services is not one of given ends and given means.[31] Framing
the problem this way compels us to develop a whole new approach to public
welfare service provision.
This re-framing of the fundamental economic question is based on the
hypothesis that decision makers do not have comprehensive and up-to-date
information allowing them to make rational choices. Relevant facts that service
professionals need in order to decide are dispersed among many sources and
Welfare State 1311

throughout organizations in society. The professionals do not have the

necessary resources and means to gather information from the different sources
to themselves: they may not even know that this information exists. For these
reasons they act in what amounts to conditions of significant ignorance.
Here we view such ignorance as significant because it cannot be over-
come by the professionals. It is not possible for them to decide on an informed
basis what kind of wants and wishes people could have, what kind of services
they need, and how they should be provided. Because service professionals do
not have answers to these questions, government should create institutional
arrangements which make continuous discovery of the necessary information
possible in service management. This approach would make discovery and
innovation structural characteristics of welfare service organizations: this
would differentiate them from efficiency promoting providers, some of which
can be innovative on occasion, but not always.
Institutional configurations like market pricing systems, entrepreneur-
ship, private property, competition, decentralization of political decision
making, and a market economy favor and support continuous discovery and
innovation. They facilitate spontaneous discovery and minimize paternalistic
relationships between customers and providers, the latter being the structural
condition of efficiency promoting service institutions. The principal question
on which the future of welfare services depends is whether efficiency drive
can be replaced by spontaneous development.

PUBLIC REGULATION AS WELFARE

Main Idea of Welfare Regulation

Regulation of privately provided services is also necessary for a well-

functioning society, although its political and economic importance has
captured less attention than that of publicly provided services. Regulation is
an essential part of human interaction in social life having many different
characteristics. For instance, people can create their own rules by which they
govern their mutual collaboration in diverse contexts. This is called voluntary
regulation because it spontaneously evolves and adapts to changing conditions.
In addition, there is public regulation which usually refers to all of those
rules enacted and supervised by government. Laws by the parliament are
regarded as the highest level in the regulation making hierarchy. In order to
make the implementation of laws as efficient as possible the parliament can
allow ministries to issue executive orders. Together these two constitute the
realm of public regulation in which we are interested here.
What then is the basic idea of public regulation? It is to create and
maintain the neutral judicial framework within which people develop and
realize simultaneously and peacefully their own unique and different plans
1312 Harisalo and McInerney

and goals.[32] This definition is based on the principle that people are
unequal in their mental and physical capabilities.[33] Thus, because they are
different or unequal, government must treat them equally.[34] Conversely, if
all men were completely equal in their gifts and inclinations, government
should have to treat them differently in order to achieve any sort of social
organization.[35]
Treating people equally means that government cannot promote positive
or negative discrimination through its regulatory powers. The former means
that government allows an advantage or a benefit for a well-defined group of
people which it denies others. The latter means that government charges some
people or groups costs, but allows others to avoid them. Rules treating people
equally before the law are held as just, legitimate and fair by most of the
people. Such rules people obey voluntarily and so doing minimize the costs of
compliance and control.

Problems of Welfare Regulation

The basic idea of public regulation as fundamental to justice and equality has long
been corroding our welfare societies. This is because public regulation has almost
unnoticeably been detached from its original purpose of promotion of carefully
defined political purposes, either by positive or negative discrimination. The tran-
sition may even mean that public regulation is replacing public services as the
main mechanism to provide welfare for people. Today it is normal for government
to justify its use of regulation for welfare objectives and purposes.
Consequently, currently government regulates many areas of social and
political life. By promoting general welfare with regulation Parliament has
also been compelled to allow ministries more freedom to use executive orders.
As a result ministries have devised different ways and means to regulate
welfare provision as shown below.[36]

• Regulation programs: give orders and make refusals; make things permissi-
ble; require notifications to public authorities; regulate conditions, on which
granting permits will be made
• Incentive programs: regulate the behavior and choices of citizens by
positive and negative incentives like financial aids, subsidies, taxation,
payments, etc.
• Performance programs: promote efficiency and effectiveness of public
service providers
• Procedural steering programs: steer and develop decision-making and
activities of private and public organizations like: the right to participate,
women’s rights, environmental requirements, etc.
• Persuading programs: pave the way towards desired behavior and choices
of citizens and organizations by advising, informing, and enlightening.
Welfare State 1313

