Hayekian Insights on Capitalism Part II: Capitalism and labor

Introduction

I am drawing a critical distinction between the role played by the market in coordinating human plans and the institutional forms people adopted in pursuing those plans.  Market advocates usually assume because the market is formally voluntary, institutions arising within and sustained by it are as well.  After making the first mistake of equating the market with civil society they then make the even worse mistakes of equating the virtues of civil society with these institutions.  They are tragically wrong.  One of the realms where this kind of thinking has done the most harm involves the relation of capitalism to labor.

The modern market economy is closely tied to enormous increases in people’s physical well being.  We live longer, have higher incomes, and enjoy far more extensive choices in our lives than have most people throughout history. This transformation in human life is due in large part to markets’ capacities to coordinate increasingly complex economic cooperation among people.

But can capitalism share in the credit? Those on the political left say “no,” and often then reject markets as a whole.  Those on the right say “yes.” They falsely assume that since the market arises from formally voluntary relations between buyers and sellers, the organizational forms people adopt while buying and selling will be as well.  They then equate markets with capitalism as they had earlier equated markets with civil society.  Capitalism therefore is equated with civil society.  In both groups the fundamental error is equating capitalism with the market.

This case can be made in Hayekian terms, as can the case for a viable alternative.

My previous argument  made four points important in discussing this question, points rooted in Hayek’s insights. To recapitulate briefly:

•  A qualitative distinction exists between markets and the organizations that act within them. This is a version of Hayek’s distinction between spontaneous orders and the other emergent systems he included within cosmos, and of deliberately constructed organizations designed to attain a specifiable purpose or a hierarchy of such purposes, which he labeled taxis.

•  Within a market, organizations have interests distinct from and often antagonistic to the market processes that produced and sustain them.  This relationship exists across the board, including the biological equivalent of organisms in ecosystems.

•  While organisms in ecosystems have only two choices: adapt or perish, organizations in spontaneous orders have a third: they can adapt, perish, or change the rules to privilege them over others.

•  Finally, civil society cannot be derived from the rules of the market.  In a free society the rules of the market are derived from within civil society.

With this foundation I want to take a brief look at what was in many ways the first modern corporation.

The Dutch East India Company

Wealth seeking organizations are nothing new. They existed long before market economies dominated the economic world. Several hundred years ago as markets slowly expanded in Western Europe the most innovative creators of such organizations adapted them to take advantage of the new possibilities opening up.  State chartered corporations are an example. One of them, the Dutch East India Company, was responsible for developing the trade in nutmeg and making it available in Europe.

The Dutch East India Company’s rise to power and prominence was connected to the Netherlands’ rise to commercial wealth, which the country achieved even before England. Among their many innovations, the Dutch first employed the revolutionary idea of public issuance of shares to fund commercial ventures. The world’s first stock exchange was founded in Amsterdam by the Dutch East India Company, which then issued stock to raise money to build their business, just as IPOs do today.

Like a modern corporation, the Dutch East India Company engaged in voluntary transactions with its customers. One of it’s most famous products was nutmeg, and customers could not be forced to buy it. Consequently, after every transaction both consumers and the company believed they were better off than before.  For market advocates this constitutes a wonderful example of what some call the “magic of the market,” whereby a small nut was transported thousands of miles, to enrich the well-being of Europeans willing to buy them. This in turn enriched those who organized the venture.

But there is more to the story.

The Dutch East India Company had been given a 21 year monopoly over trade in East Asia by the Dutch government. The inhabitants of the islands producing nutmeg were not their customers, far away Europeans were.  To the degree civil society existed it was in the Netherlands, the Bandanese  islanders, who lived where nutmeg grew, were excluded from it.

With control over nutmeg’s availability securely in the hands of the Dutch East India Company, and the inhabitants of the islands excluded from civil society, the logic of seeking wealth before everything else ruled there and it ruled fiercely:

The Netherlanders enforced their nutmeg monopoly with paranoid brutality, banning the export of the trees, drenching every nutmeg in lime before shipping to render it infertile, and imposing the death penalty on anyone suspected of stealing, growing or selling nutmegs elsewhere. When some Bandanese failed to appreciate the VOC’s God-given right to control the nutmeg trade – it’s possible the islanders hadn’t understood the “contract” to which they’d “agreed” – the then head of the Company, Jan Pieterszoon Coen, ordered the systematic quartering and beheading of every Bandanese male over the age of 15. The population of the Banda islands was around 15,000 when the VOC arrived. 15 years later, it was 600.

While capitalism had not yet formed as a national, let alone a worldwide, system, this behavior is an early demonstration of its logic. It is the logic of seeking wealth before all other values, the logic of the market freed from subordination to civil society.  Like modern corporations the company was structured to value wealth over all other considerations. If it were a church its god would have been Mammon.

