Andrew Cumbers – The Case for Economic Democracy

Microsoft was never in danger of bankruptcy. But it had become irrelevant as a new group of companies had emerged as the vanguard of the technological revolution. It is not unusual for a company to struggle after the departure of the founder. Apple had also declined after the departure of Steve Jobs in the eighties. His return to Apple elevated it from the brink of bankruptcy to the world’s most valuable company. Typically, a company in decline looks for an outsider to turn around its fortunes. Microsoft looked within itself to identify Satya Nadella as its next CEO. Nadella is widely recognized as engineering Microsoft’s renaissance. It has since replaced Apple as the world’s most valued company.

Thomas Piketty has given intellectual weight to the concerns of the left about wealth inequality. But the vast discrepancies between the pay of a CEO and its workers is a symptom of a wider and more pervasive problem companies face. Multi-national corporations have become massive organizations. Some have evolved into institutions with their own unique culture and hierarchy. The leadership necessary to manage these companies requires skills that remain difficult to understand, recognize or measure. Corporate boards have selected leaders out of desperation rather than a clear sense of the value their selection is able to bring. The compensation packages for these employees is devised from an implicit assumption that ‘you get what you pay for.’ But this attitude is reckless when an uninformed board overpays for subpar talent. It is too easy to fall into a tautology where a person is worth an exorbitant salary because somebody continues to pay an exorbitant salary. Nobody believes a worker is productive because they are paid well. It is expected a worker is paid well because they are productive.

Andrew Cumbers makes the case for economic democracy not simply as a moral thought experiment but as a rational form of organization for economic institutions. He gives examples where reforms have brought about stronger companies who are more resilient and profitable. Indeed, the evolution of the corporation has intensified the alienation between capital and labor. Management no longer serves as a bridge between shareholders and its workforce. Professional managers have become alienated from both. They own too little of the company to identify with shareholders but remain distinct from the concerns of their employees. Moreover, diversification has alienated shareholders from their investments. An individual shareholder is likely invested in a combination of mutual and index funds where it is unclear how much of each company they own.

The abstraction of financial instruments from their physical embodiment in business has brought about the conflicts between Wall Street and Main Street. The role of retirement investments like 401Ks has left many with divergent loyalties. We may want Corporate America to deliver strong returns for our retirement accounts but still want a secure job for ourselves. Too many CEOs are external hires. Unlike Satya Nadella, they do not have relationships with coworkers, customers and suppliers. Their detachment makes it easier to prefer short-term gains over a long-term vision.

Cumbers recognizes economic democracy requires large structural changes. He establishes three pillars:

  1. Individual Economic Rights
  2. Diverse Forms of Collective Ownership
  3. Deliberative and Knowledgeable Publics

The political left embraces his conception of “Individual Economic Rights” as much as the political right rejects them. However, it helps to think of this idea as a structural component rather than a collection of policies. Cumbers does go down the rabbit hole of specific policy proposals especially in his third chapter. For example, he makes an extended case for universal basic income. But it is important to distinguish between specific policy proposals and philosophical concepts. The larger idea is people must have some form of economic security to rectify the power relationship within employment. Unemployment insurance is a widely accepted form of economic security. Old Age Pensions are another form of security. In the United States it is called Social Security. A public form of health care or insurance is available in most countries but remains controversial in the United States.

Building on the work of David Ellerman, Andrew Cumbers goes beyond economists like Amartya Sen who have argued freedom requires economic and social resources. Cumbers envisions a form of labor self-governance where management becomes largely unnecessary or possibly elected. There are challenges in this idea which Cumbers fails to recognize. His idea of individual economic rights is not easily reconciled with his notion of the collective rights of labor.

Experienced managers recognize a twenty-year employee deserves greater autonomy and influence than a new hire. A work environment with substantial tenure operates differently than one with high turnover. Managers have less influence with experienced employees than new hires. The management role naturally becomes more collaborative in this scenario. Labor self-governance may become possible although some limitations remain. However, new employees require significant direction. A quality manager offers more value to a new hire in the form of training, resources and guidance. It takes time before a new hire becomes self-sufficient in their role.

Labor self-governance is possible so long as the employers and employees are committed to a long-term relationship. It makes little sense to give a new worker who has little invested in the company the same influence as a twenty-year veteran. A new hire is more likely to leave for a new role so there is a strong case to limit their rights in workplace governance. But this establishes a class system where tenured employees protect their own interests and ignore the needs of newer hires. The collective problem is resolved so long as new hires make an extended commitment to the firm. But this limits their individual economic rights to find better opportunities.

Cumbers makes an intriguing case for diverse forms of collective ownership. He envisions firms controlled not just by labor but also consumers. The current construction of corporate governance has problems. Because there is no clear sense of ownership, professional managers make decisions based on their own compensation plans. Recently, this has encouraged CEOs to buyback stock to increase the value of their options rather than to increase dividends to investors, increase wages or reinvest in the company. But it is hard to imagine how this transition might occur. An Employee Stock Ownership Program (ESOP) is an example of how some companies have transferred ownership to its workforce. But as employees change companies or retire, the ownership of the company is owned less by the current workforce than the former employees.

It is not clear how this new ownership structure would continue to attract capital for future investments. People forget the purpose of publicly traded stock is to raise capital for investment. Firms go public because they want an infusion of capital for expansion or other forms of investment. Too much emphasis is placed on the people who cash out during an initial public offering (IPO). Not enough is focused on the role of capital infusion as an alternative to debt. Firms will make new offerings when they believe the value of their stock is high and the cost of additional debt is undesirable. A new issuance of additional stock reduces the stake in the company for the current investors but brings additional capital they believe will create more value.

It is unclear how a company owned by labor or consumers can get access to capital markets outside of new debt. Capital markets are less important for established companies than new companies. This reform may simply erect an entrance barrier to prevent new companies from emerging. This reform may serve to insulate industries from capitalism’s forces of creative destruction. It may work to keep a firm solvent longer but may reduce the competitiveness of the larger industry in the long-term.

Democracy scholars must reconcile the desire to decentralize power into distinct institutions with the capacity of those institutions to centralize power into new organizations that do not behave democratically. This is a complex question which is often centered around inequalities of income and wealth. Yet these issues are related to education, religion and the family. Andrew Cumbers offers a challenge to the current structure of our economic institutions. Bernie Sanders and Alexandria Ocasio-Cortez have popularized the concept of democratic socialism, but their ideas are not as developed as Andrew Cumbers’ portrayal of economic democracy. In the end, it is difficult to imagine political equality so long as there remains an incomprehensible inequality in wealth and income.

jmk, carmel, indiana,

Follow me on Twitter @DemParadox

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