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The Philosophy of Employee Ownership

Quietly, over the past fifty years, an iconoclastic scholar named David Ellerman has been laying the intellectual groundwork for an employee-owned economy.

No one should underestimate the importance of such an effort. Adam Smith and others built the philosophical foundation for free enterprise and market-based competition. John Locke and others did the same for a republican form of government. Institutional evolution follows intellectual evolution.

Most of us in the employee ownership community probably favor the concept because it seems fairer. We believe in greater economic equality and opportunity, and so we believe in a more equitable distribution of capital ownership.

But Ellerman takes things a good deal further. In his estimation, conventional ownership structures—and the economic institutions based on them, such as the employment contract and wage labor—are fundamentally illegitimate. They amount to institutionalized fraud on a massive scale.

Ellerman is someone who might fairly be called a polymath. He holds an undergraduate degree in philosophy from MIT, plus master’s degrees in the philosophy of science and in economics from Boston University. His doctorate, also from BU, is in mathematics. His scholarly works are in the fields of economics and political economy, social theory and philosophy, mathematical logic, and quantum mechanics.

He has taught in several universities, founded and managed a consulting firm in East Europe, and worked at the World Bank, where he was an advisor to chief economist Joseph Stiglitz. He is currently a visiting scholar at the University of California/Riverside and at the University of Ljubljana, in Slovenia, and a Fellow of the Center on Global Justice at the University of California/San Diego. Now 75, he has published numerous articles and five books. (You can find listings—and many downloads—on his website.)

Two companies in one

Much of Ellerman’s work in employee ownership focuses on the disparity between legal constructs and practical reality. For example: The law says that the owners of a business corporation are those who invested their capital, or those who purchased a share of ownership from earlier investors. Obviously, this doesn’t need to be the case: workers can form a cooperative enterprise, borrow the capital they need to get started, and go into business as joint owners. Labor can hire capital just as capital can hire labor. But for historical reasons, most companies are legally owned by their shareholders.

This, says Ellerman, leads to an absurdity: “There are actually ‘two companies’: the company as a legal entity and the company as a working group of human beings.” The one consists of the shareholders, the other of the managers and employees who actually carry out the company’s business. In small, private companies, the two may overlap. But in large, publicly traded companies, there’s usually a distinct separation:

Those who are actually inside the company (the staff) are, from the legal viewpoint, outside the firm and have only a market relationship (employment) to the firm. Those who are legally inside the company (the legal members of the company), are the far-flung shareholders who typically have no business relationship with the company aside from the share ownership and who typically have well diversified portfolios of shares….

This “rather odd chimera” produces a disconnect in terms of motivation and commitment. The legal outsiders—the company’s managers and employees—commit large parts of their lives to its success. The legal insiders—the shareholders—commit little; if they don’t like what’s going on, they just sell their shares. They don’t have responsibility for the actions of the company one way or the other.

Of course, Ellerman points out, such a “bizarre structure would not actually work.” Someone has to run the business, and if the shareholders can’t do it then top management will grab the reins. So while the legal theory is shareholder capitalism, the reality is managerial capitalism. “Since there is no legal legitimation for the actual system, the public relations machinery in the companies, in the business press, and in academia broadcasts the goal of ‘maximizing shareholder value’ while the managers show their actual goals in their salaries, benefits, perquisites, (manipulated) stock options, and golden parachutes.”[1]

The two-companies disconnect by itself leads one in the direction of employee ownership. In an employee-owned company, the legal firm and the real firm are one and the same, and the owners must take responsibility for their actions as a corporation. “Here is the most urgent challenge to political invention ever offered to the jurist and the statesman,” wrote Lord Eustace Percy, a twentieth-century British diplomat and politician quoted by Ellerman:

The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law.  The association which the law does recognise—the association of shareholders, creditors and directors—is incapable of production and is not expected by the law to perform these functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one.[2]

Ellerman himself poses a practical alternative:

Suppose we reconstitute the corporation in a way that acknowledges that people who buy shares are not owners in any real sense? What if we turn their shares into something like variable income bonds, with no vote attached, and then reassign the vote to the people who work within the corporation? Right now, shareholders can’t monitor management—the people who work in the firm have a better idea of what’s going on. By reconstituting the way the firm runs, people who work in the firm can monitor management, and management can be the real representatives of the people they’re governing.[3]

This does not necessarily imply a “horizontal” organization, Ellerman notes. A company can still be hierarchical based on the delegation of authority. But employees rather than external shareholders would elect the board of directors as their delegates.

