23 Things they don't tell you about Capitalism

Free-market economists frequently argue that taxing the rich to provide welfare to the poor creates stagnation in the economy, removing incentives for people to be productive. However, Chang suggests that a well-designed welfare system can actually support a dynamic economy by encouraging individuals to be less afraid to make job changes because they have a safety net.

Chang points to the labor market in South Korea, where free-market policies led to increasing job insecurity, particularly in the engineering sector. As a result, at the time of writing, some 80% of science-track university students hoped to study medicine. Fear of losing jobs in other sectors led to an inefficient allocation of applicants. Similarly, workers in the US, which has a small welfare state, are much more likely to favor protectionist policies than are European workers, who have a stronger safety net to fall back on if they lose their jobs. This leads some in the US to hold onto failing or inefficient industries instead of transitioning into more productive sectors. The same phenomenon can be observed in bankruptcy law: Only because business owners had the chance to reduce their financial obligations if they failed did they feel safe enough to risk entering the market. Chang concludes by reviewing data on several countries’ growth rates, showing that a large welfare state may in fact encourage growth.