Academic journal article Independent Review

Health Insurance before the Welfare State: The Destruction of Self-Help by State Intervention

Academic journal article Independent Review

Health Insurance before the Welfare State: The Destruction of Self-Help by State Intervention

Article excerpt

Social scientists, especially sociologists and economists, are paying increasing attention to the concept of social capital. The expansion of its use has been so rapid that it has led some to warn against its misuse and against overstatement of its importance (see, for example, Portes 1998, 21). Bearing these caveats in mind, we show in this article how the concept of social capital can help us to understand some adverse effects of government social policy.

Since the publication of Charles Murray's Losing Ground (1984), if not earlier, it has been clear that Western-style welfare states are encountering deepening problems and that despite social scientists and politicians' efforts and an increasing amount of resources, these states' traditional measures are failing to achieve their main goals. Harvard sociologist Nathan Glazer, one of those who helped to formulate these welfare policies, summarizes the difficulties in his 1988 book The Limits of Social Policy. Sentences such as "It didn't work" and "[W]e seemed to be creating as many problems as we were solving" (2) are a leitmotiv of his account.

Today, analysts generally agree that the structure of incentives is crucial for the success of any such effort. To illustrate this point, we provide here a social-capital-based explanation of the origins and development of voluntary "social insurance," focusing on health (or "sick") insurance. We build on ideas presented in studies by Peter Leeson (2005, 2007) and by Anthony Carilli, Christopher Coyne, and Peter Leeson (forthcoming). We first describe the theory of government interventionism that provides a conceptual framework for the rest of the article. We then analyze historical cases of voluntary provision of social insurance by friendly and fraternal societies around the turn of the twentieth century.

Social Capital

Early uses of the term social capital can be ascribed to sociologists. Among them, Pierre Bourdieu is usually credited with the idea's elaboration that led to its widespread use. In 1986, he described social capital as "an attribute of an individual in a social context. One can acquire social capital through purposeful actions and can transform social capital into conventional economic gains. The ability to do so, however, depends on the nature of the social obligations, connections, and networks available to you" (qtd. in Sobel 2002, 139). Although Bourdieu's description explicitly ties social capital to an individual (and thus makes it an individual asset), the parallel emphasis on the social context has created much confusion. (1) In this article, we treat social capital as an individual asset, building on James Coleman's (1988, 1990) contribution. (2)

Employing an interesting analogy, Coleman writes about people who are investing in their social capital as exchanging "credit slips"--that is, confirmations of their mutual obligations (1990, 306). The investor (person A, who did something for person B) holds the credit slip "to be redeemed by some performance" (306) by person B later, and all such slips together constitute A's accumulated stock of social capital. Coleman also employs an analogy between these "credit slips" and "fiduciary money" (186), both of them having in common the need for trust between the trading parties inasmuch as they are not backed by any "real" values.

Leeson (2005, 2007) and Carilli, Coyne, and Leeson (forthcoming) take a similar approach. Building on a traditional Austrian approach to the business cycle (Hayek 1931, 1941; Mises 1996, esp. chap. 20), they argue that government creates "artificial" trust or distrust, thus generating fluctuations in social-capital accumulation similar to the changes in investment that result from altering the market interest rate. In both cases, government interference scrambles market information signals. People, the "social capitalists," then have difficulty distinguishing between trustworthy individuals with reliable ways of interacting and untrustworthy individuals with unreliable ways. …

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