PRETVORBA I DRU−TVENO VLASNI−TVO - Rifinstaro.rifin.com/root/tekstovi/casopis_pdf/ek_ec_403.pdf · uzima rimsko pravo kao baza, onda se raznim pravnim fikcijama usklaðuje sa

Branko Horvat1

UDK 332.025.28

Izvorni znanstveni rad

PRETVORBA I DRUŠTVENOVLASNIŠTVO

SA�ETAK

Više od dva milenija vrijedilo je rimsko pravo vlasništva po kojem

vlasništvo predstavlja jedinstvo triju prava: ius utendi, ius fruendi i

ius abutendi.

Sredinom XIX. stoljeæa došlo je do ozakonjenja dionièkih društava.

Ona su brzo rasla, i kod velikih poduzeæa došlo je do podvajanja

vlasništva na vlasništvo kapitala i vlasništvo poduzeæa (Hansmann).

Prvo znaèi puko rentijerstvo (Mason), a drugo omoguæuje donošenje

operativnih odluka. Moderna tehnologija dovodi do istih formalnih

pravnih rješenja u kapitalizmu i socijalizmu. U kapitalizmu vlasnici

su kapitala dionièari, a vlasnici poduzeæa uprava. U socijalizmu

vlasnici su kapitala svi graðani (svi su dionièari društvenoga

kapitala), a vlasnici su poduzeæa zaposleni. U kapitalizmu kapital

unajmljuje rad, u socijalizmu rad unajmljuje kapital. Postoji i cijeli

niz prijelaznih oblika. Zbog velikog pritiska tradicije, obièno se

uzima rimsko pravo kao baza, onda se raznim pravnim fikcijama

usklaðuje sa stvarnim stanjem (proksi-glasanje, uprava imenuje

nadzorni odbor a ne obrnuto, perpetuiranje uprave, navodna

143

1 Prof., dr.,sc. Branko Horvat

odgovornost dionièarima i dr.). Floskule kao što su “Društveno je

vlasništvo svaèije i nièije,”“Nema prepoznatljivog vlasnika, pa ne

mo�e biti tr�išne privrede” i dr. ušle su èak na fakultete i u zakon.

Moderna teorija vlasništva nije još stigla na zagrebaèki Pravni i

Ekonomski fakultet. A pretvorba je bila neustavna.

Kljuène rijeèi: pravo, dionièko društvo, dionièari, vlasništvo

kapitala, vlasništvo poduzeæa.

SOCIAL OWNERSHIP

INTRODUCTION

There are at least three different definitions of ownership. The classi-cal one defines ownership as a composite of three basic rights: iusutendi, fruendi et abutendi (the right of using, benefiting from andspending the property). The definition rellects premodern small-scaleproprietorship. In modern societies three diiferent restrictions areadded in order to make possible fair market competition:

1. market restrictions (cartel formations are not allowed;monopolies are destroyed; prices, imports, exports andinvestment are regulated

2. work restrictions (work safety, length of the labour day,employment of children is not allowed);

3. ecological restrictions (Horvat, 1984). “The meaning ofownership in the legal sense is to make possible and providesanctions for the appropriation”(Bajt, 1982, p. 1350). Ingeneral, the owner may expect that others will be legallyprevented from interfering with his actions if they are notprohibited by law.

The complex modern relationships gave birth to another definition ofownership as the bundle of contractual and other rights and obliga-tions concerning a valuable resource. That applies to all institutionalsettings, but we do not know what the bundle consists of. It must bedefined depending on the case at hand. In particular, the paradigmaticprivate ownership implies that the law “recognizes the right of the

144B. HORVAT : Pretvorba i društveno vlasništvo

EKONOMIJA / ECONOMICS, 10 (1) str. 143 - 168 (2003) www.rifin.com

owner to exclude others from exercizing the owner’s privaterights”(Demsetz, 1988, p. 110).

The third definition evolved from the work of legal scholar Berle andeconomist Means (1932), where they established modern separationof control (of the production process) from ownership (of capital). Atthe time they were writing (1929), identifiable individuals or compactgroups of individuals held majority of shares in only 11 percent (6percent by value) of the 200 largest industrial corporations (p. 85).Since then management control substantially increased (Blair, 1995,p. 29). This may be interpreted as a split of ownership into two sepa-rate and independent parts. The logical conclusion is that we mustdistinguish between the ownership of the enterprise (exercising effec-tive control) and the ownership of capital (different in diiferent insti-tutional settings).The property of the firm is owned by the enterprise.Hansmann, who to a large extent shares my views, also accepts theseparation of control and ownership but derives a slightly diferentdefinition: ownership implies two essential rights, the right to controlthe firm and the right to receive residual earnings (Hansmann, 1966,pp. 11, 35). That is not fully satisfactory because residual earningshave no clear meaning outside specific institutional settings. Propri-etors and social capital firms can both appropriate “residual earnings”but the former are capital owners and the latter are not. Differentiaspecifica is ius abutendi which the former have and the latter havenot.

A correspondence between first and third definitions may be noticed.Control corresponds to ius utendi. Capital ownership corresponds toius abutendi. Ius fruendi has two meanings. In capitalism it corre-sponds to residual earnings (profit). In socialism it corresponds to en-tire income (profit plus wages).

It follows that there will be three different groups of firms: the inves-tor-owned firms, the worker-owned firms (also called somewhat in-appropriately employeeowned firms) and the socially owned firms(without individual owners, i. e., fully socially owned).

Finally, we draw an institutional distinction which may be somewhatsimplified as: in capitalism, capital hires labour; in socialism, labourhires capital. From this fundamental institutional difference, all otherinstitutional differences follow, including labour management andsocial ownership and the elimination of the antagonisms betweenworkers and capitalists/managers (as expressed in strikes and



lock-outs). The two institutional systems mentioned are pure institu-tional systems. In the real world, the situation is mixed and so onemay speak only of the domination of one or the other social arrange-ment.

