Ray Carey. Democratic Capitalism. AuthorHouse, Bloomington, Indiana,
2004. xviii + 542 pp.; Bibliography; Index.
This is an unusual book, an unusually important and helpful book. It is
remarkable not only for the theme, but also for the breadth of coverage and the
authoritative grasp with which the topics are treated.
The essence of Democratic Capitalism is to turn on the productive capacities
of people by giving them a sense of purpose and a confident stake in the
collective enterprise. Ray Carey knows how to do it, and he has the track record
to prove it. Furthermore, he can point to important examples of where it is
happening. (Carey cites Wal-Mart, but just last week an article about Costco
shows that some success stories make Wal-Mart look like an exploiter.) He
believes it is a natural if not inevitable evolution of the social order,
following on the 17th century recognition that technological progress
can be deliberate, and the application of reason to the social sphere in the
political revolutions of the Enlightenment era that ensued in the
18th. The template for governance of social progress became available
through combining Adam Smith’s proposal of economic freedom through growing
capitalism and Jefferson’s ideal of political freedom through growing democracy.
The commercial application of this ideology, he says, "has resulted and
continues to result in democratic capitalism." The adversary of the project from
its beginning has been the opportunistic aspirations of financiers, whose
positions had already become entrenched through the practices and ideology of
the mercantilist era.
Without mentioning it or perhaps even being conscious of it, Carey reaffirms
the position of many industrialists in the 1930s who banded together with many
cooperative bankers in a campaign for "Stable Money". Money should be a neutral
medium of exchange, a cooperative facilitator of industry rather than an
instrument for exploiting its productive efforts parasitically. Carey cites Adam
Smith on the point that money should be ample, low-cost, non-volatile and
patient, and notes further that Smith warned against speculators who would
deflect capital away from growth and make money scarce, high-cost, volatile and
impatient. The reforms that were imposed on the financial interest in the
thirties are acknowledged here as a critical element in the ongoing rivalry
between democratic and plutocratic capitalism, and their dismantlement in the
last quarter century is a main theme of the book.
Carey believes not only that Democratic Capitalism is superior, but also that
there is a degree of economic determinism in it, that it is an inevitable
evolutionary step. He finds this in the Information Age technology and in the
kind of work environment that its successful exploitation and development
entails. Capitalism failed to reach its full potential in the Industrial Era, he
says, because capitalists have invested mainly in physical assets and not in
people. "In the Information Age, however, investment in people is no longer
merely a choice but a necessity, for success is dependent on the release of
cognitive power in motivated, involved, contributing and sharing associates."
Information Age industries require that democracy and capitalism be synergistic.
As Peter Drucker expressed it, "If the feudal knight was the clearest embodiment
of society in the early Middle Ages, and the bourgeois under capitalism, the
educated person will represent society in the post-capitalist society in which
knowledge has become the central resource." "Competitive demands in the
Information Age for involved, educated and contributing associates will finally
result in their demanding full partnership and a full share."
This perspective is what sets Carey apart and beyond campaigners for the
ideas of both C.H. Douglas and Louis Kelso. It reflects his experience of 18
years as successful CEO of ADT, Inc., the largest provider of central station
alarm services, and before that a career spent entirely in companies specialized
to leading edge technology. He knows that cooperative people power is what
builds wealth, not only in high-tech but in every kind of enterprise, before as
well as after the information revolution. By contrast, the concept of Douglas in
the early 20th century was that machines were progressively replacing
human inputs in productive activities, and that they would continue to do so
until all work was done by automated machines. The same viewpoint later inspired
Louis Kelso to focus on how displaced workers could own a share in the machine.
As an investment banker, Carey notes, Kelso thought in terms of leveraged
buy-outs and so designed a plan to enable employees to borrow money to purchase
ownership in their company, via amendments to tax laws and financial institution
regulations. Through personal acquaintance, his ideas came to the attention of
Mortimer Adler, who offered to co-author The Capitalist Manifesto (1957).
