In the aftermath of the `Conservative revolution' of the 1980s and the transformation of Central and Eastern Europe and the republics of the former Soviet Union there is wide recognition of the urgent need to identify those aspects of economic activity best left to free enterprise and those for which interventions by a `welfare state' are desirable. This term is not generally applied to the US, but the provision of services such as health and education was high on the agenda in the US election campaign; it is a major source of disagreement between the Conservative and Labour Parties in the UK; and the Social Charter and other EC initiatives are beginning to make it a major issue in the rest of Europe. This issue was addressed by a CEPR joint conference with the Anglo-German Foundation for the Study of Industrial Society, held in London 24/25 September and organized by Connie Martin, Secretary General of the Anglo-German Foundation and Dennis Snower, Professor of Economics at Birkbeck College, London, and Klaus F Zimmermann, Director of the Seminar for Labor and Population Economics and Professor of Economics at the Universität München, Co-Directors of CEPR's Human Resources programme. This was attended by some 40 academics, policy-makers, civil servants, journalists, trade unionists and representatives of employers' federations.

The conference aimed to explore the future of the welfare state in the market economies by addressing two broad interlocking themes. First, what are the limits of the welfare state? And in which areas is it socially desirable for government to provide welfare state services and which should be left to the free market? Second, what circumstances justify state intervention in free market activity? And what is the comparative advantage of the public vis-à-vis the private sector in providing welfare state services? Participants sought to formulate guidelines to identify the conditions under which government intervention in the market mechanism is and is not desirable, which might then provide a framework within which to conduct a coherent debate on the respective limits of free enterprise and the welfare state.

The opening session focused on the general principles for determining a socially desirable division between free enterprise and welfare state activities, while the remaining sessions concentrated on the specific problem areas of public services, competition policy, innovation, unemployment, health and education. The overall issues included not only market failures externalities, public goods, monopoly power and merit goods and government failures pressure groups, bureaucracy, imperfect monitoring but also the case for a `residual' versus a `universal' welfare state. Focusing both on the equity-efficiency frontier and on areas of economic activity lying well within that frontier, participants discussed a framework for evaluating a wide portfolio of policy approaches such as taxes and transfers, job-security provisions versus co-determination, vouchers, unemployment and health insurance schemes, and pensions. To highlight the interesting differences in the approaches to the welfare state at least among policy-makers in Germany and the UK, each session contained a presentation by a German and a UK economist, approaching the subject from different, academically rigorous perspectives, which were then discussed by policy-makers from both countries.

Dennis Snower opened the conference by surveying the salient policy issues concerning the provision of welfare state services and examining various promising policy proposals; Patrick Minford (University of Liverpool and CEPR) and Werner Meissner (Wirtschaftswissenschaften Universität Frankfurt am Main) then argued the cases for free enterprise and the social market economy respectively. David Newbery (Department of Applied Economics, Cambridge, and CEPR) and Charles Blankart (Technische Universität Berlin) presented papers on `Public Services'; Paul Seabright (Churchill College, Cambridge, and CEPR) and Manfred Streit (Universität Freiburg) offered different perspectives on `Competition Policy'; David Ulph (University College London and CEPR) and Klaus F Zimmermann focused on `Innovation'; and Stephen Nickell (Institute of Economics and Statistics, Oxford, and CEPR) and Wolfgang Franz (Universität Konstanz and CEPR) discussed different policies in the session on `Unemployment'. The final session on `Health and Education' included a paper by Julian LeGrand (LSE) on innovations in the UK and papers by Matthias von der Schulenberg (Universität Hannover) and Christof Helberger (Technische Universität Berlin) on the German systems.