Workplace Participation and the Crisis of Capitalist Democracy

Recent events have definitively proven that the prevailing political-economic system is bankrupt: the vast majority of working people have experienced neither material gains nor meaningful democracy, with devastating political and economic consequences. I wish to argue that these two failures are intrinsically related, and in particular that they both stem from a lack of workplace participation.

Let me begin by clarifying that the deep-seated lack of democracy currently afflicting Western societies pertains not only to formal politics, which at least maintains the charade of elections, but also to the workplace, which is so unmistakably authoritarian that even free-market libertarians have called for its reform. Indeed, the primary failure of Western democracy is that it does not extend to the areas of life that most affect the demos. On the contrary, in the institution that provides them with their livelihood and occupies the majority of their waking hours, citizens remain subservient to a class of masters, who, through the influence thus acquired, end up dominating the pageant of political democracy as well.

The absence of workplace democracy is also a primary cause of our economic woes. The despotic structure of power within the firm is what allows a fortunate few to cream off the proceeds of growth, which, in turn, is thereby short-circuited through mechanisms that have now been irrefutably exposed in recent years. I mean, just think about it - if capitalism and democracy really are such natural bedfellows, as the high priests of neoliberalism are so fond of declaring, why does democracy not prevail in the very heart of capitalism, viz. the firm? The answer is that we live in a capitalist democracy, not in a democratic capitalism.

The idea that workplace participation would kill both the political bird (a lack of democracy) and the economic bird (stagnation and inequality) with one stone may sound like a pipe dream, not least because it contradicts the conventional (but receding) wisdom that 'soft', social reforms are inimical to economic progress. To be sure, it is no silver bullet, especially considering that the causation also runs in the opposite direction - as demonstrated by Theresa May's recent about-face on her promise to install workers on company boards, the lack of workplace democracy is a symptom as well as a cause of the political and economic maladies currently plaguing society. Indeed, from a Marxian perspective, the notion that capitalism can be reformed by democratising the workplace is self-contradictory; democratic capitalism is an oxymoron. In one way or another, however, the twin crises of economics and politics can only be solved in tandem, for they are two sides of the same coin.

Central Planning, Social Ownership, and the Cooperative Solution

Since the fall of the Soviet Union, a fundamental axiom of modern society has been that a socially-owned economic system coordinated by central planning is unfeasible, and that a privately-owned system coordinated by the market has proven itself to be the only realistic alternative. On the contrary, I wish to argue that actually-existing capitalism is neither privately owned nor coordinated by the market, but is rather based on large, centrally-planned, socially-owned corporations. From this perspective, at least, capitalism and communism are really two versions of the same system.


It is standard practice in this age of neoliberal hegemony to compare real-world communism with an idealised form of capitalism, with the virtues of market exchange and private property juxtaposed with the vices of central planning and social ownership. The problem with this sort of analysis is that real-world capitalism is based on large corporations, which are in fact centrally planned and socially owned.


The notion that corporations are centrally planned is hardly controversial. Indeed, we should not forget that Marx initially got the idea of central planning from observing capitalist enterprises. Most people, however, seem to think that these 'islands of central planning' are suspended in a 'sea of market relations'. On the contrary, as Herbert Simon and others have noted, most economic activity occurs within firms rather than between them. Putting two and two together, it seems indisputable that contemporary capitalism is, on the whole, centrally planned.


The notion that corporations are socially owned is less well recognised, since shareholders are usually assumed to be the corporation's owners. Even if that were the case, it would still represent a significant deviation from the ideal of private property as individual ownership, since ownership of one thing (the firm) by multiple people (the shareholder) would involve an irreducible degree of collectiveness (socialisation). Indeed, for this very reason, Marx hailed corporations as harbingers of socialism, demonstrating that private property would eventually become obsolete. When we add that shareholders do not own the corporation, which instead comprises an intricate web of rights and responsibilities between a diversity of stakeholders, the socially-owned aspect of capitalist corporations becomes even more clear.


Capitalism and communism, then, appear to be more similar than they are different - and we have not even touched on the critical role of the state in contemporary capitalism. Indeed, I would argue that central planning and social ownership are inherent to any form of large-scale economic system. The problem is that these two aspects do not always mix well, since the central planners and the social owners are not usually identical. Just like the communist state, the capitalist corporation is supposed to be run in the interests of society (and not, as the conventional wisdom would have it, solely in the interests of shareholders). However, as soon as this task is delegated to a limited group of people - which it must be in the case of large-scale organisation - the potential for corruption arises. This seems to be what happened to the Soviet Union; and it seems to be what is happening to corporate capitalism.


