The Democratic Firm

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Chapter 2: Democratic Theory

Democracy in the Firm

The Enterprise as a Governance Institution

Is a company an organization for the governance of people or only for the administration of things? If a company carries out any productive or service operations, then the people conduct­ing those operations are governed by the company within the scope of those operations.

As a legal technicality, there could be an “uninhabited corporation” that served only a holding bin for assets that stood idle or were leased out to other companies or individuals. No one would work in such an “uninhabited company”; the shareholders would then only be concerned with “the adminis­tration of things.”

Any company with people working in it is an institution of governance—so the question of democracy arises.

Stakeholders: the Governed and the Affected

Democracy is a structure for the governance of people, not the management of property. It is the structure wherein those who govern are selected by, and govern as the representatives of, the governed. In an economic enterprise, the managers are those who govern, but who are “the governed”?

The stakeholders in an enterprise are all those people who are either governed by the enterprise manage­ment or whose interests are affected by the enterprise. Thus the stakeholders would include:

The Governed

  • The Workers (including Managers)

The Affected

  • The Shareholders

  • The Input Suppliers,

  • The Customers, and

  • The Local Residents.

But there is a crucial partition of this broad group of stake­holders into two groups which will be called “the governed” and “the affected.”
The governed” are those who (within certain limits) take orders from the enterprise management, i.e. who are under the authority of the managers.

The affected” are those whose person or property are only affected by the activity of the enterprise but who are not personally under the authority of the management.

The shareholders are not under the authority of managers; neither are the suppliers of the material inputs, the cus­tomers, nor those who live in the vicinity of the enterprise’s operations. All those people might have their interests affected by the activities of the firm, but they don’t take orders from the firm. The workers do. Only the people who work in the firm are “the governed.”

The employment system promotes the mental acro­batics of dividing a person into two different legal roles: (1) the owner and seller of labor services (the labor-seller role), and (2) the person who performs the labor services (the worker role). Under slavery, different people might play the two roles as when a master hired out some of his slaves to work for someone else during slack times. In modern times, there has even developed a labor resale market—called “employee leasing”—which separates the two roles. A person rents himself or her­self to company A and then company A rents or leases the person to company B. In the second labor-sale contract, the legal party selling the labor services (company A) is distinct from the person performing the labor.

In the normal capitalist firm, the employee plays both roles. Economists are fond of only considering the employee in his or her labor-seller role—just another input supplier. Then they can mentally treat the workers as external input suppliers who indeed do have direct control over their labor-selling activi­ties. They are not “governed” in that role. Management has no legal authority to tell them the price and quantity involved in their labor-selling decision. It is in the employee’s worker role that the person is governed by management, not in the employee’s labor-seller role.

Direct versus Indirect Control

Discussions of corporate governance are often clouded by insufficient attention to the distinction between those who are governed by the corporation and those whose interests are only affected by the firm. Vague statements are made about all the stakeholders having the right to “control” the company to protect their affected interests. But such broad assertions about “control rights” are not too helpful since the control rights legally held by shareholders are fundamentally different from the control rights held by, say, suppliers and customers. In particular, there is a basic distinction between direct control rights (positive decision-making rights) and indirect control rights (negative decision-constraining rights) that should run parallel to the earlier distinction between the governed and those only affected by an enterprise.

We are discussing the decisions of a given enterprise, not the decisions of outside parties. The direct control rights are the rights to ultimately make the decisions of the enterprise. The managers make day-to-day decisions but they do so as the representatives of those who ultimately hold the direct control rights. In a conventional capitalist corporation, the common stockholders hold those direct control rights.

Outside parties, such as supplier or customers, have the direct control rights over their own decisions, but—relative to the enterprise’s decisions—they have only an indirect or negative decision-constraining role. “No, I will not sell the firm these inputs at that price.” “No, I will not buy that output on those terms.” Even the worker in his or her labor-seller role can say “No, I will not sell that amount of labor at that price without this benefit.”

