Mill improved the definition of democratic capitalism that Adam Smith had formulated and Robert Owen had validated by careful examination of socialism and other cooperative efforts.  Mill supported socialist reform of mercantilism, the existing system that demeaned the worker, but he parted with the socialists over any abandonment of competition:  “While I agree and sympathize with Socialists in their aims, I utterly dissent from the most conspicuous and vehement part of their teachings, their declamations against competition.”^[7]  Mill was similarly adamant that private property is fundamental to any successful economic system.

Marx and his friend, Engels, published the Communist Manifesto^[8] in 1848, the same year that Mill published his Principles of Political Economy.  Marx and Mill agreed on the theory that society would progress only by moving to a superior economic system based on worker ownership. Marx’s and Mill’s features in common included the opportunity for the fullest individual development, a harmonious whole, maximum surplus through greater productivity and innovation, broad wealth distribution to sustain motivation, and broad wealth distribution to sustain economic growth and prevent economic decline.

Integration of worker ownership into democratic capitalism through modifying the economic-political structure, as outlined by Mill, was the practical alternative to Marx’s revolutionary approach. Based on competition and private property vital to capitalism, Mill offered a manifesto (see introduction to chapter 3) that coupled the power of capitalism to eliminate material scarcity with the elevation of the spirit attendant to, and necessary for, that accomplishment.  Mill recognized, however, that a simple cooperative of worker-owners would lack the managerial skills needed for success, and that the most effective reform would combine the motivations of ownership and cooperation with the experience and skills of managers, united in a new culture. 

Mill saw the opportunity for the enterprise to reach its full potential when wage earners reached their full potential.  He knew that this synergistic realization would require a change in the nature of leadership, from top-down to bottom-up, and a change in attitudes, from fearful to cooperative.  Mill foresaw that these changes could be expedited when the workers gained an opportunity to share in continuous improvement through profit sharing and opportunities to become part owners:  

That the relation of masters and work people will be gradually superseded by partnership, in one of two forms:  in some cases, association of the laborers with the capitalists, in others, and perhaps finally in all, association of laborers among themselves.

The first of these forms of association has long been practiced, not indeed as a rule, but as an exception.  In several departments of industry there are already cases in which everyone who contributes to the work, either by labor or by pecuniary resources, has a partner’s interest proportional to the value of his contribution.  It is already a common practice to remunerate those in whom peculiar trust is reposed, by means of a percentage of the profits; and cases exist in which the principle is, with excellent success, carried down to the cause of mere manual laborers.^[9]  

Mill’s proposals were extrapolations of the existing structure.  In Mill’s vision, no tearing down was called for, but rather an evolutionary restructuring that would release the enormous latent power of the people.  Mill’s theory of capitalism is made up of three components:  wage earners who are owners, managers who are wage earners, and capital.  The difference between Mill’s nineteenth-century proposal and twenty-first century capitalism is that now the wage earners have also become the source of capital.  Capital is no longer derived from a separate class of people but is produced, usually, internally to the operation, and is available from the wage earners’ savings and pension money as patient capital for investment in the job-growth economy.

In democratic capitalism, the managers are not a class apart; they are the aristocracy of talent and virtue, the product of meritocracy.  Those once dichotomized as “workers and owners,” “employees and employers,” “labor and management,” are now all “associates” in a cooperative effort, sharing in improved performance. Mill outlined this worker ownership arrangement in these words:  

The existing accumulations of capital might honestly, and by a kind of spontaneous process, become in the end the joint property of all who participate in their productive employment, a transformation which, thus effected,  (and assuming of course that both sexes participate equally in the rights and in the government of the association) would be in the nearest approach to social justice, and the most beneficial ordering of industrial affairs for the universal good which it is possible at present to foresee.^[10]  

Reformers, excited by Marx’s angry attack on capitalism, defaulted on their responsibility to synthesize Marx’s contributions with Mill’s alternative.  They assimilated Marx’s attack on the whole existing infrastructure, but they did not assimilate Marx’s axiom that social progress depends on movement to a superior economic system.  The bloodiest century in history, the 20th, was the result of this intellectual confusion.