Types of ownership

Ownership is frequently classified as private, cooperative and stateownership. This classification is not entirely helpful. From the legalpoint of view, ownership is state and private (nongovernmental) own-ership. From this point of view, cooperatives and social corporations,although collectively run, belong to the private sphere. Under socialownership, enterprises are run by workers, i.e., by private individualsand not by government employees (the same conclusion, via adifferent route, was also reached by A. Bajt, 1988, pp. 153, 155).Pri-vate ownership may be personal (family) or a collective one. In thelatter case, ownership may belong to a limited group of people (suchas cooperatives) or to all citizens (social ownership). Since it wouldbe both illegal and contradictory to privatize private ownership, thesame conclusion applies to social corporations. But it makes sense totransform capitalist private ownership into socialist private owner-ship or vice versa. From the sociological point of view, ownership ishierarchical (proprietorship and state firms belong to this category)and cooperative (partnership, cooperatives, social firms) where allemployees monitor the firm on an equal footing. This does not elimi-nate a specific agency problem, but this belongs to another field. Sim-ilar is the social system classification where ownership is based (pri-marily) on capital or (primarily) on labour. Since economic processesare also technically determined, they need a more elaborate and pre-cise classification. Such a technically (and historically) determinedtypology will be used here.

Apart from the distinction between control and ownership, there is athird characteristic useful for the pragmatic classification of owner-ship: whether the individuals or the firms bear financial liability intheir business transactions. This is, in fact, a split of ownership intothe personal and the business part. If the individuals do not have lia-bility backed by their personal property, then their activities are in acertain sense socialized. Consequently, there are at least ten types ofownership that must be legally regulated. They are shown in the table.



If the institutional framework were neutral, the market competitionwould select the most productive organizational types. As this is notso, the selection will be institutionally biased. Here I do not intend toremove the institutional bias. Organizational types will be describedas they exist in contemporaneous Europe and America.

Types of Ownership

Control by Owned byFinancialliability

capitalowners

workers managersOf

managers

1. Proprietorship yes no yes yes

2. Partnership yes yes2 yes yes

3. Commandite system yes divided3 divided2 divided2

4. Producer cooperative yes yes yes no

5. Communal firm yes no no no

6. State firm yes no no no

7. Joint stock company no no no no

8. Consumer cooperative no no no no

9. Non-profit firm no no no no

10. Social firm no yes no no

As we move down the list in the table, we observe an interesting fact:one after another the ownership characteristics disappear. First to dis-appear is the liability on the part of managers (criminal andocasionally civil liabilities reamain). The material responsibility is in-dispensable in a market setting, but it passes from individuals to thefirm and its assets. The second characteristic to disappear is the own-ership by managers. It reflects the already mentioned separation ofmanagement and ownership in modern economies. The most endur-able is the control by capital owners. This explains why legal theoristsassociate so firmly capital and ownership and model their theoriesupon the proprietorship. But eventually, even this characteristic dis-



2 Partners work themselves.3 Managing paartners with unlimited liability for obligations of the firm and investing

partenrs are liable up to their investment.

appears and in the last four cases, ownership cannot be traced to indi-viduals. Here the process of socialization of ownership is in progress.This fact is often described as if there is no owner left (which is inap-propriate because owners exist but have no effective control).

Let us now see where the enumerated ownership types predominate.

For obvious reasons, small firms of all kinds are predominately orga-nized as proprietorships. The owner-managers monitor their ownbusiness operations. However, substantial inroads have been made byvarious commercial chains. In some cases the owner hires a managerand in this way becomes a rentier. That generates the agency problem.

Partnership is widespread in the service professions such as law, ac-counting, consulting, medicine.

Commandite system or limited partnership has several organizationalforms not of interest here. It is a transition between general partner-ship, in which all partners have unlimited liability for obligations ofthe firm, and a limited liability jopint-stock company in which eachshareholder has his liability limited to his share of the total equity ofthe firm.

Producer cooperatives dominate the markets for basic agriculturalcommodities. In Sweden, they control 50 percent of truck transportand 80 percent of agricultural market. In the Netherlands and Den-mark, they are also dominant in agriculture (Hansmann, pp. 68, 122).Taxicabs are often organized as cooperatives in which the membersdo not share in income but in costs. After the WWII, the number ofproducer cooperatives in Europe has been rapidly increasing. Thelegislation regulating these firms conforms with the principles of theInternational Cooperation Alliance: one member. one vote; free andvolutary membership; limited remuneration of the underwritten capi-tal. In an econometric study Estrin et al. conclude that “...there can beno question that participation increases enterprise output”(1984, p.24). Commons (in Croatia known as zemljišne zajednice) representalso a type of producer cooperatives in which land belongs to a com-munity of tillers and so part of the property is common and indivisi-ble.

Workers do not control the firm except in partnerships and producercooperatives and under social ownership. For this reason, neithercontrol nor ownership is generally associated with labour. Althoughinitially, a proprietor who does not hire workers exercises control be-



ing a worker himself. At the beginning of the development processand at the end of it, control is based on labour.

In the capitalist setting there are three dramatis personae: the owner(who in large enterprises becomes largely irrelevant for daily busi-ness operations), the management (who are fictitiously treated as theagents of the principal, the owner) and the workers (who are sociallyopposed to owners and managers and act through trade unions).There are various combinations between management and ownershipof capital: both traits may be associated as in cooperatives, or theownership of capital may be present but not the management as inmost ESOP firms where it is extraneous. Or management may bepresent but not the ownership of capital as in non-profit and socialcorporations.

The historical process exhibits a gradual separation of control man-agement from ownership. The former component becomes ever moreimportant while the latter dwindles into insignificance. The third fac-tor, the workers, come to the fore and gradually replace the formerprincipal. But this already implies a change of the social system.

The main difference between communal and state firms is that themanagers are appointed and the control belongs to local authorities inthe former and to the central authority in the latter case. Communalfirms cater for communal needs such as water supply, refuse collec-tion, city transportation, graveyards and the like. State firms are ofstrategic importance for the nation as a whole.

