The Alternative American Dream: Inclusive Capitalism
In this 1987 MacNeil/Lehrer NewsHour report, Paul Solman reported on workers’ attempt to buyout the General Dynamics shipyard in Quincy, Massachusetts, and spoke with Chris Mackin, a leader in the worker ownership movement.
Paul Solman: Worker ownership: When I joined the labor force in 1970, it was the dream of many an “alternative” business, including ones I worked for. Egalitarianism. Justice. Capitalism for all. A Boston weekly newspaper of which I was the editor, “The Real Paper,” was in fact entirely owned by its staff.
Chris Mackin, of the consulting firm Ownership Associates, has been a key figure in the worker ownership movement for almost as long as I’ve been a journalist. He first showed up in a NewsHour story of mine in 1987. He was advising a worker buyout of a shipyard in Quincy, Massachusetts, about which we were reporting.
When I ran into him recently, I asked him to tell me what has happened to the worker ownership dream. Here’s his report.
Chris Mackin: In the classic 1967 film “The Graduate,” Dustin Hoffman gets a single word of advice about the secrets of prosperity: “Plastics.” Almost 50 years later, as economic inequality gallops, compounds and then gallops some more, we need a similarly pithy intervention to address matters of economic fairness.
One candidate that may be equal to that task is a homely sounding economic noun that separates the wealthy from the rest of us. “Assets” are a seemingly magical set of resources that work for anyone who owns them. In conversations about economic fairness, “assets” are a resource that has largely remained outside the policy tent. President Obama has recently raised expectations about how economic policy might attack the problem of inequality. But he likely won’t get that far unless he too is ready to step outside that tent.
Accounting textbooks teach us that there are different categories of assets, both tangible (e.g., land, buildings, housing, corporate stock, minerals) and intangible (e.g., patents, goodwill, copyrights). Wealthy people own lots of these assets. So many that they often forgo that more pedestrian instrument that makes possible the accumulation of income, the paycheck.
Unwealthy people own few, if any, assets. Theirs is wage-dependent, income based universe. They live from paycheck to paycheck. If assets are the key discriminant that sustains the wealthy, why is it that the most commonly invoked solutions to economic inequality tend to focus on income enhancing measures such as minimum wage campaigns, payroll tax credits and job training? That’s not where the real money is. One could be forgiven for suspecting a plot. If the general problem of economic inequality could be likened to an overly deep bowl of soup that should be more fairly consumed, income-based solutions attack the challenge with forks. We need spoons, asset spoons. Let’s examine a few.
Broad-Based Asset Sharing Strategies
Since 1982 every citizen of the state of Alaska has enjoyed an annual dividend as a return on their share of oil revenues through the Alaska Permanent Fund. Bipartisan support, including from former Republican Gov. Sarah Palin, has protected this asset sharing program for over 30 years. When legislators sought access to a share of Permanent Fund revenue to fund state deficits in 1999, they were rejected by 84 percent of voters. Annual dividend payments have ranged from $331 to $2,069 per Alaskan.
Similar natural resource-based ideas have been proposed but not yet implemented. One would provide all citizens an annual clean air dividend derived from taxing polluters. The “Sky Trust” concept developed by West coast entrepreneur Peter Barnes has also attracted bipartisan support in part because, like the Alaska Permanent Fund, it circumvents government capture and directs revenue immediately to citizens. Sky Trust dividends would be an asset shared by all. Natural resource-based asset sharing concepts have decided advantages: They can help address complex problems such as pollution, and they’re easily shared through the common status of citizenship.
Inclusive Capitalism in the Workplace
For all its appeal (and its apparently successful implementation in Alaska), resource-based asset sharing remains more or less pie-in-the-sky. But another form of asset sharing is already ubiquitous and therefore more immediately relevant to most Americans. It also challenges many contemporary assumptions about the nature of capitalism. That category is broad-based ownership of jobs and workplaces by employees, a trend with more statistical heft than is generally imagined. It also happens to be this author’s lifelong professional specialty.
