Economic Democracy, Human Rental, and Alternative Development

David Ellerman works in disparate fields, from economics and political economy, to social theory and philosophy, to mathematical logic and quantum mechanics. From 1992 to 2003, he worked, at the World Bank, as economic advisor to the Chief Economist (Joseph Stiglitz and Nicholas Stern). He has published numerous articles and books, among which The Democratic Worker-Owned Firm (1990), Property and Contract in Economics: The Case for Economic Democracy (1992), and Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance (2005). He is currently visiting scholar at the University of California, Riverside and the University of Ljubljana, Slovenia.

Editor’s note: to facilitate the reading and exploration of ideas, this conversation is divided in three parts.

Part I: The Democratic Firm

Hi David, it is a pleasure to host you for a talk in this convivial parlour. The first major topic I would like to touch upon during our conversation is democratic firms; a topic you have extensively dealt with and are an ardent proponent of. As an introductory question, how do the institutional design and governance arrangements of a democratic firm look like?

A democratic firm is a private democratic organization where the members or ‘citizens’ are the people working in the firm. A democratic firm—like, say, a democratic city—does not have owners, but has citizens. The members of the firm elect the board of directors who appoint the managers. The members may also supply capital to the firm in the form of a membership fee and retained earnings kept track of in an internal capital account, but their membership rights (i.e. voting rights and share of net income) are independent of the balance ‘in’ their internal capital accounts. These capital accounts are essentially a subordinate form of debt of the company to the members to be paid out over the years. There is no equity capital in a democratic firm any more than in a democratic municipality.

We often hear about the term “employee ownership”, but you just argued that ‘a democratic firm does not have owners, but has citizens’. What’s the point here?

Much of the literature is formulated in terms of “employee ownership”, but that phrase is a double concession to conventional usage, since the members are not “owners”—in the sense of being able to “sell” the firm—and they are not employees, in the sense that the members are jointly working for themselves and jointly appropriating the positive and negative fruits of their labor (the output-assets and input-liabilities in more technical terms).

Democratic firms are operating as private organizations in a market economy. They should not be confused with the socialist narratives of “bringing democracy to the workplace” which refer to the government as a political democracy extending ownership and control to firms.

In relation to capital, you say that there is ‘no equity capital in a democratic firm any more than in a democratic municipality’. Does it mean that there is no space for external investors (i.e. non-members) in a democratic firm?

A democratic firm, like a democratic municipality, has debt capital (but no equity capital), namely, external suppliers of capital in the form of bondholders or debenture-holders.

Alright, so external investors can hold the debt of a company but not its equity. But, if there isn’t the possibility of equity injection from external investors, wouldn’t democratic firms run the risk of being at a competitive disadvantage viz-a-viz conventional enterprises (i.e. funding structure)?

Firstly, there is the possibility of the external supply of capital in the form of bonds, debentures, and bank loans. Secondly, one should not think that, in publicly traded companies, shareholders function in any real sense as “owners”. Shareholders do not have knowledge of what goes on in “their” company, do not have any effective voting power (too large transaction costs to try to organize far-flung shareholders), and do not bear much significant risk since, unlike workers, they can shift their investment to another company with a few clicks of a mouse.

Which examples of successful democratic firms can you provide, in an historical perspective? 

The worker cooperatives of the Mondragon system in the Basque portion of northern Spain are the best and most successful examples (in spite of some all-too-human problems). There membership is based on labor in the firms, and they have the system of internal capital accounts independent of their membership rights. Their structure was determined by the doctrine of the “priority of labor over capital” in Catholic social thought, so all the capital is hired by labor, even the capital supplied by the members which is “hired” in the internal capital accounts.

You are an ardent and skilled proponent of democratic firms; why and in relation to what does the democratic firm represent a superior alternative to capitalists’ enterprises?

There are consequentialist answers to that question and principled or rights-based answers. In consequentialist terms, the members are working (jointly) for themselves, and are not someone’s “employee”. In analogy to agriculture, the quality and efficiency of their work is more like that of an independent farmer than a hired hand on a farm. That is why there is so much management literature for conventional firms about “how to get your employees to act like owners.” The attempts by so many defenders of the current employment system—e.g., conventional economists—to argue that workers are more efficient as employees than when working for themselves are rather pathetic and are ‘convincing’ only to those who desperately want it to be true.

And what about the principled or rights-based answer?

