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