It is possible to argue that these regulatory programs are continuously

increasing. In the United States, for instance, the Environmental Protection
Agency (EPA) alone has about 10,000 pages of regulations and the result of
this, after several decades of unrestrained growth, is a mammoth legal edifice
unparalleled in history. Federal statutes and formal rules now total about 100
million words.[37] In Finland the number of pages of government law initia-
tives has risen 2,5 times since 1985. Last year the total number of pages was 8100.
And it is worth remembering that in 2003 Finland’s national parliament coped
with about 100,000 pages of the European Union legislative material as well.[38]
Public regulation, in spite of generally accepted objectives and purposes,
may produce also many unpredicted costs and outcomes. For instance, it may
have significant negative effects on economic growth and on people’s ability
to take care of themselves. Regulatory costs per household in the United
States–paperwork, price and entry controls, environmental and risk reduction–
fell from just over $7,000 at the beginning of the 1980s to $5,200 at the end of
the 1980s, since then it has risen to $6,000 in the 1990’s.[39] In aggregate the
total regulatory costs equated to $525 billion—around 8% of GDP—in 1980,
down to $490 billion in 1989, up to $600 billion in 1995 and projected further
increase to $660 billion in 2000.[40]
A survey on potential effects of regulation revealed that 44% of compa-
nies cited the regulatory burden as a barrier to growth.[41] Regulation was
second only to shortage of skilled labor (46%) and well ahead of other catego-
ries such as late payment (29%), access to finance (20%), unfair competition
(20%), and the uniform business rate (15%).[42] A study of CEOs of big
Finnish food manufacturing companies showed that it was public regulation,
not expenditures invested in public services, which exacerbated many social
problems, like unemployment.[43]
As a result of these data, it is possible to infer that public regulation is not
only bringing about intended and favorable outcomes, but it is also producing
unwanted and unpredicted problems. These costs and effects may even exceed
the alleged benefits: public regulation increases the cost of living and of
production: it raises prices, and it slows down economic progress. It does not
just involve additional expenditures for the private sector; it clearly involves
extra government costs in monitoring and developing it.[44] A fair assumption
is that regulation, well-prepared and implemented, generates efficiency gains
in economic activity, but it is difficult to say how often these things can be
substantiated.[45]
In addition, there are other vital issues in public regulation such as people
endangering their own welfare and the stable functioning of the society.
Because of growing regulation, the possibility of several valid laws coming
into being at the same time is increasing and this, in turn, has created
complexity and potential contradictions for legal interpretation.[46]
Consequently, people are not quite sure about what the regulations allow
them to do, or what they must avoid. Having made their decisions, they are
1314 Harisalo and McInerney

not sure according to which set of rules their cases will be determined.
Eventually, if they are in fear of unfair and unjust treatment in a possible con-
flict, they may avoid making decisions which are beneficial to society. The
regulatory labyrinth could possibly undermine people’s sense of justice and
the legitimacy of law—the very foundation of the just society.
Another issue is that the process by which laws are drafted is significantly
deficient. For instance, there are issues of: deficient preparation, inadequate
knowledge of civil servants, insufficient political deliberation, and nearly
complete lack of public involvement.[47] The current process allows ministries
to plan and implement their own regulatory programs without significant public
debate. These problems in the creation of legislation may make regulation
harmful for people in the short and long term. Indeed, they threaten the overall
level of general welfare and sometimes may even reduce it.
The great latitude of public administrators to implement regulation
entices different organized groups to pursue their goals through it. This
explains the significant growth and activity of interest groups in policy
making.[48] These groups may have knowledge and resources which are val-
ued by policy makers and which allow them to promote their own interests at
the expense of the general public. This activity can sometimes be called rent-
seeking.[49] Thus, it may be correct to assert that it is the development of the
welfare state that has created the conditions for interest groups to flourish,
rather than the opposite.
Although rationality and certainty are thought to underpin public regula-
tion, it may not be so. As a complex phenomenon, life does not readily lend
itself to the constraints of verbal and grammatical formulation. For instance,
anyone who tries to formulate a rule on how to make a safe hammer quickly
realizes that the task exceeds the capacity of language.[50] Thus, in trying to be
too detailed regulation may become unclear and obscure even for those who
have responsibility to interpret the rules.[51] In practice, the drive for rationality
and certainty has destroyed, not enhanced, the ability of welfare regulations to
act as a guide.[52]