Most people don’t know it, but today there are over 19,000 companies that collectively employ over 25 million workers that fit under a broad definition of employee ownership. That figure comprises nearly 16 percent of the American workforce. A related statistic from the University of Chicago’s General Social Survey reports that about 18 percent of those who work for companies in this country own stock in their companies. This is progress of sufficient measure to qualify for a compelling new label put forward by the Washington, D.C.-based think tank, the Center for American Progress. In a recent policy paper called “Growing the Wealth,” they refer to these trends as constituting “inclusive capitalism.”
There are two primary structures for inclusive capitalism and a number of other structures worthy of mention. Firms owned significantly by Employee Stock Ownership Plans (ESOPs) comprise the first significant category. ESOPs are a specific form of legal trust that can borrow money while also serving as a retirement plan for employees. They are regulated by the federal government and are inclusive, covering all employees working in a company for more than 1,000 hours in a given year. They number over 11,000 companies, employing over 10 million employees. They exist primarily in small to medium size privately held firms with a median workforce of 125, though they also exist with companies as large as the Publix Supermarket chain, with 152,000 employees. Their governance practices vary widely but research indicates that ESOPs that make use of more inclusive, transparent and democratic practices enjoy decided performance advantages over their less democratic counterparts.
The second largest cohort of inclusive capitalism companies makes use of “stock options.” This category is a favorite of entrepreneurial start-ups, particularly in the tech sector. The motivational power of this method cannot be denied. Paul Solman demonstrated it on the NewsHour years ago. However, the act of “ownership” here is usually ephemeral, not unlike the love life of the praying mantis. Ownership “happens” at the moment the price of the stock rises above the option’s “call” price, at which time option holders typically end the affair by cashing in, after which ownership ends up where it started — with the venture capitalists or the public stock markets. More a form of compensation than of ownership with attendant corporate governance rights, stock option ownership does enjoy a large footprint. In 2009, the Bureau of Labor Statistics estimated that 9 percent of private sector employees — somewhere north of 11 million employees — held one or more forms of stock options.
Other forms of inclusive capitalism include partnerships in law, accounting, architecture and other professions. Partnerships have a venerable history but constraints on raising external capital and legal liability issues have lead to a decline in their implementation.
Cooperatives are the most democratic and historically authentic inclusive capitalism structure reaching back to the 18th century. They exist in a variety of forms including consumer ownership, credit unions and ownership by franchisees pursuing common purchasing efforts. The most relevant segment to this conversation, worker cooperatives, dates back to the 19th century. Their footprint here is small, consisting of approximately 350 companies with collective employment of about 3,500 people. Challenged about whether their ideas can ever get to scale, enthusiasts frequently point overseas to the Basque country of Spain where the Mondragon group of industrial and service cooperatives employ over 80,000 people in over 200 companies. Unlike other forms of inclusive capitalism that generally rely on conversions of established and usually successful firms, cooperatives typically focus on start-ups — a constraint the cooperative sector will need to confront.
For all the data and anecdotes that can be shared about inclusive capitalism, it would be a mistake to suggest that the more established model of exclusive capitalism in the American workplace is on the run. Status quo models that reinforce concentrated ownership are taught in our premier law and business schools and touted as superior models. In their modestly titled paper “The End of History for Corporate Law,” Yale professor Henry Hanssman and Harvard professor Reinier Kraakman declared the conversation about alternative ownership forms over. According to the authors, other corporate constituencies (e.g., employees) “should have their interests protected by contractual and regulatory means rather than participation through corporate governance.”
Standing side by side with the business and law school skeptics who look askance at inclusive capitalism models are the investment theory scolds. Contrary to the legendary counsel of Andrew Carnegie that those who wish to build wealth should concentrate both their thoughts and their capital in very few places, these experts remain eager to pounce on any report of workers holding too much employer stock. Because workers are supposedly “invested” in their firm by virtue of their employment, buying stock in their employer would be the opposite of prudently hedging their bets. In practice, however, evidence published in Nov. 1, 2010’s “Pension and Benefits Daily” shows that inclusive capitalism companies, particularly in the ESOP sector, are more likely to have diversified retirement designs (e.g., ESOPs and 401(k) or pension plans) than comparable companies.