              A less revolutionary movement towards the democratization of capitalism took place in the United States in the late-nineteenth century, stimulated by greater personal freedoms.  The Knights of Labor, for example, had a vision of workers leaving the wage-slave condition and becoming educated and dignified participants in the industrial process. The Farmers’ Alliance , in 1877, similarly tried to help farmers become entrepreneurs, proclaiming their democratic purpose to “more speedily educate ourselves in the science of free government.”  The leaders believed that citizen-farmers, properly educated, could then construct “a grand social and political palace where liberty may dwell and justice be safely domiciled.”^[11]  Both the Knights and the Alliance failed, however, because they were opposed by the powerful mercantilists who regarded workers, in fact, as wage-slaves, and by politically powerful finance capitalists who regarded cooperatives as subversive.

The Labor Movement was forced to abandon its cooperative idealism.  Unions led by Samuel Gompers, instead, improved the distribution of wealth through hard and frequently bloody bargaining.  By the 1920s, however, visionaries became convinced that there were better ways to couple democracy and capitalism to improve both the creation and distribution of wealth.  Congress took positive action in activating that potential synergy when they passed the Revenue Act of 1921, which gave tax-favored status to stock-bonus and profit-sharing plans.[12]  

ESOP (Employee Stock Ownership Plan)  

The promotion of worker ownership through tax policies was lost during the 1920s in the speculative excitement of the bull market, then lost again for another decade during the Great Depression of the 1930s, when the concern became economic survival.  Worker ownership came alive again from 1973 to 1987, when Senator Russell Long (D., Louisiana) promoted the passage of 15 different worker-ownership laws favoring the use of ESOPs.

Louis Kelso, an advisor to Long, was dedicated to a version of democratic capitalism.  Kelso, aided by his wife, Patricia Hetter Kelso, invented ESOPs, which were described in 1991 in Kelso’s obituary as follows:  

The employee ownership plan, known as ESOP, was invented to democratize access to capital credit.  In human terms, it is a financing device that gradually transforms labor workers into capital workers.  It does this by making a corporation’s credit available to the employees, who then use it to buy stock in the company.  The earnings of the company itself are used to pay for the stock.  The company’s reward from an ESOP—in addition to a motivated workforce of worker owners—is the low-cost financing of its own capital needs.^[13]  

Mortimer Adler, a philosopher and instigator of the Great Books program at the University of Chicago and other Liberal Arts colleges had long been a student of democracy and alternative political arrangements, but like most academicians, Adler was unaware of democratic capitalism.  After he met Kelso, Adler recorded his shocking discovery:  

I slowly came to realize that political democracy cannot flourish under all economic conditions.  Democracy requires an economic system which supports the political ideals of liberty and equality for all.  Men cannot exercise freedom in the political sphere when they are deprived of it in the economic sphere.^[14]  

Adler had it almost right: It is economic freedom that can improve lives and then lead to political freedoms. Adler, however, discovered what the intellectual community has been missing for too long, thus his epiphany is central to understanding why the world is one of folly and violence, and not one of peace and plenty. The “thinkers,” the intellectual community, have concentrated on changing the world through the political structure and the culture instead of discovering the superior economic system and helping align the political structure and culture in its support. In this persistent default, they have ignored Marx’s signature concept that social progress depends on movement to the superior economic system.  Adler apparently did not connect Kelso’s manifesto with Marx’s, so he did not propose a more careful examination by the intellectual community of this crucial axiom.

