Bernie Sanders Tacks Distributist

Bernie Sanders Tacks Distributist June 10, 2019

Presidential candidate Bernie Sanders’s plan to establish worker ownership in United States corporations is still in the development stage, so it is premature to offer any critique of it at this point. But it is precisely the right time to make suggestions about what the plan should look like.

Now the idea is, alas, going to be dubbed “socialist” by proponents and opponents alike, although it need not involve any public ownership of the means of production. Precision in language is not an American strong suit. So-called “conservatives” will use the term to try to scare people away from it. So-called “liberals,” or “progressives,” will use it in the interests of ambience. And, unfortunately, the idea will be enlisted in the service of the class war, although it is really, if properly implemented, a way, perhaps the only way, to bring an end to the class war.

The specifics of the plan, of course, are critical. The first order of business is that if we’re going to have worker ownership, we should have worker ownership. Working people should have ownership shares that are completely controlled by them, which they may dispose of as they please. There will be a temptation in some circles to operate the program in a paternalistic fashion, such as placing the shares in a trust and requiring employees to relinquish their shares upon retirement. But ownership is ownership, and until full and actual employee ownership is achieved we will be unable to rid ourselves of the internal contradiction which plagues capitalism as currently practiced.

That internal contradiction is the conflict in the interests between employees and the owners of capital; between employees, who want their compensation to be as high as possible, and the owners of capital, who want that compensation to be as low as possible so as to maximize profits. The resolution of that conflict is to somehow make all interests the same. There are two ways to do that.

The first is through socialism, properly so called, whereby private ownership of the means of production is abolished. Everyone becomes a wage earner. The problem that arises through this solution, however, is that someone has to be in charge of the overall system; and since there are no more capitalists to run things, the only thing left to fill that role is the government. If you take a moment to consider what the world would be like if your employer also controlled the police, it should become clear to you what that circumstance would be like—and has been like.

It will be objected here that socialism need not be so autocratic, that it could be coupled with democracy, where citizens could vote on what people would run the system. That should keep the leadership in line, it will be said. But notwithstanding our civic mythology, we should not be overly sanguine about democracy as a panacea. It’s no exaggeration to suggest that if the civil rights movement had been left to democratic processes it would have ended with Martin Luther King, Jr. and his compatriots in front of a firing squad. And even a democratic socialism in the Jim Crow South would have been devastating to the black community; because not only would they have been deprived of economic advancement, they would not have been allowed to start businesses in order to counter the deprivations visited upon them by the white majority.

Of course, that wouldn’t be a problem now, because we’ve rid ourselves of racism in the United States. Right? No? I move on.

Now I don’t want to give the impression that concerns about socialism should be applied to such politicians as Bernie Sanders or Alexandria Ocasio-Cortez, who call themselves “socialists.” They’re not socialists. They’re not even democratic socialists. They’re New Deal Democrats. Government programs and a strong social safety net aren’t socialism. If anything, they represent efforts to save capitalism from its own consequences. Without their intervention, capitalism would have been burned to the ground by now, as we may discover in the not-to-distant future.

It’s anyone’s guess as to why such politicians would call themselves socialists while there are still people around who remember the Soviet Union. It seems to your humble servant that they play right into the hands of those nihilist radicals who are going by the moniker of “conservative” these days. (Misnaming one’s self seems to be a fashion.) They propose universal healthcare, just like civilized countries, and the “conservatives” get to cry “socialism,” scaring the daylights out of people who had to endure the duck-under-your-desk drills in school in anticipation of a nuclear attack.

But let us leave the world of political paradoxes, and move on to the second solution for resolving the inherent conflict in capitalism. We have seen how making everyone an employee would be fraught with problems. The other solution is to make everyone capitalists. And that appears to be what Mr. Sanders is proposing.

Hereinafter, your humble servant will try to give a picture of what the implementation of the idea could look like, harboring no delusion that I have anticipated everything that should be considered. Indeed, I hope to receive friendly critiques from those who can see a flaw in the plan, since that will help to develop the idea. Unfriendly critiques, of course, are to be anticipated.

At first blush it would seem that the fairest way to go about it would be to determine what value each employee contributes over and above his compensation, and award him shares of stock or partnership shares representing that value. But that actually would be a fairly complicated calculation. It’s not even straightforward when it comes to salespeople in a retail establishment, since janitorial and maintenance crews also enhance sales by keeping stores inviting places for people to come and shop. And there are secretaries, bookkeepers, and other employees whose contribution to business revenue is not at all transparent.

It seems, then, that the only measurement tool that can be practically utilized for this purpose is the revenue “per employee—calculated as a company’s total revenue divided by its current number of employees…an important ratio that roughly measures how much money each employee generates for the firm.” [1] Under this system, company shares would be awarded to each employee based on the value of his share of the revenue.

