How do you solve a problem like capitalism? Economic democracy versus the abolition of profit

In an interview on this blog last year, Hjalti Hrafn Hafthorsson of the Icelandic organisation Alda, put the case for an intrinsically different kind of economy. Companies, he argued, should be run as worker-controlled enterprises not as shareholder-owned entities managed by small boards of directors. With decisions guided by what employees want, rather than the legally prescribed imperative of maximising profit that determines current corporate behaviour, outcomes would be radically altered. Wealth would be more evenly distributed, companies would reflect what communities wanted and monopolies less likely to be formed.

 “I tend to believe,” Hafthorsson concluded, “that if working people were voting on some of the decisions made by corporate executives today many of those decisions would be overruled because people in general have values that aren’t measured in dollars or pounds.”

Alda’s vision of “economic democracy” is seen by many as a cure for the problems that plague society - inequality, stalling wages, environmental degradation, the dominance of large firms (in the energy ‘market’ for example) that exploit their captive consumers and companies’ footloose relationship with the communities that host them.

This means not merely a different way of reaching economic decisions, but the death of the shareholder. Workers, not wealthy investors or pension funds, would own as well as govern firms. It has been argued that the wider community should be represented on company boards, not just the workforce. Either way, what you have is an economy ostensibly geared towards the public interest, not private profit.

Taken together with the burgeoning movement for a basic, unconditional income, you can see the rudiments of an economy that values people, as opposed to things or profit. An economy, in other words, that treats people not as means to an end - economic survival and profit - but as ends in themselves, and gives them the freedom, and material security, to decide what is right for them.

“The difference, of course, is that we wouldn’t have capitalism anymore,” says Hafthorsson. But are these really the ways to transcend capitalism, or will we still be caught in its web?

There are some who think escape not so easy. The American Marxist, Andrew Kliman, looks upon capitalism as a network of relationships governed by immovable laws. You cannot simply “overrule” decisions because you don’t like them. It doesn’t matter, in this view, who is in charge or what their values are – whether they are money-grubbing psychopaths obsessed with profitability, or managers elected by the workforce, concerned above all else with the welfare of fellow employees and the effect of decisions on the wider community. Kliman is adamant that:

“Directives will not break the laws of capitalist production. The most important law is the determination of value by labor-time. It compels an enterprise, whoever owns or 'controls' it, to minimize costs in order to remain competitive, and therefore to lay off inefficient or unnecessary workers, speed up production, have unsafe working conditions, produce for profit instead of producing for need, and so on. If you are in a capitalist system, you cannot just issue a directive to produce for need, or a directive to refrain from laying off workers. Cutting costs is the key to survival.”

The disagreement as to what is and isn’t possible ultimately stems from contrasting definitions as to what capitalism is. Alda’s “economic democracy” stance reflects philosopher David Schweickart’s definition. Capitalism take places in the familiar “market economy”, yes, but the decisive characteristic, to Schweickart, is that it is based on wage labour. This means the vast majority of people have to rent themselves to the small minority that own companies, shops or offices in order gain the livelihood –  the wages, salaries or fees – that enables them to have a reasonable standard of life and not frequent food banks. Their need of an income means they are compelled to subject themselves to undemocratic rule at work and the baleful consequences of inequality, the dominance of huge firms and a lack of concern of external effects on society and the environment. The solution is to end the division between the elite that owns “the means of production” and the millions of people one or two payslips from bankruptcy. When workplaces are democratised, the argument runs, the behavioural characteristic of firms will change and seemingly intractable problems will become tractable. Values not “measured in dollars or pounds” would predominate. But this is decidedly not about the abolition of profit or competition. Profit will remain, it’s just that the people who receive it will alter.

Another way of describing this transformation is that it aims at the ‘democratisation of capital’.

However, to Kliman, this is based on a fundamental misconception of what capitalism really is. “Capital,” he writes, “is nothing other than value that is invested in order to end up with more value, so the fact that products have value is part and parcel of capitalism as such, no matter what its forms of property and institutional structures may be.” You can turn the institutions - the workplaces and corporations that overshadow our lives - upside down, you can put the people, not the corporate executives in the saddle, and nothing fundamental will change. Because any firm operating in a competitive economy will be drawn, however unwillingly, into the “grow or die” mentality that exists all around it, workers in a worker-controlled company will end up exploiting themselves.