The Affected Interests Principle

Those who are potentially affected by the oper­ations of the enterprise should have an effective means to exert indirect control on the enterprise operations to protect their legitimate interests. This could be stated as the:
Affected Interests Principle. Everyone whose rightful interests are affected by an organiza­tion’s decisions should have a right of indirect control (e.g. a collective or perhaps individual veto) to constrain those decisions.
It is difficult to effectively implement this princi­ple. The market is the customary means of protecting outside interests in a market economy. But even then, there are a host of externalities where outside interests are affected without the benediction of a market relationship. And within market relations, there could be monopolistic power on one side of the market so that there is “consent” but little choice. Or there could be such large informational asymme­tries that “consent” is not meaningfully informed. In such cases, the government often intervenes to regulate the market and attempt to offer better protection of the affected inter­ests. These acknowledged difficulties in the implemen­tation of the affected interests principle need not detain us here. Our concern is the assignment of the direct control rights over the enterprise.

There is a related argument that should be men­tioned. Pressure groups for particular sets of affected interests (e.g. consumers) sometimes argue that they should have voting seats on the corporate board of directors to protect their interests. Leaving aside the fallacious assump­tion that the role of the board should be to protect outside affected interests, it is nevertheless difficult to see how this tactic can work. It runs up against the “law of one majority”; each different and opposing group of external affected inter­ests cannot have a majority on the board of directors. A minority board position may have some informational value but the vote then has little control value. To protect their affected interests, the minority out­side interests must fall back on indirect control rights (e.g. negative covenants in market contracts or government regulations) which they had independently of the voting board seats.

The board of directors is the locus for the exercise of direct decision-making control rights, whereas the affected interests principle is only concerned with assigning indirect decision-constraining rights to the outside affected interests. The assignation of the direct control rights requires another principle, the democratic principle.

The Democratic Principle

Who ought to have the ultimate direct control rights over the decisions of the enterprise? Democracy gives an unequivocal answer: the governed.
The Democratic Principle. The direct control rights over an organization should be assigned to the people who are governed by the organization so that they will then be self-governing.
The shareholders, suppliers, customers, and local residents are not under the authority of the enterprise; they are not the governed. Only the people working in the enterprise (in their worker role) are “the governed” so only they would be assigned the ultimate direct control rights by the democratic principle. Needless to say, the same person can have several functional roles, e.g. as worker, as consumer, or as capital supplier. The democratic principle would assign direct con­trol rights to the person qua worker in the enterprise, not qua consumer or qua capital-supplier.

Self-determination within a democratic framework does not include the right to violate the rights of outsiders. A demo­cratically governed township does not have the right to do what it wants to neighboring towns. Direct control rights are to be exercised within the constraints established by the indirect control rights of the external affected interests. In that manner, each group can be self-governing. The workers can self-manage their work and the consumers can self-manage their consumption—with each abiding by the constraints established by the other and with neither having direct control rights over the other.

“Shareholders’ Democracy”

In a capitalist corporation, the shareholders (absentee or not) have ultimate direct control rights over the operations of the corporation. They are the “citizens” who exercise these control rights by electing the corporate direc­tors, the “legislators,” who are supposed to act as the repre­sentatives of and in the interests of the shareholder-citizens.
The analogy between state and corporation has been congenial to American lawmakers, legislative and judicial. The shareholders were the electorate, the directors the legis­lature, enacting general policies and commit­ting them to the officers for execution. (Chayes, 1966, p. 39)
The board of directors selects the top managers who, in turn, select the remainder of the management team that manages the day-to-day operations of the corporation.

The direct control rights of shareholders are more nominal than effective in the large corporations with publicly traded shares—as was pointed out long ago by Adolf Berle and Gardner Means (1967 [1932]). Public stock markets have effectively disenfranchised the common stockholders. Each shareholder has a minuscule amount of the vote, and huge transaction costs block the self-organization of shareholders into “parties.” Most investors buy shares for the investment potential; the voting rights are only a vestigial attachment.

This “separation of ownership and control” creates a problem of legitimacy—legitimacy by capitalist standards. Corporate reformers dream of “real shareholders’ democ­racy” wherein the shareholders effectively exercise their control rights. The difficulty in this call for “democracy” is that the shareholders never were “the governed.”
Shareholder democracy, so-called, is mis­conceived because the shareholders are not the governed of the corporation whose con­sent must be sought. (Chayes, 1966, p. 40)
Perhaps an analogy is appropriate. A set of shareholders in England start off voting to elect the government of the American Colonies. Then their voting rights fall into disrepair so the autocratic government of the Colonies rules as a self-perpetuating oligarchy that is not answerable to the English shareholders (not to mention the American people). How can democracy be restored to America? Not by re-establish­ing the direct control of the outside sharehold­ers but by reassigning the direct control rights to the governed.

