Chapter XIX: Building the Ownership Society

The last chapter--finally!

Distributism and the Current Crisis

Discussions of what to do about the current crisis commonly take the form of an argument between “socialism” and “capitalism.” However, such a discussion is flawed in both of its terms. Real socialism collapsed in 1989, and few would want to return to that horrific system. What is less well understood is that pure capitalism itself collapsed in 1929, never to rise again anywhere in the world. There are few citizens with any living memory of real capitalism, and the memories they have are generally unfavorable. Capitalism collapsed for the same reason as communism, a victim of its own internal contradictions that caused chronic instability. Workers found the system unacceptable, to be sure, but so did the capitalists themselves, and few were very sorry to see it go. Pure capitalism had proved itself toxic to both capital and labor, just as Belloc predicted it would in 1913.

The first task in reforming the system to understand the system that we have, the system that is in full failure, and understand apart from the ideological terms commonly used to describe it. The system that replaced capitalism was first a hyper-active Keynesianism, brought about by World War II and which lasted until the late 70's; Keynesianism itself was then replaced by a pure mercantilism, the system which combines private privilege with public power and which so incited the wrath of Adam Smith. It is this mercantilism which finds itself in the midst of a full-blown collapse. Both the Keynesianism which replaced capitalism, and the mercantilism which replaced Keynesianism, depend on massive government controls and subsidies which are no longer practicable or sustainable. Nor can we go back to the capitalism of the 1920's without reliving the instability of that turbulent period.

If capitalism is not a viable alternative, if it represents a system that no living man has seen, why then do the arguments in its favor carry such weight? I believe the reasons are mostly ideological. Capitalists are quite willing to trot out libertarian arguments when dealing with some regulation or tax that they find odious, but they are just as willing to put such arguments aside when they seek some privilege or subsidy from the government. In this way, the most well-meaning of the libertarians serve as the fellow-travelers and useful idiots of the mercantilists. And although I have a great deal of respect for the libertarian arguments in general, in practice these arguments do not function apart from well divided property, as the older, pre-Austrian libertarians realized.

However, it would be totally unjust to critique the libertarians if the distributists did not have something of their own to offer, and something more than mere platitudes or even principles. Something programmatic and concrete, and applicable to our actual situation is required. Distributists have an advantage in this regard, since, unlike capitalism or libertarianism, there are actual distributist systems on the ground and working (Chapter XVI) and we can examine them for practical lessons to apply to our own troubles.

Distributism and Government

Critics of distributism often charge that the theory is no more than a variety of socialism. This charge is odd for two reasons: One, socialism is the theory that there should be no private property, while distributism is the theory that property ought to be spread as broadly as possible; the two are precisely opposite. Two, the actual practice of distributism, in Mondragón and other places, is more “libertarian” than anything the libertarians have been able to accomplish. Nevertheless, the critique cannot be passed off lightly because the very term “distributism” conjures up the specter of “re-distribution,” the idea that some committee of bureaucrats will decide who will, and who will not, own property.

But in the main, distributism is not so much about what the government ought to do as about what it ought to stop doing. The claim of the distributist in this regard is not much different from the claim of the pure libertarian: It is government which fosters the accumulation of property into fewer and fewer hands. Indeed, without the aid and protection of government, the piles of capital could not have grown as high as they have. And the higher the piles of private capital grow, the thicker the walls of public power necessary to protect them. Big government and big capital go together, and this is a simple fact of our history, beyond all reasonable dispute.

That being said, there are clearly cases where government must, in fact, redistribute property. The case of Taiwan comes to mind, where the population was held in virtual slavery to a few landowners. The remarkable prosperity of that island is traceable to the decisive action of the land-to-the-tiller program, which made most of the sharecroppers into independent farmers. Those who would defend the landowners and the sanctity of property over the misery and poverty of the people corrupt the very notion of property. Property is a sacred right, but not an absolute one. Every proper right is known by its limits, and an absolute right is not a right at all, but the seedbed of tyranny. Property that depends on the slavery of others is certainly not legitimate property. And in such egregious cases, the government can indeed take egregious action.

And then there is the case of the entities deemed “too big to fail,” or more accurately, too big to succeed without generous drafts from the public purse. It is quite legitimate to break up such companies and to distribute them either to the local or regional banks or to the employees. The same principle applies to the failed industrial giants that require public life support. They can be broken up and turned over to the workers through the simple expedient of placing contractual obligations for pay and pensions on the same level as the contractual obligations to the bondholders. Then we can see if the workers can run these factories any better than the geniuses in Detroit. If the similar experience in Argentina is any guide, they might do very well indeed.

Finally, we can note that as long as capitalism endures, distributists may legitimately call on the power of government to limit its manifold excesses. For example, so long as there are monopolies, price-controls are a legitimate public response. Ideally, we would want to eliminate such monopolies that are not strictly necessary, but as long as the government protects monopolies, it is reasonable to ask for protection from monopolies.

All that being said, our main interest in dealing with government is to deal it out of the game. It is not that there would be no government—we are not anarchists—but compared to the size and scale of the current mercantilism, it would look a lot like “no government.” Still there are functions which are properly left to the community and these would be left in place. Anyone who objects to any government whatsoever as a form of socialism ought not to pull that socialist lever in their home, the one that makes their waste disappear in a whirlpool into the socialized sewage treatment plant.

I present a “distributist program” not because I think our future will unfold programmatically; rather, it is likely to be chaotic, even violent, as such transitions often are. But one must be hopeful and hope for peaceful change, and even have a plan to accomplish that change. Most of the proposals presented here have already been discussed in detail in the previous chapters. Here in the last chapter it is appropriate to bring them all together and summarize them. I will refer to the chapter where each was discussed more fully.

Building an ownership society involves both political and economic goals. The political goals are based on the principles of subsidiarity and solidarity (Chapter XIII). The economic goals are built on the principle that justice is intrinsic to economic order, and not some added extra or exogenous feature (Chapter VI).

You Say You Want a Devolution?

Devolution as a Fiscal Problem. Conservatives express great frustration with the egregious violations of the Constitution by the legislatures and the courts, violations which ensure that power gravitates to the federal government, while the states become mere bureaucratic subdivisions of the federal apparatus rather than partners in a political union. In response, they call for a devolution, a return of power to the states. Many historical, political, and philosophical reasons could be advanced for the centralization of power, but at base this turns out to be a fiscal problem. Power follows property, as Daniel Webster noted. The political equivalent is that power follows funding, that it gravitates towards that level of government that has the most money to spend. When the federal government acquired the power to tax incomes with the 16^th Amendment in 1913—a source of funds with no natural limit—the rest of the constitution gradually became irrelevant.

The income tax makes the feds the most important source of funds, and hence the source of power. Local and state officials tend to kick problems “upstairs” to the largest funding source. Thus it comes as no surprise that a senator can run for vice-president on the claim that he “put 11,000 cops on the beat”; that is, that he did a job the city councilman should have done. But the councilman was happy to kick the job up to the senator, since the senator controlled the money. If you want the councilman and the senator to do their proper jobs, then you must cut the funding of the one and enhance the funding of the other. You cannot change the powers without changing the funding.

Income taxes are paid by capital and labor. Now, the more you tax a thing, the less you get of it. Yet labor and capital are things we want more of, not less. They should be taxed the least, if at all. Further, income taxes tend to degenerate into labor taxes, with the burdens shifted down the income scale, or forward to the next generation. The rich may claim that they pay the majority of incomes taxes, but this number is reached only by excluding the social insurance taxes, which only apply to the first $100,000 of income, and certainly don't include the taxes they shift onto their children and grandchildren.

In order to implement subsidiarity in government, we must also have subsidiarity in the funding of government. That is, funding must start at the local level and be dispersed upward, rather than the other way round. Further, we must tax that which has no economic value, that is, the tax should fall primarily on economic rent and externalities (Chapter XV). Economic rent can be confiscated with no negative economic consequences (except for the rentiers) and many positive ones. Externalities (the costs of a transaction charged to a third party not involved in the transaction, e.g., pollution) should be charged with the full cost of their mitigation. With any luck at all, the government will be sufficiently inefficient at mitigating externalities that businesses will prefer to perform the mitigation themselves and not pay the tax.

Economic rent is primarily embodied in ground rents (Chapter IX). Treated as a tax, ground rents are most efficiently collected at the local level, and indeed the bureaucracy to do so already exists. Obviously, there has to be national agreement on the methods used to value and assess ground rents and on the “split” between local, state, and the federal governments. But lower levels of government will then have an incentive to accept more responsibilities, rather than kick problems upstairs, because this justifies claiming a larger portion of the revenues, revenues which they themselves collect. Politically, the problem with a “ground rent tax” is that it sounds like a “property tax,” and that scares people. However, once it is understood that we are trading off the income tax for the ground tax, most people, I suspect, will see the advantage. They will have a tax easily predicted, easily collected, local, and all without the government prying into the details of their lives.

This would not entirely eliminate labor taxes, since there are still the social taxes. However, these taxes should be used solely for direct services to workers and their families, mainly unemployment and medical insurance, welfare, and old-age pensions. They should not be, as they are now, over-collected and used to subsidize the general fund, which requires that in a very few years the general fund will be required to subsidize the social funds, and this will prove to be impossible under the current system; the general fund is already broke and destined to get broke-er.

The social taxes are efficiently collected (at least in regard to wages) because they are a flat tax paid by businesses in behalf of the employees and which require no complex filings. The income limitations ought to be removed, and the tax made steeply progressive for the top 2% or 3% of incomes (since there is an implied economic rent in these cases), but otherwise, there is surprisingly little that needs to be done. The problem is a bit more complex when dealing with non-wage income, but I believe those problems can be solved efficiently.

