[This article appeared in the June 1990 issue of Conservative Review, pp. 20-24, 31.] 

 

Selling Socialism as “The New Capitalism”

The Threat Behind “Employee Ownership”

 

Dwight D. Murphey

 

In one of the strangest episodes in the history of American political thought—or perhaps in the history of ideas at any time or place—Louis O. Kelso and Mortimer J. Adler began an ideological ruse in 1958 that has gone unchallenged to this day.  Selling socialism as a “new form of capitalism,” they have managed to fool both mainstream America and free market thinkers.  The gist of the scheme: totally to redistribute property through a massive program of “social credit”; to make everyone the recipient of entitlements based on that redistributed property so that income will be fully equalized; and to call everyone a “capitalist” because of the ownership and income flow that will come from the property that he’s then said to “own.”  No one seems to have read the Kelso-Adler books carefully, but on the basis of the impetus their books have created Congress has since 1974 given massive tax preferences to Employee Stock Ownership Plans (ESOPs), the first step in the Kelso-Adler program.  In this article, Dwight Murphey examines the ruse and discusses what it means for America.

 

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            For thirty-three years, the American public has been sold a bill of goods.  We can’t call it a “fraud,” because the authors have from the beginning told the world exactly what they propose.  It’s more accurate to call it a “ruse,” a deception borne out of the authors’ adoption of a semantic that has reversed the meaning of words.  They’ve cooked up a scheme thoroughly to socialize the American economy—and have called it a “new capitalism.”

           

“Capitalistic” Road to Socialism

            The odd thing isn’t that two such thinkers have advocated a route to socialism.  “Liberal” thinkers have been remarkably inventive in producing a number of ways to do that.  One such was George Soule’s 1930’s advocacy of “central planning.”  Another was the idea, also popular in the 1930s, of creating a nationwide network of “river valley authorities” that would go far beyond what T.V.A. eventually became and would socialize the economy of each of the main sectors of the country.  Still another has been the effort, advocated time and time again over the last century, to meld “the giant corporation” into government, making corporations instruments of governmental “social” policy.  There are lots of ways to bring an economy under central control.

            Nor is it odd that modern liberal writers would attempt to mask their intentions behind a semantic smokescreen.  The effort to do that is, in fact, the primary difference between an intellectual who calls himself a “socialist,” and is proud to proclaim himself one, and an intellectual who calls himself a “liberal.”

            Except in their in-house literature, which they rightly assume few people other than liberals read, and except during brief devil-take-the-hindmost episodes such as the ’30s and the ’60s, modern liberals have taken refuge behind a screen of “dissimulation.”  The intelligentsia of the American Left have never ceased wanting socialism.  But, as all conservatives know, they’ve found it expedient to be discrete about saying so.  Here, it is important to distinguish between the Left’s intellectual culture, which has been clearly socialist, and the various interest groups that historically have gone together to make up the “liberal coalition.”

 

A Socialist Ruse

            What is strange is that for 33 years the Kelso-Adler ruse has succeeded so totally.  This success has seen it through the first phase of implementation, which has been the vast promotion of ESOPs (“employee stock ownership plans”) since Congress got behind them in 1974.

            One commentator after another has praised the Kelso-Adler scheme as pro-capitalist.  Thus, John Hoerr, writing in Business Week in 1985, was able to say that “the ESOP form of employee ownership is by no means a socialist idea or an extension of the old worker-cooperative movement.  It grew out of a ‘theory of capitalism’ advanced more than 25 years ago by Louis O. Kelso.”  A 1986 issue of the British journal The Economist told its readers that “in America ESOPs were the brainchild of the right” (emphasis added).

            Book reviewers in the major media have consistently overlooked or ignored the ideological thrust of the Kelso-Adler thesis.  After Kelso, an attorney, and Adler, a prominent philosopher, teamed together to co-author the first book, The Capitalist Manifesto, in 1958, the New York Times’ book review accurately summarized the book’s thesis, but made no observation about the irony of calling such a plan a “manifesto for capitalism.”  The Library Journal’s review presented the thesis at face value—and then, incredibly, reported that “the authors reject socialism” and propose “a positive, practical, capitalistic program.”

 

The Ruse Succeeds

            Reviewers in The New Republic and the Saturday Review saw a problem in a system in which millions of people would be supported without working, but the first of these nevertheless called it “an attractive vision.”  The second could muster nothing stronger than the comment that there will be “a few hitches during the transition.”

            When the second book co-authored by Kelso and Adler, The New Capitalists, appeared in 1961, it was met with more of the same.  Edward Bursk, writing in the Saturday Review, said it was a book “dedicated to making our capitalist, entrepreneurial society stronger.”  The Atlantic’s review spoke of transforming our economy “into a truly capitalistic one.”

