The current model of a firm is a bundle of contracts using specific assets requiring a financial guarantee (who will cover any losses?) that then hires workers has the scarcer factor (capital: indeed, entrepreneurial capital, which is even scarcer) hiring the more plentiful factor (labour). It also typically straightforwardly rewards (successful) ideas-and-coordination and allocates risk accordingly. Indeed, property rights allocations are best understood as matchings of risk with control. Where control is allocated according risk—for example in warranties and insurance contracts—the results can be highly productive. Where it is not—for example in government production and some of the more recent toxic financial products—the results are less so. There is an ongoing issue with corporate governance, with its principal-agent issues, precisely because matching risk and control is difficult.
Getting a bunch of labour-providers together who will then have collective control and bid for capital seems a much less likely exercise than the conventional firm due to its very poor incentives: it is not hard to see why such firms do not currently exist outside the very partial exception of cooperatives. (Given that many cooperatives are actually of property-holders.) As a solution to the problem of corporate governance, it seems likely to separate risk and control further by diluting individual responsibility and shifting control further away from the prime bearers of risk. Especially as a firm does not represent symmetrical risk between capital and labour, since the failure of a firm can see its capital entirely wiped out.
What, after all, most economically differentiates societies is not labour—all human societies have that—but how capital is created, maintained and utilised. The better this is done, the more capital-plentiful the society is and the more prosperous it is (which is then connected to such matters as life expectancy, health, freedom, happiness).
We do, of course, have partnerships but they are a revealing exception, for the point of partnerships is that the partners bring their own capital—their knowledge and skills. The capital, the “produced means of production”, is in their heads. So, what looks like a labour-dominated firm is actually a particular form of capital-dominated firm where the capital is embedded in the labour.
Moreover, the prime risk associated with the firm’s capital in a partnership is loss of reputation, so partnership puts control in the hands of those bearing the greatest risk.
Contracts and property
In current liberal capitalist economies, the prime mechanisms for to applying labour to (separable) capital are the commercial contract and the employment contract. The latter puts the supplier of labour under the direction of the owner of the capital (or their agents) while they are supplying their labour. Such contracts are also ways of allocating control to risk-bearers.
Commercial contracts, like employment contracts, can produce the full range of products. The boundary of the firm is not set by the nature of the product but by the boundary of the equity capital guarantee (if one accepts, as I do, Barzel’s analysis) or relative transaction costs of internal or external production (according to Coase’s seminal article).
Ellerman is implicitly offering a new form of contract than the commercial or the employment contract. We might call it the labourcratic contract, because it puts the control, the authority (kratos in Greek), in the hands of the suppliers of labour. The controllers of the firm become delegates of the suppliers of labour.
This surely increases rather than solves the problem of corporate governance, since it separates control from risk rather more emphatically. Those providing the income guarantee to the firm no longer have any control, even through agents, over the operation of the firm. This makes it a significantly worse risk for the suppliers of capital. Which makes it unlikely to be a competitive goer in the market place. To have the suppliers of labour take on the income guarantee risk (leaving aside whether they would have the capacity to do so) would certainly not increase the appeal of the labourcratic contract to workers.
The implied answer in Ellerman’s text to the question of why worker-controlled firms that do not alienate worker decision-making do not currently exist is because of a wrong theory of property, which Ellerman holds would have to be abandoned:
A similar reversal occurs concerning property rights. A basic principle in jurisprudence is the responsibility principle that, whenever possible, legal responsibility should be assigned or imputed according to the de facto responsible party. For instance, in a trial the idea is to make an official decision on the factual question of whether or not the defendant is the de facto responsible party. If so, then legal responsibility is imputed accordingly. The more positive application of the responsibility principle is the old idea often associated with John Locke that people should appropriate the fruits of their labor. This labor theory of property is both positive and negative since new products are only produced by using up other things as inputs. Hence the question of assigning legal responsibility is two-sided, to assign the ownership of the product and the liability for the used-up inputs to the people who, by their de facto responsible actions, produced the outputs by using up the inputs. Hence a private property system based on the basic principle of justice (imputing to people what they are responsible for) would have the legal members of each firm be exactly the people who work in the firm … . Thus a system based on justice in private property would entail workplace democracy.Hence, Ellerman concludes:
Far from the present employment system being based on democracy and private property, it is precisely the principles of democracy and justice in property that call for the abolition of the employment contract in favor of a private property market economy of democratic firms.This is a very static view of the economy. Not only is there the question raised above, of how such firms would be created, but the minute property is transferred out of the hands of the original creator, one has a property rights structure that looks like, well, the one we have now. Conversely, to not allow property to be transferred would enormously reduce its value. (Ellerman's theory of property is outlined in far more detail here [pdf]: I have not read the book and so am only reacting to the above-cited essay.)
