Monday, November 14, 2011

Is the Wealth of the Rich Legitimate? Part 2

In a previous post I argued that the wealth of the rich (more precisely: of capitalists) could not be justified by reference to the principle that "each person deserves that amount of wealth that reflects her productive contributions". Capitalists need not do anything productive in order to be capitalists. The pure capitalist earns everything from owning and nothing from working (that is, to the extent that a capitalist can be said to earn from working, she is to that extent not a pure capitalist).

But, as I discussed in the previous post, this story about desert and productive contributions is only one among many. Another (perhaps the most popular?) story that's told to legitimate the wealth of capitalists is that their wealth is a reward for having taken bold risks. Or, put another way, since the capitalist risks her capital when she invests it in some business venture, she deserves exclusive rights to all of the returns above and beyond costs paid out for raw materials, wages for workers, etc.

This story is told so frequently that it almost seems odd to question its plausibility. But how plausible is it?

Let's try to first figure out exactly what its saying. Is it saying that people should be rewarded in proportion to how much risk they take on? That can't be right. That would mean that the riskier I behave, the more I should be rewarded (whether or not the risk pays off). But, of course, it's a fact about risks that they can turn out for better or for worse (otherwise they wouldn't be risks). Risks always involve some element of luck and chance wherein the risk could turn out badly. But nobody in their right mind would say that the mere fact that I've taken on some risk (whether or not it pans out) means that I should be rewarded. For example, no one would say that some particular capitalist, just because they take on risks, deserves a return on their investment. If I, for example, invest in a business that has a 10% chance of succeeding, and it doesn't succeed, nobody thinks that this entitles me a cash "reward" of any kind.

But if that's not what's meant by "reward for risk", what is? Perhaps what's meant is that the capitalist's riches are her reward for having taken a risk that ended up panning out. If I bet against the odds and win, then it looks like what I get is my reward. Why not say the same about capitalists whose investments pay off?

There are several things to say here. First, it's just false that risky capitalist activity actually gets higher rewards when it pays off. Sometimes it does, sometimes it doesn't. And lots of capitalist activities aren't risky at all. An investment need not be risky to be very lucrative. If some public asset (a natural monopoly, say) is privatized and I get ownership of it, I may be able to charge fees and earn big profits even though there is virtually no risk. Or, consider that many financial institutions are, and they know that they are, "too big to fail."

We must also take into account that risk context sensitive in various respects. What may be risky for me (given my situation) may be less so for you (given your situation). Imagine a working class person who saved money for years to open up a small coffee shop. This is surely a risky activity since she will need to take out big loans on a project that could very easily go bust (and it's not as if they have millions to spare if it does). Now, imagine that I invest $40 million of a $140 million fortune in relatively low-risk securities that turn out to pay out big dividends. Instead of risking my capital on start-ups, I put it all in well-established, multinational corporations. So, I'm reaping large cash "rewards" from my investments, much larger (even in proportional terms) than the returns a successful small coffee shop owner will ever earn. But I am taking on very little risk whereas the newly petit bourgeois coffee shop owner is taking on a great deal of risk. There are innumerable examples of this sort. What they show is that capitalism doesn't, as a matter of fact, distribute wealth in accordance with the principle that riskier bets (that pan out) receive larger cash rewards than those that involve less risk.

But this isn't likely to satisfy defenders of the "risk and reward" view of why the capitalist's earnings are legitimate. They will probably reply by offering two different objections. The first has to do with the idea that capitalism is a fair game where the winner deserves to take all the spoils of victory. The second has to do with incentives and innovation. I'll examine (and refute) each in turn.

The first objection is as follows. Capitalism can be thought of as a fair game in which everyone (legally speaking) has a chance to be a successful capitalist. As long as the rules of this game are fair, then whatever outcome results from it is legitimate. So, for example, when I play blackjack and the casino hasn't rigged the game in their favor, and both the casino and I have consented to play the game, whatever I take home in winnings is legitimately mine. Capitalism, you might think, is the same way. If I risk $10 million on a risky investment and it pans out, why aren't I entitled to (or deserving of) all of the cash returns in the same way that I'm entitled to the cash returns of the game of black jack? In fact, wouldn't taxing the capitalist's profits be similar to stealing a gambler's winnings, even though she made a fair bet in both cases?

There are a number of things to say here. We might ask whether the "game" of capitalism really is fair (I shall argue that it isn't, and that the gambling/investing metaphor is misleading). But even if it is fair, we might still ask whether it makes sense to structure our economy like a winner-take-all casino game. I shall argue that there are deep problems (both structural as well as normative) with allowing the economy to be run like a casino.

