From Employee Ownership to Workplace Democracy via "Residual
Claimancy"
David Ellerman
World Bank*
May 1, 2001
Table of Contents
Capital
Rights: The Actual Rights and the Mythical Superadded Rights
The
"Fundamental Myth" about Property Rights
"Ownership
of a Firm" and Ownership of a Corporation
A Rear-view
Mirror Glance at Marxism
Implications
for the Two Visions
The
Property-Theoretic Case for Workplace Democracy
The
Democratic Theory Case for Workplace Democracy
Is
Capitalism the Economic Correlate of Political Democracy?
Sketch of
Intellectual History of Non-democratic Liberalism
From the
Employment Contract to a Democratic Constitution in the Workplace
The Approach
Via the Corporate Governance Problem
Introduction
In the circles of advocacy for employee ownership or workplace democracy, there has always been a basic divide between two different conceptualizations or visions of "the solution":
1. the capital ownership vision which proposes extending property rights in companies to workers in those companies (ESOPs were originally considered as example of this approach), and
2. the workplace democracy vision which proposes extending the personal (or human) right of self-governance to the workplace.
Since so little progress has been made with either vision, there has been (aside from a few flare-ups) a working relationship between the two groups, which might be called the "employee ownershipers" and "workplace democrats." Many advocates take a doggedly pragmatic approach that de-emphasizes conceptual distinctions, and they tend to view attempts to clarify concepts as unnecessarily divisive. When the 'Movement' has so little strength, why foster more factionalism with 'ideological' discussion? While I have some sympathy for these concerns with divisive debate and factionalism, I do not find that they add up to a persuasive argument against conceptual clarity. I find much room for common cause in a 'big tent' interpretation of the 'Movement' in spite of differences in underlying principles. Thus while conceptual clarity need not be divisive on many common front issues, I find that it does make a difference in many questions of overall strategy. For instance, the employee ownershipers and the workplace democrats both broadly support ESOPs but for somewhat different reasons, and these differing reasons come more to the forefront as we consider other strategic initiatives in addition to ESOP promotion.
Before proceeding, it might be useful to agree to call the broad common goal "democratic worker-owned firms" although the two visions have differing conceptions of that goal. The hard-core employee ownershipers would not recognize a human or personal right of democratic self-determination in the workplace (i.e., a right independent of capital ownership), and the workplace democrats would take the phrase "worker-owned firm" as a bit of an oxymoron since a democratic polity cannot be "owned."
My purpose here is to present an analysis that starts with the "capital ownership issues" and then proceeds using the notion of "residual claimancy" to end up with a treatment of property rights that fully agrees with the workplace democracy vision.
Capital Rights: The Actual Rights and the Mythical Superadded Rights
The difference between the two visions can be formulated using the question of "Who hires what or whom?" On the capital ownership vision, the goal is an employee-owned firm organized on the basis of the owners of capital hiring labor but where the workers own part of the capital. With the workplace democracy vision, the goal is a democratic firm where labor hires capital even though the workers own part of the capital being hired.
The capital ownership vision tends to (mis)interpret the ordinary ownership of capital (in either the sense of physical capital goods or financial capital), which is fully compatible with the capital being hired, leased, or loaned out, as being a much stronger "ownership of the firm." The stronger "ownership of the firm" idea is the usual notion of owning a machine or money plus the additional or superadded rights to own the product of any production using the capital and to manage the production process—all as part of the inherent rights of capital ownership.
If these superadded rights of "ownership" were indeed part and parcel of capital ownership, then clearly any notion of a democratic firm would require a diminution or attenuation of those rights. In a democratic firm, capital is just another input that could be hired or might already be owned by the members of the firm, but the membership rights would not be based on capital with these superadded rights. I will argue that these superadded rights are not in fact part of the ownership of capital even in the current property system. Thus no diminution of the actual rights of capital (as opposed to the mythical rights) would be necessary in a system of workplace democracy. The difference lies elsewhere (in the employer-employee relationship).
The origin of the idea of the superadded rights of capital is fairly clear. The usual arrangement is for capital to hire labor rather than vice-versa. When the owners of capital do hire labor, then they thereby acquired the management rights over the use of that labor by the employment contract and, having covered the costs, they are also have the claim on the produced product. These additional management and product rights that accrue to the owners of capital under the conventional capital-hires-labor arrangement then are reified as part and parcel of the ownership of the capital itself. Thus the ownership of capital, an input to the firm, is mythically transfigured into the "ownership of the firm."
It is easy to defeat the argument that these additional rights are part of capital ownership since capital may be rented, hired, borrowed, or leased—all without violating any "inherent rights of capital." If the superadded rights were indeed part of capital, then capital would in effect be unrentable; capital would of necessity be in command in the firm. But this is a misunderstanding of what is called the "capitalist" system. The capitalist system is not a system where people may be hired but capital may not be hired. The capitalist system is the system where either or both people and capital may be hired, and the arrangement of capital hiring labor is only a conventional, not a necessary, part of the system. The idea that those superadded rights were an inherent part of the "ownership of capital" will be called the "fundamental myth"
Therefore to understand how the product rights actually are assigned in the capitalist system (in contrast the fundamental myth), we need to go back to basics. How are property rights first initiated and how are they finally terminated? What is the 'life cycle' of a property right?
Property rights are created in firms and households, and property rights are also terminated by firms and households. In between is the market where property rights are transferred. The instrument for transferring property rights is the voluntary contract which is fulfilled by the transfer of the de facto possession and control of the property from the old owner to the new owner (usually in exchange for other property going in the opposite direction).
