DEMOCRACY IN THE WORKPLACE

...It follows that in some situations in which a conventional firm would expand in order to increase returns to shareholders, worker-managed firms would not...

...it also implicitly recognizes that in order to protect some fundamental right or interest, workers are entitled—have a right—to at least some democratic controls...

...Members chose to contribute more capital rather than cut their wages...

...Unless they are denied access to credit—the Mondragon complex has its own bank—self-governing enterprises have a greater resiliency than American corporations...

...Yet if self-governing enterprises can be as efficient as orthodox firms, why have they so often failed...

...The certificates would be nonnegotiable, but an employee would have the right to withdraw the value of his certificates after seven years or at the age of 67...

...On what grounds, then, must the employees' right to democratic controls be restricted to the conventional (but by no means well-defined) limits of trade unions...

...However, the president and the board in turn select a general manager from outside the membership at a salary sufficient to attract managers who thus earn considerably more than the members themselves...

...If in the meantime skilled managers are in short supply, self-governing enterprises will have to compete for their services, as does Puget Sound Plywood, a worker-owned cooperative...

...The president and members of the board of trustees are elected by and from the members, who all receive the same pay...

...Now if a citizen were perfectly free to leave, then citizenship would be wholly voluntary...

...Thus the argument for the democratic process fails...

...In both countries, and in continental Europe as well, labor and socialist movements largely abandoned producer cooperatives as a major short-run objective...

...But, of course, that is not really the issue, given the separation of ownership from control to which Berle and Means called attention in 1932 in The Modern Corporation and Private Property...

...of those that do, if citizens are competent to judge which they are sufficiently qualified to decide collectively through the democratic process...

...Property Rights AS TO PROPERTY RIGHTS, transferring control over the decisions of a firm to its employees, it might be objected, would violate the right of owners to use their property as they choose...

...Even if property rights are construed in a narrower, more legalistic sense, the way a self-governed enterprise is owned need not necessarily violate such a right...

...You don't want to milk the cow, because if you milk the cow, there's nothing left...

...The proceeds of a payroll tax covering most Danish firms (about 25,000) would be divided, in effect, in two parts...

...Their decision to do so is voluntary...

...But Michels's "law" is neither iron nor a law...

...Second, a principle of democratic equality does not require that citizens be equally competent in every respect...

...58 greater control over the government of economic enterprises...

...3) Michels' s iron law of oligarchy operates so strongly in economic enterprises that democThis essay is a revised version of one of my Jefferson Memorial Lectures, delivered at the University of California, Berkeley, and to be published as Toward Equality with Liberty...

...the introduction and survival— despite severe difficulties—of self-management in Yugoslavia...

...If too often exaggerated, it is nonetheless a grievous mistake to underestimate the importance of democratic institutions in the domain of the state...

...One could easily dream up still other meritocratic alternatives...

...in all likelihood they would strengthen it...

...racy would prove to be a sham...

...Virtually every worker would receive certificates from the fund in an amount that would vary according to the number of years worked, but not according to the employee's wage or salary...

...In larger firms, they would no doubt elect a governing board or council, which in the typical case would probably be delegated the authority to select and remove the top executives...

...In a much more systematic study published in 1981, Edward Herman found that 64 percent of the 200 largest nonfinancial American corporations are controlled by inside management and another 17 percent by inside management with an outside board, or altogether 81 percent of the total, with 84 percent of the assets and 82 percent of the sales...

...Though the causes are complex, with some exceptions they have not sacrificed investment to current income but, on the contrary, have maintained very high levels of investment...

...Although political theorists who favor worker participation have often emphasized its potentialities for democratic character and its beneficial effects on democracy in the government of the state, a stronger justification, with a more Kantian flavor, seems to me to rest on a different argument: if democracy is justified in governing the state, it must also be justified in governing economic enterprises...

...During a period of a falling economy and rising unemployment in Spain from 1977 to 1981, employment in the Mondragon co-ops increased from 15,700 to about 18,500...

...As to investment, except in the circumstances just described, members of a self-managed enterprise would have strong incentives to invest, and thus to save, whenever doing so would increase the surplus available for distribution to themselves...

...formal economic analysis showing how a labor-managed market economy would theoretically satisfy efficiency 59 criteria...

...Decisions made by the government of a firm and by the government of the state, however, are in some crucial respects more similar than this classical liberal interpretation allows for...

...growing awareness of the need to reduce the hierarchical structure of the workplace and increase participation by workers in order to increase productivity...

...Purely theoretical analysis by economists, whether critics or advocates of worker-managed firms, is ultimately inconclusive...

