Balancing Inequality and Competition: the Ideal Social Contract

Freedom is good, but security is better. That’s what Thomas Hobbes (1588-1679) believed. He made his point by imagining what it would be like to live without government, laws, or society. In this ‘State of Nature’ you could do whatever you wanted to. But anyone else could do whatever they wanted to to you. Hobbes also considers humans to be naturally vainglorious and so seek to dominate others and demand their respect. The natural condition of mankind, according to Hobbes, is a state of war in which life is “solitary, poor, nasty, brutish, and short” because individuals are in a “war of all against all”. Locke and Hobbes agree on a variety of ideas such as the non-divine origins of the political power, the need for social contract that sets out what a government can or cannot do, equal rights and freedoms of all human beings, and the existence of an ultimate state of nature for human beings.

Hobbes is famous for his early and elaborate development of what has come to be known as “social contract theory”, the method of justifying political principles or arrangements by appeal to the agreement that would be made among suitably situated rational, free, and equal persons. Hobbes believed that the social contract was designed to invest absolute power in a ruler to govern the citizenry. Locke believed that the social contract meant investing some power in the hands of the ruler, whose power would be used to protect his citizens’ human rights. In simple terms, Locke’s social contract theory says: government was created through the consent of the people to be ruled by the majority, “(unless they explicitly agree on some number greater than the majority),” and that every man once they are of age has the right to either continue under the government they were born in or to leave that government.

Social contract theory says that people live together in society in accordance with an agreement that establishes moral and political rules of behavior. Some people believe that if we live according to a social contract, we can live morally by our own choice and not because a divine being requires it. Locke and Hobbes had very different views regarding human nature. Locke claimed human nature as reason while Hobbes claimed it as power and appetite. Locke believes that reason is the primary attribute. For Locke, the role of the social contract that placed authority over people was to protect human equality and freedom; this is why social groups agreed to a social contract that placed an authority over them. Rousseau (1712-1778) argued that inequality was not only unnatural, but that – when taken too far – it made decent government impossible. He believed laws should pursue freedom and equality.

In the 19th century the idea of social contract lost attractiveness because of the growth of historical studies and idealist and evolutionist philosophies. Anna Bramwell observed that “the back to nature” views of the Romantic poets of the latter half of the 18th century and the 19th century who described nature as the source of moral and aesthetic value, stressed on the necessity of the reunification of man and nature which had fallen prey to the destructive forces of the Industrial Revolution, and who talked of the need to recourse to nature as a panacea to the philistinism of Industrial Revolution. Evolutionist ideas were spurred by the development of the Malthusian ideas on the relationship between food productivity and population growth. Herbert Spencer (1820-1903) urged the importance of examining social phenomena in a scientific way. Spencer’s survival of the fittest concept was believed to be natural, hence morally correct.

Spencer preferred the Lamarckian evolution of adapted characteristics in which he believed that societies like living organisms evolve from simple states into highly complex forms – equating evolution with progress. He saw evolutionary progress as an economic problem, worked out at the level of the individual. This supported the doctrine of social Darwinism promoted to justify laissez-faire economics, thought best to promote unfettered competition between individuals, and the gradual improvement of society through the survival of the fittest. On the other hand, when Thorstein Veblen (1857-1929) applied the Darwinian evolutionary theory to societal changes he found that laissez-faire capitalism created two groups, with the rich getting richer and the income gap between the rich and the poor widening. Veblen pointed out that that Darwinian evolution did not guarantee progress; the leisure class reacted differently than the middle class from the environmental stimuli in a system in which each individual looks after his own interests.

Floyd Arthur Harper (1905–1973), a member of the Mont Pèlerin Society, was present at the group’s first meeting in 1947 along with Friedrich Hayek, Ludwig von Mises, Milton Friedman, and Karl Poppe. He helped start up the Foundation for Economic Education, and founded the Institute for Humane Studies. The unique thing that Harper brought to the table was a social Darwinian account of human progress. Harper believed that progress was generated by the “variation,” i.e. the bell curve distribution, which “seems to pervade the universe”. Hayek claims social evolution rests upon the transmission of acquired characteristics tending towards equilibrium, that is, a theory of cultural evolution consistent with Lamarckian tradition. Hayek maintains that with social evolution “the decisive factor is not the selection of physical and inheritable properties of individuals but the selection by imitation of successful institutions and habits…the whole cultural inheritance which is passed by learning and imitation.”

In 1984, Charles Murray published Losing Ground. Its central thesis was that all government welfare programs should be abolished, supposedly because welfare hurt the very people it was intended to help by “rewarding bad behavior” such as “illegitimate babies.” Murray also called for ending food stamp programs. The New York Times wrote in 1985 that Losing Ground became “this year’s budget-cutters’ bible” noting, “in agency after agency, officials cite the Murray book as a philosophical base” for slashing social programs. Murray’s manipulation of data claimed to show welfare programs were the cause of minority poverty, rather than the cure. In order to get the numbers to work to “prove” that liberal social welfare spending created poverty, Murray excluded government spending on the elderly from his “evidence.” As Lester Thurow, former dean of MIT’s Sloan School of Management noted, 86% of federal social welfare spending went to programs to help the elderly; and the poverty rate for the elderly dropped from 25.3% in 1969 to 14.1% in 1983, refuting Murray’s thesis.

