Case for Economic Democracy

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= an argument for the Labor Theory of Property which opposes "human rentals" (or wage labour) on principled grounds of inalienable human rights.

  • Book: PROPERTY AND CONTRACT IN ECONOMICS: The Case for Economic Democracy. David P. Ellerman*

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"This book presents a modern version of the old Labor (or Natural Rights) Theory of Property and of an Inalienable Rights Theory that descends from the Reformation and Enlightenment. Together these theories re-solve the basic problem of distribution in the sense of giving a basis for the just appropriation of property and a basis for answering the question of who is to be the firm, e.g., the suppliers of share capital as in conventional capital, the government as in socialism, or the people who work in the firm as in the system of economic democracy (or labor-managed market economies). While these theories address old questions in economics, they do so in an entirely different manner than conventional economics which renders the questions as being about value or price theory (instead of about property rights and contracts). " (


"The book is divided into three main parts. In Part I, the focus is on property, principally the descriptive and normative questions of property appropriation. The conventional view of property appropriation is clouded by a basic myth which needs to be cleared away before the questions can even be adequately posed. Then the functioning of the property system–in the presence of the employment contract–can be analyzed.

The normative perspective is provided by the old "labor theory of property" which is simply the usual juridical norm of imputation applied to the matter of property appropriation. The history of the labor theory of property has always been obscured by the confusion with the labor theory of value, a confusion sponsored for different reasons by both Marxian economists and neo-classical economists. That intellectual history is analyzed and a number of standard misinterpretations of the labor theory of property are discussed.

In Part II, the focus is on contract, principally the employer-employee contract and its individual and collective predecessors, the voluntary self-sale contract and the Hobbesian pactum subjectionis. Here we find the analysis of intellectual history to be most revealing. Liberal capitalism presents the most basic social question as being "consent or coercion." Slavery and autocracy lie on the side of coercion while capitalism and democracy are grouped together on the side of consent. But we find a different story. We find that the most sophisticated defenses of slavery and autocracy were in fact liberal and based those institutions on implicit or explicit voluntary slavery contracts or political pacts of subjugation.

The definitive answer to the liberal defenses of slavery and non-democratic government came not from general liberal appeals to consent or from procedural fussing about the reality of the "implicit contracts" but from the doctrine of inalienable rights that descends from the Enlightenment. The real point of debate turns out not to be "consent or coercion" but "alienable or inalienable basic rights." As noted above, neo-classical economic theory and liberal capitalist ideology contain no coherent and uncontrived notion of inalienability that would rule out vote-selling, the self-sale contract, or the Hobbesian pactum subjectionis. Yet these prohibitions are fundamental to the modern western democracies. Thus we find the usual correlation of capitalism with democracy to be superficial. On the real question of alienable or inalienable natural rights, capitalism lies on one side of the fence and democracy on the other.

We resurrect the Enlightenment doctrine of inalienable rights (called the "de facto theory of inalienable rights") and present it in modern terms. That old doctrine of inalienable rights has considerable "bite" left in it. In fact, it supplies a critique of the contract for renting human beings, a contract which could also be viewed as the limited Hobbesian pactum subjectionis for the workplace, namely the employer-employee contract. The theory concludes that the employment contract is invalid "in the light of natural law" (to use the older language).

Parts I and II of the book are written for "intelligent general reader." Part III applies the results of Parts I and II, namely the labor theory of property and the de facto theory of inalienable rights, to economics.

Here it is assumed that the reader has an acquaintance with upper level undergraduate economics.

The initial focus in Part III is on descriptive theoretical flaws in capital theory and in general equilibrium theory (the Arrow-Debreu model) that purports to prove the possibility of a competitive equilibrium with positive pure profits.

Then the focus turns to marginal productivity (MP) theory which plays the role of both a descriptive and a normative theory in neo-classical economics. A single corn-and-labor model is developed so that marginal productivity theory, the Marxian labor theory of value and exploitation, and the labor theory of property can all be compared and contrasted in the same model.

Finally, the basics of a modern theory of property and contract are sketched. The theory has both a descriptive and a normative side. Neo-classical economics has a "fundamental theorem" which relates the notions of competitive equilibrium and allocative efficiency. We develop the similar notions for property theory and sketch the fundamental theorem of property theory.

The ideas and theories resurrected and developed in this book are in sharp structural and paradigmatic conflict with the conventional wisdom in economics and legal theory. The arguments presented here are developed in the form of a running debate with this conventional wisdom–a debate that is summarized at the end of most chapters. The debate is difficult at times to follow since the conventional wisdom does not even pose the right questions. Pouring better wine into the wrong bottles will not suffice. New bottles are developed–or rather, much older bottles are rediscovered and refurbished for modern usage."