Everything in the Dutch East India Company’s environment was a resource for its use, a problem to be overcome, or irrelevant. The natives of the Banda Islands started out being useful until control over their resources was gained.  They then became irrelevant until they objected. Once they objected they became problems, and were slaughtered.

The point of this example is straightforward. In a market economy those who do not enjoy legal protection and stand in the way of a corporation seeking wealth can easily be exterminated. This is as true of people as it is of coyotes or weeds.  Legal prohibitions against murder come from outside the market.  Civil society structures the market with rules requiring equal standing, it does not emerge from it.

Slave labor

Capitalism is supposedly a creature of free labor, but this convenient myth is not so.  In the United States slavery had long been an important part of industrial production for the market and played a key role in our industrial development.

The Baltimore Iron Works was one of the largest industrial enterprises in colonial America, having completed its first forge and beginning production in 1733. From its inception the Baltimore Iron Works used enslaved labor as a significant part of its workforce, probably because its owners already employed many slaves on their agricultural lands. Free workers, Black and White alike, were also employed, but records indicate slaves made up almost half the workforce.

Even after slavery was abolished in the North, using enslaved people in private industry was common in the South. While most slaves were engaged in the cotton industry, about 5% were owned or hired to work in factories, or in construction, mining, lumbering, and transportation.  Companies as well as individuals owned slaves.  The South’s economy was largely agricultural because on balance cotton production was enormously profitable.  But slavery was also employed there in private industry.

For skilled slaves slavery’s brutality was ameliorated  by an expanding labor market that made them sought after, even when enslaved.  But this was due to there being a viable market, not to the logic of industrial production for profit. Had the market not been expanding, or there been an over supply of such skilled people, the market’s positive impact would have been far less, or even absent.

Neither production for sale in a contractual setting nor market based industry required free labor. It only required secure property rights over resources and a reliable contractual framework between buyers and sellers. How the commodities got to market was economically irrelevant so long as they did, and could be sold profitably.

The connection between private industry and slavery went still deeper. Far from being economically secondary to Northern industrialization, slavery was crucial to it, and valued accordingly.  Much of Northern prosperity had its roots in the extraordinarily profitable cotton economy of the South. Textile production played a central role in New England’s industrial development.  Ronald Bailey writes “In 1860 . . . New England had 52 percent of the manufacturing establishments and 75 percent of the 5.14 million spindles in operation.” He added “New England mills consumed 283.7 million pounds of cotton, or 67 percent of the 422.6 million pounds of cotton used by U.S. mills in 1860.”

Steven Deyle writes  the value of slaves in the US was “roughly three times greater than the total amount of all capital, North and South combined, invested in manufacturing, almost three times the amount invested in railroads, and seven times the amount invested in banks.” In 1860 New England’s economy, was inextricably intertwined with, as Bailey puts it, “the labor of black people working as slaves in the U.S. South.

Slavery was not initially confined to Africans.  Indians and Whites alike were enslaved in the colonies. A little known chapter was the mass enslavement of the Irish under Cromwell and after.   The reasons were to acquire victims for forced labor for the market.  Blacks were ultimately preferred over other races because escape was more difficult for them. The change was economically not racially motivated.

This briefest of overviews of slavery establishes two additional points. First, market production does not need free labor.  There was a market price for slaves, and it was high. It was even higher for skilled slaves than unskilled, but that money went to the owner, to divvy up as he chose.  Second, productive slaves could bring in more for themselves when their skills were relatively scarce. Their added income was a measure of their utility to employers and not of their skills. So viable markets do not need civil society for all people, nor do they need free labor, nor need they value anything beyond profit.

Capitalism and the inhumane treatment of ‘resources’

The following ethical dilemma was reported in Bernard Rollins’ column in the Canadian Veterinary Journal:

You [as a veterinarian] are called to a 500-sow farrow-to-finish swine operation to examine a problem with vaginal discharge in sows.  There are three full-time employees and one manager overseeing approximately 5000 animals.  As you examine several sows in the crated gestation unit, you notice one with a hind leg at an unusual angle and inquire about her status.  You are told “She broke her leg yesterday and she’s due to farrow next week.  We’ll let her farrow in here, and then we’ll shoot her and foster off her pigs.”  Is it ethically correct to leave the sow with a broken leg for a week while you await her farrowing?

In the actual case, when the visiting vet offered to splint the sow’s leg for free, he was told profit margins were so tight they could not afford the time to care for her.  The vet was deeply troubled.  He had been raised on a hog farm where animals were well treated, and a similarly injured animal would have been either immediately treated, or euthanized.

Rollin writes he once asked ranchers in Colorado and Wyoming “How many of you spent more money treating scours [a disease in calves] than the calf is worth?”  He reported “Every one replied in the affirmative.”  Some were angered by the question, as if it implied they wouldn’t have done so.

