The Democratic Firm

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Chapter 3: The Democratic Firm

Theoretical Basis for the Democratic Firm

The Democratic Principle and the Labor Theory

We now start the descent from first principles—the labor theory of property and democratic theory—down to the structure of the democratic worker-owned company.

In the world today, the main form of enterprise is based on renting human beings (privately or publicly). Our task is to construct the alternative. In the alternative type of firm, employment by the firm is replaced with membership in the firm. How can the corpora­tion be taken apart and reconstructed without the employment relation? How can the labor principle at the basis of private property appropriation be built into corpo­rate structure? How can the democratic principle of self-governance be built into corporate structure?

In a capitalist corporation, the shareholders own, as property rights, the conventional ownership bundle of rights.
The Conventional Ownership Bundle (partitioned into two parts)

Residual claimant or membership rights (#1 & #2) =

1. Voting rights (e.g., to elect the Board of Directors),

2. Net income rights to the residual, and

Net asset rights (#3) =

3. Net asset rights to the net value of the current corporate assets and liabilities.

Restructuring the corporation to create a democratic firm does not mean just finding a new set of owners (such as the “employees”) for that bundle of rights. It means taking the bundle apart and restructuring the rights so that the whole nature of “corporate ownership” is changed.

The democratic firm is based on two fundamental principles:

Democratic principle of self-government: people’s inalienable right to self-govern all of their human activities (political or economic), and

Labor theory of property: people’s inalienable right to appro­priate the (positive and negative) fruits of their labor.

These two principles are correlated respectively with the first two rights in the conventional ownership bundle:

— the voting rights and

— the residual or net income rights

which are attached to the pure (current) residual claimant’s role and which will be called the membership rights. We will see that:

the democratic principle implies that the voting rights should be assigned to the workers, and

the labor theory of property implies that the residual rights should be assigned to the workers.

Implementing the Democratic Principle in an Organization

How are the two fundamental principles realized in the design of organizations?
The principle of democratic self-government or self-management is built into the structure of an institution by assigning the right to elect the governors to the functional role of being governed.
The only people who are under the authority of the manage­ment (i.e. who take orders from the managers) of an economic enterprise are the people who work in the enterprise. Therefore the democratic principle is imple­mented in a firm by assigning to the people who work in the firm the voting rights to elect those managers (or to elect the board that selects the managers).

Governance of Democratic Firm

Governance of Non-Democratic Firm

In contrast, the ultimate control rights in a non-democratic firm are not held by those who are governed.

Note that the democratic principle assigns the right to elect those who govern to those who are governed. There are a number of outside groups whose rightful interests (i.e. property or personal interests protected by rights) are only affected by company activities such as the consumers, shareholders, suppliers, and the local residents. By what we called the “affected interests principle,” those outside interests should be protected by a voluntary interface between the enterprise and the affected parties. By the market relationship (where more choice between firms is preferred to less), customers and suppliers can largely protect their interests. For externalities such as pollution, govern­ments can establish emission restric­tions, pollution taxes, or subsidies for pollution control equipment.

The democratic principle assigns the direct control right giving the ultimate authority for governance decisions to the governed. Since the external parties do not fall under the authority of the management of the firm (that is, do not take orders from the managers), the democratic principle does not assign the external parties a direct control right to elect that management.

In summary,

Affected Interests Principle: the veto to those only affected,
Democratic Principle: the vote to those who are governed.

Implementing the Labor Theory in an Organization

The “labor theory ” has always had two quite dif­ferent inter­pretations:

(A) as a theory of value holding that price or value is determined by labor, and

(B) as a theory of property holding that workers should get the fruits (both positive and negative) of their labor.

Neo-classical economics has focused on the labor theory of value as a theory of price, but it is “the labor theory” as a theory of property, that is, the labor theory of property, that determines the structure of property rights in a democratic firm.

The positive fruits of the labor of the people working in an enterprise (workers including managers) are the new assets produced as outputs which could be repre­sented as Q. The negative fruits of their labor are the liabilities for the inputs used up in the production process. The used-up inputs could be represented by K (all non-labor inputs such as capital services and the services of land).

The firm as a corporate entity legally owns those assets Q and holds those liabilities for the used-up K. Therefore the people who work in a firm will jointly appropriate the positive and negative fruits of their joint labor when they are the legal members of the firm.

The labor theory of property is implemented in the legal structure of a company by assigning the residual rights to the functional role of working in the company.
If P is the unit price of the outputs Q and R is the unit rental rate for the input services K, then the residual PQ–RK is the revenue minus the non-labor costs. In a democratic firm, that residual would be the labor income accruing to the workers as wages and salaries paid out during the year and as surplus or profits determined at the end of the fiscal year. Thus both “wages” and “profits” are labor income; there is only a timing difference between them.
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