Other Forms of Ownership and Market Socialism

Self-managed cooperatives are virtually a sine qua non for late twentieth-cen­tury socialists. In recent years there have been at least two other proposals (aside from the worker control-state ownership model) for economic systems composed of self-managed cooperatives that warrant some discussion.

There are a number of motivations for this equitylike financing (or quasi­equity ownership). Jay cites some of the problems with worker provision of equity financing just discussed: the inability of individual workers to supply enough equity, the portfolio problem, and the problem of the compatibility of worker control and free alienability of equity shares (1980, 13). He also believes that traditional capital markets are the most efficient vehicle for bringing investors and entrepreneurs together.

On the face of it, this arrangement would seem to pose a very serious expropriation hazard. Since the workers are the ultimate decision-making authorities, it seems that they would be in a position to appropriate the equity value of the firm by paying themselves inflated wages and skipping dividends. Jay maintains that this would not in fact happen because the firm has to raise capital on both the debt and quasi-equity markets to finance new investment. To do so at a reasonable cost, it must have a track record of paying dividends comparable to traditional corporations. The debt and quasi-equity markets, then, are supposed to provide the necessary discipline for the firm’s man­agement (p. 14).

This type of system has a number of advantages over the worker con­trol-state ownership model. The most important is that capital provision is through the capital markets and not through the state. Quasi-equity owner­ship avoids the vulnerabilities to exploitation that go with state ownership of capital; it also appears to have the monitoring advantages of the capital mar­kets in a free enterprise system. Shares could be traded just as freely as in free enterprise systems. In addition, even if the workers have to put up some of their own capital, their status as residual claimants would be relatively insignificant. This means that this model would avoid the fight over the firm’s net income that would be found in the cooperative in the worker con­trol-state ownership model.

These advantages of the system notwithstanding, it remains relatively infe­rior to a free enterprise system on the question of exploitation. The reason is that despite Jay’s assurances, the quasi-equity owners really are at risk of having some of the value of their assets appropriated. Managers could do this by skipping dividends, paying the workers inflated salaries, and encouraging various forms of on-the-job consumption (e.g., lavish company picnics and office parties). Jay maintains that the managers would not do this because if they did, it would be more difficult for them to raise money in the debt and quasi-equity markets to fund new investment. If they were not looking out for the interests of the quasi-equity owners, that would be reflected in the price they would have to pay for investment funds. Share prices, then, are supposed to serve the same signaling function in this system that they do in a free enterprise system. The problem is that it is not at all clear why fund­ing new investment should be so important to the managers.

The ultimate decision makers are the workers, so they are the ones who elect the board of directors or hire the managers directly. While they may have some equity stake in the firm, their holdings would not be substantial for reasons already indicated. Thus, they would have less of an interest in long-term investments that would come to fruition after they leave the firm than do the quasi-equity owners. In short, because the workers’ association with the firm is limited, this type of organization faces the horizon problem,

though perhaps not in as serious a form as the cooperative in the worker con­trol-state ownership model.

Managers answer to the workers, not to the quasi-equity owners, so when the interests of the two conflict, it would not be surprising if managers acted in a way that systematically favored the former at the expense of the latter. This means that managers need not worry as much about low share prices on the quasi-equity markets as their counterparts in a free enterprise system, since they are not hired and fired by the shareholders, and they are in no danger of losing their jobs through a corporate takeover. If they inflated wages and permitted various forms of on-the-job consumption by the work­ers, they would only cement their position as head of the firm. Moreover, since all cooperatives have the same structure of ownership rights, all man­agers would face this incentive structure, so the quasi-equity owners would effectively have nowhere else to go. For these reasons, the quasi-equity own­ers could and would be exploited by the ultimate decision-making authori­ties (i.e., the workers) in the firm. This form of exploitation cannot take place in the comparable capitalist organization, the open corporation, because in the latter, the capital providers are the ultimate decision-making authorities.

