Discussion Paper

No. 2019-35 | May 22, 2019
A new societal contract
(Submitted as Global Solutions Paper)

Abstract

This paper argues that the traditional societal contract that underlies the market economy has run its course and needs to be replaced by a new contract, based on a new conception of the “empowering economy.” Whereas different societal contracts are relevant to different societies, there must be some features that all societal contracts will have in common, in order to address some basic human needs that every thriving society must satisfy and to promote popular approval for multilateral agreements to address multilateral problems. The paper proposes a new societal contract that promotes three building blocks of economic policies: (1) automatic stabilizers that reduce inequalities of economic power, (2) policies that focus not just on material prosperity, but also on personal and social empowerment and (3) policies that develop the human capabilities of cooperation and innovation.

JEL Classification:

O31, P11, P12, P16, P41, P47, P48, P51

Assessment

  • Downloads: 119

Links

Cite As

Dennis J. Snower (2019). A new societal contract. Economics Discussion Papers, No 2019-35, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-35


Comments and Questions


Anonymous - Thooughts and criticism
May 23, 2019 - 12:53

One idea in this paper, which I particularly liked, is the notion that we have a choice. Once we broaden the objectives of companies beyond maximisation of shareholder value, we are in a different world and many of the problems which we take for granted disappear or, as the author ...[more]

... says, become manageable. This is shown by discussing competition policy. I think this notion can also be applied to other areas, for example the impact of technological transformations on employment. Here, too, we have a choice: do we deploy the technologies and substitute human work or do we change the objectives of companies and choose not to deploy some of the technologies?

But here is some criticism.

The article is essentially a criticism of the neoliberal societal contract. However, this type of societal contract - in pure form - only exists in the US and the UK, and maybe a few other countries. The other end of the spectrum, a welfare statist societal contract - in pure form - only exists in Scandinavian countries. Both types do not exist in Germany and France, as well as many other European countries; not to mention „non-western“ nations. Having said that however, I think that the conclusions and recommendations are valid for all countries, independent of which type of societal contract they have. Yet, it is easy to challenge the article by saying that the situation in country x is not what the author describe.
For example, when the author talks about the inconvenient truths: He says that the neoliberal societal contract has led to increasing inequality. That is correct. Yet, for Germany (which is somewhere between a neoliberal and welfare statist societal contract) the rise in inequality (as measured by economists) is debated and not accepted by everyone. So the author's "truth" may not be accepted as a universal truth.

I also wonder how non-Western countries would react to the article. Their societal contract is often quite different, e.g. what is the societal contract in China? If a country is repressive, surveilling its citizens and restricting access to information, are the ideas applicable in such countries?


Katharina Lima de Miranda, Kiel Institute for the World Economy, Germany - Comments
June 05, 2019 - 12:45

This is an excellent paper with an interesting and thought provoking proposal! The short and concise paper illustrates some of the core problems that arose by reason of the current economic system in many countries around the world and proposes a new societal contract is human-centered and based on three ...[more]

... pillars 1) automatic stabilizers, 2) personal and social empowerment and 3) cooperation and innovation.

While I am not entirely sure whether the economic system is the sole cause of the problems that you address, I agree that it has a large part in the challenges that we are facing today. In particular it picks up some of the narrative that we see in the public discourse driven by presumably dissatisfied and frustrated parts of the population (with growing populist tendencies) in many (Western) societies. This is very good because instead of discrediting them, you allow this part of the population to come on board. You present a rather concrete way out by proposing a new societal contract that empowers people. This proposal could, thereby, potentially receive a broad societal consensus and lead to a strengthening of multilateral cooperation counteracting nationalistic and protectionist tendencies.

Comments/Questions:
- How does it relate to multilateral cooperation? In the introduction the connection is made quite clear. The paper would benefit if this is resumed in the conclusion and some examples about how the new societal contract will help to strengthen multilateral cooperation would help illustrate your point.

- If only a single country implements these ideas wouldn’t this lead to a comparative disadvantage at first, thus giving less incentive to be the first to implement? This is particularly important when it comes to the regulation of multilateral companies, e.g. arising digital network monopolies. If one wants to shift the objectives of these companies, for example by redesigning company laws, it will require very efficient multilateral cooperation to make real progress. Connected to this, it remains rather unclear to me how we can actually break the vicious cycle and prevent a race to the bottom and convert it into a “virtuous cycle that is driven by our understanding of human needs rather than by shareholder value alone”.