Let's examine the fairness of the "game of capitalism." First, recall where capitalism comes from (read Part 8 of Capital for a detailed historical analysis): the expropriation and killing of indigenous peoples and European peasants, the forcible seizure and enclosure of commonly owned land, colonial domination and forced labor, the enslavement of human beings, and so on and so forth. And we could add that capitalism didn't leave imperialism, violence, oppression, racial domination, coercion, theft, and expropriation behind after the 17th and 18th century: these have been permanent features of the system throughout its existence. So the "game" is rigged from the start. There has never been a "level playing field" from which to begin the game.

But, suppose that there was a level playing field. Would that fix capitalism's problems? Would that mean that the "game of capitalism" is actually procedurally fair? I think not. First of all, not everyone can play the game of capitalism. In order to play, you must have something to invest (because that's one of the rules of the game). Now, defenders of capitalism will say that nobody is legally excluded from playing the game. But that's clearly a flawed argument. First of all, it's a fact that lots of people, indeed the vast majority of people, do not have the discretionary funds to play the game. David Schweickart makes the second point forcefully as follows.
Suppose you and I flip a fair coin; we each bet a dollar per round; heads I get your dollar, tails you get mine. The game is "fair" in the sense that we both face the same odds at any toss of the coin. However, a complication arises when we look at the game in light of its initial conditions. If I enter the game with $20 and you with $10, you are twice as likely as I to go bust. If you do go broke, and another player enters with $10, he will be three times more likely to be cleaned out than will I (because my initial stake has been supplemented by your losings)... So the large investor, although he has more to lose, is less likely to lose than is the small investor. Add to this that wealth gives one access to information, expert advice, and opportunities for diversification that the small investor lacks, and we see that the balance between magnitude of loss tilts toward the wealthy.
What this shows is that even textbook "ideal" capitalism isn't a fair game.

But there are further problems with this game, even if it was "fair". First of all, it presupposes that some people are playing the game--the capitalist investors--while others, who own no capital to invest, do the work--the workers. And while the capitalists are busy playing the casino-like game of capitalism, workers have no say in what is going on. Yet, and this is key, they stand to lose even more than the capitalists if the bet fails. That is, if a capitalist investor loses $10 million on a deal, but still has $3 million back at home, it's not as if he will be going hungry any time soon. But if 2,000 workers lose their jobs, we can be sure that they don't have million dollar nest eggs sitting at home waiting to be spent. Unemployment, as millions of Americans know first hand, can be absolutely devastating--particularly when wages and benefits are so meager even during periods of full-time employment. Capitalists, of course, stand to lose more in absolute dollar terms, but because of the diminishing marginal utility of money, it means much less to them. Think of the way that the economic crisis has gone thus far. The reckless, profit-driven investments of the financial sector produced a global crisis that has had devastating effects on working class living standards at the same time that it has primed the pumps for austerity administered from above. The point is this: casino capitalism is unfair because it presupposes a class of working people who can't play the game but, nonetheless, stand to lose a great deal if the capitalist's gambles don't pan out.

Imagine a capitalist who replies to a labor union as follows. "I risked all of my capital on this business, so who are you to collective bargain to get a piece of it? That's unfair because I assume all the risk, yet you want to share in the rewards." Now, we've already seen that this doesn't work because the workers do share in the risk--the risk of losing their job--even though they are guaranteed none of the winnings. But we can also add that it's not as if the workers were asked to share in the risk. It's not as if the boss will ever say: look, if you like, we can make this a worker-owned and worker-run collective in which we all share the risk (and the profit) equally. So it doesn't make sense to complain that workers share none of the risk.

One further thing to say regarding the idea that our economy is best thought of as a casino-like game in which the winner takes all. It is not clear that it makes any sense to structure basic economic institutions in this way at all. The economic system should exist to draw on the mutual benefits that we get from social cooperation. What we can accomplish together is far greater than what we can accomplish alone: that should be the basic organizing principle of any just economic system. The casino-style setup, however, exploits the fact that an economy requires mass participation, takes this mass participation for granted, and then haphazardly doles out lump sums to individuals who happen to get a good roll on the dice. That makes no sense to me. Let's use the power of economies of scale and increased productivity to maximize human capabilities, to meet socially recognized needs, to do great things together that we couldn't have done alone. Rather than being trapped inside a casino that I never asked to enter in the first place, I'd rather be a member of a self-governing community in which the condition for the free development of each individual is the free development of all.

But there is one last objection to my argument--which has to do with incentives and innovation--that I mentioned above. It goes as follows. A flourishing society requires that people take risks, innovate, try out new methods and techniques, and produce new things that may not ever pay off. I agree so far, but the objection isn't finished. It continues: in order to get people to take risks and innovate, they must be motivated by large cash rewards. And that means that capitalism is the only system in which innovation and risk-taking can flourish, because without the big cash rewards that the market hands out to successful businesses people wouldn't be motivated to innovate.