The appropriation of the equity value of the firm would not go on indef­initely, however, because at some point it would negatively affect the ability of the firm to satisfy its needs for short-term and medium-term credit. Main­taining this form of creditworthiness would be extremely important from the workers’ point of view, since this type of credit is essential for day-to-day and month-to-month operations. To do this, the firm needs an equity base to secure its loans. Fortunately, the quasi-equity owners provide an ideal reser­voir for this purpose, so long as the workers do not bleed them white. Thus, while the workers would have some incentive to exploit the quasi-equity own­ers, there are limits to what it would be in their interests to do. The upshot of all this is that although this form of capital provision is superior to what is found in the worker control-state ownership model so far as exploitation is concerned, it remains inferior to ordinary equity ownership, which joins ulti­mate decision-making authority to the provision of capital.

Jay might have a response to this but only at the price of calling into ques­tion the socialist credentials of his model. He suggests that “the existence of alternative investment outlets offering attractive returns abroad may be regarded as a necessary and proper protection of savers at home and as a desirable incentive to workers’ cooperatives to make reasonable distributions” (1980, 15). Jay’s proposal is intended for Great Britain, and what he is here advocating is an “open borders” policy for capital. This quotation and the surrounding discussion suggest that in response to the worry that investors will have nowhere else to go, Jay would say that quasi-equity owners should be permitted to sell their shares and invest in conventional open corporations overseas. In consequence, if managers in the cooperatives started to appro­priate some of the value of the quasi-equity owner’s investment on behalf of the workers or on their own behalf, share prices would fall so quickly that firms’ ability to secure short- and medium-term credit would be imperiled, which would threaten the ability of the cooperatives to survive. Foreign cap­ital markets, then, provide the alternative needed to keep the cooperative’s managers and their bosses (the workers) from exploiting the quasi-equity owners.

What all this means is that Jay envisions market socialist islands in a larger free enterprise sea that would constitute the world economy. The external environment, then, is similar to the external environment of Mondragon in this respect. Whether or not this could be called a socialist system depends on how economic systems are individuated, but it certainly seems odd to predicate a socialist economic system on the presumption that it is part of a larger system in which investors can have the full equity ownership found in the large open corporations of a free enterprise system. This gives new mean­ing to the phrase, “socialism in one country.” It also means giving up the uni- versalist pretensions that have historically been associated with socialism.

Further suspicions about the socialist credentials of Jay’s model arise when one considers his views on smaller firms. The cooperative form is supposed to be mandated only for firms that have more than one hundred employees (1980, 9). Jay recognizes some of the efficiency advantages of the classical cap­italist firm, in particular, its rewarding entrepreneurs according their con­tributions (1980, 26). This means that a large sector of the economy could be effectively private. Given this and given also that there are quasi-equity own­ers who need not be laborers, it is pertinent to ask whether this is a really a form of social ownership of most of the means of production, a necessary con­dition for a socialist economic system.

Even if it is a socialist system, however, it is highly questionable, on a number of distinct grounds, whether this type of system could realize the socialist vision of the good society.⁸ Two related social virtues that a socialist economic system is supposed to realize are the collective control of the rate and direction of economic development and suppression or correction of the social irrationalities of the market. In this model, there seems to be no room for an economic organization to execute either of these tasks. New invest­ment is thoroughly decentralized and controlled by the cooperatives in con­sultation with the quasi-equity markets and the market for debt instruments. As in a free enterprise system, the state would bear some of the responsibil­ity for dealing with the irrationalities of the market, but there is nothing in this proposal to suggest that these problems could be dealt with in a way that is categorically superior to how they are handled by states in free enterprise systems.

Finally, one of the chief social virtues that a socialist economic system is supposed to realize is a significant reduction in inequality of material condi­tion, at least in comparison to what one finds in a free enterprise system. There is nothing in Jay’s model to ensure that inequality of material condi­tion would be significantly reduced. Indeed, it is possible that the transition to his system would involve nothing more than notifying current equity own­ers of large corporations that they have now become quasi-equity owners of the new-style cooperatives and that the workers will henceforth appoint the boards of directors in these large firms. However, at one point, he does sug­gest that currency controls to prevent capital flight might be necessary for a brief period after the transition, at least until the people who have now become quasi-equity owners stop hyperventilating and adjust to their new status (1980, 15-16). Trading on the London Stock Exchange or on Wall Street could then resume.