Devolution and Deficits. A ground rent tax would collect about 20% of GDP on the best estimates. However, current government expenditures at all levels total closer to 35%. Hence there will be a shortfall under a ground rent scheme. Whether this is an advantage or not depends on whether the budget can be cut. We cannot use the “starve the beast” strategy that has characterized Republican Party policy. Such a strategy does not curtail the growth of government: it enables it. Cut off from any fiscal restraints whatever, it breeds a “deficits don't matter” mentality that divorces the budget from any fiscal reality. Further, tax cuts without spending cuts are not really tax cuts at all; they are tax shifting, mainly from the current to the future generation. Spending our children's money is both economically unsound and morally reprehensible.

Moreover, it is not just the problem of getting government to live within reduced means, there is also the problem of the enormous debt that must be paid off (or significantly reduced) if both sanity and subsidiarity are to be restored. The federal debt is, as I write this, $11.8 trillion and rising rapidly. The interest on that debt exceeds half a trillion dollars; after the defense budget, it is the largest expenditure of the federal government and will soon be the largest. These are monies that must be paid out before a single bullet is bought or a single bridge rebuilt. Thus, we seem to face intractable problems. On the one hand, we would like to reduce both taxes and the expenditures of government, and on the other we must pay a seemingly insurmountable debt from these reduced revenues. Nor is that all. Our infrastructure is aging and much of it needs to be rebuilt, at enormous expense. The freeway system, for example, was begun in the 1950's, and many parts are nearing the end of their useful life. And the same goes for many other parts of the infrastructure, such as levees and dams. This will put enormous pressures on any attempts to rein in the budget.

To add to the problems, we are about to face the retirement of the post-war baby boom generation, which will arrive like a fiscal tsunami on the Social Security and Medicare budgets. In the face of all these problems, it would seem that we need not lower taxes, but higher; not a devolution to the states, but an even more powerful central government empowered to tackle these enormous and growing problems. However, this would be to gorge on the medicine that made us sick in the first place, which can only make us sicker. How then should we confront these problems?

In regard to the federal budget, we argued in Chapter XIV, not only would it be relatively easy to cut one third or more from the general fund, it could be done without reducing (and usually enhancing) any essential services. I will not here rehearse that argument, but only mention that some of the measures are obvious, such as abolishing pointless departments like education and ending subsidies, recalling the military to our shores (do 700 overseas bases really enhance our security?) and shifting from taxes to fees wherever there is an easily identifiable group of users for a service.

Eliminating the Debt. But the largest line item, after the defense budget, is the interest on the debt. No real progress can be made if this debt is not eliminated, or at least substantially reduced. In thinking about the debt, one has to think about money itself. In Chapter VII we noted that the creation of money is the private monopoly of the banks. This money is created out of thin air, and represents no prior savings or production. Yet, it forms a claim against things that have been produced. In the case of government debt, the banks lend money they invent, but demand payment in the equivalent of real goods and services. Hence, the government must tax real goods and services and turn over the money to the creditors. But this will become increasingly less of a possibility in the near future.

About 41% of the debt ($4.3 trillion) is owned by agencies of the government, mainly the Social Security Trust Fund. This portion of the debt can simply be monetized over a ten- to fifteen-year period. That is, the government will print the money to pay off the debt to the trust funds. Some may be shocked by the suggestion that the government be allowed to simply print money into being, but this is certainly preferable to having the banks lend it into being. Will it be inflationary? It might be mildly so, but if done over ten to fifteen years, it will be no more than simply converting the current interest payments into principle and eliminating both.

There isn't much else that you can do with this debt. The only alternatives (other than just reneging on the commitment) are to raise taxes or increase borrowing. Up until now, the social security taxes have formed a vast subsidy to the general fund, with IOUs being placed in the fund. But in just a few years, the cash flow will go the other way: from the general to the trust funds; but the general fund does not have, and will not have, enough money to pay the trust fund. In order to pay off these IOUs, there would have to be a vast tax increase over and above the high social security taxes we now pay. Our children—and the economy—simply cannot tolerate that burden. Or we can simply borrow more money, but that is problematic, to say the least.

The next portion is the 29% owed to foreign governments, banks, and individuals. This portion of the debt could be monetized, but likely shouldn't be. My belief is that paying this debt should be the responsibility of the financial sector. A small tax, about 0.25%, on the transfer of financial instruments such as stocks, bonds, CDOs, CDSs, etc. should be levied and placed in a sinking fund to pay the interest and principle on these debts. Such a small tax would be sufficient to pay off the foreign debt over a term of five to ten years.

That leaves only the 31% of the debt held by American citizens and institutions. This portion of the debt could be partially monetized (as financial conditions dictate), partially paid off by the sinking fund, or simply left in place and allowed to shrink as a proportion of the economy. What is critical, however, is that the debt not be allowed to grow. And this requires abolishing the Fractional Reserve System, whereby the banks get to create money for nothing. This is the fiat money that is “lent” to the treasury. Its origin is thin air and a legal monopoly, a monopoly that must be abolished.

Monetary Reform. One of the greatest forces for the unjust accumulation of property is this fractional reserve banking system, which grants a monopoly privilege to a small group of people, namely the bankers and their allies. These private citizens have the power to create out of thin air nearly all the money in circulation. Such a system is intolerable on both moral and economic grounds, and must result in periodic credit crises, as greed and necessity moves bankers to create more money than the economy needs or can be reasonably “repaid.” That last word is in quotes because you can't “repay” what was never paid in the first place, to repay in real goods a “debt” that was only an accounting entry on the books of some bank.

I do not believe that an ownership society can be reconciled with such a money system. The creation of money is a public power, and the public ought to take it back. Coining money into being ought to be the sole authority of the federal government, or even the states that wish to do so (although this is not currently allowed in the Constitution).

There is no reason why the federal government should not create its own money and spend it into circulation for capital projects. Capital projects, in the main, create more wealth then they cost, hence there would be little inflationary effect. The Federal Government could also act as a banker to the states and cities to lend them money, at little or no interest, to finance their own capital needs. This would shift the power inherent in capital projects back to the states and cities. In any case, control of the money supply should not be in private hands; it is a public power, and the public should take it back.

Localizing the Economy

Industrial Reform. Political subsidiarity would mean little if the industrial system remained concentrated; it does no good to collect taxes locally if the production of goods, and therefore the production of taxable values, is not also widespread. In Chapter XVI, we noted the problems and inefficiencies of the current system, a system that is highly dependent on subsidies and externalized costs. Once these subsidies are removed, it is unlikely that the current production model could actually produce anything at a profit. Localized production will follow in the wake of the demise of the subsidies.

Indeed, the large corporations themselves have already opted for distributed production, divesting themselves of actual factories and seeking to retain centralized control through cheap transportation and legal control of the patents. The highly integrated, vertical model pioneered by Henry Ford has been in decline for some time; distributism is the order of the day in corporate America. Unfortunately, they have dispersed the factories around the world, rather than around the country. Nevertheless, this still plants the seeds of their own demise. One day, the workers in Vietnam making shoes for Nike will realize that they can ignore the patents, rip the swooshtika off the shoes, and sell them locally for a tenth of the price, while paying their workers three times the wages and still making twice the profit. Indeed, the Chinese have already discovered this, and all the talk of “piracy” will not change these facts.

This may help the worker in Shanghai or Hanoi, but it doesn't do much for the worker in Des Moines or Sioux Falls. For these workers to be helped, they will have to have the same privileges as the Chinese and other foreign workers. Moreover, they will have to have a production system that respects localism. Distributism offers here not just abstract models, but functioning, stable systems that anyone can examine and adapt to their own situation. That is, distributism does indeed have a coherent and functioning industrial policy. Here we just summarize the elements of these systems as it was presented in Chapter XVI:

• Flexible manufacturing able to shift between product lines as demand dictates

• General purpose machinery instead of product-specific machines.

• Demand-pull rather than supply-push manufacturing

• Local supply chains wherever possible

• Widespread worker ownership and open book management

• Scalability, production techniques that are scalable from the level of the family farm right up to the large factory.

Agrarian Reform. Distributists are frequently accused of being romantic agrarians. We are agrarians, but we are not romantics. “Agrarian” means, in this context, not “moving everybody back the farm,” but “restoring the proper relationship between town and country.” Contrary to corporate opinion, a tomato does not taste better if it is picked green and shipped a thousand miles before it is consumed. But apart from the question of flavor, there is the economic inefficiency inherent in such a system, inefficiencies that are covered up by subsidies.

One thing is for certain: neither the environment nor the economy will tolerate much longer the current system of factory farming. The cabbage grown in Oregon and consumed in Texas consumes more energy in its growing, picking, transportation, and marketing than it supplies in calories. If the energy inputs—the chemical fertilizer, the heavy equipment, the fuel for machinery and transportation, and so forth—were properly priced and the subsidies removed, this transcontinental cabbage would not be a paying proposition. And it will not be in the very near future. Even today, the system depends on an easily exploitable workforce that does not participate in the benefits offered to the rest of society, creating a vast underclass whose legal status is ambiguous, even as their numbers proliferate.

Trade Reform. Trade is a basic part of the human condition; no family, firm, city, or nation can or should be self-sufficient. But trade is only good when it really is trade, that is, when you earn enough to buy the things you purchase. A “trade” that is based on borrowing to finance consumption is not really trade at all, but the prelude to bankruptcy. This is a basic fact overlooked by our trade policies, which are based on a doctrinaire application of the basic “free trade” theory, called the Theory of Comparative Advantage. However, the people who argue the theory most strenuously seem to be the ones least familiar with the actual theory. The theory is valid only under three conditions: one, that capital is relatively immobile; two, that there is full employment in both countries; and three, the trade is balanced between both countries (Chapter XVII). Absent these conditions, a doctrinaire “free trade” makes both parties poorer, as the poor in both countries are played off against each other. In the United States, it has resulted in a hollowing out of our industrial base. But no country can expect to grow prosperous except by making things; if we lose this ability, we guarantee ourselves and our children a life of dependence and poverty.

