Thursday, May 31, 2018
Economic Insanity: Chapter 7 (part 2)
A Nation of Owners (Part 2)
The Federal Model
Each responsible citizen in the United States has a vote, but each citizen doesn’t vote on every issue, every bill, every executive decision, every Supreme Court ruling. Such a voting system would create political and social gridlock. Instead, we elect representatives, then they vote for us, make executive decisions, and appoint judges and other government officials. If we don’t like their voting record, we don’t reelect them. It’s not true democracy, but it is a workable compromise between potential anarchy and the imposed order of arbitrary authority.
We are, at least in theory, a democratic republic. And economic democratic republics would follow the same principles. Equal ownership, equal voice, equal representation. To prevent the abuses of power and position that we see in Congress, we would have to designate a limited term for those elected as managers within corporations and other organizations. Four or five years would be sufficient. And after a manager’s administrative term was completed, he or she would then return to the regular workforce. This would eliminate the professional managerial class and would prevent the politicizing of organizational leadership, which is exactly what has happened to American government on the national level.
The advantages of this form of economic organization would be similar to those created in government by the U.S. Constitution. These advantages were laid out by Alexander Hamilton, James Madison, and John Jay in The Federalist Papers, which were arguments made in support of our particular form of constitutional government. Among these advantages were the following.
The U.S. government represents a federation of states. The states retain some power and autonomy, but are bound into a greater whole. The creation of this federation was a move toward centralization, the intent being to overcome the major weak point of the Articles of Confederation—dissension among the states. The states needed to be strong, to be unified in a larger cause, and only a strong central government could achieve those ends. This move, of course, was also based on military, security, and commercial concerns.
In most businesses today, however, the movement would have to be in the opposite direction, toward decentralization, since most organizations are authoritarian in nature and dominated by strong central control. Departments or divisions, acting much as states do in the federal government, would retain certain powers and perform certain roles. Limited, universal ownership, however, would create strong incentives toward smaller, community-oriented businesses, and away from national or international conglomerates. There would be little purpose in or justification for large, nonregional businesses under such an ownership arrangement, and great impetus to break down today’s conglomerates into regional- or community-sized pieces that focused on one particular product or a set of related products. Some companies might divide up into several small, independent, department-sized groups.
Checks and Balances
Our federal government, as established in the Constitution, is a brilliant plan for preserving political freedom and democracy by preventing one individual or a segment of government from gaining too much power. Power is balanced in at least four ways: between the states and the federal government, between the two houses of Congress, among the three branches of the federal government, and between the people and their elected leaders. It is not my purpose here to explore all the ramifications of these governmental checks and balances, only to say that a similar system would need to be established in large economic institutions.
In the vast majority of today’s businesses, large and small, the owner or CEO or perhaps a small group of leaders hold total power. They function more or less as dictators, exercising the legislative (policy-making), the executive (administrative), and the judicial (decision-rendering) powers in the organization. They can do just about what they want to, with no internal checks and balances, for only certain (usually inadequate) external restraints prevent them from abusing the awesome power that is theirs. Separating the executive, legislative, and judicial powers in businesses makes perfect sense. It is the best way to prevent the abuse of authority, even if that authority is granted by the employees themselves through elected management.
Because in the United States the people are sovereign, their will influences all branches of government. Supposedly, the only tyranny possible under such a government would be the tyranny of the majority, which worried Tocqueville.
Time, however, has proved this supposition wrong. The tyranny of the majority is not, in fact, the only tyranny possible in America. Our political system has been reshaped over time so that the wealthy and influential can exert a form of tyranny. This oppression will be with us until we accept certain types of political and economic reform. But tyranny of the majority is a very real thing in America. And, ultimately, it has but one check: the virtue of the people.