How do corporate lawyers and legislators manage to avoid these none-too-subtle points? One popular method is to think of the corporation solely as a piece of property to be administered, not as an organization for the management of people. But that image would only be accurate if the corporation was “uninhabited,” if no one worked in the corporation.

It is the employment contract that turns the capital­ist corporation-as-property into an organization of gover­nance. That organization is not democratic in spite of the “consent of the governed” to the employment contract. The employees do not delegate the governance rights to the employer to govern as their representative. In the employment contract, the workers alienate and transfer their legal right to govern their activities “within the scope of the employment” to the employer. The employment contract is thus a limited work­place version of the Hobbesian pactum subjectionis. The argument for applying the democratic principle to the work­place is thus an argu­ment which implies disallowing the employment contract just as we currently disallow any such Hobbesian contract to alienate democratic rights in the political sphere (for an extended analysis of the employment contract, see Ellerman, 1992).

When the democratic principle is applied across the board, then workers would always be member-owners in the company where they work and never just employees. The employment relation would be replaced by the membership relation.

Democratic Socialism is not Democratic in the Enterprise

“Democratic socialism” refers to a political-economic system where the bulk of industry is state-owned and the state is a political democracy. Is a state-owned firm in a political democracy a democratic firm? For example, is the Post Office a democratic organization since the post office workers, as citizens, elect a President who appoints the Postmaster General? The answer is “No,” but it is important to understand why such state-owned firms are undemocratic.

Democratic socialism is often criticized on grounds of scale. For instance, the workers in any one state-owned company are such a small portion of the total citizenry that they can have little real control over their enterprise. Hence democratic state-socialists become democratic munici­pal-socialists. If the enterprise was owned by the local government, then perhaps the workers would be less alien­ated. Or at least that seems to be the reasoning.

These practical problems in democratic socialism only veil the flaw in the theory of government ownership, regardless of whether the government is local or national. Citizenship in a democratic polity such as a municipality is based on having the functional role of residing within the jurisdiction of the polity, e.g. having legal residence in the municipality. Thus municipal socialism in effect assigns the ultimate direct control rights to the local residents. Membership in a democratic enterprise is based on a different functional role, that of working within the enterprise. So-called “democratic socialism” assigns the ultimate control rights over the enterprise to the wrong functional role (the role that defines political citizenship) so it is not even democratic in theory—much less in practice—in the enterprise.

The Public/Private Distinction in Democratic Theory

Personal Rights and Property Rights

A personal right is a right that attaches to an individual because the person satisfies some qualification such as playing a certain functional role. Examples include basic human rights where the qualification is simply that of being human, and political citizenship rights in a polity (e.g. municipality) where the functional role is that of residing within the polity. In contrast, a person does not have to satisfy any particular functional role to hold a property right. A property right can be acquired from a prior owner or it can be appropriated as an initial right.

Personal rights are not transferable; they may not be bought or sold. If a personal right (that was supposed to be attached to a functional role) was treated as being marketable, then the buyer might not have the qualifying functional role. And if the would-be buyer did have the functional role, he or she would not need to “buy” the right.

In America, a person might have several quite different types of voting rights:

— a citizen’s political vote in a municipal, state, or federal election;

— a worker’s vote in a union;

— a member’s vote in a cooperative; or

— a shareholder’s votes attached to conventional cor­porate shares.

Which rights are personal rights and which are property rights?

Personal rights can be easily distinguished from property rights by the inheritability test. Since personal rights attach to the person by virtue of fulfilling a certain role, those rights would be extinguished when the person dies. Property rights, however, would pass on to the person’s estate and heirs. That is the contrast, for example, between the voting rights people have in a democratic organization (a polity, a union, or a cooperative) and the voting rights people have as share­holders in a capitalist corporation. Political voting rights are personal rights that are extin­guished when the citizen dies whereas voting corporate stock passes to the person’s heirs.

When the direct control rights over an organization are attached to a certain functional role (e.g. the role of being governed by the organization) then that control is “tied down” and attached in a non-transferable way to the set of people having that role. In contrast, the ultimate control rights over a capitalist corporation are property rights attached to the voting shares so that ownership can not only change “overnight,” it can also become very concentrated in a few hands.

The ultra-capitalist ideal seems to be to have all rights as marketable property rights (see Nozick, 1974). Then society is like a ship with none of the cargo tied down. Even if the ship starts out with the cargo evenly distributed, any wave will start the cargo shifting to one side. Then the shifting weight will cause even more tilt—which in turn causes more cargo to shift to that side.

