Originally published February 11, 1985
I ENDED my previous column (“The Faith of Fiduciaries,” NL, December 24, 1984) with the scarcely original observation that the stockholders of public corporations, who are the legal owners, are neither willing nor able to accept responsibility for what the corporation does, while the workers (including the managers), who actually do whatever the corporation does, have no systematic reason for doing it well. No one is, or can be, loyal to anyone else. In the words of the Arab in Saroyan’ s The Time of Your Life, “No foundation. All the way down the line.”
This unhappy situation is implicit in the classical economics of the invisible hand, which is amoral at the start of its analysis and hence amoral in its conclusions. As the computer people say, “garbage in, garbage out.” More particularly, disorder is implicit in the structure of the limited liability corporation and in the impersonal liquidity of efficient securities markets. The recurrent waves of conglomerations, takeovers and greenmails have at last forced some commentators to recognize that there is a problem, though so far the proposed solutions – such as those of Peter F. Drucker in the Wall Street Journal have involved attempts to turn back the clock. Before we try to move the clock ahead, let’s take a brief backward glance of our own.
One of the hoariest problems in economics has been that posed by the Labor Theory of Value. Almost every great economist has held this theory in some form or other. The theme was announced by Adam Smith: “Labor alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only.”
Smith’s successors stated the Labor Theory of Value in terms varying somewhat from his. David Ricardo contended “that it is the comparative quantity of commodities which labor will produce that determines their present or past relative value, and not the comparative quantities which are given to the laborer in exchange for his labor. … “Karl Marx put it this way: “How then is the magnitude of [use value] to be measured? Plainly by the quantity of the value- creating substance, the labor, contained in the article.” John Maynard Keynes held that “the unit of labor” was “the sole physical unit which we require in our economic system.”
Labor is a curious yardstick here in that, unlike money, it can scarcely be a store of value. Nor is it easy to say exactly what labor is. The Army sometimes taught rambunctious soldiers to mind their manners by having them dig a hole six feet wide, six feet long and six feet deep, and then fill it up again. There was plenty of labor involved in the exercise, yet not much economic consequence. Maybe, then, it wasn’t really labor, but only labor in a manner of speaking, that is to say, nominally. Additional difficulties arise in trying to find a fair equation of skilled labor and unskilled labor, efficient labor and inefficient labor, mental labor and menial labor, labor paid and unpaid, earnest labor and timeserving.
A perhaps more intractable aspect of the question is the fact that, assuming one could decide on a definition, it is obvious that the amount of labor in a product has only the most tenuous connection with its economic value, or price. The matter remains unresolved even when one recognizes (as one should) that capital is produced by past labor, and that land produces nothing except by the application of labor. It might be argued that what is valuable in a product is the result of labor, past or present. What is contemptible or dangerous or illegal in a product, however, is also the result of labor, past or present. Moreover, an unwanted product sells for little or nothing, regardless of the amount or quality of labor that went into it. In short, it is impossible to establish a connection between the Labor Theory of Value and price.
Nevertheless, the impulse behind the Labor Theory of Value is sound. Although not a source of value, labor is primary: it is the source of right. I would, in fact, supplant the Labor Theory of Value with a Labor Theory of Right. The right in question is ownership of the enterprise, not (as is sometimes proposed) ownership of the products of the enterprise. The distinction is important: An enterprise is dynamic, ongoing; its products are static, finished.
Ownership of an ongoing enterprise is different from ownership of a house or a drill press or any individual thing. An enterprise uses things – fixed capital such as factories and working capital such as inventories – but is not itself a thing. Ownership of an enterprise is a bundle of rights, including the right to control policy, to receive profits (or suffer losses), and to receive capital gains or the net proceeds in case of sale or liquidation.
The right to receive profits requires a little elucidation. Profits – like the enterprise itself – are not fixed. The profit (or loss) for a period is what is left over after sales have been made and expenses have been met. The conventional factors of production are land, labor and capital; and their conventional costs are, respectively, rent, wages and interest. All of these factors (and any others you care to name) can be, and generally are, contracted for in advance; their costs can usually be budgeted. Sales, on the other hand, can only be estimated. Under the circumstances, no matter how careful and sophisticated your cost estimating, there is always something left over – the profit or loss – because the future is constitutionally unknown. If the future were known, there would be no future, and so no present. Our autonomy was secured when Pandora’s Box snapped shut.
Insisting that something is always left over, we do not have to – indeed, we cannot – know where that something comes from. In some instances it may be the result of chance or a risk well run; in others, the chance falls the opposite way. Sometimes it is the consequence of war or pestilence (favorable conditions for certain enterprises). Sometimes innovation is richly rewarded; occasionally it is cruelly rejected. Sometimes vigor achieves wonders; other times what was hoped to be vigorous action proves to have been the rushing in of fools. Whatever we may decide, after the fact, to have been the source of a particular profit, an enterprise has no way of systematizing all sources of future profits and losses. For this reason, business firms, like armies, establish reserves that can be committed against disaster or for the exploitation of breakthroughs. Uncommitted reserves are undistributed profits.
IN CLASSICAL economic theory, profits go to the entrepreneur, the one who creates the enterprise and makes it function. Frank H. Knight argued in Risks, Uncertainty, and Profit that in the modern corporation the entrepreneur is hired by the stockholders and therefore the profits go to them. But this imagined hiring is at best a legal fiction; it is not a personal action. The modern corporation, as I said in my previous column, is itself the entrepreneur. It is thus appropriate to inquire who the persons of the corporation are. Who are the people doing what the corporation does? Essentially, to return to my observation at the outset, they are the workers – skilled, unskilled, clerical, and managerial. Secondarily, they are those who provide the producers’ goods – the capital – of the corporation. Producers’ goods are of course themselves rooted in labor. Marx, a good man with a metaphor, called them “frozen labor.” Capital, no matter how defined otherwise, is saved labor.
Current labor and saved labor are involved in the act of production, so both are entitled to participate in the proceeds. The entitlement of current labor is immediate: The workers are present, and the sweat glistens on their brows. That of the owners of capital, by contrast, depends on their capital having once been a direct entitlement of labor. Hence it cannot rise higher than labor’s, which is its source.
The foregoing heads us in the direction of some sort of employee ownership. There are several sorts, and I could tell you a tale about them based on personal experience. For the moment, though, let me emphasize just two points.
First, if you review all the problems of the different brands of economics, you will find that invariably the proposed solutions embrace or lead to some overt or covert control or depression of labor costs. I mean all problems, from the allegedly benign effects of competition to the perceived malignity of inflation. Conservative economics would cure a depression by reducing wages; liberal economics would allow wages to drive the economy into an inflationary spiral that could be broken out of only by imposing wage and price controls.
The trouble with reducing wages or controlling them is that; since the future is constitutionally unknowable, there is no clean way of also controlling profits. It consequently turns out that the owners of the means of production (including the bureaucrats of a Communist state) generally lead invidiously comfortable lives when wages are controlled. This is not a just arrangement. The sole possibility of avoiding the injustice that I can see lies in the direction of the Labor Theory of Right.
The second point I would stress is that employee ownership is no more an automatic panacea than is the invisible hand. Supporters of the idea, from Boston department store owner Edward A. Filene to the present, have argued that ownership would stimulate employees to such a pitch of efficiency that their enterprises would sweep conventional competitors from the field, increase national productivity, and even reduce international tensions. It ain’t necessarily so.
And if it were, it would be economically irrelevant. As I never tire of saying, economics is not a matter of efficient production (that is engineering or agriculture). Economics concerns justice in monetary relationships among people. The power of the Labor Theory of Right is that it is just.
The New Leader