- One central aspect in my point of view is who will define this new societal contract. In order for citizens to feel empowered this social contract needs to be built on a broad societal consensus. This will require a (possibly long) deliberation process between governments and society. Firms of course should also be involved in this process, however, I do not quite agree that each firm should design their social purpose on their own. Instead I believe that ideally there should be a discussion within the society including all actors, but in particular the “people”, to define the purpose of firms. I believe a new societal contract where firms should serve the public interest and making government AND firms jointly responsible necessarily needs a societal consent in order to gain broad acceptance.

Minor comments:
- Last paragraph: capitalism is mentioned for the first time. I would stick to economic system as in the rest of the text.
- Page 7, 4.2., second sentence: delete “to”

I hope these comments are helpful. I really liked the article and my points are mere suggestions it is already an excellent paper as it is!


Andy Mullineux, University of Birmingham, UK - Comments
June 05, 2019 - 12:49

This important paper essentially argues that a new societal contract is required to underpin a process of creating a more responsible capitalist system. The old (national) societal contracts underlying the free market (‘neoliberal’) economies has led to growing inequality and cannot function in an increasingly interdependent (‘globalised’) world; where major ...[more]

... externalities such as climate change require international cooperation by governments. The aim is to “recouple economic prosperity with the satisfaction of human needs”.
Professor Snower makes the case that this involves (nation) states moving from ‘neoliberalism’ and “welfare statism” to a new conception of the “empowering economy”; as well as increased international cooperation and coordination. The new societal contract(s) are needed to restore the trust that is essential for fostering a sense of common purpose to underpin democracy in well-functioning market economies. The role of (‘non-selfish’) governments would be to regulate to deal with market failures and externalities, engaging in international cooperation to deal with supranational problems, as required; and also to set the “rules of the game” in the form of a societal contract requiring or engendering responsible behaviour from households and firms. This behaviour would be ‘non-selfish’, in contrast to the selfish behaviour underpinning the free market economy coordinated by Adam Smith’s ‘Invisible Hand’. Responsible business behaviour would be encouraged, along with responsible consumption, banking and investment, and the latter would reward businesses for undertaking responsible business transformations; creating a self-reinforcing virtuous behavioural circle or cycle. This would be further strengthened by household voting activity rewarding responsible governments that assured rights and responsibilities were well defined and shared in achieving the wider public or common good (or interest) in dealing not only with climate change, but also societal issues relating to rapid technological change and the increasingly widespread adoption of ‘Artificial Intelligence’.
The core of the paper considers three inconvenient truths for the neoliberal social contract: free market economies generate inequality; economic performance involves more that material prosperity; and human progress rests primarily on cooperation and innovation. It concludes that a new societal contract is required to address the resulting shortcomings and that the new contract should be built on three pillars: automatic stabilizers to contain economic power (including natural monopolies); empowerment and solidarity oriented policies (underpinned by an ‘empowering state’ that redistributes incentives and creates the requisite employment skills); and recognising the central role of cooperation and innovation (leading to true and shared ‘wealth creation’, rather than ‘wealth extraction’) in generating economic (and societal) progress.
Whilst the merits of a number of the specific policy recommendations will naturally be debated, the underlying approach or framework for the proposed new societal contract is drawn from the OECD initiative (“New Approaches to Economic Challenges” and “the visions underlying the Global Solutions Initiative” (GSI), both referenced in Footnote 1 (p.2) of the paper. The basis for such (national and international) societal contracts are also likely to be drawn from the UN’s Sustainable Development Goals (SDGs) and associated UN Principles for Responsible Investment and for Responsible Banking and the Paris (Climate Change) Agreement; as indeed are the guiding principles for the underpinning responsible business transformations currently underway in a number of advanced economies.

Andy Mullineux,
Professor of Financial Economics,
Lloyds Banking Group Centre for Responsible Business,
Business School,
University of Birmingham,
Birmingham B15 2TT, UK