Open Source Society

A Theory of Open Economics
Posted on November 11, 2008 at 6:46 pm by Josh

There has been a lot of talk in the news lately about socialism.  There have been a lot of claims lately — some serious, some not — that the election of Mr. Obama has ushered in an era of American Socialism.  This is ridiculous, but it has brought a lot of attention to the topic of socialism, so I’m going to take advantage of that to put forth an idea I had a few weeks ago.  I sat down to put it onto paper, and since then I have made several modifications, but the core theory is here, and my hope is to spark some discussion to work out the details.  Read on…

So what is socialism? Well it’s many things to many people, and I won’t presume to speak for all Socialists. Some Socialists are really just Democrats who want the attention they can get from assuming a stigmatized label. Some Socialists are Soviet apologists who believe in a strong central bureaucracy to control every aspect of the economy. I fall somewhere in between these two extremes, and I differentiate between socialism as a form of government, and socialism as an economic model. Most people mean a form of oppressively centralized government when they talk about socialism, and to their credit most governments in history who have referred to themselves as Socialist have exhibited these traits. Most people who call themselves Socialist, however, consider socialism to be an economic model with some recommendations as to what form of government is most suitable to maximize social freedom.

I’ve looked over and examined many different economic models under the heading of socialism, from the iron-fisted state economy, to so-called Participatory Economics, to various forms of market socialism. So far I’ve been largely unimpressed, although each of these models has their advantages over free-market or welfare capitalism. None of them quite does the trick. A good alternative to capitalism should have several key features, one or more of which is lacking in the aforementioned models:

• Should maximize individual social and economic freedom.
• Should encourage competition and innovation.
• Should compensate individuals based on the value and quality of their labor, not just the quantity of the labor performed or some arbitrary pre-set value.
• Should be easily adapted to current social and economic conditions, without requiring a drastic restructuring of society or current social and economic relationships.
• Should not prevent the individual acquisition of property and wealth, as long as that property is not used to exploit others.

It isn’t hard to see where each of the most common models of socialism, as well as all the current models of capitalism, fall short on one or more of these points. I believe, however, I can present you with a model that will fit all these requirements. But first we will start with an examination of the basic structure of a typical business under the capitalist model, in order to have a base point of comparison.

The Capitalist Model

In the capitalist model, everything is based upon a market. There is a market for labor, a market for products, a market for ownership, and even a market that bets on these other markets. The underlying principle is that any time you have a desirable resource of finite quantity, and more people who desire a piece of the resource than there are pieces to go around, the most equitable way to decide who gets how much of what is to have a competition, or a market. Individuals compete for who can make the most appealing offer to the original owner of the resource in order to obtain some or all of that resource.

There are many, many flaws within this model, the least of which is the problem of original ownership. Who was the first person to ever “own” something, and how did they legitimately justify that exclusive ownership? History is rife with examples of one individual or group of individuals taking advantage of and robbing another individual or group of something they possessed. For example, the case of European exploitation of Native Americans and subsequent assumption of “ownership” of lands previously inhabited by them. This was indisputably an illegitimate transaction, yet all of the property deeds and land ownership in the Americas today that we take for granted as legal, are descended from what is universally recognized to have been an outright theft.

Aside from that, there are many ways to achieve an unfair advantage in a market competition, none of which are compensated for by the capitalist model. There are also flaws in some of the other basic principles, which we will examine momentarily. Under the capitalist model, there are basically two ways to make money. There is no opting out of the game either, as you must make money or you will starve and die.

The first way to make money is to possess something that other people want. This is usually a resource, such as land or precious metals; or knowledge, such as the design for a new product or process. You can take this thing that you possess, and sell it or rent it to other people in exchange for money. You can in fact make other people compete for who can offer the most money for your product.

The second way to make money, which is really just a derivative of the first, is to sell your time and labor. In this case, the object of value (or resource if you will) that you possess and are willing to sell is actually your body and mind, and any skills you may have. The entire focus of our first 25 years or so is devoted to finding and honing our innate skills in order to have a competitive edge once we enter the labor market.

There is a third way to make money under this model, which is to simply be born into it. We all recognize this is the easiest way to make money, and not really a legitimate source of wealth, but yet we allow it continue happening. This is probably one of the biggest holes in capitalist theory is that the finite wealth of the world can be hoarded within a family, thereby unfairly withholding it from the market. We’ll ignore this for now, however, since little can be gained from discussing it.

In a typical capitalist business, you usually have three participating groups of people: the employees, the administrators, and the owners or shareholders. I distinguish between administrators and normal employees because they usually have an ownership stake in the company, which delineates them from employees who in most cases have no ownership of the company, and the shareholders or owners, whose sole contribution is working capital for the business and may not take any active part in the labor necessary to maintain the business.

