Before World War 1, the public finances were not a large enough part of the total economy of a country to have any very significant influence on the business situation. And during this era, people, including economists, were not interested in directing the national economy in a planned way. It lacked political actuality. ~ Gunnar Myrdal
World War 1 mobilized governments for the first time since industrialization. The Great War changed the relationship between national governments and their private economies. It was only a prelude to the next calamity, which irrevocably altered the heft of government.
Before the Great Depression, as Gunnar Myrdal observed, “the periodic appearance of mass unemployment was accepted as a more or less natural consequence of necessary market adjustments to changing business conditions, about which not much could be done.” Political nonchalance inexorably changed when the periodic financial panics endemic to capitalism finally erupted with an economic violence and longevity that forced governments to address the inherent defects of that illiberal economic system. The era of laissez-faire ended forever with the Great Depression. In its place arose the welfare state.
The Welfare State is nowhere, as yet, an accomplishment; it is continually in the process of coming into being. In no country was it originally planned in advance – certainly not as a structure of its present imposing ramifications and importance for the individual citizens. ~ Gunnar Myrdal in 1960
Swedish economist, sociologist, and politician Gunnar Myrdal described the evolution of the welfare state in his book Beyond the Welfare State: Economic Planning and Its International Implications (1960).
Governmental economic policy measures were at first compensator: merely treating the symptom of unemployment. When capitalism stumbled and did not get back up, something more substantive was required.
In the twenties, and still more during the Great Depression, public works policies spread in all Western countries. These developments represented only steps toward demanding that the state should so direct all its financial and economic policies as to create demand for labor sufficient to liquidate mass unemployment and to keep the national economy uninterruptedly in high gear. Economic theory responded to the ideological needs of the time by placing the responsibility for economic depressions and unemployment on an imbalance between aggregate demand and supply, opening up a rational way for the state to raise investment and production and to create employment simply by raising its expenditure while keeping down taxation. ~ Gunnar Myrdal
By the end of World War 2, governments had accustomed to much bigger budgets, taking fiscal deficits less seriously, and even managing economic sectors as they saw fit.
After the war, capitalism was not reined in. What was new was government as its perpetual handmaiden in cleaning up the messes made. Western governments converged on providing rudimentary social security for citizens and paying for it through taxation: having the young pay for the old via generational income transfer.
The opponents of these schemes, who argued all the time that they would ruin the economy of the country, were again and again proved wrong. The internal political debate is becoming increasingly technical in character, ever more concerned with detailed arrangements, and less involved with broad issues, since those are slowly disappearing. ~ Gunnar Myrdal
What was never seriously considered was public ownership, particularly of the financial sector, which is the origin point of economic crises. Instead, capitalists continued to take profits while the government taxed workers, and, to a much lesser extent, businesses, to pay for the smidgen of social security provided.
Appetite whetted, the taste for governmental intervention only grew. Unsurprisingly, well-heeled interest groups were much more successful at wheedling government largess than those in need. Trickle-down worked in the welfare state like it did in the private sector: the well-off profited while the poor struggled.