When one of Rollins’ colleagues’ son-in-law was working in an industrial hog “farm” he noticed some of the pigs were sick and, being familiar with the disease, offered to treat it.  “’We don’t treat sick animals’ he was told, ‘We kill them by knocking them over the head with a crowbar.’”  The man treated them anyway and was fired for his efforts, until he told management he had done so with his own money.  He was re-hired “with a reprimand and warning.”

One additional point about markets arises from this example. When a resource is valued only as a resource, any effort attending to its needs not paid back by that resource’s added productivity is (in economic terms) wasted.  A rational manager of production seeking to maximize income will do nothing to improve the conditions of animals that does not pay for itself.

In 1781 the slave ship Zong was stranded in still air and ran low on supplies while disease struck both crew and slaves.  The captain ordered  over 100 slaves thrown overboard, expecting to collect insurance on them once arriving in Jamaica. The insurers argued they should not have to pay because the captain had claimed they threw the people overboard due to lack of water, yet the ship still held plenty of water.  The insurers lost when the original court ruled deliberate killing of slaves was legal in some cases.   They won on appeal, making it clear the killings were not required by lack of supplies.

A leading British abolitionist, Granville Sharp, then tried to have the captain, crew, and owners tried for murder. The court ruled “What is this claim that human people have been thrown overboard? This is a case of chattels or goods. Blacks are goods and property; it is madness to accuse these well-serving honourable men of murder… The case is the same as if wood had been thrown overboard.”

In 1997 the movie “Amistad” depicted the same market based logic argued in an American court involving the killing of slaves on a slave ship.

The impersonal market values slaves, pigs, and free labor by exactly the same metric: how much can it produce in excess of what is needed to sustain it?  If modern ‘free’ labor is treated better than slaves or pigs, it is not due to the market, it is due to the legal framework that establishes the rules of commerce. The logic of the market treats pigs with broken legs and Bandanese inhabitants objecting to their treatment the same way: if it makes economic sense, slaughter them.

There is another factor to consider.  As members of civil society rather than as capitalists ranchers frequently treated their animals better than a purely economic analysis of the situation justified.  They operated within a deeper moral framework than did corporate agribusiness. The best of them responded to that deeper moral framework as human beings, not corporations. This moral framework is incompatible with the pure logic of the market.  It must come from elsewhere.

These examples from industrial agriculture and from farmers and ranchers indicate the difference between operating within civil society, where prices are signals and individuals balance these signals with other values when making their decisions, and the logic of capitalism where prices are commands and the only safe choice is how to make the most money. When a resource, no matter how valuable, ceases to contribute to the bottom line it becomes immediately expendable.

I am not describing theoretical possibilities, but rather the actual behavior of market based enterprises, some in civil society and some operating with the logic of capitalism. None of these disturbing examples are in violation of the logic of market exchange. Capitalism is no more intrinsically moral than the Dutch East India Company or the murderous captains of slave ships.

Lowell, Massachusetts

Other than slaves, in the United States initially there were no masses of landless laborers.  No enclosure movement had seized people’s land for private profit, thereby generating masses of desperate poor.  Slavery had been ended in New England long before the Civil War, and the region was dominated by small farmers who owned their land.  It was in this environment that the American textile industry first began to grow.  No matter how the cotton had gotten there, the first New England mill towns were not the “dark Satanic Mills” William Blake had described in England.

Lowell Massachusetts, the country’s most famous early mill town, was founded in the 1820s and by the 1850s had become the largest industrial complex in the country. Initially the mills had to attract the daughters of Yankee farmers who were not desperate for work.  They and their families could usually afford to say “no.” Consequently the company’s early efforts to recruit female textile workers paid good wages for the time, encouraging women to accept the year-long contract for work.  Many extended their contracts, working an average of four years.

Lowell was initially famous as an enlightened example of industrial production, although it was a kind of enlightened despotism, as befitted attitudes towards women at the time. Each of the “Lowell Mill Girls” was offered space in one of the hundreds of boarding houses run by the Boston Manufacturing Company.  The houses held up to 25 women, enforced a 10pm curfew and forbade male visitors.  The girls were advised how to dress, how to conduct themselves in public, and how to speak properly.  They were also given opportunities to attend lectures, concerts, and other events.

Most employees initially worked 70 or more hours a week in hot and difficult workplace conditions. But as the rate of returning workers testified, much work back then was difficult wherever it existed.  In the 1830s, when the economy took a downturn, the mills decided to reduce wages by 15%. The women went on strike, and lost.  Two years later,  the mills proposed an increase in rent for those living in the boarding houses. More than 1,500 walked out with support from the local community.  The company was found to have in violated its written contract and the rent hike was abandoned.

