“The Three Worlds of Welfare Capitalism”, part 1: Why do welfare states exist?

Jacob Keegan
9 min readApr 19, 2021


This will be the first in a series of articles about the excellent “The Three Worlds of Welfare Capitalism” by Gøsta Esping-Andersen, first published in 1990. It focuses on 18 developed Western countries, with extensive data covering decades. Enjoy!


The 1960’s and 1970's saw dramatic expansion and empowerment of welfare states. No longer was welfare a marginal role of the state: instead, it reshaped how society and the economy was organized. But different welfare structures shaped countries differently with regard to decommodification, stratification, and employment. Crucially, these effects cannot be determined just by looking at the amount of welfare spending: it’s more complicated than that. Chapter 1, acknowledging this, will re-conceptualize the welfare state with a sociological approach. Chapters 2–4, drawing from political economist Karl Polanyi, will discuss how welfare relates to social rights. Chapter 5 will attempt to identify how different political forces led to the welfare policies we see in the data. Chapter 6 analyzes ties between welfare states and labor markets, while Chapter 7 focuses on full employment specifically. Lastly, Chapters 8 and 9 examine the post-industrial transformation.

Chapter 1: The Three Political Economies of the Welfare State

Let’s start addressing the question up top: why do welfare states exist? Esping-Andersen examines a few theories from the time. First is the structuralist approach, which has two forms, both focused on the structure of the economy as an explanatory variable. The first goes like this: industrialization destroyed the traditional power of families, churches, and guilds, necessitating the state to take over some of their function in the form of welfare. The second, the Marxist structuralist approach, says welfare comes from the state attempting to smooth over class conflict caused by capitalism.

One problem with these approaches is that, historically, welfare states often took decades to develop after industrialization occurred. Also, they don’t explain why countries came to different types of welfare states. All Western countries industrialized: but not all have similar welfare states.

There’s also the institutional approach, focusing on the role of democracy. It says that under political democracy, the median voter will support increases in public spending or social rights, to the detriment of markets. Yet, some early welfare came about before democracy to try and stop it-most famously the first welfare state in the world, made by Otto von Bismarck to try and siphon support from socialist opponents.

Lastly is the class mobilization view, whereby working class power determines economic outcomes, welfare included. After all, strong class organization can pass laws that go against the interest of the rich and employers. This argument has some merit, but it’s no surefire thing. Perhaps working class mobilization only works if right parties are divided. We also have to be careful: “we can’t assume socialism is the natural basis for wage-earner mobilization”, because the question of why wage-earners become socialists would still remain. They certainly don’t become committed socialists in every country! Lastly, it’s important to note that the role of the traditional working class in industry is going down, replaced by service and white-collar workers. So, the working class alone can’t get you serious power.

So, where do we go from here for explanations? We should look to what welfare policies historical actors and parties actually chose, and why. To do that, we must first examine their underlying ideologies.

Ideological Approaches to the Welfare State

Different ideologies, unsurprisingly, have massively different views on welfare. They follow from answers to fundamental questions about the role of the state, democracy, property, and markets. First, we start with the classical liberals. Adam Smith, for example, embraced markets as a way to attack class, inequality, and privilege. This seems strange in our modern times, where markets have produced serious class divides and inequality. But he lived in a time when the privileged class was monarchs and aristocrats, not CEO’s or company owners. The state at the time was controlled by this class: thus, the classical liberal opposition and wariness towards the state makes sense. They saw markets as a way to free people from these, and other, traditional institutions.

One response to this comes from the conservatives, who of course are fond of these traditional institutions! They defend these hierarchies, as well as traditional gender roles, from attacks of the liberal or socialist variety. [For example: you can clearly see that, despite rhetoric, the focus of the modern US Republican Party is on upholding hierarchy, rather than any real commitment to free market principles.]

As capitalism developed, new class distinctions became clear. From this arose socialists, who saw a state controlled by the owning class (a dictatorship of the bourgeoisie, as Marx said), similarly to the classical liberal view. Therefore, seeing no potential in parliamentary government (Lenin called it “little more than an empty shell”), they advocated revolution. Meanwhile, most liberals , somewhat with the exception of the UK liberal party, held tight to free markets over their more egalitarian ideals. Lastly, conservatives saw in these new classes a new way to maintain hierarchy, discipline, and order. Edmund Burke, the father of conservatism, thought aristocrats could basically maintain their positions by becoming rich employers in the market.

Yet, beginning in the early 1900’s, something fundamentally new emerged: political democracy, backed by expansions of suffrage. With it came the real chance that the working class could take power. Liberals reacted to this with hesitancy: after all, by the institutional logic above, they might vote to undermine the market. But a certain branch of socialists, especially in Nordic countries, embraced political democracy as a method to advance socialism: the social democrats. They came to power not on the working class alone, but on a coalition involving the working class, the emerging white-collar industry, and farmers. We can look to other countries with strong working-class power, like Austria, and see different welfare outcomes: this can be chalked up to different coalitions. The US had a similar situation with the New Deal coalition, yet the South stopped further welfare state advancements.