A promising answer to this dilemma is cooperative organisation. Like all viable economic systems, it is centrally planned and socially owned, and therefore susceptible to the same tendency for corruption. This corruption, however, is made salient - it is anticipated, identified, and discouraged. Indeed, it is perhaps no surprise that utopians on both sides of the political spectrum - libertarians and anarchists, free-marketeers and bleeding-heart socialists - have converged on the cooperative ideal as an alternative to both real-world communism and real-world capitalism; for it represents an expedient hybrid of the two, an auspicious alternative to both, or perhaps just a different version of what is essentially the same underlying system.

Mainstream Economics Is Art, not Science

It is well-known that mainstream economics, in an attempt to attain the status of a 'science', has become unduly obsessed with mathematical formalism. The obvious irony is that this obsession comes at the price of scientific accuracy, since the mathematical models to which it so slavishly adheres often (if not usually) bear little resemblance to reality.

This irony is multilayered; for not only has economics deviated from science, it has actually approached an art form. The models are primarily valued for their elegance and aesthetic appeal rather than for their ability to capture the real world, from which they abstract to the n-th degree. They usually contain a grain of truth - itself often highly stylised - around which they proceed to construct an elaborate system of self-referential relations. To my mind, this methodology is characteristic of art, not science.

Non-Profit Capitalism and Efficient Cooperativism

A burgeoning critique of the voguish ‘law and economics’ field is that, contrary to the conventional wisdom, shareholders do not ‘own’ the firm in any meaningful sense; rather, firms comprise intricate networks of rights and responsibilities between diverse arrays of stakeholders. Accordingly, managers are legally required not to maximise shareholder value, as the common refrain would have it, but rather to do what is best for the company, whatever that may entail.


This critique is usually framed in terms of short- versus long-term profits. Companies that maximise the value of their shares in the short term are likely to skimp on investment, training, and R&D in favour of financial manipulation, asset stripping, and other ‘low-hanging fruit’, thus compromising their ability to generate profits in the long term. For some reason, however, the critique of shareholder primacy is never taken to its logical conclusion, namely that corporations are, legally speaking, non-profit organisations.


In his rigorous book The Ownership of Enterprise, Hansmann distinguishes non-profit firms by the fact that they are not ‘owned’ in the same way as corporations (or cooperatives). In non-profits, according to Hansmann, an independent management board, entrusted with pursuing some express set of objectives, effectively governs the firm. As the shareholder-primacy critique points out, however, even corporations are in fact governed this way. Thus, according to Hansmann’s logic - and contrary to his conclusion that most firms are owned by investors because this entails a singularity of objectives in the form of profit maximisation - corporations are essentially non-profits.


The mere fact that corporations are structured as non-profits is not particularly surprising given that they were originally chartered to fulfil a specific public purpose. Moreover, it is clear that corporations have sharply deviated from their historical and legal ideal; regardless of what they are supposed to do, what corporations actually tend to do is pursue short-term profits, to the detriment of themselves and society. What is remarkable, however, is that capitalism - a system supposedly driven by profit - is based on organisations that are, technically speaking, not-for-profit. In my mind, this is further evidence that a more effective and more humane economy is not out of reach, and can be achieved without the complete abolition of capitalism.
***




What about cooperatives? Aren't they a viable alternative? It is often remarked that, unlike conventional firms - which allegedly contain the sole objective of profit maximisation - cooperatives pursue a multiplicity of objectives, including the various concerns of their members other than share value. To economists, this augurs inefficient governance, which, according to Hansmann, leads many cooperatives to adopt a non-profit style of corporate governance. We have already seen, however, that conventional, 'investor-owned' firms actually feature a broad range of objectives besides profit maximisation, meaning that their distinction on this score is specious.


In fact, the opposite argument can be made, namely that  cooperatives feature a narrower range of objectives than conventional firms. Unlike corporations, which are designed to satisfy the needs of a diverse array of stakeholders, cooperatives are specifically established to cater to their members' interests. Indeed, whereas a corporations will rarely (if ever) be created by the individuals who end up owning its shares, a cooperative will often be created by its members with the express purpose of meeting some clearly defined need.