The women organized again in 1845, seeking a ten hour workday.  Their unity was combined with thousands of signatures on petitions and the appearance of some of the women at public hearings.  The Lowell corporations eventually reduced the workday from fourteen to eleven hours. The women’s victory helped energize the American labor movement in its quest for shorter working hours.

Losing to their employees did not seriously damage the industry. New England’s textile industry rapidly expanded throughout the 1850s and 1860s. It grew so rapidly it could not recruit enough Yankee women to fill all the new jobs at wages they were willing to pay. But there was a new labor force willing to work for less.  Textile managers turned to survivors of the Irish Famine, large numbers of whom had recently immigrated to the United States. After the Civil War, with cotton again abundant, the textile mills reopened, recruiting French Canadian men and women as well. While many Irish and French Canadian immigrants moved to Lowell to work in the textile mills, until the mid-1880s Yankee women still dominated the workforce. But conditions were changing, and mostly not for the better.

By 1900 competitive pressures and technological developments had dramatically changed working conditions for Lowell’s mill hands. In every department fewer workers tended more machinery in 1900 than in 1840, and the machinery operated at considerably greater speeds. But working conditions had deteriorated.  In terms of workers’ health and safety, conditions were worse in 1900 than in the city’s early years.

The declining work-week compensated somewhat for the quickened pace of work. But the mills did not reduce working hours of their own accord. The hours declined only under state regulation. From an average 73 hours a week in the 1830s and 1840s, a 60-hour week was common by 1874. By 1912 mill owners could require no more than 54 hours. But that year, when the mills shortened their hours in response to a new state law, management cut daily wages proportionally. This action prompted the famous general strike in Lawrence, MA. The workers prevailed and won raises rather than the initial pay cuts imposed by management.  Clearly, as in 1845, there was no ‘equilibrium wage rate in any sense that mattered. The managers had a choice and made it at the worker’s expense until forced to change policies.

Working conditions had deteriorated because employees with viable options had been replaced by employees with few if any.  They improved only through political and union agitation. How far they had deteriorated can be seen from one of the most tragic industrial disasters of this period.

The openness of the market to entrepreneurship created new job possibilities, but the institutional framework within which the market operated was not equality of contract, it reflected enormously and increasingly unequal bargaining conditions arising as labor became more desperate for employment.

The Triangle Shirtwaist fire

The logic of unregulated capitalism reached one of its clearest expressions in the Triangle Shirtwaist fire.  By 1911 working conditions in the market had deteriorated to the point that seamstresses at the Triangle Shirtwaist Factory (in NY) were locked in the building so they could not leave till their workday was done. Their labor contract gave their employers the right to keep them under lock and key during their working hours.

The building caught fire. The fire escape was inadequate and collapsed.  There were only 27 buckets of water to put out the fire. 146 girls and women, most aged from 16 to 23, died horrible deaths either from burning and smoke or from jumping from high windows to escape the flames, and falling to their deaths.  The owners who had prevented them from being able to save themselves  were acquitted of manslaughter, arguing they did not know the doors were locked. They did ultimately lose a civil suit in which plaintiffs won $75 compensation per deceased victim. The company’s insurance had paid the owners about $400 per casualty. Ultimately the owners made about $60,000 from the deaths they caused.   The factory’s owners Isaac Harris and Max Blanck opened another factory a few days later with no fire escape and inadequate exits. Over the next few years, these men were repeatedly cited and fined for locking exit doors during business hours.

Union Carbide and Bhopal

The Bhopal disaster which killed thousands in India took place much more recently and involved a major American corporation, Union Carbide.

On December 3 1984, more than 40 tons of methyl isocyanate gas leaked from a pesticide plant in Bhopal, India. The plant operated with safety equipment and procedures far below those of its sister plant in West Virginia. The local government had been aware of safety problems but because the plant was doing poorly, feared the economic effects of  losing a large employer if requiring good standards had led to its closure.

The leak immediately killed at least 3,800 people and caused subsequent premature death for 15,000 to 20,000 more. The company responsible for the worst industrial accident in history lost no time in trying to dissociate itself from legal responsibility. It successfully prevented its victims from suing them in US courts. In addition, the company’s top executives refused to honor Indian law regarding their standing trial for culpability in the disaster.  Union Carbide also attempted to manipulate, obfuscate and withhold scientific data to the detriment of victims. As late as 2005, over twenty years after the accident, it has not stated exactly what was in the toxic cloud that killed so many.

Compensation was ultimately set at $2,2000 per victim, a paltry amount for human lives, and employed an artificially low number for assessing fatalities and other casualties.  After the settlement the company’s stock rose.  Had compensation been paid at the same rate Union Carbide’s asbestosis victims where being awarded in US courts its liability would have been greater than the $10 billion the company was worth and insured for in 1984. The company would have been bankrupted, its shareholders losing their investment. But Indians were not members of American civil society.