Without the necessary conditions, an insistence on free trade ceases to be a useful economic paradigm to become a mere political ideology. When conditions are less than the ideal of the pure theory, then trade between nations must be managed, just as trade between firms is managed. We should make those deals which make sense, and reject the others.

Distributism and Reform

Since the current system is not sustainable, it will be reformed, one way or the other. The only question is whether we shall get out in front of the collapse and begin an informed movement towards sanity. Since the Enlightenment, the world has experimented with laissez-faire capitalism, socialism, communism, Keynesianism, and mercantilism. While each of these systems contains some partial truth, they are all insufficient to the whole truth. All of these systems have been weighed in the balance of history and found wanting. It is time to return to a more natural system, and that is system is, I believe, distributism, or something very like it.

For the past few decades, distributists have mostly withdrawn from the purely economic debates to rest their case on moral and social claims. This is, of course, a necessary aspect of the problem. However, these claims cannot be made credible unless there is also a credible economic argument behind them. As Cardinal Ratzinger (as he then was) stated,

A morality that believes itself able to dispense with the technical knowledge of economic laws is not morality but moralism. As such it is the antithesis of morality. A scientific approach that believes itself capable of managing without an ethos misunderstands the reality of man. Therefore it is not scientific.

My intention in writing this book is to demonstrate that distributism is a robust economic theory, demonstrated by actual practice, and is capable of tackling the difficult and sophisticated problems that we face. I hope that this book will enable the distributist to enter the debate and stand his ground against all comers: socialist, capitalist, Austrian, Keynesian, or whatever.

This is the distributist moment. We must seize this moment; it will not come again. We must arm ourselves with both the moral and technical knowledge that will be required to reform our world and preserve our freedom. For make no mistake, although all these other answers have been tried and found wanting, there is yet another answer: slavery. Slave societies have proven themselves stable over long periods of time, and so provide a solution, no matter how distasteful to our Christian heritage, to the problems of social and economic stability. In the end, the question will be, as Belloc predicted it would, between freedom and slavery.

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Chapter XVII: The Practice of Distributism

The next-to-last chapter. Comments welcome

Somewhere, the Sage hath said, Philosophy is easy; plumbing is hard. The Sage is correct; we should be suspicious of systems that exist only in the mind, but are never seen on the ground. It is only on the ground that they can be tested, and on those grounds alone we should take our stand. It is easy—too easy—to come up with abstract systems which are perfection itself; it is much harder to make them work. The problem with abstract theorizing is that creating theories is a selection process; one must decide what to leave in a what to take out. But one can never know that the right elements have been included without seeing how the system works in practice. Hence, practice alone is the only standard of judgment about social systems.

In Chapter II we noted the failure to Capitalism to live up to its own standards, to deliver what it promises. We noted that it always and everywhere ends up with a statist economy, ever more dependent on government interventions. But such a critique would ring hollow if Distributism did not have its own practice which the capitalist could examine in the same way we have examined capitalism. Fortunately, there are many long-standing examples of distributist economies and practices, and their problems and successes can be examined in as much detail as you like; we can see whether the theory describes an actual practice, and whether the practice works as advertised. Here I will mention only of the more prominent examples, and I invite the reader to examine them in greater detail for himself.

The Mondragón Cooperative Corporation (MCC). Recently, the workers in the Fagor Appliance Factory in Mondragón, Spain, received an 8% cut in pay.¹⁠ This is not unusual in such hard economic times. What is unusual is that the workers voted themselves this pay cut. They could do this because the workers are also the owners of the firm. Fagor is part of the Mondragón Cooperative Corporation, a collection of cooperatives in Spain founded over 50 years ago.

The story of this remarkable company begins with a rather remarkable man, Fr. José Maria Arizmendiarrieta, who was assigned in 1941 to the village of Mondragón in the Basque region of Spain. The Basque region had been devastated by the Spanish Civil War (1936-1938); they had supported the losing side and had been singled out by Franco for reprisals. Large numbers of Basque were executed or imprisoned, and poverty and unemployment remained endemic until the 1950’s. In Fr. José’s words, “We lost the Civil War, and we became an occupied region.”²⁠ However, the independent spirit of the Basques proved to be fertile ground for the ideas of Fr. José. He took on the project of alleviating the poverty of the region. For him, the solution lay in the pages of Rerum Novarum, Quadragesimo Anno, and the thinkers who had pondered the principles these encyclicals contained. Property, and its proper use, was central to his thought, as it was to Pope Leo and to Belloc and Chesterton. “Property,” Fr. José wrote, “is valued in so far as it serves as an efficient resource for building responsibility and efficiency in any vision of community life in a decentralized form.”³⁠

Fr. José’s first step was the education of the people into the Distributist ideal. He became the counselor for the Church’s lay social and cultural arm, known as “Catholic Action,” and formed the Hezibide Elkartea, The League for Education and Culture, which established a training school for apprentices. He helped a group of these students become engineers, and later encouraged them to form a company of their own on cooperative lines. The engineers agreed to do so, but had no specific plan or product in mind. In order to establish a factory, it was necessary to obtain a license from the government, which was not always cooperative toward the Basques. But when a nearby stove factory went bankrupt, they raised $360,000 from the community to buy it (1955).⁴⁠ This first of the co-operatives was named Ulgor, which was an acronym from the names of the five students of Fr. José’s who were the founders. It was first organized as a conventional business because there was no legal form for cooperatives, nor would there be until 1959.

From such humble beginnings, the cooperative movement has grown to an organization that employs over 100,000 people in Spain, has extensive international holdings, has, as of 2007, €33 billion in assets (approximately US$43 billion), and revenues of €17 billion. 80% of their Spanish workers are also owners, and the Cooperative is working to extend the cooperative ideal to their foreign subsidiaries.⁵⁠ 53% of the profits are placed in employee-owner accounts. The cooperatives engage in manufacturing of consumer and capital goods, construction, engineering, finance, and retailing. But aside from being a vast business and industrial enterprise, the corporation is also a social enterprise. It operates social insurance programs, training institutes, research centers, its own school system, and a university, and it does it all without government support.

Mondragón has a unique form of industrial organization. Each worker is a member of two organizations, the General Assembly and the Social Council. The first is the supreme governing body of the corporation, while the second functions in a manner analogous to a labor union. The General Assembly represents the workers as owners, while the Social Council represents the owners as workers. Voting in the General Assembly is on the basis of “one worker, one vote,” and since the corporation operates entirely form internal funds, there are no outside shareholders to outvote the workers in their own cooperatives. Moreover, it is impossible for the managers to form a separate class which lords it over both shareholders and workers and appropriates to itself the rewards that belong to both; the salaries of the highest-paid employee is limited to 8 times that of the lowest paid.

Mondragón has a 50 year history of growth that no capitalist organization can match. They have survived and grown in good times and bad. Their success proves that the capitalist model of production, which involves a separation between capital and labor, is not the only model and certainly not the most successful model. The great irony is that Mondragón exemplifies the libertarian ideal in a way that no libertarian system ever does. While the Austrian libertarians can never point to a working model of their system, the Distributists can point to a system that embodies all the objectives of a libertarian economy, but only by abandoning the radical individualism of the Austrians in favor of the principles of solidarity and subsidiarity.

The Cooperative Economy of Emilia-Romagna. Another large-scale example of Distributism in action occurs in the Emilia-Romagna, the area around Bologna, which is one of 20 administrative districts in Italy. This region has a 100 year history of cooperativism, but the coops were suppressed in the 1930's by the Fascists. After the war, with the region in ruins, the cooperative spirit was revived and has grown every since, until now there are about 8,000 coops. The are of every conceivable size and variety. The majority are small and medium size enterprises, and they work in every area of the economy: manufacturing, agriculture, finance, retailing, and social services.

The “Emilian Model” is quite different from that used in Mondragón. While the MCC uses a hierarchical model that resembles a multi-divisional corporation (presuming the divisions of a corporation were free to leave at any time) the Emilian model is one of networking among a large variety of independent firms. These networks are quite flexible, and may change from job to job, combining a high degree of integration for specific orders with a high degree of independence. The cooperation among the firms is institutionalized many in two organizations, ERVET (The Emilia-Romagna Development Agency) and the CNA (The National Confederation of Artisans).

ERVET provides a series of “real” service centers (as opposed to the “government” service centers) to businesses which provide business plan analysis, marketing, technology transfer, and other services. The centers are organized around various industries; CITER, for example, serves the fashion and textile industries, QUASCO serves construction, CEMOTOR serves earth-moving equipment, etc. CNA serves the small artigiani, the artisanal firms with fewer than 18 employees, and where the owner works within the firm, and adds financing, payroll, and similar services to the mix.

We discussed in Chapter 16 how the cooperatives work as an industrial model. Here let us only add that that the Emilian Model is based on the concept of reciprocity. Reciprocity revolves around the notion of bi-directional transfers; it is not so much a defined exchange relationship with a set price as it does an expectation that what one gets will be proportional to what one gives. The element of trust is very important, which lowers the transaction costs of contracts, lawyers, unlike modern corporations, where such expenses are a high proportion of the cost of doing business. But more than that, since reciprocity is the principle that normally obtains in healthy families and communities, the economic system reinforces both the family and civil society, rather than works against them.

Space does not permit me to explore the richness of the Emilian Model. I will simply note here some of its economic results. The cooperatives supply 35% of the GDP of the region, and wages are 50% higher than in the rest of Italy. The region's productivity and standard of living are among the highest in Europe. The entrepreneurial spirit is high, with over 8% of the workforce either self-employed or owning their own business. There are 90,000 manufacturing enterprises in the region, certainly one of the densest concentrations per capita in the world. Some have called the Emilian Model “molecular capitalism”; but whatever you call it, it is certainly competitive, if not outright superior, to corporate capitalism.

