[This article appeared in the Spring 1990 issue of The Journal of Social, Political and Economic Studies, pp. 59-78.] 

 

Worker-Controlled Enterprises—The Fantasy of “Decentralized Socialism” 

Dwight D. Murphey 

 

            As one Communist regime after another has crumbled under the impetus primarily of socialism’s stark failure as an economic system, it has finally become fashionable to extol the virtues of a free market economy.  And yet the victory of the supporters of a market economy is far from complete.  Intellectual confusion is allowing a major form of socialism to “sneak back in under the tent.”   It is doing so, ironically enough, under the ruse that it is just another form of free market economics.

            The world Left is so strong, especially within the intellectual culture, that proponents of market economics can hardly expect that there will be an uncontested adoption, in Eastern Europe and elsewhere, of what Austrian economist Ludwig von Mises used to call “the unhampered market economy.”  For their part, socialists will continue to insist on government’s controlling “the commanding heights” and on its intervention to modify, for social-welfare and a number of other putatively worthwhile purposes, the results of market interaction.

            While this is true in general, there is also a more immediate and specific threat to the market economy that offers to subvert the world’s recent shift toward market economics.  It is found in the call for “employee ownership” as a way to “privatize” previously state-owned enterprises in the Communist bloc and the Lesser Developed Countries, and in the rapid push for employee ownership that has been occurring in the United States since 1974.

            Apart from socialists themselves within the American Left, who know full-well that their call for employee ownership is central to their own program, the support for employee ownership comes from a large number of people, liberal and conservative alike, who have failed to grasp the ideological history and significance of what socialists have long called “workers’ control.”

            These people simply do not realize that their advocacy of employee ownership is creating, and rapidly institutionalizing, a powerful and growing economic and ideological interest-group that can easily come to constitute a major anti-capitalist force in years to come.  At a time when trade unions have long been in secular decline within the American economy, the movement toward employee ownership (and inevitably the aspiration for “workers’ control”) offers to call into play a comparable structure, with its own forms of “labor solidarity” and anti-capitalist bias. 

The American Push Toward Employee Ownership

            Since 1974, when Senator Russell Long, the chairman of the Senate Finance Committee, became interested in employee ownership, there have been sixteen major pieces of federal legislation granting enormous tax breaks and other preferences to encourage the growth of Employee Stock Ownership Plans (ESOPs).

            With the Employee Retirement Income Security Act (ERISA) in 1974, ESOPs were defined by law—and were exempted from the requirement, applicable generally to employee retirement plans, that the assets be diversified.  (This exemption, though damaging to the interests of employees desiring secure savings for their retirement, was essential to ESOPs because an ESOP necessarily owns stock only in the firm for which the employees work.)

            Elaborate mechanisms for tax preference were created by the Tax Reduction Act of 1975 and by the Tax Reform Act of 1976.  Further elaboration followed with the Revenue Act of 1978.  After some additional legislation, the Chrysler Corporation Loan Guarantee Act of 1980 put strings on the government’s bailing out of Chrysler: the company was required to create an ESOP and donate $162.5 million worth of stock to it over a four year period.  With the Economic Recovery Tax Act of 1981, the form of ESOP known as TRASOPs was dropped, with PAYSOPs (Payroll Based Stock Ownership Plans) taking their place.

            But the greatest incentives for employee ownership were included in the Deficit Reduction Act of 1984 (enacted, it is worth noting, under the Reagan administration).  Then the Internal Revenue Code of 1986 added an extra, making it advantageous for a firm doing a “stock buy-back” to use an ESOP.

            In the meantime, legislation has been coming into place at the state level.  Some of the state statutes declare a public policy in favor of promoting employee ownership.  Programs of technical and financial assistance now exist in many of the larger states.  State tax benefits are given, and ESOPs are declared exempt from a given state’s securities regulation statute.

            The result is that, according to a Fortune article in September, 1989, “publicly owned companies could reap $13 billion in tax breaks from their ESOPs over the next five years.”[1]  Starting from virtually “ground zero” in 1974, American businesses had created between 7,000 and 8,000 ESOPs by the end of 1986.[2]  This growth, certainly not slow in itself, was then augmented by a major spurt in 1989 following a decision by the Delaware Supreme Court that ESOPs can be used to shield existing management from hostile takeovers.  In just the first nine months of 1989, eighty of the “Fortune 500” companies created ESOPs involving $15 billion worth of stock.[3]

            What is most significant is that this is just the beginning.  Each ESOP is an institutionalized structure for the continuing growth of employee ownership.  And eventually, when the “tipping point” has been reached at which employees own a controlling interest in large numbers of American companies, it is ineluctable that a demand will arise for “worker control.”

