Fixing the Welfare State Isn't About Neoliberalism

European Straits #19

Nicolas Colin

Dear all,

Last week’s newsletter, about the future of the welfare state, became an op-ed in the Financial Times’s Monday edition: How to fix the welfare state for the entrepreneurial age.

If you follow the link and scroll down to the comments section, you’ll see that most people criticize the idea that entrepreneurs have a bigger role to play when it comes to covering critical risks. For them, the fact that startups can contribute to making social insurance more efficient and effective is seemingly synonymous with the neoliberal ideal of scaling back state intervention.

But that’s not what I have in mind. The neoliberal case is about relying more on the private sector for the sake of reducing public spending, even if it means depriving people of proper coverage because of well-known market imperfections. The entrepreneurial case, on the other hand, is precisely about correcting those market imperfections. By relying on tech startups, not incumbent insurance companies, entrepreneurial liberalism aims at improving coverage instead of weakening it.

Here are a few arguments to illustrate this idea:

  1. A key feature of tech companies is that they provide their users with an exceptional experience. Indeed when it comes to social insurance, many problems are due to what Venkatesh Rao calls paperware: “Bureaucratic processes constructed from the older soft technologies of writing and money”. Paperware processes make the welfare state difficult to use and in some case result in people not even claiming what they’re entitled to. But that can all change with technology, as proved by the likes of Oscar, “a health insurance that’s easy”. A well-designed interface, a seamless workflow, and more human language are radical improvements as compared with the welfare state as we know it.

  2. Another key feature is that tech companies collect user-generated data on a regular and systematic basis . Their goal is not to invade people’s privacy, but to achieve an operational effectiveness that provides high quality at a large scale. Google, for instance, provides a better search engine because it is used by more users, and so its interest is to serve as many of them as possible. An insurance company denying people coverage is the equivalent of Google not downloading search results for the vast majority of those who never click on sponsored links. The reason why Google doesn’t do that is because in the Entrepreneurial Age such practices would shrink it down to a niche, deprive it from most user-generated data, radically weaken the quality of its service, and provide room for more aggressive competitors. We can expect the same with a more entrepreneurial approach of social insurance (collecting more data in that field obviously calls for specific regulations, but that’s another story).

  3. Also, tech companies design business models including what Tim O'Reilly calls an architecture of participation. In doing so, they invite the powerful network formed by a multitude of users to climb up their value chain, take control of resources and contribute to creating even more value through increasing returns at scale. Individuals will gladly lend a helping hand to those corporations who serve them well. They freely share their advice on hotels and restaurants on TripAdvisor, and they let Google store their search requests in order to train PageRank and improve the experience of other users. An architecture of participation is very promising in the context of social insurance: think about sick people following their treatments not on their own but as part of a network of peers; about elderly people connecting with one another to form cloud communities; about parents pooling resources to make quality child care more affordable.

The current challenge is not to merely spare taxpayer money within existing welfare state institutions, but rather to imagine a radically new version of Polanyi’s “embedded liberalism” that harnesses the power of technology to support us all in the current Entrepreneurial Age. I’ll keep on working on that in the coming months as I’m finishing my book ‘HEDGE’. In the meantime, here’s an article by Will Wilkinson that shows how fast things are changing when it comes to the political perspective on the welfare state: For Trump and G.O.P., the Welfare State Shouldn’t Be the Enemy.

I’m traveling in California and Nevada with my wife Laetitia for our tenth anniversary, so no other publications to share this week!

Warm regards,

Nicolas


How to fix the welfare state for the entrepreneurial age
Technology allows us to harness personal computing and networks to pool risks
https://www.ft.com/content/a642d4ae-4169-11e7-82b6-896b95f30f58

MAY 28, 2017 by: Nicolas Colin

The political origins of the modern welfare state lie in the turmoil of the 1930s. The Great Depression in the US and the rise of fascism in Europe showed that individuals had to be protected against market volatility lest capitalism lead to the destruction of democracy.

After the second world war, what the economic historian Karl Polanyi called “embedded liberalism” became the preferred compromise: the market was to be the primary force of value-creation, while the state would run social programmes to cover people against critical risks.

As we move from the “Fordist” era of mass production into the entrepreneurial age, the future of the social compact in developed economies depends on rethinking the role and nature of many institutions.

Contrary to the beliefs of ideologues on both sides of the debate, this does not call either for more state intervention or less. Rather it requires a redrawing of the map, reapportioning the respective perimeters of the market and the state. There are areas, such as housing in dense cities, where the rise of technology calls for more state intervention. And there are others, such as care for the elderly, where technology-driven models correct imperfections that long rigged the market. Once those imperfections have been eliminated, state intervention would be a hindrance rather than a help.

Social insurance is one such area in which there is more room for entrepreneurial ventures as opposed to state bureaucracies. This is not unprecedented: the original social insurance programmes were created by private citizens who organised to pool risk at the local or professional level. In France, for instance, fraternal benefit societies were legally recognised in 1835 and obtained full freedom of establishment in 1898 — decades before social insurance became the domain of the state.

The state took over only because the self-organising efforts of communities could not scale up to the point where the entire population would be covered. The success of such private initiatives was due in large part to the strong bond that members forged by living in the same area or belonging to the same profession; this couldn’t happen at a larger scale. And there were some risks, such as illness, unemployment and the effects of old age, that were better covered at the scale of an entire country rather than on a community level.

Today, technology allows entrepreneurs to harness the power of personal computing and networks to pool risks. This was envisioned in 2003 by the economist Robert Shiller, who wrote that “an electronically integrated risk management culture” could “work in tandem with the already existing economic institutions of capitalism to promote wealth”. Mr Shiller’s vision was largely lost in the financial crisis that followed, but various factors — increased processing power, systematic data collection, the strength of peer-to-peer networks — mean that covering risks is easier and cheaper than in the past.

Technology also makes it possible for risk-pooling initiatives to rely on what the Silicon Valley entrepreneur Balaji Srinivasan calls “cloud communities”. The members of these can be distant from one other and yet very close in terms of profile and interests. Cloud communities have an advantage over local ones because of their networked structure: the power of networks tends to increase, instead of diminishing, as the underlying community grows. While in the past state intervention was necessary for universal coverage, future increasing returns at scale could be enough for entrepreneurial cloud-based initiatives to achieve universal scope.

Given the political and economic landscape, these would be positive ways to replace crumbling welfare institutions around the world. But they also pose a problem: how to prevent people from using the entrepreneurial argument simply to scale back state intervention. The challenge is broader than that: to imagine a new version of Polanyi’s embedded liberalism that supports us all.

The writer is a former French civil servant and co-founder of The Family, an investment firm