The idea of outside equitylike financing is attractive for a number of rea­sons, not the least of which is that it stabilizes the cooperative and gives it an equity cushion to survive economic downturns and to secure short- and medium-term debt. However, if capital flight is prohibited, the workers, through their managers, could exploit the quasi-equity owners in a way that could not happen in an open corporation. On the other hand, if capital providers had real alternatives in the form of foreign investment opportuni­ties or a smaller purely private sector at home, it is doubtful whether the sys­tem should be called “socialist.” Finally, even if it should be called “socialist,” it cannot ensure the realization of key elements of the socialist vision of the good society.

One of the problems with Jay’s model from a socialist perspective is that it has too many people in it who look suspiciously like capitalists. Not only are there many classical capitalists, but the quasi-equity owners of large firms will function much like ordinary stockholders, except they do not get to vote on the membership of the board of directors. Saul Estrin (1989) believes that social ownership requires an economy more dominated by the cooperative form and one in which the individual private investor has a much diminished role. In addition, he has little faith in the state, either as a full owner of the means of production or as an owner in the truncated sense found in the worker control-state ownership model. But, as noted, he also believes that social ownership of the means of production precludes equity ownership by the workers. Who, then, should own the capital that the cooperatives employ? Estrin’s answer is holding companies, created specifically for that purpose and for the purpose of creating new firms in response to perceived profit opportunities (pp. 186-88). The latter point warrants a brief digression.

Estrin is concerned about the responsiveness of cooperatives to changing economic conditions on account of their ownership structure—specifically, the workers’ status as collective residual claimants. As was explained in the second section of chapter 6, cooperatives are less likely to expand production and hire new workers in response to increased demand. They need the spur of competition to “do the right thing.” However, if all established firms face about the same conditions and cannot hire wage labor, they would all react by raising prices instead of increasing production. Under these circumstances, customers effectively have nowhere else to go and thus are exploited, unless other firms can enter the market and make it competitively efficient. Accord­ing to Estrin’s model, this is precisely the role that new firms are supposed to play; this is why it is important for there to be easy entry for new firms.

Assuming that individuals cannot start up new firms (classical capitalist firms being generally prohibited), there needs to be a type of organization whose mandate includes the creation of new enterprises to compete with established firms. Estrin proposes that the holding companies carry out this function. They are in the best position to do this because, as owners of soci­ety’s capital, they receive the returns to capital from all other firms in the economy. Because of this, they have the resources to fund new entrants. Their general mandate can be thought of as the promotion of economic growth and development. They would launch these new firms, and they would also lend financial capital to existing enterprises to finance new invest­ment. Although the new firms would start out as creatures of the holding companies, after a time they would become regular cooperatives.

Since the holding companies own the cooperatives’ capital (both physical and financial), their other main function would be to collect interest on this capital (society’s return on its investment, so to speak), which they will use to fund new investment. Estrin believes that there should be many such hold­ing companies, who would compete among themselves to hold the mortgage notes (as it were) on the capital of the various cooperatives, as well as fund new investment proposed by existing firms, and create new enterprises. This raises the crucial question of the ownership of the holding companies. Estrin considers a number of alternatives, each of which he finds unsatisfactory for different reasons (1989, 190-91). Clearly, ordinary private ownership of the holding companies would be inappropriate; these holding companies would be open corporations, and all of society’s capital would be privately owned! What about the state? Estrin wisely puts little faith in the state bureaucracy as an engine of entrepreneurship, and so he rejects state ownership of the hold­ing companies. Nor would it be a good idea for the holding companies them­selves to be cooperatives, since the whole point of assigning primary respon­sibility for starting up new firms to the holding companies is that the cooperatives, by their very nature, tend to be deficient in their responsive­ness to changing market conditions; that is, if the holding companies were also self-managed cooperatives, it is likely that there would be some serious shirking going on down in the New Firms Department of each of these enter­prises. Also, this does not settle the problem of ownership of the holding com­pany itself.