A similar social instability would result from hav­ing political voting rights as marketable property rights. Even with an equal initial distribution, one vote per person, any disturbance would result in some votes being bought and sold which begins the process of accumulation. Then the resulting political concentration would lead to capturing more wealth, more voting buying, and even more concentra­tion. Soon most of the political votes and power would end up in a few hands. Democracy inherently avoids that sort of accumulation process by “tying down” the voting rights as personal rights attached to the functional role of being governed.

We have just this sort of instability in the economic sphere. Capitalism has structured the profit rights and control rights over corporations—where new wealth is created—as transfer­able property rights. The resulting instability has accordingly led to an incredibly lopsided distribution of wealth which continues to get worse.

The system of economic democracy ties down the profit and control rights over each firm to the functional role of working in that firm. Since those membership rights are non-transferable and non-inheritable, they cannot become concentrated. Workers come to a democratic firm and even­tually leave or retire. They keep as property the profits they earn while working in the firm (even if the profits are retained and paid back to them later), but their membership in the firm is a personal right they enjoy only when they work in the firm.

Quarantining Democracy in the Public Sphere

Since the political democratic revolutions of the eighteenth and nineteenth centuries, the government has been the main provider and guarantor of personal rights. Those who own significant property tend to want as much of society as possible to be organized on the basis of property rights, not personal rights. Hence they want “less government.” Well-intended advocates of extending democratic rights to economic issues want “more government.” This leads to “democratic socialism” where the government swallows the commanding heights of industry.

This “great debate” is ill-posed. It is based on a pair of false identifications: (1) that the sphere of government (“the public sphere”) is the sole arena for personal rights, and (2) that the sphere of social life outside the government (“the private sphere”) is solely based on private property rights. That is the traditional public/private distinction. Capitalism has used it to quarantine the democratic germ in the public sphere of government, and thus to keep the democratic germ out of industry. Instead of redefining those public/private identi­fications, democratic state-socialism compounds the error by holding that industry can only be democratized by being nationalized.

The rights to democratic self-determination will not remain forever quarantined in the sphere of government. It is an empirical fact of history that, as a result of the political democratic revolutions, the government was the first major organization in society to be switched over to treating its direct control rights (voting rights) as personal rights. There is otherwise no inherent relationship that restricts the idea of democratic self-determination to the political govern­ment. There are a host of other non-government organiza­tions in society, corporations, universities, and a broad range of non-profit corporations, where people are also under an authority relation. The “unalienable rights” to democratic self-determination that we enjoy in the political sphere should not suddenly evaporate in the other spheres of life.

The democratic firm is a model of an organization that is democratic and yet is still “private” in the sense of being non-governmental. The membership rights in a demo­cratic firm are personal rights assigned to the functional role of working in the firm.

Redefining “Social” to Recast the Public/Private Distinction

The old public/private distinction is supported by both capitalists and state-socialists. The former use it to argue that the idea of democracy is inapplicable to private industry, and the latter use it to argue that democracy can only come to industry by nationalizing it. But both arguments are incorrect, and the public/private distinction itself must be recast.

The word “private” is used in two senses: (1) “private” in the sense of being non-governmental, and (2) “private” in the sense of being based on private property. Let us drop the first meaning and retain the second. Similarly “public” is used in two senses: (1) “public” in the sense of being governmental, and (2) “public” in the sense of being based on personal rights. Let us use the second meaning and take it as the definition of “social” (instead of “public”). Thus we have the suggested redefinitions:

Social Institution = Based on Personal Rights

Private Organization = Based on Property Rights.

By these redefinitions, a democratic firm is a social institu­tion (while still being “private” in the other sense of being not of the government), while a capitalist corporation is a private firm (not because it is also non-governmental but because it is based on property rights).

People-based versus Property-based Organizations

The inheritability test can be used to differentiate personal rights from property rights; personal rights are extinguished when a person dies while property rights are passed on to the heirs. The personal/property rights distinc­tion can be used to classify organizations according to whether the membership rights such as the voting rights are personal or property rights. Consider the membership rights in the following organizations:

— democratic political communities (national, state, or local);

— democratic firms (e.g. worker cooperatives),

— trade unions;

— capitalist corporations; and

— condominium associations.