Taiwan and the “Land to the Tiller” Program. In 1949, the Chinese Nationalists were defeated by the Communists and fled to the island of Formosa, now called Taiwan. The Taiwan that greeted the refugees was a feudal backwater. Mostly it was a nation of small sharecroppers paying rents of 50-70% of the crop. Most of the land was owned by members of 20 families. Further, since the returns on land were so high, there was little interest in investing in industry. In addition, Taiwan had to absorb 2 million refugees from the mainland and bear the costs of defense. It was expected that Taiwan would soon fall to the mainland communists, as the Kuomintang had never proved very effective in controlling China. It was necessary to act quickly to reform Taiwan; it was the very failure to enact reforms which had made the Kuomintang unpopular in China and led to the victory of the Communists. They could not make the same mistake twice.

Effective control of the orient was in the hands of General Douglas MacArthur, who happened to be a distributist. He worked out a plan of reform for Korea, Japan, and Taiwan. Here we deal just with the reforms in Taiwan. The basis of the plan is that the farmers who actually worked the land would come into possession. The landowners were forced to sell the land to their tenants at a price equal to 2.5 times the average crop. The money to buy the land was given to the farmers, who repaid it over 10 years. Under this “land to the tiller” program, 432,000 families came into possession of their own land.

The results were dramatic. Farm production increased as farmers used more fertilizer, went to multiple cropping with as many as four crops/year and diversified production to higher value but more labor intensive crops. Production increased at an annual rate of 5.6% from 1953 thru 1970. The farmers suddenly had something they never had before: relatively large amounts of disposable income. Now they needed some place to spend it. Providing products to buy would require an expansion of industry on the island, if the country was not to be dependent on imports.

Most of the payments to the landowners was not in the form of cash, but in bonds. These bonds were negotiable industrial bonds which they could then invest in any light industry the former landowners chose.⁶⁠ Indeed, there was nothing else they could do with the bonds; it was a case of “invest or die.” The strategy was twofold: get capital, in the form of land, into the hands of farmers; get capital, in the form of industrial investment, in the hands of entrepreneurs. Note that the strategy provided both goods to buy and purchasers to buy them; it was a binary strategy, giving equal weight to production and consumption. A tremendous number of capitalists were created overnight; the former landowners, who previously had no interest in manufacturing, were converted into instant urban capitalists and had to find places to invest the proceeds from the lands sales; the landless peasants became proprietors. By this method, the government provided support to Taiwan’s fledgling industrial base. But the fact that the actual companies to invest in were picked by the former landowners meant better investment decisions than if the government had tried to pick the winners itself. Industrial production expanded, giving the newly empowered peasants some place to spend the money buying locally produced goods.

We can see the Taiwanese experiment for the conjuring trick it was: the government sold land it didn’t own, bought with money it didn’t have and financed industries that didn’t exist; the government managed to both expand the consumer market and to provide the industrial production necessary to serve that market and serve it from local resources. There was no inflation because the money supply expanded at the same rate as production by a sort of automatic method. Redistribution allowed for expansion of the consumer base which allowed for expansion of the industrial base. It is not often in business and economics that one gets to see solutions which are elegant and beautiful, but certainly the land to the tiller program qualifies.

The results have been impressive, both in economic and social terms. Starting with crude products made in small workshops, Taiwan followed the industrial value-added food chain right shipbuilding, electronics, and every sort of industry. Taiwan has managed 50 years of high growth rates, increased equality, and low tax rates (comparatively). Unemployment was low to non-existent through most of Taiwan’s post war history. Before 2000, it rarely exceeded 3% and usually was less than 2%. Since 2000, the rate has risen as high as the low 5’s before dropping back to the 4% range as Taiwan struggles to adjust to outsourcing to mainland China. By human measures, Taiwan’s growth was also a great success. For example, the literacy rate increased from 45% in 1946 to 93% in 1989; life expectancy went from 59 years in 1952 to 74 years in 1989 while the per capita caloric intake went from 2,078 calories to 3,070 in the same period. Living space per person went 4.6 square meters to 23.8.⁷⁠ Further, Taiwan and the other “Asian Tigers” were able to achieve these successes despite having population densities among the highest in the world, a fact which contradicts the prevailing dogma that population density is an impediment to growth.

Employee Stock Ownership Plans (ESOP). ESOPs are a leveraged buy-out of a company in behalf of the employees. To simplify a complex process, a fund is set up to borrow the money with which to buy the company. As the loan is repaid from the profits of the firm, ownership is transferred to the employees, so that over time they become owners of their own firm. There are thousands of ESOPs in theory, however there are a much smaller number in practice because the law allows ESOPs to function as a tax dodge, so many are set up with no intention of transferrring real ownership. ENRON, for example, was an ESOP in name, but certainly not in fact; the owners had no intention of relinquishing their control.

However, where there is a sincere intention to transfer real ownership to the workers, ESOPs tend to outperform their “shareholder” corporate cousins. The sign of this sincere intention is not so much the formality of the ESOP, but the culture of “open management” that is established within the firm. An outstanding example of this is the Springfield Re-manufacturing Company (SRC), which was originally a division of International Harvester, but was purchased by a group of its employees, headed by Jack Stack. These men had an idea of business that was completely different from the remote shareholder model of the modern corporation.

Of course, Stack and his colleagues would offer ownership to their employees, but this was just a means to an end:

Part of the problem has been the tendency of companies to use stock merely as a form of compensation—a carrot to get people to work harder. In a company with a strong culture of ownership, stock is more than compensation. First and foremost, it's a vehicle for change....Equity is used to involve people in the process of making a difference in the world. Why? Because business is not an end in itself. It's a means to an end.⁸⁠

What Stack set out to create was a community of entrepreneurs, rather than just a collection of people with jobs; indeed, SRC wanted to do away with “jobs” and the employee mentality altogether. But the primary problem is that people have been trained to see themselves in terms of jobs rather than entrepreneurs; they see themselves as merely performing a function for somebody else, usually somebody very remote. To accomplish this goal, to create this community, SRC used two means: education and equity-sharing.

To educate the members of the firm (it would be wrong to say “employees”), Stack invented a system of informal but continuous education he called The Great Game of Business. If the workers are going to take responsibility for the firm, they must know the rules of business, and the Great Game was the means of teaching them these rules, from the simplest to the most complex. As Stack evaluates the results of this “game,” he notes that “we’ve had dozens of employees rise from the shop floor…to top management positions, and they’re far better qualified than a lot of MBAs I see.”⁹⁠ The game required that the firm practice open-book management. If all members of the firm are to be responsible for the firm, then they all must have equal access to the books. Further, you cannot truly educate employees unless they can see how their actions affect the firm, and this is impossible without looking at the books. But the greatest benefit, as Jack Stack notes is that, “When you open your books—really open them—you also open your mind, and neither your mind nor your books will be closed again.”¹⁰⁠

Continuous education and open-book management frees the firm from the constraints of the division of labor, which confines each worker to just one task, and from the quasi-militaristic “top-down” management, which confines responsibility to just one group. The results of this culture at SRC have been nothing short of phenomenal. In 20 years, they went from sales of $16 million to $185 million, with similar results for profit and shareholder equity. But it is in the area of shareholder equity that the firm really stands out, because all of the shares are owned by the workers. The company has 727 worker-owners, of whom only five were original members of the firm. The other 722 shareholders own 64% of the firm. This point is crucial, because “owning their work” must involve real ownership, and not just some psychic substitute. Equity-sharing defines the community, a community built on the premise that all the members of the community must share in the wealth that the community creates.

Other Examples. There are many other functioning examples of Distributism in action: micro-banking, mutual banks and insurance companies, buyers and producers cooperatives of every sort. This sample should be enough how distributism works in practice. Distributists are often accused of being “back to the land” romantics. The truth is otherwise. It is the capitalist who is the true romantic, because he believes in an ideal of which there is no functioning example; capitalism is never able to operate anywhere near its own principles; the mortality rates are simply too high. The Distributist, on the other hand, is a hard-headed realist, believing in what he can see, putting his faith in systems that work in practice. In reality, this idealistic capitalism always ends up relying on government power and money to rescue it from its own idealistic excesses; the distributist relies on functioning systems to deal with . Distributism goes from success to success; capitalism goes from bailout to bailout.

1“All in this together,” Economist.com, March 26, 2009, http://www.economist.com/business/displaystory.cfm?story_id=13381546

2R. Matthews, Jobs of Our Own: Building a Stakeholder Society (Sydney, Australia and West Wickham, UK: Comerford and Miller, 1999), 184

3Ibid., 185

4Ibid., 195

5Mondragón Cooperative Corporation, “2007 Annual Report,” December 31, 2007, http://www.mcc.es/ing/magnitudes/memoria2007.pdf

6J. Jacobs, Cities and the Wealth of Nations: Principles of Economic Life (New York: Random House, 1985), 100

7S.W.Y. Kuo, “Economic Development of the Republic of China on Taiwan,” in Agriculture on the Road to Industrialization (Baltimore: John Hopkins University Press, 1995), 334

8J. Stack, A Stake in the Outcome: Building a Culture of Ownership for the Long-Term Success of Your Business (New York: Doubleday, 2003), 5

9Ibid., 9

10Ibid., 9 Boldface in original.

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Chapter XVII: Distributism and the Health Care System

I am coming to the end of this, finally. Just a few more chapters to go. Your comments and critiques are welcome.

Distributism would be of little practical use if it could not provide useful answers to practical problems of the type we face practically everyday. I believe distributism does indeed provide a useful set of tools to analyze these problems and to devise useful solutions. But the proof of this claim can only come in the analysis of an actual problem. For this example of distributist analysis, I choose the American health care system, which is experiencing great difficulties, difficulties for which no one has yet devised a workable solution.