...As we shall see later on, it could entail a shift of ownership from stockholders to employees...

...As a worker in one of the plywood co-ops put it, "If things get bad we'll all take a pay cut...

...Rule by corporate managers, it might be argued, is such a system...

...Does the Principle of Equality Hold...

...As these and other cases show, self-governing enterprises are likely to tap the creativity, energies, and loyalties of workers to an extent that stockholder owned corporations probably never can, even with profit-sharing schemes...

...But this objection not only fails to meet the problem of nonunion workers (who in the United States comprise about 80 percent of the work force...

...Is this not precisely the question at issue: do workers have a fundamental right to self-government in their economic enterprises...

...Like a state, then, a firm can also be viewed as a political system in which relations of power exist between government and governed...

...The percentage of gross value added in investment by the cooperatives between 1971 and 1979 averaged 36 percent, nearly four times the average rate of industry in the heavily industrialized Basque province in which Mondragon is located.' Moreover, when a recession in the Spanish economy led to declining profits in 1981, "investment [was] squeezed, but the workers [were] prepared to make sacrifices to keep their jobs, digging into their own pockets to keep the balance sheets in shape...

...Thus it is not inconceivable that American workers might enter into a social contract that would require them to provide funds for investment, drawn from payrolls, in return for 2 Henk Thomas and Chris Logan, Mondragon (London: George Allen & Unwin, 1982), pp...

...for if a citizen found "voice" unsatisfactory, he could freely opt for "exit...

...These decisions are enforced by sanctions, including the ultimate sanction of firing...

...HOWEVER, CAN THE ASSUMPTIONS that justify the democratic process reasonably be applied to economic enterprises...

...In the theoretical scenario just sketched out, expanding employment is a problem only at the level of the individual firm...

...Lexington, Mass.: Lexington Books, 1982)_ 0 60...

...Their market share increased from less than 1 percent in 1960 to over 10 percent in 1976...

...When they own the company themselves, their incentive to sacrifice in order to save it is all the stronger...

...3 Nor have the self-managed enterprises of Yugoslavia, on the whole, followed the theoretical model described above...

...American corporate managers are frequently criticized nowadays for an excessive emphasis on short-run as against long-run returns...

...Ends: Savings, Investment, Growth, and Employment HOW WOULD A SYSTEM of self-governing enterprises affect savings, investment, employment, and growth...

...Unlike a citizen of a democratic state, one who leaves a firm has no right to employment in another...

...I have suggested why it is reasonable to expect neither of these to occur...

...and it is often offset, if never wholly nullified, by a universal tendency toward personal and group autonomy and the displacement of strictly hierarchical controls by at least some degree of mutual control...

...If, however, a right to property is understood in its fundamental moral sense as a right to acquire the personal resources necessary to political liberty and a decent existence, then self-governing enterprises would surely not, on balance, diminish the capacity of citizens to exercise that right...

...But is not "exit" (or exile) often so costly, in every sense, that membership is for all practical purposes compulsory—whether it requires one to leave a country, a municipality, or a firm...

...If unemployment existed and enterprises failed to respond to rising demand for their product by expanding employment, new firms would do so...

...Like the Meidner Plan in Sweden, the Danish proposal is intended to achieve several purposes: greater equalization of wealth, more democratic control of the economy, and, definitely not least in importance, a steady supply of funds for investment...

...A final observation on the problem of saving, investment, employment, and growth...

...3 The Economist, October 31, 1981, p. 84...

...Means: Managerial Skills and Efficiency A DISASTROUS ASSUMPTION of revolutionaries, exhibited with stunning naivete in Lenin's State and Revolution, is that managerial skills are of trivial importance, or will arise spontaneously, or will be more than made up for by revolutionary enthusiasm...

...THE GOVERNMENT OF LARGE AMERICAN CORPORATIONS could be seen as a form of guardian55 ship...

...It is not unreasonable to expect that democratic structures in governing the workplace would satisfy the criteria of the democratic process neither markedly worse nor markedly better than democratic structures in the government of the state...

...Although managers are nominally selected by a board of directors, which in turn is nominally chosen by and legally accountable to stockholders, in reality new managers are typically co-opted by the existing management that also, in practice, chooses and controls its own board of directors...

...Their quick demise convinced trade union leaders that in a capitalist economy unionism and collective bargaining held out a much more realistic promise of gains for workers than producer cooperatives...

...But a firm, it might be said, is nothing more than a sort of market within which people engage in voluntary individual exchanges: workers voluntarily 54 exchange their labor in return for wages paid by the employer...

...while as to means they would be unable to supply qualified management and would be less efficient than stockholder-owned firms like American corporations...