            I won’t continue recounting the reviews other than to say that I have yet to find a single one that has pointed out the true nature of the proposals.  Either the reviewers have themselves been collaborating in what they have known to be a charade or they have been incompetent to the task.  One explanation for the incompetence is almost certainly a phenomenon that book authors often observe, that some reviewers don’t really read the books they purport to review; another may be that they are not sufficiently versed in the swirling maelstrom of modern ideology to recognize socialism when they see it, especially when it’s labeled as its opposite.

            In the course of all this, many conservatives, otherwise steadfast in their support for a free-market economy, have allowed themselves to be among those who have been fooled.  Accordingly, they have joined in supporting the multitudinous legislation, both federal and state, giving tax preferences and other favorable treatment to ESOPs and have even called for employee ownership as a way to “privatize” companies in Eastern Europe and the Third World.

            Necessarily, I want to approach this aspect with some diffidence.  Each supporter of a free market deserves enormous credit for having “kept the faith” during many years that have contained countless assaults upon a free market.  We are all busy people.  We can’t read everything.  The explanation for their being fooled is simply that they have taken Kelso and Adler at face value.  They have accepted the semantic without reading the books.  When we consider how overgrown the books are with technical jargon and obfuscation, this is understandable.  But certainly those who are genuinely pro-free market have not accepted the thesis because of dissimulation, as I suspect a good many commentators on the left have.

 

The Transfer of Wealth

            Kelso and Adler co-authored the first two books (1958 and 1961), and Kelso stood alone for the third one, Two-Factor Theory: The Economics of Reality (1967).  He was then joined by Patricia Hetter Kelso as the co-author of the final book, Democracy and Economic Power, in 1986.

            All four books spell out the same scheme, except that the 1986 volume becomes most specific when it formulates in detail a whole series of ESOP-like “loan” programs to give everyone an “ownership” interest in property of all kinds, including even parks and sidewalks, from which each “owner” will then receive, as an entitlement, support payments without himself rendering any service in return.

            This is consistent with what all the books have advocated, but the earlier volumes didn’t formulate the specific vehicles: CSOP’s (consumer stock ownership plans), MUSOPs (mutual stock ownership plans), GSOPs (general stock ownership plans), COMCOPs (commercial capital ownership plans), PUBCOPs (public capital ownership plans, which is where the “ownership” of such things as streets, sidewalks, transit systems, prisons, and the like comes in), and RECOPs (residential capital ownership plans).

            Employees will be given stock in the companies they work for.  Anyone who doesn’t receive an equal portion of property in this way will be made a recipient under one of the other programs.  If nothing else, a person will receive part of the ownership of a park, say, and will receive payments from the city (or whichever governmental entity runs the park) equal to what everyone else is making.  (The authors dissimulate ever so slightly on the dollar-perfect equalization of property and income, but see it as an evil for anyone to acquire enough other property to make possible his receipt of an appreciably higher-than-equal share.  They call this their “principle of limitation.”  According to this principle, “the amount of wealth that any household needs is strictly limited, and… the amount in excess of reasonable needs which it can put to good use is relatively slight.”)

            If all this sounds complicated, it is; but the overall idea is simple: to manufacture an unlimited amount of money to “lend” to people so they can buy one or another form of property.  (The loans will ideally, Kelso says, be “without recourse.”  This means there won’t be any obligation on the part of the recipient to repay.  In a straight-forward use of words, it would be called what it is—a handout.  It’s intended to be a gigantic scheme of redistribution.)

            Once they are “owners” (called “financed-capitalists” in the Kelso rhetoric), people will receive income “from their capital.”  This means that each person will receive payments as a matter of course from the property that has been redistributed to him.  If the “capital” he “owns” fails and can’t pay him his entitlement from its revenue, the illimitable public treasury will again be opened up to “lend” him the money with which to buy some other asset.

            Here, Kelso and Adler adopt an especially clever use of terminology: this is a “capitalistic” distribution of income, they say, precisely because it gives everyone a “return on capital.”  They compare this favorably to an economy in which people often have to work to earn an income (which they denigrate as a “laboristic” distribution).  This is how they arrived at their use of the word “capitalism” for their scheme.

            More broadly, before they applied the distinction between a “capitalistic” and a “laboristic” distribution, they defined “capitalism” as “any form of industrial economy.”  They then even referred to the Soviet Union (in their 1958 book) as an example of a capitalistic economy!  This by itself should be enough to make the supporters of a free market economic system suspicious.

 

Who Will Do the Work?

