Transactional thinking can only take humanity so far. It’s time to revive the ‘covenantal capitalism’ that gave us modern democracy

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It’s only natural to focus on our individual interests and to rely on a transactional approach: to act only in immediate self-interest and assume others will do the same. Much of our current capitalist system relies on this idea. But the truth is that contractual thinking can only take us so far–and in true moments of disaster, it can lead to ruin. Conversely, covenantal thinking can keep us all afloat.

The great moralist and philosopher, the late Chief Rabbi of the United Kingdom Rabbi Lord Jonathan Sacks powerfully explained the difference between a contract and a covenant.

“In a contract, two or more people come together, each pursuing their self-interest, to make a mutually advantageous exchange. In a covenant, two or more people, each respecting the dignity and integrity of the other, come together in a bond of loyalty and trust to do together what neither can achieve alone. It isn’t an exchange; it’s a moral commitment. It is more like a marriage than a commercial transaction. Contracts are about interests; covenants are about identity. Contracts benefit; covenants transform. Contracts are about Me and You; covenants are about Us,” Sacks wrote.

Recently, I was discussing this concept of covenantal capitalism with a group of Harvard students. I asked a student named Jess from a small town in New Zealand whether there was a local bakery in her neighborhood, and she said yes, but explained the bakery had closed down during the pandemic and hadn’t reopened. I asked what happened. She said, “Well, people weren’t going out of their homes, the bakery had some supply chain issues and their customer base dwindled.” I asked her if she missed the bakery and, wistfully, she said yes.

I told her about our neighborhood bakery in Jerusalem, which faced similar challenges during the pandemic. However, there was one meaningful difference in our community: Dozens of families banded together and pre-purchased tens if not hundreds of thousands of dollars of baked goods so the bakery could get through the pandemic and we could benefit from the bakery after the pandemic was over.

This bakery is a staple in our neighborhood. The owners are our brothers and sisters. Before every Passover when the bakery closes its doors for the holiday, my wife bakes cheesecake brownies for them as a sign of mutuality. The people–we, us–had a covenant with the bakery, our neighbors, and our community. As a result of our approach, the bakery survived and we all reaped the benefits together. And, when inflation hit, they were slower to raise prices than everyone else. When we have family events, they turn up with food.

That’s one small example, but it shows how a shift towards covenantal capitalism is possible–and how that shift can provide good results for everyone involved. Whether we’re talking about consumer goods, small businesses like neighborhood bakeries, or something as large and complex as banking and the financial sector, it’s easy to understand how an agreement between people and businesses to support one another in challenging times can deepen relationships and make economic progress more expansive and durable. Over time, it may even be more profitable.

After all, covenants are designed for the long term. They grow the pie rather than redistribute it. They are inclusive rather than exclusive. They assume predictability of response and responsibility because the people who engage in them are bound by a bedrock of common norms. The covenant further assumes that if we work together and trust each other, we can build something bigger than ourselves.

The notion that capitalism should be based on a covenantal foundation is not entirely new. Adam Smith’s brewer and baker, working in their own self-interest to propel the economy, were part of a protestant community infrastructure. Writing about the great philosopher and writer on America, Alexis de Tocqueville, political science scholar Barbara Allen pointed out that America was founded on a covenant.

“The principles of covenant ultimately provided the institutional and conceptual foundation of constitutional government, making America’s federal democracy less vulnerable to possessive individualism and democratic despotism,” Allen noted in Alexis de Tocqueville on the Covenantal Tradition of American Federal Democracy.

For many people, a covenant may sound religious in nature. And while religious thinking and politics may not mix well, faith and business are certainly inextricably linked. In fact, the biblical exhortation about brotherhood–“you must uphold him (your brother),” (Leviticus 25”35)–is commanded in the covenantal context of ensuring economic prosperity. In practice, banks, currencies, investment, and growth require the bonds, commitment, and trust that a covenant provides.

If we want to maintain our institutions, we need to recommit to a communal and national set of covenants based on fundamental shared values. We must be willing to invest capital, time, and effort–and to trust others to do the same. We need to go back to first principles–and create a covenantal capitalism that works for everyone.

Michael Eisenberg is a general partner at Aleph and the author of The Tree of Life and Prosperity: 21st Century Business Principles from the Book of Genesis.

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