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August 23rd, 2014

A genuine economic democracy would provide the efficiency of the market system without the associated injustice


Estimated reading time: 5 minutes

Blog Admin

August 23rd, 2014

A genuine economic democracy would provide the efficiency of the market system without the associated injustice


Estimated reading time: 5 minutes

personal-photo-for-cover-199x300Recent years have seen a spate of protests in which the structure of the global economy has been structured. But there is an alternative to the current arrangements, with workers co-ops, public banks and participatory budgeting all shown to be successful and efficient. It’s time to take democratic control of our economy, says Tom Malleson

Three years ago a ragged band of activists gathered in New York City’s Zuccotti Park to protest economic injustice and inequality. Three months later, the Occupy Wall Street movement had spread to 951 cities in 82 countries around the world, dramatically illustrating a widespread and deep concern with contemporary levels of inequality – the highest since the 1920s and the age of the Robber Barons. Of all the plans and projects that bubbled out of the Occupy movement, one of the most powerful was that of “economic democracy”. Economic democracy became a unifying theme of Occupy because it provided both a series of practical reforms as well as an overarching critique of what was wrong with contemporary capitalism, both a means and an end. Today, long past Occupy, the ideas of economic democracy remain as potent as ever.

There is a paradox at the heart of contemporary capitalism. Societies in the West are fervent about their democratic credentials. Our politicians give speeches extolling the virtues of democracy, our self-conception of being citizens in a democratic state is deeply ingrained in our identity. And yet, despite this, a central part of society, the economy, has very little democracy in it at all. Workers do not elect the managers of their firms. Bankers do not allocate finance with any accountability to the communities in which they operate. Investment decisions are not made with any participation of the citizenry. It is like we have erected a wall down the middle of society, and said that in this half, the economy, there is no need for democracy, while at the same time insisting on calling society as a whole “democratic.”

A fundamental democratic principle is that public power should be accountable to those who are affected by it (i.e., the public). This is a basic safeguard against tyranny and one of the most fundamental rationales for having democracy at all. Yet in a variety of ways, managers, employers, investors, and financiers clearly exercise power too. Their decisions have massive social and public consequences—from a manager’s decision to lay off a thousand workers, to a corporate decision to invest in dangerous deep sea oil extraction, to bankers’ decisions to provide risky subprime mortgages and resell them as complex debt instruments – these decisions have undeniable public consequences. Yet in stark contrast to our political system we do not demand that these people be accountable to those affected in any standard democratic way.

The core idea of economic democracy is that wherever there is power there should be accountability. In contemporary society, economic power is exercised in three main areas: workplaces (where bosses and managers exercise significant power over workers), financial organizations (where banks and money markets exercise significant power through their control over lending or refusing credit), and investment (where business owners exercise significant power over the nation’s citizens through their ability to invest or divest causing the economy to grow or falter).

The power that is exercised over workplaces, finance, and investment is for all intents and purposes political power, since it involves public, sustained relationships of authority and subordination, resulting in fundamentally different levels of freedom for different people. Unaccountable, unequal political power in a democratic society is unjustifiable, and so new economic arrangements should be experimented with in order to allow these sources of power to be accountable to the citizenry on a formally equal basis. The essence of economic democracy is that we should strive to democratize these three areas. There are no shortage of ideas for moving in this direction, but here I’ll focus on three fundamental ones: worker cooperatives, public banks, and participatory budgeting.

Worker Cooperatives

Worker cooperatives are firms that are owned and controlled by the workers themselves. In small co-ops the worker-owners may make decisions collectively, whereas in large ones they elect a management structure.

Credit: David Shankbone, CC BY 2.0
Credit: David Shankbone, CC BY 2.0

The co-op sector in the UK makes up less than 1% of firms. The most well-known worker cooperative in the UK is the John Lewis Partnership, which is technically an employee-owned firm, though it has been sharply criticized for having very little actual workplace democracy in it. Although the worker co-op sector is small in the UK, it’s a bigger player elsewhere. In Emilia Romagna, a prosperous region in northern Italy, 13% of the regional economy is co-op based. Many of the cooperatives have been around for decades, and many others are industry leaders in construction, agriculture, food processing, wine making, transport, retail, and machine production.

The Mondragon network in the Basque country of northern Spain is the most famous example of a worker co-op. In 1956, five young workers, with the help of a progressive Catholic priest, bought an abandoned stove factory and started producing as a cooperative business. Today, Mondragon is a giant multinational enterprise with a network of 110 co-ops employing 80,000 people, with assets of €35 billion. Each of these 110 co-ops is an autonomous worker cooperative, meaning that the workers collectively own the firm and elect their Board of Governors on a one-person one-vote basis. In addition, delegates from each firm are elected to represent their co-op at Mondragon’s Cooperative Congress, which is like a mini-parliament overseeing the system as a whole.