Two centuries ago , joint stock companies appeared. That was de-plored by no less than Adam Smith, rellecting the general opinion ofhis time. In his view - shared by many even today - no one is expctedto take such care of his property as private owners. The corporation ismanaged only by hired managers having their own interests. But thejoint stock companies florished. The family owners rarely had mem-bers of the second generation as able as the founder of the firm, whilethe pool of potential able managers is much greater. The liability ofinvestors is limited to the value of their shares and so risks are verymuch reduced while the total available capital is much greater. It issaid that the risk is allocated optimally between two classes of inves-tors, creditors and shareholders.Corporations proved to be superior inthe market competition and so, in modern economies, they produce agreater part of social product.



Regarding the joint stock companies, the legal fiction prevails thatthey are controlled by owners, i.e., by shareholders. That may be truefor small closely held companies where shareholders consist offriends, family members and close business associates of the firm’sfounder. It is not true for large, publicly traded corporations. In 1975some 85 percent (by value of assets) of such corporations were undermanagement control in the United States (Blair, 1995, p. 30). Writingfor the International Encyclopedia of the Social Sciences, EdwardMason observes: “The small, private corporation and the large,quasi-public corporation as legal persons may be equal in the eyes ofthe law, but they are so in no other respect”(Mason, 1968, p. 339).

If there are hundreds, thousands or even millions of shareholders,they cannot possibly control the company effectively. Votes are castby proxy. The management provides the list of candidates for electionto the Supervisory Board and shareholders are asked for the right tovote their shares. In his well-known book Galbraith describes how thepower has been shifted from owners to managers: “A small propor-tion of the stock is represented at stockholders’ meetings for a cere-mony in which banality is varied chiefly by irrelevance. The rest isvoted by proxy for the directors who have been selected by manage-ment. The latter, though their ownership is normally negligible, aresolidly in control of the enterprise...The Annual meeting of the largeAmerican corporation is, prehaps, our most elaborate exercise in pop-ular illusion”(Galbraith, 1967, pp. 50, 84). For this reason, the viewthat shareholders are not proper owners is widespread (Horvat, 1999).Demsetz notes that “shareholders are essentially lenders of equitycapital and not owners... What shareholders really own are theirshares and not the corporation”(p. 114). A shareholder enjoys at mostusus fructus but none of the other two ownership rights, ius utendi etabutendi. He does not participate in management. It is true that he cansell or destroy his shares. Yet, this has nothing to do with ius abutendibecause it does not affect the property of the company. There is also alogical contradiction involved. A controlling group of shareholderscan force company’s liquidation. However, if a group of shareholdersholding as little as 20 percent (or whatever deciding percentage) ofshares can legally overpower the rest of ‘owners’, than the rest ofshareholders (80 percent) are not classical owners at all. Hansmannremarks that if shares are stripped of voting rights (i.e., capital ownershave no longer any control), nothing changes in the operations of thecompany except that now hostile takeovers are not possible



(Hansmann, p. 61). And Mason concludes: “The shareholder of todayhas typically become rentier concerned only with dividends and capi-tal gains...”(p. 401).

And what about insurance companies and banks? Their own capital,even if flnanced by issuing shares, represents only a minor proportionof total capital used in business. The bulk of capital consists of insur-ance premiums paid in and of deposits. But the policy and depositholders have nothing to say about controlling their capital and aboutmanaging respective companies even in principle. The shareholderscontrol the company in principle, but in fact do not exercise control incompany of any size. The effective control of business operations hasthe management, although they possess no capital or only an insignif-icant fraction. Here we have three functional groups, although the ba-sic divorce of control from ownership remains preserved. Furthercomplications arise when the investors are not physical individualsbut institutions such as pension funds. It may be added that equityownership is usually not concentrated because investors, includingthe institutional ones, prefer diversified portfolio and so in large cor-porations rarely own more then one or two percent of shares. Suchownership makes control impossible.

Similarly as control has been divorced from ownership, shares playdifferent roles for the two acting owners, the firm (led by manage-ment) and the shareholders. For the firm, issuing shares representsone of the means of financing the operations. For the shareholder,shares represent titles of ownership and replace bank time deposits.Instead of interest, they generate somewhat higher dividends (andhigher risk with less liquidity). Because of risk avoidance, portfolio isusually diversified which means a dispersion of ownership andimpossiblity of control. Only in small companies, shares make possi-ble participation in governance (if that is at all desired). Vary rarelythe acquisition of shares makes possible hostile takeover. However,experience shows that hostile takeovers, whatever motives, have notbeen conducing to higher productivity and so, from the economicpoint of view, they appear pathological.

An additional important feature of corporations based on sharesought to be noticed. Once a corporation is formed, it becomes sepa-rate from the individuals who formed it. It exists in perpetuity regard-less of individuals who own shares. This is an important step towardssocialization.



Consumer co-operatives differ from producer co-operatives in thatthere are no individual owners. Consumer co-operatives use labour,capital and other inputs through market contracting and sell output intransactions connected with ownership. Apart from well known mar-keting consumer co-operatives, mutual savings and loan associationsare also consumer co-operatives.

Nonprofit firms may earn profits but do not (are forbidden to) distrib-ute them to the individuals in control. For that reason they do not haveindividual property owners. Examples are private, i.e.,nongovernmental and nonprofit, hospitals, universities, schools, daycare centers, nursing homes, health insurance. Here also belongzaklade in Croatia. Zadu�bine in Serbia and vakufs in Bosnia. Non-profit firms represent the ultimate separation of ownership and con-trol and thus prepare the appearance of the last organizational type,social ownership.

Socially owned firms are also private because they do not belong tothe state and are run by private individuals employed in the firm. So-cial corporations are profitmaking establishments expected to maxi-mize profits. They may distribute profits among the employees - sim-ilarly as proprietors distribute profits to themselves as consumers -but the market competition prevents them from doing so. If an indi-vidual social corporations tries to distribute all profits, it will soon bewiped out from the market. Profit is used for investment and not forconsumption. Examples are self managed firms that dominated theentire economy in the former Yugoslavia, and kibbutzim that encom-pass part of the Israeli economy. Kibbutzim, for ideological reasons,have been pushed farthest in the direction of collective ownership.They started as agricultural co-operatives but now control close toseven percent of national industry. Their members share even in con-sumer goods.