            Why?  In large part because the logic of ownership will seem to demand it and will create a moral claim to it.  Will there be any way, much less any desire, to deny control to those who by that time own a majority of the stock?  There is, in addition, an active and vocal movement on the Left that has already declared its intention to seek to organize employee ownership into an ideological and political constituency.  Because of these factors, which create a dynamic of their own, it is wisest to think of employee ownership as tantamount, eventually, to workers’ control.

            When, after a relatively short time, a significant portion of the American economy comes under workers’ control, the Left will do its utmost to imbue it with a sense of “labor solidarity” and with a social democratic ideological content.  It is possible that the Left won’t succeed in this, just as American labor unions have historically disappointed the Left’s aspirations for a militant and ideological trade union movement; but anyone reflecting upon the phenomenon of growing employee ownership will do well to appreciate the potential.

            In the context of social and economic theory, the technical aspects of how ESOPs work are hardly important.  It is worth remembering that they are, as we shall see, just one of a large number of transfer-the-wealth institutions that the principal supporters of ESOPs have called for.  The ESOP concept itself calls for a business firm to create a trust, with the firm’s employees as the beneficiaries.  Then the firm transfers stock to the trust, claiming a tax deduction for the stock’s value; or, in a “leveraged” ESOP, the trust borrows money from a bank and uses the money to buy stock from the firm.  The firm guarantees the repayment of the loan to the bank, and makes payments to the trust that provide the trust with the money it needs to repay the loan.  For the most part, these payments by the firm to the trust are tax-deductible.  Not to be left out, the bank gets to count a significant portion of the interest it receives on the loan as non-taxable income.  The long and the short of it is that the whole process amounts to a tax-subsidization of employee ownership.           

Workers’ Control Within Socialist Thought

            American conservatives have so long been accustomed to fighting the slow accretion of state functions that they have beguiled themselves into thinking that only “state ownership” is socialism.  This is a serious mistake, since the socialist attack on capitalism has often taken the form of proposals for one or another type of “decentralized socialism” that ostensibly involve no, or seemingly very little, state involvement.  Worker control has been central to several of these formulations, which in fact have presented themselves as opposed to “state socialism.”

            It is worth noting, however, that the appearance of “decentralization” in any form of socialism is deceptive.  This is true even though socialists themselves have historically taken very seriously, in their intramural arguments among themselves, each of the slight differences that have separated their respective models for socialism.

             A socialist who claims to oppose “state socialism” as such will speak in terms of such localized collectives as communes, “mutualist associations,” consumers’ or producers’ cooperatives, or the like, but almost invariably the plan becomes one of networking these collectives into larger wholes.  The integration of them into wholes may not, then, be called a “state,” but certainly we are justified in considering it one if we choose not to accept the socialist’s semantics.  When prior to World War I, for example, the French syndicalist Georges Sorel called for a massive confederation of trade union associations to govern the economy and the society, he could hardly be called an opponent of “state socialism” in any true sense.  This became particularly evident when toward the end of his life he praised both Lenin and Mussolini.

            The networking of the collectives into an integrated framework is essential to a socialist unless he is willing to foreswear his aspiration for what socialists dearly love to call “rational planning.”  There are few socialists who are willing to abjure that aspiration.

            Even if it weren’t true that the various forms of so-called decentralized socialism, usually involving workers’ control, are really types of state socialism, they would still constitute the antithesis of a free market economy.  This is because of the socialists’ opposition to the “wage relation,” to an employer’s profit (which they call “surplus value” and consider a form of theft), and to “absentee ownership.”

            These are concepts that rule out all forms of entrepreneurial capitalism that involve a firm’s hiring of employees.  They insist upon the exclusive validity of collective units, allowing only those that are worker-, consumer- or “publicly”-owned.  Many socialists find it objectionable for worker-owned enterprises to hire employees.  It is not a free market, with the institution of individually-owned property, that is to be permitted, but rather a system of collectives.