The principled arguments are more important. The conventional firm—based on the hiring, employing, or renting of the people working in the firm—violates the inalienable rights of self-government within people’s working lives. And it violates the principle that legitimates private property, namely appropriating the positive and negative fruits of their labor. Conventional human rental firms violate the principles of democracy and private property, and yet have—for over a century—been able to avoid discussion of those violations by arguing that the only alternative is a socialist system where everyone is a government employee at some level of government.

Companies nowadays are heavily criticized for the destructive environmental consequences of their economic operations. Do democratic firms represent an alternative able to better incorporate considerations about the environment into their operations? In other words, can they be restorative rather than exploitative of natural resources and the environment?

The companies that are correctly criticized for the environmental consequences are usually the large absentee-owned companies where the decision-makers are far removed from the consequences of their decisions. One is reminded of the oil executive getting rich off fracking in the Dakotas, but when another company wanted to do fracking near his Texas ranch, he joined the local anti-fracking group. No one wants to foul their own nest; democratic firms are naturally more environmentally responsible, since they are living in the local environment where the firm is located.

In scholarly literature, there are many arguments that try to explain the relative scarcity of democratic firms with respect to capitalist firms in Western economies. Let me ask you the question: if democratic firms (i.e. workers’ cooperatives) come with so many benefits, why do we see so few of them?

This is one of those very simple questions that scholars like to make seem to be difficult and profound. The people setting up a firm are the ones who determine its legal form. That founding group may even be like an informal cooperative, but it is obvious that—unless they have strong moral motivations otherwise—it is in their interest to organize the firm in the conventional manner, where they have the ownership, control, and profits—and all other workers are just employees.

If members’ fees become capital for the democratic firm, wouldn’t poor individual run the risk of facing additional challenges to put their labour at a productive use? One scenario is that wealthy and rich individuals might have the incentive to set up a firm only with similar economic status. Isn’t this a risky possibility?

The membership fee is subtracted from wages over a year or so. I have never heard of a case where a person was qualified for the job but too close to starvation to have a payroll deduction for the membership fee. In a democratic economy, people may freely associate with others to create firms or other associations.

As a conclusive question to this section; if having more democratic firms rising and thriving in our economy is the goal, which steps can we take in this direction?

One major step is this direction is to totally break out of the century-old narrative of “capitalism versus socialism”, i.e., the dichotomous choice between the private or public systems of renting people. Much of twentieth century was dominated by the conflict akin to the Peloponnesian War between Athens which had the private ownership of slaves and Sparta which had the public ownership of slaves (helots).

Now “capitalism” is seen as being triumphant and associated with “democracy and private property”. Yet the human rental firm is based both on the denial of democracy in the workplace and the denial of the private property principle of appropriating the fruits of your labor—since by renting the people in the firm, the employer appropriates the input-liabilities (i.e., pays off the input expenses) and the output-assets which are sold for the revenue. The employees, qua employees, do not owe the input-liabilities and do not own the output-assets—but are only one of the parties to whom the input-expenses are paid (the human rental payments or wages/salaries).

Part II: Capitalism vs. Economic Democracy

Starting again from “capitalism”, many people stress the institution of private property when defining it, while you argued above that capitalism violates the basic principles of private property and democracy. To begin with conceptual clarity, what is your conceptualization of capitalism?

“Capitalism” is an inherently vague “cluster concept” that means different things to different people so I no longer use it to designate the current system. Historically, the name arose out of Marx’s mistaken conceptualization of the system. In the Middle Ages, the control of people working on land and the appropriation of the fruits of their labor were thought to be part of the ownership of the land, in the vague medieval notion of “Dominion.” Marx accepted that conception of medieval rule as “landism”, but substituted capital for land to arrive at his conception of “capitalism”, where the rights to the product and to govern the workers were all part of the “ownership of the means of production.” In Marx’s own words:

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, Karl. 1977. Capital (Volume I). Translated by B. Fowkes. New York: Vintage Books., Chap. 13, pp. 450-451]

It is trivial to see that these product and management rights are in fact NOT part of the “ownership of the means of production” simply by considering the case where the capital is rented out. Then the renter could acquire the other factors of production including labor in the employment contract, and undertake production getting the rights to the product and the management rights, not the owner of the capital goods. For several decades, I have called the erroneous idea that the product and management rights are part of capital as the “fundamental myth” which is supported for obvious reasons by Marxists (as a defining part of their dogma and thus their “badge of Red courage” to maintain their self-identity as being ‘against the system’) and by the supporters of the current system who want to wrap themselves in the cloak of defending private property.

If you do not use “capitalism” to designate the current system, how do you identify it at an institutional level?

