The Next Step in Human Advancement: Economic Democracy

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A Talk Delivered by Louis O. Kelso at the University of the Americas Graduation Ceremony, Mexico City, June 8, 1990

The Economic World Today

As the graduating class of June 1990, you are entering a world both exhilarating and dangerous: a world of dazzling paradox and unprecedented opportunity.

  • You seek your place in this world at the precise moment when it is questioning the conventional wisdoms of both left and right as it searches for new concepts and better ways to operate its economic and political systems.
  • You are seeing the rigid certitudes of both east and west melting like polar ice under a spring sun.
  • To the east, you witness the Soviet Union and Eastern Europe repudiate the socialist economics which have been the guiding economic philosophy for more than half the world’s population since the end of World War II. These concepts are being abandoned because they have failed to extend the benefits of modern technology and industry to the people as a whole.
  • But at the same time, you perceive that free market development policies have failed to unleash the vast industrial potential of the less-developed market economies — including, very conspicuously, those of Latin America.
  • As for the highly industrialized market economies, the ones which hold themselves up as models for others, you cannot help but notice vast and seemingly ineradicable poverty beneath their affluent facades. Western industrial nations are unstable at bottom, like a great city built on a major geographical fault.
  • The same structural stresses and strains responsible for the Great Depression of the 1930s are still deeply at work.

Let us look for a moment at my own country, the United States. Its economy has never, except in wartime, been able to consume what it can easily produce, and this imbalance is growing. The U.S. economy is perpetually short of consumer purchasing power – the would-be customers, with unsatisfied needs and wants, lack money. Since the Great Depression, the U.S. economy has tried to close this gap by redistributing income from the highly-productive, high-earning few to the under-productive and nonproductive many.

  • Key means of redistribution include heavy taxation to support governmental transfer payments, and labor and social policies that override free market competitive forces and require higher and higher pay for less and less work input. These are destroying the competitiveness and quality of production of industry after industry in the United States.
  • For well over a decade, the standard of living and the quality of life of the majority of people in the U.S. has been falling.
  • Growing numbers of our young people no longer expect to live as well as their parents.
  • At the end of World War II, the United States was the world’s number one creditor nation. Now it is the world’s largest debtor nation.
  • We have largely priced ourselves out of the world markets where we used to be the leader.
  • So although socialism is an open and acknowledged failure, neither can the free market economy be judged an unqualified success.

It is a curious and ironic historical fact that both of these economic models, ideologically so hostile to each other, fulfill the needs and wants of their elite minorities much better than they do for their people as a whole.

  • In the socialist economies, the elite are the bureaucrats – the “new class,” in Milovan Djilas’ phrase, or the nomenklatura in Soviet terminology.
  • In market economies, the elite are the owners of the non-residential capital. By “capital” I do not mean money, but real capital: land, structures, machines, processes and capital intangibles, such as patents.
  • The United States has the broadest ownership of non-residential capital of any nation. But the top five percent (5%) of wealthholders own virtually all of it.
  • The failure of both socialist and free market economies to function as well for all families and individuals as for their own elites cannot be explained by lack of physical capacity.
  • Each economy has or has access to resources, trained and trainable manpower, technical know-how and technology. In each, people want to earn a good living, or at least a living that significantly improves over time. To most people, a good life is one that gets progressively better, especially when the starting point is humble.

We cannot avoid concluding that neither system — market or socialist — is designed to meet the reasonable and legitimate economic needs and wants of all its people. There is a defect — an institutional bottleneck — which prevents affluence from circulating throughout the body economic. This bottleneck — Marx called it capitalism’s fatal flaw — has been present in industrial economies from the start.

  • This flaw can be traced to the father of market economics himself, Adam Smith, the author of that remarkable treatise, Wealth of Nations, published in 1776.
  • Smith analyzed the economic order around him more or less as follows:
    • Nature herself had invented the ideal economic system. She had invented it simultaneously with the creation of the human race.
    • Nature gave each human being a unique power: the power to deliberately produce goods and services. Human labor power was the original form of economic power.
    • Nature’s distribution of this mighty power was democratic: one person, one labor power.
    • Nature clearly intended each human being to be self-supporting — neither a slave nor a parasite, but a producer.
    • Smith saw the purpose of production as consumption by the producers themselves.

Economic power in Adam Smith’s time was naturally diffused because every free human being owned his or her own labor power. Smith conceived a free market economy to replicate on the national scale the democratic economic plan Nature had devised for the individual.

  • But Smith had overlooked something very important.
  • In the real economic world, people since the dawn of time had found labor dependence a punishment, even a curse. To produce one’s bread by the sweat of one’s brow doomed men and women to unrelenting toil from childhood to old age. And the reward was bare subsistence.
  • For everyone but slave-owners, subsistence toil denied them not only affluence but leisure — the prerequisite for education, the arts, culture — all that makes up civilization. Bodies need creature comforts, but souls need leisure and security, because people are not only creatures but spiritual beings.

