Wanted: More Worker-Owners

Nancy Folbre is professor emerita of economics at the University of Massachusetts, Amherst.

George Washington liked the basic idea, as did Thomas Jefferson. We should build on our rich national tradition of support for widespread asset ownership. Joseph Blasi, Richard Freeman and Douglas Kruse develop this proposition in a new book, “The Citizen’s Share,” which lends historical perspective to their empirical research on shared capitalism.

When the cod-fishing industry was faltering after the Revolutionary War, public subsidies, conditional on sharing the benefits with the men actually manning the nets and lines, were provided. The 19th-century Homestead Act offered essentially free land to those willing to stake a claim and invest their labor in it.

These historical anecdotes enlivened a session at the early January meetings of the American Economic Association that included several other papers measuring some important economic advantages of worker ownership, including more employment stability over the business cycle. Encouraging companies to increase worker ownership also could potentially increase productivity and decrease income inequality (though it would be risky for workers to invest all their assets in the company for which they work).

While Professors Blasi, Freeman and Cruse show that a surprisingly large share - 47 percent of full-time wage and salary earners in the United States - enjoy some share of profits, the amount they receive is typically quite small and they are seldom offered much voice in management.

Some Republicans as well as Democrats favor policies that could help turn more workers into owners. Representative Dana Rohrabacher, Republican of California, proposes that stock widely distributed to employees should not be taxed as income, and, if held for more than 10 years, should be exempt from capital gains taxation.

In a recent Forbes article, Dean Zerbe notes that the larger tax-reform agenda could benefit from more attention to the issue. “Every worker an owner,” he notes, probably invites a more enthusiastic response than “uniformity of depreciation schedules.’

As The Economist noted in November, Britain also has a tradition of worker ownership, including a large and very successful retailer, John Lewis. The Conservative leadership there has taken steps to encourage what they term the “John Lewis economy” with measures including modest tax incentives.

Yet The Economist also questions (as do many economists) why government policies should be necessary. Presumably, corporations can figure out on their own if expanding worker ownership is advantageous and move in that direction without the distortionary effects of tax incentives.

This makes sense if you assume that corporate behavior is never distorted by any factors except taxes. But considerable evidence suggests this is not the case.

Economists have long recognized that shareholders are not able to effectively monitor managers, including chief executives. Recent empirical research suggests that managers - or bosses in general - may be subject to a kind of power bias, a desire to remain in charge even when this is not in the best interests of the company.

In “The Lure of Authority: Motivation and Incentive Effects of Power,” an article published in the American Economic Review last year, Ernst Fehr, Holger Herz and Tom Wilkening report on laboratory experiments showing that many individuals prefer to wield power even when this is costly to them. Similarly, many subordinates resent their lack of authority and underprovide effort even when this lowers their income.

These results suggests more widespread ownership might meet resistance from those reluctant to relinquish authority, even if it could improve performance.

What would Jefferson think of this? Apparently he believed in experiments, as well as widespread access to productive assets. In a section of “The Citizen’s Share” submitted as congressional testimony, the authors describe a letter Jefferson wrote in 1789 describing some research he hoped to conduct.

He proposed to import as many Germans as he had slaves, give each group 50 acres of land as sharecroppers and see how the results compared. He believed that, encouraged by habits of “property and foresight,” all would prove good citizens.

Unfortunately, this particular experiment was never performed.