From Contract to Covenant

The economy is the means by which society satisfies its needs and wants through combined effort. In complex societies, this always involves an intense combination of individual, state and societal engagement. The economy we inherit works in the interests of capital, of those who own or manage the inheritance of previous generations, understood as ownership of technology, property and money. This has intensified over the past forty years at the expense of labour.

Capital, in its essential form, is promiscuous. It seeks the highest possible rate of return at the fastest possible speed. Once the returns begin to slow, it seeks new partners that can deliver higher returns more quickly. When there are no constraints on the relationships it can initiate, and end, and when capital is the fundamental organizing principle of the economy, the consequence for society is ruinous.

For a century, the response of the left has been to advocate a role for the state as the exclusive principle of economic organization, and this has led in each case to the eventual surrender to the market. The weakness is that there is no price system that can communicate what people want and a centralized administrative system inhibits innovation. The Soviet Union disintegrated following a period of market reforms; China became the driver of globalization by creating the conditions for sustained production and the importation of capital as the central principle of production, with no recognition of the human status of labour. The first principle of New Labour was the acceptance of globalization and the diminishment of labour value and power. The task now is to conceive of a role for the state in preserving the human status of labour and the vulnerable status of nature through an institutional system that facilitates the renewal of society.

The promise of Labour, and of socialism more generally, was to domesticate the destructive power of capital, the commodification of human beings and nature. It did this by strengthening democracy as an alternative mode of power to that of capital, within a framework that upheld the fundamental liberties of religion, association, expression and conscience.

Labour reneged on that promise.

What is required is a form of political economy that can domesticate the destructive tendencies of capitalism by moving from contract to covenant as the central principle of economic organization. This requires the return of state power and the engagement of different interests in the governance of the economy.

The idea of a covenant is important because it addresses the fundamental problems of the economy; the inequality generated by debt; and a system of debt forgiveness that strengthens mutual obligation. It includes nature as a partner and has a role for institutions in brokering a common good across time and space. It indicates a way that place, work, solidarity and nature can be bound into an economic system. In other words, it domesticates the demonic energy of capital by binding it into relationship with the very forces it seeks to commodify.

Contract, in contrast, is an isolated event, an exchange of equivalents between hands that by definition is indifferent to external consequences, long-term trends or context. A contract is a legal agreement between two parties which has led, over time, to the domination by the rich of the poor, the concentration of assets in fewer hands, the dehumanization of labour as a human factor, the exploitation of the environment and the neglect of relationships and place. The idea of covenant is sometimes treated as a biblical curiosity with no relevance, yet it is central to political authority, in that Parliament and common law are intergenerational forms of authority. In specifying limits to levels of debt, the inherent status of the human being as requiring work and shelter, a partnership with the land as a common good and the strengthening of community within the economy itself through the binding of estranged interests in a shared endeavour, it provides the institutional means of building a decentralized national economy.

In short, covenant requires that human beings and nature are not treated as commodities, and that there is an inter-generational commitment to the common good between classes and regions based on the renewal of place. This gives shape to the change of consensus that is required to remedy the defects of what went before. Neither the state nor the market is sufficient to generate a good society: it requires the renewal of society, and its representation within the economy in the form of vocational and locational institutions that negotiate a common good in changing circumstances, by upholding the status of labour, land and knowledge as part of a shared inheritance. Covenant is a means of turning domination into a conscious form of mutual dependence by constraining both the market and the state through the strengthening of society.

Changing the Consensus

Any political consensus defines what people can achieve through democratic cooperation and what has to be left to the coordination of the price system. Over the past forty years, redistribution, regulation, tax revenue and interest rates have been considered to be appropriate central state functions within the economy. A market system based on fluctuating prices, in parallel, has been considered the most efficient means of communicating what people want. Beginning with the dominance of the New Right in the 1980s, the state was not considered a rational agent within the economy and as a result its function became exclusively external and regulatory.

This missed two fundamental truths. The first is that the economy is an eternal form of all societies as the common activity through which the satisfaction of material needs and wants can be achieved by the transformation of nature into goods through the exertions of labour and the application of skill. It is a substantive need rather than a formal model.

