We need a new social contract

Mi ritrovai per una selva oscura,
che la diritta via era smarrita.

(Dante)

The converging crises we face have a synergic impact. We are destroying the planet for the benefit of very few. The resources we need to face up to both the environmental crisis and the exploding inequality are squandered in sterile financial speculation. We know what should be done; the SDGs present well-organised common-sense measures. We also have the money, as the world GDP is equivalent to 3.800 dollars per month per four-member family. Our problem is not economic, in the sense of lack of resources, but of a profoundly outdated concept of social organisation.

The basic view we have been served for over several generations now is that markets govern themselves through an invisible hand. That government is a problem because if we let everyone seek to maximise their interests, the result will be prosperity for all. The argument is not to be discarded. If a baker wants to succeed, they will have to produce good bread and a reasonable amount. If they charge too much for it, another baker will set up shop in the neighbourhood.

It makes sense, but in the modern world, where baguettes are bought frozen from a corporate giant and baked in a microwave oven, there is minimal tradition. The baker doesn’t even know what flour was chosen and where in the world it came from. The bottom-of-the-pyramid producer is precisely at the bottom of the pyramid, depending on a vast corporate system over which he has little or no control. The systemic feedback from end producers and consumers up the economic pyramid is dwindling. Corporate giants love to say they serve the market. Still, in the meat imported from Brazil, neither the butcher nor the consumer will know how much rainforest was destroyed, how many antibiotics were used to fatten the cattle, nor how much soil is now sterile from excess chemistry in the soy production. With no bottom-up feedback, the economic cycle loses control.

The basic issue is that if it is cheaper to produce soy or meat by destroying the Amazon, it will continue to happen, just as the Indonesian rainforests are disappearing to produce palm oil for Europe to have cleaner fuel. This is the real face of modern markets. Make more money for a group of shareholders, whatever the systemic impact for the stakeholders. The scale of corporate operations is such that the bottom of the pyramid has no control, or even say. In contrast, at the very top, the scale of financial interests is such that they have only financial results in their sights, not social or economic outcomes. BlackRock in Brazil profits from privatised health sectors and mining activities, but its assets, around 8.7 trillion dollars, are five times Brazilian GDP. In the words of Ellen Brown, say farewell to “mom-and-pop” capitalism. We are facing a new logic of economic, social and political organisation. Capital reproduction has been taken over by rent extraction.

Market feedbacks do not balance the system, but neither does public regulation. The power of passing governments to regulate corporations is minimal, in particular, because they roam the world while public regulation is scattered in so many nations with so many scattered interests. While half a century ago, we discussed whether state planning was better than free-market, nowadays we have neither. The wheels are free, no driver in the cabin, just what Marjorie Kelly and Ted Howard have called “extractive capitalism”. When our economic system is structurally skewed, we must look for a new social contract.

The Observatoire de la Finance in Geneva calls for “new rules”: “The present situation is an opportunity to correct the distortion and bring financial markets closer to the economy by proposing “new rules of the game” to “de-financialise the economy”. This could be done by introducing a transaction tax and a capital gains tax on trading to reduce high-frequency trading or by banning the massive use of buybacks and stock options that corporations regularly promote to artificially boost their performances in the short term, not to mention a ceiling on dividends pay-outs.”¹ We may discuss if these are the necessary measures, but the critical point is that we are looking at structural change.

Thomas Piketty promotes a broad view on the necessary transformation: “The Covid-19 crises leads us to rethink the redistribution and solidarity tools. In almost every place, propositions flourish: basic income, job guarantee, inheritance for everyone. Let us state this: these propositions are complementary and unsubstituable. In the last analysis, all of them must be implemented, in phases and in this order.”² The rules here are called “tools”, but they do imply a systemic change to the way capitalism is organised. The United Nations Research Institute for Social Development, UNRISD, calls for “a human rights-based approach that goes beyond formal employment-dependent social benefits: A new eco-social contract must go hand in hand with a new fiscal contract that raises sufficient resources for climate action and SDG implementation, and fairly distributes the financing burden.”³ This clarifies that implementing the SDGs implies we raise the necessary resources, which goes to the heart of the matter: control over where the money goes.

