From Neo-Liberalism to Economic Democracy: An Alternative Road for Europe

In February 2009, the European Parliament adopted a resolution on social economy which among other things called for “experimentation with new economic and social models” and declared that the social economy is “important, both symbolically and in terms of performance, for the purpose of strengthening industrial and economic democracy”.  We see here a clear statement of support for alternative models, and specifically for economic democracy. The resolution was passed by an 89% majority, indicating that the concept of economic democracy can win broad support in Europe. Three years have gone by – a serious effort should now be made to turn this idea into reality.

While the resolution was not exactly a ringing manifesto to transform the existing economic order, it was a green light to accelerate its pluralisation through development of alternative, more democratic, forms of enterprise, ownership, and investment. The crisis of 2008-2009, whose effects are still with us, including the ongoing debt crisis, highlighted the need for alternatives to the status quo with a view to greater equality in the distribution of economic power and, with it, of wealth and income.

Social democracy as a counterweight to economic undemocracy has been difficult to sustain, and is struggling under the onslaught of the neo-liberal anti-social model, whose values, policy prescriptions, and real-life consequences undermine the European Social Model. Now, the way forward is quite straightforward: we need to get on the road to economic democracy, and that means challenging the undemocratic, unaccountable corporate power that has been at the heart not only of neo-liberalism, but of traditional Keynesianism and the “social market economy” as well. Of course, under neo-liberalism, this power is unleashed to a much greater extent, with fewer constraints imposed by the state, unions, or other social forces. It’s time to change this. It’s time to make a sustained multi-pronged effort to pluralise, democratise, and de-corporatise the economies of the European Union.

Moving towards Economic Democracy – Challenging the Status Quo

Europe already has noteworthy islands of micro-level economic democracy in the form of worker cooperatives and employee-owned companies, as well as works councils and co-determination. Spain’s large Mondragon cooperative group is proof that industrial firms can function just fine without wealthy owners and shareholders and massively overpaid executives. Britain’s Scott Bader, a highly successful chemical company, is further proof: it is owned by a charitable trust that belongs to its workers and is run democratically by them. Germany’s Bosch, like all bigger German firms, practices co-determination (as required by law), but in addition is largely foundation-owned and channels its profits mostly into philanthropic activities.

Companies like these, without external shareholders or private owners (or with only limited roles for them), besides being immune to takeovers, are not connected with a wealthy investor class and corporate oligarchy. They show that firms can prosper without this class, while empowering workers and serving society. Mondragon, in fact, has its own bank that provides capital for start-ups and investments within the group, and Italy’s large cooperative sector, especially prominent in the Emilia-Romagna region, has its own investment funds, like Coopfond, which support the creation and growth of cooperatives.

But at the same time shareholding can be a powerful tool for economic democracy in the form of multi-company worker ownership where working people collectively invest in dozens of companies and gain substantial ownership of them, with the aim of boosting employment, supporting local economies, and achieving other worthy objectives, as we see in Canada with the Quebec Solidarity Fund, a labour-sponsored pension-based investment fund. Multi-company worker investment was also proposed under Sweden’s ingenious Meidner Plan of the 1970s which envisioned employee ownership in sector-based groups of large companies being built up over time through mandatory annual allocation of shares to wage-earner funds, amounting to 20% of profits.

Economic Democracy at the Societal Level

We need more Mondragons, more Scott Baders, more Emilia-Romagnas, and more Quebecs. But we also need economic democracy at the macro or societal level, i.e. mechanisms through which citizens can democratically steer economies – and the large corporations at their core – to serve their interests. One such mechanism could be a National Investment Fund that allocates resources in line with democratically set priorities. It can take the form of a public trust, a national-scale but decentralised foundation-plus-bank – with its governance representing both the current balance of political forces and civil society stakeholders. (When necessary, the National Funds would act in concert at EU level.)

Here’s one possible scenario: We divide companies into two groups – large shareholding corporations, which form the main power base of the corporate oligarchy, and all the rest. We democratise the first group by giving the National Fund ownership of one-sixth of each corporation but control of one-third (through shares with double voting power) and at the same time we institute the Meidner Plan to build up worker ownership (through standard shares) to a point where wage-earner funds and the National Fund together gain majority control of these corporations. In exchange, we abolish corporate taxes on these companies. Internally, we implement co-determination where it isn’t in place already.