Theory of Appropriation
While it is well-known that property rights are transferred by voluntary contract, what is the legal means by which property rights are initiated and terminated in a private property market economy? It will be helpful to first establish some notation and terminology. Consider a simplified description of a productive opportunity Q = f(K,L) where the outputs Q are produced by applying the labor L to the capital services or non-labor inputs K. Many different types of labor and non-labor inputs could be considered but that would only complicate the notation and would not change the underlying logic. The initiation of a property right is called the "appropriation" of the property right. Symmetrically the termination of a property right might be called the "expropriation" of the property right but that word has now been corrupted to mean the forced transfer or "taking" of property by the state.[1] The word "expropriation" can be avoided by referring to the "expropriation of the assets X" as the "appropriation of the liabilities –X."
In the productive opportunity Q = f(K,L), the property rights to Q are initiated and the property rights to K and L are terminated so this could be described as the appropriation of the assets Q as well as the appropriation of the liabilities –K and –L. It will be useful to adopt a simple vector notation with three components representing outputs, non-labor inputs, and labor inputs respectively. Thus the vector of outputs or assets appropriated in production is (Q,0,0) and it will be called the "positive product." The vector of liabilities (signifying the used-up inputs) appropriated in production is (0,–K,–L) and it will be called the "negative product." Summing the positive and negative products component-wise gives vector of assets and liabilities appropriated in the productive opportunity (Q,–K,–L) which I will call the "whole product."[2]
Positive Product = (Q,0,0)
+
Negative Product = (0,–K,–L)
= Whole Product = (Q,–K,–L)
The "whole product" is simply a property theoretic name for the production vector familiar to economists in the production set treatment of production where the outputs are listed positively and the inputs are listed negatively.[3]
How does a private property market economy determine who appropriates the whole product? There is a "laissez-faire" or market mechanism of appropriation. A non-market assignment of liabilities by the legal authorities takes place in a trial for property damages when the defendant is found guilty and held liable for some property that was destroyed. To understand the market mechanism, one must consider who would appropriate the liability –X (i.e., terminate the property right to X) if the property X is used-up, consumed, or otherwise destroyed when the legal authorities do not intervene. In that case, the liabilities –X are borne by the last legal owner of X. Thus one could say that in the absence of any state intervention to reassign liabilities, the liabilities –X for used-up or destroyed property X is "laissez-faire appropriated" by the last legal owner of X. Furthermore, that same legal party who bore the liabilities would have the defensible legal claim (in the absence of any reassignment of the liabilities) to any new property that might be created in the process of using up the old property.
Market Mechanism of Appropriation
Let the liabilities for the used up inputs lay where they have fallen (i.e., in the hands of the last owner of the inputs), and then let that party have the claim on any produced outputs.
It should be noted that this mechanism of appropriation only works for produced outputs as opposed, for example, to gifts of nature.
In terms of our example, the last legal owner of the non-labor inputs K and labor inputs L would laissez-faire appropriate the negative product (0,–K,–L). In the absence of any state intervention to reassign those liabilities, that same party would have the defensible legal claim on the positive product (Q,0,0). Putting the two products together, one has the market mechanism for the appropriation of the whole product (Q,–K,–L). The legal party who appropriates the whole product of a productive opportunity will be called the "firm" (with respect to that opportunity). Since that party would pay for the liabilities –K and –L and receive the revenue from the outputs Q, the whole product appropriator is also called the "residual claimant."
The "Fundamental Myth" about Property Rights
The "market mechanism of appropriation" might all seem like a fancy way to restate the obvious, but it has quite strong implications. For instance, it shows that in order for a legal party to be the "firm" with respect to a given productive opportunity, it is sufficient for the party to be the last legal owner of all the inputs used up in the production process, i.e., to have borne the costs of the used-up inputs. Then that party has the defensible legal claim on the outputs that emerge in production so that party would appropriate the whole product. Since it is the fact-pattern of the input contracts (e.g., whether capital hires labor or labor hires capital) that determines who is the last legal owner of the used-up inputs, the identity of the firm ("firmhood") is contractually determined. There is no need for the legal party to additionally "buy" or "own" the production function or production set. There is no such thing as the "ownership" of a production function or production set in a private property market economy. It is not by the "ownership" of a production set that production or whole product vectors are assigned to legal parties but by the market mechanism of appropriation.
The idea that there is a property right (variously called "ownership of the firm", "ownership of the production function", "ownership of the productive opportunity" and so forth) which determines which party legally appropriates the whole product of a productive opportunity is such a pervasive and important idea that we call it the "fundamental myth" about property rights. If it is thought that the whole product is already owned by the "owner of the firm" then the entire question of appropriation (initiation and termination of property rights) in production is not even formulated. That is indeed the usual case in the economics literature.[4] Thus conventional thought in economics and legal theory does not so much have the wrong answer as have a pre-analytical conceptual framework that does not allow it to ask the right question. If the rights to the whole product are seen as part and parcel of the ownership of capital, then the question of the appropriation of the whole product does not arise, only the question of the ownership of capital.
"Ownership of a Firm" and Ownership of a Corporation
What are the origins of the fundamental myth that firmhood is established by an ownership right ("ownership of the firm") rather than by the contractual status of being the last legal owner of all the inputs to production? Perhaps the most common origin is a misinterpretation of the "ownership of a corporation." Before turning to that, it might be noted that economists use the notion of "ownership of the firm" in more general contexts independent of corporations. In an abstract model, entrepreneurs are "bidding for ownership of the firms" [Hirshleifer 1970, 124] and become the "owners of the productive opportunity" [125]. A proprietor may sell "the rights to the transformation function" or "his rights to the venture" [Fama and Jensen 1996, 341] to another proprietor. The entrepreneur is the "owner of a production function" [Haavelmo 1960, 210] and even Robinson Crusoe "owns the firm" [Varian 1984, 225].
The most common or "standard" origin of the "ownership of a firm" notion is to (mis)interpret the ownership of a corporation that is currently undertaking a production opportunity Q = f(K,L) (by virtue of its contractual position) as being "ownership" of the productive opportunity. But this interpretation can be easily defeated by changing the contractual position of the corporation without changing its ownership. For instance, if the capital services K were hired out rather than the labor services L being hired in, then the "firm" in the sense of whole product appropriator would shift but the ownership of the corporation would be in the same hands. The role of the corporation would shift from being the firm (with respect to that opportunity) to being an input supplier to the firm.