You need do “do away” with capital, Kliman insists, and that requires doing away with commodities and the production of commodities. Given that most people – Marxists included – don’t think people should just live on the potatoes and onions they have planted in the back garden, he must be referring to a special quality in “commodities” that separate them from consumer goods. But more of that shortly.  

Kliman’s firm belief is that, in a capitalist society, institutional forms don’t matter. However hard they try not to, everyone has to swim with the current. In this, I think he is partly right. Non-shareholder enterprises do, I believe, behave differently, but not differently enough. In Britain, for example, you can see a glaring disparity in the way consumers are treated. The traditional shareholder-owned companies dominant in energy and water provision since privatisation in the 1980s, have engaged in crass profiteering. Electricity prices have shot up by 120% and gas prices by 190% in the last decade. Welsh Water, by contrast, which has been run as a social enterprise without shareholders since 2001, has reduced bills every year for seven years. The nationalised Scottish Water, is into its fourth year of a price freeze. Railways in the UK paint a similar picture. Private train companies have, in the context of burgeoning taxpayer subsidy, made an enormous return of 147% for every pound invested, but when the state is inadvertently put in charge of a rail-line, the taxpayer subsidy miraculously drops. The British National Health Service, in its heyday, exemplified the primacy of need over the bottom line.

Gar Alperovitz in America Beyond Capitalism, argues that the price advantage displayed by municipally-owned electricity utilities in the US “is due to the fact of public ownership itself; locally controlled public utilities often can be especially responsive to customers' needs and do not need to pay dividends to private shareholders.”

However, all these instances occur in cases of non-competitive monopolies or without direct competition for market share. When competing in a market against shareholder-owned competitors, social or state-owned or worker-controlled enterprises have much less freedom. The record of the famed worker cooperative corporation in Mondragon in Northern Spain, illustrates both how worker-run coops are an advance on the capitalist model, but also, in important respects, ape it. In Mondragon, we have, not an isolated divergence from capitalism, but Spain’s seventh largest company. Mondragon comprises 256 businesses that generate $4.8 billion a year in manufacturing, retail and distribution. It boasts 43 schools, one university and more than 80,000 employees.

As this analysis demonstrates, in stark contrast to the towering edifices of economic dictatorship and inequality that surround us, Mondragon is a beacon of democracy and egalitarianism. It operates on a one worker one vote basis, and each worker’s vote in the Mondragon general assembly, controlling production, income distribution and the election of the board, carries the same weight. The Mondragon CEO earns only nine times the federation’s lowest paid employee. Economic downturns are not met with automatic lay-offs. Mondragon members are more likely to vote for pay decreases in order to spare unemployment.

“In contrast to most capitalist companies, whereby the measure of a successful company is almost always based on maximum profitability, the cooperative approach offers an alternative that supports democracy through an egalitarian voting system, while at the same time promoting job security for worker-members, social justice and community responsibility,” say authors from the Center for Social Epidemiology, of Mondragon.

But this is not the whole story. While Mondragon embodies these undoubted advances, it has also expanded into other countries – Mexico, Morocco, Egypt, Argentina, Thailand and China, for example –  in much the same way that a capitalist company might and, significantly, its international workforce have not been offered cooperative membership. Roughly a third of Mondragon’s workers are not members of the coop. And, after trying in 1960s to adopt alternative manufacturing processes, Mondragon now incorporates familiar capitalist practices such as just in time inventory and shift work.

What this indicates, I think, is that it is very difficult to make worker cooperatives universal – to expand them without ensuring, at the same time, that a sizeable chunk of the population remains outside them. And also that cooperatives will inevitably respond to outside competition. There is no way to ensure that even a worker’s coop that is an exemplar of internal democracy will not vote to gain an edge through the introduction of ultra-competitive practices, thus compelling other cooperatives to follow suit, to grow or die.