Some sign of these difficulties is shown by the fact that in 2007, the United States spent 16.2% of its GDP on health care, up from 8% in 1975.¹⁠ Of this amount, the government pays about 46%. Compare this with Great Britain, where they spend about half that amount, or 8.4% of the GDP (2006).²⁠ In other words, the United States spends almost as much in public money as the English do in total, yet we do not have universal health care. We spend more in private funds than the English do in total, yet we do not have a free-market system. We spend more than any other country in the world on health care, but we have neither a truly public nor a truly private system. Rather, we have a Rube Goldberg contraption that combines the worst features of capitalism and socialism. And for all the money we spend, we leave a large percentage of the population without insurance. 15.3% in 2007 (about 46 million people) and that number has risen by at least 4 million in the last year due to our economic problems. Further, even people who have insurance often find that it is inadequate and that a medical emergency leaves them with crushing debts. The insurance companies maintain large staffs whose only job is to deny as many claims as possible; indeed, their compensation is not based on how accurately they assess claims, but solely on how many they deny. Any claims adjuster who fairly assesses claims will quickly find himself unemployed.

Spending twice as much on health care might be justified if the results were significantly better. Yet the opposite is true. By every objective measure, we do far worse when compared to other industrialized nations. In terms of life expectancy, infant mortality, preventable diseases, and many other categories, the United States falls far behind Japan, Canada, Western Europe, and nearly all the other industrialized nations of the world.

The problem is not only the large share of the GDP that the system consumes, but also the continuing growth of that share. Over the last 10 years, the growth in health care expenditures as a percentage of the GDP averaged 1.86% per year. Even during this current recession, the cost of health care has been the only thing that is growing. Obviously, this cannot continue; sooner or later the system must fall of its own weight, and my guess is that day is coming sooner rather than later.

Some Possible Causes

Of the myriad of possible causes cited for this phenomenon, two are often given great weight in the discussion: improved technology and an aging population. However, there are serious problems with both of these “explanations.” Concerning improvements in technology, it is certainly true that there have been great advances in medicines and machinery. However, improvements in technology normally lower costs, not raise them. Health care is the only industry where an executive could get away with saying, “Our technology has vastly improved, therefore we are far less efficient.” That being said, there is a case where improved technology actually raises costs; it is where the technology is provided under monopoly conditions. More of this in a moment.

An aging population seems a more plausible explanation, seeing that the problems of aging tend to be more chronic and expensive than those of easily repaired youth. However, this cannot be the full explanation, since aging is not a problem unique to the United States. All of the developed countries have similar demographics—or worse—yet still spend far less than the United States. So by itself, aging cannot be the problem. However, there is something unique about the American situation which raises the costs of aging, namely, senior health care is socialized while care for most of the rest of the population is not. This means that the elderly can outbid the young and middle-aged in competing for scarce medical resources, thereby raising the costs for everybody. You have, in effect, a socialized system competing with a private system (more or less), and the socialized system seems to have endless resources, since they are the resources of the United States government.

Many other causes are often cited: the cost of malpractice insurance, immigration, fragmentation, greed, regulation, and so forth. While each of these may play a role, neither any one of them nor all of them collectively are sufficient to explain the rapid and continuing rise in costs.

Free-Market vs. Socialist?

The debates on this issue usually take place within the framework of “free market” vs. “socialized” medicine, yet the system we have is neither and both. It cannot be a free market system because the supply of medicine and medical services is limited by licenses and patents. Milton Friedman advocated abolishing the licensing of doctors altogether. Friedman argued that medical licenses restrict the supply of doctors and thereby raise the cost. He believed that the free market would judge medical competence better than any license board, rewarding the competent doctors and punishing the incompetent.

The problem with Friedman's argument is that we have already tried that. Right into the early 20^th century, doctors were unlicensed; they took perhaps one or two years at a medical college, usually a for-profit institution run by local doctors who lectured at the college. After their course of lectures, and without ever having touched a microscope or a cadaver, they set up as doctors. The results were disastrous, as became evident in the great Spanish Influenza pandemic of 1918; the level of medical training was simply inadequate to deal with the crisis. After that disaster, the move to improve education and require licenses gained public support to produce the system we have today, a system largely controlled by the American Medical Association (AMA).

Further, a free market solution depends on the availability of information and the ability to judge that information. In comparing doctors, information about them is hard come by, and even if I had such information, I would not be able to make an informed judgment. And if I am having a heart attack, I am in no position to do the comparison shopping that a free market requires.

Yet for all that, Friedman has a point. By limiting the number of doctors, we restrict the supply and raise the cost. Further, because of the high training requirements required for the license, the education of a doctor is long, arduous, and expensive. New doctors are frequently burdened with huge education loans, and setting up a practice requires a huge capital investment. This forces doctors to act more like businessmen than medical professionals; they have to turn a large profit just to break even on both their costs and the amount of income forgone while they were getting their educations. And it has frequently been charged that the AMA restricts the number of “slots” in medical schools so as to further restrict supply.

Licenses are not the only problem in making medicine a free-market service. A greater problem results from patents for medicines and medical technology. A patent is a government-granted monopoly right which gives the patent holder the exclusive right to manufacture some particular product. Currently, patents run 20 years, during which the patent holder may place any price he chooses on his product, and he usually chooses a monopoly price. Monopoly pricing is the antithesis of free-market pricing. A free market, in theory at least, prices products to produce the highest possible amount of goods at the lowest possible price; the equilibrium point between supply and demand, under conditions of perfect competition, guarantees the lowest practical price to the buyer and the lowest practical return to the producer. But none of this is true under monopoly conditions. The producer supplies the least amount of product for the greatest possible price, and in the case of medicines, it is like selling water to people dying of thirst in the desert: they will pay any price to save their lives.

Monopoly pricing also has another and more insidious effect. In a competitive market, price serves as an allocation signal. A price that is too high will leave some goods unsold; a price that is too low will result in a shortage of goods. The market will provide the proper signals to producers telling them how much product to supply to the market and at what price. But monopoly destroys this mechanism; the monopolist may demand a share of whatever funds are supplied to a given market, and the more funds supplied, the higher the prices go without increasing the supply of the product. This is sufficient to explain why medical expenses consume an ever increasing share of the GDP without increasing the number of people covered. More funding means only higher prices, not more actual goods supplied. But as the monopolists claim an ever-larger share of the total GDP, the system must sooner or later collapse.

The argument for patents is that they increase innovation; without the prospect of great wealth, people will have no incentive to develop the miracle drugs and marvelous technology that we enjoy. In other words, for the sake of science and progress, we must accept monopolies.

Health Insurance

It is often suggested that insurance can function as a middle term between the market and socialism. However, this involves a misunderstanding of what insurance is. Insurance can only be a means of cost-averaging; some must pay too much and others too little, but one way or another, the cost must be paid by the users, which, in a monopolistic market, will price many out of the market. And healthy purchasers will seek plans that eliminate as many “risky” applicants as possible; they will seek the safest “risk pool” which is reflected by the lowest cost. People with higher risks will be placed in higher risk pools with higher prices, which will price many out of the market. So nothing is gained towards a universal, affordable system.

Further, insurance works differently in a monopolistic market. Cars and homes can be efficiently insured because the home and car repair businesses are relatively free markets, which means that insurers can rely on the market to control costs. Insurance will have some inflationary effects, as people perform repairs they might otherwise have deferred, but in general the effects are mild. This is not true in the presence of monopolies; the monopolistic market cannot be relied on to control costs, quite the opposite: the more money supplied to a monopoly, the more the prices will rise. This in turn raises the cost of insurance, which drives more people out of the market. The effect is the prices rise while coverage shrinks, or precisely the effects we are seeing in the real world.

Some have suggested that these problems will go away if we make insurance mandatory and universal, as in the Massachusetts Plan. However, a mandatory purchase is just another name for a tax; since everybody is required to purchase the product, it cannot really be a free market. Again, some argue that even though the purchases are mandatory, the system is still “free-market” because of the variety of plans and prices provided. However, the price differences in the plans can only come from differences in coverage. Some will cover more, and some less; some will deny more claims, and others less. People will have to guess in advance what diseases and medicines they are likely to need, and to the extent that they guess wrong—which is inevitable—they will be uninsured. You will have, essentially, the same situation we have today but in a different form: instead of the insured and uninsured, you will have the fully insured and the partially insured, with partial insurance being the equivalent of non-insurance for many situations.

Again, some will counter that the government can require all the plans to cover the same things. However, a standard, compulsory plan is no different from socialized medicine, and is likely to be a good deal less efficient. There are likely to be high expenses for profit and marketing, even though profits are not justified for compulsory purchases, and the “marketing” can be no more than an effort to convince people to buy the same product with a different label on it; it serves no useful purpose and only adds useless expense. Finally, there is likely to be duplication in administrative expenses. If all the companies are selling and administering the same plan, there is simply no reason to have multiple administrative organizations. In such a case, a “single-payer” system makes more sense.

Some will argue that Health Savings Accounts (HSAs) combined with catastrophic insurance will go a long way towards solving the problem. HSAs allow people to put a portion of their income in tax-free savings accounts, usually up to about $6,000 per family, to pay for ordinary medical expenses and then buy high-deductible policies to cover anything beyond that. The benefits are that people will be paying for most care from their own funds and are thus likely to make better use of the funds. At the same time, high-deductible policies are much cheaper. Between the two, great efficiencies are gained.

However, HSAs or some variation have been in place for many years, but have done little to address the underlying problems. The reasons are not hard to find. The first problem is that the people who are least able to afford insurance are also those who are least likely to have a surplus that they can save. In an economy that has seen a stagnant median wage for 30 years, even in the face of rapidly rising productivity, this should not be surprising. HSAs will not help the unemployed or the underemployed at all. Further,the majority of those who cannot afford any insurance are already in the lowest tax bracket, hence the tax advantages are minimal. And the majority of taxes that they do pay are the FICA taxes, and HSAs are not exempt from these. The greatest advantages of HSAs go to those who need them the least. A person in the lowest tax bracket, assuming he can save $6,000, might get a $600 tax advantage, but a person in the 35% bracket gets a $2,100 government benefit. Although the intentions behind HSAs are laudable, in effect they are mere subsidies to those who already have sufficient surplus.