Since the firm types are different, the legislatures use different stat-utes for their regulation. American states have usually three statutesto regulate business transactions. The statutes refer either to businesscorporations or to co-operatives or to nonprofit corporations. Even sonot all cases in practice are covered. I encountered a case where theowner of a Washington insurance firm - a human rights activist de-cided to give half of his prosperous insurance firm to his employeesand to establish workers’ council to run the firm. American law treatsthis as a gift and imposes gift taxes. In order to avoid such meaning-



less taxes, our humanitarian had to hire two able lawyers for twoyears to be able to prove that the aim is not to provide a gift but to setup joint management. Similarly, typical social corporation is un-known in American law which is centered on private capitalist insti-tutions.

Proprietorship (with no hired workers), partnership, limited partner-ship and producer co-operative (first four types in our table) arelargely worker-owned frrms. They obtain labour from workers whoown it (to use economists’ jargon). Capital and other supplies are ob-tained on the market. Sales of output are also made through marketcontracting. The best known worker-owned firms are the Mondragonchain of one hundred co-operatives in the Basque Country (Spain)employing 47,000 workers, and Kerala Dinesh Beady, employing30,000 workers in Kerala, India (Thomas, Logan, 1982; Roelants,2000, p.72; Isaac et al., 1998). They are not only economically veryefficient - Mondragon with over 50 percent sales abroad - but are alsosocially very successful. In the first three types, owners are at thesame time managers and they bear full liability for the operations ofthe firm. Since this implies great risks, it is desirable to separate own-ership and management which occurs in the remaining types.

When a worker-owned firm or a proprietorship grows large, it its of-ten transformed into an investor-owned firm because the capitalneeds are too high for workers or a single proprietor to be able to sup-ply them. Here the firm’s patrons, as capital owners, supply capital.Transactions with workers, other suppliers and customers are madethrough market contracting. Communal and state firms as well asjoint stock companies are investor-owned firms. However, when aninvestor-owned firm fails, it is often taken over by the employeesthrough buyout or simple occupation (in Latin America called tomasde fabricas).In civilized countries such a transformation is usuallysubsidized by the state in order to preserve jobs (Paton, 1991). Thelargest airline in the world, United Airlines with 7000 pilots, becameworker-owned by a buyout. In 1994 employees traded wage andwork-rule concessions for a controlling part of the company stock.Similar developments can be observed in other airlines and in steeland trucking industries. Thus, in 1984 employees bought out WeirtonSteel, the tenth largest American steel producer. In the United States,the state helps the failing firms to become employee-owned (ESOP =Employee Stock Ownership Plan) by heavy tax subsidies and specialcorporation statutes. In Italy, many manufacturing firms that were



failing were transformed from investor-owned into co-operatives. InSpain, worker take-over firms are often organized as sociedadesanonimas laborales. They also exist in France, United Kingdom, Ger-many and other European countries. In Chile, I encountered about ahundred brigadas y empresas de trabajadores. A co-operative banksupported them.

Consumer co-operatives, nonprofit firms and social ownership firms(social corporations) - the last three in the table - represent the thirdgroup and may be called social frrms. They consist of two subgroups:one profit oriented (co-operatives and corporations) and the otherwelfare oriented (in Yugoslav countries called noneconomic firms(neprivreda) such as hospitals).

Social ownership

Ownership means control of property. This control may be effectivesuch as actual control of transactions concerning property (manage-ment). Or it may be formal and passive implying the appropriation ofresidual earnings (profits not spent on investment and taxes). Only re-sidual earnings are received by shareholders who can be conceived asformal (passive) owners. In social corporations the appropriation ofresidual earnings is replaced by the social control of the value of capi-tal which is considered to belong to the society.

Bearing that in mind, I shall define ownership of the firm as the effec-tive control of all transactions of the firm. Ownership of social capitalwill imply the preservation of the productive capacity (the value ofthe invested capital). The former implies labour management, the lat-ter implies that a firm must not reduce the value of its capital (i.e.,consume part of it). Both ownerships are indispensable parts of socialownership.

Social ownership that dominates the entire economy has not beentreated in the literature outside Yugoslav countries where labourmanagement prevailed. But even there the theoretical treatment wasnot particiularly elaborated (Horvat, 1984, 1991; Bajt, 1988, 1994).For this reason let me clear up some misconceptions..

Social ownership is not equal to state ownership. The two types ofownership are as different as the society and the state. Identifying the



two would imply a totalitarian state and it is certainly not my inten-tion to advocate totalitarianism.

Next, state ownership and public ownership are not identical. Socialownership is an example of public ownership, but so is state owner-ship. Public ownership includes also some other non-state forms suchas non-profit firms. In England, the corporations issuing shares arecalled public companies.

The purpose of ownership is to exclude others (“non-owners”) fromthe control of property. It is said that social ownership includes every-body and therefore cannot function as ownership. The conclusion isfallacious. One of the two components of social ownership is selfmanagement of the firms. That excludes anybody not working in thefirm. Similarly, it excludes the state, which cannot own social capital.

The labour management part of social ownership means that the own-ership of firms is really private because private individuals employedin the firm - and not the state officials - control the transactions of thefirm. There is an important practical consequence. A social corpora-tion, i.e., a labour managed firm cannot be privatized because it is al-ready private. It can only be transformed into a state firm and subse-quently into a private capitalist firm. But both, the private and thestate firm, may directly be transformed into a worker- managed firmif the owner (the state or a private individual) distributes shares orotherwise passes the ownership to the workers.

Ownership types are directly connected with social systems. Capital-ism is based on capital and so individuals or groups of individuals areowners of capital. Socialism is based on labour and so individuals orgroups of individuals are owners of enterprises. Both ownerships arehandled by private individuals and therefore must be considered pri-vate, although individuals may act collectively. In etatism, ownershipof both the enterprise and capital belongs to the state and so they areclearly non-private. Proprietorship includes also both ownerships thatbelong to individuals and so they may be either capitalist or socialist,depending of the wider social environment.