If the majority is wise and moral and virtuous in its selection of leaders, the potential tyranny of the majority will be of no consequence. The danger comes only when the majority forsakes its virtue. The Founders were well aware of this, but they had enough confidence in mankind to try this experiment anyway. Said Madison:
I go on this great republican principle, that the people will have virtue and intelligence to select men of virtue and wisdom. Is there no virtue among us? If there be not, we are in a wretched situation. No theoretical checks, no form of government can render us secure. To suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical idea. If there be sufficient virtue and intelligence in the community, it will be exercised in the selection of these men; so that we do not depend on their virtue, or put confidence in our rules, but in the people who are to choose them.1
The Founders quite clearly trusted the overall virtue of the people regarding the selection of political leaders. And I believe their confidence was well placed, for even though times have changed and our choice of political leaders is regrettably limited by money and influence, we still scrutinize these candidates through the lens of a morality that no longer governs our own lives. We expect (even demand) of our elected leaders standards of morality and virtue that we do not apply even to ourselves. The day may come when the majority totally loses its sense of virtue and surrenders to outright depravity, but sufficient moral feeling has survived to prevent the tyranny Tocqueville feared. [Okay, I have to insert a comment here. This may have been true in 1995, when this book was published, but I would argue that we have reached the point where the majority has lost its sense of virtue (at least the majority as represented in the Electoral College). The fact that America has elected the most corrupt president in its history, a completely amoral man who embodies everything the Founders tried to prevent, says something about where at least one of our political parties has gone. In 1995, I was pretty sure something like our current mess would never happen. Where we go from here will tell us who we are as a nation. I certainly hope for a strong reaction against the corruption of the Trump administration that has also infected the Republican Congress. Time will tell.]
If we organize our economic institutions according to the principles set forth in the Constitution, they would be subject to the same threat of tyranny from the majority. But this threat is insignificant next to the actual tyranny we see in our present authoritarian organizations. What this system would remove from our economic institutions is the ignorant body of employees that is willfully blind to injustice, pollution, dishonesty, and unfair business practices. No longer would there be powerless employees who say, “Hey, I didn’t know. I just do my job and don’t ask questions. I have no influence over what management does.”
The leaders we elect after examining them under the media microscope are our representatives in government. They speak and act for us. The president of the United States executes the public will; the legislature enacts laws through the authority given it by the people; the Supreme Court acts for the people in determining whether laws (and decisions of lower courts) are in harmony with the guiding principles set forth in the Constitution. None of these branches of government, however, pleases everybody. Sometimes they don’t please the majority. How is this possible?
Regardless of whether they were elected by popular vote or appointed by an elected official, these individuals have their own interpretations of right and wrong, good and bad, just and unjust. Representing a diverse populace is no easy matter. Sometimes special interests, because they have purchased influence (or gained it some other way), sway public representatives away from the majority position. Sometimes representatives, because of individual conscience, vote or act contrary to the will of their constituents. Sometimes there are several options, and pursuing even the most popular one still leaves 75 percent of the people dissatisfied. Representation, in short, is a compromise between the tyranny of the majority and the tyranny of individual rulers. It is the most necessary element of a republic.
In businesses this element would also be necessary in order to control the chaos into which a purely democratic workplace would inevitably fall. Every worker can’t have a voice in every decision, nor would he or she want to. That would be highly inefficient. But every worker would need a voice in the overall management of the enterprise and a knowledge of what is being done and why—because the workers would be the owners. And they would exert the powers of that ownership not only in choosing those who represent them, but also in establishing limits on the power of their representatives.
These four features of our democratic republic, established by the Constitution, should apply to any organization comprising more than, say, fifty or so individuals. We must put ownership back where it belongs—in the hands of the people—but we must also avoid the chaos that a purely democratic system would spawn. The federal model is a viable solution, a perhaps imperfect although workable compromise.
