The Naked King: the 'Social Contract' between Gov't, Capitalists

Feb 5 , 2022
By Yehualashet Tamiru Tegegn

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When John Locke said that by virtue of a social contract, the government is there to protect the interest of the people, he is either wrong or he meant the very few capitalists who are the source of investment and the centre of market stability, writes Yehualashet Tamiru Tegegn (yehuala5779@gmail.com), lawyer, consultant and researcher.

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In his immortal contribution to the theory of social contract, John Locke posited that the government exists because of the consent of the people who are willing to give up some part of their rights in return for the government to protect their basic rights and promote the common good of the society. People are, thus, government makers and government their protector.

Does the government protect the interest of the “people” as articulated?

Ralph Miliband, in his book, “The State in Capitalist Society,” questions the very notion of the state as we all know it today. Legally speaking, the concept and elements of a state can be traced back to the 1933 Montevideo Convention. As per this Convention, for an entity to be considered as a state, four cumulative elements need to be fulfilled: a permanent population, a defined territory, government, and the capacity to enter into relations with other states (sovereignty). Perhaps, there is another unwritten yet important element of securing recognition from the rest of the world.

Miliband is of the view that it is government that speaks on behalf of the state. The state is nothing more than the interrelationship amongst the “government, the administration, the military and police, the judicial branch, sub-central government and parliamentary assemblies.” But the existing political system in one way or another also supports capitalism. In Miliband’s own words:

“All this, however, is of no serious consequence, given a fundamental commitment to the system of which businessmen are an intrinsic and major part,” he wrote. “Because of that commitment, and because of their belief that the national interest is inextricably bound up with the health the strength of capitalist enterprise, governments naturally seek to help business and businessmen.”

This is very often the case in the contemporary world where the government intervenes in the market to protect the existing market equilibrium and maintain capital accumulation. Government intervention manifests itself in three different forms in this regard. These are the protection of property rights, management of economic crisis and providing welfare to its citizens. The first one can be categorised as negative intervention while the latter two are purely positive interventions from the government.

The first instance of government intervention in the market is through protection of property or economic rights’ of citizens. This intervention is a negative intervention. Despite the disagreements both in ideology and approach between Karl Marx and Adam Smith, both agree on an initial creation of primitive accumulation. For Adam Smith, the primitive accumulation is attributable to the peaceful process in which the diligent, intelligent and frugal elite gradually build up wealth and capital. For Marx, the primitive accumulation of capital is taking land, in effect enclosing it, and expelling the owner from their land and making them landless. This process was later legalised by law, which he considered as the legalisation of theft. Some of the groups, those having a means of production, have a strong foundation unlike many others, who own nothing but their labour.

Despite all people being declared equal before the law, this political equality never brings economic equality. To rephrase George Orwell, all are equal before the law but some are more equal than others because of their economic superiority. The state could redistribute the primitive accumulation of capital concentrated and centralised in a few individuals to the other disadvantaged groups. However, the state, by its omission, approved the existing inequality which is continued afterward. To reinforce the privilege of the few, the freedom of contract, as one of the golden and immortal principles of law, was introduced.

“If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice,” writes Sir George Jessel, a British jurist on the importance of freedom of contract

On its face value, this freedom of contract assumes the bargaining power of the contracting parties is more or less equal. This is nothing but an illusion. The state does, in fact, conduct itself as a neutral party concerning its citizens. Instead, it is precisely employing this neutrality that the state secures the foundations of capitalist relations of domination and exploitation.

The second mechanism of state intervention is through crisis management. An economic crisis can be defined as a serious and prolonged interruption of the economy-wide circulation of capital. This is to mean during economic crisis the relationship between money and capital is broken. Any rational investor invests in capital, which could be either variable or constant capital, to make  profit. In a time of economic crisis or recession, because the realisation of profit is difficult, investors will no longer inject their capital into the market. Money will be mobilised without having any further value, unemployment increases and there will be under-consumption, overproduction or a combination of both. All of these create an economic crisis. The government will intervene in this market to save the economy.

Among the many crisis management tools whereby government, as a speaker of a state, protects the interest of capitalists is through the mechanism of a bailout. The term “bailout” is a legal word used to denote “getting out” a suspect of a crime from jail. Now, a bailout is used as a metaphor to express the government-sponsored rescue mission of otherwise unviable companies.

Following the financial crisis of 2008, the US government introduced the Trouble Asset Relief Program (TARP), which was passed by Congress and signed into law by then President George W. Bush. From the very beginning, it was meant to provide bailout finance for some selected big insurance firms and automobile industries. The government was only ready and willing to support those “too big to fail companies.” Because of their size and depth of connection, if they go bankrupt, the rest of the economy would face tremendous negative consequences.

What was the yardstick to determine which companies are in a more precarious condition and have a high spillover effect if they fail?

This is purely in the discretionary power of the government. Often, politicians tend to make decisions that enhance their chance of re-election. Of course, the firms with the best accountants and lawyers with appropriate government connections are most likely to be bailed out. A study did find that out of the 237 firms that received the TARP fund, the highest proportion went to those who had spent much in government lobbying before the bailout.

The irony of all these is that most of the companies bailed out by public money are not paying back their debt and the government is not willing to go after them. In his article featured in the New York Times, Joshua Rosner, for instance, indicated that Fannie Mae or Federal National Mortgage Association and Freddie Mac or Federal Home Loan Mortgage Corporation were not able to pay the 140 billion dollars which was taken from the small pot of tax payers’ money.

This clearly shows the existence of fishy and non-transparent relationships between business and politics – cosy capitalism. Indeed, the government supports the mighty ones because it thinks they are essential for the economic and public interest.

The third form of government intervention is providing welfare. On its surface, the state providing welfare to its citizens seems like a Samaritan act. However, this is done to protect the interest of the capitalists for two reasons: to create supply for the market and create a ready reserved army. One of the definitions of capitalism is its constant expansion. An unemployed person who gets nothing by selling their labour will not have enough money to purchase. If there are no consumers for the products produced by capitalists, under-consumption or overproduction will directly affect their profit return. When the government provides welfare for its citizens, it creates a market for the capitalist as unemployed people have money to spend

The government provides welfare usually for those who are actively looking for jobs. By receiving welfare, a person is forced to be in the unreserved army of capitalists that could be deployed at any time. The welfare scheme is not only creating demand for the capitalists to their products but also supply for their employment demand.

When John Locke said that by virtue of a social contract, the government is there to protect the interest of the people, he is either wrong or he meant the very few capitalists who are the source of investment and the centre of market stability.

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PUBLISHED ON Feb 05,2022 [ VOL 22 , NO 1136]

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