A Code of Social Responsibility as a Social Contract

Keith Rankin

Social Responsibility Conference

Massey University, Albany Campus; 12-15 February 1998.



This paper considers some of the implications of making explicit the contract of rights and obligations that exists between a resident population and its democratic government. In particular, it proposes a formal definition of economic sovereignty, and the economic obligations of the governing institutions as agents of the population to whom it is accountable.

The paper uses a principal-agency framework to map out such a citizen-government relationship, as well as to map the government-subject relationship that underpins the official presentations to date of the Code of Social Responsibility.

The paper concludes that the sovereignty of the people over the public side of the national economy must lead to the view that the welfare state is the equal property of all of the people, and therefore the provision of social welfare should be based on inclusive rather than exclusive principles. A fully targeted system of welfare provision would be seen as unconstitutional under any genuine social responsibility contract.



The "Code of Social Responsibility", as first mooted in the 1997 Budget, is a concept which sets out a number of obligations for a subject people, with particular emphasis on parents whose main source of income is a social welfare benefit. It is a code that explicitly promotes the superior virtue of paid work over unpaid activities.

As a social contract, such a code would be little different from that espoused by Thomas Hobbes, in 1651, between an authoritarian Crown and a people whose lives would otherwise be "nasty, brutish and short". Implicit in the new social responsibility proposals are 'stick and carrot' incentives which can fairly be labelled 'social engineering'. Such incentives oblige people to compete against each other in the labour market for the dwindling labour share of the economic cake, thereby preventing them from making unpaid contributions to the public good.

In this paper, I wish to suggest that a Code of Social Responsibility could be, indeed should be, something much more than a one-sided arrangement between "The Crown" and a subject people. Such a code could be the basis of a social contract between the people as citizens and the people as subjects of a well-constituted democracy in which the executive government is very much an agent of the sovereign people. The social contract mooted here represents a "principal-agent" relationship that defines the responsibilities of the government to the people.

The "principal-agent problem" derives from economics, where it represents a form of market failure. New Growth economist Paul Romer (1995) says that according to the "factory metaphor ... non-production workers such as managers are there merely to see that the production workers follow their instructions. In academic discussions, this image of management is formalised in terms of a 'principal-agent' problem. The manager is the principal who must supervise the activities of hired agents who might shirk." More usually, the principal is the owner(s) of a firm, and the agent is the manager. Either way, the agents are the parties undertaking to perform, under contract, the tasks required of them by their immediate principals.

Moving from the micro perspective of economics to the macro perspective of socio-economic history, the problem appears in a very different context when we seek to define the relationship between a society and its economy. Karl Polanyi, in The Great Transformation (1944), sees the essence of the industrial revolution as being an overturning of the relationship whereby the private economy was necessarily an agent of the society to which it belonged.

The changes that took place in the "classical" era from David Ricardo (c.1800s) to John Stuart Mill and Karl Marx (c.1860s) saw the British economy take over as principal, leaving societies in general (not only British societies) and the subject population in particular as an expendable "reserve army" for industrial capitalism. The pivotal legislation used to validate this change was, for Polanyi, the New Poor Law of 1834. For him (Polanyi 1944, pp.98-101), "the picture drawn by Harriet Martineau, the perfervid apostle of Poor Law Reform" epitomised the vision that "except the distinction between sovereign and subject, there is no social difference in England so wide as that between the independent labourer and the pauper" (Martineau 1833). Polanyi adds: "this, of course, was hardly a statement of fact ... rather it was a statement of policy based upon a prophetic anticipation." The neoconservative ideology behind the New Zealand Government's proposed Code of Social Responsibility is likewise about the intention to create a distinct income gap between low-paid "self-reliant" workers and "beneficiaries".

The social liberalism inspired by the writings of John Stuart Mill, Harriet Taylor, John Maynard Keynes, William Beveridge and others represented at least a partial return to the precedence of social development over economic determinism. It is the shift in the 1980s and 1990s to global capitalism, without democratic accountability, that is once again placing the economy - the global economy rather than the British economy - as the de facto principal to whose dictates societies are expected to conform. It represents a return to a Hobbesian world; to social contracts that enforce the blind loyalty of the people to the dictates of an overcrowded global labour market which is itself an agent of global capital.

