Abstract: This book applies economic theory to the welfare state. Its core message is that the welfare state exists not only to relieve poverty and redistribute income and wealth (the ‘Robin Hood’ function) but also as a series of institutions that provide insurance and consumption smoothing (the ‘piggy-bank’ function). The book develops three central arguments about the role of the state in industrial countries and also in post-communist and middle-income developing countries.First, the welfare state has an insufficiently understood piggy-bank function that is additional to and separate from poverty relief. Even if all poverty and social exclusion could be eliminated, so that the entire population were middle class, there would still be a need for institutions to offer insurance (for example, unemployment insurance, long-term care insurance, medical insurance) and consumption smoothing over the life cycle (for example, pensions and education finance in the form of student loans). Private institutions – though often effective in other areas – face pervasive problems of imperfect information, risk, and uncertainty, and attempts to address those problems inescapably involve state intervention.Second, and consequentially, the welfare state is here to stay, since twenty-first-century developments do nothing to undermine those reasons – if anything, they do the reverse.To argue that the welfare state is robust does not, however, mean that it is static. A third set of arguments concerns the ways it can and will adapt to economic and social change.

Keywords: consumption smoothing, education finance, imperfect information, insurance, medical insurance, pensions, risk, role of the state, student loans, uncertainty, welfare state