Labour is a necessity in both of its meanings. It is the means through which society reproduces itself through biological and cultural reproduction. Each person is dependent upon a physical environment and other people for the satisfaction of needs. This in turn requires institutions that preserve and renew knowledge as a means of reproducing the necessities of life. This intensifies in a complex society. Work has a necessity and a history that is not grasped by understanding labour as an exclusively utility-maximizing activity carried out entirely by the individual agent. This is why human capital is a limited concept, in that it does not show adequate regard for the institutional inheritance that makes skilful labour possible. When it comes to labour, we all need an inheritance.

This is linked to a deeper fiction, propagated by economic theory and outlined in the previous chapter on Karl Polanyi, which is that human beings and nature are treated as commodities – defined as objects produced for sale on the open market – to be exploited efficiently by competitive markets in labour, land and food. This is because the imperative within capitalism is to turn human beings and nature into commodities when they were not produced for sale in the market and are irreplaceable. What economists call factor markets are just another description of the substance of society, human beings and nature, which is another term for creation itself.

The problem with the breakdown of political economy into a system of maximization of returns within the economy and then a redistributory and regulatory state as a means of mitigating the hazards and providing collective necessities in the form of money payments and administrative services is that it does not engage with the problem at source. It then enforces the fiction, thereby generating a more powerful need for a state to protect the basic conditions of life. The innovation in the recent cycle is that the banks and corporations receive state protection. What Andrew Haldane defines as the ‘doom loop’ – the nationalization of risk and the privatization of gain – is unsustainable as a principle of economic governance.

Virtue, Craft and Reciprocity: Blue Labour Economics

Blue Labour economics assumes that there is a distinction between real and fictitious commodities, and relates this to the role of the price system in allocating resources. The roots of this are to be found in the socialist calculation debate in the 1920s in Vienna. On one side, there was a group of socialist thinkers who thought it was possible to calculate future needs and demands without the duplication of unnecessary competition and waste. The idea was that you could build a big enough computer, input all the relevant data and plan rationally for future needs and wants. This was the basis of a planned socialist economic system. On the other side was a group of economists around Ludwig von Mises, including Friedrich Hayek, who argued such a thing was impossible. This was because the decentralized process of the price system relied on a huge amount of information that was not calculable. Price setting was a subjective process that gave a signal about what people wanted and this was essentially unpredictable and unknowable, except insofar as it revealed itself through the fluctuations of the price system. This critique of state planning, of socialist calculation, set the terms of debate for the next 100 years.

It is important to grasp the ways in which Hayek was right to appreciate the extent to which he was wrong. What is at stake is best understood through an analys is of the difference between his economic and social theory. In his social theory, he proposes three concepts that characterize the emergence of the open society, or what he calls a catalaxy. These are reason, instinct and tradition. A catalaxy, or extended economic system, is grounded in certain traditions that preserve ethics, honesty, law-abidingness, trust, skill and honesty and are irreducible to either instinct or reason. Hayek considers instinct alone a terrible threat as it is essentially communitarian and atavistic. He considers rationality alone equally threatening as it is instrumentalizing and self-defeating. Tradition is the idea he develops to mediate between and temper these two extremes of a self-defeating rationality that would lead to the ‘war of all against all’ and an instinct that generates a closed community.

In Hayek’s economic theory, however, there is no mediating principle between the state and the market and there is no account of the institutions that uphold traditions of virtue and of trust and sustain a sense of mutual obligation. There is, therefore, no attention paid to the role they play in shaping and forming the factor market of labour and those decentralized intermediate institutions that uphold skills and translate information into knowledge. These enable people to understand and adapt to change not exclusively as an external force but also as something they can understand and shape. The body politic thus plays a vital role in organizing the economy.

This is the importance of Polanyi, who rejected both statist and market orders and tried to conceptualize the decentralized institutions that could resist commodification while preserving a price system in real commodities. His argument was that the economy requires social institutions that disseminate skills, distribute knowledge and preserve the status of the person as something other than a commodity. Societal institutions, of a non-pecuniary form, renew the cultural resources, or constituents, of society, saving them from depletion and exhaustion by defying the logic of commodification and sustain the institutions which educate the person towards a notion of internal goods as well as external value. Internal goods are the skills necessary for the fulfilment of a specific task; external goods are the money and recognition you receive for them. Specific skills are not fungible or transferrable, but require apprenticeship and time, education and practice. There is a connection between the ethical character of the person and the incentive structures within which they work. Virtue is vital for a functioning economy. Under the rule of the state or the market, the only relevant goods are money and power and the internal goods, or virtues, are undermined and neglected.