            When the Soviet state came into existence in Russia in 1917, its centralized form of socialism, which for thirty years enraptured most of the world’s intellectuals, drew attention away from the earlier forms of socialist thought.  It is instructive, however, to see how much nineteenth-century socialist thought had been based on the idea of workers’ control.  This is important in light of the revival of much of that nineteenth-century thought within post-World War II socialism. 

Socialist Thought: Nineteenth and Early Twentieth Centuries

            Pierre-Joseph Proudhon (1809-1865), a Frenchman, called for a decentralized type of socialism in the form of “mutualist associations.”  For reasons that will become clear later, it is worth noting that these associations were to be funded by “cheap social credit.”  (We think of subsidies from government as coming in the form of direct grants.  One very popular form of subsidy to those who have wanted a redistribution of property and wealth, though, has been through “social credit”—loans with below-market interest rates or with no interest at all.  Somehow this seems less of a handout than a direct grant.  It also appeals to monetary cranks who have long persuaded themselves that money can be created and spent at will without offsetting costs.)

            In nineteenth-century Russia, N. G. Chernyshevsky (1828-1889) wrote passionately on behalf of worker-owned and operated shops.  In his novel What Is To Be Done? (a title copied by Lenin for a later book), he idealized a workshop whose initial owner had turned over all of the ownership to the workers.  Significantly, Chernyshevsky, too, wanted a system of cheap credit to undergird the workshops.

            In France prior to the revolutionary year 1848, Louis Blanc proposed worker-controlled producer cooperatives under the name of “social workshops.”  Again, social credit was to fund them.  The workshops were to be networked together to form a “cooperative commonwealth.”

            And then during the first quarter of the twentieth century G. D. H. Cole in Britain was the principal articulator, among many, for “Guild Socialism.”  This called for creating an “industrial democracy” by organizing each industry into a guild, with the guilds themselves integrated into a confederation of industries. 

            Although all such visions were slowly eclipsed within Western intellectual culture after 1917 by the shining example of the Soviet Union with its centralized socialism and dictatorship of the Communist Party, Mussolini sought to implement Sorel’s program during Mussolini’s long dictatorship in Italy after his seizure of power in 1922.  He installed 22 “corporazioni” in 1934 to govern each “production cycle” such as agriculture, chemical production, the arts, paper and printing, and the like.  These were networked under a National Council of the corporazioni, which in turn was accountable to a national Chamber of Deputies and to Mussolini himself. 

Workers’ Control in American Thought

            If now we look to what was occurring in the United States, we see that Daniel De Leon’s Socialist Labor Party, formed in 1876, advocated worker administration of socialized industries.  There would be a parliament composed of representatives of the industries.  In 1885, the Knights of Labor called for “a cooperative industrial system” that would “tend to supersede the wage system.”  The International Workers of the World (I.W.W.) wanted industrial unions, which then would coalesce into “One Big Union.”  All of this would be under workers’ control, as we see from Big Bill Haywood’s statement that “each branch of industry would be operated by a group of workers who best know that branch.”[4]

            The strongest call by far for workers’ control was, however, the “Industrial Democracy” movement, reflecting G.D.H. Cole and British Guild Socialism, that enthralled American “liberalism” between the years 1910 and 1925.  Herbert Croly, Walter Lippmann and Walter Weyl founded The New Republic in late 1914, and for several years that journal was a major sounding board for Guild Socialist ideas.  The Nation became an outlet for the same ideas after Oswald Garrison Villard became owner and editor in 1918, although the ideas didn’t receive as much attention within its pages because of its preoccupation with international issues.

            Croly was The New Republic’s first editor and in 1915 his book Progressive Democracy argued that “the wage-system itself will have to be transformed in the interest of an industrial and self-governing democracy.”  He urged “the deliberate education of the wage-earners for the position, which they must eventually assume, of being responsible as a group of self-governing communities for the proper organization and execution of the productive work of society.”  Becoming uncharacteristically strident, Croly spoke of “warfare appropriate for the purpose.  Their [the workers’] ‘Constitution of Freedom’ must be gradually extorted from their employers by a series of conflicts….”  Seeing a need for labor solidarity, he said that “for the purpose of this warfare a much more general and intense feeling of class consciousness” was required.[5]

            Along the same lines, a 1917 editorial in The New Republic described Guild Socialism glowingly as “the regimentation into a single fellowship of all those who are employed in any given industry.  The Guilds would have sole management of the affairs of their industries… But they would accept the co-management of the state ‘in regard to large policy, for the simple reason that the policy of a guild is a public matter….’”[6]  This statement is especially noteworthy because it shows the interplay between an apparently decentralized socialism and actual state control.

