Economic democracy

Economic democracy is a socioeconomic philosophy that proposes to shift decision-making power from corporate managers and corporate shareholders to a larger group of public stakeholders that includes workers, customers, suppliers, neighbours and the broader public. No single definition or approach encompasses economic democracy, but most proponents claim that modern property relations externalize costs, subordinate the general well-being to private profit and deny the polity a democratic voice in economic policy decisions.[1] In addition to these moral concerns, economic democracy makes practical claims, such as that it can compensate for capitalism's inherent effective demand gap.[2]

Proponents of economic democracy generally argue that modern capitalism periodically results in economic crises characterized by deficiency of effective demand as society is unable to earn enough income to purchase its output production. Corporate monopoly of common resources typically creates artificial scarcity, resulting in socio-economic imbalances that restrict workers from access to economic opportunity and diminish consumer purchasing power.[3] Economic democracy has been proposed as a component of larger socioeconomic ideologies, as a stand-alone theory and as a variety of reform agendas. For example, as a means to securing full economic rights, it opens a path to full political rights, defined as including the former.[1] Both market and non-market theories of economic democracy have been proposed. As a reform agenda, supporting theories and real-world examples range from decentralization and economic liberalization to democratic cooperatives, public banking, fair trade and the regionalization of food production and currency.

Deficiency of effective demand

According to many analysts, deficiency of effective demand is the most fundamental economic problem. That is, modern society does not earn enough income to purchase its output. For example, geographer David Harvey claims, "Workers spending their wages is one source of effective demand, but the total wage bill is always less than the total capital in circulation (otherwise there would be no profit), so the purchase of wage goods that sustain daily life (even with a suburban lifestyle) is never sufficient for the profitable sale of the total output".[2]

In the Georgist view of any economic system, "wealth" includes all material things produced by labor for the satisfaction of human desires and having exchange value. Land, labor and capital are generally considered the essential factors in producing wealth. Land includes all natural opportunities and forces. Labor includes all human exertion. Capital includes the portion of wealth devoted to producing more wealth. While the income of any individual might include proceeds from any combination of these three sources—land, labor and capital are generally considered mutually exclusive factors in economic models of the production and distribution of wealth. According to Henry George: "People seek to satisfy their desires with the least exertion".[3] Human beings interact with nature to produce goods and services that other human beings need or desire. The laws and customs that govern the relationships among these entities constitute the economic structure of a given society.

Alternately, David Schweickart asserts in his book, After Capitalism: "The structure of a capitalist society consists of three basic components:

  • "The bulk of the means of production are privately owned, either directly by individuals or by corporations that are themselves owned by private individuals.
  • "Products are exchanged in a market -- that is to say, goods and services are bought and sold at prices determined for the most part by competition and not by some governmental pricing authority. Individual enterprises compete with one another in providing goods and services to consumers, each enterprise trying to make a profit. This competition is the primary determinant of prices.
  • "Most of the people who work for pay in this society work for other people, who own the means of production. Most working people are 'wage labourers'".[4]

Supply and demand are generally accepted as market functions for establishing prices. Organisations typically endeavor to 1) minimize the cost of production; 2) increase sales; in order to 3) maximize profits. But, according to David Schweickart, if "those who produce the goods and services of society are paid less than their productive contribution", then as consumers they cannot buy all the goods produced, and investor confidence tends to decline, triggering declines in production and employment. Such economic instability stems from a central contradiction: Wages are both a cost of production and an essential source of effective demand (needs or desires backed with purchasing power), [5] resulting in deficiency of effective demand along with a growing interest in economic democracy.

In chapter 3 of his book, "Community Organizing: Theory and Practice", Douglas P. Biklen discusses a variety of perspectives on "The Making of Social Problems". One of those views suggests that "writers and organizers who define social problems in terms of social and economic democracy see problems not as the experiences of poor people, but as the relationship of poverty to wealth and exploitation". Biklen states that according to this viewpoint:

[C]orporate power, upper class power, uneven distribution of wealth and prejudice cause social problems... [T]he problem is not one of poverty, but of enormous wealth. The problem is not one of gaps or cracks in an otherwise fine system but of a system which perpetuates prejudicial views concerning race, sex, age, and disability. The problem is not one of incompetence but of barriers to education, jobs, and power. Accordingly, as long as there is a deep gulf between social classes, both in terms of wealth, power, and outlook, traditional social programs will act merely as palliatives to oppression and not as a way of ending large scale human misery. This perspective is, above all, eclectic. It embraces Marx's criticism of social class inequality but is not only a social class analysis. It is anti-racist, but it is not only a theory of race equality. It favors democratic distribution of power but is also an economic theory. It can be called a social and economic democracy perspective.[6]

