The Classical ‘Surplus’ Approach and the Theory of the Welfare State and Public Pensions

The theory of ‘market failures’ provides the conventional answer to the existence of the welfare state institutions. By contrast, the Classical ‘Surplus’ approach to the theory of income distribution strongly emphasizes the role of class conflict and of public institutions in regulating the conflict. It is therefore wide open to the mass of analytical and historical studies proposed, in particular, by the Scandinavian scholars of the social state. While neoclassical economics proposes a two-stage approach in which the welfare state intervenes ex post on market-determined income distribution to make up for market failures, the Classical ‘Surplus’ approach proposes a one-shot procedure by regarding the state, in its capacity to control part of the social resources, as a field of social conflict and, therefore, as an important factor in the regulation of income distribution among conflicting social classes.Section 2 will outline the main features of the classical approach to distribution, while Section 3 draws the implications for the analysis of the welfare state, sketching a scheme concerning the role of the state in determining the real wage rate, through the supply and demand of what the literature has defined as ‘social wage goods’. Section 4 will discuss the reasons for, and the consequences of distribution of the direct production by the state of wage goods and services. Dealing with the funding side of the social state, Section 5 will recall some elements of the classical approach to the incidence of payroll taxation. Section 6 will briefly tackle the question of the net impact of state direct and indirect provision of social wage-goods on final wages, once both this provision and taxation on wages are taken into account. Section 7 will point out the main distinctions between the classical and the neoclassical approaches. Section 8 will present some reasons for dissatisfaction with conventional Welfare Economics. Section 9 will compare the different views of Pay-as-you-go pensions (hereafter PAYG) proper, respectively, to welfare economics and the classical approach. Finally, Section 10 will stress the complementarities between the non-orthodox approaches to public pensions and the classical surplus approach.