As not being able to sell one’s labour massively reduces the value of one’s labour. The key feature of slavery (and of serfdom) is that the slave (or serf) cannot legally exit and so is denied the benefit of his or her labour beyond that of subsistence: the gap between output and subsistence is what makes slavery (and serfdom) profitable even after the productivity losses and other costs of imposing such control. So slavery (and serfdom) were only profitable in circumstances where free wages were higher than such costs and losses plus subsistence (as was the case in the land-rich/labour short Americas after the devastation of the introduction of the entire Eurasian disease pool). This made “work gang” production (such as sugar and cotton) particularly susceptible to slavery because of the simplified control required and limited skill requirements.
Given their legal exit possibilities, the employment contract can only work if the workers see the control they are under as legitimate. The ability to legally exit is not incidental: it is central. A “voting with one’s feet” that is always available to the free worker and never (legitimately) to the slave or serf. (Though the Roman labour market may have been significantly affected by [pdf] the extensive use of manumission of slaves.) But free workers’ ability to sell their labour greatly increases their income possibilities. Given how fundamental the combination of labour to capital is in production, using someone else’s property is central to this for firms of any size. As an always-reversible alienation that greatly raises one’s income possibilities, the employment contract seems an odd sort of evil.
One of the features of the employment contract is that it is often of indefinite duration: that is, it persists until terminated by either party. And, of course, breaching a contract is usually legally actionable. That does make exit any less of a genuine and powerful factor in free employment.
As it is in many circumstances. Competitive jurisdictions—the ability of capital and (particularly skilled) labour, to move between jurisdictions—is clearly vital to explain the development of less exploitive rulership over time. It deeply affects the operation of companies. Years ago, there was an excellent article in Quadrant by someone who had managed a business in Hong Kong. At first he was deeply alarmed, because every day when he came in, his workers would be reading the newspaper employment columns and, if they left, the business would collapse. After a while, he realised that they were simply scanning to see that he was paying at least the going rate. He was only in trouble if he stopped doing so—in which case, they would exercise their option to exit.
The problem with Hobbesian alienation, after all, is that, whatever the personal protection benefits, it is never reversible and the same benefits can be had from a system of delegated rule. Indeed, the benefits are likely to be, in fact, greater under such. Offering workers a system of workplace governance that gave them a vote but reduced their income is not quite such a better deal.
Moreover, property is no more “congealed labour” than value is “congealed labour”. The key feature of value is someone wants it. The key feature of property is that someone controls it and there is some point to the control, the control has to matter—the thing controlled has to have sufficient scarcity and be sufficiently wanted by someone for such control to matter. We can control a twig, but who cares? But a hunter who kills a deer establishes property in that deer (despite the fact that he did not create it) as does any potter making a pot establish ownership in the pot.
As previously noted, societies are distinguished far more by the level, extent, creation, maintenance and utilisation of capital (the produced means of production) than of labour (which all societies have). Indeed, capital distinguishes labour as well, since skill and knowledge are also forms of capital, forms of the produced means of production.
Labour is aimed at creating things people want and creating things people can control (which can be used for purposes people want). But so is anything used to create property, or to create something of value. A labourer may be worthy of his or her hire, but labour is not the only contribution and the other contributors are also worthy of their hire. Moreover, one does not measure property by the labour used to create it, no more than one does for the value of something, for that is not its nature.
One should always be deeply sceptical of theories of property which are not compatible with the common law tradition, since it has such a long history of dealing with property and represents distilled experience in doing so. A tradition which slavery was, in Somerset’s case, famously found to not be part of. In the words of the judgement:
The state of slavery is of such a nature, that it is incapable of being introduced on any reasons, moral or political; but only positive law, which preserves its force long after the reasons, occasion, and time itself from whence it was created, is erased from memory: it's so odious, that nothing can be suffered to support it, but positive law.Nor, for that matter, was torture.
The political option
There are other problems with the political analogy. The difference between the static and the dynamic is a difficulty with the state-government/corporate governance analogy Ellerman is arguing for in his solution of workplace democracy. States are much more stable than firms and government covers a far wide range of activities (and level of coercion) than does corporate governance. The ability to exit is a much greater feature of firms than states. As is the ability to collapse: something that is a somewhat bigger threat to the holders of capital (who can see their capital entirely wiped out) than the providers of labour.