The membership rights in the first three organizational types are personal rights while the membership rights (also called “ownership rights”) in the last two are property rights.

A condominium is an association for the partial co-ownership of housing units (often part of one structure such as an apartment building). The members are the unit-owners. Each unit-owner exclusively owns one or more units, and all the unit-owners through the association own the remaining property in common (e.g. the surrounding grounds). Each unit is assigned a certain percentage of the whole depending on its access to common resources and its drain on common ex­penses. A unit casts its percentage of the votes and pays that percentage of any common assessments.

A condominium and a capitalist corporation have the common feature that the membership rights are at­tached to property shares (the units in a condominium and the shares of stock in a corporation) which are owned by persons. In contrast, membership in the other three organi­zations mentioned above is not obtained through ownership of a piece of property but by personally fulfilling a certain functional role. If an organization is thought of as a molecule made of certain atoms, then the two different organizations have quite different atoms. For the capitalist corporation and the condominium, the atoms are the property shares (which are owned by people), while for a democratic organi­zation (like the three considered above), the atoms are the people themselves.

We will therefore say that an organization is people-based if the membership rights are personal rights (i.e. the atomic building blocks are the people themselves), and that an organization is property-based if the member­ship rights are attached to property shares owned by people.

Two Basic Different Types of Organizations

This useful distinction shows up in ordinary language. In a democracy, the people vote, whereas in a corporation the shares vote, and in a condominium the units vote. In either case, it is people who ultimately cast votes but a citizen casts his or her vote while shareholders cast the votes on their shares and unit-owners cast the votes assigned to their units. The distinction also ties in with the inheritability test. In an association of persons, the death of the person forfeits that membership, but in an association of property shares, the property survives. Thus when a person dies, the heirs do not inherit the person’s political vote but they would inherit any corporate stock or condominium units owned by the deceased.

Another important distinction between a people-based and a property-based organization is in the distribution of ultimate voting rights. In a property-based organization, the most basic “constitutional” voting (say, to adopt the fundamental charter of a corporation) is according to shares. In a people-based organization, the most basic constitutional level of agreement must be based on one-person/one-vote. Moreover since no one can be committed without their consent, the vote must be unanimous. The unanimity requirement is not as restrictive as it seems at first since it may work to determine which people may join an organization. The set of possible members is not necessarily “given” ahead of time. Late joiners need to agree to the basic rules as a condition of joining.

The agreed-upon constitution needs to specify how subsequent decisions will be made. Some later decisions might be delegated to representatives who are selected by some agreed-upon procedure. Other decisions might be put to a vote of the members. In such a second-stage and post-constitutional level of voting, there seems to be no theoretical reason why the voting should be one-person/one-vote—so long as the procedure was agreed to at the constitutional level. Much ink has been spilt on the question of one-person/one-vote in the American worker ownership movement (including by the author). But no convincing basic argument has emerged as to why post-constitutional decision-making in a democratic organization has to be based on the one-person/one-vote rule, or has to be put to a vote at all (as opposed to being a delegated decision). This is not to say that one voting rule is as good as another, but only that fundamental principles do not force the one-person/one-vote rule.

People might belong to many different democratic organizations. Some people might have a very incidental connection to an organization while others might have a central involvement. When the members have agreed on a specific goal, then the members might have very different responsibility for achieving that goal. The members might agree that post-constitutional voting should be based on some measure of a person’s contribution or responsibility towards the goal of the organization. For instance in a democratic firm, a person’s salary (i.e., share of salary in total salaries) might be taken as a measure of the person’s importance to the firm and might be a basis for post-constitutional voting. There might be some psychological resistance to this unequal voting, but, then again, there is also some psychological resistance to unequal salaries in the first place. In the American political system, there is roughly equal voting for candidates to the lower house (the House of Representatives), but there is rather unequal representation in the upper house (the Senate). Each state elects two senators regardless of the size of the state. In a similar manner, one might have different groups in a democratic firm electing representatives to the board of directors. Each person might have the same vote within the group but with different sized groups, there would be unequal representation on the board.

Clearly once an organization gets away from a thorough-going equality rule, then there is room for abuse. One type of abuse would be voting rules that push the organization back towards a property-based organization. For instance, salary is based on the functional role of working in the firm, but the ownership of shares is not. If votes are based on the number of shares owned (e.g., due to using the legal form of a joint stock company) and if shares are freely transferable, then the organization has been converted back into a property-based firm. However, if the number of shares owned is proportional to salary and the shares are not transferable (e.g., are held in a trust), then share-based voting would be compatible with a people-based democratic firm.