And yet, the “diversification” criticism exposes a disagreement about inclusive capitalism’s purpose. Inclusive capitalism is not an investment proposition; it is an ownership sharing proposition. It is about creating a new “membership” relationship between employees and their place of work, a relationship that is not merely psychological, creating a “sense” of ownership, but about real ownership.
Finally, how does an exclusive capitalism thesis comport with the existence of inclusive public stock markets open to all? Doesn’t the existence of massive amounts of 401(k) stock owned by ordinary Americans refute the claim of exclusive ownership? Unfortunately, research by NYU economist Edward Wolff suggests not. Using 2010 data, he estimates that 80.8 percent of stocks and mutual funds and 91.5 percent of business equity are held by the top 10 percent of American society. So despite the populist marketing claims that Wall Street is owned by all of us, the evidence indicates otherwise. The public markets of Wall Street remain the preserve of exclusive capitalism.
The Politics of Inclusive Capitalism
Inclusive capitalism may not sell well with professors and pundits, but it appears to have some genuine appeal at the grass roots with “Main Street” business owners and across a surprisingly wide spectrum of political opinion. There are actually indications that these ideas can unite or at minimum enforce a practical truce among ideologically disparate people.
Case in point: The federal government’s two strongest champions of broad-based employee ownership through ESOPs also happen to be ideological outliers in Congress. Rep. Dana Rohrabacher, R-Calif., believes in ESOPs to encourage broad-based property ownership in the private sector that, if successful, promotes conservative values by lessening dependence upon government. He has drafted his own far reaching legislation that would give preferences for broad based employee ownership companies in areas such as government procurement. In the other corner, Sen. Bernie Sanders, I-Vt., a self-described democratic socialist, looks at ESOPs and cooperatives and sees economic inclusion and justice. He’s familiar with examples in his home state, including an ESOP company of roughly 200 employees, King Arthur Flour, whose roots predate the Revolutionary War.
At a reception of ESOP companies not long ago, I mentioned this seemingly strange ideological commonality, namely the enthusiasm of Sen. Sanders, to its conservative champion, Rep. Rohrabacher. His reply to me… a short, stunned pause followed by a gradual smile. “Bernie served with me in the House before moving on to the Senate… we have our differences, but we also agreed on a lot of things. I think he is a patriot. So am I. So we agree on this issue. That’s great!”
The Rohrbacher-Sanders story suggests that the idea of inclusive capitalism enjoys a kind of ideological ambidextrousness that is promising. If enthusiasts of both the right and the left can refrain from insisting that participants enter the world of these ideas through their particular ideological doors, even more progress can be made.
Writing about the overall importance of ideas in the conclusion to his “General Theory,” John Maynard Keynes famously claimed that “after a certain interval” the scribbling of economists and political philosophers is more powerful than is commonly understood. If an interval of a century and a half — 165 years to be precise — fits this definition, we may hope that the thoughts of one of Keynes’ more prominent predecessors are now ready for fresh inspection. John Stuart Mill is widely considered one of the founders of the field of economics. In his 1848 book “Principles of Economics,” Mill cast a wary eye toward the newly entrenched ownership structures of industrial capitalism he was then observing. He predicted a different future:
“The form of association, however, which if mankind continue to improve, must be expected in the end to predominate, is not that which can exist between a capitalist as chief, and work-people without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves.”
Over the past decade, ample evidence has been collected to demonstrate that inclusive structures of capitalism at the workplace are fully competitive with more exclusive models. It appears that no concessions need be made at the altar of efficiency when structuring a more fair economy. This kind of evidence is useful on its own but perhaps its most important virtue is how it can affect the overall policy conversation. Because Americans still need to pay the bills, a focus on income related interventions and paychecks will remain important. However, if we are to bridge the economic divides that trouble us today, we also need to break out into new territory. We need to break down the exclusive club that capitalism has become. We need to share the machinery of capitalism.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions