published: Aug. 7, 2020, 9:57 p.m.
Economic democracy is the broad idea of extending the idea of democracy into the economic world. People who are into this think it will not only give people the empowerment that we associate with democracy in politics but also make the economy more efficient as well. It attempts to increase the participation in the economy and well being of the average person, without adding more government regulation or centralized controls over markets.
Us humans have some nice features going for us like our opposable thumbs, big plump brains, and the ability to create and use tools. But the trait that has probably separated us from other animals the most is our ability to organize into groups that have a particular purpose. Cave people formed organizations made up of hunters that would take down large beasts. Organizations can accomplish much more than just one person on their own ever could. Organizing has allowed us to construct the pyramids and built the rockets that put us on the moon. Unlike other animals that organize themselves like wolves forming a pack, the hierarchies we form can be much more complex and we can be part of multiple different organizations at the same time. The wolf is only a member of their pack but a person is a member of their nation, their family, a business, a bowling team, a church, and whatever else they are into. In regards to the nation, which is usually the largest organization we are a part of, there are multiple ways they can be run. Some are just like the wolves were the strongest member is in charge of the whole thing until someone stronger person comes along and takes it from them. Then there are Monarchies were one person is bestowed complete ownership of the organization by god and when they die they pass it on to their kids like some sort of family heirloom. And then there is a democracy, where the people who comprise the organization are the ones who collectively determine how it is run. If a monarchy is like one person owning an organization, then democracy is like the people who comprise the organization owning it.
In America we are quite familiar with democracy, our democratic government is a point of pride for us and we closely associate it with freedom. We celebrate our founding fathers who transformed the source of power from being the Crown to being the people. Yet for the average American, the only time we interact with this great democracy they provided us is through casting a vote every couple of years. For the vast majority of people, most of their time spent under the control of an autocratic organization in the form of the corporation.
Today the word corporation seems synonymous with business. It derives from a Latin word meaning "body of people" and in Roman law corporations allowed for a group of people to be treated like a single entity. This entity could sue or be sued, own property in its name, and make contracts. Later on in Europe during the days of powdered wigs, colonialism, and mercantilism the corporations we love today came about in the form of joint-stock Corporations. These corporations were run by civilians but were created by the government to serve a specific purpose specified by its charter (like how the English East India Company was chartered to conduct trade in the far east). The entity that was the corporation was then owned by people who possessed shares of it. These shares entitle the holder to part of the profits and could be resold to anyone looking to own part of the company. In addition to the rights granted under Roman law, the shareholders of European corporations were given the advantage of being granted limited liability by the state. This was meant to incentivize investment into the corporation over other businesses or ventures by ensuring that no one risked losing more than they invested. Shareholders ran the corporation by sending a representative on the board of directors, who would vote on matters related to the corporation.
Joint-stock Corporations have a special place in American history. Many of the original colonies in America were founded by joint-stock corporations like the London Virginia Company. This led to the early state governments sort of mirroring the corporate governance structure that existed when they were founded. Landowners where the equivalent to shareholders who elected representatives to the houses, where they would act as a sort of board of directors who would decide on matters of government. Overtime the colonial companies turned into states ruled by the crown, but the remnants of corporate governance remained. After more than a hundred years of this democratic tradition in the colonies coupled with the autonomy that was necessary due to the crown being so far away, it seemed reasonable to many Americans that democracy could be a suitable replacement to the monarchy.
1776
1776 is a pretty famous year in America. In January Thomas Pain published Common Sense, his sensational pamphlet roasting tyranny and laying out his vision for radical democracy. Then the 13 colonies came together to write the Declaration of Independence that formally rejected England's Monarchy and started the world's most famous democracy. Over the next couple of decades as our lust for democracy grew all states eventually extended voting rights from just the landowners to all citizens who comprised the country because as James Madison said, "those who are to be bound by laws, ought to have a voice in making them" (although they still managed to leave out women and slaves). Also in 1776 on the other side of the Atlantic, the Scottish economist and philosopher Adam Smith published the Wealth of Nations. This book gave birth to the idea of capitalism as we know it today. Smith covered a range of topics that today make up a solid chunk of what is taught in Econ classes like international trade, wages and employment, and free markets. But one thing that was barely mentioned in The Wealth of Nations was corporations. In Smith's day, a large majority of the businesses that comprised the economy were partnerships, were the owners of the business were also responsible for running it and had to make sure it was run well to ensure they made a profit. But with joint-stock companies, there was a separation between the stock-holders who invested in the company and the management who is paid to run it. Smith believed that this was inefficient as the managers wouldn't run it properly since they were working with other people's money. Nowadays that is referred to as the agency problem.