This argument might be better understood by considering a productive opportunity both outside and inside a corporate legal form. Consider a simplified process where the labor L is applied using the services K of a widget-maker machine in order to produce the widgets Q during each time period. If the machine is owned by an individual, then it is clear that the person could hire in the labor L and produce Q—or could hire out the services K to another party. The pattern of contracts determine whether the individual owner of the widget-maker operates as the firm (with respect to that opportunity) or as an input supplier to the firm. Now suppose that the individual incorporates a company and issues all the stock to himself in return for the machine. This legal repackaging changes nothing in the market logic of the argument that separated capital ownership from residual claimancy. The corporation (rather than the individual) would own the widget-maker machine and, depending on the direction of the hiring contracts, may or may not appropriate the whole product of the productive opportunity using the widget-maker. The process of incorporation does not miraculously transubstantiate the ownership of a capital asset into the ownership of the whole product vectors that might be produced using the capital asset.
In real-world markets, there are likely to be large transaction costs to rearranging the input contracts. The incumbent corporate residual claimant has sizable first-mover advantages so that any challenging party would have to incur such high transaction costs to redirect the input contracts that it might be just as cheap or cheaper to simply buy the corporation and thereby take over the residual claimant's position in the existing pattern of input contracts. These transaction cost barriers create the image that the existing incumbent corporate residual claimant "owns" the production opportunity.
One of the advantages of idealized frictionless models in economics, as in physics, is that they show the basic logic of the system without irrelevant distractions. In a world without transaction costs, the input contracts could be costlessly rearranged to switch residual claimancy from one party to another without changing the ownership of a corporation from one party to another. That shows the underlying logic of the contractual determination of residual claimancy in a private property market economy.
The transaction cost barriers to rearranging contracts in real-world markets create the illusion of a property right such as the everyday notion of "ownership of the firm." Transaction cost barriers are only that; they are not property rights. For instance, as transaction costs change it might become more feasible to acquire residual claimancy by rearranging input contracts rather than by purchasing the corporation. This would not violate the corporation's "ownership of the production set" since it had no such property right in the first place.
The purpose of my argument so far is to clarify the actual rights of capital in our current private property market economy. Many people take the rights of capital to include the superadded rights of management over production (as if those rights didn't have to acquired in the employment contract) and of product ownership (as if there was no legal appropriation of the whole product based on contractual position). Starting from that interpretation of the rights of capital, they then conclude that to reach what we have loosely called the "democratic worker-owned" firm, then those capital ownership rights must somehow be transferred to the workers in the firm (e.g., ESOPs) or that the rights of capital must be attenuated to allow for democratic rights to be recognized in the workplace.
A Rear-view Mirror Glance at Marxism
One line of argument starts with Marx who mistakenly accepted the fundamental myth about capital and even misnamed the current system as "capitalism" on that basis. His acceptance of the fundamental myth was based in part on a faulty analogy with one interpretation of feudal rights. In feudal times, the governance of people living on land was taken as an attribute of the ownership of that land: "ownership blends with lordship, rulership, sovereignty in the vague medieval dominium,...." [Maitland 1960, 174] The landlord was Lord of the land. As Gierke put it, "Rulership and Ownership were blent" [1958, 88]. Marx mistakenly carried over that idea to capital.[5] The command over the production process was taken as part of the bundle of capital ownership rights.
It is not because he is a leader of industry that a man is a capitalist; on the contrary, he is a leader of industry because he is a capitalist. The leadership of industry is an attribute of capital, just as in feudal times the functions of general and judge were attributes of landed property. [Marx 1977, 450-451]
Marx was simply wrong; he bought the fundamental myth.
Marx's "ownership of the means of production," indeed Marx's notion of "capital," involves the mythical "ownership of the firm." By "capital" Marx did not simply mean financial or physical capital goods; he meant those goods used by wage labor in capitalist production. Outside of capitalist production, "capital" becomes just the "means of labor." In short,
Marx's "capital" = "means of labor" + "contractual role of being the firm."
If one wishes to use the word "capital" in that Marxian sense, then not all of what is included in "capital" can be owned. There is the ownership of the means of labor (financial and physical capital goods directly owned or indirectly owned through the legal shell of a corporation), but there is no "ownership" of the residual claimant's contractual role of being the firm, and thus there is no "ownership" of the "means of production" or "capital" in Marx's sense. There is a similar ambiguity in the common language notion of "owning a factory." There is the ownership of factory buildings (or corporations with such assets), but there is no "ownership" of the going-concern aspect of operating a factory as that is a contractual role in a private property market economy. [6]
By agreeing that there is the ownership of "capital" (which includes being the residual claimant), Marx swallowed the fundamental myth of capitalist ideology even though he took great pride and joy in exposing other aspects of capitalist mythology. It should be carefully noted that our analysis of the "ownership of the firm" is entirely descriptive; it is not normative. The point is not that the "ownership of the firm" should not exist; the point is that it does not exist. Marx accepted that the "private ownership of the firm" does exist as a part of the capitalist system, and he argued that it should not exist, at least not privately.
Marx's proposed solution to his own mistaken analysis of "private ownership of the means of production" was the public ownership of capital with all workers becoming state employees. On the democratic socialist interpretation of Marx's thought, the state would be a political democracy and thus the workers as citizens would be the indirect owners of the capital in one big democratic employee-owned firm, namely the democratic socialist state.
There are two basic mistakes in this democratic socialist vision. One is the aforementioned fundamental myth that the product and management rights are part of the "ownership of the means of production." The other mistake is the presumption that the right of joint democratic self-determination is a monopoly of the state or the 'public' sphere instead of being a right in all organizations no matter where the organizations sit on the conventional public-private spectrum. An organization need not become 'public' (in the sense of government) in order to become democratic.
