Incentivising an ethical economics

History shows that when the wealthy are incentivised to contribute to the population’s basic needs, everybody wins.

Simon Szreter Hilary Cooper Ben Szreter
22 July 2019, 8.37am
Image: Marko Verch, CC BY 2.0

An ethical economic system – where everyone has a stake in future well-being – is essential to address the problems facing the economy and society. To achieve this, policy makers should look to Britain’s history for inspiration.

There are two clear periods in our past when everyone in society contributed to the population’s basic social security, education and health needs because everybody could see the strong and tangible benefits that resulted from it.

Most obviously, this happened in the postwar decades of the new welfare state as hitherto unseen levels of investment in the population’s health and education fired up productivity growth so that it reached a historic peak of 2.4% per annum from 1950-1973, three times higher than the entire period 1871-1937.

Far less well-known, this also happened throughout the two centuries which led to the industrial revolution. From 1601 onwards England had the world’s first ever universal social security system in the form of Elizabeth I’s Poor Laws. This transformed the choices available to ordinary people, providing a safety net in times of unemployment and guaranteeing support for orphans, widows, the sick and the elderly. People could take risks, such as moving to towns for work, knowing that they would be supported if this didn’t work out and that they were no longer tied to staying put to support their parents.

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All of this was good for the economy: it led to the elimination of famine in England over 150 years before the rest of Europe combined with much higher rates of labour mobility and urbanisation.

The simultaneous 1601 Charitable Uses Act was a masterstroke of statecraft. Since the wealthy were now mandated to support the poor, this Act incentivised them to choose to do so instead by gaining kudos for their good works: a flow of charitable almshouses, schools, apprenticeships and even hospitals ensued. The wealthy could clearly see that such initiatives, if effective, could reduce their future liabilities to support the destitute.

The success of these past periods of growth demonstrates ‘incentivised altruism’ – encouraging the prosperous to provide the resources for all to participate in economic growth because they can see they will also gain from it. If we were to apply this idea to contemporary Britain, what would it look like? If it was a growth promoter in the past, how could we design it to be a growth promoter now?

Our winning submission to the IPPR Economics Prize proposed creating two altruistic contracts, one which focuses on investment for future growth and one which focuses on providing resources to support an ageing population. They are altruistic because they require businesses and the people with the most wealth to contribute most. They are incentivised – and this is the key innovation – because the people who contribute the funding are given clear rewards that are set out from the start.

The first contract raises the level of corporation tax to fund a transformational programme of investment in greening the economy and reversing the education, skills and health inequalities that blight so many communities. Businesses then win back reductions in corporation tax every two years provided new national targets on growth, productivity, decarbonisation, skills and inequality are met. The harder businesses work to deliver on this, the greater the reward.

Alongside this, there should be a higher rate of income tax at the point at which people earn more than ten times the average salary – with the money raised used to alleviate poverty. As the pay gap between high earners and the rest of the population is reduced fewer people will pay the higher tax.

The second contract is an intergenerational one that offers free care in old age, based on need, with long-term funding guaranteed through a ring-fenced citizens’ wealth fund. New taxes on wealth and inheritance will be needed to support the fund, but the payback – incentive – is that this liberates the older generation from the lottery of losing everything to pay for care. It also frees younger generations from unsustainable future care and tax burdens so that they can contribute productively to our economic growth.

Ethical economics, in which welfare is reconceptualised as a growth promoter, is not only important to restore our economic health. It is also fundamental to a genuine democracy – one in which everyone shares in economic success because they acquire the skills and support to do so. It may sound too good to be true, but the good news is that we’ve already achieved this mix twice in Britain’s history, each time with remarkably positive economic outcomes.

Simon Szreter, Hilary Cooper and Ben Szreter are joint winners of the IPPR Economics Prize. All opinions are those of the authors only.

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