Democracy Denied by the Employment Contract, not Private Property

The Employment Contract

We saw in the previous chapter that capitalist production, i.e. production based on the employment contract, denies workers the right to the (positive and negative) fruits of their labor. Yet people’s right to the fruits of their labor has always been the natural basis for private property appropriation. Thus capitalist production, far from being founded on private prop­erty, in fact denies the natural basis for private property appropriation. In contrast, the system of economic democracy based on democratic worker-owned firms restores people’s right to the fruits of their labor. Thus democratic firms, far from violating private property, re­store the just basis for private property appropriation.

Thus to switch from capitalist firms to democratic firms is a way to transform and perfect the private property system by restoring the labor basis of appropriation. It is not private property that needs to be abolished—but the employment contract. In the switch-over from capitalist firms to democratic firms, the employment relation would be replaced with the membership relation.

A similar picture emerges when the firm is analyzed from the viewpoint of governance rather than property appropri­ation; the employment contract is the culprit, not private property. The employment contract is the rental relation applied to persons. It is now illegal to sell oneself; workers rent or hire themselves out.
Since slavery was abolished, human earning power is forbidden by law to be capitalized. A man is not even free to sell himself: he must rent himself at a wage. (Samuelson, 1976, p. 52 [his italics])
When an entity, a person or a thing, is rented out, then a certain portion of the entity’s services are sold. When a car is rented out for a day, a car-day of services are sold. When an apart­ment is rented out for a month, an apartment-month of services are sold. When a man is rented out for eight hours, eight man-hours of services are sold. The party renting the entity has the ownership of those services which gives that party the direct control rights over the use of the rented entity within the limits of the contract. Thus tenants are free to make their own decisions about using a rented apartment—but only within the constraints set by the rental contract.

It is the same when people are rented. The buyer of the services, the renter of the workers, is the employer. The employer has the direct control rights over the use of those services within the scope of the employment contract. The archaic name for the employer–employee relation is the “master–servant relation” (language still used in Agency Law). That authority relation is not now and never was a democratic relationship. The employer is not the represen­tative of the employees; the employer does not act in the name of the employees. The right to govern the employees is transferred or alienated to the employer who then acts in his own name; it is not a delegation of authority.

There is the contrasting democratic authority relationship wherein authority is delegated to those who govern from the governed. Those who govern do so in the name of and on behalf of those who are governed. This is the relationship between the managers or governors in a demo­cratic organization (political or economic) and those who are managed or governed.

Democratic and Undemocratic Constitutions

Both authority relations are based on “the consent of the governed.” There are two diametrically opposite types of voluntary contracts or constitutions that can form the basis of constitutional governance:

— the Hobbesian constitution or pactum subjectionis where­in the rights of governance are alienated and transferred to the ruler, or

— the democratic constitution wherein the inalienable rights of governance are merely delegated or entrusted to the gover­nors to use on behalf of the governed.

The distinction between these two opposite consent-based authority relations is basic to democratic theory. Sophis­ticated liberal defenders of undemocratic governments from the Middle Ages onward have argued that government was based on an implicit or explicit social contract of subjugation which transferred the right of governance to the ruler [see Ellerman, 1992 for that intellectual history]. Early pro­ponents of democracy tried to reinterpret the mandate of the ruler as a delegation rather than a transfer.

This dispute also reaches far back into the Middle Ages. It first took a strictly juristic form in the dispute ... as to the legal nature of the ancient “translatio imperii” from the Roman people to the Princeps. One school explained this as a definitive and irrevo­cable alienation of power, the other as a mere concession of its use and exercise. ... On the one hand from the people’s abdication the most absolute sovereignty of the prince might be deduced, ... On the other hand the assumption of a mere “concessio imperii” led to the doctrine of popular sovereignty. [Gierke, 1966, pp. 93–4]
“Translatio” or “concessio,” transfer or delegation; that is the question.

That question is still with us. As noted previously, the employer is not the delegate or representative of the employees. The employment contract is a transfer of the management rights, not a delegation. Thus the employment contract is a limited workplace version of the Hobbesian constitution. The democratic firm is based on the opposite type of constitution, the democratic constitution. The board of directors is the parliament elected by those who are governed. The board selects the top manager (like the prime minister) who in turn assembles the management team. Management governs in the name of and on behalf of the governed.