Ending the Oligarchies and Monopolies

It should be clear that the vast majority of current thinking about the problem does little to address the underlying causes of our dilemma. And this is odd because the mechanics of prices are well known and have been since the time of Aristotle. No competent economist of whatever school disputes these mechanics. There are two bedrock facts about any market system that we must confront :

1. You cannot lower prices without raising supply relative to demand

2. You cannot raise the supply in the face of oligarchies and monopolies.

Therefore, the key to the whole problem is first to control or eliminate the monopolies. Without addressing this problem, the system will be as it is, and any “reform” will only make it worse. However, there can be no question that a continuing stream of innovations have been provided under the patent regime, and medical licenses have guaranteed at least a minimum level of training for medical personnel. Is there any way to reform these systems and yet maintain their advantages?

The Problem of Patents. Contrary to received wisdom, patents are not necessary for research in any field. Even today in the medical field, 40% of research funds come from the government or from non-profit organizations. Hence, even a sudden end to the patent system would not end medical research. What research does require is a reliable funding source, which can come more efficiently from manufacturing licenses than from patents. That is, when a firm develops a new medicine they get the right to license that product to any number of production firms. The licenses should be for a longer term than the current patents, which will provide R&D firms with a much more secure revenue stream from which to fund further research. The license fee would be small relative to the current monopoly profits, but they would continue for a longer period of time, after which the product would enter the public domain and be appropriated by everybody.

Manufacturers, on the other hand, will have to compete on price and service, and will therefore have to find the most efficient ways to manufacture and distribute the medicines. The effect of such a license system would be to divide R&D and manufacturing firms. R&D firms would want as many companies as possible to distribute their product, and would have an incentive to keep the fees low. There may be a role for the government in setting the license fees.

If, however, the pharmaceutical firms insist on maintaining their current monopolies, then the only way to control costs is to have government set the prices. This is anathema to a free-market system. However, monopolies are the antithesis of the free market. And the monopoly cannot have it both ways: they cannot insist that the government enforce their monopoly rights while demanding that the government take no role in pricing. If they wish the government to withdraw from pricing, then the government should cheerfully agree, but it should also withdraw from enforcing their patents. This system of price controls already obtains in countries with a “single-payer” system. The government negotiates the price of the drugs with the manufacturers. This is why American drugs are usually cheaper in other countries than they are in America. The American taxpayer bears all the burdens of research, but gets none of the price benefits.

The Problem of Medical Licenses. Milton Friedman is undoubtedly right that medical licenses restrict the supply of medical services, and under the current system, this will not change. However, the current system may be an over-reaction to the lax standards of the 19^th century. And any group that sets its own standards is likely to set them too high in order to limit supply and keep their income high.

I believe that we can drastically increase the supply of medical services—and therefore decrease the price—by providing a range of licenses: midwives, nurse practitioners, medical practitioners, medical doctors, and more advanced doctors of medicine. First-line care could easily be provided by NP's and midwives working in their own neighborhood clinics, perhaps under the general supervision of a medical practitioner or medical doctor. Another area where this applies is in orthodontics. There is no reason why anybody needs a degree in dentistry to install orthodontics; the work could be as safely performed by orthodonturists, and at a far lower cost. It is only the legal monopoly that dentists have on the business which keeps the prices so high, thereby denying this useful and normally affordable service to many poor people, while charging the rest of us unreasonable prices.

A series of licenses would provide another benefit. As things stand now, a student will spend most of his youth and all of his fortune in getting an MD, and will still be left with staggering debts. Yet, he will have a degree in a profession he has not actually practiced. A series of licenses will provide the student with a career path by which he may alternate education with practice. He will have an income stream with which to finance his education, but he will also have practical experience to take to each successive layer of education. This will produce doctors who are more practiced.

Medical Guilds

It is not enough, however, to address supply and demand problems. All social goods, medical services included, are delivered by institutions, and the structure and control of these institutions will dictate the outcomes. If our social institutions are organized solely around the profit motive, as they are now, they will find clever ways of defeating any attempts to restrain their power to set prices. People who are only concerned with supply and demand are usually baffled by how easily the mechanism breaks down and monopoly and oligopoly take control. But the answer is not surprising: if profit is the only measure, then the entire institutional effort will be towards breaking down the limits on profit, the major limit being a truly free market. (See Chapter V on mechanisms businesses use to defeat market pricing.)

This is not to say that there is anything wrong with the profit motive per se. Indeed, without making a profit, no firm or institution can be sure that it is delivering a useful product and correctly allocating its resources. But it is to say that a single measure—any single measure—is always self-defeating. As an analogy, suppose we designed cars solely on the basis of safety. We would indeed produce cars that were absolutely safe in nearly any circumstances. However, such cars would be so heavy and expensive that few people would want them. In the same way, a system where profit is the only measure will eventually fail even to make a profit. Other measures must come into play. But an institution solely devoted to profit cannot allow such measures. So what institutional framework should medicine have?

I believe that the answer lies in a well-tested institution from out past, and that institution is the guild. The guilds were associations of professionals in a given field who took responsibility for the training of their members and the quality and price of their products and services. They were the sole judge of the qualifications of their members, and had the power to set both standards and prices. What I propose is that we allow medical professionals to form guilds with the power to grant various licenses. They would be the sole judge of the qualifications required, and they would set the practice standards and prices. But most importantly, the guild would stand surety for its members. That is to say, when a patient had a complaint, he would sue not the doctor but the guild. The guild would be responsible for the competence and good conduct of its members.

You might ask, “Why would one doctor stand surety for another?” But in fact, this is what already happens in malpractice insurance. Insurance is merely cost averaging. If the losses go up for one doctor, the rates for every other doctor in that insurance pool go up. But doctors have no control over who is in their insurance pool; the quack and the competent get thrown in the same insurance system, with the latter required to pay for the former. In a guild system, the guild would have a strong incentive to ensure the competence of their members and monitor their practice standards; they would want to weed out the incompetent or downgrade their licenses. The guild would purchase insurance for all its members, or even provide the insurance itself, thereby removing the profit motive and lowering the cost.

Since the guild would be the sole judge of the qualifications and practices of its members, there would be a greater diversity of practical approaches. The Guild of St. Luke, for example, might favor one approach to medicine, The Galen Guild might favor another, and natural competition and practical experience would be sufficient to discover the superior approach. And while it might be difficult for the public to judge one doctor against another, it would be easier to judge the performance of one guild versus another. Further, this also provides space for “alternative medicine.” I have no way to judge whether such things as acupuncture or Chinese herbalism are medically valid. But when joined in a guild and required to stand surety for each of their members, practices which do have some value would likely thrive, even if conventional medicine does not, as yet, recognize their value. And if they have no value, it is likely that such practices would simply disappear because the insurance claims would bankrupt them. Likely the government would still have some minimal role to prevent outright quackery; they would not likely allow a Guild of Peach Pit Cure-alls.

In addition to insuring their doctors, the guild would offer insurance to the public. That is, they could offer to treat people for a fixed annual fee. This would give the guilds an income stream, but also a great incentive to insure that small problems do not go untreated to become big problems. In other words, such health insurance would actually be concerned with insuring health rather than denying claims. Further, the guilds could be required to devote a certain amount of their resources to free or low-cost care for the impoverished or indigent. The government might play a role here in qualifying people as eligible for such reduced-cost treatment, and could even pay a part of the cost.

The guild would be empowered to establish its own clinics, its own training and education programs, its own pharmacies, labs, administrative structures, and whatever else is necessary to medical practice. This would also make it easier for medical professionals to enter practice without worrying about setting up the business and administration that consumes so much of doctor's time today. The doctor, and every other member of the guild, would be the “owners” of the guild, and while they would certainly be interested in their own incomes, it would be impossible for that to be their sole interest, not so long as they are providing insurance to each other and to the public.

The Future of Reform

The current system, consuming 16% of GDP—and rising—is simply unsustainable. Moreover, the great burden it places on our businesses makes us uncompetitive in world markets, as we have discovered in the auto industry. The status quo is no longer an option. But here we come to a great conundrum: either we return to the chaos and quackery of the 19^th century, or we move to a European-style socialist system, in which medical services are allocated by the state. European socialism has resulted in better over-all health statistics and at least a perception of fairness in allocating services. However, socialism converts everybody from being a citizen to being a ward of the state. Nevertheless, if one has a life-threatening illness or injury, one might prefer to be a live ward rather than a dead citizen.

But there is a great problem in establishing universal health care, whether by socialism or any other method. Namely, there will be an additional 50 million persons in the system who are currently uninsured, plus the untold millions who are under-insured. This is a tremendous increase in demand with no corresponding increase in supply. Either there will be huge price increases, or the government will be forced to severely ration health care. Both courses of action are untenable, and the system will collapse before it gets started. Without increasing the supply, you cannot control the costs, and this is impossible without curtailing or eliminating the monopolies and oligarchies that currently restrict supply.

But if costs are brought under control by market forces, and the institutional problem is solved by the guild, then the problem of universal care will turn out to be a relatively easy one; providing medical insurance to all will be no more difficult than providing car or home insurance. No system of reform currently on the table addresses either the supply or the institutional problems. Instead, they all exacerbate both problems. It will become painfully clear that as we move towards universal care, we will increase the demand but leave the supply unchanged. This will result in a disaster. I firmly believe that only a distributist analysis can give us the tools to look the problem squarely in the eye and provide rational solutions.

1Center for Medicare and Medicaid Services, “NHE Fact Sheet National Health Expenditure Data,” National Health Expediture Data, http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp.

2OECD, “OECD Health Data 2008 - Frequently Requested Data,” http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_37407,00.html

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Chapter XVI: Distributism and Industrial Policy

Can the Patient be Saved?