            A question naturally comes to mind as to who is going to do the work in an economic system in which everyone is guaranteed equal property and income without giving any effort in return.  That’s one place where Kelso and Adler have preferred to be vague.  Obviously there is still plenty of work to be done.  In his famous socialist best-seller Looking Backward more than a century ago, the American author Edward Bellamy foresaw a total equalization of property and income—and solved the problem of who would do the work by talking in terms of assigning people to “industrial armies.”  Since then, the world’s had its nasty experience with Soviet communism, so it’s not likely that a socialist will any longer speak in terms of conscripted labor armies.  But the problem of “who will do the work?” remains, and the answer, in the absence of economic rewards, must necessarily lie in either a volunteer or a conscripted force, or some combination of the two.

            Nor have Kelso and Adler had much to say about precisely who will make the decisions in an economy based on total, or near-total, equality.  There is much to “read between the lines” here.  Socialists historically have proposed a variety of solutions, varying anywhere from “dictatorship of the party as the vanguard of the proletariat” to a seemingly decentralized “economic democracy.”  Even the so-called decentralized forms of socialism, though, envision a networking of units, such as workers’ cooperatives, into a larger structure so that “economic rationality” (i.e., central planning) can be achieved.

            It’s hard to believe that all of this could have been sold to the American public for 33 years as a new approach to “capitalism.”  I would urge any reader who feels skeptical about my summary of it to read any one, or preferably all four, of the books.  It’s all there in black and white.  It simply requires persistence to penetrate the mumbo-jumbo and a readiness to look behind the inversion of words.

            If for no other reason, the books are worth reading simply as a curiosity, since they represent one of the world’s all-time great intellectual scams.  Kelso and Adler deserve credit for a monumental, if highly perverse, achievement.

           

“Nonrecourse” Loans

            Although there is no substitute for reading the books, here are a few brief passages that illustrate the summary I’ve given:

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

            This tells us the supply of “social credit” is potentially limitless with which to fund the redistribution. 

            In common with crank-money schemes going back over the centuries, Kelso and Adler see the economists’ standard touchstone, economic scarcity, as an unnecessary impediment arising out of our failure heretofore to organize the economy rationally.

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

            Here, we see a little dissimulation in their hedging about whether the loans will be nonrecourse.  The whole idea is to redistribute property without call for anything “laboristic” from the recipients.  Any required repayment would only be a transitional expedient.  Or else repayment could be made out of the “earnings” the recipient gets as an entitlement from the redistributed property.  But this wouldn’t make much sense, since it would amount to a tax upon the handout.

            The passage also shows how the redistributive handouts are disguised as “loans.”  This, too, is clever, since there is such a thing as “nonrecourse loans” in large business transactions (such as, say, where a lender will have a right simply to take over a shopping center if a default occurs rather than to pursue the personal assets of any individual).

            .  “Accumulation of more capital than is required to meet the owner’s consumption needs and wants and to free him or her from subsistence toil… violates the right of others to be adequately capitalized.”

            Again, we see the goal of an equal distribution of property and income.

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

            The technique is the same as that advocated more than a century ago by the French socialist Pierre-Joseph Proudhon, who called for the creation of socialism through “cheap social credit.”  The idea of low-interest or even nonrecourse loans as a method of redistribution was then picked up by other socialists, such as N. G. Chernyshevsky in late 19th century Russia and Louis Blanc in France.  Essentially, “social credit” represents a certain dissimulation even on the part of the socialists who have advocated it, since direct government grants would accomplish the same thing in a more straight-forward way.

            .  “Government should not hesitate to make up for any deficiencies in private credit facilities, either by the insuring of credit or by directly providing it.”

            The use of private credit, stimulated by major tax incentives, such as has been done with the creation of “leveraged ESOPs” in the United States in recent years, is merely an expedient.  As the quote indicates, the public treasury stands ready to carry out the redistribution if the existing credit mechanisms aren’t equal to the task.  Of course, private credit can itself be governmentally expanded through central bank operations.

 

How Much of the Scheme Has Been Carried Out So Far?

            Thus far, the United States has gone heavily into the ESOP idea for creating employee ownership through tax preferences.  This is the easiest part of the Kelso-Adler program for its proponents to initiate, since it has considerable appeal to the average American and, to those who aren’t conversant with the history of employee-ownership as a central feature in much socialist thought, gives no hint of anything dangerous to our economy.

            In 1974, Kelso gained a powerful disciple in Senator Russell Long (D-La.), chairman of the Senate Finance Committee, who wholeheartedly embraced the ESOP idea.