Following the disaster Union Carbide closed its plant but did not completely clean the site. Apparently as of 2005 the plant continued to leak toxic chemicals and heavy metals that have found their way into local aquifers.

Since the Bhopal disaster Union Carbide has shrunk dramatically in an effort to restructure and divest itself. By doing so, the company avoided a hostile takeover, placed a significant portion of its assets out of its victims’ legal reach, and gave its shareholders and top executives bountiful profits. Today the company still operates under the ownership of Dow Chemicals.

 

Summing up

As the Dutch East India Company and slavery demonstrated murderous and exploitive organizations are quite compatible with market principles such as joint stock ownership, private property rights, contract, and dependence on consumers as voluntary customers.  The success of slavery in the economic history of the US before the Civil War, and in Southern industry indicates that it was compatible with the rise of an industrial market economy. In America’s market economy during the early 1900s workers could be locked in buildings during their work day, and if the building burned down the owners faced only negligible fines and ultimately made a profit on the disaster.  Much later corporations hid their resources and prevented those they harmed from having access to them, and refused even to report all that had killed innocent people. Their victims could not sue in American courts because they were not Americans.  Civil society was closed to them.  The issue here is not the market, but the degree to which American civil society included people as equal members. To the degree people were not equal in fact as well as law, they were simply resources valued solely by the money they could make others.

Unlike a few hundred years ago killing inconvenient people is no longer acceptable business practice. Unlike a few decades ago, imprisoning workers in fire traps is no longer allowed in the US.   But having people die due to business decisions remains a cost of doing business, mere collateral damage on the way to the bank.  Except when constrained from the outside, for purely profit oriented businesses everything in their environment helps increase income, is a threat, or is irrelevant. The needed constraints are from their perspective limitations on their right to make a profit.  What has changed is not the nature of these businesses but the context within which they act.

Today laws opposed by business limit this kind of abuse, but corporations are continually pushing for new laws that, if carried to their natural conclusion, would establish a new industrial serfdom, something close to slavery, because workers would not own the contents of their own minds if those contents could be linked to what they learned while working for a business.  When a janitor cannot take a better job because of a do not compete clause in a contract, we are approaching re-establishing serfdom while libertarians call it freedom of contract.

Those who equate markets with corporate capitalism, and also equate them with freedom, do not understand markets, they do not understand freedom, they do not understand corporations, and they do not understand capitalism. And they have no grasp at all on the role labor should play in a free society.

Hayek gives us some important insights on the broader nature of the problem and how to address it.

Cosmos and taxis

The failure to distinguish civil society from capitalism is rooted in the ascension of economics as the ultimate description of a free society in much of this country. Among the many casualties of this transformation, is complete blindness as to how capitalism is a specific development of the market, one where corporations are allowed to grow unhindered. Economists, even those claiming to be inspired by Hayek’s work, have generally failed to comprehend the full implications of one of his most valuable insights, that distinguishing “spontaneous orders” from organizations.

Hayek’s distinction between instrumental organization and spontaneous order points to a fundamental contrast in the living world. This distinction extends from animals in ecosystems to businesses in markets, political parties in democracies, research teams in science, and charitable organizations in civil society.

Like organisms, organizations adapt to their environment in order to persist. Different environments lead to different adaptations.  Within civil society a rich economic ‘ecosystem’ arises, from sole proprietorships and artisans to partnerships and family owned businesses; from workers’ cooperatives to corporations.  The mix is incredibly complex although in practice it still reflects the enormous material and legal inequalities existing even with formal equality of status.

As part one explained, the interests of economic organizations are in tension with the market. Some organizations will try to change the rules in their favor rather than adapting to changes they do not control.  Those of great wealth, and particularly corporations, have been most successful in this regard. As they do civil society is overridden by capitalism.

Within capitalism, organizations are forced by market processes alone to maximize their financial income on pain of being taken over by others if they do not. In capitalism the biggest winners are corporations, overrunning other associations because of their ability to manipulate the system in their favor and total specialization to the market feedback alone. They are the kudzu  of the market, the keystone species of capitalism.

The basic problem is straightforward: under capitalism, capital rules and labor is a cost to be minimized. Under capitalism human well-being is secondary to acquiring capital.  Within a free society human well-being is the good to be maximized and capital exists to serve human well-being. They are mutually exclusive.

Solutions: The Mondragon Co-Operative Corporation

In 2012 I was part of a group that traveled under the auspices of the Praxis Peace Institute to Mondragon, Spain, in Basque Country. We were the latest in a series of trips the Institute regularly sponsors to study the most impressive example of worker co-operatives in the world today.  The following description draws on my experience there and elsewhere along with published sources, to demonstrate how the relations between markets and human well being can be reversed, and made positive. But first a few revealing facts about the Mondragon Co-Operatives.