The necessity for leisure was Aristotle’s justification for the institution of slavery. However cruel and unjust, Aristotle thought the slavery of some was necessary to enable others to create and perfect civilization.

Thus the human race rebelled against its destiny of perpetual labor servitude. It invented tools, discovered fire, developed industrial processes and machines, built structures and improved land. And right under Adam Smith’s bespectacled nose, it was launching its final onslaught against primordial toil and poverty. It was mounting the Industrial Revolution – transferring the burden of production from the backs of men and animals to the forces of nature harnessed by machines – capital assets.

Smith did not notice that “capital stock,” as he called it, was in fact a new way for people to produce goods and services that had the potential to liberate human beings from subsistence toil and compulsive poverty.

Adam Smith, an incomparable scholar and philosopher, should have been familiar with Aristotle’s speculation in Book I of his Politics. There was no alternative to slavery, Aristotle declared, unless, in some distant future, looms would weave and musical instruments play by themselves without the touch of human hands – in other words, until humanity managed to mount a successful industrial revolution. Then, said Aristotle, people would have mechanical slaves to perform the subsistence toil for them and their dependents. Capital instruments would be men and women’s surrogate producers.

  • In 1776, Aristotle’s utopian vision was actually coming true. But Smith, blinkered by the labor theory of value, failed to see it. In Marshall McLuhan’s famous phrase, Smith was looking at the future through the rear view mirror.
  • Smith did not understand that ownership of productive capital must of necessity be as widely distributed as labor power.
  • Otherwise, his formula for free market economics, which called for productive power democratically held, would not work.
  • If one producer, through his privately-owned capital, should produce and earn hundreds of times more than he and his dependents can possibly consume, then Say’s Law — which holds that “supply” creates its own “demand” — is not applicable.
  • Nevertheless, Smith’s basic insights into the dynamics of the free market were sound.
  • The Industrial Revolution in no way invalidated the principles he identified. It did not change the rules, just the technological facts of producing goods and services.
  • The Industrial Revolution did not change the rule that in order to earn income you must make productive work input.
  • But it changed the nature of production from labor intensive to capital intensive.
  • It invented a new kind of worker — the “capital worker.”
  • To work today means to work increasingly with and through capital.
  • Therefore, universal capital ownership is not an option, but a necessity. People must earn incomes from capital ownership and use those incomes in the consumer markets if we are to avoid the political and economic ills that flow from wildly erratic and unreliable income distribution, or the need for coerced income redistribution from those who produce and earn to those who cannot produce and earn because they are not sufficiently capital-equipped to do so.
  • Free market logic equally commands that every producer be a consumer. The income generated by the free market must be spent to buy that market’s current output. Otherwise we make depression inevitable and supply does not create its own demand.
  • Technology will never make labor power obsolete; it just makes universal capital ownership increasingly necessary

Karl Marx, who shook the world with his Communist Manifesto in 1848, made the same mistake as Smith. But since he wrote three-quarters of a century after Smith, he had less excuse for failing to see that the Industrial Revolution was changing the nature of work — or production.

  • Marx’s stirring descriptions of the gigantic, self-powered capital instruments of his day — Nasmyth’s steam hammer was one — are unequalled in economic literature.
  • How could Marx describe these autonomous machines in action, and record the human labor they destroyed, yet still proclaim that only labor produces wealth?
  • Marx thought that capital (improved land, structures, machines, processes and capital intangibles) was merely congealed labor power.
  • He thought that the value of capital represented theft by its owners — the capitalists — from helpless labor, and that the evils arising from privately concentrated economic power could only be corrected by abolishing private property in all producer goods and transferring ownership to the state.

Today the world is awakening to the fact that Karl Marx’s solution was not a solution at all, but a terrible mistake that destroyed both political freedom and the free market. That, ultimately, it negates the Industrial Revolution.

I do not think that Marx could have made such a disastrous mistake had he read and understood Aristotle’s utopian vision of automated production, in which every person would be endowed with additional economic power through the ownership of mechanical slaves.

  • We are in no position to criticize either Smith or Marx for failing to understand the meaning of the Industrial Revolution, or its effect on work and income distribution.
  • We have failed to understand it ourselves.
  • But there is more to Marx’s work than his erroneous views on private property in capital. There is another of his basic teachings called the “Marxian analysis.”
  • Marx greatly admired capital as the embodiment of technological change — the prize of the Industrial Revolution.
  • He lauded the awesome power of capital to turn out vastly greater quantities of goods and services of higher quality than could ever be done by labor alone.
  • But he realized that if only a few people acquire and own the capital assets, then those people will be in a position to exploit and dominate the great non-capital owning, labor-dependent majority — the “proletarians.”
  • This reinforced his belief that private property in capital must be abolished.
  • Marx believed that capital is such a good and necessary thing for society and humanity that it is wrong for only a few to monopolize its fruits.
  • Can we in all good conscience say that Marx was wrong about this?