As the years went on the control that the states had over the corporations that they chartered weakened while at the same time states were offering more and more charters. The competition between states for that sweet tax money gained by having corporations registered in the state led to a race to the bottom where each state made it easier and easier to become incorporated. The purpose that a joint-stock corporation is supposed to serve for society became vaguer until it came to a point where they basically exist solely to create profit. Eventually, corporations came to dominate the business world. As corporations became larger, conflicts between the laborers who have an employment contract with the corporation became more of an issue. From the profit-oriented perspective of a corporation, all labor is viewed as an expense where the amount spent on paychecks and costs like providing a safe work environment should be kept down as much as possible. However, the workers are trying to maximize their paychecks and livelihood as much as possible. These opposing desires have led to a constant standoff between the shareholders, the management running the company, and the laborers whose livelihoods depend on it. State and Federal laws as well as government agencies had to be put in place to keep the corporations from exploiting laborers to a point. The executives and shareholders have their disputes too. Through countless lawsuits between owners and the managers, common law has been shaped in such a way that enforces the idea that executives of a company have a legal obligation to hold maximizing shareholders' value as their primary goal. For example, when Henry Ford attempted to cut some dividends to shareholders in favor of hiring more workers he was sued by the other owners of the Ford Motor Company. The judgment from the courts was that profits to the stockholders should be the primary concern for the company directors and Ford must give the shareholders the dividend. This legal obligation strongly pushes the modern corporation to have a singular focus on profits.
In the 21st century, one of our many sci-fi dystopian concerns is the effect of the growing presence of artificial intelligence and the consequences of their inhuman nature. These calculating machines do not come with any human ethics and exist with a singular goal to maximize whatever metric they were designed to, whether it be viewer retention on Youtube, keeping a car on road, or stamps collected. But since the industrial revolution people have had there lives dominated by inhuman beings in the form of corporations. Most people's livelihood is dependant on the corporation that employs them and the goods produced by corporations. When a person is faced with a decision they weigh the pros and cons based on a complex combination off of their desires at the moment, long term goals, emotions, moral values, and whatever else is going through their head. No one can quite quantify exactly why we decide what we do, and that makes us uniquely human. All decisions made by a corporation are still technically made by people, but as an organization all the desires and values are distilled down to one goal, increasing profits. The most complicated moral dilemma for them is whether to increase profits this quarter or increase profits in the future. Move a factory overseas? If it reduces manufacturing costs then yes. Cancel a TV show because of its political message? If the trouble and attention caused by the show affect the Bottom line then yes. Toss some toxic waste into a local river? If the cost of disposing of it properly or not creating it in the first place is higher than the price paid by damaging the river than yes.
So Corporations have the agency problem, an inherent conflict between owner and laborer, and a lack of human values. How does democracy fit into this? Currently, there is some democracy in corporations, people who own stock in a public company can vote on a representative for the board of directors. This board oversees the long term goals of the company and appoints executives. But because this democracy is reserved for only shareholders, it does not really fit into Economic Democracy. The mathematician and Economic Democracy proponent David Schweickart defined what he thought the underlying value behind Economic Democracy as "the right of individuals in a society to participate in forming the rules to which they must submit and the consequences of which they must bear". In the joint-stock corporations, the stockholders participate in forming the rules, but don't really submit to those rules or deal with the consequences. They could not even know anything about the company besides its ticker symbol. Meanwhile, the executives and workers are directly governed by the companies rules but have no democratic say in creating them. The key idea behind economic democracy is that forming an organization like a corporation would require that organization to be run democratically by the people who comprised it. Because that would mean stocks could not be sold to people who were not part of the firm, ownership would be restricted to those who comprise the organization, like workers and executives. But how would this work in practice? The best way to evaluate that is to look at the existing type of business that is democratically run and owned, cooperatives. This type of organization is much less known than partnerships or corporations but it has been around since the 1800s. Over in Europe, there are currently tens of thousands of them.