There is a widespread suspicion about worker co-ops that they are inefficient (people in the UK are especially prone to think this since it’s likely that their only experience with a co-op is with the occasional small alternative coffee shop or radical DIY bike store). But in fact this is a misperception. The evidence is clear: when co-ops and capitalist firms are scientifically compared (in a careful, controlled way), economists over the last thirty years have found co-ops to be just as efficient as comparable capitalist firms. Co-ops have been found to have just as high productivity all over the world, in the US, Uruguay, France, the UK, Italy, Spain, Denmark, and Sweden.

If we give this a moment’s thought it’s not particularly surprising. Co-op workers are likely to have significantly more motivation to work hard because they are co-owners, so unlike in a capitalist firm where the harder I work the more the boss makes, in a co-op workers have enhanced motivation because they receive a portion of the profits. In addition, co-ops are likely to have smoother coordination in their operation because the workers are likely to feel more trust and less alienation, and so there tend to be less sick days, and, importantly, less need to hire many expensive managers to constantly monitor and supervise every little thing.

One of the major advantages of worker co-ops is in terms of wage equality. This is a big issue, since we know that economic inequality is at a higher level today, particularly in the US, than in any other time since the 1920s. Indeed, contemporary American inequality is significantly worse than during the height of the Roman Empire and is even starker than in Russia on the eve of the Revolution. The average American CEO makes 300 times the average worker; the average CEO in continental Europe makes about 15-20 times the average worker; whereas for worker co-ops, the ratio hardly ever surpasses 3 to 1.

The second major advantage of worker co-ops is that they are far better at dealing with downturns than conventional firms. Whereas managers in conventional, undemocratic firms typically react to recessions by firing workers en masse, a cooperative structure allows workers to make shared sacrifices by collectively agreeing to reduce their hours or pay in a fair and equal manner. Since workers are their own bosses, lay-offs only happen as a very last resort. “Economic rationality with a human face,” as one commentator puts it. This is why during the Basque recession from the mid-1970s to 1984, the region saw the loss of 100,000 jobs and a 20% unemployment rate, yet, remarkably, not a single Mondragon member lost her job (though some temporary non-member workers did). While Mondragon is unlikely to escape the current Spanish depression unscathed, the latest data suggests that, once again, it will be responsible for far fewer layoffs than its competitors.

Public Banks

Public ownership of banks has been a common feature of many economies for many years. In 1970, 59% of the equity of the 10 largest banks in an average country was owned by the government, and still in 1995, 42% was state-owned. The most important rationale for public banks over private ones is that they can serve a social purpose broader than narrow profit maximization. Since public banks are not dependent on making money, they can provide financing to poor people and poor communities, they can invest in green businesses, they can help finance any number of socially desirable (but unprofitable) activities, from public transit, to art and culture, to volunteering and social justice activities.

For example, one of the most serious failures of the private banking sector is the number of poor communities left without adequate financing. In the United Kingdom, for example, 26% of people from the poorest quintile of society have been refused credit; many are thus forced to rely on the subprime credit market where annual percentage interest rates typically range from 100 to 400%.

Finance is so crucial to the day-to-day functioning of our economy that it is really a public utility—like a post office, water system, or an electricity grid. Society is utterly dependent on it. If banks and stock markets stop providing finance, businesses go bankrupt, people lose their jobs, then their livelihoods.

One important example of public banks is found in India. In 1969, then further in 1980, the Indian government nationalized the bulk of its banking system. The rationale for nationalization, codified in the 1968 Bank Nationalization Act, was that an institution such as the banking system which touches and should touch the lives of millions has to be inspired by a larger social purpose and has to subserve national priorities and objectives such as rapid growth in agriculture, small industry and exports, raising of employment levels, encouragement of new entrepreneurs and the development of the backward areas. For this purpose it is necessary for the Government to take direct responsibility for extension and diversification of the banking services and for the working of a substantial part of the banking system.

The banks were required to open branches in rural areas and to provide a portion of their credit to poor and marginalized people. Now it is clear that there was corruption in the public banks as well as inefficiency (though it’s not clear that public banks suffer from more corruption than private ones). However, it is also clear that the banks were largely successful in their social mission. Indeed, India witnessed the largest rural branch expansion program ever seen: between 1969 and 1990, bank branches were opened in roughly 30,000 rural locations which had no prior formal credit and savings institutions. This expansion of public banking can explain roughly half of the fall in rural poverty between 1961 and 2000. Furthermore, if we compare the period between 1977 and 1990, when the banks were public, to the subsequent period after the partial privatizations, we see that rural bank expansion and poverty reduction were significantly greater in the public banking era than in the private one (since the private banks have been much less interested in operating in less profitable rural areas). The Indian example makes it crystal clear that public banks can serve a social purpose far more effectively than their private counterparts.