            The enthusiasm for all of this had waned by 1925, and Croly went into a phase of mystical funk, consistent with the “lost generation” theme of that time.  After his death, the editors of The New Republic threw themselves into support for Franklin Delano Roosevelt’s “National Industrial Recovery Act” in early 1933, at which time they thought it would organize industries in much the same way that G.D.H. Cole had called for.  An editorial in May greeted the bill to create the N.R.A. with the hope that “it may mark the beginning not merely of recovery but of a collectivization of the economic system.”[7]  They preferred a scheme Lenin had favored years before, though: “Lenin’s proposal went much further than Mr. Roosevelt’s does in two significant directions—control by organized labor and organization of consumers.”[8] 

            The editors became disillusioned quite soon, however, for precisely the reasons they expressed in their preference for Lenin’s approach.  By as early as September, 1933, they were finding that the industry-wide codes were not being made instruments of workers’ control and of central planning.[9] 

Revival After World War II

            Although the Guild Socialist fad was eclipsed for several years by the Soviet example, the decline of Soviet prestige in intellectual circles after World War II led to a revival, within socialist thought, of the earlier decentralist models.  This occurred both among European democratic socialists and American socialists.  In 1968, for example, the socialist author Ken Coates could argue that “for socialists and radicals who mean business, workers’ control has become the central strategic axis, to which all other reforms and demands must be related” (emphasis added).[10]  In 1973, G. David Garson spoke of “the growing worldwide movement for workers’ control” and referred to it as “at least the central issue of class struggle in our generation.”[11]

            Writing in the British Socialist Register in 1980, the American socialist S. M. Miller reflected the attitude of the Left outside the Communist bloc.  Writing that “bureaucratic, authoritarian socialism is repellant,” he asked “where is the ‘good socialism’?” and answered by saying that “decentralized visions of a ‘socialism’ seem to be emerging.”[12]

            What most Americans don’t know is that there has been an extensive literature within the American Left in recent years calling for workers’ control.  Thus a strange parallelism has occurred: a vast popular literature within the media favoring ESOPs and employee ownership, and a flourishing socialist literature, almost never referred to by the popular exponents of employee ownership, that sees workers’ control as its centerpiece.  This lack of cross-reference has had the effect of making the socialist support for workers’ control invisible outside of the intellectual community.

            But make no mistake about it: the socialist movement is serious.  In his 1984 book on workers’ self-management, Christopher Gunn spoke of such “reformist” measures as ESOPs in tactical terms as “a starting point.”  He saw them as “significant to workers’ self-management primarily as a means of joining consciousness, agency, and organization—of linking ideological, grass-roots, and spontaneous resistance to capitalism.”  To him, the growth of ESOPs brings into play “the potential for creation of a new socialist politics that would outgrow reformism….”[13] 

The Kelso-Adler Ruse in the United States

            Most of this literature has, of course, been little read by the American public.  So far as the popular exposition of employee ownership is concerned, that has been done primarily by Louis Kelso (“the father of the ESOP”), who has made a career of promoting ESOPs.  The philosopher Mortimer Adler joined Kelso as co-author of the first two of four books.  The Kelso-Adler efforts have in turn been followed by a vast literature in popular magazines and newspapers.  In professional and academic journals alone, there were more than 700 articles on employee ownership between 1973 and 1987.[14]

            The first of the Kelso-Adler books appeared in 1958 and was called The Capitalist Manifesto.  The second followed in 1961, entitled The New Capitalists: A Proposal for Free Economic Growth from the Slavery of Savings.  Kelso was the sole author of the third book, Two-Factor Theory: The Economics of Reality, which appeared in 1967.  Then he was joined by Patricia Hetter Kelso as co-author of the fourth book, Democracy and Economic Power in 1987.  In this, we see a continuing effort by Kelso over three decades.

            His greatest influence emerged, however, when powerful Senator Russell Long became a devotee of ESOPs in 1973, leading to the flood of legislation that has followed.

