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Who Owns Capital?
December 1, 1998
With Responses From
Dec 1, 1998
13 Min read time
Gates has put “capital” back on the map.
Jeff Gates's "Ownership Solution"1 is important, but in ways I think he may not entirely recognize. His work is likely to be judged one of the first serious post-Cold War efforts to put the problem of "capital" back on the map in a manner relevant to ordinary citizens. This is partly because, having served as counsel to the Senate Finance Committee, Gates knows a great deal about how capital really gets allocated via the back doors of the tax system; partly because Gates is a very energetic promoter of ideas; and partly because as the US welfare state continues to decay the search for alternative sources of income for non-middle-class citizens must grow. Mostly, however, it is because there is now enough "on-the-ground" experience with institutional alternatives to both traditional entrepreneurial and corporate capitalism to begin to talk (however tentatively) about "something different." Whether that talk gets beyond the tentative may well be the most important question of the new century.
Gates reminds us that wealth is far more concentrated than income: the net worth of the top one percent of American households exceeds that of the bottom 90 percent taken together. Moreover, there are now more workers involved in some form of worker ownership than there are members of unions in the private sector, and the former are increasing while the latter are decreasing, both in numbers and as a percentage of the labor force. Roughly 11,000 companies are currently involved-mostly medium-sized firms, but some as large as United Airlines.
I say some form of worker ownership, as most "worker-owners" are participants in ESOPs (Employee Stock Ownership Plans), and in practice most of these are legal mechanisms that help supplement retirement pensions through ownership of stock in the worker's company. They are growing because of laws Gates helped write. These laws both allow corporations to gain tax benefits by making financial contributions which help build employee pension fund stock ownership, and offer other tax benefits to retiring owners of closely held firms if they sell 30 percent of the firm to their workers. As a consequence-and however one judges the costs and benefits-ESOPs give workers a capital ownership position.
Most ESOPs (and most workers) stop there, with a tax mechanism that helps both the company and the employees. An interesting question, however, is what happens as the ESOP (and thus the workers) accumulates more and more of the company's stock. At some point and in some cases, the employees realize that they own the company, or at least have a controlling or majority interest. Then different possibilities can occur: demands for greater voice, increased participation, etc. Not surprisingly, most studies indicate that this also improves productivity.2 (Note, too, that majority ownership-as some far-sighted union leaders already understand-could well present openings for future organizing which might define a round of new, more important democratizing demands.)
In his article Gates suggests several other ways to make "owners" of everyone, but in the real world the main concern has so far been to increase incentives to corporations to help build an ownership stake among their own employees. Make no mistake about it: so far ESOPs are both the heart of the matter and the center of the action. What are the implications? One way to think about the strategy is to consider two quite fundamental long-term questions. First, suppose the trajectory of American development were actually to follow the slow and steadily expanding current evolutionary path it is on (or that the pace were increased through new incentives)3 so that firms became increasingly owned by the people who work in them; would this produce greater equality? And second, what kind of political-economic "system" would result?
The answer to the first question is not simple. Although giving workers a stake in ownership will increase the income and wealth of those involved as compared with others in the society who do not own stock in the firms in which they work, recent studies of what actually happens within the firm show that ESOPs produce more, not less, inequality. This follows from the way pension contributions and rights are related to income: managers and others with higher wages and salaries tend to build up a greater share of ESOP stock ownership than those further down the scale.4
If this is so, a society which fully achieved the vision implicit in Gates's argument might slightly dilute the ownership of tiny elites at the very top, but in general it would be even more unequal among the vast majority than our own society, for two reasons: One, since stock ownership would improve the overall income-wealth position of those who participate, it would elevate those who work in firms above those who do not work because of age, illness, unemployment, or any other reason to an even greater extent than now; and two, as indicated, it would increase inequality among those who work. Furthermore, consider the difference between garbage workers who own a firm in Appalachia and oil workers who own one in Texas as petroleum becomes more and more scarce in the new century: the latter-and indeed all workers who own firms favored by resource shortages, technological change, trade flows, or pure luck-will also be elevated above the rest of society.