...Unlike citizens of a state, you might object, workers are not compelled to obey managerial decisions...

...For example, would workers vote to allocate so much of enterprise earnings to wages that they would sacrifice investment in new machinery and future efficiencies...

...This was one of the aims of a proposal introduced in Parliament by the Danish Social Democrats in 1973...

...Given the passivity of stockholders in a typical firm, their utter dependency on information supplied by management, and the extraordinary difficulties of contesting a managerial decision, it seems to me hardly open to doubt that employees are on the whole as well qualified to run their firms as are stockholders, and probably on average a good deal more...

...Because of the overwhelming weight of existing institutions and ideologies probably most people, including many thoughtful ones, will find it hard to believe that employees are qualified to govern the enterprises in which they work...

...As Peter Jay has remarked, it is hardly relevant to compare . . . the rational investment behavior of workers' cooperatives with the rational behavior of idealized capital enterprises working according to textbook optimization...

...At most it is a universal tendency in human organizations...

...And we lose the company...

...Although it is reasonable to assume that the percentage of management-controlled firms would decline among smaller firms, the question remains whether workers are as qualified to govern economic enterprises as managers who gain their position by co-optation, producing a sort of co-optative guardianship...

...Relationships of governors to governed of a sort that Americans have insisted on for 200 years in the public governments of the state would be extended to the hitherto private governments in the economy...

...Although rigorous comparisons of the relative efficiencies of labor-managed and conventional corporations are difficult and still fairly uncommon, the best analysis of a broad range of experiences in a number of different countries appears to support these conclusions: participation by workers in decision-making rarely leads to a decline of productivity...

...Yet just as the democratization of the authoritarian structures of centralized monarchies and modern dictatorships has transformed relations of authority and power in the government of states, so there is every reason to believe that the democratization of the government of modern corporations would profoundly alter relations of authority and power in economic enterprises...

...However, in considering whether a principle of democratic equality holds for business firms, it is important to keep two points in mind...

...To say that its scope is limited by an equally or more fundamental right to property runs afoul of our earlier analysis...

...and they would have a definite incentive not to do so if they expected that by doing it they would reduce their own earnings...

...It was from the failure of privately owned companies that the plywood co-ops started...

...One part—the smaller—would go to a national "Investment and Dividend Fund" that would be used both to beef up Danish investment and to provide a social dividend to Danish workers...

...If self-governing enterprises proved to be better matched to the incentives of workers than hierarchically run firms, and thus more efficient, this country might have a recipe for economic growth that would outperform even the Japanese—and leave recent American performances far behind...

...Let the firm be considered a political system, you might now agree...

...Efficiency and economic growth flow from investments in human capital every bit as much as from financial capital, and probably more so...

...Thus the effort to inaugurate the democratic process within firms is essentially a waste of time...

...If we actually lived in the latter world, we would hardly be considering the problem discussed in this paper at all.' Turning then to the domain of practical judgment, it seems likely that in the real world, self-governing enterprises might stimulate as much saving, investment, and growth as American corporate enterprises have done, and perhaps more, because workers typically stand to incur severe losses from the decline of a firm...

...The question raises many familiar issues of democracy versus guardianship as alternative politi56 cal regimes, notably the issues of competence: in making a judgment about the competence of workers, as about citizens in the state...

...It is hardly surprising that workers may fail to save a firm after management already has failed...

...Within this political system, however, cannot the rights of workers be adequately protected by labor unions...

...Guardianship has also been the ideal of many socialists, particularly the Fabians...

...And unless they were more likely to evade the external controls of competition and regulation, they should not be less efficient in a broader sense...

...In the real world, however, these comparisons between theoretical models do not take us very far...

...But an objection along these lines exaggerates the differences between a worker's subjection to decisions made by the government of a firm and a citizen's subjection to decisions made by the government of the state...

...Take a local government...

...During a period in which the Spanish economy was expanding generally, the sales of the Mondragon cooperatives grew at an impressive rate, averaging 8.5 percent annually from 1970 to 1979...

...In recent years, however, a number of factors have brought about a reassessment of the relevance of the older experience...

...explicitly or by implication they uphold guardianship...

...57 hardly deny that the losses incurred by workers from the decline of a firm are normally even greater than those investors suffer...

...The introduction of self-governing enterprises could be accompanied by the creation of new investment funds operating under democratic control...

...and the seeming success of many new arrangements for worker participation, control, or ownership in Europe and the United States...

...The most rigorous analysis to date is in the studies contained in Participatory and Self-Managed Firms, Derek C. Jones and Jan Svejnar, eds...