First of all, we've seen that capitalists don't need to do any innovating at all. They can pay someone else to do it. Capitalism--where there is private ownership of the means of production which are run in order to enrich the owners--does not distribute wealth in accordance with who is the most innovative or who takes on the most risk to make some socially useful good. There is no close connection between being a capitalist and being an innovator. R&D departments--many of them subsidized by public funds (this is called "externalizing costs")--do that. Much R&D is located within universities--which are more feudal, guild-like institutions than they are capitalist.

Second, it is demonstrably false that people need huge cash rewards in order to innovate and do great things. Great scientists, great novelists, great musicians and artists, and so forth rarely do what they do out of a single-minded focus on cash reward. Think of those who develop open-source software. I think it is true of a lot of people that if they were guaranteed a basic standard of living, they would be happy to spend a large portion of their time developing open-source, free software for the betterment of all. There are too many examples here to count. People, of course, want an adequate standard of living in which they don't want for any basic necessities, in which they have adequate leisure and a degree of discretionary spending. But that doesn't mean they have to have huge million-dollar rewards to socially-useful things.

Finally, capitalism thwarts a ton of really important innovation while it privileges others. Many know about the strange murder of the electric car. There are other examples of this kind --particularly green technologies that aren't profitable or undermine the profitability of natural resource extraction. In fact, we may never know how many great ideas are out there that haven't been given a try simply because capitalist production can't earn a profit off them (or because they take too much long-term planning or upfront investment, as is the case with much green technology). To be sure, there is a place for competition to determine who should win socially-produced funds for some new innovative project. But that doesn't require capitalism. Despite encroachment from corporations and moneyed interests, grant funding for scientific projects doesn't involve capitalist markets or profits.


Bill said...

"Second, it is demonstrably false that people need huge cash rewards in order to innovate and do great things."

You would take the point further: an extrinsic motivator, which a cash reward is, is detrimental to creativity. It works well to get people to do things more quickly, but not more creatively/innovatively.

Some primary research, the conclusions of which are widely replicated under different circumstances.

If you want someone to do what she or he is told as quickly as possible so one can say "the task is done" and get the reward, pay money. Make the principle systemic, and you have late, stagnant capitalism.

Devin Finbarr said...

Before I comment on the post, I want to clarify exactly the kind of economic system that you propose instead of capitalism.

Let's go back to a slightly altered version of the Evan Williams example for a moment. Evan quits his day job forgoing his normal salary. He pools his own life savings with investments from friends and families. He uses that money to cover basic living expenses plus money for servers and other costs of business. He sets up a website and starts boding a blogging platform. He then starts charging people money to use this platform. Under your system is all this possible? Is he allowed to charge money to access a web property? Is he allowed to raise capital from friends and family? Now let's say that after much work the platform becomes popular. Evan starts making very large profits from selling subscriptions to the platform. Is there some maximum amount he is allowed to make? After x amounts of profits is his tax rate 100%? Is there some max amount the friends and family investors can earn as a return on their original investment? 1X the original investment? 5X? 10X? At some point Evan needs to hire more workers. He hires system admins, customer service reps, etc. Must Evan give shares in the company to these employees? Must he give the entire company to the workers? Under your system must he give the company entirely over to the employees at some point and make it a worker owned coop? How many shares must he give to the employees, and at what point?

BTW, I'm curious, what line of work do you do for a day job? I work in product development at a tech startup, so naturally have sympathies with the idea that it is proper for people to get rich from taking risks in producing innovative new products.

t said...

@Devin Finbarr

You raise a number of points. First, let me give out more I.O.U's: since a good deal of your example concerns entitlement on the basis of market exchanges, my hope is that I can address, in an upcoming post, the question of whether Williams may be said to have justly acquired the earnings from his software.

Second, I'd like to say something about the Williams example. To be sure, it raises a lot of interesting questions, some of which put pressure on the kind of view I'm defending. But there's a sense in which it is analogous to Robert Nozick's Wilt Chamberlain example in that it focuses our attention on a particular individual rather than the broader context (or, if you like, the system) in which that individual's activity is situated.

Suppose that the people who purchase subscriptions don't mind paying the fee. But suppose further that they value some kind of equality wherein no one individual should be able to acquire so much as to be able to dominate her fellow citizens. When each individual consents to pay the subscription for her own use of blogger, is it clear that she is thereby consenting to the macro situation in which all of the individual transactions end up leaving one person, Williams, with a massive sum of resources at his disposal that may give him power over others? I'll examine this more closely in the post on entitlement and transfer.

The main point, however, is that we can't just consider things from Williams's perspective: we have to examine the macro situation as well and see whether it is well-ordered. The Williams case presupposes a lot of macro-stuff (e.g. a market of people with the purchasing power to buy his product, a stable social order in which some regime of property is enforced by law, public infrastructure of various kinds, a system of social labor in which the necessities of life are produced and sold on markets, etc.).