Where Does This Leave Us Today?

Public ownership of capital leads to the totalitarian state because it consolidates political and economic power in the bureaucrats.

  • But in private property economies, conventional finance is concentrating capital ownership faster than ever, while technological change makes capital ever more productive.
  • Smith said every consumer must be a producer, and vice versa.
  • But capital is doing more and more of the producing.
  • More and more people are held in poverty because they are not capital-equipped to earn a good living.
  • So what do we do now?
  • What should the faltering rich market economies do?
  • What should the restructuring socialist economies do?
  • What should less-developed economies like Mexico do?

The answer is: adopt economic policies that acknowledge the need of your citizens to become capital workers as well as labor workers.

  • The means for doing this have already been invented. One of them – the Employee Stock Ownership Plan (ESOP) – is in use by 10,000 U.S. corporations.
  • More than ten million ESOP participants have become or are on their way to becoming capital workers. But quite as important, ESOP companies are becoming more profitable and competitive. They are expanding, hiring more people, paying more taxes.
  • It is not uncommon for participants in successful ESOP companies to retire with hundreds of thousands of dollars in company stock. This stock, sold back to the ESOP upon retirement, or retained for its earning power, its “wages,” will provide comfort and security as long as its owners live.
  • Capital work is the best source of lifetime employment. It is the ultimate job security.
  • Other financing methods embodying the ESOP’s logic can make capital workers of civil servants, teachers, nurses, artists, senior citizens and others outside the corporate sector.

What do these ideas mean for members of the Graduating Class of the University of the Americas in June of 1990?

One of the questions almost certain to be on your mind today is: “Now that I understand what the Industrial Revolution is all about, how do I position myself to earn a good living for me and my dependents during the rest of my life?”

If what I have said this morning is true, as I believe it is, then the traditional advice to graduates, good though it is, is no longer adequate.

The traditional advice is:

  • Get a good job. Work hard, do the best you can to be a credit to your family and to your country.
  • Live modestly in order to save as much as you can to educate your children and to support yourself and your family after retirement.

As far as it goes, this is still good advice for young people, but it is based on the idea that the only way to earn a living is by getting and keeping a job — in other words, by performing labor work. That idea is obsolete.

  • In the post-industrial era, there is another way: Now most goods and services are produced, and incomes earned, by people working through their personally-owned capital.
  • Only through capital ownership can you engage in production and earn income after you leave the labor market because of age, illness, or business failure.
  • The one thing we do not tell young people who are entering the economic world is what you most need to know: how to acquire capital.

I am going to give you some general guidelines on how this can be done.

The logic of capital acquisition is, and has always been, to buy producer goods — capital assets — on terms where they will pay for themselves, in a reasonable period of time.

  • I have invented methods of business finance which exploit this fact for people born without capital ownership — and that means almost everyone in the world today.
  • I have already mentioned the Employee Stock Ownership Plan (ESOP), which is the best known of these new democratizing self-financing capital acquisition plans. There are seven other financing methods, each of which use the same logic.
  • Several of these tools are even more powerful and versatile than the ESOP.

The national economic policies of all market economies — Canada, the U.S., Mexico and all others — are obsolete.

  • The policymakers have not thought through the cause and effects of the Industrial Revolution.
  • They still assert, as a matter of policy, that we can all live well on jobs alone.
  • It is false.
  • It is misleading to the people.

Let me sharpen that statement: You live in a great democracy. If the logic of capital acquisition is to buy capital assets on terms where they will pay for themselves in a reasonable period of time, AND THAT IS ITS LOGIC, you can persuade the government of your country to adopt — and implement — a national economic policy that recognizes your human right to acquire capital out of its own income.

  • Ownership of a reasonable holding of productive capital, legitimately acquired, is the prize of the great Industrial Revolution.
  • If the Industrial Revolution, at its outset, and as an ever-ongoing phenomenon, is sustained by the efforts of all citizens of every society, then every human being who lives in a democratic country should insist and work for the establishment of an institutional infrastructure through which he or she, over a reasonable lifetime, can acquire and own a reasonable holding of productive capital.
  • After all, when governments help their citizens to become capital workers as well as labor workers, the government is also cooperating with Nature, as it should.
    • It is enabling its citizens to augment their democratically-held labor power with capital power.
    • It will reduce, even eliminate, welfare costs, redistribution and subsidies.
    • It will make its people more productive and make it easy for them to pay taxes.
    • It will raise the quality of their lives.
  • Capital is the keystone of the life support system of every post-industrial society.
  • Every family and every single individual needs to legitimately acquire and own a reasonable part of that life support system — so that the principles of free market economics will work in the post-industrial age.