            From the best that can be determined, virtually no one has read these books carefully to take a look at their actual content.  The reviewers, whether with tongue in cheek or not, have all taken them at face value, accepting them as clarion calls for “a new capitalism.”  The ironic result has been that Louis Kelso is even a welcome speaker at groups favoring free market economics.

            The Kelso-Adler thesis, however, is exactly the opposite of private-property capitalism.  Instead, it calls, and Kelso continues to call, for a vast system of social credit by which government will underwrite everyone’s being “loaned” money—without any personal risk or responsibility to repay—to buy an equal share in all forms of property in the economy, including even sidewalks, parks, etc.  Payments coming to the many owners will provide continuing support to them as a form of entitlement.  ESOPs are seen as just one of a great many such loan programs that will effect a complete equalization of property and income.

            The whole thing is socialist in every sense of the word—but has been packaged and sold under the label of a “new capitalism” because it is clever enough to adopt a private property semantic and thereby to talk in terms of “making everyone an owner.”

            If this sounds too incredible to believe, the solution is simply to read any one of the four books.  There, underneath the “capitalist” semantic, the reader will find a thorough-going socialist model.  The fact that such a thing could fool the American public for so long is both high comedy and the saddest possible commentary on the distortions of our public consciousness.

            For those who don’t have time to cut through the verbiage of the Kelso-Adler books, a brief explanation may suffice.  First, we see that Kelso and Adler defined “capitalism” to be “any form of industrial economy.”  This even allowed them to refer to “the kind that exists in Soviet Russia.”[15]  This will come as a surprise to any genuine supporter of capitalism.

            Then they refine their definition of capitalism to speak of a particular kind, the kind they prefer: an economy in which all payments to individuals will be a “return on capital” rather than a return for labor performed (what they call a “laboristic distribution”).  This, too, is odd, because there is nothing in the usual thinking about a free market that requires that ownership, and not work performed, be the sole source of someone’s revenue.  But the semantic is important to Kelso and Adler precisely because they intend that, once everyone in the society owns an equal amount of property with everyone else, everyone will receive payments derived from that property—a system of equalized property and income arrived at through a vast state-sponsored redistribution.

            Even though all of this is amazingly simplistic, it is clothed in magnificent trappings of sophisticated analysis.  It requires a lot of effort to unscramble.  Here, though, are some quotes that go to the heart of their scheme:

            .  “There are no known limitations to the amount of fabricated capital that can be created….”[16]

            .  “…the financed-capitalist program… would provide a limitless alternative source of new capital formation.”[17]

            .  “Loans could be, and probably should be, nonrecourse loans, that is, they should not involve the personal liability of the borrower.”[18]

            .  “…a credit system intended to bring into existence millions of new financed capitalists….”[19]\  

            In addition to ESOPs to transfer the ownership of business enterprises to their employees, Kelso’s 1986 book calls for a variety of other ownership-transfer programs, all based on funding the transfer through unlimited social credit: CSOPs (Consumer Stock Ownership Plans), MUSOPs (Mutual Stock Ownership Plans), GSOPs (General Stock Ownership Plans), ICOPs (Individual Capital Ownership Plans), COMCOPs (Commercial Capital Ownership Plans), PUBCOPs (Public Capital Ownership Plans, for the “ownership” of streets, sidewalks, transit systems, prisons, etc.), and RECOPs (Residential Capital Ownership Plans).  There is no limit to what can be transferred to people with fabricated money.  Kelso refers to all of these programs as his “kit of democratization tools.”[20] 

Recent Calls for Employee Ownership to “Privatize” Firms in Eastern Europe and the Third World

            The illusion that workers’ control is an expression of free market capitalism has been so beguiling that even a major publication from the conservative Heritage Foundation has declared employee ownership a cornerstone of suggested economic policies both domestically and for the Third World.  Its Issues ’88: A Platform for America argues, for example, that “through privatization, leaders of LDCs [Lesser Developed Countries] can espouse worker control and other populist ideals within a capitalistic framework.”[21]

            Emerging from the disaster of Communist economics, Eastern Europe has groped in recent months both for vehicles of transition and for a consensus about what ultimately will be best for the future.  Workers’ control occupies a prominent place within the plans for reform.  American conservatives, looking on, see it as a move toward a market economy; but to socialists commenting from both inside and outside of Eastern Europe, workers’ control fits into their picture of a revamped socialism.