Are Democracy and Private Property in Conflict?

Economic democracy requires the abolition of the employment relation, not the abolition of private property. But doesn’t it require the abolition of the conventional property-based corporation? Isn’t that type of corporation undemocratic? Here we must be very careful; the analysis must be much more fine-grained than the crude Marxist slogans about the “private ownership of the means of production.”

The capitalist corporation combines two different functions that must be peeled apart:

(1) the corporation as a holding company for owning certain assets and liabilities, and

(2) the corporation as the residual claimant in a production process.

A number of people can pool their assets together and clothe them in a corporate shell by setting up a corporation and putting in their capital assets as equity. That only creates a company in the first sense above. The company is only a holding company for these assets; the company is as yet “uninhabited.” If the corporate assets were just leased out to other parties, that transaction could be handled by the shareholders or their attorneys all without anyone working in the company. The company would remain an asset-holding shell. There is no governance of people, only the admini­stration of things. There is private property, but no employ­ment contract.

It is only when the company wants to undertake some productive activity to produce a product or deliver a service that it would need to hire in employees, buy other inputs, undertake the productive operation, and then sell the resulting product or service. Then the company would be the residual claimant for that operation, bearing the costs and receiving the revenues. It is only in that second role that the corporation becomes an organization for the governance or management of people, the corporate employees. And it acquires that role precisely because of the employment contract. The employment contract is the Archimedean point that moves the capitalist world. From the conceptual viewpoint, the capitalist corpora­tion is a “wholly owned subsidiary” of the employment contract.

We have differentiated the roles of private property and the employment contract in the capitalist cor­poration. Without the employment contract, the corporation as an asset-holding shell is comparable to a condominium. The tenants in a condominium unit (whether a unit-owner or a renter) are not under the authority of the condominium association. The tenant has the direct control rights over the use of the apartment-unit within the constraints specified by the condo­minium rules (and the rental contract if the apart­ment is rented out).

In a similar fashion, an uninhabited asset-owning company might lease its assets out to other parties. The company would not have an authority relation (i.e. direct control rights) over the lessees. The lessees could use the leased assets within the constraints of the lease contract.

Is a capitalist corporation undemocratic? In which role? In its role as a depopulated asset-holding shell, it does not have an authority relation over any people at all. It would not then be an organization for the governing of people, only for the management of property. It thus would be neither democratic nor undemocratic since no people were governed. When a farmer manages his farmland property, we do not ask if he does so democratically or undemo­cratically since the management of his property does not involve an authority relationship over other people. In the same fashion, we may say that a conventional corporation that is without any employment contract and that operates solely as an asset-holding shell is neither democratic nor undemocratic. Yet it is a privately owned property-based organization. Thus there is no inherent conflict between “the private ownership of the means of production” and demo­cratic rights in the workplace.

A conventional corporation only takes on an author­ity relation over people when it hires them as employees (managers or blue-collar workers). And, as we have seen, there is a conflict between democratic rights and the employment contract. Thus democratic rights require not the abolition of the private ownership of the means of production but of the employment contract. They require that conventional corpora­tions not be abolished but only “depopulated” as a result of the abolition of the employment relation. To be employed produc­tively, the assets would have to be leased to a democratic firm.

The reversal of the contract between capital and labor (so that labor hires capital) could also take place by internally restructuring a capitalist corporation as a demo­cratic firm with the old shareholders’ securities being restructured as parti­cipating debt securities.

Democracy can be married with private property in the workplace; the result of the union is the democratic worker-owned firm.

The De Facto Theory of Inalienable Rights

The analysis of capitalist production based on the labor theory of property (see previous chapter) culminated in an argument that the employment contract was a juridically invalid contract. It pretends to alienate that which is de facto inalien­able, namely a person’s de facto responsibility for the positive and negative results of his or her actions. This de facto inalienability of responsibility was illustrated using the example of the employee who commits a crime at the command of the employer. Then the legal authorities intervene, set aside the employment contract, and recognize the fact that the employee and employer cooperated together to commit the crime. They are jointly de facto responsible for it, and the law accordingly holds them legally responsible for it.