In the context of the so-called transition economies, often the ques-tion is raised how to distribute state ownership among the population.Social radicals suggest that shares be issued and distributed equally tocitizens. This solution is triply inappropriate. To prepare, issue anddistribute millions of shares involves enormous waste of resources.



Next, flooding the market suddenly with many shares reduces to agreat extent their prices. Those, who need money, sell their shares atbargain prices. Speculators buy cheap shares, and a strong process ofsocial polarization is in fact stimulated. Social polarization generatesinjustices and leads to an unstable society. Thirdly, such a solution isunnecessary because social ownership implies a just and costless dis-tribution of (virtual) shares to every individual. The only difference isthat such shares cannot be bought, inherit and sold which is exactlywhat we wish to achieve. Namely, to connect ownership with labourand not with capital. To paraphrase Proudhon (1982, p. 27), liberty isa human right and is inviolable. So is social ownership implying theright to work and control one’s work. Liberty cannot be sold or alien-ated. Every contract that would imply the cessation of liberty is null.And so is the law on the appropriation of social ownership by thestate. Liberty as a human right generates political democracy, selfmanagement as a human right generates economic democracy.

The critics will then say that the owners have no possibility to makeuse of their property, for instance to sell it. An individual sells some-thing in order to earn interest on savings or to by something else. ‘In-terest’ on social capital is earned anyway in the form of social divi-dend. Selling the ‘shares’ would mean loosing the opportunity to par-ticipate in the social dividend. If it is desired to increase consumptiontemporarily, there is a bank to give consumer loans. If consumption isreduced temporarily, saving can be deposited in a bank and earn theusual interest rate. If one needs resources to set up a profitable busi-ness, there is an investment bank. Investment can be financed by bor-rowing from a bank, by Iloating bonds or issuing stock. In short, ev-erything is possible as in a capitalist market except speculation andexploitation.

Similarly, some people argue (e.g. Ellerman, 1991, pp. 1270-74) thatthe appropriate solution is a Mondragon-type solution wherby work-ers buy their entrance in the enterprise and those who leave or retireget their life-time savings from the cooperative back. Such a solutionmay be appropriate in a capitalist setting, not in a socialist one undersocial ownership. One need not be acquainted with the systemic the-ory of economics to be avare that physicians, teachers, policemen,people working in non-profit organizations etc. should not obtain the“life-time savings” back, although they contributed to the economicwelfare of the society similarly as industrial workers. The former andthe latter participate in the social dividend (increase in the GNP) on



equal footing without additional remuneration. However, it is morethan that. If the enterprise needs additional capital, it may issueshares. The worker will participate in such a decision as a self man-ager. The worker also participates in the distribution of incomeamong all members of the enterprise and the distribution betweenpersonal incomes and savings (profit) of the enterprise. The workerhimself may buy shares of other enterprises. Or buy governmentbonds. One of the general business principle is the diversification ofrisks. Tying one’s savings to one single enterprise would violate thisprinciple.

In the literature on “property rights” it is argued that with social own-ership there cannot be adequate incentives for investment. Namely, ifan individual deposits his money in the bank, he may later take homeboth his original principal and interest accrued. In the social enter-prise, he will be able to recover only interest and therefore will not beinterested in investing in the firm. The aargument is not correct. Realinvestment is usually not taxed, while income, interest and capitalgain are and therefore the two cannot be simply compared. Also, co-operatives, that tried to follow the Ellerman’s principle strictly, foundout that they may be left without the necessary capital or simply notbe able to pay out those who leave or retire and therefore (includingMondragon) introduced various restrictions. But the main point isthat in a different institutional system, economic logic is also differ-ent.

Suppose the rate of profit and the rate of interest paid by the bank areequal (in fact, tis cannot be so because of the bank fees and becausethe risk aversions are different; but neglect complications). In distrib-uting income earned, workers have to decide either to invest profit inthe enterprise or to distribute it to workers as surplus wages and toborrow from the bank the same amount in order to finance real invest-ment. In the former case, increased capital of the firm will earn in-creased income (same per capita wages, increased profit). In the lattercase, the surplus wages may be deposited in the bank and earn inter-est, while all future profits are used to repay bank credit. In both caseswage rates and profits remain the same. Of course, workers may de-cide to spend their surplus wages. In that case the firm’s capital re-mains the same, but total social capital (of enterprise plus bank depos-its) is reduced and that must be compensated in an increase of bank’sinterest rate in order to preserve full employment. Thus, increasedwages in the present period must be compared to reduced wages in



the next one and nothing is gained. Since interest rate of the bank isnow higher than the profit rate of the enterprise, it pays to revert backto self finance. If all surplus wages are distributed in the enterprise,wagges paid out of the budget will have to be increased as well in or-der to keep up certain proportions in the standard of living undis-turbed. And that requires higher taxes - and lower net wages. Notealso that surplus wages are progressively taxed because they repre-sent personal income. Capital is never taxed because that makes nosense since it belongs to society anyway. There are other complica-tions, first of all the role of technological progress. Workers must in-vest because of competition and in order to preserve their workingplaces. But all that already belongs to the theory of firm. And, ofcourse, in a rationally planned economy, adequate investment can al-ways be realized. In Yugoslav experience, investment tended to betoo large and not too small. The conclusion reached is exactly oppo-site to the one from the “property rights literature”: in capitalism, in-vestment incentives are likely to be wrong, and full employment isnot achieved, except by fluke. Theoretically, individualistically basedeconomic theory cannot be corrrect; what is needed is systemic the-ory.