Let’s look at each group’s motivations and expectations, starting with the shareholders or owners. The shareholder’s part in this play is to supply the money needed to start the business, or to expand it in some way. In return for this loan, the shareholder expects a percentage of future profits of the company, and eventually expects to recoup the full amount of the original loan, and then some. So while they usually perform no labor, and take no part in the day-to-day administration of the business, they justify receiving income by holding a piece of the company’s debt. Their incentive to invest money is the expectation of future income from a share in the company’s profits, and the more money they invest, the higher their percentage of the resulting profits. So assuming the company is healthy and making profits, the only motivation for the shareholder is to try and acquire a larger chunk of the wealth (in the form of profits) which they had no physical or mental hand in creating. If the company is no longer profitable, or profitable enough, the incentive for the shareholder is to sell their stake and recoup as much of their initial investment as possible, and often times they will still yield a profit. In conclusion, there is no motivation or incentive for the shareholder to consider the needs of anyone but him or herself at any time.

The administrators perform the functions necessary for the day-to-day management of the company. Their contribution is mostly mental, as they are selling their skills as managers to the shareholders in return for a piece of ownership in the company as well as salary compensation. Their incentive to work as hard as possible is the expectation that if the company is more profitable, they will directly benefit through their ownership stake in the profits, and possibly also through rewards in the form of bonuses and salary hikes bestowed by the shareholders. Their primary motivation is to do whatever necessary to make the company turn the highest amount of profit possible. If this expectation is not met, they have the option to leave the company, sell their ownership stake, and seek a position elsewhere. The limited number of people with management skills, and the fact that administration is a universal requirement of any business means that there is a shortage of administrators in comparison to the number of available administrative jobs. This puts the person with administrative skills at an economic advantage over the possible employer when seeking a position with a company. An additional motivation exists in the fear of being terminated or receiving a cut in pay if the shareholders do not perceive the quality or value of their labor to be worth the value of their wages, however this is mitigated to a large extent by the administrator’s own ownership stake in the company. The administrator is generally only motivated to consider the needs of him or herself and the shareholders.

The employees perform the actual labor that produces the product which the company sells. It is their work that generates the wealth which becomes profits for those with an ownership stake in the company. They themselves generally do not have any ownership of the company, and the only percentage of the profits they receive is that portion designated to them on an individual basis by the administrators and shareholders. This is usually alloted on a quantitative basis, as in actual hourly wages or a salary based on an assumed number of hours worked at a certain hourly rate. Their basic incentive to work is the expectation of compensation in the form of the aforementioned wages. They are also motivated by the possibility of an increase in their hourly rate or salary, or a promotion which implies either an increase in authority and stature, or a reduction in the amount of labor necessary to maintain the same or greater level of income, or both. An additional motivation exists in the fear of being terminated or receiving a cut in pay if the administration does not perceive the quality or value of their labor to be worth the value of their wages. They must be motivated to consider the needs of the shareholders, the administration, and lastly themselves. Since there is almost always a shortage of available positions in comparison to the number of available applicants for those positions, should the employee be terminated or decide to leave his position, he is at a significant economic disadvantage when seeking a position with a company, which often motivates him or her to make significant compromises in order to obtain an available position. There is actually an incentive to sacrifice his own needs for the good of the company, and by proxy the shareholders, and in so doing he may be rewarded by a promotion or raise. However, he is totally at the mercy of the administration and shareholders as to if he will be rewarded, and how much that reward will actually be. There may in fact be (and in many many cases there is) no direct correlation whatsoever between the quantity or quality of the employee’s labor, and the amount of reward or compensation she receives for it. Her expectation of reward may never be realized. In fact, companies must be compelled by law to provide any compensation at all for her labor, as for a long period after the capitalist model was first adopted, there was an extremely strong incentive for businesses to utilize completely uncompensated labor in the form of slaves. The administration is motivated to minimize the amount of reward and compensation the employee receives for their labor as much as possible, since this cuts into the profitability of the company and therefore his personal reward. The shareholders are also motivated to minimize the reward and compensation for the employee for the same reason.

This model puts the administration and owners of the company in direct conflict with the employees who provide the labor. The owners cannot generate wealth without the labor of the employees, and the employees cannot survive at all without the wages from selling their labor, but both groups are motivated to try and exploit one another as much as possible – the employees to work as little as possible, the owners to undervalue the employees’ labor as much as possible– , which means that every business is in fact a controlled contradiction within itself.

Employees may not be motivated to work as hard as they can, as this does not necessarily translate into a larger reward for themselves. In contrast, the owners and administrators cannot help but be motivated to pay the employees as little as possible, since this does directly result in a greater reward for themselves. It’s easy to see that this is not an efficient system, and it often fails miserably to meet the needs of either the employees or the owners.