In fact, the key institution in the current system is the employment contract to hire, employ, or rent the workers, not private property. The only legitimate basis ever put forward for the appropriation of property is that it is the fruits of one’s labor; yet, the current human rental system allows the employer to appropriate the positive and negative fruits of the labor of the people working in a conventional firm by renting them.

Far from the human rental system being “based on private property”, it is based on the human rental contract that allows the only legitimate basis for property appropriation to be violated; so, it is best called the “private theft system” (more in line with Proudhon’s “property is theft” than Marx’s fundamental myth). But as long as the socialist left keeps attacking “private ownership of the means of production”, then the apologists for the renting of human beings can pose as the defenders of private property, while all the time violating its legitimate basis. That is why Marxism in the West is part and parcel of the system to serve as the useful fools, i.e., as “capitalist tools,” to perpetuate the human rental system. And that is why the fundamental myth serves as the pons asinorum for those who want to better understand the human rental system.

In the aggregate, does a market economy dominated by democratic firms—what you name an economic democracy—work differently than one dominated by capitalist, conventional firms? If so, in which aspects, processes and institutions?

The neo-abolitionist goal of abolishing the employer-employee or human rental contract would complete the work of the historical abolitionists who obtained the abolition of the buying and selling of human beings, even when voluntary. Their work was not completed since the new system was based on the voluntary rental of persons, instead of the voluntary or involuntary system of owning people. The abolition of the human rental contract would:

·      Refound the appropriation of the assets and liabilities created in a firm on the labor (i.e., responsible human actions) of the people working in the firm and, thus, for the first time establish a legitimate private property system;

·      Abolish the inherently fraudulent contract that pretends that responsible human action can somehow be de facto alienated and transferred from employees to employer, and thus complete the historical abolition of three “contracts” that similarly pretended that aspects of personhood could in fact be alienated: the voluntary slavery contract, the coverture marriage contract, and the social contract to alienate self-governing rights in a pactum subjectionis.

·      Bring democracy to what people do all day long in the workplace.

In the words of John Stuart Mill:

It is scarcely possible to rate too highly this material benefit [DE: greater efficiency of people working for themselves], which yet is as nothing compared with the moral revolution in society that would accompany it: the healing of the standing feud between capital and labour; the transformation of human life, from a conflict of classes struggling for opposite interests, to a friendly rivalry in the pursuit of a good common to all; the elevation of the dignity of labour; a new sense of security and independence in the labouring class; and the conversion of each human being's daily occupation into a school of the social sympathies and the practical intelligence. [Mill, John Stuart. 1848. Principles of Political Economy, Book IV, Chapter VII]

In a circular conversation, Prof. Giacomo Corneo argues in favour of Shareholder Socialism, an institutional design in which the government acquires shares of all big publicly listed companies on the international stock market. One of the main benefits he sees in this system is the possibility to break down vicious relationships between political powers and economic super-powers. What do you think about this proposal and the scenario of having the State to invest in the international stock market on behalf of the citizens?

Prof. Corneo is just giving a new-fangled version of state ownership of the “commanding heights” of the economy, which in every historical case has unified and strengthened rather than break down the vicious relationships between political powers and economic super-powers. Typical of the socialist mentality, as explained previously, the focus is on the “ownership of the means of production” and only substitutes some version of state employment for private employment in the “big publicly listed companies.” It substitutes some version of state-dominated capitalism for private enterprise capitalism.  Indeed, we have that transition already taking place in China starting from a communist state.

Which are the main problems capitalism suffers from? Will the change in the employer-employee relationship, which is completely eliminated in a democratic firm, be the channel through which we will find ourselves in an alternative, post-capitalist, economic system?

From the neo-abolitionist perspective, it is always useful to rephrase the question “Which are the main problems” in the slavery system? Was the problem

·      that the slaves were underpaid (in terms of their real wages in food, clothing, and shelter),

·      that the slaves were mistreated,

·      that the slaves were feeling dominated and alienated,

·      that the state legislatures were controlled by the plantation class, or

·      that there was a horrendous maldistribution of income and wealth between the slave class and the master class?

What were the “main problems” in slavery? Today, the good-hearted progressives approach the current system of renting human beings with the same mentality of thinking in terms of “main problems” to be solved.