•  The Mondragon co-operatives are over 50 years old and today have almost 90,000 worker members engaged in high tech and traditional manufacturing, engineering, banking, retail sales, housing, education, social services, and agriculture.

• In 2005, the latest year for which I have figures, they were the third largest supplier of automotive components in Europe and had been designated by GM as “European Components Supplier of the Year” in 1992.

• Co-operatives contribute 10% of their surpluses to the community, serving civil society at still another level.

•  Management within each cooperative is chosen from among its worker members by the worker-members.  Top management can never be paid more than six times the lowest paid ‘wage’ in that particular firm.

• Today there are over 120 Mondragon co-operatives. In all its history only two have failed, one after over 50 years of success.

• When the Mondragon co-operatives began the Basque region was the poorest in Spain. It is now the country’s richest.

The Mondragon cooperatives constitute proof free people within a contractual regime and market economy can create prosperity for themselves, their children, and their region. At another level they constitute a powerful critique of the intellectual, moral, and historical case for capitalism. They prove that capital can be employed by labor to the benefit of nearly all.

Ideology

The Mondragon co-operatives reflect the coming together of several ideological movements that sought to find a middle ground between what they regarded as the amoral heartlessness of capitalism and the tyranny of state socialism.  These movements include Rochdale Cop-operativism, Christian socialism, and distributionism, which centered around the work of Hilaire Belloc and C. K. Chesterton in the interwar years.

Probably the single largest influence was Catholic social thought, though its contents were and are not specifically Catholic. This outlook placed economic activity within a larger moral universe rather than is so often the case today, seeking to reduce all social life to economic concepts.  It emphasized labor’s primacy over capital and argued enterprises should be governed by those who work in them. The church has never abandoned this ideal though obviously some care more about it than others.  Pope John Paul II summarized it as:

. . . associating labor with the ownership of capital, as far as possible, and by producing a wide range of intermediate bodies with economic, social, and cultural purposes; they would be bodies enjoying real autonomy with regard to the public powers, pursuing their specific aims in honest collaboration with each other and in subordination to demands of the common good, and they would be living communities both in form and in substance, in the sense that the members of each body would be looked upon and treated as persons and encouraged to take an active part in the life of the body.

It should be obvious this approach is in keeping with my emphasis on civil society rather than the market in any of its forms as the center of a free society. Every time a Pope is accused of being anti-capitalist, this is the perspective he is taking.

It should be clear that Mondragon’s guiding ideas do not fall into contemporary left/right categories. I would argue this is so because both left and right tend to be economistic in ways this kind of thinking is not.

Mondragon demonstrates that when labor can hire capital rather than capital hiring labor the market is compatible with civil society and human well-being.  My point is not that a free society should consist only of workers’ cooperatives and with no traditional wage labor.  Even among the Mondragon cooperatives some salaried people, particularly those with rare skills, prefer the more traditional arrangement. As a result they have no decision-making power within the company.  When people are free to cooperate under conditions of equality a wide variety of forms can be expected to arise.  But such a society will place wage labor in a very different context, one where capitalism no longer calls the shots, civil society does.

I think one of the most important innovations the Mondragon co-operatives made was establishing their own bank.  This success demonstrates how credit unions and other mutualist financial intermediaries can spur local and regional economic development.

It is also run as a co-operative managed by the co-operatives that established it as well as by its own workers.  This enabled them to finance their own expansion and enabled future workers to borrow the money needed for initial membership at low to zero interest, and repay it easily.  Neither is possible under traditional capitalist banks in the US.  Unlike US banks the bank actively assists new entrepreneurial co-operative ventures, and this assistance explains why in over 50 years only two co-operatives failed.

Citizenship over ownership

The second vital change made by the Mondragon co-operatives was in abandoning the traditional market model of a co-operative.  Traditionally co-operatives are owned through possession of shares, as in a corporation, but no one is allowed to own more than one share.  Mondragon is different.

Membership rests on working in the co-operative, not on owning a share. Membership reflects being a member of a community in civil society, not on money invested. Once accepted for membership, I am a member only so long as I work there. As a member I have an equal vote with all other members. Collectively we govern the business.  If a worker retires or goes to work elsewhere he or she loses membership, and with it the right to vote.  The money he or she invested in buying a share is returned.

The worker has a right to a share of the cooperative’s net profits, paid out in a way superficially similar to wages in a traditional business and is pegged with prevailing wage rates in non-co-operatives.   Consequently it will not necessarily increase in an unusually profitable year.

While a member the worker also accrues a portion of the company’s net worth, which hopefully is increasing.  But he or she only receives this portion after ceasing to be a member, usually upon retirement. Increases in capital value are kept within the enterprise to be used for business needs, and when a person retires they receive their accrued portion over and above their pension.