It is clear to everyone that the world economy is undergoing a deep crisis. The question on everybody's mind is whether this is just a “normal” part of the so-called “business cycle,” or whether it represents something more profound, perhaps even the end of that form of capitalism as it has existed for the better part of the last century. That is, have we just caught a cold, or do we have cancer? I hope the answer is the former; I fear it is the latter.

If it is the former, then it is likely that some form of government stimulus is the proper remedy, and as much as all sides may debate the particulars, they all agree on the medicine. There is good reason to believe in this medicine: it has worked well and often since the end of World War II; indeed, our economy has become dependent on huge government expenditures to remain in balance, and these temporary imbalances can be cured as they have been cured: by a little jiggling of the monetary and fiscal policy levers. If this is the case, then we will soon recover and go on as we have.

But there is a stronger reason to believe that it will not work as it has in the past, namely because it hasn't worked for the past eight years. The fact is, the economy has been operating under an extraordinary stimulus package since 2001. Think on this: George W. Bush took all the debt we accumulated between the time of Andrew Jackson (the last time the debt was paid off) up through Bill Clinton, and doubled it! He added $5 trillion to the national debt, a considerable stimulus by any measure.

Throughout it all, the economy remained anemic. Indeed, the “economy” was driven mainly by a housing bubble created not by any real growth, but by a compliant Fed and greedy financiers. An expansion of housing should be driven by an increase in wages, but median wages in this period actually fell. Hence, I think it reasonable to believe that what hasn't worked won't work; that another $800 billion, or even another $5 trillion will not do the trick. The old reliable system will not work any longer, and no amount of medicine can revive it. The system must change or die, or must change after it dies. Change is inevitable; death is optional.

The problem lies not with the banking system, although that system has its problems, but with the industrial and farming systems, the systems that actually create wealth. All other economic enterprises depend on these. Without fixing the industrial system, all other fixes will be either meaningless or, at best, temporary. Here we will look at the problems of the current system, and how distributism responds to these problems.

The “Supply-Push” Industrial System

While we may think of the current industrial system as a natural or eternal part of capitalism, it is in fact of relatively recent vintage. Indeed, when Adam Smith wrote about “the invisible hand” in the 18^th century, he assumed an economy of small and mostly local producers, none of which had any market power, and hence no way to substantially alter the competitive outcomes. Most firms, save a few dealing with commodities that were traded internationally, had an incentive to remain small and employ as little fixed-capital as possible.¹⁠ But all that began to change in the 19^th century, and especially in the second half of that century, with the development of the railroads. For the first time mass marketing over large areas became practical. The best way to take advantage of this new system was with highly expensive, special-purpose machinery. This made the capital employed in production very large indeed, which meant that finance became more critical to the economy than ever before; those without access to large amounts of capital had little chance of competing. By the late 19^th century, a new form of organization had appeared, the “M-form corporation” (“M” for multi-divisional) which spread all phases of production, often for very diverse products, across many divisions of the firm, while imposing a hierarchical structure to keep track of so many diverse functions.

All of this resulted in firms of tremendous power, both economic and political. This power replaced the invisible hand of Adam Smith with the all-too-visible hand of managers and government. Firms were now not price-takers, as in Smith's model, but price-makers. They could drive out smaller competitors, to be sure, but they could also drive down the price of labor. But when you drive down the price of labor, while increasing its productive capacity, you run into the problem that is usually called “overproduction” but is really “underpayment.” By 1890, the system was already plagued with constant “overproduction” problems.

This structure is often called the “Sloanist” model, because it was perfected by Alfred Sloan, the legendary chairman of General Motors from 1923-1946. Kevin Carson describes the model this way:

The only way to keep the unit costs of such machinery down is large-batch production to utilize full capacity, and then worrying about making people buy it only afterward (commonly known as "supply-push distribution.") So Sloanist industry, under "Generally Accepted Accounting Principles," produces goods to sell to inventory, regardless of whether there are orders for it or even of whether the product works, and has an astronomical recall rate. It follows a business model based on consumer credit and planned obsolescence to keep the wheels running. As Ralph Borsodi described it, the push distribution system ... amounted to making water run uphill. The overall logic of the system is that instilled by hypnopaedic suggestion in Brave New World: "Ending is better than mending." "The more stitches, the less riches."⁠²⁠

In other words, what the system actually manufactures is landfill, objects that spend as little time as possible in the hands of consumers as useful products while on their journey to the dump as useless garbage. Thus, the production model requires a consumerist model; we must be constantly taught, through expensive, manipulative, and unrelenting propaganda (advertising) that our happiness lies not in persons, but in things, and not merely in things, but in constantly new things. The old is icky; worse, it is unfashionable. Only by constantly buying what we don't need or already have can the system sustain itself; the size of the garbage dump becomes the true measure of our “wealth.”

To solve the problem of overproduction, governments have resorted to growing the public sector to supplement demand. This is has been the greatest impetus behind not only the growth in government in the 20^th century, but also for the extension of its imperialist and globalist reach in an effort to find, and force our way into, ever-new markets, as well as to guarantee sources of cheap labor and raw materials.

After World War II, the system reached some balance as the forces of the corporations, the government, and unions tended to balance each other out, and were sufficient, for a time, to keep wages high enough to absorb all the production, with some help from government spending. Since the 70's, however, productivity has exploded while median wages have stagnated. A vast gap opened up between the goods available for sale and the purchasing power necessary to absorb them. Markets could not be cleared. The obvious way to solve this problem is to fix the wage system. Without a just wage, without the worker getting a fair claim to his portion of the output through his wages, there is insufficient purchasing power to clear the markets. But rather than fix the wage system, the economy has relied on consumer credit; those with too much money simply lend it to those with too little, and at usurious rates. This solves the problem in the short term, but it makes the long-term problem worse. Because of high interest, more and more capital gathers at the top, and the day of reckoning is deferred, but not deterred.

The consumer's problem becomes the investor's dilemma; without sufficient purchasing power in the mass of men, the pool of good investments shrink, and the investor is forced to turn to pure speculation. He finds his portfolio full of exotic instruments he no longer understands. And what he primarily doesn't understand is that these instruments are not “investments”at all; that is, they do not provide funds to businesses to expand production. Rather, they are pure bets on the direction of some market, such as the housing market. Further, the excess capital tends to encourage leveraging; that is, investors lend huge amounts to other investors who place it in speculative instruments which are themselves dependent on an increasingly troubled productive sector. What you have is a dense network of highly leveraged bets that depend on other bets that depend on an increasingly shaky productive sector. The bets are so highly intertwined that a failure in one sector endangers every other sector. That is how a failure in a relatively minor market, like sub-prime mortgages, can bring down the entire credit system.

Meanwhile in the productive sectors of the economy, the combination of an oversupply of capital and an underfunded consumer makes it difficult for businesses to increase their profits. In an effort to improve their margins, they start by firing their workers and end by firing their machinery; more and more, the productive sectors move actual production overseas, leaving only a shell in the home country responsible for accounting, coordination, and marketing. Production is distributed, but legal control remains centralized. They invest their capital not in expanding production, since the consumer can't absorb any more production anyway, but in acquiring other companies to eliminate competition. The result is that ownership is increasingly concentrated in vast collectives known as corporations, even as production is distributed around the globe.

The argument infavor of the M-form mega-corporation has centered around the “economies of scale” that such large organizations can obtain. However, while there are some economies of scale, these are vastly outweighed by the dis-economies of scale; mere size brings great problems. But mere size also brings great power, and it is this power that interferes with the free market and hides the inefficiencies. Corporations can command the resources of government to obtain subsidies and favorable tax treatment, and they can raise barriers to competition through regulations whose main purpose is to raise the entry cost to small and more efficient competitors. Without the subsidies to hide the dis-economies and the barriers to keep out competition, the mega-corporation would not be a viable enterprise.

The Corporation as a Planned Economy

Economic literature is full of critiques of the socialist planned economies, all of which highlight the difficulties of trying to bureaucratically allocate resources in absence of a real market. But as it happens, all of these critiques can be applied equally to the modern corporation. After a certain size, the M-form corporation becomes indistinguishable from a planned economy, and convert what should be “free market” enterprises into bureaucratic structures that suffer from all the problems of a socialist state, with none of the benefits. To see how this happens, let us examine these problems in more detail.³⁠

Lack of an Internal Market. In a corporation of any size, there is an enormous internal trade in goods and services. The outputs for one division are the inputs to another, and services such as accounting, computing, and marketing are offered across divisional boundaries.⁴ But there is no market for these goods and services. In general, each division does not have a choice about which products and services to purchase and to whom they will sell their product. Yet, without a market, how does one know how to price products or how to allocate resources? The answer is that products are priced, and resources allocated, bureaucratically, by administrative decisions. Managers often find that their main job is to constantly fight the “battle of the budget” since it is the administrative process, and not the market, that determines their success. Readers will recognize this as the primary critique of a socialist economy, but one that fits equally the corporate economy. But a bureaucrat, public or private, can only make decisions as good as the information he receives. And here we encounter another problem endemic to both systems.

Information costs. In a large organization with a highly complex structure, there is a separation of of knowledge from work and a distribution of information spatially across many offices that may be separated by thousands of miles. But before any decisions can be made, this information must be gathered, processed, assimilated, and judged. Further, the separation removes the information from any context, and as the people who must use the information have little knowledge of the work they remotely supervise, the ability to judge information gets lost. It is not that such organizations lack information; quite the contrary, they are inundated by it. But it is like doing a Google search and coming up with millions of sites, only a few of which are relevant. It is impossible to know in advance which sites have the needed content. Unfortunately, in a hierarchical structure, power relationships tend to determine the content; there is always the danger that a “rank-based” logic will prevail. Managers, intent on advancement, tend to supply the information they know their superiors want to hear, rather then the information they ought to hear. Large organizations tend, therefore, to become systematically stupid.

All of this imposes high information costs. But no matter how many resources are devoted to information gathering and analysis, there is no way to ensure the completeness, accuracy, or relevance of the information.