These considerations turn the world upside down. Corporations are usually praised by economists for their efficient governance systems and scorned by everyone else for neglecting social concerns, while the opposite is the case when it comes to cooperatives. Perhaps this state of affairs should be reversed: in reality, the cooperative governance system might be efficient from an economic perspective but suspect from a social perspective, while the opposite might be true for conventional corporations. Indeed, this inverted view of cooperatives was once the norm, with economists (like Marshall and Mill) and social critics (like Webb and Bakunin) respectively lauding their efficient governance structures and deriding their 'collectively selfish' behaviour.


The truth is that neither extreme tells the full story - even if, for the sake of argument, we accept the unduly simplistic categorisation on which that story is based. In fact, the whole point of this post is to discourage the sort of black-and-white thinking that pervades the topic of corporate governance. If we adopt a more nuanced perspective, moreover, the political implications become more nuanced as well. Neither reactionary conservatism nor radical Marxism holds the answer to our problems: the prevailing model of corporate governance is broken, and needs to be fixed, but we shouldn't throw the baby out with the bath water.


In fact, the answer might be right under our noses: corporations can be socially beneficial, just as cooperatives can be economically efficient. The trick is to find a way to get the best of both worlds. So-called 'social cooperatives', which incorporate a range of stakeholders as members, are one possibility, as are the so-called 'community benefit corporations', which return to the original function of the corporate form. We should encourage the further proliferation of these incipient forms of organisation while devising more ways to make business fit for purpose.

Why Has the Old Institutional Economics Not Made a Comeback?

The Anti-Climax of the Old Institutionalism

Thorstein Veblen is an economist that I have admired ever since I was introduced to his work at graduate school; indeed, my research was to a great extent inspired by his ideas. In the past year, I have even come to relate to him on a personal level, since, like him, I have struggled to secure academic employment. Encouragingly for me, Veblen went on to become an influential economist and intellectual, despite having a somewhat troubled career. Veblen arguably founded not one but two schools of economic thought – the Institutionalist and Evolutionary schools – with his ideas also resurfacing in currently fashionable behaviouralist approaches, among others.

Unfortunately, with the ascendancy of Neoclassical Economics, the Institutionalist school with which Veblen is most closely associated suffered a critical defeat from which it has never fully recovered. The new orthodoxy dismissed all rival schools, including Veblen’s, as ‘soft’, insufficiently rigorous, or unscientific – this latter allegation being especially ironic given that, as we will see later, Veblen actually devised a number of his theories as substitutes for what he deemed to be the unscientific foundations of neoclassical economics, particularly its fantasy of homo economicus. Institutionalism was later revived by the self-declared ‘New’ Institutional Economics, but in bastardised, emasculated form that replaced much its distinctive content with the standard tenets of Neoclassical Economics, in much the same way as the Keynesian Compromise was forged.

More recently, in large part thanks to mounting disillusionment both within and without the economics profession, the so-called ‘Old’ Institutionalism has received renewed interest. It nevertheless remains relatively peripheral – not only in the ivory tower of mainstream economics, but even in forums dedicated to economic pluralism, which tend to favour Keynesianism, Marxian approaches, and even minor schools like Feminist Economics. In his celebrated book Debunking Economics, for example, Steve Keen provides a list of possible alternatives to the neoclassical paradigm, consisting of Keynesian, Marxian, Austrian, Complexity, and even Evolutionary Economics, but conspicuously lacking Institutional Economics (unless he treated it as included in or coterminous with Evolutionary Economics, which would be understandable given Veblen’s approach but inaccurate when it comes to the field as a whole).[1]


The Case for the Old Institutional Economics

As a social scientist interested in the economy (which is the definition of an economist in my opinion, although not in the opinion of most economists), and more specifically one who would identify as an Institutionalist if pressed to declare an allegiance, I find this state of affairs astonishing and lamentable. In my opinion, the Old Institutionalism is more relevant than ever, both to the discipline of economics and to the economy itself. To argue this case, I would like to consider some (but not all) of the core principles of Old Institutionalism in turn, focusing mainly on their relevance to current problems in the economy rather than current problems in economics, since the latter has been thoroughly covered by scholars like Geoffrey Hodgson who are sympathetic to the Old Institutionalist tradition.

1) The Technology-Institutions Dichotomy
Probably the most well-known contribution of Veblen’s institutionalism is the dichotomy between technology and institutions[2], which in fact encompasses a number of dichotomies, such as that between ceremonial and instrumental institutions and that between industry and business. The essence of all of these dichotomies is that the correspondence between those institutions that are oriented towards a technological or industrial imperative (“instrumental” institutions) and those that are oriented towards an acquisitive or predatory imperative (“ceremonial” institutions) is imperfect. Whereas instrumental institutions play a “serviceable” role in the community, for example by providing consumers with innovative or lower-cost products, ceremonial institutions are societally detrimental, generating excessive waste, parasitising on common resources, engaging in destructive forms of competition, and obstructing social progress.

It seems to me that advanced economies are currently experiencing a critical divergence between technology and institutions, between instrumental and ceremonial institutions, and between industry and business, not dissimilar from Veblen’s own era. The financial crisis is the most egregious example of non-serviceable business running amok, squandering social resources for purposes of private gain without contributing whatsoever to technological progress. More broadly, however, many commentators have declared that capitalism has come to revolve disproportionately around rent-seeking rather than value-creation. Whether or not you completely agree with that diagnosis, you only have to consider issues like exorbitant corporate salaries, tax- and regulation-dodging, patent trolling, financialisation, and share buy-backs – which propagate not only the deplorable levels of inequality but also the distressing degrees of stagnation currently afflicting our economies – to appreciate the aptness of Veblen’s analysis. Indeed, Veblen’s pet peeves included absentee ownership, “conspicuous consumption”, and an obsession with corporate profits, all of which remain salient issues today.

2) Cumulative Causation
A related aspect of Veblen’s framework was his conceptualisation of society (including the economy) as an evolving system akin to the biological systems studied by Darwin. As simple as this idea may sound, it actually flies in the face of most mainstream economics – including the ‘New’ variety of Institutionalism – which tends to espouse a simplistic model of natural selection whereby a single institution, namely the market, allows only those institutions that are fittest in some absolute sense to survive. By contrast, Veblen emphasised that institutions co-evolve through an endogenous, path-dependent process which called “cumulative causation”, whereby the selection mechanisms themselves alter over time. As a result, even completely “imbecile” institutions can persist, despite being undesirable from a technological or social perspective. The static analysis favoured by neoclassical economics is therefore incomplete, and even inappropriate – what matters is the context, the history, the trajectory.

This component of Veblen's work is also pertinent to the economic times in which we live. To be sure, with the rise of the New Institutional Economics, institutional shortcomings have become decidedly vogueish in comparative explanations of economic underperformance. However, Veblen’s theory implies that, contrary to the conventional wisdom, these shortcomings result not from ‘artificial’ interventions in the market mechanism, but rather from quite ‘natural’ processes of cumulative evolution. In fact, Veblen emphasised precisely that “purposeful action” would be required to intercede in these evolutionary forces in order to make society’s institutions more instrumental and less ceremonial. By the same token, his framework implies that the usual prescription of simply adopting so-called ‘good’ institutions – which, to complicate matters further, are not those that Veblen would necessarily identify as instrumental – is unlikely to improve matters, since ceremonial institutions entail “vested interests” which are likely to resist radical change. These interests may even capture the state apparatus itself, according to Veblen, so that public policy comes to perpetuate rather than counteract the status quo.

3) The Critique of Homo Economicus
In my view, Veblen’s critique of homo economicus – the superhumanly rational, purely self-seeking representative agent of mainstream economics – remains one of the most powerful to date. Veblen advocated an interdisciplinary approach to understanding human behaviour, drawing particularly on anthropology (the study of man and civilisation), psychology (the study of mind and behaviour), and evolutionary biology (the study of the evolution of living organisms), which he deemed to be qualitatively more scientific and more suitable to the subject in question than the neoclassical approach characterised by arbitrary assumptions. Veblen’s interdisciplinary synthesis held that humans act according to instincts and habits before even engaging in the sort of demanding calculations assumed by Neoclassical Economics to drive behaviour, and are furthermore motivated by loyalty and workmanship in addition to the self-interest assumed by that school to prevail exclusively. Crucially, Veblen insisted that individuals' means of decision-making and preferences, both of which Neoclassical Economics treats as predetermined, evolve over time through the processes of cumulative causation described above.

This aspect of Veblen’s Institutionalism may appear to be more an academic dispute than a practical tool. In fact, however, the way that human behaviour is conceived affects virtually everything in economic theory, which in turn shapes research and policy agendas. To name just a few applications, whether we consider individuals to be robotic “bundles of desire” or multifaceted “social animals”, to use Veblen's terminology, has an immeasurable bearing on whether we believe that benefit recipients will cheat the system, whether employees must be monitored and incentivised to do their jobs properly, whether markets will automatically self-equilibriate, and whether assets prices always reflect fundamental values – questions that are more pressing than ever, not only for economics, but also for the economy itself.