Membership in Mondragon is more analogous to democratic citizenship than to traditional ideas about owning property. As Joseph Tuck, CEO of northern California’s Alvarado Street Bakery,  which is organized along the Mondragon model, explained to me “Nobody owns the cooperative.”

In the US different tax laws lead to a different way of distributing net profits. While the Alvarado Street Bakery is governed along the same lines as the Mondragon co-operatives, each year workers receive their portion of net worth above that which went to maintaining the enterprise.  The pay out is based on hours worked rather than on proportion of ownership or monthly income and in 2013 averaged $18,000 above an average ‘wage’ of $68,000. The company’s CEO, Joseph Tuck, told me many workers received a greater share of this income than he did because they put in more hours.

In either Mondragon or Alvarado Street, by having membership rights attached to work but capital rights attached to the person working, these cooperatives solved the problem of future workers not being able to afford membership in an successful ongoing enterprise, which has been a bane of worker cooperatives organized along purely economic lines.  No worker need come up with the enormous amount needed to buy into a successful enterprise. Nor can the retiring worker sell his or her share to reap the benefits of capital accumulated during their membership because this capital is distinct from the share.  When a new member buys in they immediately begin accruing value from capital accumulated during their membership.  Shares guarantee “skin in the game” but not the worker’s entire pelt.

The breadth of the Mondragon cooperatives’ actions, and their success in competing within the European market, points to their practicality. That the same organizational structure succeeds in the United States demonstrates there is nothing about us that makes worker cooperatives impractical.

The market supports civil society

Becoming an owner of a business is a transformative experience.  David Ellerman quotes a man’s reaction when  Fr. Arizmendi originally tried to convince them to start a bank.

We told him, yesterday we were craftsmen, foremen, and engineers. Today we are trying to learn how to be managers and executives. Tomorrow you want us to become bankers. That is impossible.

This man later became a leading member of the bank.  Civil society and human well-being benefit from empowered workers.

Civil society and human well-being apparently benefit from empowered workers. David Erdal reports on research indicating a

… community with high employee ownership is a better place to live than one with least employee ownership. Residents of [such communities] are less likely to be victims of crime, more likely to have feelings of confidence in public authorities, more likely to have a feeling of security, less likely to be involved with domestic violence, more likely to stay in school, more likely to have training after school, more likely to enjoy better physical and emotional health, more likely to have a network of friends they can rely on in time of trouble and more likely to give blood.

Policy Implications

A free society will have many individual businesses, from small-time operators to giant companies established by brilliant innovators such as Elon Musk and Steve Jobs.  But when these people pass from the scene the legal system should treat the joint stock corporation as the option of last resort.  If a family cannot maintain control and if workers are unable to buy the business, and convert it to a Mondragon kind of organization, then the public corporate form may be necessary.  But it should be a last resort, not a first, and workers should have right of first refusal if and when it is sold.

But all public corporations’ wings need serious clipping so that they never again becomes the dominant species in the market ecosystem. Among such measures the following seem to me important:

• They should not be able to buy other businesses not directly related to their activity.  And when they do they should give up the name of the acquired firm, and use their own.

• As institutional sociopaths, corporations’ propensity for illegal action should be explicitly recognized with a measure such as “Three Strikes and You’re Out” implemented where after three significant illegal actions the company is broken up and sold, with shareholders receiving nothing.

•  The corporatists on the Supreme Court to the contrary, corporations should be banned from making political contributions. A society that gives its sociopaths dominant financial influence over those elected to make its laws is a society in trouble.

• Corporations should be barred from owning land and from engaging in activities requiring maintaining a viable ecosystem. As such they should be excluded from agriculture, lumber, fishing, and similar activities, for reasons to become clear in Part III.

If they can succeed economically under such circumstances, perhaps they should.

Robots

Even Mondragon style businesses are threatened by the rise of robots in increasing areas of economic life.  As it is those who benefit from adding robots to production are capital owners while wages are pushed lower than they might otherwise be.  For working people’s incomes this coming transformation is China on steroids.

It need not be.

The solution does not involve abolishing or weakening the market.  Nor does it involve eliminating opportunities to grow wealthy based on one’s entrepreneurial skills.  But it does require “putting people back together again.” For markets to serve human beings we need a coherent model of a human being in market analysis.  As it is, human beings serve markets in far too much economic thinking.

My mom’s death endowed me with the capital I need to live for quite some time on it alone, and with the aid of Social Security perhaps indefinitely, barring an expensive illness or need for institutionalization.  To preserve this state of affairs I do not have to perform any productive function with this wealth beyond choosing a person to manage it.