...Advocates of self-governing firms reply that in an economy of self-governing firms, the problem of employment is theoretically distinguishable from the problem of investment and growth...

...Indeed, if a citizen does not want to obey his country's laws, he is "free"—at least in all democratic states—to leave his country...

...The argument might be made that as to ends, self-governing enterprises would produce lower rates of savings, investment, growth, and employment than the "society" might rationally (or at least reasonably) prefer...

...Except in very large enterprises, the employees might constitute an assembly for "legislative" purposes—to make decisions on such matters as the workers chose to decide, to delegate matters they prefer not to decide directly, and to review decisions on matters they had previously delegated as well as the conduct of the board and the managers in other ways...

...First, while we may reasonably compare the ideal or theoretically possible performance of one system with the ideal or theoretical performance of another, we cannot reasonably compare the actual performance of one with the ideal performance of another...

...What is surprising is that workers' cooperatives have sometimes succeeded where private management had failed...

...plywood cooperatives and the Mondragon group...

...The other and larger part of the proceeds from the payroll tax would remain in the firm as share capital owned collectively by the employees, who would vote as enterprise-citizens, that is, one person, one vote...

...On the contrary, a government by the best qualified, that is, a system of guardianship or meritocracy, is justified by the marked differences in competence...

...For in times of stringency, when an orthodox private firm would lay off workers or shut down, in a self-governing enterprise the members can decide to reduce their wages, curtail their share of the surplus, if any, or following a prosperous period even contribute additional capital funds, as at Mondragon...

...far more often it either has no effect or results in an increase in productivity.' How Much Internal Democracy...

...A moderately foresightful worker would therefore be as greatly concerned with long-run efficiencies as a rational investor or a rational manager, and perhaps more so...

...Would firms run democratically by their employees be more short-sighted than firms run hierarchically by managers...

...upon death their value would be paid to the employee's estate...

...If the self-governing enterprises were to become widespread, it would be wise to provide much wider opportunities than now exist in any country for employees to learn some of the tools and skills of modern management...

...A system of self-governing enterprises would be likely to heighten—not diminish—efforts to improve a country's human capital...

...and since he cannot be punished by management for leaving, his decision to obey is perfectly free of all compulsion...

...To be sure, democratic structures do not escape Robert Michels's "iron law of oligarchy...

...Thus in theory and practice both corporate capitalism and bureaucratic socialism have rejected democracy for economic enterprises...

...In fact, citizenship in a democratic state is in one respect more voluntary than employment in a firm...

...Advocates of self-management agree that in contrast to conventional firms in which managers seek to maximize total profit for shareholders, the worker-members of self-governing firms would seek to maximize the per capita income of the members...

...I can readily imagine several objections to this argument: (1) A system of self-governing enterprises would violate a superior right to property...

...After all, laws made by the government of a state can be enforced by physical coercion, if need be...

...In most countries, in fact, nationalized industries are governed by some such scheme...

...But if so, then the government of a firm looks rather more like the government of a state than we are habitually inclined to believe: because exit is too costly, membership in a firm is not significantly more voluntary or less compulsory than citizenship in a municipality or perhaps even in a country...

...The employees' share of capital, however, and thus of voting rights, would not be permitted to increase beyond 50 percent—presumably a move to reassure private investors...

...Yet the decisions of firms, like the decisions of a state, can be enforced by the severe sanction of firing...

...some stunning successes, such as the U.S...

...In view of this, some critics have pointed out that members would have no incentive to expand savings, production, employment, or investment unless the effect were to increase their own per capita earnings...

...and to say that it is not justified in governing economic enterprises is to imply that it is not justified in governing the state...

...If so, would not the particular interests of workers in an enterprise conflict with the general interest...

...in distinguishing knowledge about the ends the collective enterprise should seek from technical knowledge about the best means for achieving those ends...

...It is sufficient that they are qualified enough to decide which matters do or do not require binding decisions—for instance, which matters require general rules...

...The question is not, however, whether self-governing enterprises would need managerial abilities but whether workers and their representatives would select and oversee managers less competently than is now the case in American corporations, which are largely controlled by managers whose decisions are rarely open to serious challenge, except when disaster strikes, and not always even then...

...If they have such a right, is it not obvious that, however essential conventional trade unions may be in reducing the impact of authoritarian rule in the government of a firm, an ordinary firm, even with a trade union, still falls very far short of satisfying the criteria of the democratic process...

...Would self-governing enterprises accentuate the sacrifice of deferred to immediate benefits, to the disadvantage and contrary to the collective preferences of their society...

...At the level of the economy, however, it would be dealt with by insuring ease of entry for new firms...