Features of the Welfare State

Capitalism is centered around the labor market, in which you sell the ability to do labor (labor power) in exchange for a wage. While markets existed before capitalism, this omnipresent labor market is new. Capitalism commodified labor. But welfare can decommodify it to an extent by giving you income outside of the labor market (full decommodification would entail you get paid the same whether you’re working or not). Again, decommodification here describes the “degree to which individual, or families, can uphold a socially acceptable standard of living independently of [labor] market participation.” This is a key feature by which to analyze welfare states. In general, Anglo-Saxon countries have low decommodification, as their benefits are meager and means-tested. Germany has compulsory social insurance, with fairly high benefits. Yet the benefits mainly rely on contributions from work, so it’s far from highly decommodified. Lastly we have the Scandinavian model, which decommodifies labor the most. Benefits are universal, with generous minimums, yet also with high replacement rates for most folks.

Another aspect to analyze is how welfare states affect social stratification. Welfare does not always build solidarity and unity: it can instead create new divisions. For example, means-tested welfare states seperate the poor from the rest of the populace, and they face stigma and administrative barriers to accessing welfare. [The impetus for some welfare reform in the UK and Scandinavia came from the middle class “wanting in” on generous benefits given to poor folks, see the reference to Peter Baldwin here.] Meanwhile, Bismarck and France tied benefits more to occupation. Bismarck wanted benefits for state workers to ensure their support and allegiance. For a more quantitative example, France in 1980 spent ~3 times as much, as a percentage of GDP, on pensions for public employees than Norway, Sweden, or Denmark. Italy meanwhile has over 120 different occupational pensions. These corporatist policies divide people on occupation.

Socialists, too, faced the problem of stratification and stigma, but from a different direction. This passage is worth quoting in full:

So, many socialists embraced parliamentary reformism instead to empower the working class and build solidarity. Initially, some pursued Beveridge-type welfare, with basic, equal, and universal benefits. But in developed countries, these meager, flat benefits weren’t sufficient for the growing middle class, or to offer a real alternative to work. This, too, led to stratification, as the better-off turned to private insurance to cover them. Everyone faces risks and costs from normal life, from having kids to getting sick, and properly covering these risks is crucial to getting folks to support the welfare state. Social democrats realized that to ensure solidarity and equality, the private market must be crowded out of areas like old-age and health insurance.

Meet the Three Worlds

With that background in mind, let’s finally address the three welfare state regimes that form the basis of this book.

Liberal/residual welfare states offer meager, means-tested assistance. They are careful not to displace the market, meaning decommodification is low. Often a work ethic that wants to condition welfare on “proper moral behavior” is present, through drug testing and making welfare beneficiaries look for work for example.

Conservative welfare states uphold status differentials in the market and the family. They do this in part through corporatism (benefits tied to occupation), as well as excluding non-working women from welfare (encouraging them to be stay-at-home mothers). You can think of their motto as this: “the state will only interfere when the family’s capacity to service its members is exhausted”.

Lastly is the smallest and best regime-type: the social democratic welfare state. Universalism is key, and decommodification is high. Costs formerly borne by a family are socialized, from raising kids to childcare. This, combined with individual rather than household benefits, leads to a high degree of individual freedom. Private insurance is purposely crowded out in favor of state provision. “All benefit; all are dependent; and all feel obligated to pay.” As we will be returning to much later, full employment is key to a successful social democratic welfare state, as it generates the high tax revenues needed to support non-workers, and prevents potential class divides between the employed and unemployed.

2. Decommodification in Social Policy

Before capitalism took hold, one’s capacity for survival depended on their relations to lords, their family, and the church. This is pre-commodification, as opposed to the commodification of labor that came with capitalism. It’s important to note that this commodification wasn’t natural: for example, the UK’s poor laws made the cash nexus, the market, the “linchpin of existence”. This process of commodification led to new demands: “with no recourse to property, and no state to which human needs can be directed, the market becomes to the worker a prison within which it is imperative to act as a commodity in order to survive.” Thus, labor movements often pushed for the next stage, decommodification. It’s important to note that decommodification is a scale. It’s a question of what standard of living folks can have outside of the market.

While under liberal welfare states, “the commodity logic is supreme”, it is not perfect. Non-workers still must be cared for. Liberals were pushed to support some kind of welfare policy, because to do otherwise would undermine the ability for workers to participate in the market.

Socialists Against Commodification

As part of their goal to end class conflict, early socialists wanted to end labor’s commodification, as it caused competition (and thus alienation) between workers. Marx praised and pushed for worker rights, like the 8 hour day, that fought commodification. Marxist theorists Karl Kautsky and Rosa Luxemburg both praised the social wage (providing income outside of work). In the early 20th century, Lenin created a split among socialists. While revolutionary communists “believed that the roots of revolution lay in crisis and collapse [of capitalism], the reformists realized that the human misery that crisis breed would only weaken the socialist project”.

The reformists, social democrats, fumbled with welfare state design for awhile. By the 60’s and 70’s, they had settled on welfare that didn’t just spend a lot, but was also of high quality and with extensive coverage.

Data on Decommodification

For our first test of our welfare regimes, we’ll measure decommodification. We’ll use an index in which easier access, longer duration, higher income replacement, and a greater range of coverage leads to higher scores. Entitlement could depend on need (like Supplemental Security Income in the US), on work performance (as in Germany), or simply on the basis of being a citizen (the most decommodified option). The index will measure scores for pensions, sickness, and unemployment benefits, then combine them into a single number.

Here’s part 2!



Jacob Keegan

Economics and welfare knower.