Underlying every economic system is a social contract setting people’s norms, values, and beliefs, thereby determining how people are expected to behave within the economy, what their reciprocal obligations are, and how the economy is to be run. Many market economies around the world—in both advanced and emerging countries—rest on a materialistic social contract that is increasingly failing to address basic needs of many citizens.
This materialistic social contract rests on philosopher and economist Adam Smith’s principle of the invisible hand, whereby people pursuing their own self-interest in free markets are led—as if by an invisible hand—to make everyone in society as well off as possible. The popular appeal of capitalist economies relies heavily on this principle, since people usually support capitalism because it is alleged to deliver higher living standards and more economic freedom than alternative economic systems. The underlying assumption is that human needs can be satisfied through material prosperity and that decentralized, self-interested market decisions tend to generate such material prosperity more efficiently than more centralized, coordinated approaches. Political parties differ in terms of the degree of government intervention deemed necessary to redistribute the economic pie, but there is broad agreement that the Invisible Hand is an effective tool to enhance the overall size of the pie.
In many countries, however, this economic model has generated rising inequality in one or more of various dimensions—income, wealth, education, health, skills, and social esteem. The approach has also generated falling social mobility, rising social fragmentation, a widespread sense of disempowerment in response to the vagaries of globalization and automation, and resentment among many people that their hopes for a good life are being ignored. These phenomena are apparent in the political and social divisions within the U.S. and in many countries across Europe, Asia, and Latin America. These divisions undermine the foundation of trust that is essential for well-functioning market economies and the sense of common purpose that is necessary for democracies to work, thereby threatening the future peace and prosperity of nations.
Changing this economic model requires not just technocratic reforms, but a new social contract. Whereas different social contracts are relevant to different societies, all such contracts share certain features aimed at addressing common human needs. The norms, values, and beliefs that are implicit in any particular social contract must be appropriate to satisfy these needs.
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