Chapter 1: The Fundamental Myth of Capitalist Property Rights

Chapter 2: The Appropriation of Property Rights

Chapter 3: The Labor Theory of Property

Chapter 4: Labor Theory of Property: Intellectual History

Chapter 5: Misinterpretations of the Labor Theory of Property


Chapter 6: The Employer-Employee Relationship

Chapter 7: Non-Democratic Liberalism: The Hidden Intellectual History of Capitalism

Chapter 8: Contracts and Inalienable Rights

Chapter 9: An Intellectual History of Inalienable Rights Theory

Chapter 10: Misinterpretations of the De Facto Theory of Inalienable Rights


Chapter 11: Property Fallacies in Economics

Chapter 12: Marginal Productivity Theory

Chapter 13: Marxian Value Theory, MP Theory, and the Labor Theory of Property

Chapter 14: Fundamental Theorem of Property Theory

Chapter 15: Conclusions



Introduction: End of the "Great Debate", by David Ellerman:

The Great Debate between Capitalism and Socialism is at last over. The free market and private property have decisively won. Does that mean the "end of ideology" or the "end of history"? Can we rest assured that there are no fundamental structural flaws in the western-style economy? Our legal system is structured to forbid discrimination on the basis of race, but racism persists. Is that the only type of social problem that remains–where the structure is correct in principle but the implementation is flawed?

We shall argue that the current western-style economic system is fundamentally and structurally flawed. The problems are not just in the implementation of sound principles. Moreover, we shall argue that the system is flawed because it violates the principles of the institutions that are usually associated with capitalism. That is, it violates the basic principles of both private property and democracy. From the conventional point of view, this will seem to be a strange position. Isn't capitalism usually identified with private property and democracy? That identification has been based on the Great Capitalism-Socialism Debate, on assuming that "the alternative" to capitalism is state ownership of businesses and one-party dictatorships. But that debate is over, and accordingly capitalism can now be evaluated in a new light.

Since "capitalism" is so often definitionally identified with a private property market economy, we must give a more precise definition of "capitalism" so that we are not just arguing about definitions. By "capitalism" we mean production organized on the basis of the employer-employee relationship. We shall also use "the employment system" or "employer-employee system" as more accurate but less known names of the system based on the employer-employee relation. The alternative is a private property market economy where everyone is self-employed (individually or jointly) in their workplace. A firm where the managers and workers are jointly working for themselves will be called a "self-employment firm," a "worker-owned firm" (where "worker" always includes all who work in the business enterprise), or a "democratic firm" in contrast to the conventional "capitalist firm" or "employment firm."

The basis question is this –the employer-employee relation or universal self-employment in the workplace?

We shall have more that one occasion to use a slavery analogy. Consider a private property market economy where the workers were largely privately owned slaves, like the American economy before the Civil War. Suppose the defenders of such a system managed to restrict consideration of an alternative to a system of state businesses with state or socially owned slaves. The "Great Debate" would be between the "Athenian" model of privately owned slaves and the "Spartian" model of publicly owned slaves. The Athenian model would most likely be more efficient. Over the years, it would demonstrate its superior efficiency while the Spartian model might eventually collapse under its own weight. Would the victory of the Athenian model of private slave ownership signal the "end of history"? Would the victory mean that the Athenian model contained no structural flaws, only problems of implementing otherwise correct principles?

The Great Debate of our day has been similar except that the question has been the voluntary private or public hiring (or renting) of workers instead of the private or public ownership of workers. In spite of its political importance, the public-private debate has been conceptually wrong-headed from the beginning. The real question about slavery is not the public or private ownership of slaves but whether the master-slave relationship should be allowed (involuntarily or voluntarily) or should people always be self-owning (which implies that the right of self-determination should be inalienable even with consent). Today, the real question is not about the public or private employment of workers (as it was in the capitalism-socialism debate). The question is: should the hiring or renting of people be allowed at all or should people always be self-employed in the their place of work?

Some would say that the universal self-employment system should be presented as a variant of capitalism rather than an alternative. That may be; there is no need to argue only about words. But there are conceptual and historical reasons to use the word "capitalism" exclusively to represent the employer-employee system so long as one is clear, precise, and explicit about that usage. When people are self-employed in their firms, then the suppliers of capital are not hiring the workers. Labor (in the sense of all the people, managers and blue-collar workers, who work in the firm) is hiring capital. Since Labor would then be the "residual claimant" (the party receiving the profits left from the revenues after the costs are covered), it would be odd to call that arrangement a variant of "capital-ism." In any case, the reader has been forewarned; "capitalism" herein refers to the use of the employer-employee system. The alternative is a private property market economy based on universal self-employment.


