Faint Praise for Profit Sharing

Originally published March 25, 1985

IN MAKING the case “For a Labor Theory of Right” (NL, February 11-25), I remarked that “if you review all the problems of all the 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.” There is one fundamental reason for this, and two secondary reasons.

The fundamental reason is that anything wrong with an economic system shows up in the relation of price to values. If prices and values were identical, or roughly identical, the system would be perfect. Nobody would have a beef. Disordered prices are the sign of trouble, and life has troubles.

The first secondary reason is that the cost of labor is the largest component of the price of almost everything. For the economy as a whole, the cost comes to somewhere between 80-85 per cent of the gross domestic product. This does not mean that labor is getting a fair shake (quite the contrary), but it does mean that should you have a problem with prices, such as inflation or the need to close an international trade gap, labor cost is the obvious initial place to look for a solution.

The second secondary reason is that the most variable component of every price is profit. As S. Jay Levy and David A. Levy show in Profits and the Future of American Society, profit is essential for any enterprise, whether under a communist or a capitalist system. But profit varies, if only because sales are unpredictable. Wages and salaries are contracted for and can be fixed; rent and interest are contracted for and can be fixed, Profits are not contracted for and cannot be controlled. Consequently, by putting a collar on labor costs to hold down inflation, or for whatever reason, you are necessarily setting up a situation in which profits may be very high indeed, and stockholders will make a killing.

Can’t profits be controlled by taxation? Well, up to a point. I am reminded, however, of the 85 per cent excess profits tax of World War II. Each year at Thanksgiving time, book publishers began to see what their profits for the year would be (other industries pretend to be more farsighted; book publishing is inescapably myopic). If things looked good, they scurried around in search of ways to spend the profits before the tax collector got them. They couldn’t give unusual raises or bonuses because of wartime controls. They couldn’t invest in fancier offices because of a lack of materials and a lack of time. There was one thing they could do-advertise. As a result, the New York Times and the New York Herald Tribune and all the other papers that then existed bulged with book advertising in December. What the newspapers did with their profits I have no idea.

You may be tempted to think that the extra advertising sold more books and therefore increased profits and taxes. If so, you will please stay after class and I’ll try to disillusion you about book advertising. For the moment, you may take my word for it that this was institutional advertising. The aim was to show the publishers’ flags to authors and their agents and perhaps sign up some good books for future years. Because of the excess profits tax, the institutional advertising cost only 15 cents on the dollar, and at the worst was a cheap way for publishers to massage their own vanity as well as that of their authors.

Similar tricks can be played with profits in any industry at any time. Plant and equipment can be expanded or renovated on an accelerated or more ambitious schedule. Offices can be moved or redecorated. Last year’s marvelous typewriters can be replaced by this year’s word-processing wonders. Expense accounts can be relaxed. Executive limousines can be stretched a few inches longer.

These effects are like those of the present depreciation law, whereby General Dynamics and others pay dividends in the billions and increase their net worth astronomically, yet pay negative income taxes. Profits can always be sheltered, and the benefits will always accrue to the owners of the companies.

Now let me take a different tack. As Perry Mason used to say, I’ll connect it up. I suggest to you that the kernel of truth in Marx’s class theory had nothing to do with dialectics or materialism, which are (forgive the color) red herrings.

Today’s classes have come into existence precisely because they have no material base. In fact, they have no base at all; they are committed to nothing. The structure of the modern corporation and modern financial markets has liquefied – almost vaporized – loyalty. Ownership flows mindlessly hither and thither in search of immediate profits. Even the owners of old and distinguished publishing houses like Scribner’s can see no virtue in maintaining their firm’s existence. The owners of individualistic magazines like the New Yorker can see no virtue in maintaining their publication’s independence. Stockholders in corporations deny that there is any intrinsic virtue in owning the enterprise. Modern finance has created a class that is a class because it is without virtue.

A class does not exist (as Marx noted) except in opposition to another class and the owning class has its foil in the working class. Since the former proclaims its lack of virtue, it is tempting to infer that the latter is virtuous; but it, too, because of the structure of our corporations, is unable to risk commitment.

Although Marx was right enough in seeking a resolution of class conflict, the Soviets have shown even old-line enthusiasts that state ownership merely breeds what Milovan Djilas called the New Class. In socialist but non-Marxist Britain, five years before the recent bruising strikes, feisty Lord Shinwell said: “I nationalized the coal mines, but do you think I’m proud of that? No, not at all. The wages are better and the safety conditions are better, but you’ve still got the same old class divisions. We got rid of the coal owners and replaced them with bureaucrats. Despite all the fine and lovely idealism, it went wrong.”

On the other side, conservatives are right enough in trying to preserve (or create) opportunities for personal endeavor and innovation. Unfortunately, as the modern corporation has developed, the incentives reward those who merely own money. They do little or nothing to inspire those who do the actual work of the economy.

HOW CAN the valid aims of the communists and the conservatives be reconciled and realized? The answer brings me to another argument for some form of employee ownership. Last time out I urged the justice of what I call the Labor Theory of Right. Here I want to urge the social efficiency of that theory. It is stating the obvious to say that if you want to control corporations in any way for any reason (I can think of many reasons), you will remove one major source of trouble if you are able to heal the split between capital and labor. That healing can be approached through employee ownership, and, I think, only thus.

Profit sharing has been touted as a method of doing the same thing. It may be a step in the right direction. But profits can be sheltered; then there is nothing to share, and labor (including management) is justified in crying foul.

The profit-sharing scheme put forward by Martin L. Weitzman in his book The Share Economy (the “Best Idea Since Keynes” proclaimed the headline of a New York Times editorial) contemplates labor negotiations settling on relatively low hourly rates plus (for each company’s labor force as a whole) a percentage of profits or of revenues (the latter would eliminate the sheltering problem). In accordance with this scheme, the marginal cost of hiring a worker would always be below the average cost, so (Weitzman contends) it would be in the interest of every company to hire as many people as possible. The expanding companies would in this fashion achieve economies of scale, which would allow lower prices, which would increase sales, which would maintain the economy in a fully employed and inflation free boom.

You will be persuaded by this reasoning if you believe that economics is a branch of mathematics. Then you will believe that economies of scale are always achievable and, moreover, always proportionate to the size of the work force. You will believe that the demand for any product always rises in smooth proportion to a decreasing price. You will believe with Jean-Baptiste Say, of the early 19th century, and Congressman Jack Kemp (R.-N.Y.) of today, that you can always sell whatever you make. You will believe that John Maynard Keynes was wrong in noting that most people, for various reasons, will not spend or invest all their money, and that their clear preference for liquidity – even if there were no other reason would render Say’s Law inoperable. (See “The Savings Bust,” NL, October 17, 1983.)

Beyond the foregoing (and additional considerations that can be found in the current issue of the Journal of Post Keynesian Economics), it should be apparent that, with the best will in the world, Weitzman’s scheme is yet another that solves the ills of the world at the expense of the working man and woman. Indeed, he considers labor a commodity, albeit one he has great respect for. Capital gains still go to those who do no work. The professor unwittingly gives the game away when he remarks that his plan is a sort of share-cropping. Against his handful of cases of allegedly beneficial share-cropping, any student of agriculture could cite volumes of disasters.

For my part, I am also made uneasy by Weitzman’s assurance that his scheme would, after a little tinkering, automatically eliminate our problems. I don’t know whether Milton Friedman is right in saying there’s no such thing as a free lunch, but I am quite sure that there’s no such thing as perpetual motion.

The New Leader

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