            Thus, Robin Blackburn, editor of the New Left Review, was able to write in a recent issue of The Progressive, in the context of the future of the Soviet economy, that “…some basic problems remain to be solved: how to attain a socialist economy in which the market mechanism itself is subject to social regulation, how to devise an institutional mechanism for consumer representation, and how to provide appropriate opportunities for worker self-management.”[22]  This passage is instructive, since it highlights (a) that the aspiration is precisely for a continuing socialism, certainly not to embrace capitalism in the truest sense; (b) that workers’ control is intended to be a major feature; and (c) that while the shift is seemingly toward decentralization and a “market,” the desire continues within the socialist breast to keep the resulting economic system “subject to social regulation.”

            The first tentative moves toward workers’ control have not been without some humor.  In early 1988, the Soviet Union introduced the concept of “workers’ shares” in a state-owned conveyor plant in the western Ukraine, although being careful not to imply that the workers really shared in ownership, but rather that they would simply receive a dividend.  The resulting firm was called a “Shareholding Socialist Enterprise.”  Unfortunately from a propaganda standpoint, the Russian acronym for this is—“GASP.”[23] 

Both a Theoretical and a Practical Question: Is Workers’ Control Consistent with a Free Market Economy?

            Probably the main factor that has blinded conservatives to the threat of employee ownership is that, in terms of the theory of a free market, there is no inherent inconsistency between workers’ control and a market economy.  After all, sole proprietorships and general partnerships, both very common and acceptable forms of enterprise within a free market, combine the elements of ownership and on-the-spot effort by the owners in the operation of the business.  And, too, employee ownership can result from freely-arrived-at contractual relations, which are at the heart of free-market theory.

            There is no ground for objection to a firm in which the same people both own it and do the work.

            What is important, however, is to realize that this consistency with a free market presupposes certain things that most assuredly will not be present in the foreseeable future:

            a) that the employee-owned entities exist by virtue of market preferences and efficiencies themselves, truly reflecting freedom of contract, and not as a result of state intervention to create and maintain them; and

            b) that they not be invested with an ideology, supported by the state or by a class-conscious invocation of a coercive “labor solidarity,” that seeks to make worker-controlled firms the only form of enterprise.

            Twentieth century Americans have become so accustomed to the countless interventions of government into the economy that the massive tax-subsidization of ESOPs since 1974 has seemed innocuous.  It has just been “more of the same” so far as the role of government is concerned.  So inured have we become to government intervention that we no longer question the legitimacy of something that exists only by virtue of such intervention.

            This passive acceptance may suffice to get us by in the confused setting of contemporary pragmatic politics.  But when we come to examine the theoretical validity of ESOPs, we are forced to set them against the yardstick provided by the principles of a free society.  It is here, then, that they are seen to be creatures of government intervention, not spontaneous growths of market interaction.

            We are foolish, too, if we ignore the century-and-a-half-old ideological underpinning of workers’ control.  The world we live in is a world in which the Left—dominating the intellectual culture and the media, and backed by a wide assortment of interest groups—plays, and will continue to play, a major role.

            The ideological significance of workers’ control to the Left lies precisely in the fact that it is a substitute for the much-hated forms of entrepreneurial capitalism that involve someone’s starting a business and hiring people to work for it.  In today’s world, workers’ control cannot become a major institution without carrying with it strident calls for abolishing all forms of “the wage relation” and of “absentee ownership.”  These calls will come from socialists of all varieties; and an enormous effort will be made ideologically to create a “democratic consciousness” within the employees themselves.  They will be urged to see workers’ control as the sole legitimate form of enterprise and to feel the type of “labor solidarity” that trade unions have long sought among workers.

            This is a process that is directly antithetical to the theory of a free market.  If socialists have their way, collectives, networked into a structure of state oversight and direction, will take the place of freedom of contract.  The free market’s nexus of voluntary contractual relations is just the opposite of this: it welcomes peoples’ starting firms and hiring whoever wants to come to work for them.  

What are the Actual Prospects?

            This matching of the principles of a free society against the actual political and ideological context of the world today gives rise to serious concerns.  But are those concerns purely theoretical?  What are the actual prospects?  Isn’t that what we should really be thinking about?

