The myth of employee ownership

Bruce Bartlett
Posted: Dec 05, 2002 12:00 AM
The imminent bankruptcy of United Airlines may be the final blow to an idea that once entranced both liberals and conservatives. Known as industrial democracy, its proponents preached that employee ownership of the means of production could overcome the historical conflict between management and labor. But as UAL, an employee-owned company, demonstrates, it works a lot better in theory than practice. The left-wing approach to industrial democracy grew out of Marxism. Karl Marx argued that the fundamental economic problem of the industrial age was the alienation of labor from its product. Previously, workers made entire products by hand for their final owners. But once they joined factories, workers might only make one small part of the product and had no idea who its final owner might be. For some reason that I have never been able to comprehend, Marx thought this was a big problem. Unfortunately, Marx convinced a lot of other people that it was a problem, as well. They concluded that only socialism would solve it -- total state ownership of all productive assets. The theory was that workers controlled the state and would thereby own the assets. Thus workers would no longer be alienated and exploited by greedy businessmen. Part of this theory assumed that owners and managers added nothing whatsoever to the production process and were, by definition, parasites. In the early 20th century, some industrial democracy advocates took a more moderate approach. They said that it was unnecessary to go all the way to socialism in order to gain its benefits. Advocates of industrial democracy pushed for employee ownership of companies and plants within capitalist countries. They thought that the benefits would be so manifest that eventually socialism would emerge by evolution, rather than revolution. Interestingly, as the left's interest in industrial democracy waned in the 1950s, some conservatives picked up the idea. Pushed mainly by lawyer Louis Kelso, they argued that employee ownership could overcome the adversarial relationship between business managers and labor unions. Kelso thought that if workers could participate more in business decision-making and also share in its rewards, they would be willing to moderate demands for excessive wages and work rules that hampered productivity. The result, he thought, would be a win-win situation for management and labor. Kelso's ideas got a big boost in 1973, when he convinced Sen. Russell Long, Democrat of Louisiana and chairman of the Senate Finance Committee, to support them. Although fundamentally conservative economically, Long also had a populist streak inherited from his father, Huey Long, the famous governor and senator from Louisiana. Kelso's idea of using the tax code to create employee stock ownership plans (ESOPs) appealed to Long, who put it into law in the mid-1970s. The ESOP legislation led to a sharp increase in employee profit-sharing plans. In a few cases, such as the Weirton Steel Company and Hyatt-Clark Industries, workers took full ownership in order to stave off layoffs or bankruptcy. However, Weirton ended up laying off workers anyway and Hyatt-Clark went out of business a few years after workers took control. Economists that have looked at ESOPs generally find that there is no significant increase in productivity at companies with such plans. The benefits to each individual worker are too small to fundamentally change their attitudes. On the contrary, they often use their ownership to block productivity-enhancing changes. The result is that management is even more hamstrung than it was before, leading to losses and bankruptcies. A Dec. 4 report in The Washington Post looks at the experience of China with employee ownership, which the government strongly encouraged. Workers proved unwilling to make radical changes, blocked layoffs, slacked off from work and often abused corporate assets. At the Jing Wine Company, for example, workers apparently drank much of the profits. Says economist Martin Sullivan about ESOPs in general, "There do not appear to be any microeconomic foundations to back up claims that employee ownership of large corporations is good for the economy. In fact, there are -- unfortunately -- many reasons for economists to believe employee ownership can just cause problems." UAL seems to be the latest case of failure. Workers there have owned a majority of the stock since 1994 -- half of that owned by the pilots. Yet UAL has the highest salaries for pilots of any domestic airline -- receiving as much as $306,000 per year. This is $43,000 more than at the next highest-paid airline, Delta, and twice what pilots at Southwest Airlines make. No wonder the company is losing money. Employee ownership may still make sense as a way of privatizing government assets, but it is clearly no ticket to higher profits and productivity.