In the end, what Estrin favors is ownership of the holding companies by the cooperatives themselves! He says, “It is instead feasible that self-managed firms might become shareholders in the holding companies, creating a cir­cularity of ownership.... This would be the most attractive solution from my point of view” (1989, 190). He also believes that private individuals, workers, and the government could be shareholders in the holding companies, though presumably most shares would be held by the cooperatives. These shares would be publicly tradable on the stock market, and shareholders would have proportional voting rights in the holding companies, which means that they would be the ultimate decision-making authorities. In this way, the owner­ship of capital would be ultimately monitored by the same array of instru­mentalities found in a free enterprise system.

One can ask the same questions of this model as of the others. Is it in fact a socialist system? Can it realize the socialist vision of the good society? The first question can be rhetorically rephrased as follows: Is it really a socialist system if the holding companies that own all of the society’s capital are them­selves privately owned? Estrin might respond by saying that the socialist char­acter of the system is assured by a combination of the self-management struc­ture of the non-financial enterprises and by a wide dispersion of ownership of the equity shares in the holding companies.⁹ It is hard to know whether this response is adequate. As with the Ellerman model, it seems that social wealth is managed for the benefit of private interests, though the network of those interests would perhaps be broader and systematically different from what exists in a free enterprise system. It is possible that this system is social­ist at the micro level but not socialist at the macro level.

Putting to one side the issue of the socialist character of this system, wide dispersion of ownership of the holding companies is also important for another reason. If cooperative C owned controlling shares in holding com­pany H and if H held the note on C’s capital, this would create a clear conflict of interest that could result, among other things, in the exploitation of minor­ity stockholders in H. For example, H could be ordered to renegotiate C’s debt or to fund projects that //’s management thinks are unwise; or, perhaps most importantly, C could prevent or discourage H from funding firms that might be competitors to C. Each of these would involve forms of exploitation. Estrin would undoubtedly favor laws prohibiting this, but it is unclear whether these laws could prevent the inevitable logrolling and vote trading among the cooperatives that would emerge to achieve the same ends as would be achieved by direct control of the holding companies’ boards of directors.

Supposing that this problem could be solved, there is a further difficulty with this model from a socialist perspective. Some of the cooperatives are going to do much better than others in the stock market (i.e., the market for standard equity shares in the holding companies). At some point, some of this wealth is going to go into private hands (viz., to members of cooperatives that have good portfolio managers). There is nothing in the system to ensure that significant inequalities of wealth and income would not emerge from trading in these markets. Once again, it will not do to propose that these gains be taxed away. Either the affected parties will act through the political process to prevent this from happening, or the stock market will wither because, in the end, there is little to be gained by buying and selling shares in the hold­ing companies. When that happens, the superior monitoring afforded by the stock market will also be lost. One cannot get this monitoring without pro­viding the opportunity for some people to become rich.

Notice that the cooperatives are highly leveraged, since all of their capi­tal is in the form of debt, which is held by the holding companies. It seems likely that there would be opportunities for exploitation at this interface between the cooperatives and the holding companies—opportunities that do not exist in the classical capitalist firm and the open corporation, both of which have equity bases to secure their debt.¹⁰ At this interface, perhaps the most important challenge for the holding companies is to ensure that the value of the physical capital and the quasi-rent value of the firm are properly maintained. Because the members of the cooperative have a limited time horizon, all of the opportunities for exploitation associated with state own­ership of capital in the worker control-state ownership model would exist in this system. Because the holding companies are private firms whose shares are publicly tradable (and not public bureaucracies) these opportunities might be smaller and less easy to seize; however, there is no getting around the fact that there is a monitoring problem in this arrangement that does not afflict the classical capitalist firm and the open corporation.