Like many managers who discover the power of democratic capitalism through trial and error, the Kelsos and Adler did not acknowledge walking in Marx’s footsteps when they identified the potential synergy between democracy and capitalism.  In the Capitalist Manifesto that Adler and Kelso co-authored, they proposed ways for workers to borrow money in order to become capitalists and enjoy the benefits of ownership.  Kelso was an investment banker; consequently, he thought in terms of leveraged buy-outs; and he designed a plan to enable the employees to borrow the money to purchase ownership in their company.  In Kelso’s plan, profit-sharing is not used as a way to build equity; only borrowings are used for that purpose. For this reason, ESOPs  give a measure of motivation but not so strong as worker ownership that requires a financial sacrifice to buy ownership through a payroll deduction plan.  Kelso’s legacy is kept alive by CESJ (The Center for Economic and Social Justice), founded in 1984 by Norman Kurland, who participated in the first meeting between Louis Kelso and Senator Long in November, 1973.^[15]

Senator Long became evangelistic about employee stock ownership, and he challenged Congressional interest:  

Employee ownership should and would broaden and expand ownership; encourage capital formation and innovative corporate finance; improve labor/management relations, productivity and profitability in firms; help the economy accommodate developments in technology, the spread of transfer payments, and inflation; and create an economic democracy.^[16]  

In 1975, Senator Jacob Javits (R., New York) supported the concept of worker ownership to “improve the financial condition of working Americans and at the same time improve the productivity of American industry.”^[17]  Tax benefits were subsequently approved by Congress for ESOPs and for banks lending money to ESOPs.   

ESOPs enjoyed other bi-partisan support.  Republicans, such as President Reagan, interpreted the intentions of the American Founders as an economic system based on broad distribution of wealth that would prevent economic and political power-concentration.^[18]  Democrats, such as Hubert Humphrey, connected ownership and job growth:  “Capital and the question of who owns it and therefore reaps the benefit of its productiveness, is an extremely important issue that is complementary to the issue of full employment.”^[19]

Jeff Gates, who was counsel to Russell Long’s Senate Finance Committee, documented support for worker ownership from Republicans, Democrats, Martin Luther King’s widow, and Russian Premier Mikhail Gorbachev, the author of Perestroika.  This broad support validated in 1998 the appeal of worker ownership, and it dramatizes the thirst for a “third way” between raw capitalism and inept socialism.  This ideological support is extraordinary in a polarized and grid-locked country, where political opposites seem incapable of truth-seeking or combined action for the common good.  The following quotations—lifted from the jacket of Gates’s book, Ownership Solution^[20]—span the political spectrum, lending further optimism that the country and the world are aware of the need of, and are ready for, ownership solutions that democratize capitalism:  

·        “Expansion of ownership and greater access to capital will both strengthen and spread democracy and market economies throughout the world.”  Republican Jack Kemp, former Senator and Presidential candidate.  

·        “Broad-based personal ownership can strengthen communities and make global sustainable development possible.”  Democrat Dick Gephardt, Majority Leader , U. S. House of Representatives.  

·        “Worker ownership focuses on the central issues that have to be addressed if the twenty-first century is to transcend the simplistic dilemma of capitalism versus socialism and create a new, sustainable civilization.” Mikhail Gorbachev, former Russian premier and author of Perestroika.  

·        “Ownership is a sine qua non of sustainable development.” James D. Wolfensohn, President of the World Bank.   

·        “Long-term, sustainable development requires a balancing of economic, social, fiscal, and environmental goals.  Broad-based capital ownership can help achieve them.”  Bill Bradley, U.S. Senator 1979-1997, and unsuccessful candidate for President in 2000.  

·        “Somewhere in between unbridled capitalism and the welfare state, there has to be a more just and equitable economic system which provides genuine opportunities for all citizens, while preserving incentives for investment ... a creative yet credible strategy for empowering working people with a more vital interest in private enterprise.  If capitalism can indeed have a human face, the reforms proposed merit careful consideration.” Coretta Scott King, founder of the King Center and widow of Martin Luther King, Jr.