Their exposition eventually captured the attention of Senator Russell Long, who,
says Carey, "became evangelistic about employee stock ownership". Long sponsored
initiatives in Congress for tax benefits to Employee Stock Ownership Plans and
for banks that lend to ESOPs (1975).
Although Carey acknowledges ESOPs as one of the instruments by which workers
can become stakeholders, his formula for democratic capitalism is in another
respect at the far opposite end of the spectrum from a notion that followers of
Kelso insist upon. In years following the collaboration with Adler, Kelso began
to imagine himself as an economic theorist. He hardened his belief in the power
of embodied technology into the notion that physical capital operates
independently of human input and then, without bothering to do the requisite
reading, began to claim that traditional economics paid attention only to labor
as a factor of production. Thus he produced Two-Factor Theory in 1967 to
rectify the "mistake" and by the time of his death had persuaded some of his
intimate admirers that he had invented a completely innovative economic theory
that he chose to call Binary Economics. These followers have carried the
"independence" of capital to an extreme in producing a book that only gets round
to explaining the techniques for applying Kelso’s ownership scheme after a long
and quirky exposition of how tools do the real work, even if a human is holding
the shovel. In Carey’s analysis, by contrast, the human contribution becomes
even more important as the sophistication of the machine increases.
Douglas’ followers persist in a variation on this somewhat archaic notion,
insisting on the inevitable and progressive displacement of labor from
productive processes. Their blind spot is the notion that "work" consists of
moving a mass through a distance and so lump all the other activities it takes
to keep a society functioning as "leisure" occupations for which no payment need
be made because distribution of income will be taken care of by "dividends" from
the common endowment of accumulated physical, social and intellectual capital.
The Douglas vision, and to a lesser degree that of Kelso, share a feature of
Thomas More’s Utopia, that once people have fulfilled their daily or
weekly obligation for work in the production of necessaries, they will be
"anxiously engaged in a variety of good causes and bring to pass much
‘righteousness’ of their own free will and choice". Possibly the most frequent
response of audiences introduced to either the Douglas or Kelso ideas is
skepticism over the belief that once manual labor is no longer necessary,
unorganized leisure would get all of the world’s sophisticated work done. Carey
does not even entertain such a notion, for he recognizes that that other work
includes all kinds of research, education, entertainment, health promotion and
medical care, architecture and urban design, engineering–in fact most of the
jobs which provide the incomes for most occupants of industrialized countries.
Virtually all of the "services sector". Furthermore, even in industries that
still require substantial input of human motive power, construction for example,
many employees are engaged with computers and specialized software to keep the
projects organized. While there may still be an argument for Douglas’ specific
remedies, based on his dynamic analysis of payments flows, Carey’s analysis of
human motivations and interactions seems better suited to quieting the
reservations that are commonly expressed to proposals for income that is
separate from payment for direct labor.
Carey provides a list of ways that wage earners can become worker-owners,
some of which like the ESOP are programs specific to U.S. regulations. Among
them, however, are some generic methods, including company pension plans, stock
grants, stock options and stock purchase. The latter, when combined with a
scheme for profit sharing based on company performance improvement, is Carey’s
personal favorite and the one he implemented as a CEO. It is better than a
simple company match of payroll deduction purchases because it is combined with
a motivation to make the company more successful. The worst of the methods is
stock options. The rationale is worth quoting in full:
QUOTE
Stock options are a counterproductive compensation device at all
levels of corporations. Employees ought never to be financially destroyed by the
downside of any corporation compensation plan [as many have been, in bear
markets]. At the executive level, stock options became the coupling device with
Wall Street that motivates executives to go for extremes for short-term earnings
that rain money on all of the deal-makers but that leave the downsized parched
and dry. Stock options helped create the environment in which executives faked
profit improvement and disgraced the word "capitalism."
