Articles

Marc Fleurbaey
Professor, Author
Princeton University, Princeton, USA
Collège d'Etudes Mondiales, Paris, France

 

Economic peace and economic democracy

On Google, “economic peace” attracts ten times less references than “economic war” or “economic warfare”. Are we condemned to live on the dark side of conflict and only see glimpses of the light of peace, from afar?

In fact, the expression “economic peace” or “war” typically refers to relations between states. When demand and supply initiatives on international markets, or trade restrictions, become a tool to weaken a foe or an adversary in geopolitics, economic policy is just an instrument of non-economic goals. But peace and war can also depict the nature of economic relations among groups and individuals within states. This expansion of the span of observation does not make the current situation look less bleak, since economic affairs are not particularly harmonious on many fronts.

There are two loci of conflict in economic affairs. First, relations between competitors are, by definition, competitive rather than cooperative. Second, relations between contractors and traders also offer many occasions for conflict over price or quality.

Let us look at competitors first. The harshness of competition is actually praised by economic theory. Cooperation by the economic agents on one side of the market (supply or demand) may generate peaceful relations between them, but at the expense of the other side of the market and also at the expense of the “total surplus”. Attempts at grabbing an extra share of the market pie by means of cartel agreements reduce the total pie and are an aggression against the other side.

But the standard form of competition, which is never totally “pure” or “perfect”, also has negative effects which are less prominent in economic textbooks. It encourages actions other than minimizing costs and maximizing productive efficiency. In particular, it fosters concentration, as each competitor seeks to absorb some of the opponents in order to overwhelm the others –which means that pure competition is inherently unstable and needs antitrust regulation. It encourages overspending in advertising, which generates huge wastes of resources and serious nuisance for the consumers who are not particularly fond of seeing the same ad dozens of time in the week. It also encourages excessive obsolescence, since innovation is used not just to please customers but also to undermine competitors.

Relations between traders are also inevitably conflictual, as they have opposite interests about the price as well as the quality of the traded product or service. This conflict is muted when sufficient competition makes the price an external parameter determined by the anonymous forces of the market and when repeated transactions make quality appear reliable to the traders. When competition is imperfect, as is especially the case on the labor market, conflicts can be severe. The whole history of “class warfare” stems from clashing interests between employers and workers over wages as well as working conditions and labor intensity.

The two types of warlike relations between economic agents interfere and reinforce one another. The tense competition among firms induces them to impose harsh conditions on their workers. The resulting stress and its consequences on health and family relations are not internalized by the firms’ managers. Similarly, excessive turnover among firms due to competition generates excessive frictional unemployment and disruptions on careers, again with severe consequences on workers and their families that are not accounted for in the key decision-makers’ strategizing. In the other direction of causation, excessive harshness on wages depresses consumption, and an anemic consumer market exacerbates competition between firms. A depressive spiral can unfold, with wage cuts undermining consumer demand and reinforcing competition and the drive for downsizing, offshoring, and wage cuts.

The rough competition between firms, with a tough life for employees indirectly pitted against one another across firm boundaries and submitted to the hazards of layoffs and business cycles, is reminiscent of the medieval era in which feudal warlords were in permanent competition and exposed their serfs to the dangers of such conflicts. From the viewpoint of ordinary employees, too much risk is imposed on their lives by investors and managers. The comparison can also probably be made with the much more ancient lifestyle of hunters-gatherers, who lived in small groups and combined warlike relations, between groups, with a mix of solidarity and internal fight for status, within groups.

What is the deep cause of such conflictual phenomena? Greed and need are obviously the drivers of the search for resources that underlies all these conflicts. Interestingly, affluent societies should see the “need” leg of this ominous pair fade away. One hardly ever sees strong animosity over the price of bread in affluent Europe, whereas in poorer countries riots over the price of basic staples are not exceptional. But many occasions for strife remain even under opulence, unfortunately, since competition for social success transforms luxuries into necessities. Therefore, it is hard to imagine how changing people’s hearts could massively improve the situation.

However, one should not underestimate the power of internal reformation. In particular, without changing the rules of the game, there is a lot of room for enhancing the “solidarity” characteristics of relations between employees within firms. The economic performances of firms that develop trust and cooperation within their teams are generally praised, and in addition such firms generate less negative externalities in the form of personal life difficulties for their employees and their families.