A couple of other things about the Williams piece come to mind. You suggest that it is significant that he made great sacrifices and took great risks. But such sacrifices may not have been necessary if he was, for example, assured of a basic standard of living (e.g. health insurance, adequate housing, etc.) as a condition of citizenship. Moreover, the risks he took don't, as far as I can see, entitle him to anything in particular. Maybe he deserves praise or respect for having taken a risk to do something cool. But I'm not sure how that enters into distributive question of how much money he should receive. The clearest answer seems to be that he deserves whatever individuals voluntarily give him via market transactions (and that any "interference" with those transactions is wrong). I'll address that argument in the upcoming post.

t said...

As far as the worker-controlled question is concerned, I would say that a just society would be one in which the wage labor relationship is abolished. So, if a small business owner wants to grow their operation, it would have to be a condition of doing so that they brought others into the fold as equals in certain respects. There might still be a division of labor, different offices within the firm, etc. But those could be democratically chose posts, recallable if necessary, where the pay scale is determined democratically.

No entrepreneur is entitled to another person's labor. The only reason that they can procure it in capitalism is because there is huge mass of people who have no other way to make a living (except by selling their labor-power). If people didn't need capitalists to earn a living or procure the necessities of life, capitalists would have a really hard time getting them to come aboard as employees. The point I'm making is that the petty-bourgeois small-business owner (petty-bourgeois since she both works for herself and owns a small amount of means of production) would have to entice employees by offering them an equal place within a self-governing firm. She wouldn't be able to play off their desperation to get them to take on work for a market wage. Nor would she be able to simply command them in the workplace as capitalists can command their workers.

Anonymous said...

The voice/exit distinction seems relevant to what you say at the end. The worker in a capitalist firm has only freedom of exit (e.g. "if you don't like the pay or the work conditions, you can quit'). But she lacks freedom of voice --that is, she lacks any say in the work conditions, the pay scale, the structure of the firm, etc.

Sheldon said...

Once again great post. I am going to post a link on my Facebook that says "if I had time to write something on my blog, I would want to write something like this"

Devin Finbarr said...


I focus on one particular example because the devil is always in the details. The type of entrepreneurial capitalism that Evan Williams represents has been responsible for a large number of innovative products and technological advances. I want to know how your alternative to capitalism changes the incentives of future Evan's, and how your system supports innovation.

If you have links detailing your ideal economic system, I would like to read them. If not, I look forward to future posts on the subject.

I am not an ideologue when it comes to capitalism. I agree with most of your point critiques. But I do not claim that free market capitalism is a perfect system and that its outcomes are perfectly fair. I just think free market capitalism is a better at producing prosperity for the average person than any other system I have encountered. It is not my burden to defend capitalism in the abstract, I only aim to defend it versus alternative schemes. But right now I don't really know the details of your scheme so it's hard for me to comment (but I will continue to comment anyway :-)).

Devin Finbarr said...

My defense of Evan William's fortune is as follows:

a) Any economic system needs to reward people for working hard (and working hard needs to be defined both in raw hours and in effort put into working efficiently and effectively). In addition to rewarding people it needs to reward teams and organizations. Even if you offer some sort of social safety net, people who work need to get more rewards than people who slouch.

b) Measuring effort at innovative, creative crafts such as product development is not easy. It's very easy to get in a trap of "fake work", you put in 40 hours a week but you do too much fun stuff instead of rentlessly perfecting your craft.

c) Thus for innovative tasks it is much more efficient to reward people (and teams) for results rather than effort.

d) Additionally, in order to reward someone for working hard, someone else must monitor that work. The monitor might be a manager, a grant officer, a research director or a democratic committee. The innovator and the manager might not agree over fruitful paths of innovation. I think the innovator should be able to say, "I think I am right about the value of this project. But clearly you think I am off my rocker. How about I work without salary to create this product. If I'm right, and people find it valuable and are willing to exchange their own wealth for my product, then I get to keep a share of the proceeds. Deal?" I think the innovator and society should be able to strike this deal.

e) Innovation always has natural risks to it. One can work extraordinarily hard and still fail. So if the innovation works you need the reward to be big enough to justify the risk. The reward thus needs to be a function of both risk and value created. The fairest way of doing this seems to be to allow the innovator to keep a portion of the profits that other people voluntarily exchange for the good the innovator created.

That said, no fortune is earned in a vaccuum. Tech fortunes are earned both for creating value, but also for capturing winner-take-all, natural monopolies. Thus I have no problem with a progressive taxation scheme as a wealth sharing mechanism.

Devin Finbarr said...

You proposed two alternatives methods of producing innovative products: a) the open source/voluntary model b) the grant based/research institute model.