...If so, is it not appropriate to insist that the relationship between governors and governed should satisfy the criteria of the democratic process— as we properly insist in the domain of the state...

...What, then, is the nature and scope of this right or interest...

...Thus the members of one coop voted to increase their capital contributions by amounts varying from $570 to $1,700, depending on a member's wage level...

...Have I now understated the difference...

...Even in a democratic state, a minority opposed to a law is nevertheless compelled to obey it...

...hence both investment and employment would increase...

...2) The assumptions that justify the democratic process do not apply to an economic enterprise...

...Since a worker may choose to obey the management or not, he is free to leave the firm if he prefers not to obey...

...They did so, for example, at both the Chrysler Corporation and the Rath Packing Company...

...and if on matters they do not feel competent to decide for themselves they are qualified to set the terms on which they will delegate these decisions to others...

...The historical record relieves one of all need to demonstrate the foolishness of such an assumption...

...I mentioned the Mondragon producer cooperatives as an example of success...

...Moreover, in the past producer cooperatives have usually been organized in the worst possible circumstances, when employees desperately attempted to rescue a collapsing company by taking it over— often during a recession...

...This conjecture is supported by at least some experience showing that, given the opportunity, workers will make significant short-run sacrifices in wages and benefits in order to keep their firm from collapsing...

...These include the highly unsatisfactory performance of both corporate capitalism and bureaucratic socialism, which has stimulated a search for an alternative to both...

...Are Decisions Binding...

...For one thing, do economic enterprises make decisions that are binding on workers in the same way a state government makes decisions that citizens are compelled to obey...

...As everyone knows who is familiar with American and British labor history, the late 19th century saw waves of short-lived producer cooperatives both in Britain and in the United States...

...It has become clear that in the past labormanaged firms were often doomed from the start by weaknesses that are not inherent but remediable, such as shortages of credit, capital, and managerial skills...

...for it is ordinarily much easier and less costly in human terms for a well-heeled investor to switch in and out of the securities market than for a worker to switch in and out of the job market...

...They include the largest manufacturer of machine tools in the country, as well as one of the largest refrigerator manufacturers...

...Except in exceedingly small firms, employees would surely choose to delegate some decisions to managers...

...In this view the managers of stateowned enterprises were to be chosen by state officials, to whom the top managers were to be ultimately responsible...

...In the United States, at least, a significant proportion of both blue- and white-collar workers, often the more ambitious and aggressive among them, aspire to supervisory and managerial positions but lack the essential skills...

...2.b) Generally speaking, employees are not as well qualified as others to run a company...

...As a result, they have created their own managers...

...Most academic observers, including labor economists and social historians, concluded that the idea of labor-managed firms was a rejected and forlorn utopia irrelevant to a modern economy...

...In giant firms, where an assembly would suffer all the infirmities of direct democracy on an excessively large scale, a representative government would have to be created...

...Although a good deal of the discussion of self-governing enterprises that follows is necessarily conjectural, my aim is to compare how self-governing enterprises would probably perform in the real world with the actual performance of their main real-world alternative, the modern privately owned corporation...

...One reason for the success of the Mondragon cooperatives is the prominent place they have assigned to education, including technical education at advanced professional levels...

...Like the government of the state, the government of a firm makes decisions that apply uniformly to all workers or a category of workers: decisions governing the place of work, time of work, product of work, minimally acceptable rate of work, equipment to be used at work, number of workers, number (and identity) of workers laid off in slack times, and whether there is to be any work at all—or if, instead, the plant is to be shut down...

...OFTEN THE EFFECTS of more democratic structures have been greatly exaggerated by both advocates and opponents...

...If we permit ourselves to violate the unenforceable injunction of some welfare economists against interpersonal comparisons, we can ' Peter Jay, "The Workers' Cooperative Economy," in The Political Economy of Co-operation and Participation, A. Clayre, ed...

...100-105...

...Within a democratic country, citizens may ordinarily leave one municipality and automatically retain or quickly acquire full rights of citizenship in another...

...Oxford: Oxford University Press, 1980), p. 20...

...Perhaps an even more relevant example is the Mondragon complex of more than 80 worker cooperatives in Spain...

...A citizen who does not like a local ordinance is also "free" to move to another community...

...Unless self-governing enterprises were less competent in recruiting skilled managers, they should be no less efficient in a narrow sense than American corporations at present...

...In particular— (2.a) Decisions in economic enterprises are not binding in the same sense as decisions made and enforced by the government of a state...

...It is also a mistake to underestimate the importance in the daily lives of ordinary people of authoritarian institutions in the sphere of work...