Kliman would say that these inescapable flaws mean you have to “do away with” capitalism and markets, or, alternatively, that capitalism, the process of adding value through the sale of products, inevitably entails markets and you cannot have one without the other. That is what he means by commodities, the selling of products and the reinvestment of the profit made through that sale, as opposed to the neutral designation, ‘consumer goods’. But lesson of 20th history seems to indicate that you can’t abolish capitalism and markets, without entering a nightmare realm of central planning and total state domination. Kliman refers to the “horrors of state-capitalism that called itself ‘communism’” so he clearly doesn’t want to go back to that. He also says “we have to work out how we can have a modern society that operates without the laws of capitalist production being in control”. By “modern society” he seems to mean a society with a myriad of consumer goods and conveniences but lacking the compulsion or necessity to make a profit from these goods; to turn them into commodities. Is this an impossible dream? Is economic democracy within some form of regulated market, the best we can hope for? Can you really abolish capitalism? I would like to consider these questions at some point when I have the time.

Is this a market I see before me? Review of 'After Capitalism'. Final part.

If memory serves we were up to number 5.

5 Overwork

ED (economic democracy) should be able to do something about both the length of work and its intensity. Workers in control of an enterprise, if they desire a healthier balance between leisure and work, have it within their power to institute just that. “Work-life balance” would become a reality as opposed to possessing, as it does now, the status of an abstract choice.

Work could also become more varied. In the co-operative complex of Mondragon in Northern Spain, work tasks are rotated every two hours as a way of enhancing the mental health and productivity of the worker-owners.

But it is questionable whether, in a market, ED would be able to do everything about overwork. The imperative of any enterprise in a market is to survive and if other work-controlled enterprises chose to prioritise work over leisure and increase production and sales as a result, it seems likely that fellow worker-controlled enterprises would have to follow suit whether they wanted to or not.

Cure for Capitalism rating: 6/10

6 Instability

Capitalism’s instability stems from what (Keynesian and Marxist) economists call the business cycle. An immense and growing amount of goods and services are produced which eventually glut the market and become too much for consumers to absorb. Recession results and, in time, the process begins again.

Like ping-pong, you might say. “Don’t worry, be happy/things will get better naturally”.

In addition, capitalism, in the last thirty years, has become more volatile. It has suffered more frequent downturns and financial crises. This, it seems, is due to attempts to postpone a full-blown depression by bolstering people’s flagging incomes with consumer debt, and thus, because of spiralling interest payments, creating far more money at the top of society which just ends up in speculation.

“The ever-present danger to the system is deficient demand,” says Schweickart. “When supply outstrips demand, the economy falters. If goods can’t be sold, production is cut back, workers are laid off, and demand declines further.”

Would ED abolish the business cycle? I have to admit I’m not entirely sure. ED would undoubtedly abolish, or drastically reduce, wage-labour - the material dependence workers have, under capitalism, on how much money they can negotiate by selling their labour. Workers in ED enterprises would not be exploited. They would own and direct their work-places and receive a full share of profits. Labour would not be another “cost” of production. Because of this, the income of worker-consumers should be far more stable.

Whether ED enterprises would accumulate profits and use that capital to produce more goods, eventually glutting the market, I’m not certain. From what I can gather ED would substantially ease the business cycle, if not abolish it outright.

Cure for Capitalism rating: 7/10

Is this a market I see before me?

ED, compared to traditional socialism, embodies an alien trinity – profits, competition and markets. ED enterprises make profits and they compete with each other in a market economy. Historically, the Left has regarded the “market economy” as the problem, never the solution. It is, in many leftist eyes, from Friedrich Engels to Murray Bookchin, synonymous with capitalism and its myriad injustices.

But ED is unashamedly, a market economy. The “counterfoil” to the market lies in the practice of social control of investment – the destination of up to 15% of new investment is determined democratically through public meetings. But the bulk of the economy takes place in a market.

ED is, as Schweickart says, decentralised. It avoids the deformations of Communism. “There is no central authority,” he writes, “dictating consumption, production or employment.” But at what costs are these defects, this fatal centralisation of political and economic power, avoided? Does ED “socialism” cut off its nose to spite its face?