Ways to Put Things Right in Welfare Regulation

It is possible to find effective ways to correct regulatory problems and

issues.[53] The first thing to do is to make the current relative ease of enacting
laws and rules more difficult, for instance, by lengthening the process during
which political ambitions and passions, private interests, and rent-seeking can
be recognized and suitably managed by legislators. At the same time
Parliament must make sure that there will be a proper public discussion about
emerging law initiatives. Such an initiative could encourage citizens to
participate more actively, and so, equalize the power balance between lobby
groups and citizens.
Welfare State 1315

However, it is not sufficient to find only technical solutions to bloated

regulation, it is also necessary to understand what regulation really entails and
what it can practically achieve. The real nature of public regulation is not its
use as a means of satisfying different wants of particular groups: this turns the
legislative process into a power-driven and situation-based activity, in turn
feeding the sense of arbitrariness and coercion in society. What must be
understood is that public regulation appears to be in many situations too quick
to be efficacious, too unpredictably far-reaching to be wholly beneficial, and
too directly connected with the contingent views and interests of a handful of
people to be a remedy for all the people concerned.[54]
Law represents fundamental justice and has the objective of maintaining
and developing the values of society within a legal framework. Democracy is
a means by which citizens promote that objective and ensure that laws are not
turned into rent-seeking devices by vested interest groups. Universality,
equality, and certainty are the main characteristics of good and beneficial
laws.[55] In other words, the trend toward particular, unequal, and uncertain
regulation must be slowed down or stopped. But this is easier said than done
because it requires that political parties and citizens must re-think their funda-
mental political expectations about what the political process can really
achieve.
Parliament can restrict government ministries in the use of their statutory
powers and restrain them from widening them. Legislators are not only over-
seeing ministries, they must also protect citizens against potential regulatory
malfunctions, arbitrariness, and misconduct. One of the best ways of achieving
the necessary balance is to submit regulatory initiatives to cost-benefit and
cost-effectiveness analyses in order to identify their potential positive and
negative outcomes. Public discussion, statistical analysis, and Parliamentary
debate should be made accountable by means of regulatory budgets showing
social costs and benefits of such programs to the society in the short and long
term.[56]

FINANCIAL TRANSFERS AS WELFARE

Main Idea of Welfare Transfers

According to the original logic, the welfare state has the legitimate right to
provide certain citizens with the necessary financial resources by which they
can solve their problems and buy the goods they need, which they could not
afford from their own resources. Government’s responsibility to help people
in need is based on the assumption that public financial help is functional or
consequential and therefore also temporary.[57] By taxing people government
ensures that the affluent will participate in helping the destitute, thus
constructing a more egalitarian society.
1316 Harisalo and McInerney

Financial transfers are an efficient way to help and support different

needy people in the society, on the assumption that there are problems and
issues which can be sufficiently and economically dealt with by public
money. For instance, such assistance helps people to overcome sudden
unemployment difficulties, solves their housing problems, and makes it easier
for them to take care of their children. For these reasons financial transfers are
politically very popular.
Such transfers serve the welfare purposes of society and support con-
cretely public services and regulation. They help to spread wealth and equal-
ize material conditions between people. They link the poorest and displaced
members of the society with its many opportunities and wealth-creation
processes. They are the means by which people may walk away from the edge
of subsistence, marginalization, and dependency towards economic autonomy
and independence. By using financial transfers to assist people in critical
situations, they can learn how to avoid getting into similar problems again in
their life. Therefore, in this sense financial transfers are valuable tools for
government welfare programs.
There are many ways for government to distribute money for different
purposes. For instance, it can distribute money to the needy, immediately if
necessary. It can allow them the right to claim allowances or deductions in
taxation. Indeed, on occasion, such money can be given either in advance or
after the event to claimants.

Problems of Welfare Transfers

Finally, with wealth accumulating significantly in our societies, the nature of

financial transfers has changed from being temporary to being more of a con-
tinuous nature. Another big transformation has been the change from helping
individuals to that of helping different groups: such as organizations, areas,
and businesses. These two particular changes explain the greater part of the
growth in the needy relying on government to help them over the last two
decades.
However, it soon proved that this splendid idea of helping people with
transfers did not work as intended. The transfers have not, as was originally
thought, served as situation-based, temporary, and short term: as complemen-
tary tools to people’s own and their communal resources. Some of those people,
entitled claimants, on occasion have found it rational to position themselves in
a way to increase their chances of being continuously eligible for them. In
other words financial transfers are prone to make people more dependent on
them. In Finland, as elsewhere, this problem is characterized either as the
income trap or taxation wedge.[58] Reward, does indeed, shape behavior.
In addition to keeping people on public assistance schemes, financial
transfers may entice people to qualify for them by adapting their economic
Welfare State 1317

circumstances to meet the criteria entitling them to public money: there are
always some people who find it more convenient to rely on public money
instead of working for it or developing their own capabilities and resources.
When this occurs, financial transfers are generating the opposite outcomes to
those intended.
This greedy appetite of some people, groups, and organizations accounts
for a significant part of the growth of financial transfers. Anders Isaksson,[59] a
Swedish author, has described this desire as always more, never enough. He
shows that in pursuit of their own welfare from the state, people, who could do
without any public money, can be extremely clever and selfish in “qualifying”
for continuing transfers, paying no attention to the increased economic burden
they assign to their fellow-citizens. Where such incidents occur, the welfare
state is being undermined by diverting resources from those people with
legitimate needs to that of distributing money to those who are capable of
providing for themselves.
It is of significant concern how little attention has been paid to the ever
increasing total amount of financial transfers: genuine claimants, who by
objectively calculated criteria need it more, get as much as those other people
who have sufficient resources to do without such transfers. This is an abuse of
vertical equality because people in different situations are treated equally by
government.
A broken moral compass is an issue worthy of much attention. When it
is broken, it does not inform us about the importance and urgency of prob-
lems of needy people, and seduces policy makers to include all claimants as
equally qualified for public help. However, as resources are scarce,
demands for them are considered comparatively in political process and
only winners will survive the screening and be rewarded. But, this does not
mean that the winners are those who really need help and losers are those
who do not need it.
It is customary to think of financial transfer policies in terms of needy
individuals or families, but it currently contains also another continuously
growing area; the area of corporate welfare.[60] It seems to be as natural for
corporations as for individuals to try and qualify for easy money from govern-
ment. It must be remembered that public financial support for private corpora-
tions is prone to distort competition: it encourages companies to invest more
on qualifying for public subventions, instead of paying attention to increasing
their innovative resources and capabilities. When this happens, no one knows
what kind of distortions will result in society.
The increasing pursuit of public financial support is usually portrayed
as human concern for the weak, the destitute, and displaced peoples. Of
course this can sometimes be correct, but hardly always: politics also serves
the well-defined interests of efficiently organized lobby groups, not general
interests as is usually supposed. Such lobby groups can be very skilled at
painting their demands in a way which make them justifiable in public opinion.
1318 Harisalo and McInerney

Ways to Put Things Right in Welfare Transfers

It is often argued that in the public policy arena citizens are being divided into
two groups, insiders and outsiders: with government supporting the former
but neglecting the latter. If this description is correct, it can be explained by
the intense campaign of people and groups who have significant resources, are
well-organized, socially visible, and have access to centers of political power.
These things weigh the scales in favor of the insider group. And if this is a
sufficiently accurate way of describing the problem, it is government policy
which has helped create this division.
To correct problems in welfare transfers, government must repair its
moral compass in order to be more capable of recognizing people whom it
must help and differentiating them from people whom it need not help. It must
revert toward temporary, provisional, and situation-based policies. Moreover,
it must abandon the idea of subjective rights and replace them with means-
tested transfers. Government should not be wasting its scarce resources on
anyone who can afford to tackle their problems from own resources. There is
something curious in the fact that today we all are healthier, wealthier, better
educated, and more capable of taking care of ourselves than people of
previous generations, but in spite of this we seem to need more public support
than ever.
As to corporate welfare it must be accepted that in free and open market
economies companies will make decisions to maximize their profits. Compa-
nies must try to earn their profits from private open market transactions, not
from public authority subventions. The state should minimize its interventions
in open market economies and not pursue a policy of corporate welfare provi-
sion. If private corporations cannot profitably function without state transfers
in open market economies, in the general case they do not deserve to be
supported by state transfers.
What applies to corporate welfare also applies at the level of the individ-
ual citizens who can take care of their own welfare. When they do so they are
going to live at the expense of the state. However, from the point of view of
the long term well-being of civil society this situation is an incipient threat:
citizens must have the capacity to organize themselves around different
concerns and purposes from within their own resources. To the extent that
they succeed in this, this will help the society to prosper organically.