            Since then, there has been a constant stream of federal legislation, amounting to sixteen statutes so far, promoting ESOPs.  Most importantly, elaborate tax preferences have been created.  In addition, the Chrysler corporation, as part of its bail-out, was required to donate $162.5 million worth of its corporate stock to an ESOP.  And companies making a “stock buy-back” have been encouraged by law to use an ESOP for the purpose.

            State legislatures have chimed in, adding preferences and encouragements at the state level.

            By the end of 1986, there were between 7,000 and 8,000 ESOPs.  Since each is structured to increase the amount of employee ownership in years to come, these are just the beginning of a massive structural shift in the American economy.  A major spurt in the use of ESOPs occurred during 1989 after the Delaware Supreme Court held that ESOPs can be used as part of a strategy to shield existing management from hostile takeovers.  During the first nine months of that year, eighty of the “Fortune 500” companies set up ESOPs, using stock worth $15 billion.

             It is just a matter of time (and not much, at that) before “employee ownership” emerges from being “the new boy on the block” to becoming a major structural fact in the American economy.

            The mechanics of how an ESOP works are not themselves important to the issues we are discussing here, especially when we consider that the mechanics can be changed by future legislation.  The ESOPs we’ve seen so far involve a business firm’s creating a trust and declaring the firm’s employees the beneficiaries.  The firm conveys stock to the trust.  In a “leveraged ESOP” situation, the trust gets a bank loan and pays the money to the firm in exchange for stock.  The firm serves as guarantor of the obligation to the bank, and over time makes payments to the trust in amounts sufficient to allow the trust to pay the bank.  Both leveraged and non-leveraged plans receive their primary stimulus from generous tax preferences of assorted kinds, both to the firm and the lending bank.

            The establishment of a trust creating an ESOP is just the beginning.  Even if it starts small, it institutionalizes the process of increasing employee ownership.  Once thousands of ESOPs have gotten on their way, as they have, enormous future growth of employee ownership is assured.

 

How Conservatives Have Been Misled

            It is important that we reflect on how employee ownership fits with respect to the theory of capitalism.

            Part of the reason conservatives have been fooled regarding it is that employee ownership is not itself incompatible with a free market.  There is nothing about the entities within a market economy that precludes the same people’s both owning and operating a firm.  We see that already in sole proprietorships, partnerships and most small corporations.

            Incompatibility with a free market arises, instead, from two sources:

            First: Any form of entity that owes its existence primarily to government preferences is a creature not of the free market but of the interventionist political-economic system to which we have become so accustomed.  And for reasons we will explain later, the nature of employee ownership automatically creates a demand for vast new interventions, as well as a political constituency to assure they are granted.

            Second: We need to understand that the Left sees employee ownership as a fertile ground for vastly increased ideological activity.  Workers’ control is one of the main avenues to socialism as socialists themselves see it.  American “liberals” were once engrossed with the idea of “industrial democracy” based on British Guild Socialist ideas, utilizing both workers’ control and consumer cooperatives.  These ideas have enjoyed a substantial revival within both European and American socialist thought since World War II.  If employee ownership is used either as a window to socialism or as a window toward anti-capitalist ideological organization and agitation, which it certainly will be during the years ahead (judging from what the American Left itself tells us), such developments are very much at odds with a free market.

 

The New Realities of “Employee Ownership”

            So much for theory.  What concerns us more than anything else is the realities we are going to face in the near future.  When employee ownership has grown to where it is a major force in our economy, certain things will follow:

            1.  As just indicated, a massive new political constituency will have been created that will predictably come to play a vastly important role in our political life and in our interventionist economy.

            Employee ownership is a form of investment that lacks diversification.  (Congress necessarily had to exempt ESOPs from the diversification requirements applicable to retirement plans in general under the Employee Retirement Income Security Act of 1974.)  It is accordingly an especially treacherous type of holding for an employee to rely upon for retirement.

            Because of this, the new political constituency formed by employee ownership will find it imperative to call upon government either (a) not to let any employee-owned company fail or (b) to guarantee the value of each employee’s retirement assets.

            The first of these options, applied to thousands of companies, is so radical a departure from the model of a competitive market that it can itself destroy the market economy as we know it.  The second, if it’s the one adopted, will add enormously to the interventionist role of government in the economy and to the transfer-payments that have become so significant a part of our public expenditure.  A third alternative, which after a while no politician will dare to support, is simply to let the employees suffer when much of their savings vanishes with a failing company.

            2.  In light of the place workers’ control has played both in overtly socialist and American “liberal” thought, an ideological, political struggle will be waged over a period of many years for the loyalty of the employee ownership constituency.  In this struggle, proponents of a free market economy will again find themselves in a “silent majority.”  Who can doubt but that the liberal media will be on the side of the Left in this struggle?