Such somewhat unexpected results could in theory be altered by mechanisms which redistribute resources either within the firm or external to it, but all such mechanisms come up against standard and commonly intractable political-economic difficulties-namely, those who have greater resources do not wish to yield them (and in large part because they have greater resources they also commonly have sufficient power to resist attempts to require them to yield.) We are back to a very traditional problem.5
Consider now the larger trajectory which a fully-developed political- economic system along the lines of Gates's proposal would suggest. The concept of worker-ownership of the means of production, however structured, basically returns us to the classical proposals of, on the one hand, guild socialists, and on the other various forms of syndicalist and anarcho-syndicalist theory. It also returns us to the classical critiques of these political-economic "system models": To the extent-and to the degree-that political power echoes or mirrors underlying economic institutional structures (especially ownership of capital), worker-ownership systems privilege sectoral and institutional interests as against the community as a whole. They also tend to privilege the market. Although thorny public goods problems obviously arise in any attempt to define the interests of "the community as a whole," the basic issue comes into clear focus when one asks whether a worker-owned chemical company under the competitive pressures of the market would have a significantly greater incentive to reduce the flow of toxic pollutants to the local river than a privately owned firm. The answer, unfortunately, is that market pressures force an externalization of costs in both cases, and although plausibly the worker-owned firm might develop a somewhat broader concern for the community in which the company (and the families of the workers) make their homes, competitive pressures to reduce costs or go out of business are likely to dominate in both cases. (Only a firm owned by the whole community would be in position to directly confront-hence, "internalize"-the problem so as to make a clear choice between whether, for instance, to maintain competitive position by reducing salaries and profits to pay the costs of reducing toxic wastes, or accept the poisoning of its own environment.)
The classical criticisms of "worker-ownership" models also come into focus when one asks whether worker control of the police (by the police-workers) would serve the community at large well; or worker control of schools by the teachers, etc. State and communitarian socialists, as well as many democratic theorists, have elaborated the differences between sectoral and community-wide interests-and also the power politics associated with all schemes which yield too much control to "workers." Again, proposals to regulate worker-owned firms or to establish a planning framework to achieve broader goals also quickly run into the underlying power problem: such firms, like current corporations, also build up political power relationships as they confront the state, and do not automatically (to say the least!) allow a general community-benefiting resolution of the underlying difficulties. Empirical studies by Edward Greenberg have shown that the positive values inculcated in worker-owned plywood firms in the Northwest did not extend very far (or in most areas) beyond the firm; nor is there much evidence that the materialism of the workers was altered.6 (We must note, however, that the plywood firms were operating in a capitalist environment, and it is not surprising they could not on their own reverse the impact of the surrounding culture.) We may also note that even the best ESOPs are hardly one-person, one-vote systems; voting-when it occurs-is based on the number of shares one owns, hence is even more biased against true democratic processes.
Do not misunderstand: I favor the further expansion of various forms of worker-ownership (and have been personally involved in some of the most important modern battles-including the late 1970s steelworker efforts at Youngstown Sheet & Tube which helped put such ideas on the map). I also favor the development and critical evaluation of ESOPs as a step in this direction; and I favor incipient proposals for related union-backed capital investment banks following Canadian precedents. The larger and more fundamental question, however, is where even a fully developed worker-ownership vision might lead, and what other contributions efforts such as those urged by Gates might make along a trajectory of historical development. Progressives need to get much tougher with themselves about assessing the structural implications of even the more democratic forms of such proposals-even now, in a dismal time of low expectations and seemingly low possibilities. Among some, "worker-ownership" ideas often produce uncritical knee-jerk affirmation. We need to ask instead whether these ideas will actually get us where we want to go.7
Gates's strategy is to sell his proposals to one and all-left, right, and center-promising to make capitalists out of everyone. Though I think the overall strategy mistaken, worker-ownership on its own has considerable political appeal. Moreover, the primary ESOP rationale, like that of traditional socialism, is that the ownership of capital is important-indeed, an absolutely central issue in any society. And all worker-ownership schemes demonstrate, quite simply, that models other than the traditional trio of entrepreneur, corporation and state are feasible. They implicitly challenge the idea that only one way of doing business is possible, and they open the door to further discussions of the alternatives.