Agency Problems. In a socialist economy, the officers of the state are supposed to run an economy that is “owned” by the people and act as their agents. But in practice, the socialist managers become the effective owners of the system, constituting a privileged group with their own interests. No matter how democratic the political system, the public at large generally lacks the information necessary to manage large enterprises. The same critique, however, applies to corporate management. The board of directors is supposed to act as the agents of the stockholders, and the managers as agents of the board. But as with the socialist collective, the managers of corporate collectives become the de facto owners.

John Bogle, the founder and former president of the Vanguard Funds, has documented the ways in which the top managers have constituted themselves as a new class that appropriates to itself all the privileges of ownership without any of the risks.⁵⁠ They appropriate to themselves outsized rewards that should, by right, go to the owners and the workers. How can they do this? Ownership of a business once designated active control of that business, but now, as John Bogle notes,

The position of ownership has changed from that of an active to that of a passive agent. The owner now holds a piece of paper representing a set of rights…but has little control. The owner is practically powerless to affect the underlying property through his own efforts…the “owner” of industrial wealth is left with a mere symbol of ownership while the power, the responsibility and the substance which have been an integral part of ownership in the past are being transferred to a separate group in whose hands lies control.⁶⁠

In other words, “ownership” itself no longer has the meaning in the corporation that it does with any other form of property. “Ownership” has been attenuated to a mere claim to whatever portion of the profits that the directors care to distribute, and the right to vote for these directors. However, this “right,” from the standpoint of the average shareholder, is more formal than actual. In practice, the costs of running a campaign against board members is prohibitively high, and the right to vote means little to the average stockholder, who rarely exercises it. In absence of active owners, the executives become the de facto owners of the firm. The corporation becomes, in effect, a mass of unowned capital appropriated by the managers. This new class tends to push the burdens and risks of work downward, and the rewards upwards.

The Divorce of Technical from Entrepreneurial Knowledge. Socialist planners prided themselves on their technical expertise and their deference to engineering talent. However, as their critics point out, while technology provides us with an endless range of production possibilities, it is impossible to evaluate these possibilities without knowing the price of the inputs. Since so many of the inputs are internal to the corporation, and since the corporation benefits from so many public subsidies, it is impossible to say that one system is more “efficient” than another. One can easily point to engineering marvels, but one cannot say that they are economically efficient. For example, the distribution system built by WalMart is certainly a technical achievement, but it depends on subsidized transportation costs. Without these subsidies, would the system aid or bankrupt the company? Neither the engineer nor the entrepreneur can answer such a question in absence of market prices.

Regarding this phenomenon, Kevin Carson notes:

Fully rational decisions are possible only if the knowledge of the relative value of inputs is combined with knowledge of how those inputs are to be used internally. The separation of ownership of capital from the knowledge of the production process leads to decisions divorced from reality. The same is true of the separation of management from the direct involvement in the production process, and the accountability of management to absentee owners rather than to workers.⁷

⁠For these reasons—and for many others—the modern corporations form, in the words of David Friedman, “indigestible lumps of socialism” in what is supposed to be a free-market system. Like any socialism, the system becomes increasingly dependent on state power and subsidies.

The Distributist Alternative

This critique would be pointless if distributism had no alternatives to offer. And the distributist alternatives would not be credible unless they were on the ground and working, and working in both large- and small-scale manufacturing. As it turns out, the distributist is offering not abstract panaceas, but systems which are on the ground and functioning; systems which any interested party may examine for their effectiveness. One such system is the distributive economy of Emilia-Romagna (Bologna) in Italy. As Kevin Carson describes it:

The closest existing model for sustainable manufacturing is Emilia-Romagna. In that region of 4.2 million people, the most prosperous in Italy, manufacturing centers on "flexible manufacturing networks" of small-scale firms, rather than enormous factories or vertically integrated corporations. Small-scale, general-purpose machinery is integrated into craft production, and frequently switches between different product lines. It follows a lean production model geared to demand, with production taking place only to fill orders, so there's no significant inventory cost. Supply chains are mostly local, as is the market. The local economy is not prone to the same boom-bust cycle which results from overproduction to keep unit costs down, without regard to demand. Although a significant share of Emilia-Romagna's output goes to the export market, its industry would suffer far less dislocation from a collapse of the global economy than its counterparts in the United States; given the small scale of production and the short local supply chains, a shift to production primarily for local needs would be relatively uncomplicated. The region's average wage is about double that of Italy for a whole, and some 45% of its GDP comes from cooperatively owned enterprises.⁸⁠

The salient points of this analysis concern distributed and flexible manufacturing, the use of small-scale, general-purpose machinery, the gearing of production to demand (“demand-pull” rather than “supply-push”), local supply chains, and widespread worker ownership. Let us look at these points in turn.

Flexible Manufacturing, This allows for the quick movement among different product lines as demands shift. This is difficult in the M-form corporation, where a new product line often involves setting up a new division complete with its own capital requirements, not to mention management overhead. Moreover, it is easier to integrate this sort of manufacturing with craft production, bringing about the best of both worlds. “Craft” no longer has to mean a trade-off between quality and price, between single-piece and mass production.

General-Purpose Machinery. The use of general-purpose machinery means that the factory can shift easily from product line to product line, as demand dictates, without excessive re-tooling costs. The current system which relies on product-specific machinery cannot match this advantage. Moreover, such general-purpose machinery is already widespread. Most households already own quite a bit of it, and if you canvass any neighborhood, you are likely to discover a wealth of capital which can be joined together to produce a variety of products cheaply, efficiently, and locally.

Demand-Pull Production. Demand-pull manufacturing has a number of both economic and social consequences. Economically, it lowers the need for inventories, encourages the localization of those supply lines, and lessens the “boom-bust” cycle. But socially, it relies less on advertising to move goods. Currently, consumers are the victims of non-stop propaganda which appeals to their basest instincts. It is no more than commercial pornography, but it is necessary to the supply-push problem. This propaganda is especially directed at children, who must be socialized to the culture of consumerism if the current system is to survive.

Local Supply Chain. Local supply chains greatly lower costs and increase the utility of any firm to its own region. We have convinced ourselves that it is more “efficient” to ship a tomato 2,000 miles before we eat it, or to ship parts from the other side of the world. But obviously, there is something wrong with that equation, and even the most dedicated “flat-earther” would concede that local supply is better than remote, all other things being equal.

Since the manufacturing is divided up among largely local firms that are selling to one another and to the public, the system is free-market and all the inputs are priced at their market price. This means that correct engineering, product, and marketing decisions can be made and resources allocated much more efficiently than in the internal socialism of the M-form corporation.

Widespread Worker Ownership. Finally, widespread ownership overcomes the problems of the division of capital, management, and labor, and of the division between technical and entrepreneurial knowledge. Workers are no longer commodified cogs in an economic machine, but in control of their own destiny because they are the owners of their own properties, be it property in land, machinery, or skills. The problems associated with the division of ownership from work and management from knowledge of the production process are overcome. Moreover, a sense of community is encouraged and strengthened. And in the last analysis, this is the real purpose of an economy. It is never about just making piles of money, but creating real wealth that supports real families and real communities.

Scalability. The M-Form corporation depends on gargantuan size to achieve its power, and thereby opens up a gap between “business” and big business, two very different kinds of enterprises with two very different effects on the market. The distributed model has also shown itself to be effective in large-scale manufacturing (as we shall see in the next chapter) but it is also scalable down to the level of the family firm, or even the single individual. Indeed, the distributed model allows people to take advantage of the capital they have, but is currently unused. For example, one can use one's own kitchen and spare room to open up a small restaurant. Indeed, it is only the oppressiveness of zoning laws, regulations, and the need for extensive tax accounting that keeps this from being more common than it is.

Now, one can debate as long as one wishes the efficacy of the distributive system. However, there is one group that has decided in favor of distributism, and that is the manufacturers themselves. For the past 20 years, they have been busy creating a perverse simulacrum of a distributed system. They have realized that it is no longer profitable to hold expensive machinery, and have distributed their plants throughout the world, relying on cheap transportation and legal ownership of the patents to maintain control of the end product. In today's industrial system, it is considered somewhat vulgar to actually own a factory when all that is needed is to own the brand.⁠⁹⁠ This is the “Nike” system, where the “product” is not the shoe but the “swoosh” on the shoe. Indeed, Nike itself makes nothing but patents and advertisements; actual shoes are made in sweatshops. But the advertising allows Nike to sell a shoe with a dollar in direct labor costs for $100.

This sounds like a good business, but actually the company sows the seeds of its own destruction. Management guru Thomas Peters gushes that some 90% of a product's value is not in material or labor costs, but in “intellectual property.” What this means is that the corporation is able to exercise control through the patent laws. However, it will not take much for the actual factories to decide that the patent has no moral or economic justification. They will tear off the swooshtika and discover that they can sell their product locally for one-tenth of the price while paying their workers three times the exploitative wage. As the current economic order disintegrates, the corporations are likely to find that they have set in place everything necessary for their own replacement.

And that is good news.

1Pankaj Ghemawat, “How Business Strategy Tamed the "Invisible Hand" — HBS Working Knowledge,” Harvard Business School Working Knowledge, July 22, 2002, http://hbswk.hbs.edu/item/3019.html.

2Kevin Carson, “Industrial Policy: New Wine in Old Bottles.”

3Throughout Throughtout this discussion, I am highly indebted to Kevin Carson, Organization Theory: A Libertarian Perspective (Booksurge, 2008).

4I should note here, in passing, that goods sold internally do not have a sales tax, giving the corporation a government-sponsored advantage over other forms of organization.

5J.C. Bogle, The Battle for the Soul of Capitalism (New Haven & London: Yale University Press, 2005), xix.

6Ibid., 31-2.

7Carson, Organization Theory: A Libertarian Perspective, 198.

8Carson, “Industrial Policy: New Wine in Old Bottles,” 4.

9Naomi Klein, No Logo (New York: Picador, 2002), 3

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