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Otto von Bismarck pioneered the welfare state in Germany and Bismarck was/is greatly respected by Germans.

Pre-World War I British Liberal Party made welfare reforms after the 1906 general election. One of the reasons was that the success of social legislation in Bismarck's Germany made leading Liberals in the UK such as David Lloyd George and Winston Churchill want to put forward similar legislation (http://en.wikipedia.org/wiki/Liberal_welfare_reforms).

Post-World War II British Labour Party implemented welfare state policies after their victory in the 1945 general election. The economic result lagged Germany's. When Margaret Thatcher came into power, she reversed the welfare policies which did not seem to be working as expected and pushed through free market-oriented policies. On the other hand, today's welfare policies in Germany still remains Bismarckian in principle.

Why did the welfare state succeed in Bismarck Germany but lagged in 20th-century Britain?

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Hold on a sec, your comparison is flawed - before you compare Bismarck's policies to British Labour model 1945 you should first compare them to the reforms made by British Liberals in 1906-1914. Look up Lloyd George's "People's Budget" for example: en.wikipedia.org/wiki/People's_Budget As it stands the question is poorly constructed and misleads. -1, I am afraid, till is fixed. –  Felix Goldberg Nov 9 '13 at 14:10
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Well, yeah, comparing late 19th century Germany with post-war Britain is not perhaps a useful comparison. –  Lennart Regebro Nov 9 '13 at 14:47
    
@Felix Goldberg: The aftermath of the Liberal welfare reforms did not look good either. The timing coincided with the decline of the British empire. On the other hand, one of the causes for these reforms was that the success of social legislation in Bismarck's Germany made leading Liberals in the UK such as David Lloyd George and Winston Churchill want to put forward similar legislation. en.wikipedia.org/wiki/Liberal_welfare_reforms –  curious Nov 10 '13 at 0:16
    
@Felix Goldberg: I edited the question to include the Liberals part but kept the Labour Party portion because of the wonderful answer already provided by Lennart Regebro which compared Bismarck Germany and Labour Britain –  curious Nov 10 '13 at 0:28
    
@curious I should at this point note that Germany still has a Bismarckian system. The question can rather be reinterpreted as why the welfare state succeeded in Germany but failed in Britain (perhaps focused even on the time between 1950 and 1980). Such a comparison would be more fair. –  Lennart Regebro Nov 10 '13 at 7:22
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There are probably several reasons, and it's likely impossible to answer without writing a book, and most of the reasons are not political but has rather to do with economics.

One of the major reasons is based in fundamental economics. The Bismarckian welfare state is based on social insurance, ie, the government pays for an insurance that the welfare recipient can use as they best see fit. The most clear example is in health care, where the Bismarckian health cases system has a tax-funded health insurance which you can use to pay for to a largely privately run health care system. This preserves competition and ensures efficiency better than the British system (often called the Beverige model), where the health care system is not funding individual health care, but instead funding state owned health care. This creates a monolithic bureaucratic system where the health care is overpriced. The result is typically that the rich pays for better private health-care, while everyone else are forced to endure long queues and waiting lists for operations, fueling resentment and dissatisfaction with the system.

The second major reason is political, and that is that the unions in Britain used their power to a large extent to block change and economic reforms. When industry was going badly, the Unions would not accept changes as this would have resulted in cut downs, instead they striked to prevent the cut downs, which just resulted in companies shutting down completely. This resulted in a conflict between the unions who were unrealistically blocking reform, and the union-supported government who tried to make reforms and still keep the unions happy at the same time.

This impossible situation and the resulting economic decline was then only reverted when a conservative government took over, as this government did not need nor want the support of the unions and went through with the economic reforms despite the unions opposition.

Countries with similar situations to the UK (like Denmark and Sweden) saw similar development. Both Denmark and Sweden has also, like the UK, made many free-market reforms, and both are busy improving their health-care problems by moving the a Bismarckian system (but not the UK, yet).

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The key points of your answer were (1) German health care system funds the individual health care (2) British health care funds state-owned health care. Bureaucrats are well-known for bad spending. Individuals allocate capital much better than bureaucrats. I wish I could upvote your answer twice. Thanks for answering my questions as always –  curious Nov 9 '13 at 9:32
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There is a slight problem here: German healthcare is significantly more expensive than UK healthcare (total health expenditure is 11.3% of GDP in Germany compared with 9.4% in the UK; German GDP per capita is higher too) but life expectancy at birth is marginally higher in the UK (81.1 years in the UK compared with 80.8 in Germany). It seems that the larger number of health interventions in Germany do not actually produce healthier people. –  Henry Nov 10 '13 at 19:08
    
@Henry 1. When people are allowed to control their health care expense they will generally spend quite alot. That's expected. 2. life expectancy at birth is not the only (or even a good) measure of what health care provides. 3. This is not exactly a good place to discuss health care policies. –  Lennart Regebro Nov 10 '13 at 20:08
    
@LennartRegebro: You said "the welfare state succeeded in Germany but failed in Britain", so I hardly started the discussion. Private spending on health is also higher in Germany than the UK, so perhaps Germans find their insurance system less sufficient than UK citizens find their state health provision. –  Henry Nov 11 '13 at 1:11
    
@Henry: No curious did. That's the base assumption for the question, and I think he is correct. And the higher private spending is the reason for the higher total spending, as already mentioned. It doesn't seem to me that further discussion in this topic with you will be constructive. –  Lennart Regebro Nov 11 '13 at 5:36
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