In the 20th century the notion of the social contract was the basis of two influential theories of justice, those of John Rawls (1921–2002) and Robert Nozick (1938–2002). Rawls argued for a set of basic principles of distributive justice (justice in the distribution of goods and benefits) as those that would be endorsed in a hypothetical agreement among rational individuals who have been made ignorant of their social and economic circumstances and their personal characteristics (the “veil of ignorance”). Nozick, in contrast, argued that any distribution of goods and benefits – even a highly unequal one – is just if it could have come about from a just distribution through transactions that did not violate anyone’s natural rights to life, liberty, and property. Because such transactions in a state of nature would have given rise to a “minimal state” (whose powers are limited to those necessary to prevent violence, theft, and fraud), only the minimal state is justified, according to Nozick.

Adam Smith’s theory of the invisible hand, which says that competition channels self-interest for the common good, is probably the most widely cited argument today in favor of unbridled competition – and against regulation, taxation, and even government itself. But what if Smith’s idea was almost an exception to the general rule of competition? Robert Frank, who coined the term “Darwin’s wedge” challenges this, resting his case on Darwin’s insight that individual and group interests often diverge sharply. Far from creating a perfect world, economic competition often leads to “arms races,” encouraging behaviors that not only cause enormous harm to the group but also provide no lasting advantages for individuals, since any gains tend to be relative and mutually offsetting. What Frank argues, is that Darwin’s understanding of competition describes economic reality far more accurately than Smith’s. Inequality and competition drive the debate on how much government we need.

Some observations from Secretary-General António Guterres delivered on the 18th Nelson Mandela Annual Lecture in 2020: But income, pay and wealth are not the only measures of inequality. People’s chances in life depend on their gender, family and ethnic background, race, whether or not they have a disability, and other factors. High levels of inequality are associated with economic instability, corruption, financial crises, increased crime and poor physical and mental health. When we look around: Tax concessions, tax avoidance and tax evasion remain widespread. Corporate tax rates have fallen. This has reduced resources to invest in the very services that can reduce inequality: social protection, education, healthcare. The corrosive effects of today’s levels of inequality are clear. We are sometimes told a rising tide of economic growth lifts all boats. But in reality, rising inequality sinks all boats. Confidence in institutions and leaders is eroding.

A leading argument advanced in favor of cutting taxes for corporations is that this will make them more competitive in today’s global marketplace. But one important issue is when competition makes people less cooperative, promotes selfishness and free-riding, reduces contributions to public goods, and leaves society worse off. If a small number of businesses wield too much market power, they are often able to raise prices or decrease the quality of goods to increase profits at the expense of consumers. On the whole, taxes play a relatively small role in corporations’ decisions about where to invest. Other factors play a much larger role – factors such as strong worker skills and education, access to consumers, modern infrastructure, and well-functioning legal institutions. American competitiveness would be better served by ensuring that corporations pay their fair share of taxes and investing those revenues in education, infrastructure, and other public investments that make US a desirable place to do business.

Late capitalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning. Inequality is recast as virtuous. With respect to social needs, their belief is the market ensures that everyone gets what they deserve. Despite its alleged commitment to market competition, the neoliberal economic agenda instead brought the decline of competition and the rise of close to monopoly power in vast swaths of the economy: pharmaceuticals, telecom, airlines, agriculture, banking, industrials, retail, utilities, and even beer. The drastic inequality of the control of resources – as the big get bigger – creates the majority of the problems we have today. This breeds cut-throat competition which leads to crime, corruption, non-cooperative behavior, and many other negative side effects. Indeed, the failure to recognize that we live in Darwin’s world rather than Smith’s is putting us all at risk by preventing us from seeing that competition alone will not solve our problems.

Prioritizing short-term profits for individuals has sometimes meant that the long-term well-being of society and the environment has lost out. During the 21st century the cost of many discretionary goods and services has fallen sharply, but basic necessities such as housing, healthcare, and education are absorbing an ever-larger proportion of incomes, aggravated by wage stagnation. These shifts point to an evolution in the “social contract”: the arrangements and expectations, often implicit, that govern the exchanges between individuals and institutions. Broadly, individuals have had to assume greater responsibility for their economic outcomes. For many individuals the changes are spurring uncertainty, pessimism, and a general loss of trust in institutions.1 Policy makers need to focus on two fronts to reduce inequality: tax relief and income supports or transfers to build the middle class and secondly, education and anti-discrimination policies.

1 The social contract in the 21st century. (Feb 5, 2020) James Manyika, Anu Madgavkar, Tilman Tacke, Sven Smit, Jonathan Woetzel, and Abdulla Abdulaal https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-social-contract-in-the-21st-century

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