By accepting the fundamental myth as a point of fact, Marxism becomes the perfect symbiotic partner and the ideal foil for capitalist ideology. Then the battle could rage about the private or public "ownership of the means of production"—when all the while the actual basis of the system lies elsewhere in the employment relation.
Implications for the Two Visions
Moving beyond the highly ideological and ritualized debates of yesteryear about Marxism, one still finds the similar use of the fundamental myth in non-Marxist literature. For example, those who approach workplace democracy from democratic political theory might inadvertently accept the fundamental myth about the meaning of "ownership of enterprise" but then hold that democratic rights should take precedence even at the firm level (i.e., without making the second mistake of assuming that a firm must become 'public' or nationalized in order to be democratic).
Ernest Barker is one example of a political theorist who mistook the fundamental myth as fact.
The owner of capital resources, or the agent who acts on behalf of the owner or a number of associated owners, controls and determines, in virtue of such ownership, the process of production and the action of the workers who are engaged in the process. In its unqualified form, capitalistic organization is a form of autocracy or absolutism. In practice it is never unqualified. ... We may call it ... a limited absolutism, which naturally seeks to escape its limits, and on which (so long as it exists) combinations of workers will as naturally seek to impose new limits. [Barker 1967, 105-106, emphasis added]
The preeminent democratic theorist of our time, Robert Dahl, presented essentially this analysis of democracy in conflict with the "ownership of the enterprise" in his otherwise excellent book Preface to Economic Democracy [1985]. In this conflict, Dahl holds that democratic principles should take precedence over property rights, and then, after that unnecessary argument for the attenuation of property rights, he makes the case for economic democracy at the firm level to arrive at much the same conclusions developed here.[7]
Thus the first contribution of the argument for the contractual determination of residual claimancy (i.e., whole product appropriation) is to undermine a key step in the employee ownership approach—that the road to the democratic worker-owned firm must go through "ownership".
And the second contribution of the argument is to show that workplace democrats (e.g., Dahl) do not need to argue for any attenuation in the actual rights of capital ownership since those superadded rights are not part of capital ownership even in our current private property market economy.
The Property-Theoretic Case for Workplace Democracy
I have outlined two visions of what I have loosely called the "democratic worker-owned firm." I have used the analysis of the fundamental myth (which shows the contractual determination of residual claimancy) to show that one key link in the capital ownership approach is missing and, by the same token, one potential barrier to the workplace democracy approach is not a barrier at all. The superadded rights of capital, so key to the capital ownership vision, turn out to be a paper tiger.
Within the workplace democracy vision, there are at least two arguments that are convergent in the sense that starting from different perspectives and principles arrive at the same conclusions. One should not think that one only considers "property rights" and "ownership" under the capital ownership approach and that the workplace democracy approach is limited to democratic arguments. Quite to the contrary, one of the clearest arguments for the workplace democratic vision is the argument based on the modern treatment of the labor theory of property. Indeed this argument follows so quickly on the heels of asking the question of appropriation of the whole product that it seems to be one of the primary impediments for the orthodox-minded to ask the question of appropriation. Part of a sound orthodox mind is a sixth sense to see trouble coming if one poses the 'wrong' question.
It is not my purpose here to greatly elaborate on this property-theoretic argument for workplace democracy [see Ellerman 1992], but it can be sketched as a reference point. To complete the argument, we need only note that while all the factors of production are productive in the sense of being causally efficacious, only human actions ("labor" includes the human actions of all who work in an enterprise) can be responsible. Then it follows directly that the human beings working in an enterprise, management and non-managerial workers, are in fact jointly responsible for producing the whole product (i.e., for producing the outputs by using up the inputs). That is the factual or de facto responsibility for the whole product.
One of the basic principles of jurisprudence is that legal or de jure responsibility should be, in so far as possible, assigned or imputed to the de facto responsible party. For example, a civil or criminal trial tries to ascertain the factual matter of whether or not the defendant was in fact responsible as charged so that the legal responsibility can then be assigned accordingly. In our case, the legal responsibility for the whole product means the legal liability for the used-up inputs in the negative product and the legal ownership of the produced outputs in the positive product. By the standard imputation principle of jurisprudence (i.e., assign legal according to factual responsibility), the legal responsibility for the whole product should be assigned to the legal party whose members are the people working in the enterprise. That is the property-theoretic case for the democratic firm.
It should be noted that the ownership of the capital only enters the argument in determining to whom the whole product appropriator should be liable for using up the capital services. Since the responsibility principle implies that those people who used up the services of capital should bear those costs, it means that they would have to sooner or later have to pay those costs, e.g., by renting or already owning the capital. Similarly for the other (non-labor) inputs. Thus the responsibility principle applied to production implies the direction of the input contracts, e.g., labor hiring capital.
We saw previously that there is a market mechanism of appropriation that is used when there are no civil or criminal wrongs committed that would require a trial. By that mechanism, instead of the ideal imputation determining what the contracts should be, the actual contracts determine what in effect the actual imputation is. The last legal owner of the used-up inputs bears those costs (absent any recontracting), and thus has the defensible claim on the produced outputs. In that manner, the hiring party legally appropriates the whole product.
Is the operation of that market mechanism of appropriation in accordance with the responsibility principle? We saw that it would be if the contracts were reconstructed in accordance with the de facto responsibility of the people working in an enterprise for the whole product, e.g., when labor hires capital. The problem comes when the employer-employee contract is used to create the reverse situation where the workers become "employees" hired or rented by the employer. If, somehow, the de facto responsibility could be transferred from employee to employer to "fulfill" the employment contract, then the market mechanism would again correctly assign the whole product solely to the hiring party, the employer (since the employer would then, by assumption, be the only responsible party).
