The Democratic Worker-Owned Firm (Routledge Revivals)

A New Model for the East and West

David Ellerman

• Publisher: Routledge
• Year: 2021
• Topic: Economics
• eBook ISBN:
  9781317484776
• Subtopic: Human Resource Management
• Index: Economics

When this book was first published in 1990, there were massive economic changes in the East and significant economic challenges to the West. This critical analysis of democratic theory discusses the principles and forces that push both socialist and capitalist economies toward a common ground of workplace democratization.

This book is a comprehensive approach to the theory and practice of the "Democratic firm" – from philosophical first principles to legal theory and finally to some of the details of financial structure. The argument for economic democracy supports private property, free markets and entrepreneurship for instance, but fundamentally it replaces the employer/employee relationship with democratic membership in the firm.

For students, teachers, policy makers and others interested in the application of democracy to the workplace, this book will serve as a manifesto and a standard reference on the topic.

PART I

Theory of the Democratic Firm

1

The Labor Theory of Property

Property Rights and the Firm

This book presents a new analysis of capitalism. The analysis is new to the conventional stylized debate between capitalism and socialism. But the ideas are not new. The labor theory of property, democratic theory, and inalienable rights theory are part of the humanist and rationalist tradition of the Enlightenment.

The theory of the democratic worker-owned firm walks on two legs. That is, it rests on two principles.

(1) The property structure of the democratic firm is based on the principle that people have a natural and inalienable right to the fruits of their labor.

(2) The governance structure of the democratic firm is based on the principle that people have a natural and inalienable right to democratic self-determination.

This chapter deals with the labor theory of property (the fruits-of-their-labor principle) while the next chapter deals with the application of democratic theory to the firm.

The Fundamental Myth about Private Property

The understanding of what private property is and what it is not—is clouded in both capitalist and socialist societies by a “Fundamental Myth” accepted by both sides in the capitalism/socialism debate. The myth can be crudely stated as the belief that “being the firm” is a structural part of the bundle of property rights referred to as “ownership of the means of production.” A better statement and understanding of the myth requires some analysis.

Consider any legal party that operates as a capitalist firm, e.g. a conventional company in the United States or the United Kingdom that produces some product. That legal party actually plays two distinct roles:

— the capital-owner role of owning the means of production (the capital assets such as the equipment and plant) used in the production process; and

— the residual claimant role of bearing the costs of the inputs used-up in the production process (e.g. the material inputs, the labor costs, and the used-up services of the capital assets) and owning the produced outputs. The “residual” that is claimed in the “residual claimant” role is the economic profit, the value of the produced outputs minus the value of the used-up inputs.

The Fundamental Myth can now be stated in more precise terms. It is the myth that the residual claimant’s role is part of the property rights owned in the capital-owner’s role, i.e. part of the “ownership of the means of production.” The great debate over the public or private ownership of the residual claimant’s role is quite beside the point since there is no “ownership” of that role in the first place.

It is simple to show that the two roles of residual claimant and capital-owner can be separated without changing the ownership of the means of production. Rent out the capital assets. If the means of production such as the plant and equipment are leased out to another legal party, then the leasor retains the ownership of the means of production (the capital-owner role) but the leasee renting the assets would then have the residual claimant’s role for the production process using those capital assets. The leasee would then bear the costs of the used-up capital services (which are paid for in the lease payments) and the other inputs costs, and that party would own the produced outputs. Thus the residual claimant’s role is not part of the ownership of the means of production. The Fundamental Myth is indeed a myth.

Who is to be the residual claimant? How is the identity of that party legally determined—if not by the ownership of the means of production? The answer is that it is determined by the direction of the contracts. The residual claimant is the hiring party, the legal party who ends up hiring (or already owning) all the necessary inputs for the productive operations. Thus that party bears the costs of the inputs consumed in the business operations, and thus that party has the legal claim on the produced outputs. The residual claimant is therefore a contractual role, not an ownership right that is part of the ownership of the means of production.

The ownership of the capital assets is quite relevant to the question of bargaining power; it gives the legal party with the capital-owner’s role substantial bargaining power to also acquire the contractual role of residual claimancy. But there is no violation of the “sacred rights” of private property if other market participants change the balance of bargaining power so that the capital assets can only be remuneratively employed by being leased out. Markets are double-edged swords.

Understanding the Fundamental Myth forces a re-appraisal of certain stock phrases such as “ownership of the firm.” That usually refers to the combination of the capital-owner’s role and the residual claimant’s role. But residual claimancy isn’t something that is “owned”; it is a contractual role. What actually happens when party A sells the “ownership of the firm” to party B? Party A sells the capital assets owned in the capital-owner’s role to B, and then B tries to take over A’s contractual role as the hiring party by re-negotiating or reassigning all the input contracts from A to B. Party A cannot “sell” the willingness on the part of the various input suppliers to re-negotiate or renew the contracts. Thus A’s contractual role as the previous residual claimant cannot be “sold” as a piece of property like the capital assets. If B could not successfully take over the contractual role of residual claimancy, then it would be clear that by “buying the firm,” B in fact only bought the capital assets. Thus buying the capital assets is not a sufficient condition to “become the firm” in the sense of becoming the residual claimant.