In the 1970s and 1980s, most of the bi-partisan support for worker ownership concentrated on ESOPs, not on profit-sharing and stock-purchase plans.  Inevitably, clever people took advantage of the tax breaks that were legislated, and applied them to refinance failing or troubled companies.  Some owners used ESOPs to take cash out of the companies and leave the workers holding the bag.  These events resulted in a loss of confidence in ESOPs and worker ownership in general.  One book on the subject was subtitled Revolution or Rip-Off?^[21] and one magazine article said it all in the title:  “Employees left holding the bag, the deals looked wonderful when companies decided to sell out to their workers.  But many employees lost their equity, jobs, pensions, and more.  Now they’re suing.”^[22]

Stories of failing ESOPs are reminders that even democratic capitalism cannot succeed when management lacks skill, and when products and markets are mismatched.  Democratic capitalism works best when it is applied as a coherent whole; financial motivation alone will not work when the rest of the corporate culture is not dedicated to the development of the individual in a harmonious whole.  In retrospect, although many experiences validated the enormous power of worker ownership, some ESOPs failed because they involved too high a rate of change.  When too many of the business variables are in a state of flux, the demand for management skills goes up exponentially. 

Another route to worker ownership is the gradual accumulation of equity through profit-sharing and stock-purchase plans with no radical change in the financial structure, but a significant change in the corporate culture.  Profit-sharing, stock-purchase plans, and ESOPs, however, are not mutually exclusive; they can each democratize capitalism under different circumstances.  Success of any such program should encourage greater use of the others.  

Profit-Sharing and Stock-Purchase Plans  

The most universal, safest, long-term way for employees to accumulate ownership, and for capitalism to be democratized, is for workers to buy stock with their own money and earn more through performance bonuses. Using the 401(k) feature that allows deductions from pre-tax dollars, a worker purchases company stock through a payroll deduction, along with other investment options.  While many plans are available in which the company matches part of the employee’s money, the plan most consistent with the democratic capitalist culture does the matching based on a performance improvement formula.  In these plans, the associates make their contributions, both individually and as part of a team, and then they share in the results.  The feeling of ownership from stock purchase, along with sharing in improved group performance, motivates the associates to maximize the surplus, and this then is distributed broadly.  Both the creation and distribution of wealth are optimized.

This democratization of capitalism depends on a trusting and cooperative work culture that can be sustained only by a fair sharing of the improvement produced.  Profit-sharing and stock-purchase plans make clear whether the financial motivation and the work culture are consistent.  If they are not, employees typically will not sign up to give up part of their paycheck.  The total of the payroll deductions can also be a significant source of low-cost equity capital for the company’s growth.  Alternatively, if the company does not need growth capital, it can buy stock on the open market and prevent dilution.  Over years, substantial equity and dividend income can be produced from seemingly small payroll deductions.  Worldwide use of these plans would allow workers in even low-wage countries to build significant savings and dividend income.  This addition to spendable income for reciprocal purchases can help make free trade the route to peace and plenty that it should be and not a source of friction that it has become because of the corruptions of ultra-capitalism.  

ERISA  

During the 1970s, Washington squandered a unique opportunity to democratize capitalism and have an enormous positive effect on wealth creation and distribution.  The opportunity was to couple the interest in worker ownership of Senator Long’s committee with the flow of funds provoked by ERISA (Employees’ Retirement Income Security Act), the 1974 law that required companies to fund future pension benefits fully.  “Full funding” means that companies could no longer pay these obligations out of future earnings that might not materialize:  The managers were required to take the cash out of the company and invest it for the future pensioners.

About 100 billion dollars a year, half-private/half-public, was now looking for an investment opportunity.  The largest part of it ended up on the stock market, a money dump that upset the normal buy/sell dynamic sufficiently to initiate and sustain the longest-running bull market in history.  When this flow of funds began to move to Wall Street, average corporate stock prices were 10 times earning per share. At the market peak in 2000, this P/E ratio had quadrupled to over 40, but because so many companies were cooking the books, the actual P/E ratio was substantially higher. This bull market, in turn, caused the short-term earnings pressure that allowed ultra-capitalism to dominate the economy.  Another result of this government error is in the future: When pensioners begin to draw this money out of the market to live on in their retirement, the ebb tide of funds will reverse the stock-buy pressure to a stock-sell pressure, with a negative effect on market values.

