The case for economic democracy

This was first published on Shifting Grounds

Not since the 1930s have we lived in such economically precarious times, and not since then has capitalism been subjected to such intense and hostile scrutiny. The shape of our economic future has become a major theme of national debate, but this has manifested itself through specific issues: bankers’ bonuses, austerity, bailouts, workfare and the ‘squeezed middle’, to name a few. What our collective questioning lacks is direction; it only addresses sporadic inequalities and injustices when what we need is a common thread that will enable us to have a more focussed economic debate.

There is an overwhelming sense that the financial market has become a supranational puppeteer controlling various forms of government below it. On a domestic level, key financial institutions used the Treasury as a lender of last resort when the financial crash exposed the folly of their risky investments only to start awarding extravagant bonuses again as soon as they could get away with it.

On a European front, political leaders feel they must bow to the financial markets and ratings agencies as they effectively dictate Greece’s terms of existence. Irresponsible investors have risked capital and are now pressing political leaders to impose further austerity on the country. Fundamentally, Greece has moved from sovereign democracy, through European technocracy, towards financial oligarchy.

Supporters of ‘the market’ will argue that it is (by definition) democratic, as people choose products and thus determine price and quality. They vote through their choices. Unfortunately, this misses three key points: firstly, actors within financial markets represent a very small number of the ‘financial elite’; secondly, financial power, unlike democratic power, is unequal because those with more money effectively have more votes; and thirdly, on a microeconomic level, markets are not fully democratic, because although they offer us a degree of choice as consumers, they do little to empower us as employees.

These problems are amplified by the socioeconomic phenomenon of globalisation. Fundamentally, globalisation only works when both capital (which has small population representation) and labour (large population representation) can move freely across borders.

Certainly, capital is now mobile thanks to digital technology and the deregulation of financial markets. But labour can never be truly free-moving, even within individual countries, as the barriers in question are rooted within human nature: traditions, ethics, ideals, relationships. As a result, when investments come and go (often in search of short-term profit), local communities are abandoned and sources of employment opportunity and work-based identity are destroyed.

These wider points serve to highlight the need for a form of capitalism that involves greater local commitment, more equality of opportunity and influence, and a real measure reciprocity between investors and employees.

The common thread linking the solutions to these problems is economic democracy, and it is this which offers an alternative to the dominant free market orthodoxy of the last thirty years.

Economic democracy questions the laissez-faire assumption that the market should be considered a wholly private sphere from which public authorities and democratic principles should be excluded on the grounds of efficiency. This position exaggerates the autonomy of markets by ignoring the extent to which they depend on the provision of public goods such as the rule of law, transport infrastructure, a healthy and educated workforce and commercial risk limited by public guarantee. Business has a responsibility to society that needs to be recognised in the way it is structured, and the way it behaves, beyond considerations of profit and loss.

Economic democracy also challenges the tendency of social democrats to rely too much on the democratic state as an expression of the public interest and a counter-balance to the free market. The role of elected government at every level is, of course, an essential part of the answer, but only a partial and imperfect one. In reality the state has often failed to give people a real sense of control over their economic destiny. The experience of nationalisation yielded next to nothing in terms of real economic empowerment for most British people.

What we need is an economy that takes the representation and power of democracy and plants it firmly within the business structure itself. Both Will Hutton and Vince Cable have recently made interventions that move the debate onto this terrain. The report delivered by Hutton’s Ownership Commission argues that the committed ownership of assets improves decision making and economic performance, and that greater employee ownership can therefore boost productivity and decrease risk. Cable has echoed these sentiments and is championing the role of co-operatives and employee ownership within the coalition.

But these ideas need to form the basis of a movement rather than a series of piecemeal initiatives to keep people ‘on side’. There is also needs to be greater democratic participation in companies where employee ownership may not be on offer.

There should be a greater worker representation on boards and other internal decision-making bodies, as well as within the investment process. There should be more transparency over company accounts, and voting rights on wages and improvements. Above all, there should be a venue for taking ideas from the shop floor directly to management. Not only will this give the worker a sense of empowerment and fulfilment, but worker representation (i.e. greater internal democracy) will root firms within a community and mitigate short-term risk taking.

Finally, share incentives should be used, not only to give employees voting rights upon joining, but continually to reward greater productivity, to ensure that they get a fairer return on their labour and to promote a more equal distribution of national wealth. This could simultaneously boost companies’ performance while rewarding workers with greater representation. The long-term benefits for both the individual and society would be significant.

This creates a real opportunity to lay out what a new economy would look like and offer more than a critique of current ‘business-as-usual’ thinking. Using the common thread of economic democracy, Labour can give practical substance to the idea of a reformed and socially responsible capitalism by connecting a range of interdependent issues.

Political democracy is vital for the fair and legitimate management of national resources, but in today’s complex society, substantive empowerment in the workplace will only come when politicians have the courage to build democratic principles into the fabric of our economy.

Joe Sarling is an economist. He blogs at and tweets from @joesarling.


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