Capital is valuable because of the social context within which it exists. As my example demonstrates, its value has little to do with the skills of its owners.  Neither money nor a silicon chip manufacturing center nor a solar plant would have any value in a hunting and gathering society.  To serve human beings capital must serve the society that makes it valuable. To do so it must serve the people who live in that society, for it is constituted out of their networks of cooperation.

Beyond Mondragon?

From these considerations comes my proposal (though similar alternatives are possible and some may be better): upon reaching adulthood every citizen of the US receives a percentage of the capital value of the country that is passed on to future generations in that year.  The percentage is calculated by the number of years the person filed tax returns.  Each year would provide an equal percent to every recipient times years tax reports were filed. It would be divorced from the amount of taxes paid or the income earned, treating every member of society equally.  Each citizen would be able to invest this capital as he or she wishes, including starting a business or hiring out this entrepreneurial function to others.  The income they receive from it would serve as a guaranteed income.

Where would this wealth come from?

There should be a 100% inheritance tax beyond the amounts those passing away left to others enabling them to live at up to middle class levels. It is both reasonable and laudable for the very successful to seek to care for their descendents and loved ones after they are gone.  This provision enables them to do so, whether they wish to give to one person or to 1000.  As of this writing any such beneficiary should be able to receive up to $1,000,000, perhaps a little more. No one could receive more than this total.  So long as they live modestly the recipients would be freed to devote their lives to pursuits that need not be focused on making more money. Perhaps they could be artists and poets or create gardens or backpack across the world or simply collect wine.  The choice would be theirs.

Anyone could also make as much money as they wished and were capable. There would be no tax on their success.  But given that their wealth depends not only on their skills, but also on the society within which they live, upon their demise after leaving generous amounts to as many people as they wish, the rest returns to the common pool.

What about philanthropy?  If some one wants to support their university or other nonprofit or charity let them donate while they are still alive.

Problems solved

This proposal is based on the Mondragon model in Spain and similar enterprises in the US.  These systems are successful. Mondragon has flourished for over 50 years and played a pivotal role in turning Spain‘s poorest province into its wealthiest.  The Alvarado Street bakery is now over 30 years old.

• The capital in which increasingly wealth is absorbed would now serve every American, but with no hindrance to the important role entrepreneurship plays in investing and creating new businesses.

• One major source for political corruption by wealth is erased.  There are no permanent oligarchs able to pay to have the laws gamed in their favor.

• People will be able to become rich, and those receiving inheritances will be better off than those who do not.  But no one will suffer a poor old age.

•  This policy would provide a steadily growing floor as every adult ages..  The floor it provides is maintained in a way that benefits the economy both by facilitating a wide range of smaller more local enterprises that will be more labor intensive, and also by preserving a healthy investment market. The job market would be transformed

Robots in such an economy will benefit everyone, because everyone will ultimately be their owners.

Beyond capitalism

If present trends continue capitalism will break down for any of several reasons, but one is that with the advent of effective robots there will be a permanent downward pressure on wages. Yet capitalism requires customers.  In economic terms customers are the other side of labor.  People who are broke do not buy much.

I believe this demonstrates that capitalism is unsuited to the logic of a prosperous and free market economy.  It is an adaptation of pre-modern organizations seeking wealth by any means possible to market conditions.  The mass poverty associated with pre-market and early market conditions helped solidify its styles of organization, and time was all that was then necessary for the logic to work itself out.

Along the way even the greedy found that they were as much subject to serving the system as the people they controlled and abused.  Its guiding principle is the rational sociopathy exhibited by the Dutch East India Company, by the rational and market based slavery of the United States, and by the exploitative and lethal practices of the Triangle Shirtwaist Company and Union Carbide.  This behavior will not change because the bias is within their mode of organization and strongly favors those at ease with it for leadership positions.

The confusion of capitalism with markets, and of markets with civil society is one of the greatest intellectual and moral failings of our time. It is time to end it. Seeing clearly has been blinded by equating markets with capitalism and with civil society, and so capitalism becomes civil society even though it consistently undermines it.  It is time to finally see clearly.

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Sources used but not linked

Erdal David. 2002, “Is Employee Ownership Better for your Health?” in Owners at Work, Vol. XIII, No. 2, Winter 2001/2002, Kent, Ohio, Ohio Employee Ownership Center

Rollin,  Bernard E. 2014.  Our Broken Bond and Promise to Animals, The Land report, no. 74, summer, 2004, p 12.  Article adapted from his address to the 2004 North American Veterinary Conference.

Boehm, Randolph and Charles Dew. 1995 Slavery in Ante-Bellum Southern Industries, University Press Pub.

Starobin. Robert S. 1970. The Economics of Industrial Slavery in the Old South The Business History Review, Vol. 44, No. 2 (Summer, 1970),

______. 1970. Industrial Slavery in the Old South, 1970. Oxford University Press