Those in Congress excited by worker ownership apparently did not make the connection that ERISA funds could have flowed more directly into worker ownership.  For example, a new financial instrument could have been offered, a 6% convertible preferred stock, that allowed workers to buy ownership with their pension money; enjoy an annual return of 6% to be spent, saved, or reinvested in more stock; and a chance to contribute to, and benefit from, the long-term appreciation of the stock.  The companies could have either used reinvested dividends for long-term growth investment or they could have paid more dividends.  In this fashion, ownership plans would have spread rapidly by the attraction of an annual 6% return plus the longer-term appreciation.  Dividends would thus have taken their place as an important part of broad wealth distribution.  It did not work this way, however.

Unfortunately, the connection of worker ownership and the new, enormous flow of pension money was not made by government planners; instead, most of the annual flow of 100 billion dollars of new cash went to Wall Street and helped build the dominance of ultra-capitalism.  In effect, no-cost internal capital used for growth or dividends was extracted from industry through the efforts of  the Wall Street lobby and delivered to the stock market.  Only a part of it was recycled back into the job-growth economy.

At the beginning of the 21st century, the debate about privatizing part of Social Security ignored the reality that a FICA Social Security payroll-deduction dollar can be used only once, either as an investment for the future benefit of a younger person or as a payment to a retired person.  Betting part of Social Security money on Wall Street could also upset the economy the same way ERISA did, with another blow torch of excessive liquidity that distorts the market’s buy/sell dynamic, pushing values to artificially high levels and with very little returned to the real economy.  The alternative was still open, however, to design a new financial instrument that balances income, appreciation, and security for more direct investment in the job-growth economy.

Other countries have demonstrated the benefits of using Social Security money as an investment, not as a source of funds for general government purposes.  For example, Chile privatized their Social Security with impressive results.  The average Chilean worker, who earned only one-half of an American counterpart’s income during similar careers, nonetheless enjoyed pension benefits double the American level.^[23] The retirees’ money, instead of being used by the government as a not-well-understood subsidy for more spending, was used as investment capital to energize the economy and provide jobs. The Wall Street Journal reported on Chile ’s having pioneered this private system in 1980:  

A fully funded private pension system based on savings and investment rather than taxing and spending. In most of the world, trade liberalization is cast as a battle between capitalists and employees, between “global elites” and the “common man.” In Chile , however, market-invested retirement funds mean that every employee is a capitalist and has a visible stake in an internationally competitive economy. For 13 years, under three different governments, economic growth has averaged 7% a year.[24]  

The U.S. government’s record of economic error is a long and unhappy one.  If the same rules legislated in ERISA, that is, the necessity to put funds away now to pay future benefits, had been applied at the beginning to Social Security and government employees’ pensions, an enormous additional flow of funds would have been available to fund job-growth while democratizing capitalism.  Social Security would not need to be saved, had the government followed the same practice at the beginning that it forced on industry.  Instead of putting the money into investments to pay future benefits, the government spent it on current costs.  Instead of building up a huge fund to pay the huge future retirement obligations of government employees, including the military, the money will now have to come, instead, from future tax revenues.  

Stock Options  

The broad use of stock options became popular particularly in Information Age companies.  Many regarded this expansion of stock options as a manifestation of a more democratized capitalism.  Already in the 1980s, I regarded the proliferation of stock options, however, with dread, for I had experienced the bad things that could happen in a bear market.  I opposed this proliferation on the two Board Compensation Committees on which I served, but I was in the minority.  My argument was that stock options were being given to people who combined little financial sophistication with a trusting attitude:  “If the company is giving it to me, it must be good.”