LOCAL GOVERNMENT AS WELFARE

Main Idea of Local Government

The core question is: to what extent should public administration be decentral-
ized or centralized in planning, financing, and providing public services, in
Welfare State 1319

delivering financial transfers, and in supervising public regulation? Local

government has traditionally had the most significant role in our society in
taking care of these welfare functions. This is understandable, because our
municipalities have had a long tradition of self-government and democracy.
From an official perspective in Finland, local government is strongly
protected by the Constitution under which municipalities can decide freely on
their responsibilities and functions; and, on their financing through taxes
levied on the income of the local citizens. It is supposed that local authorities
have an built-in proclivity to serve the local community: helping it solve its
problems, and realize its aspirations. There is general acceptance that decen-
tralization serves these purposes better than centralization.
Local democracy inspires and motivates local citizens to participate in
politics and the development of policy. It recruits them from different political
backgrounds and stages of development and educates them how to move from
initial contradictory claims to a balanced and coherent strategy for the whole
municipality. About two hundred years ago a French traveler to America
argued that the main bulk of the ordinary business at that time was centered in
the townships where the desire for esteem and the pursuit of substantial inter-
ests assume a different character compared with that of the national
politics.[61] He was of the opinion that decentralization is a more favorable
condition for a well-functioning society, but unfortunately his point of view is
usually easily forgotten by those who favor centralized development of the
society.[62]

Problems in Local Government

The welfare state began and continued as a state-led project, because it was
the most efficient way to deliver services, transfers, and regulation to every
municipality despite differences in their situations, economic conditions, and
political dispositions. Unfortunately, it is not possible to see how well
government has succeeded in using decentralization as a means to promote
these three goals. However, it is widely accepted that the following six factors
largely account for the trend toward centralization in the building of a welfare
state:[63]

• rational and comprehensive decision-making requires centralization

• service scalability is a necessary goal in organizing service provision
• economy, efficiency, and effectiveness are the main criteria in evaluating
welfare provision
• specialization of personnel is possible only in sufficiently large organizations
• equality between local authorities is emphasized
• the state is better equipped to carry out welfare functions than the more
politically unstable municipalities
1320 Harisalo and McInerney

These assumptions and arguments have inevitably favored centralization

in the development of the welfare state. Over time they have turned munici-
palities from decision makers on local preferences to solely implementation
machines[64] or from self-governing entities to supervised bureaucracies.[65]
This transformation has proceeded without much attention or critical thought.
As a result, local authorities are probably more dependant at this time on the
state in their decision-making than ever before. A deplorable outcome of this
is that they have lost most of their inherent capacity to recognize and solve
local problems with local ideas.
This is a severe problem for local authorities at this time, when all the
important insights and innovations come from centralized decision
making. Because of centralization, the stream of ideas in local government
systems is drying up, and there is less and less for municipalities to learn
from each other. At the same time municipalities are developing their
organizations, resources, and responses in an increasingly homogeneous
fashion.
The first problem here is that we cannot be sure that the ideas developed
and implemented centrally are the most fruitful and beneficial for a society in
the long-run. The second problem—the reduction of the innovative capacity
of local authorities—is that societies have been deprived of ideas which
municipalities may have discovered in conditions of centralization and of
whose existence we are all totally ignorant.
Centralization does not necessarily mean that the state has sufficient
understanding of the things it has achieved in municipalities. Centralized
decision-makers could buy the support of municipalities by promising them
more resources and visibility. But, in a time of financial austerity, the state
does not prune or suspend central plans, and find central costs to cut in order
to find sufficient resources for municipalities to continue to carry out their
welfare functions. On such occasions, central government forces local author-
ities to make needed cuts and slimming down of services.
Discussion of municipalities being local welfare agents lacks substance,
because it is based on the assumption that people’s homogenous welfare needs
are best met with standardized organizations and services. But, this may not
be an extremely realistic description of people’s needs. If there are important
differences in local needs and problems; and, if they are tackled in the same
way, then, some people may get more public services than they warrant, while
others may receive less than they should.
The development of welfare provision has had a notable effect on the
vitality of the democratic steering of politics. It has increased the complexity of
judicious reasoning, administrative decision making, and economic supervision—
all of which civil servants as full-time professionals are much more in favor of
than local politicians as lay members. Consequently, there has been a power-
shift from the political to the organizational in local government which
accounts for much of the weakening of local political authority and of the
Welfare State 1321