Indeed, worker-ownership is not the only non-traditional institutional form of capital ownership currently being experimented with among ordinary citizens even now. There are some 2,500-3,000 neighborhood corporations (CDCs) operating in communities around the nation, and an increasing number of these are moving beyond traditional neighborhood housing production and ownership to the development of stores, light industry, and various service businesses. Many other non-profit community-based organizations are also beginning to own capital and capture profits on behalf of quasi-public goals as other sources of funding dry up. There are also an increasing number of small scale municipal enterprises involved in everything from land development to cable television. So too, local land trusts teach practical on-the-ground lessons concerning alternative ways to answer the question of who owns, or might own, or ultimately should own, capital.8
Although he does not mention any of these, Gates does discuss possible extensions of the ESOP idea to include different communities, consumers, and other constituencies-so long as the core mechanism involves individual stock ownership rather than community, public, or quasi-public ownership. This discussion, however, is somewhat misleading: at several points Gates writes as if these "ownership" models are on a roughly equal plain, although in reality they all are far less developed both technically and politically than ESOPs. He also mentions the Alaska Permanent Fund, through which all citizens of the state have a direct stake in earnings derived from oil production (about $1,000 a year currently-as a matter of right to each woman, man, and child). In general, however, Gates shies away from strategies which extend the concept of capital ownership by directly or indirectly socializing and distributing the profits of most or all corporations.
This concept-which involves a right to a significant share of all dividend flows for all citizens-takes us beyond the confines of privileging the workers involved in any one firm, and it is perhaps understandable (even, tactically speaking, reasonable) for Gates to avoid this controversial terrain. On the other hand, I think it likely that the question of "who should own capital," once posed, may ultimately move to this fundamental question-and also to renewed interest in local (and possibly larger-scale) public ownership: The latter trajectory, as noted, is already under way at the local municipal level, and the painful logic of a decaying welfare state points to capital and asset ownership as the only alternative way (if there is any way at all!) to address serious issues of redistribution. Indeed, the handwriting is already on the wall-and not simply among progressives. The foundations of the current ESOP laws are, in fact, easily traced to the late Louis Kelso, a creative San Francisco corporate lawyer who long ago proposed that income from new capital formation ought rightly to flow in significant part to all citizens (and who developed schemes to achieve this goal). A similar basic argument can be found in John Roemer's proposal for "coupon socialism," and in the work of the late Cambridge economist and Nobel laureate James Meade; still other writers-Robert Kuttner and Bruce Ackerman, for instance-have recently proposed various forms and uses of capital grants. (It would not be surprising if conservatives who urge a "privatization" of Social Security on the grounds that the ownership of capital is-or should be-important to achieve public purposes may one day see this idea come back to haunt them!)
We are entering what I believe may be a painful and dark period of American history. As inequality grows, and when the next recession hits, we could well see great strife, violence, and repression. The old structures simply do not work to address many of our problems. The sooner we turn our attention to questions of distribution and power related to who owns the nation's resources, the better. I believe that Jeff Gates's work, even allowing for all the difficulties I have cited, is an important contribution to that end. And the slow but steady growth of even flawed real world alternatives-on the ground, among ordinary people-is a necessary precondition to opening the key questions beyond the ranks of academic theorists as we move into the formative years of the new century.
1Also see his recent book by the same title: The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century, with a foreword by Stephan Schmidheiny, (Reading, Mass.: Addison-Wesley, 1998).
2For a review of recent studies, see "Worker Participation and Productivity In Labor-Managed and Participatory Capitalist Firms: A Meta-Analysis," Industrial and Labor Relations Review 49, no. 1 (October 1995).
3A number of other proposals have also been offered to facilitate worker-ownership. See, for instance, Joseph R. Blasi, Employee Ownership: Revolution or Ripoff? (New York: Harper & Row, 1988), pp. 239-51. For a different approach, see Samuel Bowles and Herbert Gintis, "Efficient Redistribution: New Rules for Markets, States, and Communities," Politics & Society 24, no. 4 (December 1996): 307-42.
4See the important recent study by Peter A. Kardas, Adria L. Scharf, and Jim Keogh, "Wealth and Income Consequences of Employee Ownership: A Comparative Study from Washington State," Washington State Community, Trade and Economic Development, November 1998.
5For a rigorous and systematic new analysis of this problem, see Francisco Rodriguez, Essays on Redistribution, Development, and the State, Ph.D. Dissertation, Harvard University, 1998. See also his "Inequality, Redistribution and Rent-Seeking" (mimeo).
6See Edward Greenberg, Workplace Democracy: The Political Effects of Participation (Ithaca: Cornell University Press, 1986).
7For a compilation of recent answers to this question, see Thad Williamson, What Comes Next: A Preliminary Bibliography of Recent Proposals for a Different Society, with Critical Annotations, (185 pp., $15). Available from the National Center
8See Ted Howard, The Democratization of Capital: The Explosion in Citizen-Based Asset-Building Institutions, from the National Center for Economic and Security Alternatives (forthcoming spring 1999).
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