When the joint venture being carried out by employer and employees is not criminal, the employees do not suddenly become de facto instruments. However, the law then does not intervene. It accepts the employees’ same de facto responsible cooperation with the employer as “fulfilling” the contract. The employer then has the legal role of having borne the costs of all the used-up inputs including the labor costs, so the employer has the undivided legal claim on the produced outputs. Thus the employer legally appropriates the whole product (i.e. the input-liabilities and the output-assets).

The critique does not assert that the employment contract is involuntary or socially coercive. The critique asserts that what the employees do voluntarily (i.e. voluntarily co-operate with the employer) does not fulfill the employment contract. Labor, in the sense of responsible human action, is de facto non-transferable, so the contract to buy and sell labor services is inherently invalid. The rights to the positive and negative fruits of one’s labor are thus inalienable rights.

This argument is not new; it was originally devel­oped by radical abolitionists as a critique of the voluntary self-sale contract and it was the basis for the antislavery doctrine of inalienable rights developed during the Enlightenment. The employment contract is the self-rental contract, the contract to sell a limited portion of one’s labor—as opposed to selling all of one’s labor, “rump and stump” [Marx, 1906, p. 186] as in the self-sale contract. But de facto responsi­bility does not suddenly become factually transferable when it is “sold” by the hour or day rather than by the lifetime. Thus economic democrats are the modern abolitionists who apply the same inalienable rights critique to the employment contract that their predecessors applied to the self-sale contract.

This de facto theory of inalienable rights was also devel­oped as a part of democratic theory. There it was directed not against the individual self-enslavement contract but against the collective version of the contract, the Hobbesian pactum subjectionis. In questions of governance (as opposed to produc­tion), the emphasis is on decision-making (as opposed to respon­sibility). But the basic facts are the same. Decision-making capacity is de facto inalienable. A person cannot in fact alienate his or her decision-making capacity just as he or she cannot alienate de facto responsi­bility. “Deciding to do as one is told” is only another way of deciding what to do.

Here again it is useful to contrast what one can do with oneself with what one can do with a thing such as a widget-making machine. When the machine is leased out to another individual, the machine can in fact be turned over to be employed by that ”employer.” The employer can then use the machine without any personal involvement of the machine-owner. The employer is solely de facto responsible for the results of said use. Furthermore, the employer has the direct control rights over the use of the machine. The employer decides to use the machine to do X rather then Y (within the scope of the lease contract), and the machine-owner is not involved in that decision making. Thus decision-making about the particular use of the machine and the responsibility for the results of the machine’s services are de facto alienable from the machine-owner to the machine-employer.

The employment contract applies the same legal super­structure to the very different case when the worker takes the place of the machine. Then the decision-making and the responsibility for the results of the services is not de facto transferable from the worker to the employer.

People cannot in fact alienate or transfer decision-making capability—but persons can delegate the authority to make a decision to other persons acting as their represen­tatives or agents. The first persons, the principals, then accept and ratify the decisions indicated by their delegates, representatives, or agents.

The Hobbesian pactum subjectionis is the political consti­tution wherein a people legally alienate and transfer their decision-making rights over their own affairs to a Sovereign (see Philmore, 1982 reprinted in Ellerman, 1995, Chapter 3 for an intellectual history of the liberal contractarian defense of slavery and autocracy). Since human decision-making capability is de facto inalien­able, Enlighten­ment democratic theory argued that the Hobbesian contract was inherently invalid.
There is, at least, one right that cannot be ceded or abandoned: the right to personality. Arguing upon this principle the most influen­tial writers on politics in the seventeenth century rejected the conclusions drawn by Hobbes. They charged the great logician with a contra­diction in terms. If a man could give up his personality he would cease being a moral being... This fundamental right, the right to personality, includes in a sense all the others. To maintain and to develop his personality is a universal right. It ... cannot, therefore, be transferred from one individual to another... There is no pactum sub­jectionis, no act of submission by which man can give up the state of a free agent and enslave himself. (Cassirer 1963, p. 175)
The employment contract can be viewed both as a limited individual version of the rump-and-stump labor contract (the self-sale contract) and as a limited economic version of the Hobbesian collective contract. The employees legally alienate and transfer to the employer their decision-making rights over the use of their labor within the scope of their employment. Thus the other branch of inalienable rights theory, the critique of the Hobbesian contract, can also be applied against the employment contract.

The critique of the employment contract based on the de facto inalienability of responsibility and decision-making thus descends to modern times from the abolitionism and democratic theory of the Enlightenment which applied the critique to the self-sale contract and the pactum subjectionis.

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