steering power of politics.[66] As a result citizens’ respect for politics has

diminished and they have learned to scorn it.
This development also touches on citizens’ willingness to participate in
and accept political roles. They perceive themselves as relatively powerless
and reluctant bystanders in the administrative and professional game in which
their fate is debated and decided. This phenomenon, which weakens local
communities, also diminishes society’s capacity to spontaneously renew itself
and find imaginative ways to adapt to new conditions.
Centralization is about providing, organizing, and ordering without
requiring much proactive thinking and independent participation from citizens
locally. It is assumed that it is much easier to receive than to provide, or to be
served with what is available rather than go to great lengths to do what is
actually required. Superficially, centralization is a more convenient option to
decentralization. However, the act of making appropriate decisions is proba-
bly much more important for people’s welfare than passively receiving what
is homogeneously provided.[67] Centralization is not a definitive way to build
utopia.

Ways to Put Things Right

Obviously it is right to try and fix the problems of local government, because
it has not outlived its purpose of harnessing local human tradition institution-
ally to serve local people and society. The question is how to reinvent local
government and find it a proper place in contemporary public society. The
first thing is to help local authorities to somehow defend themselves against
the centralized will of the state: this may be technically easy but is politically
difficult.[68] Local authorities should be provided with a significant right to call
into question or challenge the aspirations and objectives of the government.
At this time there are no functional and organized processes by which the
government and municipalities can share their expectations and their view of
opportunities on which to collaborate.
The next step is to consistently strengthen decentralization in society: a
political process of rediscovering civil society. It is a common and mistaken
view that the problems of municipalities are outcomes of excessive decentral-
ization; and, therefore, centralization is the quickest way to remedy those
problems. Government can encourage diversity by allowing municipalities to
define social problems and opportunities in their own terms, and allow them
to develop their own robust solutions. Social diversity engendered by munici-
palities is not an affront to equality.[69] In summary, we see decentralization as
one of the hallmarks of civil society.
To efficiently remedy the problems of local government, it is also
important to rediscover the roles and functions of politics at local level. A
society cannot envision itself as democratic, if there is no proper role in
1322 Harisalo and McInerney

politics for collective decision making. However, it is not possible for politics
to revert to the old ways and habits. Thus, a new role must be established in
society whereby citizens are more capable than ever to take care of themselves
and solve their own many and different problems.
Central administration must also refine the means by which it develops
and steers municipalities. In the old hierarchical world the major commit-
ments of the state to local authorities were financial support, organizational
configurations, judicial mandates to act, and national standards. In the
emergent public administration both actors must invest in creative interaction
to define and solve problems and to realize opportunities. To succeed in these
new conditions both sides must be capable of partnership, creativity, inspira-
tional capacity, synergy, and future-orientation. Local authorities in particular
and the state in general have not lost their right to exist: only that the old logic
that underpinned organization and action are no longer appropriate and need
to be replaced by more relevant and robust alternatives suitable for contemporary
times.

DISCUSSION

We believe we have uncovered noteworthy issues in the institutional

structures and in the practices of the welfare state. These questions, if left
unattended, weaken the authority and legitimacy of the welfare institutions
and people who run them and work in them. Nothing can be gained by closing
our eyes to the problems; it is much more productive to confront them and to
resolve them.
We have excluded many important issues of welfare from our analysis.
For instance, we did not touch on the question of what is welfare and how it
can be understood. We did not ponder what kind of problems there are in
comparing people’s needs and the fulfillment of those needs. We did not focus
on what kind of moral and social problems are brought about by the political
process which allows the views of occasional majorities of people to prevail
over those of different minorities.
However, based on our analysis of the use of the four major institutional
tools that the state has to promote its welfare policies, we found that it would
not be correct to characterize the state as a welfare state. Our robust conclu-
sion is that the welfare state on the one hand promises too much to people;
and, on the other it resists their attempts to modify or change it. In terms of its
current level of achievement, the welfare state can be seen as significantly
deficient in relation to the original vision and in urgent need of reinvention,
repair and reinvigoration. This does not mean that we have to forget the idea
of providing as much welfare as is necessary and affordable. However, we
must be prepared to search for new institutional arrangements and new
paradigms for welfare direction and provision.
Welfare State 1323

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1326 Harisalo and McInerney

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