For instance, good-hearted progressives like Joe Stiglitz, James Galbraith, Paul Krugman, Robert Reich, and Thomas Piketty fret about the horrendous maldistribution of income and wealth between the employee/servant class and the employer/master class (much amplified by the financial system) and they suggest various approaches to the “main problems” such as:

·      higher taxes on the higher income brackets,

·      a tax on wealth,

·      increase the minimum wage,

·      strengthening the trade unions to bargain for better wages/benefits,

·      improved public health, social security, and welfare programs, and

·      perhaps even a Universal Basic Income to better pacify the employee/servant class.

Like the abolitionists of their day, calling for the abolition—rather than amelioration—of the underlying relation between employee-servants and employer-masters is to go beyond the pale and to forfeit one’s status as a “responsible thought-leader” in public discourse and in the social/human sciences.

As a conclusion, which societal and human values underlie an economic democracy?

·      Refound private property on its only legitimate basis,

·      Abolish the inherently fraudulent contract to alienate aspects of personhood and to only allow alienation contracts for genuine commodities, not aspects of personhood, and

·      Bring democracy to what people do all day long.

Part III: Development & international collaboration

This final part of our conversation hinges upon your long experience at the World Bank as economic advisor to the Chief Economist (Joseph Stiglitz and Nicholas Stern) and upon your book on development, “Helping People Help Themselves”. On Circular Conversations, I had the opportunity to talk with inspiring African women who are trying to use sustainable innovation as a force to shape an autonomous and harmonious development path for Africa, beneficial for all Africans. If western countries were interested in helping in the process, what could they do in order to collaborate with a positive impact?

Most forms of helpful help (as opposed to unhelpful help) work through indirect methods to change the norms and customs, rather than trying to directly incentivize this or that. The initial focus should be on controlling the rampant corruption that prevents businesses from forming or thriving.

Most Western aid has in the past tried to ‘change the incentives’ i.e., bribe people to do what the West thinks is the right thing, but that is too direct and just enables rent-seeking behaviour to do X because it gets money, not to do X for sustainable reasons. Other forms of aid have been oriented to giving Westerners a ‘warm buzz’ that they are ‘doing good’ (e.g., microfinance to help women to form microbusinesses that have little or no growth potential) and are only a disguised form of aid.

It is hard to separate cause and effect, but since the end of WWII, the part of the world where the multilateral and bilateral aid agencies had the biggest footprint (e.g., Africa), development has been the least, and where development has been most successful (i.e., East Asia), the Western aid has had little effect.

Is it ‘help’ that ‘developing/less developed’ countries need, or is it something else?

At this point, there is an argument for “less is more”. That is, the problems will not be solved by “more aid” but by less of the traditional forms of aid and more of other indirect forms of involvement. Rather than trying to incentivize people to start something, find out where “the trains are already moving on their own”, and then help them in subtle and indirect ways to go faster and do better. Read more of Albert Hirschman on pragmatic and unbalanced growth, and less of Jeffrey Sachs’ ideas of the big push with more aid, etc.

Which mistakes should a ‘wealthier’ country not commit when trying to contribute to the development path of another country?

For the major countries, ‘aid’ is just part of global politics, so helping countries along a development path is quite secondary to their political objectives in the region (e.g., the US-sponsored wars in the Middle East, which have been enormously anti-developmental). Smaller wealthy countries have a much better chance to work in helpful indirect ways to fight corruption, further business development, promote local innovation, and educational advances. Having a ‘light touch’ is important to avoid crowding out the own-incentives of those one is trying to ‘help.’

We often tend to depict this relationship as one-directional, wealthier-donor countries giving to the poorer-assisted ones. Is it really so? To phrase it differently, what can wealthier countries learn in the process and how can they benefit from this collaboration-exchange?

The primary thing the wealthier countries can learn is some humility and less arrogance. The people in the developing countries need to own their development strategies, and that will not happen if already developed countries think they already know the path (like the rich kid who was born on third base and thinks he knows how to hit a triple) and throw a lot of money around trying to get the poorer countries to “do the right thing.”

Which kind of knowledge transfer is needed between different countries for a positive change and development?

Horizontal learning between countries that are close together in development can be more helpful that supposed ‘learning’ from far advanced countries. People should learn about realistic success stories, not about what is more like ‘science fiction’ for them so when they go back home, they say only “that could never happen here.”

Most success stories are not directly transferable but still have something for others to learn from, so they can then reinvent the successes locally in their own way. One slogan I put into one of Stiglitz’s talks was: “Scan globally; reinvent locally.”

‘Scan globally; reinvent locally’, the perfect advice to close our conversation with! Thank you very much for sharing your ideas with us today, David; already looking forward to more democratic firms & more fruitful collaboration in our economies!

January 2019