With the political infighting over the federal government’s budget intensifying, it’s becoming obvious that more is at stake than simply how much and what will be cut. Also in play is a basic dispute about the meaning of what many call the “social contract.” In April 2011, for example, President Barack Obama stated that the fiscal agenda advanced by public figures such as Congressman Paul Ryan “is less about reducing the deficit than it is about changing the basic social compact in America.”

In very broad terms, social contract theory is a way of understanding the relationship between governments and the people. It holds that, having agreed upon the need for a government, individuals create a state on the basis of mutual promises. This permits the state to claim that its authority is based on a delegation of people’s rights to pursue their particular interests in their own way.

Our present economic disputes are, at a deeper level, about the precise content of those mutual promises. One influential interpretation may be found in John Rawls’ Theory of Justice.

On the basis of what reasonable people in an imaginary “original position” and blinded by a “veil of ignorance” about their future abilities, social status, etc., would want, Rawls argued that each person had “an equal right to the most extensive total system of equal basic liberties with a similar system of liberty for all.”

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As part of this calculation, Rawls maintained that no one in the original position would risk being abandoned at the bottom of the social heap. Rawlsian social contract theory has thus, economically speaking, usually been interpreted as translating into extensive entitlement programs and large welfare states.

At the other end of the social contract spectrum is an older concept. This was given prominent expression in John Locke’s Second Treatise of Government.

In Locke’s view, what he called “the Law of Nature” meant that individuals were morally bound not to damage other people’s lives or property. The only way to ensure that this was given effect was through a government that defended everyone against anyone else’s attempts to damage their lives or property. The citizens thus agreed to set up a state that would protect the life, liberty, and property of everyone living under its sovereignty.

In economic terms, this position broadly equates to a state that focuses upon protection of property rights and adjudication of contractual disputes. Issues of distribution according to criteria such as need are deemed beyond the state’s competence.

The significance of these understandings of the social contract is difficult to overstate. The Lockean conception profoundly shaped the Declaration of Independence and much of today’s movement for limited government. By contrast, the Rawlsian interpretation represents the most contemporary philosophical underpinnings of modern American progressivism.

Indeed, once we bracket out the technical economic arguments informing today’s opposed positions—symbolized by, say, President Obama and Congressman Ryan—it’s likely that most of the philosophical assumptions informing today’s heated discussion of political economy fall more or less into one of these camps.

But both conceptions of the social contract pose significant problems. Ironically, it was the libertarian philosopher Robert Nozick who pointed out in Anarchy, State and Utopia that Locke (seen by some as one of libertarianism’s progenitors) “does not provide anything remotely resembling a satisfactory explanation of the status and basis of the law of nature in his Second Treatise.”

As for Rawls, numerous scholars have observed how his particular social contract theory simply excludes widely accepted criteria of justice, which leads to endorsement of essentially unjust wealth-distributions. For once we exclude considerations such as merit and desert (as Rawls insists we must), we cannot look backwards to judge who, for example, has worked harder or contributed more. We are thus forced to make arbitrary judgments about when to assess the validity of the precise distribution of wealth at any one point of time in the future.

If, then, considerable incoherence characterizes each of these positions, perhaps we should consider that something may be wrong with the very notion of a social contract itself.

One problem is social contract theory’s assumption that society is essentially artificial. This flies in the face of the commonsense observation that humans are naturally social and political beings. Another difficulty is that the people’s supposed delegation of authority to a government is—as figures as different as the natural law scholar John Finnis and the father of modern skepticism David Hume have noted—invariably a fiction rather than a real historical act.

A third problem lies in social contract theory’s conscious choice to eschew robust conceptions of human happiness, flourishing, or any substantive discussion of the proper ends of human choice. Much social contract theory assumes there is such disagreement about these matters that it is better to avoid them altogether (which itself invariably ends up privileging particular positions).

With other social contract theorists, there’s often an unspoken commitment to relativism. In the end, happiness is whatever you “feel” (not reason) it to be. The main action is subsequently to be found in arguing about the rules of the game that might be agreed upon by what an older Rawls described as a “reasonable overlapping consensus” (which turns out to be less than reasonable, far from overlapping, and based less on agreement than upon who turns out to be more ruthless in seeking official endorsement of their particular desires).

But what if there are in fact conceptions of the flourishing of free, rational, individual, social, creative, and flawed human beings that can be demonstrated by reason alone to be more coherent than other conceptions?

What would be, for instance, the implications for political economy if it could be reasonably demonstrated that entrepreneurship, for example, is not only central to wealth-creation but also an action through which I can realize virtues such as industriousness, prudent risk-taking, and courage?

Note the implicit claims underlying this example: that, in themselves, industriousness, courage, and prudent risk-taking are good, and that laziness, cowardice, and recklessness (or excessive caution) never constitute human flourishing. The way to prove this is to ask ourselves who can reasonably claim that, for instance, laziness is ever intrinsically better than industriousness.

Granted, attention to human flourishing does not in itself resolve every question posed by concerns for freedom and justice in the economy. It does, however, give content to a number of ideas that help us think coherently about important aspects of political economy, such as the state’s role in economic life.

A basic requirement for human flourishing is that we act for ourselves—as the fruit of our own reflection and choices—rather than have others act for us. It is thus extremely important that people are free to make such choices.

To make these choices in economic life, people need certain things. For most people, it’s very hard to take the risk of starting a new business without a loan and it’s often imprudent to do so without such assistance. The same people, however, also require the liberty to make the choice to start the business for themselves. We will never know how many potential entrepreneurs have been deterred from taking a prudential risk by all 9,834 sections of the United States’ Internal Revenue Code.

The principle that helps us to resolve these dilemmas in ways consistent with a commitment to human flourishing is the oft-cited, much misunderstood concept of subsidiarity.

Subsidiarity’s genius is the manner in which it uses this attention to free choice, human flourishing, and the need for support to provide guidance concerning how we apply subsidiarity’s two axioms of non-interference and assistance. It helps us determine (1) what economic roles can only be performed by the state (such as the provision of courts to adjudicate contractual disputes); (2) when the state should allow other communities to provide assistance (private banks should normally be the first place of call for loans); (3) when the state should intervene outside its normal economic responsibilities (when those communities that would normally assist are clearly unable to do so); and (4) when such interventions should cease (when they start impeding human flourishing or when the communities that normally provide assistance are now able to do so).

Does this always produce clear-cut answers about the state’s economic role? No. There will always be reasonable disagreements over precisely when an intervention should begin or cease.

But the process of deliberation is one marked by coherence and undergirded by a reasonable conception of human flourishing that takes free choice and assistance seriously. It also helps to rescue contemporary political economy from the fictions and cul-de-sacs associated with social contract theory. That subsidiarity tends to facilitate more efficient outcomes and would most likely result in scaling back what many regard as the state’s currently excessive economic role is, in some ways, beside the point.

None of this means that technical economic arguments about matters ranging from the efficacy of markets versus neo-Keynesianism to the merits of fiat money versus the gold standard are unimportant. If anything, these issues require even more attention.

But political economy, strictly speaking, has always been about more than positive economics. A serious concern for human flourishing has the potential to transform our starting-points for economic reflection. Given the serious failures of much mainstream economics over the past decade, what have we got to lose?