We have considered a number of areas where conventional economics is directly at odds with the legal structure of the western democracies.

Modern legal systems · prohibit vote-selling by citizens,

· prohibit voluntary self-sale contracts between adults,

· take basic political rights of self-determination to be inalienable,

· would not recognize any political pactum subjectionis, and

· impute responsibility only to persons (never to things regardless of their "productivity").

All these practices are in direct conflict with the most fundamental recommendations of conventional economics. On the one hand, economics does not advocate that these practices be changed to be consistent with economic theory and, on the other hand, it does not give a coherent and uncontrived explanation of why these practices should be considered as "exceptions." In short, economics tends to duck these basic issues. There have always been these intimations of structural shortcomings, lacuna, and flaws in conventional economics. Economics has only seemed to be coherent and complete theory because it chooses to ignore the paradigm-threatening discrepancies between the theory and the legal structure of the modern western democracies.

The discrepancies outlined above between received economics and modern legal systems are not minor problems that can be patched up without disturbing the basic paradigm of neo-classical theory. They drive to the core of the notions of property and contract. Hence this book is about property and contract. It is not simply that the concepts of standard economics need to be applied with even more cleverness to resolve these discrepancies. New concepts need to be developed–or rather old concepts need to be rediscovered, dusted off, and represented in modern terms. Hence our theoretical discussions will be interrupted by forays into the intellectual history of ideas almost totally unknown in the conventional histories of economic thought." (


From Chapter 15: Conclusions, Redefining the Great Debate,

"This is a post-socialist book. That is, the book is written in the intellectual landscape that presupposes the collapse of socialism. The traditional capitalism-socialism Great Debate is over; markets and private property have triumphed. In that intellectual milieu, this book examines the institutions of property and contract that prevail in the western market economies. Does that type of economy represent an ideal free of structural flaws? Are the only economic problems left the non-structural problems of implementing otherwise sound principles? Does the structure of the western-style private property market economy satisfy all basic natural rights? Is there some new "Great Debate" that should emerge in this post-socialist landscape--or are the only remaining questions those of technique and implementation?

Our approach to these questions should by now be clear. The capitalism-socialism debate was ill-posed from the beginning. It is as if the slavery debate in the eighteenth and nineteenth centuries was presented as the choice between the private and public ownership of slaves. The real choice should have been posed between any ownership of slaves (private or public) and the universal condition of self-ownership. In a similar manner, the recent debate between private and public employment (capitalism or socialism) was ill-posed. The real choice is between the employment relation (private or public) and the universal condition of (individual or joint) self-employment in the workplace.

Universal self-employment means work without the employer-employee relation. Everyone is individually or jointly working for themselves in their place of work. Economic self-employment is the natural correlate of political selfdetermination or political democracy. Thus universal self-employment is sometimes referred to as "economic democracy" (although the phrase is also used vaguely to mean economic populism).

Some examples of self-employment are well-known in western market economies such as proprietorships, family farms, and owner-operated small businesses. Some firms for the most part constitute joint self-employment with a fringe or periphery of hired labor. Professional partnerships (e.g., legal, architectural, medical, or engineering) consist of a core of jointly self-employed partners with a periphery of non-partners--some on the partnership track while others are in a permanent underclass of hired labor (e.g., secretaries).

Worker cooperatives are a more exotic form of joint self-employment in western market economies--the Mondragon cooperatives in the Basque region of Spain and the Italian cooperative leagues are some of the better examples. In England, there are a number of "industrial partnerships" that fit the joint self-employment model (e.g., John Lewis, Scott Bader, and Baxendale Industries). In recent decades, many American firms have set up employee stock ownership plans or ESOPs. The current workers of a company are the members or participants in the ESOP trust. The ESOP may own any percentage of the company from a token ten percent to complete one hundred percent ownership. With at least majority ownership, ESOPs can be seen as examples of firms wherein people are working jointly for themselves [see Ellerman 1990].

With some generosity of interpretation, even the large Japanese and perhaps German firms can be seen as evolving towards a self-employment model. From the formal legal viewpoint, these firms have absentee ownership, not insider ownership. But the force of this outside ownership is largely dissipated either by the dispersion of shares on the stock market or by rolling ownership back into a broader group of insiders such as the Japanese keiretsu. Management considers itself responsible to stakeholders rather than just stockholders, and the primary stakeholders are the insiders such as the long-term employees.

