ABSTRACT
The modern welfare state has taken centuries to develop. In early days the priest has played a crucial role to convince people to give to the poor. He had to overcome free-rider problems, since nobody likes looting and begging by the poor while each citizen would prefer others to take care of the poor (Swaan de, 1989). It is relatively easy to break down the welfare state and destroy the solidarity that may have taken centuries to build, but much harder to build up a welfare state. People are altruistic, particularly to next of kin and others closely related to them. The principle of mutual obligations underlying reciprocal altruism is important, even though people also display non-reciprocal altruism. People are more willing to help the poor if they make an effort and take risks to educate themselves and make a living. Happiness of people depends on material living standards, but also on what other people in their reference group earn and consume. This may induce a rat race in which people try to keep up with the Jones’s and thus work excessively hard in order to keep up with consumption of their peers. What do these insights in and determinants of reciprocal altruism, willingness to co-operate and happiness imply for the support for redistributive taxation and the size and design of the welfare state? Are progressive taxes still a public bad? Are unemployment benefits necessarily harmful for economic activity? We attempt to investigate what these more sociological and psychological insights imply for the tax system and the welfare state and their consequences for economic performance. In particular, we are interested to examine in full political-economic equilibrium what this implies for unemployment and the purchasing power of people. We also investigate why the welfare state in Europe has evolved in a very different way from the welfare state in the US. The ‘Washington consensus’ maintains that liberalising markets and trimming down government is best for economic performance. We argue that this is may not be the case in societies with reciprocal altruism and rat races or when markets do not clear and unemployment is caused by trade unions, efficiency wage and/or search frictions. In that case, progressive taxes and conditional unemployment benefits may boost economic performance.