One might ask why we would use revenue rather than profit. The answer is that profit is the figure arrived at after expenses, which is not in the discretion of the employees. Managers could engage in expenditures that were solely motivated by reducing the employee share. These expenditures might be ostensibly sensible, such as capital improvements; or they might involve such things as decorating executive offices. Either way, money generated by the employees could be diverted by mere caprice.

Moreover, the idea is to reward employees based on their labor investment. If the revenue they generate goes to new machinery, for example, that still constitutes value they have added to the company.

Two objections come to mind. The first is that not all employees are equal in terms of the value they bring to a company. An executive vice-president is more valuable to the company than a cashier. But the revenue per employee method puts them all on the same footing.

It is important to keep in mind, however, that the revenue per employee method compensates in ownership shares, not wages and salaries. Employees deemed more valuable to the company will still receive more pay than those deemed less so. It is true that distributions will be equal on a per share basis when it comes time to disburse dividends, but companies will still have to pay competitive salaries at the higher ranks.

The second objection is more formidable. Investors in a company are in a position to lose their money, while employees are not. What’s more, smaller businesspeople are often required to sign a personal guaranty with lending banks to be utilized in the event the corporations they form become insolvent. If a company goes belly up, the investors will lose their money permanently, but the employees can always find another job. Is it even fair to put employees on an even footing with the original investors, even though they haven’t risked as much?

Of course, the loss of a job for some people can be far more devastating than the loss of an investment to others; that investors are facing a greater risk isn’t something that should be simply assumed in every case. Moreover, I am not proposing that every company be coerced into compliance with this plan by law.

On the other hand, I do propose that businesses will be encouraged to adopt this proposal with tax incentives, and that those incentives should be sufficient to make adoption of this plan desirable. We know that much of the taxes businesses pay can be passed on to consumers in the form of higher prices. When this happens, consumers are the ones that are really paying the tax, and that tax turns out to be a regressive one, since prices don’t vary based on individual consumer income. While I won’t go as far as to say that there is effectively no such thing as a corporate income tax, since businesses have to set prices so as to have a sufficient number of purchasers, the phenomenon of passing on the tax to consumers can’t be denied. And this consideration should weigh heavily in deciding how generous tax incentives can be in this connection. Any lost revenue can, and should be, made up for by increasing individual taxes, steepening their progressivity, and increasing the top marginal rates at higher levels of income. I will add that widespread adoption of this plan can be expected to reduce social safety net expenditures.

But there is another objection to consider. Shouldn’t we worry about discouraging investors, who will see their percentage of ownership decrease over time, and, therefore, perhaps the value of their shares? And this isn’t something that would only impact billionaire stockholders, but also pension funds. Besides, capital investment really is beneficial to a company. New equipment can increase productivity, enriching the entire business, and it isn’t a fair assessment to assign all of that enrichment to the employees any more than it is to assign it all to capital. As Pope Leo XIII said in Rerum Novarum,

“The great mistake made in regard to the matter now under consideration is to take up with the notion that class is naturally hostile to class, and that the wealthy and the working men are intended by nature to live in mutual conflict. So irrational and so false is this view that the direct contrary is the truth. Just as the symmetry of the human frame is the result of the suitable arrangement of the different parts of the body, so in a State is it ordained by nature that these two classes should dwell in harmony and agreement, so as to maintain the balance of the body politic. Each needs the other: capital cannot do without labor, nor labor without capital. Mutual agreement results in the beauty of good order, while perpetual conflict necessarily produces confusion and savage barbarity.” (Ibid, No. 19) [2]

The difficulty comes in deciding how much of revenue should be assigned to which group. How much of productivity should be assigned to labor versus capital will vary from company to company, and from time to time. But we need a formula that won’t result in annual litigation, and the best way to do that is to divide the revenue in half, with one half being assigned to the capital side and the other being assigned to the employees. The capital side revenue will be allocated on a per share basis, and the employee side revenue will be allocated on the basis of hours worked.

Of course, there will be individuals who will receive allocations from both sides. CEOs tend to own shares in the businesses they run, and, over time, so will lower level employees under this plan. Working owners will undeniably prosper more than the non-working variety, but it is hard for your humble servant to see how that would be a negative social outcome.

Still, there is no point in denying that capital won’t lose out to a certain extent under the plan. The attempt here is to develop a plan that will make ownership of capital more widely spread, and that inevitably will mean that the ownership percentages of some will be diminished. Because of that, we can expect some to use the “s” word when evaluating this plan.

But while both opponents and proponents will likely prefer to call this idea “socialism,” it is really the opposite of socialism as it has been classically understood. That kind of socialism sought to abolish private ownership of the means of production. This idea, on the other hand, will make ownership of the means of production more common; and that is, precisely, distributism.