Here, I propose an alternative social contract that confers ownership of society, and hence of the economy, to the people. In the classical worldview, economic progress and the growth of poverty were inseparable (Polanyi, p.103). Thomas Paine, in his 1797 pamphlet Agrarian Justice, questioned the view that economic progress had to take place under conditions of pauperisation. He insisted that the people as owners of their landed inheritance - of the original public domain - had economic rights as a consequence of that property relationship; namely the birthright to draw individual income streams from that public asset.

In the same way a modern democratic social contract requires the people to assert ownership over their public domain and therefore of the economy that operates within it. That means owning the constitutional apparatus, the public institutions, the natural and social inheritance, and the "nonrival goods" (Kelly 1996) such as ideas that will drive economic growth in the 21st century.

The chains of responsibility and influence in a modern democracy can be understood through Figure 1 below. The apparatus of government serves as both agents and rulers of the people. The executive branch is an agent of the representative parliament. Private interest groups - the people in their many non-civic roles - inevitably exert some influence on all who act as public principals with respect to others: on citizens, political parties, parliament and government.


Figure 1


In a well-constituted society, the sovereign is the residual beneficiary of the economic surplus; the constitutional principal is the public beneficiary of the activities of its well-behaved agents and subjects. For Margaret Levi (1988, p.61), "rulers bear the major and, often, initial costs of providing the good or service [or resource] and are the residual claimants of any surplus from the charges for its creation, maintenance, or use." When rulers - ie executive governments - are understood as themselves being socially responsible agents, then they are obliged to collect taxes on behalf of their principals from the private users of the public domain, and to allocate the revenue to the people in the form of a social wage.

This particular insight into fiscal responsibility - an essential component of social responsibility - can be found in particular in the writings of the French "Physiocrats" in the 3rd quarter of the 18th century. In 1933, Luigi Einaudi picked up from them the essence of the fiscal contract that belongs with a modern Code of Social Responsibility:

"I don't say that physiocrats were the first and only economists who formulated correctly the taxation problem. [But] theirs was the first conscious endeavour to formulate correctly that problem as a problem not of a burden laid on individual producers' shoulders for the sake of keeping the consumptive governmental machine going, but as a problem of distribution between productive agents - the State being counted among them [emphasis added]."

The sovereign is a productive agent. Indeed, according to new growth theory - linked irrevocably to the name of Paul Romer1 - it is nominally free nonrival goods rather than privately owned inputs (such as labour and capital equipment) that are driving the growth process. This means, in a socially responsible 21st century, tax rates will be rising rather than falling. The social wage fund should rise faster than the aggregate "compensation of employees" in the national accounts. Income drawn from the social wage fund should become relatively more important than income drawn from the labour market. That's not a burden. It's not a problem; it's a solution.

A form of this solution generated economic growth in the heyday of the welfare state. Weldon (1988), an historian of economic thought, believes that the social wage was cut during the 18th and 19th centuries (leading to the widespread perception that poverty and progress were synonymous) and that the welfare state became, in effect, an essential device to correct this imbalance:

"The theorist today who would follow the classicists in deferring to reality must notice at least one great change in the structures that determine distribution. There is an ever widening difference between the private and the social wage, between the private and social share of the surplus. ... One has in mind the enormous 'post-war' expansion of the welfare state, especially in the industrialised world ... One would not be at all surprised, incidentally, to learn that the ratio of social to private wage declined from Petty [late 17th century] to Marx, and that its rise in this century has been a return to the much earlier proportion."

The world economy is moving into another privatising phase, such as that "from Petty to Marx", a phase that repudiates the social contract that we called the welfare state. Bollard (1996), in their introduction, explain the New Zealand economic "reforms" as an end of the social contract approach. According to my argument, this privatising phase represents a misallocation of wealth, whereby the public domain is appropriated by private interests and is not used to generate a social wage fund for its principals.

