Wednesday, October 20, 2021

We’re a Republic, Not a Democracy! Is That Right?

It is common to hear people say that the United States was not meant to be a democracy but a republic. But what does that mean? Perhaps nothing very specific in many cases. But the Constitution tells us that the “United States shall guarantee to every State in this Union a Republican Form of Government….” (Article IV, Section 4) [1], and we would do well to suppose that the Framers meant something specific by the term.

We can’t look to the federal courts for clarification, since the U.S. Supreme Court in 1849 “established the doctrine that questions arising under” that section of the Constitution “are political, not judicial, in character and that ‘it rests with Congress to decide what government is the established one in a State . . . as well as its republican character.’” [2] But similar language “was contained in the Virginia Plan introduced in the [Constitutional] Convention and was obviously attributable to [James] Madison.” [3]

So, what did James Madison mean by the term “republican”? In Federalist 14, he wrote that “in a democracy, the people meet and exercise the government in person; in a republic, they assemble and administer it by their representatives and agents. A democracy, consequently, will be confined to a small spot. A republic may be extended over a large region.” [4] And so, if we follow Madison in this, a republic is the sort of government we have in the United States today; and if all one means by saying he is a republican (small “r”) rather than a democrat (small “d”) in this Madisonian sense, then his philosophy of government is in keeping with the governmental configuration found in the federal and state governments. It is also true, that a democracy in the sense that Madison described it would be wholly impractical in all but localities with small populations.

But Charles Louis de Secondat, Baron de Montesquieu was a political philosopher who was quite influential with the founding generation. He said that “a republican government is” one “in which the body or only a part of the people is possessed of the supreme power….” [5] “WHEN the body of the people is possessed of the supreme power,” he said, “this is called a democracy. When the supreme power is lodged in the hands of a part of the people, it is then an aristocracy.” For him, democracy isn’t a different kind of government than a republic, but a kind of republic; all democracies are republics, but not all republics are democracies.

Now today, people call the United States a “democracy,” or, perhaps more correctly, a “representative democracy.” Montesquieu would agree with this terminology, since, regarding democracies, he said, “They have occasion, as well as monarchs, and even more so, to be directed by a council or senate. But, to have a proper confidence in these, they should have the choosing of the members; whether the election be made by themselves, as at Athens; or by some magistrate deputed for that purpose, as on certain occasions was customary at Rome.”

Thus, in the United States, we have a republic if we use the terminology of Madison or Montesquieu. But the pertinent question, is whether we have, using Montesquieu’s terms, a democracy or an aristocracy.

At first, we undoubtedly had an aristocracy. Only white men with property could vote. And there were slaves to boot. Since that time, we have been moving in the direction of a democracy, and we now have, purportedly, universal suffrage. I say “purportedly,” because there have been continuing efforts to suppress the voting rights of black people down through the years up until today.

So, then, what do people mean when they say that we’re not a democracy but a republic? Some of them might just be talking nonsense, of course, but we should, without knowing otherwise, give them credit for cogency. If they mean anything coherent, they might well be arguing for a kind of aristocracy, where some people enjoy the franchise and others do not.

Tuesday, September 28, 2021

Decide! Once and for All!

It is a well-known fact among historians “that Revolutionary American political leaders widely admired and made frequent reference to the works of Charles Louis de Secondat, Baron de Montesquieu, and especially to his The Spirit of the Laws….” [1] Montesquieu’s name is mentioned in the Federalist Papers “no less than 12 times,” [2] and his chief influence was on the doctrine of separation of powers.

We still maintain our three branches of government, although the presidency has certainly become more influential than originally conceived, and that due to a combination of congressional political cowardice and partisanship. But there is one lesson that Montesquieu does not seem to have successfully imparted, although it should have been as obvious as the necessity of dividing governmental powers among separate bodies.

Montesquieu divided republics into two types: democracies and aristocracies. [3] “WHEN the body of the people is possessed of the supreme power,” he said, “this is called a democracy. When the supreme power is lodged in the hands of a part of the people, it is then an aristocracy.”

Now it may be characterized as a dirty little secret that the Founding Fathers envisioned an aristocratic republic, rather than a democratic one. There were everywhere gender and property qualifications to vote, not to mention slaves. But we have, presumably, moved beyond the original concept. We now have what is supposed to be universal suffrage, as is evidenced by the efforts of some partisans as of late to throw difficulties in the way of voting rather than the outright prohibitions that they would doubtlessly prefer.