Open source is great, but it has yet to be proven that volunteer developers will create polished products for the average consumer. Most open source tools are kludgy and require technical expertise. The successful open source projects either have developers as their target user (linux, mysql, jQuery, python, etc) or have a profit seeking corporation driving their development (Firefox, Chrome, Android, Wordpress). Creating a polished consumer product is a major schlepp. You have to debug it under all sorts of systems and scenarios, worry ceaseslessly about comptability and data loss, due endless iterations, polishing, and tweaking. Maybe some people are crazy enough to do that work for free, but not many.

Research institutes are great too. I support funding them (and support greatly reforming them to make them more effective). But they have the problems I mentioned above with regards to measurement and the freedom to choose one's own project. In my oberservation, institutes tend to become more sclerotic and less innovative as they age. If you solve these problems by introducing performance based pay and creative destruction (shutting down underperforming institutes) then you are back to something that approximates entrepreneurial capitalism.

t said...


You raise a number of interesting points, and I won't be able to respond to all of them here. But here are a couple of thoughts:

I sympathize with your desire to try to figure out exactly what a different, non-capitalist society would be like. I'm interested in thinking through that problem myself. But I don't think we need to have a blueprint for an alternative society ready at hand in order to criticize an existing social formation. As a matter of fact, I think socialism--which is, simply put, workers (democratic) control of production--is a feasible alternative to capitalism. But none of my criticisms depend on that being the case. None of the criticisms of capitalism thus far depend on having a ready at hand alternative that is fully specified down to the last details. Much (though not all) of what a socialist society would be like cannot be fully specified in the abstract, precisely because a socialist society would be radically democratic. And a democratic society is one in which the people collectively self-govern themselves, which means that we would pre-empt the deliberations of citizens if we were to specify, in painstaking detail, exactly how things have to be in the future socialist society. To be sure, I'm not saying "everything is up for grabs" and a socialist society can be whatever people want it to be. But within suitable constraints (e.g. no exploitation, no private control of the means of production, no oppression, etc.) there must be space for socialist citizens to determine the details themselves (or else democracy wouldn't be important).

So, either my criticisms of capitalism hold or they don't. Their soundness does not depend on whether I have a blueprint for a completely different kind of society. If a defender of capitalism were to say to me: "Look, I agree with all of the problems you put forward. Capitalism is a rotten system. But I think it's the best we can do", that would be one thing. But to suggest that the absence of alternatives to capitalism means that the criticisms are faulty is another.

I don't think capitalism is the best we can do. To say that it is at this point--in the midst of a protracted global economic crisis--strikes me as lacking imagination. Capitalism is not a smoothly-functioning system; it is riddle with contradictions. It depends on social-cooperation at the same time that it undermines it and pits people against one another in a struggle for the necessities of life. It privileges accumulation of capital as a basic social priority, but nonetheless preaches about human well-being. To say that we can do no better than capitalism is to refuse to see the kernel of a better society that *already exists* in many of our daily practices. It is to refuse to think that we could build on the good (social cooperation among workers in some workplaces, solidarity in the face of attacks from above, shared sacrifice, etc.) in an effort to forge a different kind of society in which the basic structure of the economy was brought under the democratic control of the people.

t said...

One more thing: I don't accept defenses of the status quo that say that we must have a full alternative before criticizing it. Imagining alternatives to capitalism is difficult in many respects--in part because we're dissuaded from doing it in innumerable ways. Capitalism took many hundreds of years to crystallize. And in the midst of feudalism it would have been very difficult to say exactly what full-blown capitalism would look like. So it would be unfair to say that socialists must have everything figured out before hand in order to start the project of fighting for a more rational, humane and democratic alternative to capitalism.

If my criticisms of capitalism are sound--and I claim that they are--then I think we are compelled to start talking about alternatives. This requires creativity and thinking outside of the box. It also requires courage, since we are constantly bombarded with the idea that capitalism is natural, or the best we can possibly do, or the end of history, or whatever.

t said...

I'm writing up the post on entitlement to property on the basis of voluntary market exchange. I'll try to think how your Evan Williams example pertains to what I say there. Thanks again for the thoughtful comments on the blog!

t said...

OK, a couple more thoughts. I don't think that people should have to do socially useful or necessary labor for free. I endorse the principle "from each according to her ability, to each according to her (socially recognized) needs". That cuts both ways--it requires that, as a condition of sharing in the fruits of social cooperation, people must contribute as well.

The key is that in a capitalist society, most of the things we need to live a good life are only available through the market. Not all of them, mind you: fire protection services, for instance, are simply made available to us insofar as we're members of this society, regardless of ability to pay. But most of the things we need--housing, education, health care, food, clothing, etc.--are only available through the market on the condition that we can afford them.