My concerns were well founded.  After the stock market decline in 2000-2001, The New York Times reported 25 cases of personal bankruptcies filed by Microsoft workers.  Behind the figures were stories of personal tragedy:  

            Some people who were experienced engineers and programmers yet naive about the stock market turned their options into stock and then borrowed against those shares to pay their taxes.  The high-risk practice, known as a margin loan, is more often a tool of speculators aiming to buy additional stock without additional money.  As the stock fell, these workers’ shares were sold, leaving them broke.        

            One mid-level Microsoft employee said that a broker at Solomon Smith Barney, the firm hired by Microsoft to administer its option program, pushed him to take these risks.  At the peak, his shares were worth about $1.5 million, but, when the stock began to dive, the firm began selling shares out of his account to pay off the loan.  Finally, most of his stock was gone and he owed $100,000 in taxes, more than he made in a year and more than he had.  His only remaining asset was a modest Seattle home, which he and his wife feared they would lose.^[25]  

Stock options are a counterproductive compensation device at all levels of corporations.  Employees ought never to be financially destroyed by the downside of any corporate compensation plan.  At the executive level, stock options became the coupling device with Wall Street that motivates executives to go to extremes for short-term earnings or deals that rain money on all of the deal-makers but that leave the downsized parched and dry.  Stock options helped create the environment in which executives faked profit improvement and disgraced the word “capitalism.”  Stock options are a poor way to democratize capitalism.  

Stock Grants  

An effective alternative to stock options is stock grants because grants incur a charge to earnings and tax consequences to the recipient at the time that they are given. This financial pain disciplines the quantity of grants provided, and in contrast to stock options, grants remind everyone that “there are no free lunches.” The argument used by promoters of stock options, such as Senator Joseph Lieberman (D., Connecticut), that options are critical to the success of start-up companies by helping to attract the requisite talent, does not survive examination because these companies are not making money anyway and the expense of stock grants only adds to their tax loss for the benefit of future profit. Similarly, the use of grants instead of stock options to attract highly talented people would require the company to take over much of the individuals’ tax obligation in the form of a signing bonus. In each case, some pain goes with the gain, and that is what provides the missing discipline. Other alternatives, according to Business Week,  include “restricted stock, which converts into common stock over time, and performance shares—grants based on meeting certain goals.” [26]  

Worker Ownership around the World  

The massive privatization plan in Russia in the 1990s is an example of good concept (democratize capitalism) but terrible execution. The country’s assets were stripped and a corrupt few were made enormously wealthy (see chapter 7). The workers lost their new equity either from failing companies or through sale to the new oligarchy.  Eastern Europe had a more mixed experience: 300 companies with 80,000 employees were privatized in Hungary ; 1,500 companies with 350,000 employees in Poland ; and 91% of all privatized companies in Slovenia gained employee ownership.  A study of 299 companies during the 1990s identified a 17% boost in productivity from profit-sharing plans.^[27] 

            Interest of the European Commission in worker ownership has been marked by a series of PEPPER reports.  PEPPER stands for “Promotion of Employee Participation in Profits and Enterprise Results.”  These reports highlighted 57% of French, and 40% of British, companies that had profit sharing schemes.

At Kent University in May 2001, representatives of many countries participated in an International Seminar on Employee Ownership.  The meeting was organized by Capital Ownership Group (COG) whose stated mission is to “forge a coalition that will promote broadened ownership of productive capital in order to reduce inequality of income and wealth; increase sustainable economic growth; expand opportunities for people to realize their productive and creative potential; stabilize local communities by improving living standards; and enhance the quality of life for all.”^[28]

John Logue reported on one of the best known success stories of worker ownership, the Mondragon experience in Spain :  