The traditional lawyers frequently ask who is the subject or ti-tle-holder of social ownership. They would say that social ownershipbelongs to “everybody and nobody”, for that reason has no “knownowners” (the phrase used in Slovenian and Croatian “privatization”laws) and cannot function in legal transactions. Besides, the “un-known owner” is an empirical and logical nonsense. Empirical, be-cause a market economy cannot function without precisely knownowners. Logical for the following reasons. By definition, social own-ership implies that every member of society similarly as any share-holder - is an owner with specifled ownership rights: to participate inthe social dividend (as owner of aliquote part of social capital). Theother part of ownership rights consists in the entitlement to run the en-terprise if he works in it (labour as a basis of ownership makes him anowner of enterprise). On the other hand, anonymous shares do nothave a “known owner” and yet a business enterprise in capitalism en-counters no difficulty in operations.

As usually, traditional views are not applicable to new situations. So-cial ownership has two subjects: the enterprise (based on the labour ofits members) and the society (reflecting common insterests of itsmembers). The former is angaged in daily business operations. The



latter, through one of its specialized institutions, steps in extremelyinfrequently and only in legally (or constitutionally) specified condi-tions (when the firm makes protracted losses). The property of thefirm belongs exclusively to the enterprise (as long as the social capitalis not diminished), and the enterprise is a precisely identified owner(title-holder) registered at the court. Besides, who is the subject ofownership in joint stock company? The shareholders?

Finally, some people propose various voucher schemes which wouldenable individuals to choose which shares to buy. On top of all nega-tive aspects of the distribution of shares, this scheme has an additionalone: it forces individuals to speculate on the stock exchange insteadof concentrating on their own work. Instead of mass dedication towork, we get mass speculation with obvious consequences of greedand corruption.

Everything said has one common characteristic: it refers to the distri-bution of wealth while wealth must first be created. Producing richand poor people, privileged and unprivileged ones, does not generatewealth. And exactly the latter is the purpose of labour management.The popular claim of the procapitalist ideologues is that it is neces-sary to increase the income inequalities in order to create incentivesfor greater production. Empirical measurements contradict to thisclaim. In nine develooped countries, for which the data are available,in a century and a half (1830-1985) inequalities had negative impacton growth in all stages of growth.In shorter periods and for othercountries diferent authors also found the same negative correlationbetween growth and inequalities (Aghion, Williamson, 1998).Consequently, as self management has an egalitarian impact, it alsoaccelerates growth. And that, of course, we experienced ourselves.

Self-management

Labour management means management of own labour (and produc-tive life) and so it is coterminous with self management orworker-management. Self management is (partially) possible withoutsocial ownership (such as single proprietorship). But social owner-ship is impossible without self management. The two always appearin pairs. Self management has organizational, economic, social andpolitical aspects. Since everything follows from organizational ar-rangements, I shall concentrate on them.



The organizational chart of a capitalist (or an etatist) firm may be rep-resented by a pyramid. At the top there is a general manager, himselfan owner or a representative of the owners; at the bottom there are op-eratives; the flow of commands is unidirectional, from the top to thebottom. The pyramid has two loose ends, the peak and the base. Thisis a source of undemocratic (autocratic) behaviour and class polariza-tion.

A labour-managed flrm consists of two pyramids - or a sand-glass -connected by a point where the two peaks (summits) meet. The in-verted upper pyramid has a broad basis of workers and a summit con-sisting of labour legislators. This summit meets with executive sum-mit of appointed professional managers. This lower pyramid has thebasis consisting of the same workers, but now as work operatives.The flow of directives in the upper pyramid is political, and in thelower one it is professional. The political process implies equality ofindividual judgments, the professional one implies a hierarchy ofknowledge. The two bases are connected because they have identicalmembership. They are only functionally different: the upper basis ispolitical, the lower one is professional. Since the social structure isclosed, there is no possibility for class polarization (Horvat, 1982, pp.174-209).

The foregoing principles will now be transformed into actual organi-zational chart. All workers are owners of the enterprise. The will ofthe employed workers is concentrated in the elected Labour Council(LC). The council appoints the Chief Executive Officer (CEO) as thegeneral manager. The CEO selects his collaborators who make up aBoard of Management (BM). The former body is political, the latter isprofessional. Together (LC plus BM), they represent labour manage-ment.

The Chief Executive Officer is appointed for a term of several yearsso that he has sufficient time to carry out his program accepted by theCouncil. The CEO is responsible for his business program. That willbe checked by every member of the firm (thus minimizing corruptionand malpractice) and also by independent external auditors. At theend of the business year, they send their report to the LC. The CEOcannot be removed or fired before the end of his mandate unless hecommits some gross offense. If so desired, the Chief Executive Offi-cer may be considered an individual entrepreneur, the Labour Coun-cil as a collective entrepreneur.



The LC is elected for a term of, say, three years and its members canbe reelected. Business reports by the CEO and by the LC are pre-sented to the workers every year.

Important decisions, such as investment, determination of relativewages, large bank loans, restructuring of the firm and the like, aremade jointly by LC and Management Board. Distribution of the com-pany’s income and drastic changes of the labour force are to be ap-proved by the members of the firm, i.e., by all employed workers (asort of referendum).

The firm may issue nonvoting shares and bonds either to insiders or tooutsiders or to both. Thus, hostile takeovers are prevented, but the co-operative mergers are, of course, possible. The other three sources ofcapital raising are internal funds, banks and general public. Oncemeans of production have been installed, their value must not be re-duced.