            The answer isn’t entirely simple.  There are several parts to it:

            1.  There is a very real prospect that the workers’ control that is instituted in the nations now emerging from Communism and in the Third World will serve the distinctly socialist purpose of holding those nations to socialism rather than seeing them adopt a genuinely free economy.  In this context, workers’ control may seem useful as a transition, but threatens almost immediately to retard the development of really dynamic economies in those countries.

            2.  We should recall the thesis that Friedrich Hayek expressed in his famous book The Road to Serfdom in the 1940s.  He argued that democratic socialism contains within it forces that necessarily impel it to totalitarianism.  Even though there is reason to be skeptical about any prediction of “historic inevitability,” even when it comes from someone like Hayek, his point is a good one in directing our attention to the dangers.  If Eastern Europe and the Third World embrace democratic socialism, they will at least continue on the edge of the abyss.

            3.  There is relatively little chance that workers’ control will actually lead to socialism in the United States or in any other advanced economy.  Why?  Because workers’ control, like all socialism, is terribly inefficient.  Socialism kills incentive; and, for its part, workers’ control has built-in mechanisms of limitation.

            Many of the partisans of employee ownership make glowing claims about its enhancement of employee morale and productivity.  But, surprisingly, other partisans are forthright about the fact that studies show that employee ownership actually has little effect.  In a 1987 book, Joseph Raphael Blasi reported that “the key finding is that the presence of an ESOP does not make the firm more productive or efficient or profitable.”  He added that “studies that discovered improved profitability or productivity have been shown not to have controlled for alternative explanations.”[24]  And Sylvia Nasar (though not herself a partisan), writing in Fortune, says that “the General Accounting Office, in its 1987 study, considered the largest and most thorough, found there was no correlation between ESOPs and productivity growth.”[25]

            These findings may seem to contradict common sense, which would say that a share in ownership should spur workers on.  But upon further examination we find that employees aren’t all that motivated from just receiving shares as a fringe benefit, when what they most desire is money.  This is especially true during the period prior to the time when the employees collectively gain a controlling interest.

            After the controlling interest comes into being, things go in either of two directions: either the employees delegate the management functions to professional managers, which creates a sense “that nothing has really changed from working for just any other company”; or the employees seek to manage the company themselves.

            The history of employee self-management is strewn with failures as companies come to be run “by committee,” with all of the chaos and wasted effort that implies, and as inhouse politics and factionalism set in.  It proves extremely difficult, too—especially as there is turnover in personnel—to maintain the collective elan with which the experiment in workers’ control started.  One of the weaknesses of collectivism is that it counts on a continuing “public spiritedness” as one of its major motivators.

            All of this suggests that, at least in an advanced economy where people have a choice, workers’ control will defeat itself and never succeed in becoming, as socialists want it to, the exclusive mode of organization.

            This doesn’t mean, of course, that there can’t be an enormous amount of wasted effort and frustrated expectations along the way.  It will take time for workers’ control to make its failure apparent.  It is a shame, really, that now that Communist economic failure has become so glaringly obvious, there is a siren song that offers a lead peoples down yet another blind alley.

            4.  If, as we have just predicted, workers’ control won’t lead to socialism in the United States, is there anything more for the supporters of a market economy to be concerned about?  The answer is yes, for two reasons:

            The first is that employee ownership is likely to institutionalize a movement within capitalism that is ideologically hostile to it.  There is a strong likelihood that it will be similar in this regard to trade unionism, which historically has embodied class consciousness and an ideological hostility to the very market system that has served as its host.  Certainly this will be the result, as a bare minimum, if the Left is able to infect the employee ownership phenomenon with its own ethos.  Given the responsiveness of American society to the many thought patterns imposed upon it by the Left, it will be amazing if employee ownership simply takes its place as a normal part of a market system.

            The second is that, given the interventionist attitudes and expectations that have been so rampant in American society, it is easily predictable that employee ownership will give rise to escalating demands for more intervention.

            The Federal Government itself has called into being a type of fringe benefit that millions of workers are counting on to help support them in their old age, but that utterly lacks diversification.  Thus there is a strong moral case for government’s not allowing any ESOP-owned company to fail; or, if it lets such firms fail, not allowing the employees to suffer privation from the loss of value of their stock.  The very intervention that encourages ESOPs creates a plausible claim (and certainly an irresistible one, politically) for more intervention later.  The government will be called upon to serve as a guarantor, in effect, against the failure of tens of thousands of companies.