Savings, investment and unemployment

In his 1879 book Progress and Poverty, Henry George argued that a majority of wealth created in a "free market" economy was appropriated by land owners and monopolists through economic rents, and that concentration of such unearned wealth was the root cause of poverty.[7] "Behind the abstraction known as 'the market' lurks a set of institutions designed to maximize the wealth and power of the most privileged group of people in the world—the creditor-rentier class of the first world and their junior partners in the third".[8] Schweickart claimed that private savings are not only unnecessary for economic growth, they are often harmful to the overall economy.[9]

In an advanced industrial society, business credit is necessary for a healthy economy. A business that wants to expand production needs to command the labor of others, and money is the default mechanism for exercising this authority.[10] It is often cheaper for a business to borrow capital from a bank than to stockpile cash.

If private savings are loaned out to entrepreneurs who use them to buy raw materials and hire workers, then aggregate demand is not reduced.[10] However, when private savings are not reinvested, the whole economy suffers recession, unemployment, and disappearance of savings [11] which characterize deficiency of effective demand.

In this view, unemployment is not an aberration, indicating any sort of systemic malfunction. Rather, unemployment is a necessary structural feature of capitalism, intended to discipline the workforce. If unemployment is too low, workers make wage demands that either cut into profits to an extent that jeopardizes future investment, or are passed on to consumers, thus generating inflationary instability. Schweickart suggested, "Capitalism cannot be a full-employment economy, except in the very short term. For unemployment is the "invisible hand"—carrying a stick—that keeps the workforce in line."[12] In this view, Adam Smith's "invisible hand" does not seem reliable to guide economic forces on a large scale.[13]

Assuming business credit could come from public sources rather than from private savers, Schweickart and other analysts consider interest payments to private savers both undeserved and unnecessary for economic growth. Moreover, the personal decision to save rather than consume decreases aggregate demand, increases the likelihood of unemployment, and exacerbates the tendency toward economic stagnation. Since wealthy people tend to save more than poor people, the propensity of an economy to slump because of excess saving becomes ever more acute as a society becomes more affluent.[10] Richard Wilkinson and Kate Pickett suggested that health and social problems are significantly worse in more unequal wealthy nations.[14] They argue that there are "pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, (and) encouraging excessive consumption"[15]

Monopoly power versus purchasing power

Regarding a social and economic democracy perspective on social problems, Douglas P. Biklen states:

The theme of profit superseding individual well-being flows through this antimonopoly view of social problems. On the one hand, poor and middle income people find their lives deformed by their meager or nonexistent ability to pay for goods and services. Wealthy people, on the other hand, find that their relative position, in terms of wealth and power, grows with their ability to maintain the gulf between social classes. Thus monopolies or concentrated wealth plays a large part in creating social problems. Indeed, one might say, monopolies and policies which promote the former or concentrations of wealth are the problem.[16]

The discipline of economics is largely a study of scarcity management; "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses".[17] Absent scarcity and alternative uses of available resources, many analysts claim there is no economic problem". While he considers these functions a public wrong, Kellogg also asserted the responsibility of the public to find and implement a remedy. Generally considered monopoly power, some view this "public wrong" as the most influential factor in artificial scarcity. For example, Henry George further suggested:

There is in reality no conflict between labor and capital; the true conflict is between labor and monopoly... Abolish the monopoly that forbids men to employ themselves and capital could not possibly oppress labor... [R]emove the cause of that injustice which deprives the laborer of the capital his toil creates and the sharp distinction between capitalist and laborer would, in fact, cease to exist.[18]

For example, many analysts consider invention a "more or less costless store of knowledge, captured by monopoly capital and protected in order to make it secret and a 'rare and scarce commodity', for sale at monopoly prices. So far as invention is concerned, a price is put on them not because they are scarce but in order to make them scarce to those who want to use them."[19][20][21] Patent monopolies raise share prices above tangible labor value. The difference between labor-value and monopoly-value raises goods prices, and is collected as "profit" by intermediaries who have contributed nothing to earn it.[21]

Analysts generally agree that such conditions typically result in a deficiency of effective demand. Labor does not earn enough to buy what enterprises produce. According to Jack Rasmus, author of The Trillion Dollar Income Shift, in June 2006, investment bank Goldman Sachs reported: "The most important contribution to the higher profit margins over the past five years has been a decline in Labor's share of national income." [22]