A socially owned firm must not decrease its social capital. This is eas-ily achieved by prescribing minimal depreciation necessary to keepcapital intact. (In capitalism, depreciation prescribed is a maximalone in order to prevent the reduction of profits as a basis for taxation.)In a worker management system, profits are not taxed because theybelong to social capital. Subject to tax is the surplus wage bill whichnot only generates budget revenues but also helps to prevent inflation.Horvat, 1990). If the finance is borrowed, depreciation remains but isused to repay the credits taken. In this way we do not have to woryabout the value of capital., but focus on the current businss results.Losses imply the reduction of the value of capital, by definition so-cially owned. Small losses during two-three years can be covered outof reserve funds accumulated for the purpose. Large and persistentlosses indicate that something is wrong with self management. Sincethey failed, worker-managers cannot continue to act as the trustees ofthe society. If the firm cannot obtain finance for its operations, it mustturn to a public body, which need not belong to any ministry but maybe associated with, e.g., Chamber of Commerce. Let us call it theManagerial Agency. It is similar to already existing organization ofpublic receivers. Labour management is suspended, the firm is putunder receivership of the Agency and a new manager is appointed.When the firm recovers and the operations are normalized, self man-agement will be re-established. Of course, some firms - particularlythe smaller ones - may suffer bankruptcy and disappear. But gener-



ally, no firm is bad and so the liquidation is a waste of resources.Wrong may be the management, the production program or the hu-man relations of the work force. And that can be improved. The viewthat bankruptcy always serves as a means to establish financial disci-pline and that helping the failing firms means wasting the taxpayersmoney - is mistaken. Stoping the operations of a firm almost alwaysmeans destroying the invested human capital, even partly physicalcapital, the know-how, business and social relations, means also theincrease of unemployment and social misery. Putting the firm backon its feet does not require taxpayers money but a bank loan whichwill be repaid.

The Labour Council plays the role of a somewhat comprehensive su-pervisory board. It represents governance as different from manage-ment. Besides being more encompassing, the other difference is thatthe LC is much more effective than the capitalist Supervisory Board(in America called Board of Directors) because its members are inti-mately acquainted with the firm and have existential interest in itsprosperity. Also, they can always select some useful outside membersif they wish so. Codetermination, practiced in the European Union,where the employees elect certain number of members of the Advi-sory Board, is a transition from the old hierarchical management to anew participatory management.

A new firm enters the market financed by a loan from a bank, perhapsguaranteed by the Managerial Agency, that runs a bank of its own. Itmay also issue its own financial instruments. Borrowed capital mustbe repaid.

Let me also clear a frequent misunderstanding that self managementmeans that “everybody does everything” (similarly as the assertionthat “social ownership belongs to everybody and nobody”). AlreadyAdam Smith knew the advantages of the division of labour, and that istoday a selfevident truth. Managerial work requires special expertiseas any other professional work in the enterprise or the institution. Aneurosurgeon may not be interested in running a hospital. But he is vi-tally interested in obtaining the magnetic resonance apparatus for hiswork. And he must have a say in that. So must every engineer orworker in the enterprise.



Historical experience

By now economic test has been passed by worker-management. Else-where, I examined the comparative efficiency of capitalist andworker-managed firms (Horvat, 1982, ch. 6). The final conclusionwas that the worker-managed firm can do anything that a capitalistfirm does and something more. There are numerous studies showingthat participation of workers increases productivity (Blinder, 1990).When a capitalist firm is failing, it is often taken over by its workersand the jobs are preserved. The process is often promoted by the state,even in America (ESOP). The efficiency of labour managed firms canbe judged by productive chains employing tens of thousands of work-ers such as kibbutzim in Israel, Mondragon in the Basque Country orKerala Dinesh Beedy in India. In the former Yugoslavia, the ship-building of the labour-managed shipyards became the third in theworld measured by output. Most of the ships were sold on the com-petitive world market. After labour management was abolished by anundemocratic state fiat, shipyards gradually passed under state re-ceivership and the production was severely curtailed while one half ofthe labour force was fired. The shipbuilding regressed from the thirdin the world to the thirteenth position. In four decades of labour man-agement, Yugoslav economy was developing at the fastest rate in Eu-rope. After labour management was destroyed, various Yugoslaveconomies have been pushed back for a quarter of century or more interms of output, and unemployment exploded. Market implies com-petition. But competition may be of Olympic games type or of gladia-tor type. Business games may be non-cooperative or cooperative. Inthe former case, equilibrium is reached at the maximin point, in thelatter case at the maximax point. Obviously, the overall maximizationgenerated by cooperation is preferable because everybody benefits.Macroeconomics of labour management is also different and moreconducive to economic growth (Horvat, 1969, 1990).

Socially, labour management leads to a radical social homogeniza-tion of the society. Income spans are very much reduced, everybodyhas a job (the right to work), education is accessible to everybody,class differences fade, all sorts of manmade risks are abolished.

The theorists of the capitalist market talk about labour market. It iswell known that market serves for buying and selling commodities.Consequently, labour force is treated as a commodity. According toAristotle, slaves are cattle that talk. In feudalism, serfs are slightly



above cattle, but below free citizens, are not allowed to leave their vil-lages and must work part time for their lords. In capitalism, workersare legally free to move, but only as commodities. Even if there is per-fect political and social democracy - which are heroic assumptions -the lack of economic democracy (right to work plus self manage-ment) implies restricted freedom. American political scientist RobertDahl summarizes: “Ownership and control contribute to the creationof great differences among citizens in wealth, income, status, skill, in-formation, control over information and propaganda, access to politi-cal leaders and, on the average, predictabte life chances, not only formature adults but also for the unborn, infants and children”(1985, p.55).

An objection that high mobility of labour - fostered by labour market- is necessary for production effciency, must be rejected. It suiffces torefer to the fast growth of Japanese economy where companies prac-tice life employment. A similar frequent blunder is the assertion thatunemployment is necessary for price stability and effciency. Butprice stability is achieved by increase in productivity, and increase ofproductivity is the result of technological innovations. The latter arenot created by unemployment but by fast growth generated by fullemployment. Besides, loosing one’s job generates a psychic trauma.This stress is only second to the loss of a parent. And we certainly donot wish to have a traumatized, unhappy society.

Politically, labour management means economic democracy. Therehas been a glaring contradiction between democracy in public life andautocracy at the place of work where one spends a greater part ofone’s productive life. Now democracy enters the factory. After politi-cal democracy (freedom) and social democracy (equity), now a legiti-mate aim becomes also economic democracy (economic self determi-nation). In this way, the democratic cycle is closed and we may speakof full democracy.