            Not only this, but a constituency of millions of people, all being tugged at by an eager leftist ideology, will be in place to insist upon all sorts of state interventions into the economy that we cannot yet even imagine.  Pragmatists among our politicians (and it’s a rare politician who can survive as such in a grab-bag interventionist system without being “pragmatic”) will find reasons to be responsive. 

Conclusion

            So far, there has been a made rush toward employee ownership.  Virtually no voices have been raised against it.  Isn’t it time we stopped to give it serious thought?  

[Note in 2006: From the preceding, the reader can readily see how much Dwight Murphey supported a market economy and opposed the ruse of imposing socialism by a “capital-granting” approach to the redistribution of property and wealth.  Readers will no doubt be surprised, then, by the analysis he later makes in his book The Emerging Crisis of Economic Displacement, where he says that the combination of outsourcing, offshoring and non-labor-intensive technology is so greatly changing the nature of capitalism that it is coming to no longer support a broad middle class, which he sees as the bedrock of a free society.  If, he says, an enormous polarization of wealth and income is occurring, that in effect brings about the very conditions that socialist thought long imputed (at that time wrongly) to a market economy.  He sees the need for a “shared market economy” adopting, ironically, some of the same features as the Kelso-Adler plan.  Since the matter is too complex to explain adequately in a note such as this one, a reading of the book just mentioned is essential.  It has been published to this collected writings web site as book B8.]  [Note in 2011: See also Murphey's book, published exclusively to this Web site, A Shared Market Economy, which is an updating and simplification of the book just referred to; and The Great Economic Debacle -- and Beyond, published in 2011.]

 

ENDNOTES


[1]   Sylvia Nasar, “The Foolish Rush to ESOPs,” Fortune, Sept. 25, 1989, p. 141.

[2]   Joseph Raphael Blasi, Employee Ownership Through ESOPs: Implications for the Public Corporation (New York: Pergamon Press, 1987), p. 13.

[3]   Nasar, “Foolish Rush,” p. 141.

[4]   Milton Derber, The American Idea of Industrial Democracy, 1865-1965 (Chicago: University of Illinois Press, 1970), p. 146.

[5]   Herbert Croly, Industrial Democracy (New York: The Macmillan Company, 1915), pp. 84, 389-91.

[6]   The New Republic, Sept. 1, 1917, p. 123.

[7]   The New Republic, May 31, 1933, p. 57.

[8]   The New Republic, May 17, 1933, p. 4.

[9]   The New Republic, Sept. 6, 1933, p. 3.

[10]  Ken Coates, ed., Can the Workers Run Industry? (London: Sphere Books Ltd, 1968), p. 12.

[11]  Gerry Hunnius, G. David Garson and John Case, eds., Workers’ Control: A Reader of Labor and Social Change (New York: Random House, 1973), p. 469.

[12]  S. M. Miller, “The Eighties and The Left: An American View,” The Socialist Register, 1980 (London: The Merlin Press, 1980), p. 74.

[13]  Christopher Easton Gunn, Workers’ Self-Management in the United States (Ithaca: Cornell University Press, 1984), p. 201.

[14]  Blasi, Employee Ownership, p. 3.

[15] Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto (New York: Random House, 1958), p. 4.

[16] Louis O. Kelso and Patricia Hetter Kelso, Democracy and Economic Power (Cambridge: Ballinger Publishing Company, 1986), p. 22.

[17]  Louis O. Kelso and Mortimer J. Adler, The New Capitalists: A Proposal to Free Economic Growth from the Slavery of Savings (New York: Random House, 1961), p. 96.

[18]  Ibid., p. 63.

[19]  Kelso and Adler, The Capitalist Manifesto, pp. 235-6.

[20]  Kelso and Kelso, Democracy and Economic Power, p. 89.

[21]  Mark B. Liedl, ed., Issues ’88: A Platform for America (Washington: The Heritage Foundation, 1988), p. 118.

[22]  The Progressive, July, 1989, p. 21.

[23]  Quentin Peel from “Financial Times” of London, World Press Review, July, 1989, p. 53.

[24]  Blasi, Employee Ownership, p. 43.

[25]  Nasar, “Foolish Rush,” p. 146.