Just as there are some mixed and ambiguous examples of joint self-employment in market economies, so some ambiguous hybrids have evolved out of the socialist economies. By far the best-known example was the Yugoslav self-managed firm. Yugoslav self-management was remarkably successful as a quasi-privatization and marketization that genuinely destroyed the centralized ministries of traditional socialism. But moving to a full system of joint selfemployment would mean enforcing a "hard budget constraint" (bearing one's own liabilities to the point of bankruptcy) and allowing individualized property rights to retained profits in the self-managed firms, not to mention multi-party democracy in the political sphere. Instead of any self-responsibility for jobs, Yugoslav "self-managing" workers had jobs protected by government enforced high severance pay (e.g., two years' salary). Instead of having real bankruptcy, the self-managed firms floated in a sea of easy and inflationary credit supplied by the local and federal governments. Moreover, the socialist legacy meant that the firms had the capital structure of non-profit companies. Any retained earnings became social property with no individual claims. Thus instead of some form of joint self-ownership, the Yugoslav self-managed firm ended up as a decentralized type of social ownership. It is also clear that it is well-nigh impossible for a marxist socialist system to evolve smoothly to a market system of universal self-employment. As with government or military employment in the West, one of the main virtues of real existing socialism was security--job security plus a cocoon of medical, housing, educational, and other social services. For that reason alone, there could be no smooth transition to a hard budget constraint operating in a rough-and-tumble market environment. Moreover, marxism was dedicated to abolishing "private ownership of the means of production." Yet joint self-employment is not only compatible with private property; only universal selfemployment is compatible with people getting the fruits of their labor--the natural basis for private property appropriation.

It is thus almost impossible to expect a smooth transition to universal self-employment from the Left--starting with marxist socialism. A smooth transition from the Right--from a private market-based employment system--is more plausible. With the collapse of socialism, a revolutionary transformation to a market-based system of universal selfemployment may be possible in the post-socialist countries (instead of just rebounding to a system of private employment). That is one of the larger questions in our time of profound economic and political transformation in the post-socialist world. But for the self-employment option to be understood, the "Great Debate" must be clearly redefined.

The analogy with a private-public slavery debate is relevant. With the economic and ideological collapse of a system of public slave ownership, the defenders of private slavery are not about to let their moment of victory be stolen by suddenly redefining the choices to include a "third way," the abolition of the master-slave relationship in favor of universal self-employment. In quite the same fashion, the defenders of the private employment system are not about to let their moment of triumph over socialism be destroyed by allowing serious consideration of a new third option, the abolition of the employer-employee relationship in favor of universal (individual or joint) self-employment in the workplace. Red-baiting is too much of a temptation. Defenders of the Faith associate self-employment with "selfmanagement" or "worker control" which, in turn, is associated with socialism. Thus the ideal is to counter the selfemployment option by associating it with socialism which has already been thrown into the dustbin of history.

Redefining the Great Debate will therefore not be easy in the post-socialist intellectual milieu since it will mean jettisoning the investment of the private employment system in defining the Great Debate as the choice between private or public employment.

  • Property

At the heart of the system of private employment is a "property right" that is not a property right. It is only a specific contractual arrangement protected by barriers of high transactions costs. This "property right" is the so-called "ownership of the firm." To review the argument, we might use the notions of the de facto firm and the de jure firm. In a business enterprise, there is a specific set of people using specific machines, office equipment, and premises to produce some product or perform some service. This is what Lord Eustace Percy called the "human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors..." [quoted in Oakeshott 1988]. It is the "de facto firm." The legal system recognizes a de jure firm superimposed on the de facto firm. The legal party which owns the produced outputs (and thus receives the revenues), is liable for the used-up inputs (and thus pays the expenses), and has the legal rights of positive discretionary control over the work activity is called the "de jure firm."

The point about the non-existence of the "ownership of the firm" is that there is no property right that connects the de jure firm with a given de facto firm. The de jure firm does not "own" the de facto firm--even though certain specific assets (machines, buildings, and land) used in the de facto firm might be owned by the legal party operating as the de jure firm. The connection is contractual, not via property rights. With a rearrangement of the contracts (e.g., a contract reversal between Capital and Labor) would change the de jure firm but not the de facto firm. The same de facto firm would then be operating under the auspices of a different legal party, i.e., a different de jure firm. In the real world, it is very difficult and costly to rearrange these contracts. When it happens, it is usually in distressed businesses that might otherwise fail. Thus the alleged "ownership of the firm" is in fact only a contingent contractual arrangement. But the contractual fact-pattern is so protected by barriers of transactions and other costs that is has the appearance of a "property right." The interpretation of the contractual arrangement as a property right is what we called the "Fundamental Myth" of our current property system.