Finally, it is questionable whether this system could really provide the req­uisite entrepreneurship to keep markets from stagnating (to use the language of chapter 3). Stagnant markets are, of course, the breeding grounds for exploitation, since one party to an exchange in a stagnant market is not get­ting the value of his or her contribution and often has nowhere else to go. Estrin recognizes the importance of entrepreneurship. However, his proposal to deal with the problem does not appear to be as good as what one would find in a free enterprise system. As explained in the first section of chapter 6, it is almost always more difficult to create a new firm to meet increased demand for a product than it is for existing firms to expand production by hiring on wage labor. This is true independent of the mechanisms by which new firms are created. A comparison of these mechanisms reveals a further disadvantage of the Estrin model in comparison to a free enterprise system. In a free enterprise system the primary mechanism by which new firms are created is by individuals’ starting up classical capitalist firms. These individ­uals can capture the full value of their entrepreneurial insights, something that cannot be done in Estrin’s model. The importance of these considera­tions is that if cooperatives are less sensitive to profit opportunities than their free enterprise counterparts, then the economic system that Estrin favors is likely to be more exploitative than a free enterprise system on this score.

To summarize, the basic ownership structure of Estrin’s model separates ultimate decision-making authority and residual Haimancy (both of which are vested in the workers) from capital provision. In this respect, it resembles the worker control-state ownership model. Despite the arguably superior mon­itoring afforded by profit-making holding companies, this system still creates distinctive opportunities for exploitation—opportunities that do not exist in classical capitalist firms and are minimized in open corporations in a free enterprise system. In addition, it is questionable whether this system could really reduce inequality of material condition, which is one of the elements of the socialist vision of the good society.

This concludes the discussion of alternatives to the worker control-state own­ership model of market socialism. With the exception of the full state own­ership model, all of the models or types of economic systems considered in these two sections are ones in which the self-managed worker cooperative is the predominant organizational form. In the last third of the twentieth cen­tury, the prominence in socialist thought of this organizational form in the context of a market economy is perhaps best understood as a natural out­growth of the repudiation of central planning and its top-down organizations, together with the belief that the hierarchy found in capitalist firms is, in one way or another, responsible for many of the ills attributable to the capitalist economic system.

An important issue that this book has addressed concerns the ownership structure of the capital in these cooperatives. This discussion is not exhaus­tive and is not intended to be. For example, a system in which the state is the residual claimant and the workers are both capital providers and ultimate decision-making authorities has not been considered. Another possibility that has not been discussed is a variant on the Estrin model in which the holding companies are residual claimants as well as capital providers, but the work­ers are the ultimate decision-making authorities. An account of the relative deficiencies of these types of system can be left as an exercise for the reader. However, this chapter, together with chapters 6 and 7, tries to cover some of the major options that have been proposed or discussed in recent years and that have some obvious attractions from a socialist perspective. Other writers have discussed various desirable features that a socialist society ought to have, but relatively few have said anything about a set of property rights in the means of production other than that they favor self-management. Fewer still have discussed property rights in the firm and its capital in enough detail to make possible the kind of comparative institutional evaluation offered in chapters 6 and 7 and the first two sections of this chapter.

One of the most important lessons of the preceding two chapters and this section is that equity ownership precludes forms of exploitation that would otherwise exist. Byjoining the roles of ultimate decision-making authority, provider of capital, and residual claimant, the major organizational forms of a free enterprise system (classical capitalist firms, open corporations, and even closed corporations and partnerships) prevent forms of exploitation that are permitted once these roles are separated. Equity ownership is the real essence of private property in the means of production. Once a society abandons this form of ownership, it becomes vulnerable to these other forms of exploitation. The problem for socialism is that it is unable to countenance equity ownership of the means of production because the equity ownership is responsible for both substantial inequality of material condition and decen­tralized control of the economy. From a socialist point of view, inequality is a social vice of capitalist societies and decentralized control of the economy is responsible for the social irrationalities of the market. However, to be in a position to deal with these problems, a market socialist society must decom­pose equity ownership in such a way that new and distinctive opportunities for exploitation are created.

Other Optionsfor Market Socialism?