Enclosure of the commons

Artificially restricted access of labor to common resources is generally considered monopoly or enclosure of the commons. Due to the economic imbalance inherently imposed, such monopoly structures tend to be centrally dictated by law, and must be maintained by military force, trade agreements, or both.[7]

In 1911, American journalist Ambrose Bierce defined "land" as:

A part of the earth's surface, considered as property. The theory that land is property subject to private ownership and control is the foundation of modern society.... Carried to its logical conclusion, it means that some have the right to prevent others from living; for the right to own implies the right exclusively to occupy; and in fact laws of trespass are enacted wherever property in land is recognized. It follows that if the whole area of terra firma is owned by A, B and C, there will be no place for D, E, F and G to be born, or, born as trespassers, to exist.[23]

In The Servile State (1912), Hilaire Belloc referred to the Enclosures Movement when he said, "England was already captured by a wealthy oligarchy before the series of great industrial discoveries began". If you sought the accumulated wealth preliminary to launching new industry, "you had to turn to the class which had already monopolized the bulk of the means of production in England. The rich men alone could furnish you with those supplies".[24]

According to Peter Barnes, author of Capitalism 3.0, when Adam Smith wrote The Wealth of Nations in 1776, the dominant form of business was partnership, in which regional groups of co-workers ran co-owned businesses. From this perspective, many considered the corporate model—stock sold to strangers—inherently prone to fraud. While numerous scandals historically support this dim view of corporate policy, small partnerships could not possibly compete with the aggregate capital generated by corporate economies of scale. The greatest advantage of corporations over any other business model is their ability to raise capital from strangers. The corporate model benefits from laws that limit stockholders' liability to the amounts they have invested.[25]

In A Preface To Economic Democracy, Robert A. Dahl suggests that agrarian economy and society in the early United States "underwent a revolutionary transformation into a new system of commercial and industrial capitalism that automatically generated vast inequalities of wealth, income, status, and power." Dahl claims that such inequalities result from the "liberty to accumulate unlimited economic resources and to organize economic activity into hierarchically governed enterprises."[26]

The rise of corporations and ending labor shortage

According to author Greg MacLeod, the concept of the corporation originated in Roman times. However, "the modern business corporation evolved radically from its ancient roots into a form with little relation to the purpose as understood by historians of law." John Davis, a legal historian, noted that the precursor of the business corporation was the first monastery, established in the sixth century, the purpose of which was to serve society. Most business corporations before 1900 developed in Great Britain, where they were established by royal charter, with the expectation of contributions to society. Incorporation was a privilege granted in return for service to the crown or the nation. MacLeod goes on to say:

A corporation is considered by the law to exist as a legal person. In the Middle Ages it was called a "persona ficta". This is a very useful way of looking at a business corporation, because it suggests correctly that the corporate person has a certain personality. It has duties and responsibilities vested unto it by the legitimate government or society that fostered it. The corporate person receives great benefits from society – and, in return, it must exercise great responsibilities. One of the most basic responsibilities is job creation, a fundamental need in any society.[27]

By the mid-nineteenth century, corporations could live forever, engage in any legal activity, and merge with or acquire other corporations. In 1886, the U.S. Supreme Court legally recognized corporations as “persons”, entitled under the Fourteenth Amendment to the same protections as living citizens. Unlike average citizens, large corporations had large flows of money at their disposal. With this money they can hire lobbyists, donate copiously to politicians, and sway public opinion.

But, despite Supreme Court rulings, the modern corporation is not a real person. Rather, the publicly traded stock corporation is what Barnes terms an "automaton", explicitly designed to maximize return to its owners. A corporation never sleeps or slows down. It externalizes as many costs as possible, and never reaches an upper limit of profitability, because no such limit has yet been established. As a result, corporations keep getting larger. In 1955, sales of the Fortune 500 accounted for one-third of U.S. gross domestic product. By 2004 they commanded two-thirds. In other words, these few hundred corporations replaced smaller firms organized as partnerships or proprietorships. Corporations have established a homogeneous global playing field around which they can freely move raw materials, labor, capital, finished products, tax-paying obligations, and profits. Thus, corporate franchise has become a perpetual grant of sovereignty, including immortality, self-government, and limited liability. By the end of the twentieth century, corporate power—both economic and political—stretched worldwide. International agreements not only lowered tariffs but extended corporate property rights and reduced the ability of sovereign nations to regulate corporations.[25]