But here is the rub. People differ from things not only in being responsible but in that people cannot be transferred between people as things can. I can use a tool or machine and be de facto responsible for the results. Or I can turn the tool or machine over to some one else to use it and then they are solely de facto responsible for the results. That is what happens to fulfill the contract to rent or hire out the tool or machine to the other person. But then the employment contract is used to try to apply the same idea of hiring out one person to another person. But in that case, the person being hired cannot in fact turn themselves over to the hirer or employer in such as way that the employer is solely de facto responsible for the results. The hired person can at most co-operate with the hirer and is then inherently de facto co-responsible for the results. The fundamental flaw in our current private property market economy is that it counts this de facto co-responsible co-operation of the employee as "fulfilling" the employment contract, and thus it sets up the legal appropriation (via the market mechanism) of the whole product solely by the employer—in violation of the responsibility principle.
The problem lies not in the market mechanism of appropriation but in the attempt to apply the notion of a hiring or rental contract to human beings rather than just to non-responsible tools, machines, and other things. Persons are just not inter-personally transferable. The non-transferability or inalienability of de facto responsibility is easily recognized when the legal authorities set aside the market mechanism and intervene to explicitly apply the responsibility principle in a civil or criminal trial. The employee in work suddenly becomes the partner in crime.
All who participate in a crime with a guilty intent are liable to punishment. A master and servant who so participate in a crime are liable criminally, not because they are master and servant, but because they jointly carried out a criminal venture and are both criminous. [Batt 1967, 612]
To apply the responsibility principle, the legal authorities must disallow the employment contract ("master-servant contract" was the older terminology) and legally construct a partnership "venture" where both are de facto and thus de jure responsible ("criminous"). The argument given about is that the facts of human nature do not change when people are not committing crimes. The same underlying facts about responsibility are there in normal work. Instead of then applying the fiction that responsible co-operation suddenly "fulfills" the employment contract, that contract for hiring people should be always disallowed regardless of whether the activity is criminous or not.[8] Responsible co-operation should always be legally constructed as a partnership with joint responsibility for the results. With the employment contract thus invalidated, people would always be hiring (or already owning) things—rather than the owners of things "hiring" or "employing" other people.[9]
The Democratic Theory Case for Workplace Democracy
Is Capitalism the Economic Correlate of Political Democracy?
The rights mythically superadded to capital were the rights to the (whole) product and the management rights. The property-theoretic case for workplace democracy was an argument that the whole product rights should be assigned to the legal party whose members were the people working in an enterprise, i.e., that the enterprise should be legally organized as a democratic firm. Now we give another approach to the same conclusion that focuses on the management rights.
Liberal capitalism likes to comfort itself with the view that the institution of hiring, employing, or renting human beings (i.e., the employer-employee or master-servant contract) is fully compatible with democracy. This comforting liberal view seems to be based on the massive misreading of intellectual history which sees democracy as being the only system based on the "consent of the governed" and that all non-democratic systems were based on coercion. Since the capitalist firm is also based on consent of the governed in the employment contract, capitalism supposedly shares the philosophical basis of democracy. This commonplace liberal view ignores the long and venerable tradition that bases non-democratic government foursquare on consent. That tradition run from antiquity through the unmistakably clear Thomas Hobbes down to today's unmistakably clear Robert Nozick. This contractarian tradition sees any settled state of government as being based on an implicit (and in some cases explicit) social contract. Non-democratic government was seen as being based on a social constitution or contract of subjugation (pactum subjectionis) wherein the citizens alienate and transfer their right of self-government to the sovereign. In a democratic constitution, by contrast, the citizens secure rather than alienate these rights; there is only a delegation, not a transfer, of decision-making to their representatives and governors. The basic difference between alienation and delegation is shown by the answer to the question of "In whose name does the government govern?" The Hobbesian Sovereign governs in his own name; the democratic governor governs only in the name of the governed.
Perhaps it was the ideological conflict with communism throughout most of the 20th century that lulled liberal democratic capitalism into the soothing simplicity that the issue was coercion versus consent so that capitalism and democracy came out on the same side of the issue. Yet a slightly closer look at the intellectual history of democratic and non-democratic thought shows that one must 'drill down' into the consent side of issue to discover the real issue between two fundamentally different types of contracts or constitutions: those that voluntarily alienate versus those that voluntarily only delegate the rights of self-governance. Perhaps the reason this is not ordinarily done is that the alarm bells in the orthodox mind go off. The employment contract falls on the wrong side of the divide. The employer is not the delegate of the employees; the employer does not manage in the name of the employees. Thus in spite of all the comforting free market rhetoric about consent, the employment contract turns out to be fundamentally different from the democratic constitution.
Sketch of Intellectual History of Non-democratic Liberalism
It will be useful to review the highlights of that intellectual history. The sovereignty of the Roman emperor was usually seen as being founded on a contract of rulership enacted by the Roman people. The Roman jurist Ulpian gave the classic and oft-quoted statement of this view in the Institutes of Justinian (Lib. I, Tit. II, 6):
Whatever has pleased the prince has the force of law, since the Roman people by the lex regia enacted concerning his imperium, have yielded up to him all their power and authority. [quoted in Corwin 1955, p. 4, or in Sabine 1958, p. 171]
The American constitutional scholar, Edward S. Corwin, noted the questions which would arise in the Middle Ages about the nature of this pact.
During the Middle Ages the question was much debated whether the lex regia effected an absolute alienation (translatio) of the legislative power to the Emperor, or was a revocable delegation (cessio). The champions of popular sovereignty ... took the latter view. [Corwin 1955, p. 4]
It is precisely this question of translatio or concessio —alienation or delegation of the right of government—which separates the alienable versus inalienable rights traditions of liberal thought.
As the idea of grounding rulership on land ownership receded in the Middle Ages, the idea of a contract of rulership became widespread.