A New Model

This new model is a blend of socialist egalitarianism with capitalist innovation. This isn’t anything new, and many of you will recognize traits of syndicalist theory, but I have tried to combine some of these ideas with an aim towards meeting the earlier stated goals of maximizing fairness and freedom, without compromising overall innovation and competition. If this is a wholly unoriginal idea, I deeply apologize to all of you and relinquish all claims of having concocted it.

My hypothesis is simple: by eliminating the practice of providing set hourly wages or a salary in exchange for the labor of an employee, and instead providing each employee with an ownership stake in the company, we can resolve many of the conflicts of the capitalist model and still provide a stimulus for increased productivity.

Now I know what you’re saying: “That’s already been done! That’s not socialism!”. The key here is the manner in which ownership is extended to the employees, and the extent to which it is done. Most profit-sharing plans in place today do not extend to all employees of the company, and in the majority of cases the stake offered to the employee is insignificant, because the employee is also receiving regular wages as their primary compensation.

The idea then is extend ownership to all employees, and for all the employees to democratically come to a consensus as to what percentage of ownership each position within the company is worth. This has several far-reaching effects which we will examine in detail.

The first, and probably most significant effect, is that with their primary compensation coming in the form of a share of the total profits the company produces, the employee is directly rewarded when the company’s profits increase. The employee does not have to count on the benevolence of the administration or shareholders to increase the rate at which he obtains wealth, she is in direct control of how much she makes. Her incentive is to work as hard as possible and to innovate ways to increase the profitability of the company, because what benefits the company also directly benefits her. She is also motivated to encourage hard work and innovation among her coworkers, since their hard work will benefit her as well. No matter what her actual percentage may be, she can directly impact her rate of income by regulating the quality and quantity of labor she performs. There is no motivation for her to perform as little work as possible as under the capitalist model, since this will directly result in a loss of profit for her. Right away, we’ve met four and a half of our five initial goals:

• We have maximized individual social and economic freedom, because the employee now has direct control over the amount of money they make, and they have an unlimited potential for income growth.
• We have encouraged innovation among the employees, since they will now receive a portion of the rewards that comes from new ideas. We have not encouraged competition among the employees, because by encouraging cooperation we actually increase productivity and provide a friendlier workplace with no animosity between coworkers based on competition for status.
• We are now compensating individuals based on the value and quality of their labor, not just the quantity of the labor performed or some arbitrary preset value. We are doing so in an even more egalitarian manner than under the capitalist model, without using government bureaucracies or sacrificing efficiency. In fact, efficiency is greatly increased over the capitalist model.
• This model is easily adapted to current social and economic conditions, without requiring a drastic restructuring of society or current social and economic relationships. The only fundamental difference is that ownership in a company is no longer concentrated in the hands of a few individuals who provide the capital investment. This extension of ownership can be justified in that the very act of extension means that employees will have as much stake in the health and success of the company as those who provide the capital investment, and their labor arguably provides a contribution of equal value to the company.
• It does not prevent the individual acquisition of property and wealth, as long as that property is not used to exploit others.

We have in fact met the other half of the second goal, because we have not removed the overall market for products. This means competition in the market as a whole still exists as a motivator for innovation, efficiency, and quality control, something the majority of socialist economic models fail to account for.

What at first seems like a minor adjustment to the existing capitalist structure, will upon further reflection reveal itself to be a fundamental change in the way we live and work. We have not eliminated the pursuit of wealth, but we have leveled the playing field drastically, and opened the door to many more people without doing so at the expense of others. Granted, the capitalists will have to give up some of their ownership, but this redistribution of ownership can very easily be justified given the employees’ role in producing the wealth that the capitalists currently take a hefty share of. The capitalists will still hold a share in the profits, and will in fact benefit from the drastically enhanced motivation among employees to increase profits, so it is more of trade-off than a sacrifice.

So there is socialism according to Josh. I don’t believe it’s nearly as scary or Utopian as most people perceive it to be, or try to characterize it. As stated before, this is but one person’s perspective among thousands or even millions of individual ideas of what socialism is. However, I think this model is a feasible framework for change, and represents a significant step in the transition to a more egalitarian society. Some companies have already made small steps in this direction. It has been said many times that a successful economic model is one that provides the greatest good to the greatest number of people. I believe this model does just that, in a manner more efficient and meritorious than either capitalism or state socialism can offer.

I do not wish to suggest that this model solves all of society’s problems. I recognize that I haven’t even begun to touch on all the ways that capitalism is flawed, or on all the problems that plague our society today. However, I firmly believe that by adopted this model as the standard for the way we conduct business, it will be a good step in the right direction. Combined with more democratizing changes in the way our government is run, I think even this small step would go a long way towards improving the lives of all Americans, without doing it at the expense of any one group.