David Schweickart submits that such "hypermobility of capital" generates economic and political insecurity.[10] "If the search for lower wages comes to dominate the movement of capital, the result will be not only a lowering of worldwide wage disparities (the good to which some economists point) but also a lowering of total global income (a straight-out utilitarian bad)."[28] Jack Rasmus, author of The War At Home and The Trillion Dollar Income Shift, argues that the increasing concentration of corporate power is a cause of the large-scale debt, unemployment, and poverty characteristic of economic recession and depression. According to Rasmus, income inequality in contemporary America increased as the relative share of income for corporations and the wealthiest one percent of households rose while income shares declined for 80-percent of the United States workforce. After rising steadily for three decades after World War II, the standard of living for most American workers has sharply declined between the mid-1970s to the present. Rasmus likens the widening income gap in contemporary American society to the decade leading up to the Great Depression, estimating "well over $1 trillion in income is transferred annually from the roughly 90 million working class families in America to corporations and the wealthiest non-working-class households. While a hundred new billionaires were created since 2001, real weekly earnings for 100 million workers are less in 2007 than in 1980 when Ronald Reagan took office".

According to economist Richard D. Wolff, the 1970s brought an end to the labor shortage which had facilitated more than a century of rising average real wages in the United States.[29] Wolff says Americans responded to the resulting deficiency of effective demand by working more hours and excessive borrowing; the latter paving the way for the financial crisis of 2007–08.[30]

Imperialism

According to David Harvey, "the export of capital and the cultivation of new markets around the world" is a solution "as old as capitalism itself" for the deficiency of effective demand.[31] Imperialism, as defined by Dictionary of Human Geography, is "the creation and/or maintenance of an unequal economic, cultural, and territorial relationship, usually between states and often in the form of an empire, based on domination and subordination."[32] "These geographic shifts", according to David Harvey, "are the heart of uneven geographic development".[33]

Vladimir Lenin viewed imperialism as the highest stage of capitalism. He asserted that the merging of banks and industrial cartels gave rise to finance capital, which was then exported (rather than goods) in pursuit of greater profits than the home market could offer. Political and financial power became divided among international monopolist firms and European states, colonizing large parts of the world in support of their businesses.[34] According to analyst Michael Parenti, imperialism is "the process whereby the dominant politico-economic interests of one nation expropriate for their own enrichment the land, labor, raw materials, and markets of another people."[35] Parenti says imperialism is older than capitalism. Given its expansionist nature, capitalism has little inclination to stay home. While he conceded imperialism is not typically recognized as a legitimate allegation about the United States, Parenti argued:

Emperors and conquistadors were interested mostly in plunder and tribute, gold and glory. Capitalist imperialism differs from these earlier forms in the way it systematically accumulates capital through the organized exploitation of labor and the penetration of overseas markets. Capitalist imperialism invests in other countries, transforming and dominating their economies, cultures, and political life, integrating their financial and productive structures into an international system of capital accumulation.[35]

In his book, The Political Struggle for the 21st century, J.W. Smith examines the economic basis for the history of imperial civilization. On a global scale, he says developed nations tended to impede or prohibit the economic and technological advancement of weaker developing countries through the military force, martial law, and inequitable practices of trade that typically characterize colonialism. Rhetorically termed as "survival of the fittest", or "might makes right", such economic crises stem from the imbalances imposed by corporate imperialism. Just as cities in the Middle Ages monopolized the means of production by conquering and controlling the sources of raw materials and countryside markets, Smith claims that contemporary centers of capital now control our present world through private monopoly of public resources sometimes known as "the commons". Through inequalities of trade, developing countries are overcharged for import of manufactured goods and underpaid for raw material exports, as wealth is siphoned from the periphery of empire and hoarded at the imperial-centers-of-capital:

Over eight-hundred years ago the powerful of the city-states of Europe learned to control the resources and markets of the countryside by raiding and destroying others’ primitive industrial capital, thus openly monopolizing that capital and establishing and maintaining extreme inequality of pay. This low pay siphoned the wealth of the countryside to the imperial-centers-of-capital. The powerful had learned to plunder-by-trade and have been refining those skills ever since.[1]

Smith goes on to say that, like other financial empires in history, the contemporary model forms alliances necessary to develop and control wealth, keeping peripheral nations impoverished providers of cheap resources for the imperial capital centers. Belloc estimated that, during the British Enclosures, "perhaps half of the whole population was proletarian", while roughly the other "half" owned and controlled the means of production. Under modern Capitalism, J.W. Smith claimed that fewer than 500 individuals possess more wealth than half of the earth's population. The wealth of 1/2 of 1-percent of the United States population roughly equals that of the lower 90-percent. [13]