Then, when the question about Ownership had been severed from that about Rulership, we may see coming to the front always more plainly the supposition of the State's origin in a Contract of Subjection made between People and Ruler. [Gierke 1958, p. 88]
The intent of this contractarian thought was at first not to attack undemocratic power but to found it on consent:
In contrast to theories which would insist more or less emphatically on the usurpatory and illegitimate origin of Temporal Lordship, there was developed a doctrine which taught that the State had a rightful beginning in a Contract of Subjection to which the People was party. [Gierke 1958, pp. 38-39]
In terms of the liberal "coercion or contract" dichotomy, this alienist natural rights tradition was grounded foursquare on contract.
Indeed that the legal title to all Rulership lies in the voluntary and contractual submission of the Ruled could therefore be propounded as a philosophic axiom. [Gierke 1958, pp. 39-40]
A state of government which had been settled for many years was ex post facto legitimated by the tacit consent of the people. In about 1310, according to Gierke,
Engelbert of Volkersdorf is the first to declare in a general way that all regna et principatus originated in a pactum subjectionis which satisfied a natural want and instinct. [Gierke 1958, p. 146]
William of Ockham (1290-1349) is sometimes cited as the first to expound the idea of consent-based legitimacy in The Dialogue (1343).
Ockham cites as one provision of natural law ... the requirement that rulers should be elected by consent — probably the first time in the history of political thought that governmental legitimacy was defined as derived from consent based on natural law. ... Ockham adds that subjects can relinquish or transfer to others their right of election (he cites the case of the Holy Roman Empire) ... . [Sigmund 1971, pp. 56-57]
The feudal relations between lords and vassals or serfs were sometimes seen as contractual. The vassals held a higher station than the serfs.
Actually only gentlemen could be vassals to a lord. The relation was marked by elaborate ceremonies at its beginning (homage) and was always regarded as a mutual relation of give and take, indeed, as a contractual relation. [Brinton 1950, pp. 211-212]
As an example of a feudal oath from around 920 AD, a man might say to his lord:
I will be to you faithful and true ... on condition that you keep me as I am willing to deserve, and all that fulfil that our agreement was, when I to you submitted and chose your will. [quoted in Barker 1962, p. ix]
But scholars disagree about the contractual aspects of medieval feudalism.
While slavery is widely accepted as being an involuntarily achieved status (although there were cases of voluntary entry ... in ancient and medieval Europe), other forms of what are sometimes called "forced labor" are the result of voluntary agreement. Recently economic historians have reopened the discussion of whether European serfdom represented a voluntary exchange -- protection for labor services -- or whether it was a form of forced labor imposed from above. [Engerman 1973, p. 44]
Hugo Grotius (1583-1645) was a pivotal figure in the development of natural rights political philosophy, but he also, in the alienable tradition, viewed man's natural right to liberty as a right which could be transferred with consent.
A man may by his own act make himself the slave of any one: as appears by the Hebrew and the Roman law. Why then may not a people do the same, so as to transfer the whole Right of governing it to one or more persons? [Grotius (orig. 1625), reprinted in Coker 1938, p. 414].
Grotius cites an example.
Nor is it difficult to conceive causes why a people may resign the whole power of its own government and transfer it to another; as, for example, if it be in great peril and cannot find a defender on other conditions; or if it be in want and cannot otherwise obtain sustenance. So the Campanians of old, driven by want, submitted themselves to the Romans; and some other peoples which wished to do so were not accepted. What then prevents a people from giving itself up to some very powerful man in the same manner? [Grotius (orig. 1625), reprinted in Coker 1938, p. 414]
Grotius was followed on the Continent by Samuel Puffendorf (1632-94), who, as Rousseau pointed out, continued the alienable natural rights tradition of treating liberty as a property right.
Puffendorf says that we may divest ourselves of our liberty in favour of other men, just as we transfer our property from one to another by contracts and agreements. [Rousseau 1973 (orig. 1755), second part]
Thomas Hobbes (1588-1679) made the best-known attempt to found an absolute monarchy or oligarchy on the consent of the governed. Without an overarching power to hold people in awe, life would be a constant war of all against all. To prevent this state of chaos and strife, men should join together and voluntarily transfer the right of self-government to a person or body of persons as an absolute sovereign. This pactum subjectionis would be a
covenant of every man with every man, in such manner as if every man should say to every man, I authorize and give up my right of governing myself to this man, or to this assembly of men, on this condition, that you give up your right to him and authorize all his actions in like manner. [Hobbes 1958 (Orig. 1651), p. 142].
With the success of the political democratic revolutions, this long and venerable non-democratic tradition of liberal thought did not die; it retreated to the private economic sector. There it has thrived ever since as liberal capitalist thought which condones the limited pactum subjectionis of the workplace, the employment contract.
The liberal tradition of allowing non-democratic forms of government based on the consent of the governed is brought up to date in the alienist libertarianism of Robert Nozick. The contract of subjection re-emerges from its economic habitat to enter the political sphere in Nozick's work since his ultra-capitalist approach to political theory is the marketplace writ large. Unlike Hobbes, Nozick does not espouse alienating the right of self-government to an absolute sovereign—but only that it should be permitted. Nozick's point is that the basic "framework should be fixed as voluntary" [Nozick 1974, p. 331]. An individual should be free to sell himself into slavery[10] or to forswear such contracts. People should be free to contract away the right of self-government to an authoritarian "dominant protective association" [p. 15] or to enter into democratic protective associations.
From the Employment Contract to a Democratic Constitution in the Workplace
We have seen a long history dating from antiquity where non-democratic government was seen as being based on a voluntary contract of subjugation. The citizen-subjects alienated and transferred their right of self-government to the sovereign who ruled in his own name. The employment contract is a contract of this sort. The employees alienate and transfer the right to manage their work to the employer. The employer does not exercise delegated power in the name of the employees; it is a contract of alienation and transfer, not delegation.
The democratic argument for workplace democracy argues that the employment contract should be converted from a contract of subjugation into a democratic constitution that delegates rather than alienates the rights of self-determination in the workplace. This conversion in the workplace would to some extent mimic the conversion from an autocracy or monarchy seen as based on an implied contract of subjugation into a political democracy based on a democratic constitution. In some countries, the conversion came by revolution and in others by gradual evolution.
