Proposed Op-Ed Piece for COG Members

Creating an Equitable Capitalism

Capitalism, it seems, has triumphed. The world worries today about ethnic cleansing, religious fanaticism, persistent racism, and other ideological perversions, but not about the struggle between communism and capitalism. That defining! divide for half a century is gone. Capitalism has won. It has won because it demonstrated that it simply works better at creating more wealth for more people. Communism was better at ensuring equality, but it was largely an equality of poverty; even the poor in most capitalist countries were better off than most of the population in most communist countries.

Capitalism’s success, however, has not masked its failures. The essence of capitalism is the ability to attain wealth in two ways, through freely offered and contracted labor and through the ownership of assets, particularly assets that themselves produce wealth. Unfortunately, very few people in capitalist countries are capitalists, and most of those who are only owners in a trivial sense.

In the U.S., for instance, according to a 1995 study by Andrew Poterba of M.I.T. and Andrew Samwick of Dartmouth, 71% of the populations owned less than $2,000 in stocks in any form -- mutual funds, 401(k) plans, direct ownership, etc. As Jeff Gates, author of The Ownership Solution points out, 40% of the gain in the stock market in the last decade was captured by just 1% of the population. From 1973 through 1999, median real wages increased only a few percent, but the Dow Jones Average boomed from under 1,000 to close to 11,000. The small minority of owners of corporate assets thus gained mightily, while those who worked for them ran in place. As Gates shows, the data worldwide are even more shocking. He quotes the United Nations Development Program as concluding that the world is heading for “grotesque inequalities.” The top 20% of the world’s population holds 83% of its wealth. Assets held by the world’s 358 billionaires in 1996 exceeded the combined income of 45% of the world’s population. What the West spends on cosmetics and pet food alone could feed the rest of world and provide for basic health care to boot.

Defenders of the status quo say these numbers are unfortunate, but inevitable. Capitalism relies on a system of variable incentives that provide large rewards to those who take risks, create new products and services, or are workers wh!o have something special to offer to their employers. Without these large variations in rewards, people would not be motivated to do the things that make capitalism successful. And while capitalism is inequitable, those on the bottom and in the middle still do better than most people in most other places.

Yet more and more, even staunch defenders of capitalism worry that the inequities will make capitalism an unsustainable system. Business Week editorialized that unless people perceive the system to be fair, they will vote to weaken it -- or rebel outright. George Soros, one of the world’s largest financial traders, worries that unfettered capitalism can create such inequities that it is morally insupportable. Joseph Stiglitz, the chief economist of the World Bank, cites studies showing that large-scale inequality in wealth slows economic development.

For pragmatic or philosophical reasons, therefore, both staunch defenders of capitalism as well as their critics have long sought to find ways to make capitalism more productive for more people. The most common approach has been to use the tax system to fund programs to bolster the economic security of the non-wealthy. Government-funded retirement systems, public health insurance plans, subsidized higher education, welfare, mortgage and housing assistance, and other entitlement programs have broad public support and are almost universal elements of advanced capitalist countries. Liberals and conservatives argue about their extent, not their existence.

These efforts have made things better for millions of people, but they have done little to allow most people to develop their own piece of the capitalist pie. People could acquire ownership by saving and investing, of course, but with wage incomes stagnant, and perceived current material needs always rising, this has proven impractical. Governments could use their retirement systems to invest in equity markets for employees, but this controversial approach raises many thorny issues and only provides for income in the very long-term.

There is, fortunately, an alternative. Millions of employees around the world, especially in the U.S., are becoming equity owners at work. Whether through employee stock ownership plans (ESOPs) in the U.S. or England, broadly distributed stock options (especially in the U.S., but in many multinational companies and more and more countries), or worker cooperatives, employees are increasingly getting ownership as part of their compensation at work. In most of these plans, employees do not give up wages to become owners. In fact, a major U.S. study shows that ESOP participants actually have 5% to 12% higher wages and three times the retirement assets of comparable non-ESOP participants in other companies.

Companies are sharing ownership for several reasons. Some countries, especially the U.S. and England, provide significant corporate tax benefits to do so. Tight labor markets in some countries have made offering ownership increasingly important to attract and retain good people. A change in corporate cultures to a more participative management style, one which demands that employees take on more business decision making responsibility, has made sharing ownership a logical reward for changed behaviors. Finally, corporate assets are increasingly composed of the knowledge workers have; in fact, according to Business Ethics magazine, only 25% of the assets of the S&P 500 companies are now in the form of physical capital.

When companies do share ownership with employees, and do give them a greater role in day-to-day work decisions, their performance improves substantially. Several U.S. studies show these companies grow 6% to 11% per year faster than would have been expected, for instance. Share prices of these companies outpace the general market as well. In other words, everyone wins. Employees acquire an equity stake, companies make more money, shareholders see their stock go up, and the government gets more taxes. It’s no wonder that Tony Blair has made wider share ownership a top priority of his government.

There are few policy changes that have the kind of broad political appeal of employee ownership. It has been endorsed by both conservative and liberal leaders, by labor and business. But the issue has not risen to the top of many political agendas. There are many ways to encourage employee ownership; all that is lacking is more political will. For more information and an ongoing internet discussion on related policies contact cog@cog.kent.edu.