ED is based on the assumption that our most pressing economic problems stem, not from the fact that enterprises interact in a market, but the way production is organised. A hypothetical Martian landing on earth, mused the economist Herbert Simon, would conclude that human beings live in an organisational economy, rather than a market economy. Most economic activity takes place within the boundaries of firms rather than through market transactions between those firms. ED wants to radically change how these firms are internally organised.

You can, theoretically, utterly change the way Tesco is organised as a business, without altering its place in a market competing with other supermarkets

Light and Dark

But markets have inescapable defects. Organisations operating within them are forced to be institutionally selfish and have little regard to the people outside the boundaries of their precious organisation. They become egotistical competitors and, even if organised democratically, can become in Arizmendietta’s fear, “collective egotists.” Worker-controlled enterprises can and probably would be selfish in much the same way that trade unions currently are. Unions do, to some extent, represent the general interest but in a sense if you are not a member of a particular union, you don’t count.

But markets also have, it seems to me, certain definite advantages. They signal consumer preferences to enterprises more effectively than any form of planning. You can have undemocratic planning – central planning, the way the old Soviet Union and its replica states were organised. And you can – though it never been implemented on a mass scale - have democratic planning. Participatory economics and social ecology both embody democratic planning. But if you want goods and services to be produced unconsciously   -- to be available merely because enterprises react to signals that what they produce or do is popular and has demand – then that means some form of market.

The dilemma, I think, is that the advantages of markets are intrinsically linked to their detriments. The advantages are that consumer desires don’t have to be consciously stated. The disadvantages are that markets only work if there is profit to be made, they have a conservative bent, are hostile to experimentation and they grow.

Mondragon has an entrepreneurial division that tries to find consumer niches to exploit.  It’s quite possible that worker-controlled firms may be too successful. The evidence (and we are in the realm of large bodies here) is that they are more efficient than their capitalist equivalents, so they may actually be better at exploiting and magnifying consumer desires, and thus growing.

Shutting your (market) butt down (in certain areas)

What is clear is that there are large areas of society that should be closed to markets, however organised. “Thinking that we can live by the market alone is like believing that we can live by eating only salt, because salt is vital for our survival,” says the anti-austerity but pro-capitalist economist Ha-Joon Chang.

Markets – whether worker-controlled or not – do not work in health, for example, and cause either over-treatment or no treatment at all. In the media, the field of the creation and propagation of ideas and interpretation of everything “out there”, solutions are now focusing on non-market solutions. Participatory commissioning, for example, eschews markets and concentrates on public funding of investigative reporting.

Or culture, cinema and TV. The English writer Mark Fisher has spoken of the “the cult of minimal variation” - the need to make a profit means the risk-taking essential to artistic and cultural innovation is hamstrung. “Since it is now clear,” he writes, “that a certain amount of stability is necessary for cultural vibrancy, the question to be asked is how can this stability be provided, and by what agencies?” Notice, he does not say state agencies. But neither does he say market agencies.

Richard Wolff, another advocate of economic democracy, says you can have the advantages of markets – that they respond to consumer desires – without their downsides automatically following in train. If an enterprise in a worker-controlled economy fails, new jobs or training should be offered to its workers, he says. They are not just left to fend for themselves.

I can’t give absolute approval to Schweickart’s ED plan. There are elements I like about it. It gives meaning to democracy when the current capitalist charade just does a not very plausible impersonation. It accepts the necessity of markets but doesn’t go far enough in adjusting to their limitations and downsides. There are articles that consider this issue more completely than I have. ED also, rather conventionally, regards employment creation as an absolute good, when we are moving towards a world where thanks to technology, work is changing.

But After Capitalism does debate capitalism as a system and looks it squarely in the eye.  “If the contradictions of capitalism are as serious as I argue they are, and if they become more, not less, acute, as almost surely they will, then we will witness another sustained challenge to this most peculiar economic order,” Schweickart wrote a decade ago.

The contradictions are becoming more acute and another sustained challenge is brewing. The contents of the intellectual backpack of this coming anti-capitalist movement are, therefore, of crucial importance.