So, if you're worried that someone who does a bunch of socially useful innovating work developing software shouldn't have to do that labor for free *in a capitalist society* I agree with you. But, in a socialist society, we would have the power to determine whether certain basic goods should be provided on the basis of need. And if someone is educated, well-fed, insured against illness, etc. then I see no reason why that person might not want to contribute to certain socially-useful projects without a large cash reward being dangled in front of them.

Another complication here is the burden of doing certain socially useful tasks. Notice that capitalism does not distribute income or wealth on the basis of labor burden (or on the hardness, physical or otherwise, of the work). Some socialists think that incomes should reflect labor burdens, not productive contributions or rewards for innovation. That is to say, the income level of a particular job should reflect the burdens (physical or otherwise) that go into it. Thus, really fun jobs that have little physical burden, say, would not pay as much as jobs that required hard or undesirable labor (e.g. coal mining).

To determine incomes on the basis of labor burdens would require a radical shift away from capitalism. Capitalism uses the market to determine incomes, and markets reflect the bargaining power of the seller and buyer. In capitalism, the buyer of labor-power (the employer) always enjoys a bargaining advantage over an individual seller (the worker). Often, those who take jobs that are dirty, or physically difficult, or socially undesirable, do so because they have no other options available to them. Because of their relative desperation compared with others, they have little bargaining power in a labor market when pitted against a capitalist. So wages in capitalism do not reflect labor burdens in general at all. Otherwise custodians and janitors would be paid much more highly than professional golfers.

Devin Finbarr said...


To criticize a system does not require describing an alternative. I do not object to your criticisms. I agree with many of them.

But if I read you correctly, you go beyond criticism. You want the whole system replaced. You don't believe that the fortune of any capitalist is legitimate. If you want to throw out a system entirely then you must describe a replacement system and argue why it would be better.

The status quo has both terrible flaws and great virtues. A corrupt banking system rewards scam artists, while hundreds of millions go without work. Yet the past century of capitalism has also produced a great bounty of material wealth that has radically improved the standard of living of all Americans.

The status quo is a mixed economy. It has elements of free market capitalism, crony capitalism, democratic socialism, and crony socialism. Some sectors in the American economy, such as finance and healthcare, manage to combine all the worst asepects of capitalism and socialism (eg. privatizing the profits, socializing the risks).

The question before us is how to reform the status quo without destroying the good parts. Perhaps we should replace the crony capitalism with socialism or perhaps we should replace the crony capitalism and crony socialism elements with free market capitalism. That is the question and the debate before us. If you wish to read my own answers, I have my own essays with pet theories on how to reform the banking system and how to address the economic crisis. Another post enivisions a drastic reform of the political system as a whole.

When you say the economy should be run 'democratically' that doesn't really convey any information. The common platonic ideal of democracy - uniform power distribution - is an impossibility. The Iron Law of Oligarchy is indeed iron. Thus whenever anyone says, "'X' should be decided by a democractic process", I mentally replace 'democratic' with 'unicorns and rainbows'. The systems we actually call 'democracy' span an incredibly wide variety of frameworks, from small groups deciding by consensus, to councils chosen by lot, to majority rule referendums, to mob uprisings, to corrupt Congresses with 98% re-election rates, to party systems where you have two choose between 'two lizards'. Some people call it democratic when actions happen via elected representative, some people call it democratic when protesters comprising a small portion of the population thwart the elected government. Some people call it democracy when the voters enact a law via referendum, others call it democracy when an unlected judge overturns that law.

Despite the lack of detail about your proposals for democractic ownerhsip of the means of production, I'll try and present some criticisms.

Devin Finbarr said...

'Ownership' of the means of production has two separate components. Ownership entails sharing the fruits/profits of production and exercising control over how the firm is run. These two components can exist independently. Workers can reap the profits of the firm, without exercising control. For example, at the startup where I work I have non-voting stock in the company. I share in the profits, but I do not exercise executive control. Workers can exercise control independently of profit sharing. For example companies often have a yearly pool for raises. Normally management decides who recieves raises and promotions, and how much each person gets. But one could imagine that the allocation gets decided 'democratically'.

I'll examine each case independently and see if worker ownership of a firm is desirable.

Let's say we want to give workers the profits of industry. The first option (that I believe you favor) is that the law could stipulate that all firms must be worker owned and must grant shares to employees based on years employed. An alternative approach (that I favor) is that you have a progressive income tax that is then issued as a dividend to all workers in the economy. Essentially under my proposal you have profit sharing and worker ownership at the economy level.

The first approach (within firm profit sharing) has two problems.

First, it is not much more fair than the current system. A line cook or computer programmer for Google earns an extra $250,000 a year from profit sharing. Meanwhile the cook at McDonald's makes a few grand extra, and the janitor at Sears or the cook at the stuggling oadside diner makes nothing extra. The jobs at high profit companies will be tightly guarded and transferred through corrupt black market deals. The situation will be like rent controlled apartments in New York.