Cooperative Ownership
In a worker cooperative "employment" takes on a different meaning than it has compared to a corporation. With a corporation when someone is employed they have a contract with the corporation to sell their labor to it. There can be other benefits thrown like 401Ks, and if they are in a union the workers can bargain for their contracts collectively, but the relationship between worker and corporation will always be a contractual one. When someone is employed by a cooperative they become a part of the entity that is cooperative. They are owners of the organization and will receive a portion of the profits just like the shareholders of a corporation, they have a vote in decisions related to the company, and receive a salary for the work that they do. The standoff between the shareholders, the management running the company, and the laborers does not exist since everyone plays a part in those three roles. Trade-offs between profits and employee salaries/well-being still have to be made, but since everyone has a stake in each side and a vote, these issues can be resolved democratically and without the need for government stepping in. There won't need to be a Henry Ford style court case between owners and management since they are one and the same. By moving decision making from being about only what increases profits to instead being what people vote on it reintroduces the human element into the organization's decision making process. Move a factory overseas? If the loss of manufacturing jobs outweighs potential increases in profit people may vote against it. Cancel a TV show because of its political message? If people think that the message or maybe freedom of speech is an important part of the organization's culture they would vote against it. Toss some toxic waste into a local river? If the workers live near the river or know people who do they may vote to pay the extra cost of safely handling the waste. In addition to making the organization more human, democratically involving workers in decision making actually makes the organization more efficient. Across countries, firm samples, and methodologies, studies find that greater participation in governance is a factor of increased productive efficiency in worker cooperatives. This is thought to be due to increased motivation and the fact that more participation allows for employees with the most information on an issue to involved in the decision-making process related to the issue, instead of the decision being made solely by middle management who could be out of touch. This prevents mushroom managment and increases the quality of decisions made in the organization.
It also should not be overlooked how much a positive phycological effect worker self-management has on employees. Some study once found that 94 percent of workers consider autonomy and independence "very important" or "important" to job satisfaction. When the journalist Johann Hari was researching some book he was writing about depression, he found that a large percentage of people who were depressed or anxious did not like their jobs. Due to our inherent desire to find meaning in the stuff we do, it turned out people who had less responsibility at work were not as depressed as people who were just cogs in the wheel. When Hari interviewed workers at a cooperative bike shop they said that working in an environment where orders aren't given from the top down but decided on democratically greatly reduced their depression.
Another type of cooperative is consumer cooperative. One of the most known examples of these here in America is the Green Bay Packers. Every other sports team in the US is owned by a few wealthy shareholders, but ownership of the Packers is spread out amongst 360,000 residents of Green Bay. The board of directors running the team is elected by the fans. Any other owner would have moved the team out of Wisconsin to some big city where they think they could make more money, taking away the team that is a part of people's lives and culture in Green Bay in the process. However since Green Bay is owned by the fans they have no incentive to move the team, they care more about it than just profit. A relentless focus on profit must have had little effect on how successful the organization is based on how many Superbowl they won. They are also incredibly popular, there is something like a 30-year waitlist for season tickets. Some grocery stores and electric utilities are other examples of consumer cooperatives. In some rural areas, privately owned utilities reached the conclusion that the investment in infrastructure needed to provide electricity to rural communities was not worth the cost. To receive access to power rural communities were forced to create their own utilities where they were the customers and the owners. In addition to just trying to provide a profit to its members, the utility is also trying to maximize the safety of its customers and the reliability of the grid. There are 900 electric co-ops across the country.
Efficiency
Its generally taught that the goal of an economic system is to allocate goods and resources in a way that is the most beneficial to society. Adam Smith and other economists pointed out that this optimal allocation could be achieved without any central coordination and solely through market interactions if there is ideal perfect competition. But the real world is not ideal and some inefficiencies prevent us from perfectly allocating stuff. These inefficiencies can be thought of in two groups. One group is the things that prevent the firms that make up the economy from interacting efficiently. Monopolies that prevent competition and government-imposed restrictions on markets would an example of this. There is another type called X-Inefficiency. This refers to the inefficiencies within each of the firms comprising the economy that prevent the firm from achieving whatever its goal is. A way to think about these inefficiencies is to imagine making the economy benefiting society like trying to make an orchestra of kids create music that sounds as good as possible. The first step is to allocate each instrument to the kid that is most talented with that instrument. For most things in a capitalist country, this part would be done by the market. In the old Soviet Union, some committee would decide what kid should have what. Any mistakes here that would reduce the quality of the music played like giving a violin to a trumpeter would be results of the first type of inefficiency. Then the second part that determines how well the music will sound is how well each kid can convert whatever music they are envisioning into actual sound. Anything that impedes them from converting what they desire into reality like having a broken finger or a lack of talent would be X-Inefficiency. In the real economy, this could be something like an incompetent manager at a bakery whose wasteful processes mean they have to buy twice the flour to make bread than they ideally need.
