PROPE &CONTRACT • ln ECONOMICS The Case for Economic Democracy DAVID P.EUERMAN 13 This book argues that the recently deceased capitalism-socialism debate was wrong-headed from the beginning - like a "debate" over the private or public ownership of slaves. The question was not private or public slavery, but slavery versus self-ownership. Similarly, this book argues that the question is not whether people should be private employees (capitalism) or public employees (socialism) but whether people should be hired or rented as employees at all versus always being jointly self-employed as employee-owned companies. Being a genuine work of political economy, the book re-examines the basic principles of private property and contract to obtain results at odds with the employer-employee relation and in favor of universal self-employment or economic democracy. Joint self­ employment in the firm is the economic version of joint self-determination or political democracy in society. Private property should be based on people getting the fruits of their labor, but that only happens under joint self­ employment. Market contracts should only apply to what can be transferred, but a person's labor is not really transferable (as we easily recognize for hired criminals). This book traces these ideas - the labor theory of property and the notion of inalienable rights - from the ancient Stoics through the Reformation and Enlightenment, and restates the ideas in modern terms with critical applications to economic theory. Overall, this book provides a timely perspective on the fundamental economic and political questions in the wake of the collapse of the East-European bloc and the continuing debate in the West over the role of labor in the enterprise. Copyright © David P. Ellerman 1992 The right of David P. Ellerman to be identified as author of this work has been asserted in accordance with the Copyright, Designs and Patents Act. 1988. First published 1992 Blackwell Publishers 2JR Main Street, Suite 501. Cambridge, Massachusetts 02142 USA I08 Cowley Road Oxford OX4 lJF UK All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part may be reproduced, stored in a retrieval system, or transmitted. in any form or by any means, electronic, mechanical. photocopying, recording or otherwise, without the prior permission of the publisher. Except in the United States of America, this book is sold subject to the condition that it shall not, by way of trade c•r otherwise, be lent, resold, hired out, or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. Library of Co11gren Cataloging-in-Publication Data Ellerman, David P., 1943- Property and Contract in Economics: David P. Ellerman. p. cm. Includes hihliographical references {p. ) and index. ISBN 1-55786-309-1 l. Ri~ht of property. 2. Democracy. 3. Capitalism. 4. Soci.ilism, S. Marxian economics. I. Title. HB701.E45 1992 330.1'7 - dc20 92-6390 CIP Hriri,lr L,hrary Cataloguing-in-Publication Data A UP catalogue record for this book is available from the British Library. Typeset in 10 on 12 pt Times by Graphicraft TypesetteB Ltd., Hong Kong Printed in Great Britain by TJ. Press Ltd., Padstow, Cornwall This book is printed on acid-free paper Contents List of figures vii List of tables ix General editors' preface xi Introduction 1 PART I Property 9 1 The fundamental myth of capitalist property rights 11 2 The appropriation of property rights 23 3 The labor theory of property 36 4 Labor theory of property: intellectual history 49 5 Misinterpretations of the labor theory of property 75 PART II Contrad 91 6 The employer-employee relationship 93 7 Non-democratic liberalism: the hidden intellectual history of capitalism l08 8 Contracts and inalienable rights 124 9 An intellectual history of inalienable rights theory 142 10 Misinterpretations of the de facto theory of inalienable rights 165 Part Ill Property and contract In economiC!I 177 11 Property fallacies in economics 179 12 Marginal productivity theory 201 13 Marxian value theory, MP theory, and the labor theory of property 212 vi Coments 14 Fundamental Theorem of Property theory 227 15 Conclusions 241 References 261 Index 269 Figures 3.1 The poetic active-inputs view of production 42 3.2 The engineering passive view of production 43 3.3 The humanistic view of production 43 4.1 "The labor theory" 59 4.2 No surplus labor 61 4.3 6 hours surplus labor 61 4.4 No profit 62 4.5 4 shilling "exploitation" of spindle 62 4.6 Two interpretations of Marx's LTV 70 5.1 Interpreting the "whole product'' 76 7.1 The liberal vision of institutions 109 7.2 Division of liberal institutions on alienability 113 8.1 Two legal roles of the slave 126 8.2 Two legal roles of the employee 135 10.l Two legal roles of the employee 168 10.2 Factual transaction 174 11.1 Standard circular flow diagram 199 