A social wage fund is the equal property of all social principals; of all citizens. Thus, in essence, an income distribution system based on economic sovereignty must be universal. If we all own the public health care system, then we must have equal access to it; likewise public education. Social welfare must also be universal, which implies some level of cash income payable to all citizens; a universal basic income (UBI). A universal system also allows citizens to allocate some social wage income to those with special needs. We are talking here about the distribution of a publicly owned fund, and not about targeting. Targeting means making transfer payments by taking from one group of individuals called "taxpayers" to give to another group of individuals called "beneficiaries". Targeting creates an exclusive two-class society.

Targeting, as a system of income support, follows from the worldview that all income is private, that taxes represent expropriated private income rather than public income, and that private spending choices made by individuals lead to better social outcomes than does the public spending and redistribution of private income. Thus it has a strong bias towards low tax rates. This worldview denies any direct economic return to the public owners of our most important assets.

A universal basic income is an effective means of formalising the social contract. Not only would everyone earn a share of the social wage, but also everyone would receive a basic cash benefit as a private income drawn from the social wage fund. This has the advantage of obliging societies to define citizenship in an inclusive way. Michael Goldsmith (1997, p.54) puts it this way:

"Universal Basic Income offers a way ... to recast citizenship claims in ways appropriate to the contemporary world. In so doing, it conjoins two supposedly incongruent ideas of progressive concern: a 'politics of redistribution' that deals with struggles over resources and a 'politics of recognition' that deals with conflicts about identities."

In conclusion, in a modern democratic Code of Social Responsibility, a government is bound to its principals. As such, it is required to collect and distribute a social wage fund on behalf of its ruling citizens. Being a responsible agent means being committed to the unconditional support of and the care for all the people to whom one is constitutionally, legally and morally responsible.

The people, as subjects and as producers, are bound to contribute to the maintenance of the public domain:


To fall back on an old cliché, the public domain is the "golden goose" that drives a modern economy, and the social wage fund represents its "golden eggs". Under a responsible social contract, the government nurtures the public domain, facilitates private activity that extends the public domain, collects taxes commensurate with the value of the public domain, and distributes the social wage fund equitably as public welfare. And the private economy serves as an agent of society.



  1. Romer, an economist at Stanford University, California, has written many articles, some of which are accessible to the general public. His Internet web page is [back]
  2. Unsocialised private activity is any activity which, if pursued by all, makes society worse off. Examples include externalising a firm's costs by polluting public spaces, or a firm competing in a predatory manner by, for example, refusing to fund the training of its own workers in preference for "free riding" off the training funded by others. [back]



Bollard, Alan, Brian Silverstone and Ralph Lattimore eds. (1996) A Study of Economic Reform: the Case Study of New Zealand, Amsterdam: Elsevier.

Einaudi, Luigi (1933) "The Physiocratic Theory of Taxation" in Economic Essays in Honour of Gustav Cassel.

Goldsmith, Michael (1997), "Universal Basic Income and the Concept of Citizenship", Social Policy Journal of New Zealand 9:45-54.

Hobbes, Thomas (1651) Leviathan.

Kelly, Kevin (1996) "The Economics of Ideas [Paul Romer]", Wired, Issue 4.06 - June. { }

Levi, Margaret (1988) Of Rule and Revenue; University of California Press, Berkeley.

Martineau, Harriet (1833) The Parish.

Paine, Thomas (1796) "Agrarian Justice" in Pioneers of Land Reform, ed. M. Beer (1920).

Polanyi, Karl (1944 [1957]) The Great Transformation, Boston, Beacon Press.

Romer, Paul (1995) "Beyond the Knowledge Worker", Worldlink, January/February.

Weldon, J.C. (1988) "The Classical Theory of Distribution" in A. Asimakopulos ed. Theories of Income Distribution, Boston, Kluwer.


© 1998  Keith Rankin

Rankin File