Explaining the False Dawn

I have made the case that the current neglect of the Old Institutionalism is unjustified. How, though, do we explain this neglect? It seems to me that there are three potential explanations, which are by no means supposed to be mutually exclusive.

1) Absorbed by the New Institutional Economics
One possible reason for the non-appearance of the Old Institutional Economics is that all of its meaningful material has already been been absorbed by its ‘New’ counterpart, as proponents of the latter indeed claim. I have already contended, however, this is not the case. On the contrary, the Old Institutionalism is needed at present precisely as a counterweight to the New variety, which, with its autistic assumptions, market veneration, liberal philosophy, Western prejudice, and conservative bias - to name a few of its faults - has engendered a dangerously lopsided economic paradigm.

2) Filtered into Other Schools
A second possibility is that the insights of Old Institutionalism have been variously adopted by other schools, which have in turn experienced a resurgence. This is the position of Geoffrey Hodgson, for example, who in his 2007 article entitled ‘the Revival of Veblenian Institutional Economics’ expounded the widespread influence of Veblen’s thought on contemporary economics, including the closely related Evolutionary school, ‘trendy’ fields like Behavioural Economics, and even relatively mainstream areas like game theory. It remains to be explained, however, why the Old Institutionalism itself has not re-emerged as a cohesive school, since there are elements in the work of Veblen and his successors apart from their ideas on behaviour and evolution that are essentially Institutionalist – not least the various dichotomies described above – which cannot be completely distilled into other schools.

3) Limited Applicability 
Another potential explanation is that the Old Institutional Economics, even in terms of its distinctive dichotomies, does not provide a comprehensive framework for understanding the economy. A comparison to this effect might be made with Austrian Economics, which has suffered a similar fate. While I would certainly agree that the Old Institutionalism is no panacea, the same is true for any school of economic thought; in fact, for the reasons submitted above, I would argue that the Old Institutionalism is one of the most widely applicable, offering a radical alternative to Neoclassical Economics. The Austrian school, by contrast, really does consist of a range of specific arguments relating to specific economic problems, and while it definitely offers an alternative perspective to the mainstream, it arrives at some of the same key conclusions and implications.

4) Overshadowed by Marxianism
The obvious reply to the foregoing is that the Old Institutionalism is neither comprehensive nor radical when compared to its Marxian cousin.  It could be argued, in particular, that the Old Institutionalism is just a counterfeit, diluted form of Marxianism that neglects the crucial dimension of class conflict. Indeed, Veblen borrowed extensively from Marx despite repeatedly (and often mistakenly) criticising his writings; even the Institutionalist dichotomies bear a striking resemblance to Marx’s distinctions between the forces and relations of production and between the social and technical relations. By the same token, the Old Institutionalism offers one of the only serious alternatives for those who would assume a radical perspective on society without placing class at its centre – indeed, Veblen deliberately conceived it as such. It is true that Veblen’s programme never received the same degree of traction as that of Marx, the latter of which has been continually expanded, clarified, and – dare I say – improved by subsequent adherents; but that only begs the question.


Concluding Remarks

In lieu of a conclusion, I would like to propose a research agenda based on the Old Institutionalist school which I have argued is unduly neglected in modern discourse. Veblen believed that economists should be concerned with identifying which of society’s institutions (or which aspects of a given institutions) are instrumental and which are ceremonial, and with devising ways to elevate the former over the latter. This seems as good a place as any to resume the Old Institutionalist programme, recognising that many have already taken it upon themselves to do so. Veblen’s own admittedly whacky idea – which, to his great credit, he attempted to implement in practice while at the New School in New York – was for a technocratic “soviet” of engineers to seize (or inherit) control of capitalism from the errant businessmen that he so harshly lambasted. This no longer seems feasible or even desirable, if ever it was; but perhaps, like Veblen, we can dare to challenge prevailing dogmas - or “habits of thought”, as he called them - in our pursuit of a better society.


Notes

[1] I admit that I have not provided much evidence to support my assertion that Old Institutionalism is neglected in pluralist circles, which is mainly based on my own anecdotal experience. I’m sure that others have had differing experiences in this regard.
[2] It is debatable whether Veblen ever really proposed such a dichotomy, which is more clearly embraced by Veblen’s disciple, Clarence Ayres. The subsidiary dichotomies, however, are indisputably Veblenian.