Buying the capital assets is also not a necessary condition for becoming the firm. A rearrangement of the input contracts could result in a new party becoming the residual claimant of the production process using the capital assets without there being any sale of the capital assets. The prime example is a contract reversal between the owners of the capital and the workers. We will later discuss examples where worker-owned firms are established by leasing the capital assets from the legal party that previously operated as the residual claimant in the production process using those assets. For example, this sometimes happens in distressed companies when the capital-owner no longer wants the residual claimant’s role. It also happens in the Soviet Union and China when the means of production in certain enterprises are leased to the collectivity of workers.

Contract reversals can also go the other way. For example, the physical assets of many gas stations are owned by large oil companies that lease the assets to individuals as independent operators. During the Middle East oil embargo a number of years ago, gas prices shot up and long lines developed at gas stations. The gas stations became potential profit centers for the oil companies so some companies decided to reverse the contracts. Some oil companies terminated the leases and offered to hire the previously independent operators as employees to run the stations. One independent operator in Texas made the national news by barricading himself in the station and refusing to accept the new arrangement. He said to the oil company, “You can’t do that; you have to buy me out.” He thought he “owned the firm” in the sense of “owning” the residual claimant’s role. The oil company would have to “buy the firm” from him. But, alas, one doesn’t own a contractual role, and the oil company had more than enough bargaining power to reverse the contracts (with him or someone else as the station manager).

Thus “ownership of the means of production” is neither necessary nor sufficient to being the firm in the sense of being the residual claimant in the production process using those means of production. Contrary to the Fundamental Myth, being the firm is not part of the ownership of the means of production.

Ownership of a Corporation is not “Ownership of the Firm”

The logical structure of the above argument is, of course, independent of the legal packaging used by the capital owner, e.g. is independent of whether the capital is owned by a natural person or by a corporation. Thus understanding the Fundamental Myth also allows us to understand what is and what is not a part of the bundle of property rights called “ownership of a corporation.”

Suppose an individual owns a machine, a “widget-maker.” It is easy to see how that ownership is independent of the residual claimant’s role in production using the widget-maker. The capital owner could hire in workers to operate the widget-maker and to produce widgets—or the widget-maker could be hired out to some other party to produce widgets.

That is a simple argument to understand. But it is amazing how many economists and lawyers (not to mention lesser souls) suddenly cannot understand the argument when the individual is replaced by a corporation. Indeed, suppose the same individual incorporates a company and issues all the stock to himself in return for the widget-maker. Now instead of directly owning the widget-maker, he is the sole owner of a corporation that owns the widget-maker. Clearly this legal repackaging changes nothing in the argument about separating capital ownership and residual claimancy. The corporation has the capital-owner’s role and—depending on the direction of the hiring contracts—may or may not have the residual claimant’s role in the production process using the widget-maker. The corporation (instead of the individual) could hire in workers to use the widget-maker to manufacture widgets, or the corporation could lease out the widget-maker to some other party.

The legal ownership of the corporation only guarantees the capital-owner’s role. The residual claimant’s role could change hands through contract rearrangements or reversals without the ownership of the corporation changing hands. Therefore the ownership of the corporation is not the “ownership of the firm” where the latter means the residual claimant’s role in the production process using the corporation’s capital assets (e.g. the widget-maker). The idea that the repackaging of the machine-owner’s role as corporate ownership is a transub-stantiation of capital ownership into “ownership” of the residual claimant’s role is only another version of the Fundamental Myth.

The Appropriation of Property

Property rights are born, transferred, used, and will eventually die. In production, old property rights die and new property rights are born; in exchange, property rights are transferred. In production, the new property rights to the outputs are born or initiated. The acquisition of the initial or first-time property right to an asset is called the “appropriation” of the asset. Property rights die (i.e. are terminated) when the property is consumed or otherwise used up. In production, it is the property rights to the inputs (materials and services of capital and labor) that are terminated. When a property right is terminated that is a negative form of appropriation; it can be termed the appropriation of the liability for the used-up property.

In production, there is the appropriation of the assets produced as outputs and the appropriation of the liabilities for the used-up inputs. Some symbolism can be used to capture the idea. Consider a simple description of a production process where the people working in the enterprise perform the labor services L that use up the inputs K to produce the outputs Q. Thus the produced outputs are Q and liabilities for the inputs could be represented by the negative quantities −K and −L. Let us represent these three quantities in a list where the quantities are given in the order:

$\left(\text{outputs},\text{inputs},\text{labor}\right).$

Then the list (o...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Dedication
• Table of Contents
• Introduction
• Part I: Theory of the Democratic Firm
• Part II: Worker Ownership in America and Europe
• Part III: Enterprise Reform in the Socialist World
• Conclusion
• References
• Index