A key point in Economic Democracy is that there would not be an increase in the first type of inefficiency since the market still plays the role of allocating goods and services. The internal structure of the firms would be different but they would still be buying and selling things from each other and consumers the same way they do now. Being decentralized as much as possible is very inline with the democratic ideals and a Soviet-style centrally planned economy goes against this. The invisible hand of the market that Adam Smith described that is loved by economists and worshipped by libertarians would still be calling the shots and deciding which kid gets which instrument. The effect that Economic Democracy would have is to decrease the X-Inefficiency of each firm and therefore make the economy as a whole more efficient. This is done by the ways we talked about earlier of eliminating the agency problems, conflicts between owner and laborer, and introducing democratic decision-making. A drawback of a democratic organization is that decision making could get harder as the organization gets larger. But this might not be a bad thing. We like to glorify small businesses and bemoan the Walmarts of the world that crush them, so maybe having a system that gives an inherent advantage to smaller more flexible businesses might not be a bad thing.
Something that cooperatives don't have is the corporation's original skill, its ability to raise an obscene amount of money. When ownership of shares of the business is limited to only the workers or consumers they cannot be resold to anyone else, so the business must rely on loans. Big billion-dollar IPOs are out if the question. Corporations on the other hand can get loans too but can raise money whenever they want by selling off some shares. To address this issue of raising money in an economy made up of democratically run organizations, the mathematician and Economic Democracy proponent David Schweickart proposed a replacement of the current system of how funds are allocated to new businesses. In the current system, new business ventures are funded mostly by privately owned banks, venture capitalists, the cast of Shark Tank, and sometimes through government incentive programs. Schweickart proposed that the funding for new ventures in a society comprised of all cooperatives could be allocated in a more efficient and socially responsible way. All businesses would pay a tax on capital assets that would be pooled into a giant fund. This fund would then be split up amongst regions based on their populations and given to community ran banks. These banks would then decide what to invest in. The banks will pick businesses that will maximize there return on investment, but because the investors are elected by the community they would also be more incentivized to invest in projects that benefit the community. Some businesses will provide positive externalities to the neighborhood, like how a new factory in town would be beneficial to the nearby restaurants. Mark Cuban would never for a second factor this in when making an investment decision but a community elected investor might since the community will be the one who reaps the reward of the positive externalities.
Summing it up
Forming organizations is a natural thing that humans do. The structure and ownership of the organizations known as corporations is not a natural thing, it was a creation of government. Its structure of ownership is molded by a complex web of state and federal laws as well as different regulator bodies. If these state and federal laws were changed to require democratic ownership of organizations we would be living in the world of Economic Democracy. No rule says this is the current corporate ownership structure is the best, but it is what was done a couple of hundred years ago and has become the norm. The people who are in a position to make changes to the system normally have also benefited from it, so they have no incentive to fundamentally change it. But, Monarchy was a way of owning an organization that was the norm, and the people running the show had no incentive to change it. That hasn't stopped a lot of countries throughout the world from realizing the benefits of democracy and making the shift.
To me radically changing corporate laws to make them more democratic seems a little drastic. But the ideas behind economic democracy are still interesting. I have always thought of democracy as one of the best ideas that we have going in our society, but we basically have only been using it for the same applications for over 200 years. It's like inventing the internet and only ever using it for its original purpose of sharing messages across universities. Applying democracy to the workplace also disrupts the common messaging we hear about "work". On the one hand, you will hear people say that businesses are exploiting their workers and that work-induced stresses, traumas, and injuries are harming society. On the other hand, people say businesses are the lifeblood of society and constant government interference hurts them, and also that work is virtuous and gives us meaning. We are usually told that we have to trade off one for another, but Economic Democracy allows us to imagine how they can be complementary.