Employee Ownership: A Rapidly Growing Threat to a Free Market
JULY 01, 1990 by DWIGHT MURPHEY
Dwight D. Murphey is an associate professor of business law at Wichita State University and author of several books on social and political philosophy.
In the first nine months of 1989, nearly 80 of the “Fortune 500" companies established Employee Stock Ownership Plans (ESOPs) involving shares worth more than $15 billion. Prompted by a decision of the Delaware Supreme Court that ESOPs can be used to forestall hostile takeovers, the massive growth of employee ownership in 1989 accelerated what already had been a rapid rate of growth. In one of the fastest structural changes that has ever occurred in the American economy, the move toward employee ownership had by 1987 resulted in between 7,000 and 8,000 ESOP companies, involving between 11 and 13 million workers. There were virtually no ESOPs before the push for employee ownership began in 1974.
With such a start, employee ownership will soon become a major economic constituency in the United States- -and, as we shall see, an ideological and political constituency as well. Each ESOP is an institutionalized framework for a continuing increase in the amount of employee ownership. If the trend continues, the near future will see the creation of ESOPs at tens of thousands of companies. Each will lead to a growing presence of employee ownership.
The mechanics of an ESOP are simple. It begins with a business firm’s creating a trust. The firm transfers stock in itself to the trust, with the company’s own employees as the beneficiaries. In a “leveraged” ESOP, the trust obtains the shares by borrowing from a bank and using the money to pay the company for the stock. The company serves as guarantor on the bank loan. As an important part of all this, Federal law gives major tax breaks both to the company and to the bank.
What has caused this phenomenon? Three related factors: massive government intervention to prefer ESOPs with billions of dollars in tax breaks; the desire of the business community to emulate the Japanese through greater employee participation and company loyalty, as well as to use ESOPs for their tax advantages and as a way to fight takeovers; and a •good deal of feverish effort by the media, the academic community and the American Left to popularize employee ownership at a time when there has been virtually no awareness of danger among free market proponents.
Sixteen major pieces of Federal legislation since 1974 have created tax breaks and other preferential treatment for employee ownership. State legislatures have joined in by declaring public policies in favor of employee Ownership and creating other preferences and tax incentives.
The rush toward employee ownership is part of a worldwide phenomenon. The world Left pushes it as part of its renewed interest in “workers’ control” as the centerpiece of democratic socialism. Employee ownership is important to socialist policies both in Western Europe and in the countries emerging from the Soviet cocoon.
At the same time, ironically, many leaders of American conservatism have spoken up for employee ownership. Unaware of the dangers, they see it as a way to “involve employees in capitalism” and also to “privatize” governmentally owned enterprises both inside and outside the United States.
The purpose of this article is to sound an alarm. Employee ownership poses a serious and expanding threat to a free market.
Since the danger emanates from the Left, it cannot be fully appreciated without understanding the role that “workers’ control” has played in a century and a half of socialist thought.
The various forms of “decentralized socialism” proposed by 19th-century socialist thinkers are relevant today because the decline of Soviet prestige in the world intellectual community since World War II has resulted in a renewal of those earlier socialist models. During the period between the Bolshevik Revolution in 1917 and approximately 1947, those earlier models were eclipsed in the imaginations of most socialists by a highly ideal ized perception of the Soviet example, which involved a centralized state socialism under the dictatorship of the Communist party.
The inspiration for most models of “decentralized” socialism came from the French socialist Pierre Joseph Proudhon (1809-1865). Proudhon, famous for his statement that “property is theft,” advocated organizing the economy around “mutu-alist associations.” The associations were to be funded by low-interest government loans (“social credit”).
Among the followers of Proudhon was the Russian socialist N. G. Chernyshevsky (1828-1889). In his famous novel What Is to be Done? (a title later copied by Lenin), Chernyshevsky idealized the image of a workshop that its owner had turned over to its employees. Again, “social credit” was to provide the funds.
In France prior to the revolutionary tumult in 1848, Louis Blanc called for worker-owned producers’ cooperatives called “social workshops.” He, too, wanted them financed by the state through social credit. Later in France, Georges Sorel, a syndicalist, wanted French society run by a confederation of trade union associations.