If the workers are the responsible controllers, that also raises interesting problems about letting new people in. For extra workers dilute the control of existing workers. This raises all sorts of difficulties and likelihoods: a tendency to resist hiring people, a tendency to hire according to affinity and so on—remembering that the people making the decisions would no longer have their own capital at risk. Shareholders expanding the capital of the firm are “paid off” for that in a way worker-voters would not be likely to be.
This is not a mere theoretical possibility. One of the very large differences between the Roman Republic and the classical Greek polities, is that the latter were very reluctant to spread citizenship, since it diluted the value of the votes of existing citizens. The power of the Senate in the Roman Republic created different incentives (since more citizens meant a bigger army under the control of the Senate without diluting the votes of individual Senators), so Rome was much more willing to expand citizenship (even, indeed, to former slaves: not true in Greek polities).
A strength of democracy is that it aggregates concerns and perspectives and forces attention to the governed. It is not merely that it is consensual, it is the consequences of being such—if democracy was not functional, it would not survive. But it also has fairly notorious weaknesses as a decision-making mechanism. There are already problems in corporate governance in connecting decision and outcome. It is far from obvious that the worker-sovereign corporation would work more efficiently. Indeed, if there were efficiencies to be achieved, one would have expected such firms to evolve, given the widespread interest in achieving increased income.
One of the great barriers to tyranny, and the development of better societies, has been competitive jurisdictions. But firms compete for resources (including workers) far more thoroughly than states compete for citizens and capital. It is far from entirely coincidental that commerce has often treated disadvantaged groups far better than politics. Labour, by contrast, has often been a hotbed of prejudices, as a way of seeking to cartelise against competition.
One also notes that the prime political mechanism in workplaces—unions—are in decline, particularly in the private sector. There may be a range of reasons for this, which basically come to them not aligning with the interests of workers as much as they used to due to changes in economic circumstances.
Abolishing the state
But there is a deeper difficulty that seems to have escaped Ellerman. Perhaps the largest gap between broadly “libertarian”/classical liberal analysis and left/progressivist analysis is that libertarians/classical liberals typically analyse public/government/political action on the same analytical continuum as private/corporate/market action. So the same issues of incentives, information flows, agency issues, conflicts of interest and so forth operate in both realms, but the highly aggregated and coercive nature of public/government/political action tends to make such issues particularly problematic in that realm.
Conversely, a lot of left/progressivist analysis seems to treat them as two completely different realms analytically, so that public/government/political action becomes inherently less problematic because it is taken not to have the same problems: especially not self-interest. It might appear that Ellerman is insisting that firms and the state be treated in exactly the same way—hence worker-democracy—but that is, quite profoundly, what he is not doing.
For the question is simple: if you do not have employment contracts, how can you have the state? If there are not paid people bound to follow the direction of the elected representatives, then the delegated sovereignty of the citizen-voters that Ellerman makes so much of is void. The analogy with workers in a corporation is not with voters, but with public servants and government employees of all varieties.
Ellerman’s analysis may dissolve the capital-owned corporation, but it dissolves the state at least as thoroughly. We can use his denial of the public/private distinction in reverse. If it is an illegitimate alienation of one’s right to self-governance to have a master-servant employment contract with a private employer, it is not less so with a public employer since the issue is the alienation of personal governance, not who you are alienating it to. An employment contract (whether public or private) does not magically change its nature because the state is democratic. (Indeed, some C19th jurisdictions banned some government employees from voting, on the grounds that that would give them too much power.) If labour is non-transferrable, then it is non-transferrable regardless of whether the employer is private or public.
That public employment has increasingly become a device for enriching a privileged caste at the expense of the general public (and unionism, particularly in the US, is increasingly about organising for more of that) hardly suggests that giving public employees even more say over their work is a good option.
The distinctive thing about a government employee is not that are voters, nor under a democratic polity: these features may or may not pertain. The distinctive feature is they are paid to follow direction to implement public policy. To turn that into a labourcratic contract would clearly grossly undermine the ability of the state apparatus to carry out public policy whether or not that policy came from the elected representatives of the voters.
If one asks why the employment contracts persists, when the other forms of alienation contracts have fallen by wayside or not developed, the simplest answer may be that it is essential for the state that it continue. But that, as we have seen, is not the only reason.
So, unless anarcho-syndicalism is the only just system, there must be something wrong with Ellerman’s analysis, beyond the practical and other considerations adduced above.
ADDENDA This post has been amended to eliminate some repetition and clarify some points.
[This discussion is concluded in my next post.]