We now have an attempt at what Montesquieu would call a democracy. So much has this become the civic goal that the word “democracy” has achieved a sacrosanct status. A policy proposal attacked as antidemocratic must be defended as being consistent with democracy. One never hears a politician say in defending his or her position, “To hell with democracy!”

This is now, and, of course, nowadays political terminology is largely vacuous. But if anyone wants to tout democracy as the preferred system of government for our country, he should be called to the bar of one of America’s principal instructors on politics to consult him as to what a real democracy requires. In chapter V of Book V of The Spirit of the Laws, entitled “In what Manner the Laws establish Equality in a Democracy,” he says,

“SOME ancient legislators, as Lycurgus and Romulus, made an equal division of lands. A settlement of this kind can never take place but upon the foundation of a new republic, or when the old one is so corrupt, and the minds of the people are so disposed, that the poor think themselves obliged to demand, and the rich obliged to consent to, a remedy of this nature.

“If the legislator, in making a division of this kind, does not enact laws, at the same time, to support it, he forms only a temporary constitution; inequality will break in where the laws have not precluded it, and the republic will be utterly undone….

“Though real equality be the very soul of a democracy, it is so difficult to establish, that an extreme exactness in this respect would not be always convenient. Sufficient it is to establish a census, which should reduce or fix the differences to a certain point: it is afterwards the business of particular laws to level, as it were, the inequalities, by the duties laid upon the rich, and by the ease afforded to the poor. It is moderate riches alone that can give or suffer this sort of compensations; for, as to men of over-grown estates, every thing which does not contribute to advance their power and honour is considered by them as an injury.”

Human nature hasn’t changed much since Montesquieu’s day, neither has what a true democracy requires. If your democracy is characterized by vast differences in wealth, it is either not really a democracy or its days are nearing their end.

We already know, or should know, where we are. A 2014 study shows “that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence.” [4] Universal suffrage notwithstanding, the United States is not a democracy.

There are misguided acclamations of that fact to be heard in defense of federalism or the Electoral College from those who say that we are a “republic,” not a “democracy.” But neither federalism nor the Electoral College have anything to do with that. Montesquieu would tell us that if we are a republic, we are either a democracy or an aristocracy. And since we are clearly not a democracy, there is only one other option. True, we don’t have a hereditary aristocracy, not by force of law in any event. But it is undeniable that we live in a country ruled by the wealthy.

So, we must decide whether we want to have an aristocracy or a democracy. If we want an aristocracy, we don’t have to do anything; we’ve already arrived. I would only caution that there is no evidence that riches have any correspondence with either virtue or wisdom. But if we want a democracy, we’re going to have to even out the wealth people have in the United States.

To accomplish that we will have to prevent anyone from becoming extremely rich or extremely poor. We will need both a minimum and a maximum income, and the most straightforward way to do that is through a steep progressive income tax.

There may be other ways to accomplish it. But we should decide, once and for all, whether we want to have a democracy or not. That can’t be done if some people live in poverty and others are obscenely wealthy, the way it is now.

 

Monday, September 6, 2021

Capitalism and the Labor Theory of Property

Your humble servant has been addressing objections that have been made to the plan that was presented here [1] and here [2] for employees to share in the ownership of the companies they work for. Three more serious objections remain. They are: (1) I divide ownership shares according to time only, and do not take adequate account of the difference in training, education, and expertise that various employees will have; (2) passive investors should not be treated the same as employees and investors who also work for their companies, and (3) I divide ownership shares based mainly on Revenue per Employee, but that, it is said, is not an adequate measure of production. I will respond to all three of these objections here.

Regarding the first objection, it is important to remember that I have set out a plan for the distribution of ownership shares, not a plan for wages and salaries. Training, education, and expertise would still be rewarded with enhanced compensation, as would positions of authority and responsibility in the company. A company president would still be paid more than a line worker, and an engineer more than clerical staff. Disparities might not be as great as they are at present, as employees come to own a greater percentage of the company, but, in our day, the ratio of CEO pay versus the pay of the average worker in a company has attained ridiculous proportions. Of course, ownership shares involve dividends or other means of distributing profits to ownership, and those would have to be distributed on a per share basis. But nothing in this plan requires that everyone receive the same wage or salary, and it would be misguided if it were attempted.

As for passive investors, I should point out that, while I am opposed to the way capitalism is practiced, I am not opposed to capitalists. On the contrary, I want to make everybody a capitalist.

Unless money is obtained through things such as interest or rent, it is earned through labor in some form. A person can work, and, with thrift, might invest some of his money in a business. Although he might not be involved with the business in terms of work, he has certainly added value to the business. There doesn’t appear to be a cogent reason to deny him a rightful share other than prejudice against so-called passive income. But if he has invested money he worked for, the income he derives from it isn’t really passive. He simply worked in a place different than where he invested.