In the above-mentioned paper on “mom-and-pop” capitalism, Ellen Brown also centers on getting back control on our money: “Reforming the banking system is another critical tool. Banks operated as a public utility could allocate credit for productive purposes serving the public interest. Other possibilities include enforcement of anti-monopoly legislation and patent law reform. We need a set of rules that actually levels the playing field, rewards productivity, and maximises benefit to society as a whole, while preserving the individual rights guaranteed by the U.S. Constitution.”⁴ This is not just economics; it implies political change. The Roosevelt Institute is also looking into the future and lining up key transformations for what it calls new-progressivism: “Looking ahead, we would know the worldview was strengthening if we saw development of some of these policy approaches: more direct money; money and services delivered quickly to real people and with community control over those resources; more public goods; less extractive corporate power; and more countervailing power for workers and other stakeholders…Tinkering around the edges and patching broken systems can no longer be an option. Neoliberal solutions won’t decarbonise the economy, close the racial wealth gap, or create shared prosperity.”⁵ Here again, the system.

The well-behaved conservatism we have been used to in The Economist is changing: “Governments must remake the social contract for the 21st century. Social spending must flow quickly and automatically to those who need it—not, as in America, only during crises when a panicked government passes emergency legislation…Last year over two-thirds of Europeans said they supported a universal basic income (ubi), an unconditional recurring payment to all adults.”⁶ Is a new social and economic conscience emerging? In a world with almost a billion human beings going hungry, while in 10 months in 2020, a few hundred billionaires raised their wealth by over 1 trillion dollars. What is stunning is how slowly we are opening our eyes to reality.

We know all about the social and environmental dramas. What is more promising is that analysis has been shifting to the means: in The Case for a Green New Deal, Ann Pettifor raises the key issue: “The big question is this: how to transform financialised capitalism? How to wrestle power over the great public good that is the monetary system away from the few that exercise private authority over the system? How to restore this great good to public, democratic authority?”⁷ Finance is not a “sector”; it is a dimension of every economic activity. The critical issue is not whether we have the money or not, but who holds the strings. The Green New Deal implies we transform the decision process, the logic that governs the allocation of our resources.

A new social contract must also consider that equal rules for unequal stakeholders do not work. Daniel Mutevar, in IPS, stresses the debt issue: “The share of government revenues in developing countries used to meet external debt service increased threefold from 6.6 to 17.4 per cent between 2011 and 2020. In at least 32 countries, governments are now allocating more than 20 per cent of government revenues to debt service...The prioritisation of creditor rights over the rights and livelihood of the populations of developing countries is a well-known dead-end. Instead, the international community must recognise that the health and lives of people in the developing world is a basic precondition of a successful economic recovery. It will be impossible to achieve one without the other.”⁸ Free-for-all competition with this level of inequality can only lead to deeper unbalances, and several institutions are adopting the Global Green New Deal Approach.

In this brief overview of proponents of a new social contract, a general idea emerges that humanity is indeed ripe for new rules, for a socio-economic reset of how things have to work. As we saw, we have the financial resources to ensure everyone has access to a dignified and comfortable life, with a very moderate reduction of inequality. We have the technological capacity to reroute our production process so that we do not destroy the natural resources our survival depends on. But we do face a political stalemate, with inequality moving power to global corporations, and these have little interest in change. Many corporations are presently promoting the ESG (Environment, Social and Governance) approach, and billionaires are funding charities; some even declare they should be taxed. But we are heading towards a wall much faster than we can promote the necessary change.

The present digital revolution has moved power from industrial barons and national governments, what we knew as industrial capitalism, to global platforms that control finance, communication and information. Our primary challenge is not only the environmental catastrophe and the exploding inequality – these are the results – but the lack of political capacity to promote the necessary change. The basic challenge is governance, and it goes far beyond the pandemic.