Business leaders have recognized the benefits of giving employees at least the illusion of democracy, although they generally give employees only a fraction of the voice they deserve. The recent movement to permit employees to participate in ownership—from PepsiCo’s “Share Power Plan” to Wendy’s stock options for employees—is commendable and is gaining momentum in the United States. Much of this growth in employee ownership has come through employee stock ownership plans (ESOPs), now in place at some eleven thousand companies, involving 11.5 million employees (13 percent of the civilian workforce). Employees now own more than $120 billion in their own companies’ stock, which though impressive represents only 3 percent of all shares in U.S. firms.2
These plans are popular because they (predictably) increase employee commitment and generate cash flow, but they do not go far enough. Employee shareholding at limited or token levels should not be mistaken for actual employee ownership. A business can never become an economic “democratic republic” if most of the stock is held by either a few powerful individuals or a multitude of distant, uninterested shareholders. Authoritarianism with a democratic facade should not be confused with republican democracy.
If we are serious about overcoming our nation’s deep problems, we must make sweeping fundamental changes in our economic system, in both theory and practice, by bringing it more in line with our political philosophy and our social ideals. Says Shann Turnbull:
To minimize corruption of all sorts, we need to decentralize power to the greatest extent possible so as to maximize checks and balances. The most fundamental sources of power in society arise from the ownership and control of land, enterprise and money. The current ownership system was developed to serve the needs of past rulers who sought absolute powers. As a result, there is no limit as to the extent and value of property which any person can possess. New rules are needed to decentralize the power of owning things—rules which follow the self-limiting and self-regulating principles found in all living things.”3
Given the fact that capitalism as we know it is both corrupt and rapidly deteriorating, we are faced with the dilemma of how to get from our present system to one that is both more equitable and more workable. This will not be an easy transition, for it will involve the conversion of our present authoritarian organizations into democratic institutions. Unfortunately, recognizing that we need to make this transition is much easier than actually making it. How do you convert from a system of either narrow, unlimited ownership or widely dispersed absentee ownership to a system of limited, universal ownership?
A good argument can be built for making this transition gradually, over a long period of time. If we were to try to make this shift overnight, the consequences would likely be as horrible as they are predictable. Suddenly abolishing our present system of ownership would create a crisis far more perilous even than the Civil War, which arose from abolishing a different, although related, form of ownership. It would be naive to think that those who have accumulated vast amounts of money, property, and power would simply yield to reason (or even newly enacted laws) and give up these possessions without a fight. And I mean a literal fight, one in which the odds would be stacked against change and democracy. It is not difficult to imagine an actual civil war far more devastating than the one fought over slavery.
How then can we make this transition? Turnbull takes a shot at this dilemma. He proposes a system in which ownership of corporations transfers gradually, at a rate of 5 percent per year, from investors to stakeholders (employees, customers, suppliers). The investor would reap profits for ten years, after which this gradual transfer would begin. What this means is that thirty years after the initial capital infusion, the investor would have no ownership in the enterprise. This, says Turnbull, “would make corporate investment consistent with the time-limited rights provided to all investors in intellectual property like patents and copyright.”4 Mature corporations, according to Turnbull’s plan, would then finance new technology and market growth by transferring parts of their operations to spinoffs or “corporate offspring,” which would attract new investors.
This system, although a far cry better than our present heap of perpetual, monopolistic shareholding, is still a system in which technology and economic growth would be supreme, and in which capital would still be concentrated enough that individuals and groups could invest heavily in new spinoffs or corporate offspring. Seen in the context of these issues, Turnbull’s vision of economic change might be an intermediate step that would pave the way for a system of complete equality and limited, universal ownership.
The first question we should ask, though, is this: Do we have thirty years to convert our present system into Turnbull’s vision, which is still only a halfway house from our current economic prison to the free society we would become? The answer, I fear, is that we may not have even ten years. Time is not on our side in this matter.
1. Alexander Hamilton, James Madison, and John Jay [“Publius”], The Federalist Papers (New York: Bantam Books [1787–88] 1982), xxi.
2. Corey Rosen, “The Options Option: A New Approach to Employee Ownership.” Management Review, December 3, 1991, 30.
3. Shann Turnbull, “Transforming Society,” World Business Academy Perspectives, winter 1992, 6.
4. Turnbull, “Transforming Society,” 6.