Although the education toward more peaceful minds and behaviors can produce important effects, one cannot hope the development of good management practices to produce an economy-wide transformation of economic relations from war to peace, or even to eliminate the competition for status and resources within firms. How can one push the peace agenda further? Presumably, one has to look beyond people’s hearts and minds and into rules and institutions in order to imagine a peaceful economic system.

The traditional answer to this sort of question by economists involves redistributing resources in the fashion of social-democracy. Suitable taxation of bequests, capital income, and earnings would reduce the frenzy for resource-grabbing. This view is corroborated by the observation that after important tax breaks were conceded to the high income earners and the wealthy in countries such as the USA, the inequality of salaries within firms has soared, since it became much more interesting for managers to seek and obtain pay rises and bonuses from their boards. A vicious circle is set in motion when taxes decrease and inequalities increase, letting the rich become ever more powerful and able to lobby for further advantages. Social relations become sour when the ordinary workers and citizens feel that the rich and powerful are disconnected from them and no longer understand their condition and their concerns.

In this perspective, curbing the fight for resources through central intervention and redistribution of resources is the key to pacification. There is, however, another interesting route to peace. The internal mechanisms of decision-making can be modified in order to induce different behaviors within and between groups. In other words, one should consider redistributing power rather than resources as another, perhaps more effective way of reducing the level of conflictuality.

Imagine that the rules of commercial activity required firms to submit their managers to democratic processes of selection and supervision involving the main stakeholders (shareholders, lenders, workers, local communities). This would quite substantially affect the level of trust within the organization, since the stakeholders would have greater confidence that their interests are taken into account in the management decisions, and conversely, the managers would know that the stakeholders have a greater level of commitment to an organization that better respects them and their interests. In particular, the conflict between workers and employers would be substantially alleviated and transformed into a reciprocal relation of mutual support and monitoring.

More democratic firms would be more peaceful internally. What about competition on the market? Strong solidarity within small groups does not necessarily imply less aggressive behavior toward outsiders. However, anthropological studies of preindustrial societies have shown that less hierarchical societies are less aggressive against their neighbors, and sometimes also less plagued with interpersonal violence. The existence of a strong leadership is often correlated with warlike behavior, with leadership appearing useful in a war situation, and war serving as a vehicle for leadership promotion and selection. The contrast between the aggressive behavior of feudal lords and the peaceful behavior of enfranchised towns in the Middle-Age also illustrates this pattern. Even in the modern era, democratic countries are typically more peaceful than authoritarian countries, although colonial and imperialistic behaviors make the picture more complex.

It is therefore sensible to predict that more democratic firms would be more focused on the interests of their stakeholders and less willing to engage in risky expansion or risky aggression of their competitors. Managers would no longer elevate their professional standing primarily by warlike feats of takeovers and absorption, but instead by maintaining the efficiency of their organization and the goodwill of their constituency of stakeholders.

Democratic firms, such as cooperatives, are often derided as being less prone to development, less flexible in terms of adjustment of the workforce to the business cycle, less ambitious in innovation. Another way to look at such characteristics is that such firms better internalize the social costs of competition and the disruption to personal lives and local communities induced by standard aggressive business. They are also likely to better internalize the local environmental costs of their activities, since workers and local communities would have a strong say in the management. And it is a virtue to be less prone to concentration, because keeping organizations within a “human scale” makes for a much more rewarding atmosphere within the organization and preserves the possibility of convivial decision-making, smooth circulation of information, and therefore smarter management.

This democratic route would alter the rules of the game within firms but not between competitors on the market. Keeping competition on the market seems inevitable in order to preserve the freedom and independence of economic agents and the effective processing of decentralized knowledge by the price mechanism. One can even argue that the very principle of democratic decision-making requires something like the market, since democracy itself requires decentralizing decision-making at the level of the affected individuals. If two individuals want to make a deal, they should be, barring externalities, the prime decision-makers in this matter. Therefore there is no contradiction between preserving the market and imposing democratic rules within firms. Both recommendations follow from the same democratic principle that all decisions should primarily involve the affected individuals.

More deeply, conflicts over resources would not disappear in a more peaceful and “democratic” economy. Cooperation cannot replace competition entirely, it can only expand its own realm by rules and institutions that foster the internalization of common interests. When, in the current economy, firms become gigantic and start instilling competition between teams of their own personnel, they produce worse results than a true market of small autonomous and close-knit organizations whose management closely espouses the interests of the stakeholders. When firms pit their employees against one another in a competition for rewards over performance, they generate many negative outcomes and externalize these costs through the destroyed lives of their personnel. In contrast, human-scaled firms that foster cooperation within their organization are much more effective at producing satisfactory results both for their bottom line and for their human impact.