            3.  Opponents of socialism will have to become intensely involved in this struggle—or lose it by forfeit.  Continuing efforts will need to be made to assure that employee ownership serves as a way to build pride in capitalism (which is the way virtually all conservatives have perceived it up to now).  But this won’t be easy, since their efforts will be in direct competition with the propaganda the Left will inevitably use on behalf of “worker solidarity” and “economic democracy.”

            Some American businesses now take justifiable pride in considering their employees “partners” or “associates.”  This is an attitude reflecting both good will and a love of enterprise.  The idea is that each employee will identify with the creative impulses that brought the firm into being in the first place and that continue to sustain it.  It’s unfortunate that this good will and love of enterprise, shared with the employees, will soon be forced into an adversarial role in an ideological struggle.  Companies will need to prepare to wage that struggle.  But they need to realize from the beginning that their good will will inevitably be portrayed as self-interested and as an effort to “co-opt” true “economic democracy” and employee control.  Ideologically, business firms will be placed in much the same position that they have been in during the last 150 years with regard to the trade union movement.

            4.  The call for “workers’ control” will not only begin to be heard, but will become strident.  Once employees have a majority ownership, their moral and legal claim to control will be incontestable.  Who will deny it to them, and on what legal or moral ground?

            5.  It is doubtful whether all of this will actually lead, however, to socialism in the United States.  Ultimate socialism isn’t likely, for at least three reasons.

            The first is that Kelso’s success in promoting ESOPs will hardly be matched by comparable success in advancing his other schemes of redistribution.  Those other vehicles are far more transparent.  (It’s one thing to give employees shares in the companies they work for; it seems far different to give them shares in sidewalks and prisons as part of what is then visibly a purely redistributive scheme.)  The American people don’t want a George Bernard Shaw-type of total equalization of property and income as per his An Intelligent Woman’s Guide to Socialism and Capitalism—and aren’t likely to vote for it once they know what they are voting on.

            Second, there is a self-contained limitation in employee ownership and workers’ control.  It is that workers’ control is basically a disaster for firms unless the employees are willing to turn over operation of the firm to hired managers (in which case experience shows that the employees frequently become disillusioned with the whole idea, since they often find that “working for one boss, even one we hire ourselves, is pretty much like working for any other”).

            If the employees try to run the company by themselves, really invoking “economic democracy” as the Left would like them to, they run into untold frustrations and inefficiencies as decisions come to be made “by committee” and as tasks are rotated among people who lack the expertise for them.  There is considerable consternation about this in the socialist literature that deals with past experiments with workers’ cooperatives.

            A high level of motivation exists at first because of enthusiasm for the “democratic” nature of the effort, but past experience with worker-controlled enterprises has shown that this is awfully hard to sustain.  Such “collective motivation,” based on public-spiritedness and ideology, is typical of socialism of all kinds.  The fact that, over time, it is no match for individual self-interest is perhaps the single most important reason for the recent collapse of socialist economies.

            A third reason socialism is not likely to result is that Americans are too used to entrepreneurial freedom.  In our entrepreneurial culture, it would be very difficult to suppress that freedom.  The leftist movement for “economic democracy” that is coming will no doubt call, as part of its ideology, for “solidarity” in favor of employee-owned enterprises and cooperatives against any firm that hires people who are not owners.  (Socialists even detest an employee-owned enterprise’s hiring anybody.)  Why?  Because hostility to the “wage relation,” to an employer’s profit (which the Left has long denounced, with Marx, as “surplus value”), and to “absentee ownership” has long been integral to the Left’s critique of capitalism.  Before we are through, great animosities will no doubt be generated over this desire for the exclusion of non-employee-owned firms, but it is hard to imagine Americans succumbing more than partially to such pressures.

            6.  As the prior points indicate, what is far more likely than socialism is: A massive escalation of government intervention in our already highly interventionist economy, with a major new constituency to demand it; and the introduction of a strident ideological factor into our national life as the Left, supported by all its organs in academia, the media and elsewhere, seeks to use employee ownership for its own ends.

            It isn’t necessary to predict an ultimate victory for socialism for conservatives to have reason for serious alarm.  By default, we have already allowed the ground to be laid institutionally for employee ownership to become a major force.  But the sooner we perceive the danger and stop the preferential creation of employee ownership, the more we can limit the damage.

            So far as Kelso and Adler’s further plans for a complete redistribution are concerned, they could be stopped in their tracks simply by the exposure of the charade that has veiled them for so many years.  Once it is pointed out that “the emperor has no clothes,” few continue the illusion.

 

[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.)