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Leading economic thinker, Baroness Nemat Minouche Shafik, the President and Vice Chancellor of the London School of Economics and Political Science, and soon to become the first woman President at Columbia University in New York, delivered a tour-de-force lecture on the necessity of creating a new inter-generational social contract which sought to deliver fairness and equal opportunity for all.
Baroness Shafik, who was born in Egypt and emigrated to the United States, was introduced to a Panmure House audience, which included online international viewers, by Professor Adam Dixon, who has taken up the position as the first Adam Smith Chair of Sustainable Capitalism, based at Panmure House and the Edinburgh Business School.
Prof Dixon explained that Baroness Shafik had become the youngest Vice President of the World Bank at the age of 36, and has held a range of senior policymaking positions including Deputy Managing Director of the International Monetary Fund, and Deputy Governor of the Bank of England.
In delivering the Adam Smith Tercentenary Lecture, Baroness Shafik, who was appointed a cross-bench peer in the House of Lords in 2020, said she was deeply honoured to address such a gathering in the intimate space where Adam Smith spent his latter years refining his greatest work and discussing economics and moral philosophy with the figures of the Scottish Enlightenment.
Her book, What We Owe Each Other: A New Social Contract,1 has already received widespread plaudits for its insights and its radical suggestions to tackle the most vexing problems related to climate change, structural inequality and how modern welfare states can organise themselves differently to fix such problems.
She set out her cogent arguments for the creation of a new social contract, an argument grounded in the writing of Adam Smith’s twin works, The Wealth of Nations, and The Theory of Moral Sentiments, with the emphasis on the interaction between enlightened self-interest and empathy, and an “evangelising for the power and necessity of reason”.
In setting out her stall, she cited William Beveridge and his seminal report on the creation of the Welfare State and the foundation on the National Health Service, in the UK. Beveridge, who like Shafik was also a Director of the London School of Economics, published his revolutionary report in late 1942 when Britain was still at war and London was still being bombed.
She said that Beveridge’s outstanding social-centred report proved that: “There is never a quiet moment to shape tomorrow” and this was the case today with the need for a ‘new paradigm’ for what a social contract for the 21st century would look like.
In assessing the current weaknesses of the British economy, she spoke about the cost of living crisis, fuelled by dramatic shifts in supply and demand for goods, particularly energy and foodstuffs, at a time of war in the Ukraine. This has been coupled with a more severe weakness, which is “an entrenched and toxic blend of structural low growth and productivity”, resulting in the UK being dubbed Stagnation Nation with the highest inflation rate in the G7, labour productivity at the bottom of the OECD rankings, shrinking real wages since 2010, causing the biggest collapse in living standards in British households in the last 60 years.
“The economic problems in the UK and many other countries reflect the breakdown of the basic set of norms, rules, benefits and obligations that bind individuals, firms, state and states together, and lay out what we owe to each other, what I call the social contract.”
She posed several questions about education, childcare, pensions and health and social care, asking: “How much of health and social care is the responsibility of individuals and how much of it should paid for collectively by insurance or public funding?”
In pointing out the challenges, Baroness Shafik explained that the ‘social contract’ and welfare state may sound similar but they were not synonymous. She said there has been a breakdown in the consensus about how the economy functions and “most people’s expectations about what society will provide for them, and what we should ask of them.”
While she described the ‘Robin Hood’ function of the welfare state, where taxation takes income from the more affluent to redistribute to the poorer in society, she prefers the ‘Piggy Bank’ analogy, where the state supports a person in early years and education, then expects that person to contribute by working and paying taxation, and when reaching retirement age, again being supported by the state. Researchers have calculated a typical individual takes from the welfare state the equivalent of the taxes they put in over their lifetime.
“The Piggy Bank function role is very important. It is at the heart of what economists call the ‘redistribution nexus’, policies that invest in and around citizens to enable them to be productive and to contribute to society,” she said.
However, there has been a massive disruption to this model with the labour market changing, more women in work, and fewer at home looking after children, while there is the high cost of childcare in developed countries, and the changing concept of ‘the family’. She said the global pandemic had revealed the cracks in the social contract and how the state has failed many in the UK population.
Baroness Shafik shared three principles underpinning her argument, these are: security for all, in that everyone should be guaranteed a minimum for a decent life; a maximum investment in capability, with society investing as much as it can afford in creating productive opportunities for people to contribute to the common good; and the efficient and fair sharing of risk, meaning that risk could be better managed if resources were allocated differently between individuals, families, employers and the state.
In speaking about education, she highlighted the important of a child’s first 1,000 days of life when so many cognitive functions are opened up. “It is during this period – before the age of 3 – when brain development is highly influenced by nutrition, mental stimulation and social and emotional development, that the foundations for learning are laid.”
Giving young people a better start has shown to lead to better outcomes for society. She said investment in children’s early years is one of the most cost-effective ways of producing an educated labour force capable of acquiring new skills, and citizens less likely to require support from social assistance programmes or commit crimes and more likely to contribute to society.
She then addressed the widening problem of ‘inter-generational debt’, which meant that thousands of young people were unable to afford decent housing and therefore better living standards. She said that levels of support for maternity leave, childcare, and sickness and welfare benefits had to be more effective and generous in allowing people to retain their dignity. She said those with comfortable pension pots must be expected to pay more towards the common good.
Baroness Shafik makes some radical suggestions about how this might be funded, through the imposition of property taxes which would direct a flow of capital from those in high value properties to those unable to get on the property ladder, through a capital endowment scheme. She points out that wealth inequality is far greater than income inequality, and that the redistribution of wealth is the key to equalising opportunity in society.
In referring to Adam Smith’s intellectual legacy, she said: “I think we owe each other more than the current social contracts delivers, we need to combine the invisible hand of the market with the visible hand of sympathy and a better social contract.”
Concluded on a note of optimism, the baroness said a new social contract is possible and that it would give everyone the possibility of a decent life, sharing risks more humanely, and drawing on everyone’s talents. It means asking everyone to contribute towards the common good.
“A better architecture of security and opportunity could be based on the principles of minimum security for all, maximum opportunity and possibility, and sharing risks more efficiently and equitably.”
[1] What We Owe Each Other, Vintage, Penguin Random House, 2021.