The employment relationship

In Ellerman’s view, the contradictions of today’s economy run still deeper, infecting a relationship so common that we take it utterly for granted: that between employer and employee. To understand his argument about this, it helps to go back in history—and the philosopher is glad to take us there:

At one time, the king was seen as the owner of a country, the prince as the owner of a principality, and the feudal lord as the owner of his dominion. This “ownership” was not just a bare property interest in real estate; it included the governance of the people living on the land. The landlord was the Lord of the land. The governance of people living on land was taken as an attribute of the ownership of that land….[4]

“Today,” writes Ellerman, “the same mentality is very much with us in the notion of corporate ownership.” In employment contracts—explicit or implicit—corporations obtain the right to govern their employees during work hours in return for paying them a wage.

(Does “govern” seem like too strong a word? It carries a lot of freight—the “consent of the governed” and all that—but in fact it seems quite appropriate. With only minimal legal constraint, employers can tell employees what to do and how to do it every minute of the working day. They can tell employees how [and how not] to dress; they can tell employees what to say [on the phone, for instance] and what not to say. They can even enforce requirements about interpersonal behavior [make eye contact with the customer; smile when someone approaches your desk]. In addition, an employment contract may also constrain outside-the-workplace behavior [no drugs] and what the employee is allowed to do once he or she leaves the company [noncompete agreements]. If this isn’t governance, it’s hard to say what is.)

There are two moral problems here. The first is that human beings cannot turn themselves into zombies or robots. They retain moral responsibility for what they do no matter what the ostensible terms of the contract may be. To explicate this argument, Ellerman again takes us on a historical tour, this time to the era of slavery.

Slavery was not just a “peculiar institution” of the antebellum American South. On the contrary, it existed in one form or another throughout most of recorded history. Not surprisingly, legal theorists and philosophers in Rome and elsewhere developed moral theories about it, such as how a person could legitimately be enslaved (by being a member of a defeated army, for instance). Enlightenment thinkers in the west took mixed views of slavery; those who deplored it typically did so on the basis that it involved coercion. But some theorists, Locke and Montesquieu among them, decided that men or women could sell themselves into slavery if they did so voluntarily in a contract with rights on both sides (at least on paper). Six states in the antebellum South allowed free African-Americans to do just that.

Today, we don’t recognize a voluntary slavery contract as being valid. We believe that freedom is an inalienable right—it can’t be sold. That fits with reality, because even if a man were to sell himself into slavery, he would still retain all the faculties that make him human.

And yet: we do allow human beings to rent themselves out, for eight hours or more a day. You can’t sell your labor in units of a lifetime, but you can sell it in units of hours, days, or weeks. What is the difference?

The immediate response is that the employment contract is voluntary. Well, says Ellerman, so is voluntarily selling yourself into slavery, and yet that is not allowed. A second response: employees are free to quit their job at any time. But the issue is what happens inside the employment relationship regardless of its duration.

Consider, for example, the difference between a true contractor—a plumber, say, or a business consultant—and an employee. Contractors offer a piece of work for sale. Their customers have no control over them other than to say what they want and expect from the job. Employees, by contrast, always operate under the employer’s direct control. They are governed by the employer, and all of their work time is owned by their employer.

There’s another difference between contractors and employees, and it brings us to the second moral problem. Any economic enterprise, from a medieval manor to a software company, creates products by using resources. The moral question is who should have a claim on that product and be liable for those costs. In the manor, there was no doubt: the entire crop was the lord’s to dispose of as he saw fit. In the corporation, the entire net product is the company’s, which means the shareholders’. Contractors sell the product of their work and pay their own costs. Employees receive only a fixed wage. They have no responsibility for a company’s liabilities and no claim on the fruits of their labor.