Perhaps most important, certainly so far as its impact on socialist and liberal thought in the United States was concerned, was the British Guild Socialist movement early in the 20th century. Foremost among its popularizers was G. D. H. Cole. Guild Socialists wanted each industry organized into a “guild.” These in turn would form a confederation of industries. There would be two parliaments—one representing people in their capacity as producers, the other as consumers.
We should note that each of these types of “decentralized” socialism isn’t really decentralized at all—but is rather a blueprint for centralized power. While calling for local collectives under one name or another, proponents want the collectives brought together into industry-wide, and then national, networks. Mussolini did precisely that with his “Corporazioni.” The network then provides what is, in essence even if not in name, a state. The “rational planning” that socialists crave is done through the confederation.
It was Guild Socialism that led to the great “Industrial Democracy” vogue within American “liberalism” between 1910 and approximately 1925. The journal The New Republic was established in late 1914 and for several years was the principal sounding board for Guild Socialism. Although The Nation focused mostly on international issues, it, too, promoted Guild Socialism after Oswald Garrison Villard became its owner and editor in 1918.
The Soviet example absorbed the attention of the world Left after 1917, although it took until about 1925 for Guild Socialism to go fully out of fashion. Since World War II, however, there has been a major socialist literature both in Western Europe and the United States making workers’ control a principal element.
One socialist author wrote in 1968 that “for socialists and radicals who mean business, workers’ control has already become the central strategic axis . . . .” In 1973, another spoke of “the growing worldwide movement for workers’ control” and called it “the central issue of class struggle in our generation.” A book by Christopher Gunn in 1984 treats “workers’ self-management” as a way “of linking ideological, grass-roots, and spontaneous resistance to capitalism.” He expressed the hope that “it may offer the potential for creation of a new socialist politics . . . .”
Distinctions Without a Difference
Confusion often arises between “employee ownership,” “workers’ control,” and “workers’ self-management.” Though related, these aren’t identical. What should be emphasized, however, is that it is largely a matter of “distinctions without a difference.”
Conceptually, it is possible for employees to own a company while not controlling it. Here, they would acquiesce in continuing control by, perhaps, the prior management. Although it is often assumed that employee ownership won’t displace existing management, there are compelling reasons to think that the employees eventually will assert control. The very existence of majority ownership creates a moral, as well as a legal, right to control. There is an articulate pressure from the Left for employees to exercise that right. “Workers’ control” will no doubt become a major factor in the American economy once the thousands of ESOP firms reach the “tipping point” at which the employees own a majority interest.
Whether the employees will then delegate management functions to directors of their own choosing or will undertake to manage themselves by committee or by some other form of “participatory democracy” depends upon the choices the employees make after they have control.
Oddly enough, employee ownership and the workers’control that results are compatible, at least in theory, with all three economic models: a market economy, state interventionism, and socialism.
The theoretical model of a free market certainly doesn’t bar firms that are owned and run by the same people. Sole proprietorships, partnerships, and many small corporations already meet that description.
This compatibility assumes, however, that certain distorting factors won’t be present. It assumes that the worker-owned firms will have come about freely through market choices and freedom of contract, not through massive state intervention.
It presupposes also that the worker-owned firms won’t harbor an ideological virus that will make them a transitional vehicle to socialism or to further interventionism. It would not be compatible with a free market for them ideologically to invoke “labor solidarity” and to demand the abolition of the type of firms where owners hire employees. Socialists have long attacked such businesses, which involve the much-hated “wage relation,” “absentee ownership,” and “making of ‘surplus value’” (the socialist name for an employer’s profit).
But the question of purely theoretical compatibility isn’t the major issue to pose about workers’ control today. The more important query is: What are the realistic prospects, given the world we live in today? Is there any reasonable expectation that employee ownership, leading to workers’ control, will really serve free market purposes?
The answer, unfortunately, must be that, “no, there is none.” This is true both outside and inside the United States.