The second problem is that worker ownership makes employees more exposed to risk. In the first example, would it not be superior if the workers could sell their company shares or trade their shares for shares in another company? That way if their company fails, they may lose their job, but at least they'll still have income from their other stock holdings.

For both of these reasons I believe having transferrable stock and a redistributive, progressive income tax is superior to mandating worker ownersihp of a firm.

Devin Finbarr said...

The second issue is the voice of the workers at a firm. Let's imagine that we have a worker owned firm. It's a 500 person firm and workers own 100% of the company. There are potentially two ways of managing the firm. One is the traditional, hour glass style hierarchy. A broad base of share holders elects a smaller board of directors. The board appoints a CEO to run the company. The CEO manages an executive team. Executives manage the broad base of workers.

In opposition, you propose democratic management. I do not know exactly what you mean by this. Do all promotions, firings, and pay raises get put up to a majority vote? Do decisions on product direction and resource allocation get put to a vote? Or is it broken in to small committees who decide by consensus?

Personally, I would prefer to work in the hourglass/hierarchical firm. I would rather have one boss to monitor me and manage me than have the entire company be my boss. If I believe in building some product or feature, I'd rather only convince one person than to convince a commitee or some sort of voting. Nor would I to be in struggle sessions where people negotiate and haggle over compensation and promotions. Hierarchal management also creates more accountability than a committee system. Each decision point has a direct owner, who is held accountable for his or her decisions. Thus that person has a good incentive to weigh all the evidence, seek the right advice, conduct surveys and feedback meetings if neccessary, and make a good decision. I do now know which engineers on other teams deserve raises and which should be fied. I do not want to worry and deliberate about it. I prefer to have a team manager who makes that decision and is held accountable for the results of the team.

I like the fact that in the existing system, if I believe there is an opportunity to build a useful product, I can forgo consumption, save up money, convince friends and investors that I am a hard working, competent person, and then go off and build the product supported by my own capital and the capital of people I know. I hate the idea of having to convince a committee or voting electorate to invest in me.

Hourglass/hierarchial management does not mean workers have no voice. The managers at my company constantly solicit feedback, in one-on-one meetings, group sessions, surveys, and our internal web forums. The web forums in particular are famous for having numerous debates on everything from the sales comission strategy to the beer policy. But at the end of the day, one person is responsible for balancing the feedback, cutting off the discussion when it starts to jump the shark and people are just repeating themselves, and making the ultimate decision. That person is then held accountable for the result.

Anonymous said...

Life after capitalism:

Anonymous said...

@Devin Finbarr -what's to stop me from using your arguments against democratic political institutions as well? Why not have a hierarchical bureaucracy that manages political institutions in place of voting (for all of the reasons that you lay out)?

Jon said...

Thanks for this series, t, and I'm looking forward to the 4th installment.

Devin's question about alternatives are a stumbling block for me. I think your criticisms are right on. You are right that you don't have to have an alternative worked out in order to identify valid criticisms. On the other hand though if all your criticism is right and yet capitalism still produces better overall outcomes then any alternative, then the criticisms become irrelevant.

So you take the case of a guy that works day and night to create a small business, and he finally has success after years of work. I think of my uncle that pounded a lot of pavement in order to create a tool and die business. He took a lot of risk and did a lot of work. It seems unfair to think that all the equipment he was able to purchase, with perhaps a home equity loan as a starting point, shouldn't belong to him. It should belong to the 6 or 7 guys he now employes as well as him. Can they vote him out after all his work?

It may be that democracy is just messy. People's general sense of fairness would probably prevent this kind of a scenario. But not necessarily. Who should own the mills and lathes in my uncle's shop? When you are talking about GM or Ford, yeah, having the workers own the equipment after all this time makes a lot of sense. They do the work. The owners don't. The small business though is a different story, which is why the right likes to focus on them.

Unknown said...

Here's part 3 of a 3 article series. It gives a sketch of what post-capitalism could be like.

Here's my own sketch:

I don't know why all of this convo is taking place in the abstract. The Paris Commune of 1871, the Russian revolution of 1905-1917, the workers councils in Italy and Germany 1918-1920, in Spain in the 1930's, in Chile, Portugal, Iran, in the 1970's, and in the Solidarnosc movement in Poland in 1980 all show concretely what socialism could be like.

Read Homage to Catalonia by George Orwell, The Civil War in France by Karl Marx, 10 Days that Shook the World by John Reed, among other works.

Basically, workers at the point of production decide by majority rule certain basic and important points -how much to produce and where to distribute it. They also elect delegates to bigger councils that meet in major cities (or by skype and other technology) to make macro , regional, and international decisions. Thirdly, they elect commissars to supervise the work of skilled middle-class technicians, simply to ensure that the technicians are performing their normal work and not sabotaging anything.