Is this just? Ordinarily, we assume that people who create something have a basic property right to what they produce. That’s in accord with the fundamental judicial principle that legal responsibility follows factual responsibility: if you create something, you should own it, and if you destroy something, you should owe for it. But the employment relationship violates that principle. Somehow, the owners of capital have arranged things so that they—who bear no responsibility for the day-to-day operations of the firm—are entitled to the net product the firm creates, rather than the people who actually create that product. This is not just an absurdity; it is legalized fraud.

It’s easy for non -philosophers to get lost in what are, after all, abstract arguments. But Ellerman offers a simple distinction that helps untangle things. If somebody hires you to commit a crime, and you do, you can’t defend yourself on the basis that you were just carrying out the terms of your contract. You are just as culpable as the person who hired you, because you are both responsible human beings. (This distinction applied even to slaves, who were treated as nonpersons in every way but one: if they committed a crime, they were suddenly turned back into legal human beings, responsible for their actions.) So how can it be that you are not legally responsible for noncriminal behavior? People cannot give away responsibility—like freedom, it is inalienable—and so they can never be zombies. They are human beings, and they are jointly entitled to the product that they jointly create.

Outlandish Ideas?

Ellerman readily admits that his views on the illegitimacy of the employment contract have little currency today. Politicians, lawyers, economists, and most of the rest of us accept without question that people have a right to trade their time for money, so long as the enterprise isn’t criminal. Reformers, from Marx on down, have accepted the idea, and typically concern themselves only with whether employees are fairly paid for their time. To Ellerman, the level of pay is exactly the wrong question. The right one is who owns and controls the enterprise. Human beings should be joint owners of the enterprise they work for, so that they have an ownership rather than merely a contractual interest in their job and in what they produce. Then they can be paid whatever they or their delegates (the board of directors and the CEO) decide is the appropriate amount.

So yes, it’s an outlandish set of ideas. But history has a way of taking once-outlandish notions and making them part of the intellectual mainstream. It once seemed outlandish that serfs should have any rights vis-à-vis their lord or their king. It once seemed outlandish that slavery should be abolished. Today, by contrast, it seems outlandish that anybody should ever be a slave or a subject of a ruler, with no democratic rights.

And so it may be, some day, with wage labor, and with employee ownership.

Ellerman on Slavery and the Gig Economy:

“What’s happening now…is that employers have so much control and the labor movement is so weak that they’re repackaging jobs and calling people independent contractors. Now you’re paying your own costs, but you still have a sort of de facto employee-employer relationship.

“And this is what happened after slavery. When slavery was abolished, what happened next? It was recreated, but with a different legal package. You’re an independent farmer, but you don’t happen to have any land. So you can rent my land, and pay me part of your crop, and it’s called sharecropping. And you don’t have seeds, and I will give you some seeds, and you’ll owe me. And you don’t have fertilizer, and I will give you some fertilizer, and you’ll owe me. So you end up with a situation where you’re legally packaged as an independent farmer, but it’s actually debt peonage. Sharecropping with debt peonage on top of it. Slavery was essentially recreated by another name.

“And that what is happening now with Uber and a lot of this gig economy stuff. Because the few advances that the labor movement has made are attached to the employee role, employers say, look, we’re going to allow you to come in as an independent contractor, not an employee. And this pushes back these gains. You have people who are really employees, but who have been repackaged as if they’re independent contractors, just as sharecroppers were repackaged as if they were independent farmers. The sharing economy is modern sharecropping by another name.”[5]

[1] All quotes so far are from David Ellerman, “The Two Institutional Logics: Exit-Oriented Versus Commitment-Oriented Institutional Designs,” International Economic Journal 19:147-168 (June 2005), available here.

[2]  Percy, Eustace. The Unknown State: 16th Riddell Memorial Lectures. London: Oxford University Press, 1944, p. 38.

[3] David Ellerman, “Against the Renting of Persons,” David Ellerman in conversation with The Straddler, available here.

[4] This discussion appears in Economic Thought 4.1: 1-20 (2015), available here.

[5] David Ellerman, “Against the Renting of Persons,” David Ellerman in conversation with The Straddler, available here.