How might this conversion take place? We start with a corporation A where the people who work in the company have an employment contract with the company. In terms of our previous discussion, "capital" (e.g., the collectivity of the shareholders) hires labor. We also saw that the same productive opportunity (abstractly defined) could be undertaken with the same people and resources but with the reversed contract between capital and labor. One way this might happen (involving large transaction costs) would be for the workers to form a new democratic corporation B with themselves as members and then for B to hire, rent, or lease the required assets of A. However, another way this might take place, with less transactions costs, would be to directly reconstitute A as a democratic corporation A* with all who work in the company as members and the shareholders as preferred stockholders or income bond-holders. Either way would eliminate the employment contract in favor of a democratic workplace constitution that would constitute the democratic company B or A*. Unless otherwise mentioned, we will henceforth think of the conversion of an employment contract into a democratic workplace constitution in the form of the direct reincorporation or rechartering of corporation A as A*.
This is the other approach, aside from employee ownership, to arrive at what we loosely called a "democratic worker-owned" firm. The employee ownership approach transfers ownership from the old shareholders to the employees (with the old shareholders' equity being replaced by creditors, namely the source of the buy-out finance). The workplace democracy approach changes ownership by the shareholders into membership by the workers (with the shareholders becoming a class of creditors).
We have seen practical ways of carrying out the employee ownership approach, e.g., a leveraged buy-out using an ESOP. What are the practical ways to carry out the conversion contemplated in the workplace democracy approach?
One partial conversion is used in German co-determination scheme [see Dore 2000]. The workers in an enterprise become a kind of junior partner with the shareholders and are represented on the supervisory board of the company. The workers also typically collectively bargain with the company so they might be seen as partial hybrid between a democratic members and wage employees. Experiments with various types of works councils are also taking place in other countries of the European Union.
Another type of conversion has taken place in the large Japanese firm. Here the conversion was effected not by a change in the explicit law but in the implicit contract and custom of the firm. The insiders are represented on the board through the presence of the senior and retired managers (although there is no formal machinery for these board members to be elected by, or held accountable to, the insiders).
Although there is some danger of oversimplification in making such a statement, the most direct description of this situation is that Japanese corporations 'are controlled by, and exist for, their employees'. Japanese corporations are thus united bodies of corporate employees. [Matsumoto 1991, p. 27]
On the basis of analyses made on control structures within Japanese corporations, Takanori Nishiyama claims that the Japanese economic system has already been transformed into a system that might called 'laborism', where corporations are under the control of workers, or, perhaps, supervisory workers. [Matsumoto 1991, p. 20]
The connection between board membership and representation of those having the functional role of being “in the firm as a community” (i.e., being a long-term worker in the enterprise) realizes part of the basic structure of the democratic firm [see Dore 1987, 2000 for the model of the Japanese firm as a community]. And just as the long-term workers are in effect redefined as the members of the community, so the shareholders become, in effect, creditors. The returns on the shares have more of the characteristics of debt or preferred stock [see also Gerlach 1989, p. 157; Matsumoto 1991, p. 6; Dore 1987, p. 114].
Against this pattern as it has developed in the West, the common stock shareholder of the Japanese company is more in the position of a preferred shareholder in a Western company. Having made an investment that is at risk, the shareholder is entitled to a return on that investment. Therefore dividends are paid, but not as a percent of earnings but as a percent of the par value of shares in the company. [Abegglen and Stalk 1985, p. 184]
How might this sort of transformation take place in the United States or the United Kingdom?
The Approach Via the Corporate Governance Problem
The corporate governance debate in the United States dates from the Adolf Berle and Gardiner Means' seminal 1932 book The Modern Corporation and Private Property. They argued that the mass stock market atomized the traditional notion of ownership combined with control. The far-flung shareholders still had "formal" ownership but the actual or effective control has passed into the hands of the top managers (who are only nominally the "agents" of the shareholders). The "problem" of corporate governance (CG) arises from this separation of ownership and control. The shareholders are so disparate that high transactions or collective action costs (called "agency costs") prevent them from coming together and actually making decisions as one group.
One approach to the CG problem is to redefine the "owners" of the company from being the shareholders to being a broader set of "stakeholders," e.g., workers, long-term customers, suppliers, and local residents. Unfortunately these suggestions are rarely if ever accompanied with any mechanism by which the managers would actually be accountable to the stakeholders. One sometimes has the suspicion that "stakeholder" governance ideas are being floated by managers who know that by being responsible to everyone, they will be accountable to no one.
Among all the groups of stakeholders, some writers have pointed that there is one group that is not far-flung and in fact do hold meetings—eight hours a day for five or so days a week. This stakeholder group not only can make decisions but have to if the work of the enterprise is to be done. Some writers in the stakeholder tradition have pointed out that this is the one stakeholder group that can have the organization and the information to hold management accountable. "The only cohesive, workable, and effective constituency within view is the corporation's work force." [Flynn 1973, 106] Indeed, as emphasized by Coase in his classical work on the nature of the firm, a firm represents a lower-cost solution of a coordinated action problem than coordination through the marketplace. Coase in effect answers the question: "Doesn't [employee ownership] just create a whole new set of agency costs?" [Minow quoted in Blair 1996, 66]. The coordination problem for effective governance by people who already act collectively together in the firm for eight or more hours a day is likely to be minuscule compared to the problem of joint action by far-flung external shareholders or stakeholders.
In this manner, the corporate governance debate can lead back to the idea of a democratic firm. In the Nader and Green book Corporate Power in America [1973], they suggest that Federal rechartering may be the way to carry out the democratization of companies either voluntarily or for all companies that satisfy a certain criterion (e.g., beyond a certain size of capital or workers).