Robert Lane puts it succinctly: “The ‘movement of progressive soci-eties’ from status to contract was at the same time a movement fromascription to achievement and from circumstantial determination toself determination” (Lane, 2000, p. 236). But then he concludes thatpolitical participation, however desirable, is not self determination (p.238). By definition, social democracy is not self determination either.Something is lacking within the framework of the capitalist societyLane is analyzing. Our analysis of social ownership indicates that



economic democracy is an important step towards self determination.The participation in the decision-making is a direct one. And this is anessential contribution to the social contract in an already contractualsociety.

Concluding remarks

Labour management or self management is not a new phenomenon.In Europe, it can be traced back to the first universities in eleventhcentury. Ever since, universities have been self managed defendingeagerly their celebrated autonomy. A family business is also selfmanaged undertaking. And so are co-operatives. Self management isnot compatible with hired labour (even less with forced labour). Al-though not fully developed, social ownership - or rather some aspectsof it - have been with us for centuries. After all, human institutionsevolve only gradually. In the ideal case, self management requiresfully educated workers, socially homogeneous society, high eco-nomic welfare, a legal state and a planned economy. Education, bothformal and social one, is indispensable for the proper working of thesystem which is not simple. Socially homogeneous society is indis-pensable because class polarization prevents genuine self manage-ment. Also, social homogeneity requires that every individual be edu-cated. High living standard diminishes drives toward exploitation ofothers in order to improve the own living standard (Lane, 2000). Thelegal state makes the outcomes of business contracts predictable andso enables smooth business transactions. Planned economy reducesrisks involved in economic transactions and so prevents destructivespeculation. In popular terms, the precondition is a decent society.

No country fulfills five enumerated conditions as yet. Therefore, afully developed social ownership is still to be built. This is not the rea-son to stop developing self management and social ownership. If fullself determination is not achievable as yet, this is not the reason tostop striving towards that goal. Social practice enables human beingsto learn most quickly. And numerous worker-owned enterprises allover the world demonstrate that self management may be successfuleven in the poorest countries.

In the meantime, we shall encounter transitional regimes. Being tran-sitional, they will include mixed institutions.



References

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Berle A. A.; Means, G. ( 1932), The Modern corporation and PrivateProperty, New York: Commerce Clearing House.

Blair, M. M. (1995), Ownership and Control, Washington, D.C.: TheBrookings Institution.

Blinder, A., ed. ( 1990), Paying for Productivity, Washington: BrookingsInstitution.

Dahl, R. (1985), A Preface to Economic Democracy, New Haven: YaleUniversity Press.

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Galbraith, J. K. (1967), The New Industrial State, Boston: HoughtonMifllin.

Hansmann, H. ( 1996), The Ownership of Enterprise, Cambridge, Mass.:Harvard University Press.

Horvat, B. (1969), Privredni ciklusi u Jugoslaviji, Beograd: Institutekonomskih nauka.

Horvat, B. (1982), The Political Economy of Socialism, Oxford: M.Robertson.

Horvat, B. (1984), Društveno vlasništvo, Naša zakonitost, 3, 343-47.

Horvat, B. (1990), Poduzetništvo i tr�išna transformacija društvenogvlasništva, Zagreb: Institut za javne financije.

Horvat, B. (1991), Social Ownership, in: R. Russell, V. Rus, eds.,International Handbook of Participation in Organizations, hol. 11,Oxford: University Press.

Horvat, B. (1999), A Note on ‘Stocks and Stakes’ by Mario Nuti, EconomicAnalysis, (2) 2, 156-57.

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Isaac, T. H.; Franke, R. W.; Raghavan, P. (1998), Democracy at Work in anIndian Industrial Cooperative, Ithaca and London: Cornell UniversityPress.



Lane, R. (2000), The Loss of Happiness in Market Democracies, NewHaven: Yale University Press.

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Notes

Earlier I drew distinction between primary and secondary ownership(Horvat, 1991, p. 166). The appelations used here are borrowed fromHansmann (1996, p. 15), who calls his entire book The Ownership ofEnterprise. Demsetz notes that in large corporations “a small man-agement group becomes de facto owners”(p. 114), irrespective ofhow much capital they own. An interesting correspondence in themodern economy may be noticed. Hansmann, describing capitalistfirms, finds that shareholders are owners of capital and management -Galbraith would call them “technostructure” - assumes the ownershipof the firm. A few years earlier, describing socialist firms, I found thatcapital is owned by the entire society and workermanagers appear asthe owners of the enterprise. In both cases, the ownership is split andwe have two different subjects of ownership.

There are many variations of the first definition. N. Mygind statesthat owners have (1) the right to control, (2) the right to surplus and(3) the right to wealth (capital that can be sold)(1992, p. 363). As for



the third definition, Vanek speaks of national ownership (by which heunderstands social ownership) which implies: “...that (1) no with-drawals from the earnings of capital can ever be made by anyone forthe purposes of consumption; (2) that the capital stock must grow aslong as income of capital...is positive; and (3) that national ownershipgives neither power of control nor right to consumption to anyone; itonly serves the nation (or a given society) adopting it as a given vehi-cle for indefinite growth and expansion” (1970, p. 315).

The legal fiction that ownership and control always go together iswidely shared, even in international institutions (therefore responsi-ble for great damage on that account). The former chief economist ofthe World Bank - who resigned after having been unable to changethe wildly harmful attitude of the Bank and IMF remarked: “In retro-spect, one of the remarkable features of the body of western advicegiven to post-socialist economies (‘Washington Concensus’), espe-cially as they approached the issue of privatization, is the absence ofthe attention to the separation of ownership and control. Theintelectual framework often seems to be a curious preBerle-Meansworld where ‘private ownership’ and control of the enterprise are es-sentially the same thing as if the small or medium-sized closely-heldcorporation was the norm”(Stigiitz, 1999).

In England small companies with at most 50 shareholders are calledprivate companies. They are free from having to publish accounts andare prohibited to invite public subscription of their shares and deben-tures. Public companies must publish accounts and have no limit forthe number of shareholders.

I use the term ‘worker’ instead of ‘employee’ because the employeesare employed by an employer and the workers are self employed.



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