Participatory Budgeting

Most countries today have “public” investment that is largely dislocated from the actual public – a vote every four years for a state with millions of people in it is an extremely narrow avenue for citizens to express their investment preferences. The local level is the area where the least public investment is presently done, yet it is where the most democratic potential lies.

Instead of public investment always happening at the highest levels of the state, furthest away from grassroots influence, imagine if the state were to devolve substantial funds to the cities or to neighbourhood assemblies to democratically allocate investment. That way local people could engage in a meaningful way, deliberate about their investment priorities and make decisions on an equal one-person one-vote basis. An important real-life model for this is participatory budgeting. The most famous example of which is from Porto Alegre, Brazil, where the state devolves tens of millions of dollars every year for the citizens themselves to decide to spend in a participatory fashion. The process started in 1989 and then spread to over one hundred municipalities across Brazil and has now spread to 1,200 cities across the world from Canada to India. Residents in Porto Alegre meet in neighbourhood assemblies to deliberate on spending priorities and elect delegates to implement these priorities. In many ways participatory budgeting has been a great success: there has been a flourishing of participation in local investment decisions with thousands of people participating every year, mostly through local neighbourhood meetings to set investment priorities. Especially important is the fact that the process is dominated by poor and working people – a previously marginalized segment of society.

There is widespread agreement that PB has brought significant positive changes to Porto Alegre. From 1996 to 2003, nearly US$400 million of new investment projects were implemented through PB; the projects ranged in size from small drainage systems and street paving to complex housing projects. It is important to note that the type of investment that has occurred is markedly different under PB than earlier eras. In terms of basic sanitation, for instance, in 1989, only 49% of the population was covered. By the end of 1996, 98% had water and 85% had sewage. De Sousa Santos reports that while all previous administrations combined had built 1,100 km of sewers, under PB, 900 km were built. Other common investment projects include roads, houses, and schools. Between 1989 and 1996, the number of students in school doubled and the number of schools quadrupled. Even the democratically recalcitrant IMF admitted that “the process of participatory budgeting has brought substantial changes in Porto Alegre”.

Economic Democracy – A Systemic Alternative

Economic democracy is not simply a series of piecemeal reforms; it is also a vision of a fundamentally different kind of society. Imagine a society with full and robust economic democracy based on the following four pillars: the majority of workplaces are worker cooperatives; workers and consumers interact in a highly regulated and redistributive market; finance is provided by public banks; and public investment occurs partially at high level for major projects, but significantly through lower levels via participatory investment.

How would the nuts and bolts of such a system function? People would apply for jobs in the normal way. Co-ops would try to make money in the market, just as firms do today. The co-ops would be free to pay their workers equal wages or not (though previous experience with co-ops indicates that wage differentials will not usually exceed 3:1). Co-ops looking to expand would apply for loans from their local public bank. Businesses that are innovative and successful at responding to the demand of the population would grow and prosper. So successful firms would make more money than their competitors, thus providing incentives to work hard. High levels of taxation would prevent the rich from becoming super-rich, and would also pay for excellent public services, perhaps a Guaranteed Basic Income. Firms that are producing things that no one wants would go out of business; their workers would need to find new jobs (but note that unlike today, this would not at all be a tragedy since the public services or basic income provide very strong social support). Moreover, community members would be able to direct the economic development of their neighbourhoods through their participatory budgeting system as well as the public banks. Such a system would retains price signals for efficient allocation, a certain degree of material incentives for hard work, but no devastating consequences for business failure. There would still be business competition, which is useful for keeping firms accountable to what the population wants, but in this competition, no one wins majestically and no one loses tragically (no one ever becomes rich enough to acquire power over others or poor enough to go hungry, or lose their healthcare). The democratic market here resembles more a friendly sports race than a life-or-death battle.

A true economic democracy would possess all the efficiencies of the market system without the profound injustices and disenfranchisement. There would be far more freedom – workers have enhanced say in their workplaces, citizens would have enhanced say about the economic development of their communities. There would be far more equality – due to the compressed pay scales of the co-ops and the higher taxes. Democracy too would have finally breached the barriers of the political system within which it has previously been confined, and would thereby come to animate all the main institutions of society. Such a society would be neither capitalist nor communist. It would be a radically democratic society. Clearly it would not be a perfect society, but just as clearly, it would be a profound advance from where we are now.

This piece originally appeared on OurKingdom under the title ‘Economic democracy in the 21st Century’, and at the Democratic Audit of the UK blog.

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Note:  This article gives the views of the author, and not the position of USApp– American Politics and Policy, nor of the London School of Economics.

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About the author


Tom Malleson – King’s University College at Western University, Canada
Tom Malleson is an Assistant Professor in the Social Justice and Peace Studies program at King’s University College at Western University, Canada. He is author of After Occupy: Economic Democracy for the 21st Century.

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