Besides, I have proposed a way in which every employee of every company can enjoy passive income in this sense. Employees will share in the profits according to the shares distributed to them. They will receive dividends. And I fully intend that they be able to pass on their shares to their families. I have not suggested that they be compelled to sell their shares back to the company at retirement, and would not suggest it. Indeed, an essential aspect of the plan is to place them in exactly the same position they would be in if they bought their shares with money. I am proposing an expanded capitalism, not socialism or some form of cooperativism.

For all these years long we have been operating under the absurd arrangement that a person can purchase shares of a business with money earned by labor, but not by labor itself. This has arisen through the confounding of money as a store of value with value itself. That is essentially the absurdity I am trying to address.

Regarding the last objection, that Revenue per Employee isn’t an adequate measure of production, the only thing that I can say in response is that it is the best measure I have found, and it has the beneficial characteristic of being calculable. And calculability is a critical component if it is ever to be used in the real world.

Profits can’t be the true measure of the value imparted by an employee, because there may not be any profits in a given year. That doesn’t mean that an investor hasn’t supplied any value, nor does it mean that an employee hasn’t done so. And revenue per Employee is used precisely to roughly measure how much each employee generates for the company. [3] It is true that not every employee generates the same revenue. Some are more productive than others. But I await a more precise measurement that will give us the revenue generated by each individual employee, a task that might seem simple when production line workers or sales personnel are considered, but nearly impossible if attempted with human resources or accounting departments, or other office workers.

My aim is to take the labor theory of property and apply it to our capitalist economic arrangement. While it hasn’t been attempted in exactly the way I’ve described it, I am confident that it would go far toward resolving the wide income and wealth gaps that currently plague the American economy.

Tuesday, August 24, 2021

Labor Cost's Costs

Your humble servant is in the process of responding to objections to the proposal contained in this post [1] and this post [2], and those who are new to the conversation should read those first in order to understand the following.

The objection I want to answer in this post is, essentially, this: The employees don’t stand to lose anything if the business fails, while those who invest money do, and I haven’t properly considered that in giving the employees shares in recognition of the value they impart to their firm.

This objection simply fails to understand the nature of money. While money is certainly a store of value, it isn’t equivalent to value. It is a means of exchange into which value is abstracted so that we don’t have to barter between sheep and chickens. It is a convenience that we wouldn’t want to live without, but when money becomes mistaken for value, we end up with a distorted view of the way things operate in the economy.

Now in most market transactions we seek to exchange equivalent values. Say you’re selling sandwiches. You conclude that a certain sandwich is worth four dollars. If I agree that it is worth that much, and I want a sandwich, I will be willing to give you four dollars in exchange. Presumably, the ingredients of the sandwich didn’t cost you four dollars, and your time spent in making it wasn’t worth as much, but the two together were. In this way you make a profit over and above the cost of the ingredients. But when we add in the value of your labor, we have engaged in an even exchange.

But the situation is different when it comes to an employee. The full value of an employee’s work isn’t realized by him because it would make profits impossible. Profits are derived from the difference between the value given by the employees and their compensation.

This is easy to see using our sandwich example. When someone makes a sandwich, or any other product for sale, he realizes the value of his labor when he sells it. But this only works insofar as he makes the product himself. If he employs the labor of others, then the compensation he gives to those others becomes a cost to him, along with materials. And if the employees were able to realize the total value of their work, there would be nothing left over for profits, which would have been realized by the employer if he was doing all the work himself.

Thus, we see that every employee experiences a loss simply by being employed. He may not lose any money, which is a store of value, but he loses value all the same. And this will be true even if the company he works for is profitable, indeed, especially if the company is profitable. So, the employees do share in losses, and they have losses even if the company is successful.

The capitalist’s answer to this problem is to deny that it exists. The Marxist answer has been to abolish ownership of the means of production. What I am trying to accomplish, on the other hand, is restore the loss of value to the employee, in a word, restore the employee’s property.

Apart from this, to claim that employees lose nothing from a failed business is to ignore their opportunity costs. Instead of working somewhere else they chose to work for the business that ended up failing. That ends up being quite an expense if the other opportunity was one where they could have ended up better off.

“Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.” [3] Employees of a business that fail can lose a lot in terms of opportunity cost, even if they haven’t directly lost any money. Here again, the conceptual error arises from mistaking money for value.  

Labor is viewed by a business as a cost. And costs don’t have costs. But labor consists of people, and people do have costs. Even if they're employees.