ENDQUOTE
By contrast, when employees are motivated by opportunity to share in company
profits, when their contributions of innovative effort are recognized and
rewarded, and when they feel the effects in their pay envelopes, they develop
the attitudes of ownership, responsibility and (consumer) sovereignty that are
the elements of a true democracy. They learn about democracy in the
micro-climate of the enterprise, preparing them to demand and participate in
political democracy at the state level. Carey cites Singapore as a primary
example, where the burgeoning economy even under an authoritarian government has
brought greater political freedom in its tail. (Similar stirrings seem to be
afoot even in China among the growing entrepreneurial class.)
That political democracy follows from economic democracy is a major theme in
Democratic Capitalism. It is a lesson that is repeatedly discovered by
successful industrialists, says Carey, and is a concept that should be
recognized in business schools but so far has not been. Thus part of the blame
for the hostile, adversarial relation of workers to owners (managers and
capitalists) in the Industrial era belongs to ideologists who tried to put the
cart before the horse by introducing political freedom and democratic control
among peoples who didn’t have the adequate preparation that comes from
cooperative effort in smaller scale undertakings. He credits Mortimer Adler, in
his collaboration with Louis Kelso, for having "discovered what the intellectual
community has been missing for too long... .The ‘thinkers,’ the intellectual
community, have concentrated on changing the world through the political
structure and the culture instead of discovering the superior economic system
and helping align the political structure and culture in its support."
A long central chapter on "The Economic Logic..." focuses on the
contributions of Adam Smith, J.S. Mill and Karl Marx as the trio of thinkers who
laid out the key concepts of a democratic capitalism. Smith is credited, as
noted already, for recognizing that a constraint on the financial interests was
necessary to the flowering of his "invisible hand", and both Mill and Marx for
recognizing that the failure of capitalism lay in insufficient purchasing power
in the hands of worker/consumers. Mill’s evolutionary solution was job security,
worker ownership and profit sharing, but Marx, in his belief that labor would
continue to be displaced by the capitalists’ technology and its wage to be
continually suppressed, opted for revolution. His followers "inherited the
intellectual tradition of loving the state and distrusting commerce." "Adler
apparently did not connect Kelso’s manifesto with Marx’s, so did not propose a
more careful examination by the intellectual community of...Marx’s signature
concept that social progress depends on movement to the superior economic
system."
The adversary of this democratic vision of capitalism is a parasitical
financial behemoth, which has been a threat to it since the dawn of industrial
development in the 17th century and which vaulted into complete
dominance as "ultra-capitalism" in the past three decades. Business schools have
failed to see this, and schools of economics have been its patsies. Almost half
of the book is devoted to description and analysis of ultra-capitalism, its
origins, tactics and consequences. A full chapter dramatizes its parasitical and
often irresistible threat even to companies that have built success on the
principles of democratic capitalism. Carey brings the campaign literature of
money reform up to date with a carefully detailed exposition that explains how
the financial interests fought back from the reforms of the 1930s to its current
unregulated dominance over governments as well as business, linking it clearly
to abuses such as outrageously excessive "compensation" of CEOs, fraudulent
financial reporting, incompetent and venal auditors and spectacular corporate
meltdowns of recent years.
So, although Carey makes a case in the first half of the book for democratic
capitalism as an evolutionary social development due to the exigencies of
exploiting technological progress, he comes back at the end to essentially the
same conclusion as Douglas: the vision will be constrained until the parasitical
financial adversary is defeated, and that will take an informed as well as an
outraged (or more likely desperate) citizenry. Having by this time read a
substantial amount of the money reform literature of the 1930s and ‘40s (see
July ER and the current review of Caldwell), I can affirm that Carey’s
treatment is comprehensive, advanced and novel. I recommend it highly to readers
of ER as a handbook for elucidating and summarizing most of the
principles that have been developed in these pages by Wm. Krehm and his
colleagues. It is available in paperback as well as hard cover (Amazon), and may
be had for free download at
Keith Wilde