In the Basque region of Spain , the Mondragon cooperative industrial group does $3 billion of sales, 47% export; the retail group does $4 billion in sales; and, its bank has more than $7 billion in assets.  This worker owned group was started in the mid-1950s by a priest in a technical school.  It has become the seventh largest, closely-held business in Spain , employing 53,000 people.”^[29]  

The Ohio Employee Ownership Center (OEOC), associated with COG, experienced the conflict among competing forms of capitalism first hand in their work in Russia , where they introduced the advantages of employee involvement by training both workers and managers in 1990.  The Russian oligarchy, however, abetted by bad advice from U.S. experts, chose instead the greedy opportunities in ultra-capitalism and took their country down in one of the worst economic disasters of the twentieth century (see chapter 7).

Gongyun Situ, an economist from Nanjing University in China , presented a paper at the COG International meeting on the extensive experiment with ESOPs and cooperatives formed around China ’s TVES (Township and Village Enterprises).  China plans for more ESOPs as part of their enormous privatization of state industries. The TVES are a little understood part of China ’s movement to economic and political freedom:  

More than 600 million rural voters in 31 provinces, municipalities, and autonomous regions have taken part in the elections to the Village Committees in the last ten years. The voter turnout averages 80%.[30]  

The Chinese ownership story is typical of start-up failures and successes, but China has demonstrated the patience and determination to make economic freedom work that was lacking in early efforts in Russia .  China provides an important test of worker ownership, not only because of this patience and determination but also because they have avoided many of the structural problems of ultra-capitalism that destroyed the economies of the Southeast Asian countries in 1997 (see chapter 7).

Also at the COG meeting, Jay Choi, Project Director, Korean Desk of Union Network International, described similar successes and problems in South Korea .  The total number of ESOP companies in South Korea reached 1,546 in 2000.  The unions were worried about ESOPs because of the almost total concentration of the workers’ net worth in a single company.  Choi made her report before “Enron” became a household name and called attention to the “too many eggs in one basket” problem.  

Worker Ownership: the Way to Democratize Capitalism  

  In the last quarter of the 20^th century, many managers found that world competition forced a reevaluation of the whole working culture.  A Fortune article reported:  

So it has come to this: You’ve automated the factory, decimated the inventory, eliminated the unnecessary from the organization chart, and the company still isn’t hitting on all cylinders and you’ve got an awful feeling you know why.  It’s the culture.  It’s the values, heroes, myths, symbols that have been in the organization forever, the attitudes that say, don’t disagree with the boss, or don’t make waves, or just do enough to get by, or for God’s sake, don’t take chances.  And how on earth are you going to change all that?^[31]  

            DuPont CEO Edgar Woolard discovered what all democratic capitalists understand:  “Employees have been underestimated.”  He concluded with the democratic logic, “You have to start with the premise that people at all levels want to contribute and make the business a success.”^[32]

The National Center for Employee Ownership (NCEO) reported over 10,000 ESOP plans in place in the United States along with growth abroad in the early 1990s, when politicians again discovered the promise of worker ownership.  Congressman Dana Rohrabacher (R., California) enthused:  

Employee ownership is freedom’s next step.  A force in society to be applauded by those who believe in individual rights, free enterprise and democratic government.^[33]  

            As worker participation grew, it became more apparent that it was a change in management that was required to make it work. The right culture depended on management who had a natural respect for the ordinary worker.

Business executives, politicians, and journalists have rediscovered the powerful coupling of democracy and capitalism.  They have reaffirmed the original liberal principles of the American Founders. They have awakened to the fundamental mission of the nineteenth-century Populist Movement, the Farmers’ Alliance , and the Knights of Labor.  Capitalists and Congress people have become aware of the good effects promoted by new tax laws in the early 1920s and later in the 1970s. Bi-partisan thinkers have realized that the diffusion of economic power is vital to the diffusion of political power and deserves support by Republicans, Democrats, and independents.

