Social Contract 2.

0 Table of Contents

A New Conversation about the Rights and 1. An Evolving Bargain

Responsibilities of Society’s Institutions
2. The Social Contract Gets
Jacob Harold Specific

Draft: July 9th, 2009 3. How the Social Contract

Evolves

4. Five General Principles for

1. An Evolving Bargain Social Contract 2.0

The world is in flux. We face an immediate 5. A New Institutional

crisis in the global economic system and a Taxonomy
looming one in the global climate system. 6. Outstanding questions
Advances in technology are radically shifting
culture and commerce. Demography and
geopolitics evolve quickly and with unpredictable consequences.

The rights and responsibilities of our institutions must evolve in the face of this flux.
Banks and newspapers are already in the midst of painful—and uncertain—
adjustments. Every institution will soon enough face the need for similar change. It
is, thus, time for the citizens of the world to begin a conversation about—for lack of
a better phrase—a new social contract. This conversation will not be quick, nor will
it be easy. But over the next several years, we need a framework to address two
basic questions: What are the rights of our institutions? What are the
responsibilities of our institutions?

In this essay, I offer a basic framework to address these questions in the context of
the United States—though I believe they are also relevant around the globe. First, I
describe how the social contract needs to become more specific. Second, I offer a
framework for thinking about how the social contract evolves. Third, I offer five
general principles on how social contract is currently changing. Fourth, I suggest a
preliminary taxonomy of key institutions and their evolving rights and
responsibilities.

2. The Social Contract Gets Specific

Here I define the social contract as a collective understanding of the roles and
responsibilities of institutions in society. The first discussions of the social contract
focused on the relations between citizens and government. Over time, the
discussion broadened beyond government to include business and civil society in a
three-legged stool of social institutions.

It has become clear, though, that in each case these categories are simply not
specific enough. Civil society includes everything from the Gates Foundation to Al
Qaeda. The roots of the current economic crisis in the financial services sector
show that “business” may be too general a category to be useful. Government is a
vague concept covering diverse municipal, state, national, and multi-international
institutions. The complexities of the 21st century demand more texture, granularity,
and precision. To be useful, the discussion must move beyond sectors (business,
government, civil society) to sub-sectors (e.g., finance, municipalities, foundations).
Later in this essay, I offer a preliminary taxonomy of these sub-sectors.

3. How the Social Contract Evolves

No one signs a social contract, but we all live by it. A set of implicit understandings
have evolved over centuries. We assume that finance should offer credit. We
assume that national governments should guarantee public security and offer a
safety net for citizens facing difficult times. We assume that religious institutions
should tend to our spiritual needs and that basic research happens at universities.
This evolution has not been arbitrary; there are good reasons for the rights and
responsibilities we give our institutions. But nor is the current system inevitable: we
have made decisions as a society to give certain rights and responsibilities to
certain institutions. Wars have been fought, lives lost, history bent because of
these decisions.

Above, I noted a set of forces which are accelerating the evolution of the social
contract: technology, demography, environmental pressures, and others. But the
social contract is sticky. Even with all of these profound forces for change, the
essential roles of institutions in our society will remain the same for the foreseeable
future. Society offers several forms of inertia which preserve the social contract
and while also facilitating its evolution:

• Language: The words we use fortify the social contract. If a new

organization sells a product we reflexively call it a business, even if it is a tax-
exempt charity. The emergence of new words (e.g., social enterprise) and
language patterns can provide a cultural lubricant to institutional change.

• Law: Organizations are born and operate within a legal framework. Upon
formation, organizations must decide on their legal form (or lack thereof).
Their activities are constrained by the law—just as they are guaranteed
recourse and transactional stability by the rule of law. As the law evolves,
though, it can accelerate institutional change.

• Taxation: Governments are empowered to extract cash flows from

transactions. While taxation’s primary purpose is to provide government
revenues, it is also a critical mechanism for defining institutions (e.g., tax-
exempt charities) and guiding decisions (e.g., homeownership rates are
driven by the mortgage interest deduction).
 • Institutional form: Institutions created for a certain role tend to keep it.
They are culturally and organizationally calibrated to address a need, and
their mere existence reinforces their role. Business models are designed to
meet a need at a point in time—and respond to the resources available at
that time. In the long run institutions of all sectors must bring in more money
than they spend. They are constrained by historical business models until
new ones emerge—at which point institutional form can become an
accelerator for change.