It is also worth emphasizing that, among the benefits of more democratic decision procedures within firms, lower inequalities in salaries are conspicuous. The extravagant pay rises and bonuses of CEOs that have been observed lately would not pass muster in front of a board made of shareholders and employees. Loosening the connection between wealth and power, within firms as well as in the political sphere, would also strongly reduce the attraction of accumulating wealth and therefore further contribute to cooling down the competition for resources.

As alluded to earlier, if a democratic and peaceful economy flourished, one can bet that it would be less aggressive not only against its own human members, but also against nature. Indeed, the concentration of financial interests in the current economy makes the tradeoff between the bottom line and environmental preservation lean in favor of the former. Those who decide in the business world do not depend very much on the affected environment (in multinational firms, they may even live abroad), and their personal social and financial success looms much larger. In contrast, when stakeholders have a strong say in the decisions, it is much more likely that some of them will be seriously concerned, possibly affected by the pollution due to the firm’s activity.

In conclusion, the most promising route toward a peaceful economy may not simply involve good management practices in the current capitalist institutions, or redistribution by the welfare state in a social-democratic style, but also a more substantial democratization of economic decisions, in particular in firms, so as to enhance a truly cooperative spirit within organizations and a more benign attitude on the market and toward nature.

What is hard to imagine is the transition to such a pacified society. The competitive spirit is strong in an elite for which business strategy is like medieval chivalry, and which feels little empathy for the fate of the less advantaged who bear the externalities of this sport. Moreover, a globalized economy with free capital movement makes it very easy for financial interests to blackmail governments and prevent regulation viewed as inimical. This is perhaps where the movement for good management practices can be useful. It could reveal the virtues of running a more cooperative organization and initiate a stronger demand, among stakeholders, for recognition and respect. Paradoxically, the excessive promises of social democracy may be an obstacle to such a transition, because they put the focus outside the productive sphere. The illusions of the more radical communist model were even more dangerous, since they ignored the value of letting free and independent agents operate in a decentralized way. Even the model of the cooperative, which displays many of the virtues of the democratic firms discussed here, is glaringly unsatisfactory since it imposes cumbersome constraints on financing that really hamper an efficient allocation of investment funds. The Swedish worker’ fund (proposed in 1970 by Rudolf Meidner, and comparable to a similar idea put forth a few years earlier by Marcel Loichot in France) was also problematic since it aimed at sharing power only through the sharing of capital in a centralized pension fund, and did not directly recognize the importance of decentralized decision-making and non-capital forms of stakeholding. The German Mitbestimmung system is closer to what is envisioned here, but it has suffered from its limited application to a small number of firms and the strong pressure from business interests to emasculate it in the context of a globalized competition. The idea of “shared capitalism” currently promoted by the economist Richard Freeman goes quite some way in the direction of economic democracy, though it focuses more on profit sharing with workers than on power sharing with all stakeholders.

The challenge for the peaceful economy based on economic democracy is that it must not only challenge the monopoly of the elite over the centers of power, but also avoid the pitfalls of previous failed or misconceived attempts at sharing power in the economic sphere. However, if one believes that the push for an ever-expanding application of the democratic ideal will never stop, one can be optimistic.

 
Suggested readings:

• Marc Fleurbaey 2006, Capitalisme ou démocratie? L'alternative du XXIème siècle, Paris: Grasset, 2006.
• Richard B. Freeman, Joseph R. Blasi, and Douglas L. Kruse (eds.) 2010, Shared Capitalism at Work, Chicago: University of Chicago Press.
• Axel Gosseries and Gregory Ponthière (eds.) 2008, Special issue of Revue de philosophie économique on workplace democracy, vol. 9, no. 1 (with articles in English and in French).
• Martin O'Neill and Thad Williamson (eds.) 2012, Property-Owning Democracy: Rawls and Beyond, Chichester: Wiley Blackwell.

 

Marc Fleurbaey's professional experience

Marc Fleurbaey is Robert E. Kuenne Professor at the Woodrow Wilson School and the Center for Human Values at Princeton University, and member of the Collège d'Etudes Mondiales in Paris. He is the author of Fairness, Responsibility and Welfare, and co-author of A Theory of Fairness and Social Welfare (with F. Maniquet) and Beyond GDP (with D. Blanchet).