On this approach, the democratic worker-owned firm is established not by transferring ownership from the shareholders to the workers but by replacing the employment contract with the membership relationship and by replacing the shareholder relationship with a variable income bondholding contract.
We have already noted that the development of political democracy could take place, as in England, not by quick revolution but by the gradual reinterpretation of the social contract from one of alienation to one of delegation.
How might the employee-to-member transformation take place? Let us first look at the transformation psychologically. Today, who are considered to be the members of a company? Go to a bookstore and pick up any book out of the management/business rack and see who is referred to as the "members" of the company. Or in the course of conversation, use the phrase "members of the company" and see how people interpret it. Or consider a standard managerial accounting textbook.
An organization can be defined as a group of people united together for some common purpose. A bank providing financial services is an organization, as is a university providing educational services, and the General Electric Company producing appliances and other products. An organization consists of people, not physical assets. Thus, a bank building is not an organization; rather, the organization consists of the people who work in the bank and who are bound together for the common purpose of providing financial services to a community. [Garrison 1979, 2]
Who are these people who make up the organization? In each case, the members or the people who are the organization are the people working in the company. Nevertheless for the strict legal point of view, the legal members of the corporation are the shareholders who trade in and out of the company stock by the hour if not by the minute. It is those shareholders who are invited to the "Annual Meeting" of the company each year, not the people who hold a meeting to conduct the business of the company every working day of the year.
Thus we see that just as one lie requires more lies to complete the picture, the fundamental fiction of the employment contract (the fictitious "transfer" of human action from one person to another) leads to another fiction: the fictional company consisting of the shareholders in contrast to the factual company consisting of the people working in it.
The same distinction between the de jure firm and the de facto or actual firm was pointed out in 1944 by Lord Eustace Percy.
Here is the most urgent challenge to political invention ever offered to the jurist and the statesman. The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise--the association of shareholders, creditors and directors--is incapable of production and is not expected by the law to perform these functions. We have to give law to the real association and withdraw meaningless privilege from the imaginary one. [quoted in Goyder 1961, 57]
The legal conversion of the association of workmen, managers, technicians and directors from being employees to being members is precisely the transformation that would "give law to the real association and withdraw meaningless privilege from the imaginary one."
We have noted that to some extent the psychological transformation has already taken place in the sense that employees are at least referred to as the "members" of the company. But it would be hard to say that this new psychology has really taken deep root. Employees still to a large extent think of themselves as "Us" and the company as "Them" without internalizing the mentality that they are the company in the de facto sense.
In the nineteenth century, the labor movement aimed to abolish the wage relationship and to establish the "cooperative commonwealth" [see Grob 1961, Lasch 1991, Grossman 1945]. During the twentieth century, the labor movement was turned into the trade union movement that aimed to get "more, more, more" within the wage relationship through collective bargaining. The transformation from employees into members would hark back to the older goal of legally abolishing the wage relationship and becoming the company.
Thus one approach to the employee-to-member transformation would be through a reconstituted labor movement. Perhaps associational unionism is a step in that direction. In any case, this would, to say the least, require a mental retooling of the present-day union movement. It would mean, for example, arguing with management not about what is best for the employees as wage-earners but about what is best for the company. For example, the Engineering Union at Boeing might criticize the decision to move the headquarters to Texas not because it might hurt the employees but because it would be bad for the company as a whole. They would then be taking the company's side against the management—not the usual perspective in collective bargaining. In general the transformation would mean expanding the potential membership in the union to include the middle managers and potentially everyone in the company. It would mean, as in Japan, taking the notion of a company union seriously. And it would mean somehow going outside the golden cage of the National Labor Relations Act which presupposes the employment relationship. All of that is a rather tall order, particularly in a country with a labor movement in long-term secular decline.
Thus I reluctantly think that the original labor movement goals of abolishing the wage system and establishing the "cooperative commonwealth" must be approached through quite different means appropriate for our current historical situation. Here I must clearly enter the realm of speculation. One analogy that might be explored is with the development of political democracy. The active class was neither the lower classes nor the rulers but the middle class. In a similar manner, the most likely group to lead a movement for corporate democracy might be neither the workers on the bottom nor the corporate mandarins at the top but the broad group of white-collar and middle managers. Perhaps the question is who identifies with the company as a long-term entity or organization and thus would be willing to participate in an effort to become the legal members of the company? The answer would seem to be the broad middle range of blue and white collar workers—particularly those who have developed firm-specific skills and knowledge. The first step in any social movement to redefine the corporation with the insiders as the legal members is to build up the explicit consciousness that they are the de facto members.
The increasing power of the stock market to influence managers through their stock options and the general growth of globalization create fertile opportunities for the "middle class" in a company to oppose the greed and lack of long-term commitment on the part of the option-chasing top managers. They could fuel a drive to address the corporate governance and corporate irresponsibility problems by converting the company into a democratic firm.
Today the corporate governance debate is stuck on a double deception. The managers and the shareholders in the large companies both agree to the theory that the shareholders are the "owners" of the company. The shareholders support this theory because they dream that they can thereby best exercise control and extract value from the company. The managers support the theory because they know the effective impossibility of the disparate shareholders actually exercising ownership rights. By thus supporting this deception, the managers can in fact rule without be actually accountable to anyone but themselves. Or at least that is the position of many managers in the large companies. Yet there is also an older ethic of management that thinks first of the company, the company as the collective body of the present and future members. The natural constituency for a drive for corporate democracy would be the workers (white and blue collar), the middle managers, and the top managers who identify with the company.
It is difficult to predict how a movement for corporate democracy might develop. It may well develop along some new American lines instead of following the German system of co-determination or the Japanese form of the community-company. But no matter how it might develop, it will never get started until these issues are formulated in fresh terms and are clearly and forcefully aired and discussed not only in intellectual circles but by the general public. The re-examination of the capital ownership and workplace democracy approaches using the notion of residual claimancy (whole product appropriation) is intended as a contribution to at least the intellectual part of that discussion.
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