1. Outside the United States. Workers’ control isn’t a feasible transition to a market economy in Eastern Europe or the Third World. It merely substitutes one form of socialism—the misnamed “decentralized socialist” models we have just examined—for another. Given the predominance of the Left in much of the world, workers’ control will take its place as a form of “democratic socialism.”
If under present circumstances it proves to be a more humane type of socialism—one that actually has “a human face”—that is to be desired, so far as it goes. But it is a tragedy for the peoples of the Third World or those emerging from Soviet domination to become enmeshed in yet another round of the economic wastefulness and inefficiency that long and painful experience shows typify every sort of socialism.
Workers’ control is inefficient to the extent that it is socialist. If “privatization” occurs through a movement into workers’ control, entrepreneurs will continue to be victims of ideological hostility and state blockage if they go outside the “workers’ control” model. And the “rational planning” that even a democratic socialism will employ will interpose all sorts of obstacles to free market activity.
How much better it will be if “privatization” can be of a sort that will move Eastern Europe and the Third World into a true free market system! It will avoid millions of people’s having to go through yet another painful cycle during which the lessons of economics—hammered home forcefully to the world recently by the utter failure of the Soviet economy—have to be learned all over again.
2. In the United States. It is unlikely that the rush into employee ownership will actually lead to socialism in this country. Despite everything that the American Left will foreseeably do to bring that about, the inefficiencies of workers’ control almost certainly will prevent it from displacing the customary forms of enterprise.
Disappointment comes when workers have reached majority ownership but then delegate management functions to others. They have found in the past that “we haven’t really gained anything, since one boss is pretty much like another.”
Inefficiency comes when workers seek to serf-manage the company “by committee” or through the chaos of “democratic. participation.” Factionalism, the tedium of decision-through-infinite-discussion, and in-house politics have been found to destroy the viability of many such enterprises in the past.
If a socialist victory doesn’t threaten us, what, then, is the danger? The answer is twofold:
Even though the Left won’t be able to use workers’ control to displace other forms of enterprise, it will be able to work constantly to mold employee ownership into an ideologized constituency. The past haft-century has seen the secular decline of labor unions as a hostile institution within a free market. Now, however, we are threatened with a movement for “industrial democracy” that will be potentially even more hostile. Do we really want to see that happen?
To the extent that the Left imbues employee ownership with its ideology, an extra dimension will have been added to a movement that already will have become, for other reasons, a powerful economic and political constituency in the interventionist system we have today.
Even without ideological content, ESOPs are quickly creating one of our larger interest groups. When tens of millions of people come to be encompassed within “employee ownership,” the movement will possess vast political power.
The intervention that is most immediately foreseeable is one that is utterly incompatible with a free market: that the government will no longer be able to allow any of the thousands of employee-owned firms to fail (or will have to compensate the employees in each firm for the enterprise’s failure). Why? Because by subsidizing and encouraging a type of employee “fringe benefit” that lacks diversification, the government has since 1974 caused millions of people to rely upon a precarious form of asset for their ultimate security in retirement. An irresistible moral claim will be made that the government cannot then allow the failure of an employee-owned firm to cause the employees to lose the value of the assets they’ve been relying upon. The government will have to either guarantee the viability of thousands of firms or provide transfer payments to make up each individual’s loss.
The intervention can hardly be counted upon to stop there. Such a constituency, when organized as all interest groups are today, will predictably call for interventions that we can only speculate about now. Employee ownership may well become the constituency that the American Left has long yearned for, one that will undergird the Left’s entire welfare-state program.
The time for response is short. Underwritten by billions of dollars of tax-preferences, and thus far having faced no opposition from market advocates, ESOPs are ushering in a new age for the American economy in which employee ownership will be a dominant factor. Thus, just when we least expect it, we find we are in a time of crisis for a free market economy.
6. See the case studies of chaotic inefficiency cited in Daniel Zwerdling’s Workplace Democracy: A Guide to Workplace Ownership, Participation, and Self-Management Experiments in the United States and Europe (New York: Harper Colophon Books, 1978), pp. 91,117,127,128.