A Lecture Delivered by Patricia Hetter Kelso, Frankfurt (Oder), Germany, October, 2012

The private property free market economy cannot function if a few people monopolize the productive power of capital. 

That fact has been obvious from the earliest years of the Industrial Revolution when machines fueled by the forces of nature began to replace human labor in the production process.  The owners of the machines grew richer. The industrial nations grew richer. But the shadow side of the wealth of nations is the poverty of nations. In market economies, only the top 10 per cent are affluent. Wealth distribution in these countries resembles the Eiffel Tower, with the rich at the pinnacle and mass poverty at the base. 

Marx came close to explaining the cause of wealth concentration in an industrial economy. Labor dependent people cannot earn an adequate living in competition with machines. 

But the owners of the machines have never liked that explanation much; they liked Marx’s proposed solution, the abolition of property rights in capital, even less. And since in practice the Marxian experiment proved to be a disaster, the private property market economy, despite it’s defects, continues to hold the high ground. It seems to be the best model possible in an imperfect world. We simply must learn to live with periodic system collapse —  panics, general gluts, recessions, depressions. The names change, but the underlying phenomenon remains the same: chronic under-consumption, a shortage of purchasing power in the pockets of would-be customers. Economists accept the boom-bust cycle as the price we must pay for our economic system. Lester Thurow, a superstar of the economics profession, writing on the Asian crisis, states, “Economic collapses are an intrinsic part of capitalism.” 

Mass production requires mass consumption. The few cannot consume for the many.

Two historical anecdotes vividly illustrate the two sides of the consumption problem created by concentrated wealth. John D. Rockefeller, founder of the Standard Oil Company, was in his time the richest man in the world. His public relations consultant, Ivy Lee, admonished him: “Your fortune is piling up, piling up! It is an avalanche that will crush you and your children!”  Mr. Rockefeller responded to this challenge by inventing modern” philanthropy.”  The Rockefeller Foundation was established to dole out for worthy social purposes the fortune too vast for the Rockefeller family to spend on its consumer needs. But while philanthropy does an enormous amount of good work in society, it can never solve the ever-growing imbalance between production and consumption that the rich’s monopoly of productive power creates. 

The other side of the consumption problem is presented by Walter Reuther, founder of the United Auto Workers, once America’s most powerful labor union. Mr. Reuther liked to tell the story of how he was taken on a tour of the highly-automated Ford engine plant in Cleveland, Ohio, by a top official of the Ford Motor Company. The official said: “Mr. Reuther, you are going to have trouble collecting union dues from all these machines.” 

Walter Reuther replied: “You know, that is not bothering me. What is bothering me is that you are going to have more trouble selling them automobiles.”

Now the world fears yet another economic collapse, one which Louis Kelso predicted. He said it would make the Great Depression of the thirties “look like a Sunday school picnic.”

The most fundamental question of economic policy has yet to be answered: who shall own the capital assets on which everyone’s livelihood and social well-being depend?

• Shall they be narrowly held so that capital earnings flow to families who already earn more capital income than they can or wish to spend on consumption?

• Or shall they be widely held so that capital earnings flow to the many who will spend them on improving their standard of living?

Louis Kelso had studied engineering, before he turned to finance and law. He analyzed the mechanics of income production and distribution of the so-called Capitalist economy as an engineer would a malfunctioning machine. And he concluded that there was nothing wrong with the machine! It performed exactly as programmed. It was explicitly designed to make its owners richer. That is the reason why they financed its formation.

Ownership of capital assets is determined in the financing process, specifically by the archaic practice of financing new capital formation from savings. Making savings a pre-condition for acquiring capital assets keeps the poor from competing with the rich for ownership of the things, which produce wealth in an industrial society. The poor have no savings. If they had savings, they would not be poor. 

Louis Kelso knew that only in the earliest stage of the Industrial Revolution did capital formation have to be financed through heroic feats of underconsumption. Capital is self-financing. After earning its formation costs, a capital instrument goes on producing income for its owners indefinitely.  Savings are a kind of down payment. They function as a kind of performance bond that insures that the investment will actually earn its investment costs and they will be repaid to the original investors. 

To buy a going concern requires capital credit; capital credit requires savings large enough to ensure repayment of the acquisition loan and interest. People rich enough to guarantee this risk have always been few. Kelso designed the Employee Stock Ownership Plan to enable employees, who had no savings, to buy shares in their employer corporation and pay for them out of its future earnings — the corporate profits that the new employee shareholders would be motivated to increase. ESOPs are powerful enough to enable employees to buy a company outright. 

The ESOP has built significant share ownership into tens of millions of rank-and-file working people in the United States, who have used their capital earnings to retire in comfort. Ten million U.S. workers are currently acquiring shares in 10,500 ESOP companies. 

Dr. Jens Lowitzsch has designed a European ESOP that he presents as one of the building blocks for adapting employee financial participation to the diverse needs of the EU Member States. The empirical findings presented in this book, stemming from the PEPPER IV Report, present conclusive evidence, regardless of data source, that the past decade has seen a significant expansion of employee financial participation in Europe.  

A question yet to be answered concerns the extent of employee financial participation in the Russian Federation.  Given the huge potential of their economy, employee ownership could deliver huge benefits to the Russian people.

Property — actual ownership and the opportunity to attain ownership — is the most powerful economic motivator ever devised.

The ultimate form of employee financial participation is ownership! An owner of an enterprise shares in its profits directly as a shareholder. Capital earnings can provide an income independent of work, the ultimate reward of work.

Employee ownership is an idea whose time has come.   In every country, people are demanding the better material life they know is possible. They are rebelling against hereditary poverty. They want more autonomy and freedom. These demands no longer can be met by mass employment or the make-work expedients of the past. We must design new income distribution systems, which link individuals and families to the earning power of capital. And we must convince the richest members of society to use their excess billions to finance the economic expansion necessary to build a proprietary society.

Financial Participation for A New Social Europe offers concrete financial proposals for achieving this grand vision at the European level. In making working families better consumers, both employee shareholding and profit sharing address the Achilles heel of the free market, known variously as the production-consumption gap, under-consumption, purchasing power insufficiency, etc., but essentially the same old problem obvious to Chief Sitting Bull 125 years ago. As he explained to sharpshooter Annie Oakley: “The white man knows how to make everything, but he does not know how to distribute it.”

In an electronic age, with instant transmission of powerful images and information, governments, which cannot meet the new demands of their peoples quickly enough and at an acceptable level, will not long remain in power.