13.1 Price-wage tradeoff p(r)z(r) = l 217 13.2 "Exploitation" analysis of apple price change 218 VIII Figures 13.3 Different property appropriations with the same income distribution 222 13.4 Comparison of the three theories 226 14.1 Legal transaction: employment firm 233 14.2 Factual transaction: employment firm 235 14.3 Legal transaction: self-employment firm 239 14.4 Factual transaction: self-employment firm 239 Tables 14.1 Analysis of appropriation in capitalist production 232 14.2 Analysis of capitalist exchanges 235 14.3 Analysis of appropriation under self-employment 239 I I General editors' preface Interest is growing throughout the human sciences in studies that look for an understanding beyond what can be gotten from the narrow set of methods positivist philosophy had deemed scientific. "Theory" in the human sciences need not be restricted to exercises in mathematical model building. "Empirical work" can involve more than the search for quan­ titative patterns in statistical data. The "philosophy or economics" can involve more than a set of methodological recipes to make the human sciences look more like physics. The "human sciences" are starting to notice that they have at least as much to learn from the humanities as they do from the sciences. Calls for a more humanistic and interpretive approach are even beginning to be heard from within the economics profession. The Interpretive Economics series will be an outlet for the exciting new work in economics that exemplifies what a more interpretive approach has to offer. It is particularly interested in work that is being done on the interface of economics with fields where "more interpretive" kinds of research are already going on, such as anthropology, history, sociology, lin­ guistics, ethics, social theory, cognitive science, and others. It will include studies that shed new light on economic subjects through the creative use of interpretive approaches. The series will comprise three major strands under the following headings. Interpretive empirical studies. Interpretive empirical studies would include, for example, historical interpretations of past events on the basis of original, archival research, or anthropological studies of current events. on the basis of participant-observation and interviewing methods. The editors are think­ ing of "close-up" studies of specific market processes, economic communities and institutions, and policy making. Case studies could be undertaken of the discursive processes underlying important institutions of the economy, xii General editors' preface for example, how a bank's employees make decisions about credit trans­ actions, how management/labor relations are seen from "both" sides, etc. History of economic theory. Books under this heading will study the past of economics in the light of concerns that arise in contemporary economics. The editors are especially interested in intellectual histories that are oriented toward improving our understanding of the diverse interpretive frame­ works one encounters in the history of economics. Philosophy of economics. Here the editors are looking for studies that use interpretive strategies to study the rhetoric and interpretive frameworks of economics, as well as ethical, religious, and political issues in an economic context. This series will not be captured under one political label. What the editors share is not policy conclusions but a certain orientation about how eco­ nomics can deepen its interpretive dimension, both in its theorizing and its empirical work. They share the conviction that the interpretive approach will hring new life into economic discourse and hope that the series will be an important vehicle for the dissemination of this approach. Arjo Klamer Don Lavoie Introduction END OF THE "GREAT DEBATE" The Great Debate between Capitalism and Socialism is al last over. The free market and private property have decisively won. Does that mean the "end of ideology" or the "end of history"? Can we rest assured that there are no fundamental structural flaws in the western-style economy? Our legal system is structured to forbid discrimination on the basis of race, but racism persists. Is that the only type of social problem that remains - where the structure is correct in principle but the implementation is flawed? We shall argue that the current western-style economic system is funda­ mentally and structurally flawed. The problems are not just in the imple­ mentation of sound principles. Moreover, we shall argue that the system is flawed because it violates the principles of the institutions that are usually associated with capitalism. That is, it violates the basic principles of both private property and democracy. From the conventional point of view, this will seem to be a strange position.