A just and comfortable society depends on a growing economy based on optimum wealth creation and broadest possible distribution.  The historical tension between capital and labor has obscured the opportunity for broad-based ownership to create more wealth and distribute it broadly.  Worker-owners are motivated to innovate and produce for personal gain and as part of a team; hence, wealth is maximized.  As owners, they share in this maximized surplus, then they recycle their financial rewards back into spending that sustains economic growth, and into saving that provides patient capital for greater growth.

Worker ownership succeeds because it is built on the human duality of individual ambition and the instinct for social cooperation.  The requirement of leadership is to provide the education and training necessary for individual development and the trusting, cooperative environment necessary to develop team spirit.  Combining the needs, drives, and effects of the individual with the social in human interaction focused on work, releases the latent power that can move the whole towards realization of full potential.

Worker ownership is the best way to create and distribute wealth because it is freedom based.  It satisfies the universal urge for freedom and comfort.  It provides individuals with a wider opportunity to control their lives.  Worker ownership encourages a sense of personal responsibility in the recognition that one can make a difference, both as an individual and as part of a team.

Emerging economies can expedite their progress by early adoption of worker-ownership plans.  Just as they can skip generations of obsolete communications infrastructure by moving to fiberoptics, wireless, and internet, so their economic system can skip generations of alienation between capital and labor by moving quickly to democratic capitalism.  Even in low-wage countries, significant ownership can be accumulated over time to the benefit of the workers and the whole economy alike.

The problem of alienation between capital and labor should no longer be with us.  The wage earner, through pension plans, 401(k) savings, and stock purchase plans, is now the major source of new American capital.  Labor and capital are now largely one!  In addition, the Information Age has enhanced the capacity of capitalism to feed, clothe, shelter, educate, and provide good health care and hope to the world.  Competitive demands in the Information Age for involved, educated, and contributing associates will finally result in their demanding full partnership and a full share.^[34]

Despite these positive developments, the fatal flaw of traditional capitalism, concentrated wealth, shockingly persists.  More than two billion of the world’s six billion population live in poverty.  Wealth is concentrated in record percentages in the United States , and although most people are living better, a sense of unfairness is building social tensions.  Japan ’s economy has been starved for decades by the lack of adequate consumer demand at the same time that large corporations have amassed tens of billions of dollars in cash.  Europe ’s economy does not distribute surplus to the wage earner; instead, they tax and redistribute from 50% to over 60% of their countries’ national production.  Modest changes in the tax laws in all of these countries would encourage the spread of ownership plans and the greater distribution of surplus in dividends directly to the people. Wealth distributed in ownership plans motivates people to maximize the surplus; wealth redistributed through taxation, by contrast, demotivates people and reduces the surplus.  In the United States , wealth is still concentrated because government policies are dominated by Wall Street and designed for the privileged few, not to promote the general welfare.  For example, hundreds of billions of dollars have been spent by corporations buying back their own stock, most of this repurchase without economic benefit, and a similar amount wasted making acquisitions to hype short-term earnings.

Democratic pressure by institutional investors is needed to get corporations to pay large dividends and to get the government to eliminate the double taxation penalty on dividends.  Tax-free dividends for low-and middle-income wage earners would return the surplus to the benefit of the economy.  Large dividends would be a strong inducement for the spread of profit-sharing, stock-purchase plans, and ESOPs that maximize surplus and then distribute it broadly to raise domestic demand and make free trade a universal benefit.  Many would reinvest their dividends in more stock, thus providing low-cost, patient capital for economic growth.  Finally, this priority for large dividends would relieve the stock market’s frantic pressure for short-term earnings by valuing companies highly for large dividends as well as for fast growth. 

This democratization of capitalism is now both possible and urgent!  Why, then, is it not presented in the Business Schools as a coherent and integrated whole?

Since 9-11 and the Iraq War, people have searched for an alternative to an increasingly violent world. Economic common purpose based on broad wealth distribution through forms of worker ownership is that alternative because only when the standard of living throughout the world is steadily going up, will the violence go down.