Perhaps, because of its provenance, distributism can conjure images of ox-drawn carts, small family farms, and village blacksmiths: an enticing image until one remembers the infant mortality characteristic of those bygone years. But the kernel of distributism is spreading ownership of the means of production as widely as possible, and the plan outlined here could go a long way toward accomplishing that. So it appears that Bernie Sanders has proposed distributism as a means of reducing income inequality.

Should we tell him?

 

The icon of St. Joseph the Worker is by Daniel Nichols.

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  • RJB

    If I’m reading this correctly does that mean I have to have a greater than 50% gross margin in order to even consider hiring a single employee and all businesses that project less than 50% gross margin cannot have employees?

  • JackQuirk

    No, though you might decide that is what you wanted to do. Disbursement of shares would be based on revenue, before the cost of goods sold were taken into account.

  • RJB

    If the disbursement of revenue shares is based on revenue before even cost of goods solid than the answer is effectively yes, because the business would be losing money on every sale it made. This model would only be feasible for companies that generate revenue at twice the level of total expense. Those are few and far between. Unless it is mandatory, the only type of business I could see even considering participating, ironically, would be like a high price law firm. They would have to effectively change the way the compensate their associates by making them partners right out of law school, but other than that most industries are priced out because their revenue is too small when compared to their expense. Do you have any research or rough business analysis of what a budget P&L would look like for a business trying to do something like this?

  • billwald

    The ignored problem is that the median American doesn’t have the ability to run a company. I don’t have the ability to run a company. The average American might have the ability. If you don’t know the difference between average and median, you don’t have the ability . . . .

    Here’s the difference. 5 union scale carpenters standing at the local bar. Median pay, $50K. Average pay, $50K. Bill Gates joins them. Median pay, 50K, Average pay, $50 million or more. OK, how much do most people make? Probably less than 3 bucks over minimum wage.

  • bobnelsonfr

    This article makes a simple subject complicated.

    First – “socialism” is incorrectly defined. The proper definition is collective ownership of means of production and distribution”. That may be employee ownership or government ownership or a mix of the two.

    Second, shares in an employee-ownership company cannot be transferable, or the company would quickly become an ordinary capitalist company.

    Third, economic planification is independent of ownership. There is no need for “someone to be in charge of the whole system”. History shows us that “supply and demand” works well in all competitive situations, and “central planning” works best in monopoly situations.

    Finally, socialism and democracy – inside the company and out – are inseparable.

  • Debra Simpson

    This is the first time I’ve read your blog. I was glad to find out I’m not a socialist but a New Deal Democrat. Although it sounds complicated, distributism is a hopeful idea to create more equality throughout our society.

  • RoamingCatholic

    If you can get him to embrace the term “distributist” rather than insisting on calling himself a socialist (or the most “progressive” candidate) “in the interests of ambience” with little regard for precision, then I might vote for him.

  • JackQuirk

    I think you misunderstand. Revenue determines ownership shares under this plan, not compensation.

  • RJB

    In that case, if it always is going to be 50% of shares go to the workers why does the revenue verses net income even relevant. Using either would always give the same number of shares.

  • JackQuirk

    Revenue can’t be manipulated, and reflects the value per employee.

  • RJB

    That may be true, but if 50% of equity is going to be given to the employees it wouldn’t matter if you could manipulate revenue. You could double revenue or cut it in half and the equity distribution would be unchanged. I don’t see why revenue is relevant. It changes nothing.

  • JackQuirk

    Revenue is a measure in this case. I didn’t make up revenue per employee. It is already used as a measure to determine the financial productivity of employees. The percentage wouldn’t change, but the value of the distributions would depend on the amount of revenue.

  • RJB

    There isn’t a way to run any legitimate business valuation based on revenue/ employee alone. Business equity just isn’t priced that way. When you are distributing equity to someone you don’t get to declare it’s value based on your chosen model. The value of the equity is always going to be based on value of expected future cash flows. There is always uncertainty around that number, but models are created to make a best guess. Have you ran this plan by anyone with any finance or accounting background?.

  • JackQuirk

    You’re conflating value with shares. I did say that the value of the distributions would depend on the amount of revenue in my previous response, so I’m responsible for that confusion. Obviously, the value of a business involves its net assets.

  • RJB

    I still don’t understand why the revenue distinction is needed. Can you clarify with a simple example.

    Company A expects to have 2 million dollars of revenue with 1 million of expenses every year going forward.

    Company B expects to have 4 million dollars of revenue with 3 million of expenses every year going forward.

    Assume they have the same number of employees and risk associated with those numbers. What is the impact on these companies with this plan given that one has higher revenue?