We should be thankful for these contextual forces. The social contract can certainly
change too quickly. But even with these frictions, our institutions evolve, and as
should our collective understanding of their rights and responsibilities.

4. Five General Principles for Social Contract 2.0

Some changes facing society’s institutions appear to be universal—they impact all

of the institutions of society. Below, I note a few of these general changes. None of
them are new. You can find centuries-old precedents for each. But time and
technology have highlighted and expanded these phenomena. They are
qualitatively more important in the 21st century, and together they offer the
contours of the new way we relate to our institutions—and how they relate to each
other.

• Principle #1: Every institution reports to multiple stakeholders.

Governments may be directly responsive to voters, but they must engage
with individuals and institutions inside—and outside—of their borders. A
corporate CEO may report to her shareholders—but she can expect
accountability from customers, employees, vendors, and others. In nonprofit
organizations the “buyer” (donors) is not the “customer” (final beneficiary)—
but both are critical stakeholders.

• Principle #2: Institutions must track progress across multiple

metrics. Gone are the days when a business executive could simply drive
up share price and expect to be left alone. Companies are now asked to track
and manage against more than just shareholder value—from carbon footprint
to net job creation to lobbying expenditures. Nonprofits cannot be content
with a low overhead ratio; donors demand lasting results. National
governments cannot merely track GDP growth; multi-dimensional quality of
life measures are the only way to paint a complete picture of the success of a
city, state, or nation.

• Principle #3: Complex issues require cross-sector collaboration.

Wicked problems like climate change simply cannot be addressed by only one
sector. Success requires the flexibility of civil society, the mandate of
government, and the scalability of business. In any one issue, sub-sectors
 will be called upon in different ways—whether foundations to provide flexible
capital or the media to enrich the public’s understanding.

• Principle #4: Tools are applicable across sectors. In a changing context

institutions experiment. Social enterprises adopt banking tools to
microfinance in order to bring the poor out of poverty. The business world
trumpets techniques of intrinsic employee motivation pioneered by
nonprofits. Universities use tools from business to monetize intellectual
property from faculty research. Communications enables tools to evolve
across institutional lines faster and more effectively.

• Principle #5: Transparency is now the default. Collaboration requires

that institutions understanding what other institutions are doing. Moreover,
stakeholders demand access to information—for both confrontational
accountability and cooperative support. There will continue to be good
reasons for institutions to not share some types of information (military
intelligence, patient data, competitive secrets). But in most cases there is no
good reason not to share—and many good reasons to share. Transparency
may have started as a moral imperative but has in many cases become a
practical aid to results.