Regarding the rest, we set a target of converting one-third of them into employee-owned firms (including cooperatives) and foundation-owned firms (with co-determination) over a ten-year period – and we also set up Quebec-style funds that can acquire equity in companies within this group. Naturally, we provide the necessary state support and incentives. Last but not least, we set up regional public investment councils (with broad-based representation) to vet major investments by firms in either of the two basic groups to ensure they don’t harm workers or communities.

The result of all this would be greater pluralism, both vertical (i.e. within the large corporations) and horizontal, a true mixed economy with a substantial democratic content. This combined with financial sector democratisation (a big topic in itself!), wealth taxation, income ratios (stipulating maximum intra-organisational differentials), and greater unionisation would lead to much more democratic and egalitarian societies in Europe. What we now need is political parties, trade unions, cooperative federations, the employee ownership sector, and civil society groups to take up the cause of economic democracy. Perhaps we can start with a new resolution by the European Parliament – this time focusing exclusively on economic democracy, and a little more ringing, a little more transformational!

  • http://www.robinwilson.eu Robin Wilson

    This is very good. I would be interested in more thoughts on the particular challenges transnationals would pose. Would there be capital flight? How would the threat–and that there would undoubtedly be–be dealt with? Would this have to be a project implemented at the European level to face this challenge and, if so, is such political co-ordination conceivable? This certainly could give the PES a genuine transnational project in the next European Parliament elections.

    • Nyegosh Dube

      Glad to hear your positive feedback, Robin! Yes, the question of transnational corporations and possible capital flight would need to be addressed. European-level coordination would probably be necessary. Ways would have to be found to implement the plan’s ownership and share allocation structure in the national-level entities of transnationals. Strictly speaking, there’s no real justification for capital flight, because the plan is more or less neutral in terms of the bite taken out of profits. Instead of corporate tax (which would be abolished), it would take the form of profits allocated to the National Fund and to the relevant wage-earner fund. Adding together these two allocations, one-sixth to the relevant National Fund plus let’s say 10-15% to the relevant wage-earner fund, you get a figure ranging from 26% to 32%, which is the range in which most corporate taxes fall in Western Europe. In each country, the amounts can be calibrated so that they equal the current tax plus the division between the NF and WEF can vary.

      The big difference, of course, compared to the present situation, is control. Under this plan, control would shift more and more in a social direction, as a variety of social stakeholders gain representation on corporate boards through the NF, in addition to representation for workers through co-determination and the wage-earner funds. For sure, CEO and other top executive pay will fall, once societal and workers influence gets stronger inside big corporations!

      • http://www.robinwilson.eu Robin Wilson

        Thank you, Nyegosh, for the courtesy of this extended reply. I had surmised that that was your calculation but many thanks for spelling it out.

        I think another valuable element in your argument is what such a shift in ownership and control signals in terms of incentives in firms. The theory of 'shareholder value' assumed that the interests of executives had to be aligned with those of shareholders, with all the perverse effects in creative accounting (Enron), short-termism (debt-funded company acquisitions and asset-stripping before resale) and rent-seeking (bonuses) which that incentivised. Arguably, a focus on 'employee value' should seek to align the interests of employees and consumers, since the former would be released from executive instructions (made with a view merely to boosting profit) and allowed to respond untrammelled to the aspirations of the latter. We know from a range of cases that a strong consumer orientation linked to the autonomy of front-line staff and work teams to make discretionary decisions (unsurprisingly) boosts company performance (see Gary Hamel's The Future of Management). Similarly, we know from research commissioned by the United Steelworkers of America that employee share ownership usually boosts productivity–but only if it is associated with reduced executive supervision and enhanced employee responsibility (Geoff Owen, ‘When the workers take over’, Financial Times, 27 April 2011 (www.ft.com/cms/s/0/b5b957de-7111-11e0-962a-00144feabdc0,s01=1.html?ftcamp=rss#axzz1KnC3Mu9i).

      • Nyegosh Dube

        Robin, thanks for your observations about the effects on incentives and the importance of staff autonomy. And thanks also for the FT link. It was interesting to read about Tullis Russell. I'm glad to see the FT taking such a sympathetic view of employee ownership! Regarding the USW-Mondragon collaboration mentioned in the article, last week in fact the USW and Mondragon announced the launch of their new union cooperative model: http://www.usw.org/media_center/releases_advisori