Immediately, right away, some of the irrationalities of capitalism are done away with. Take that food that's dumped in the ocean, and f-ing feed everyone! Take those foreclosed houses lying empty, confiscate those 3rd and 4th houses of the rich, and put homeless families or families from the projects into them. Invest heavily in green technology from the profits made through fossil fuels. Take that huge military budget, and the money wasted on advertising and micro-packaging, and hire tens of millions of new teachers.

Give reparations to Africans, African-Americans,Iraqis and other colonized peoples, abolish all racist, sexist, and homophobic laws and immediately expand access to sexual education, contraceptives, and abortion.

Work to abolish the cleavage between mental and physical labor, through education. Once we accomplish this, William's creativity will not be exceptional. EVERYONE, given the basic needs, the education, and a society of solidarity and cooperation, is capable of massive feats of creativity. Those 20 Chinese teenagers who jumped off the roof of Shenzhen's iphone plant because they worked 11 hour days at $1/hour are every bit as intelligent as Steve Jobs (who, as with Bill Gates, didn't invent much of anything, but simply marketized others' inventions). I know dozens of black teenagers in jail right now who are more brilliant than any capitalist I've ever met or heard of. Why aren't they rich? Because they DON'T HAVE CAPITAL. Because they live in a society where the most important area of life -the point of production, is not in any way democratic, and in which racism (and a host of other horrible ideas), is created, reproduced, and mobilized in defense of this authoritariansim.

Unknown said...

Most great learning and invention is collaborative (Einstein had teachers, parents,friends, a wife), and as brilliantly laid out above, capitalism (crony or otherwise) don't not reward those who are constructively creative. If anything, it mobilizes the creativity of some in order to crush the creativity of others -and it is built of direct force -atlantic slavery, the expropriation of peasants and indegenous peoples (most recently in China in the 1950's, Latin America in the 1980's, and India today), and the pillaging of the earth's natural resources.

Moving into socialism, we would also work immediately to abolish the contradiction between humans and our natural environment. I agree that all decisions will be democratic (we vote in workplace, neighborhood, and school councils, majority rule, and our delegates vote the same way at regional, national, international levels)-but I know that at whatever level I am voting at, I will argue for the implementation of bio-mimicry and bio-synthesis in all our technologies, for the ripping up of all the concrete, for new high-speed train projects, and for research teems of 15-25 year olds and 45-65 year olds to travel the world to find the best practices of urban and rural peoples and publish their findings in public forums.

Remember, capitalism has some people working 10 hour days at lower-than-their-value wages (that's how profits are generated in most industries). Meanwhile, other people have no jobs at all. Under socialism, every able bodied and minded person can work 4-5 hours a day, and have the rest of the day for leisure, education, but also, political planning and debate. This will not longer be the exclusive domain of a political class tied to moneyed interests.

This is the kind of world bubbling up right now, in the Occupy America GA's, in the shop-floor debates of the Egyptian working class, in the mass-democratic deliberations of the latino/hispanic world from Bolivia and chile to Portugal and Spain. If people can organize this type of democracy while facing state repression, imagine what they could accomplish if they won.

Unknown said...

Ultimately, it comes down to differing notions of human nature. We are obviously very flexible in our ability to engage in different behaviors and create different social relations. But if you think the most likely pattern for human beings is one in which some are rulers and others are ruled (which is what you think if the word "democracy" conjures images of unicorns and fairies), than capitalism, as well as fuedalism, slavery, despotism,and clan hierarchy, make sense to you. If you think that humans lived for 100,000 years under conditions which put evolutionary selective pressure on their egalitarian collaboration, and that most people, even in the last few thousand or hundred years (depending on where) of class society, aspire to this egalitarian collaboration in both their theory and their practice of life, then you think that a mass democracy, with collective ownership and control of the means of production, under conditions of overwhelming abundance, is possible. It will take a revolution to make it real.

Sorry for massive run-on. I'm in the middle of finals, but I had to stop and comment. Even the socialists on this forum are equivocating, intellectualizing. Most people are really suffering and being denied any possibility for "creativity" and "risk taking". The progress in the standard of life of Americans in this century went at a snail's pace compared to what it could have been, and it only happened because of the mass struggles of workers, blacks, women, and immigrants against capital. In the words of Frederick Douglas, power concedes nothing without a demand. Moreover, whatever exceptional material progress has been made was made because the US has been bombing the shit out of it's competitors since WWII, and terrorizing indigenous peoples for at least a century before that. To try and sanitize past and present suffering is terribly offensive.

I'll end with a question, perhaps the host of this excellent blog can write on this: Are the reforms necessary to stave-off complete ecological collapse possible under capitalism? If so, are they possible without a massive social movement pressuring that reform? The IEA issued a report weeks ago, saying that we have 5 years to reform this shit. Meanwhile, Obama continues to pocket-veto any step toward international energy-reform treaties.