5. A New Institutional Taxonomy

As discussed above, the generality of the government-business-civil society

framework limits its usefulness. For citizens to have a useful conversation about the
new social contract, they need a more specific framework of sub-sectors. Below, I
offer a preliminary taxonomy. Paired with each sub-sector, I suggest one way of
phrasing the core role of each. In addition, I include some notes on how the
subsector’s role appears to be evolving. Finally, I have included a column on the
future rights and responsibilities of each institution. This final column is, for the
time being, left blank so that we may stay focused on the task at hand: getting the
framework right.
 CORE ROLE CHANGE FUTURE
What do we expect How has the role How should the
of this institution? evolved? role evolve in the
future?
Government
National Maintain a Interest-group
monopoly on force politics has shifted
to ensure safety power from
and rule of law individuals to
institutions
Military Provide for Recent combat focus
common defense has been on non-
against external state actors.
enemies Signeficant role in
building
infrastructure and
strengthening
governance in Iraq
and Afghanistan.
Justice system Execute the rule of Tort law as regulatory
law mechanism;
protection of
individual rights
Entitlement system Provide social Cost structure is
safety net creating long-term
uncertainty
Regulatory system Protect consumers Market-based
and environment regulatory
mechanisms like cap-
and-trade;
prevalence of cost-
benefit analysis
Infrastructure Enable flow of Privatization (water,
goods, services, roads, ports); auction
and information of radio spectrum
Research Fund basic More relative
research on responsibility for
targeted issues basic research given
(military, energy, reduction in
health) corporate R&D
spending
State and local Maintain law and Serve as laboratories
government order; tactical for federal policy
execution of (e.g. California for
services and energy policy)
governance
Multi-lateral Prevent war (UN); Address complex
institutions maintain global issues by
financial stability establishing
(IMF, GATT/WTO). standards and
leading
Business
Finance Provide capital and Drive economic
manage risk growth (until 2008
economic crisis)
Investment banks Facilitate complex Represent business
transactions on macroeconomic
matters
Venture capital Provide start-up Address social
capital problems (e.g.
climate change)
Insurance Provide Provide mechanisms
mechanisms to to address
address investment risk
operational risk
Private equity Provide growth Impose efficiency on
capital operating companies
Hedge funds Provide vehicle to Provide public
hedge financial market liquidity
risk
Real economy Drive economic Vehicle for delivery
growth; provide of social good;
goods and services deeper influence
from finance
Entertainment Storytelling Provide public
education; platform
for personal
expression
Journalism Impose external Decentralization of
accountability on institutional form;
institutions constant flow of
news; citizen
journalism
Retail Provide access to Provide mass
products employment
Health care Address health Address health
problems ex post problems ex ante
facto (treatment) (prevention)
Law firms Trusted advisor on Transactional service
legal issues provider; more
contingency fees
Information and
communications Enable connection Aggregate and
technology among users organize information
Extractive Provide raw Manage growth of
industries materials developing countries
Manufacturing Develop and Far fewer jobs; less
manufacture basic research;
products, mass consideration of
employment complete product life
cycle
Civil society
Foundations Provide capital for Oversee multi-sector
social good (with strategic agendas;
assumption that restructure market
government will incentives
scale proven
innovations)
Nonprofit Facilitate ad hoc Systematically drive
organizations private change in society
engagement for
the public good
Charitable Serve unserved Increased earned
organizations need; facilitate income; outsourced
civic engagement service provision for
government; rise in
importance of
intermediary
nonprofits
Advocacy Represent Policy analysis;
organizations constituencies outsourced corporate
regulation and
government
accountability
(extreme form: non-
state actors)
Universities Education and Interdisciplinary
basic research initiatives focused on
social problems,
monetization of
research findings
Associations Provide Increase in power of
mechanisms for associations of
cooperation and institutions; decrease
engagement in power of
within self-defined associations of
communities individuals
Religious Provide for Formal partnerships
institutions spiritual health of to execute on service
citizenry delivery for
government
Labor unions Represent Represent interests
interests of union of all workers
members
 6. Outstanding Questions

Human societies inexorably evolve in the face of a changing world. Our intellectual
understanding of our institutions must evolve as well. This essay offers only a
tentative step forward. It leaves us with a set of major questions, seeds for an
evolving discussion:

• Are the general principles of the new social contract offered in this essay
correct?

• What are the rights and responsibilities of society’s institutions?

• As the world changes, how should these rights and responsibilities evolve?

Please join the conversation at www.socialcontract2.com.

On this sunny Saturday afternoon, the town square is the beating heart of
the community.

At the north end of the town square is City Hall. Outside, two aldermen
talk with their constituents.

At the south end sits the main hall of the local college. Students sit on the
steps reading and swapping stories of last night’s parties.

The bank on the west side will be open for another hour. Customers
emerge, the fear and excitement of a new mortgage on their faces.

On the eastern edge is the community’s oldest church. Volunteers hustle

to prepare for the next day’s service.

In the square itself, dozens are gathered around the booths of the farmers’
market, searching for a fair deal on a perfect peach.

At a cluster of card tables citizens raise money for a new clinic and gather
signatures for a ballot measure.

The town square is the community’s toolbox. And it is being rattled by

forces beyond its control.