10 - The era of political economy: from the minimal state to the Welfare State in the twentieth century

Summary

Economy and politics at the close of the nineteenth century

In the last third of the nineteenth century, a number of Western European economies started to catch up with Britain (see Chapter 6), and participated in a phase of modern economic growth. It was an era of the minimal state. Government expenditure, central as well as local, as a share of GDP was around 10 per cent and most public expenditure was consumed by the military, law and order and civil administration. Public education, state-funded health and assistance to the poor and elderly amounted to less than half of government expenditure. The role of the state was to set the rules of the game, i.e. to enact laws and regulation for industry and trade, which might include legislation about maximum hours of work and safety standards for industrial workers. Poor relief actually stagnated in the nineteenth century and did not surpass 1 per cent of GDP until democracy gave the poor more say. In some nations, unemployment insurance was introduced with the help of the state, but trade unions were instrumental in setting them up. State subsidies were resisted in other nations on liberal grounds. A liberal consensus emerged, although attitudes to free trade differed when the losers from trade liberalization triggered off a protectionist backlash in the 1880s. However, the role of government was limited.

Money supply was left to the banking system and ultimately to central banks when they were granted a monopoly on note issuance.