The importance of the non-existence of the "ownership of the firm" may not at first be obvious. One clear consequence is that going from an employment system to self-employment doe not mean abolishing "sacred property rights"; it means a different contractual arrangement (which is analyzed in detail in Part II). In terms of property, transcending the Fundamental Myth allows the question of property appropriation to emerge in the context of the business enterprise. Appropriation has both a descriptive and normative side.

On the descriptive side, we found that there is a simple and basic mechanism of appropriation built into the private property system which we called the "laissez-faire mechanism of appropriation." When property is used up, consumed, or otherwise destroyed, there must be some implicit or explicit mechanism to assign the legal liability for those losses. In a small percentage of cases, a court of law intervenes to try to ascertain the de facto responsible party and to assign or impute the de jure responsibility to that party. But in almost all cases of used-up or consumed property, there is no legal intervention so the laissez-faire mechanism or the "invisible judge" takes over. A laissezfaire mechanism can render only one judgment; the invisible judge can only say "Let it be." This means that the legal responsibility for the used-up property is in effect imputed to the last legal owner of said property.

A closely related question is the assignment of the initial property rights to newly produced property. But the laissez-faire mechanism also covers that case. Just as expenses are matched against revenues in accounting, so at the level of the underlying property rights [see Ellerman 1982], used-up inputs can be matched against producedoutputs. The party that laissez-faire appropriates the liabilities for the used-up inputs has the legally defensible claim on the produced outputs.

The descriptive question about property appropriation is answered by the laissez-faire mechanism. The normative question is: "To whom should the legal responsibility for the used-up inputs and the produced outputs be assigned?" If production was an accidental phenomenon then there might be some controversy about the imputation of the legal responsibility (since "No one was responsible"). But the production of goods and services is well within the realm of deliberate and intentional human activity. The legal principle for the imputation of the results of deliberate actions is clear from the cases where the Law does intervene to hold a trial. The legal principle of imputation is to assign the de jure or legal responsibility to the de facto responsible party. The purpose of a trial is to legally ascertain who is the de facto responsible party so that legal responsibility may be assigned.

At this point, our investigation joined up with the tortured history of the labor theory of property. This theory has always been confused with, and, after Marx, eclipsed by the labor theory of value. Yet when cleansed of any connection with the labor theory of value, the labor theory of property emerged as nothing more nor less than the legal principle of imputation applied to the question of appropriating property assets and liabilities.

The most controversial application of the legal imputation principle (i.e., the labor theory of property) is to the business enterprise. In every enterprise, there is a certain set of insiders (managers and workers) who are the people actively involved in carrying out the operations of the enterprise. They are the members of the de facto firm. Their operations were abstractly characterized as "using up certain inputs to produce certain outputs." The normative question of appropriation is to whom should be imputed the legal liabilities for the used-up inputs and the legal responsibility for and ownership of the produced outputs. The standard legal principle of imputation answers "the insiders"--the people working in the enterprise who used up the inputs and who produced the outputs. They should legally appropriate the positive and negative fruits of their labor. The members of the de facto firm should be the members of the de jure firm; they are then jointly self-employed, bearing their own costs and receiving their own revenues. That is the property-theoretic argument for universal (individual or joint) self-employment in the workplace.

The recognition that the labor theory of property is the legal imputation principle expressed in property language served to answer many of the long-standing questions about "the labor theory." In particular, the old question "In labor peculiar?" or "Is labor in some sense the only creative factor?" can finally be answered. Labor is not uniquely "productive" in the sense of being the only causally efficacious factor. But labor is the only responsible factor. Things (as opposed to persons) can be productive (in the sense of being causally efficacious) but they cannot be responsible.

The recognition of this simple fact that "only labor is responsible" greatly elucidates the ideology and dogmatism that has characterized both sides of the capitalism-socialism debate. The fact that marxists have never been able to grasp and explain the point is perhaps not too surprising. Marx missed the point, and, after Marx, the genetic code of marxist thought was fixed. Mutations on such a basic issue had no survival value in the marxist environment.

The real disappointment is with the orthodox economic thinkers who claim to be so free of ideological blinders. The unique responsibility of labor was clearly pointed out, for example, by Friedrich von Wieser, one of the early developers of marginal productivity theory at the end of the nineteenth century. Yet he passed over the point quickly and only interpreted it to mean that the usual notion of de facto responsibility in the law should be replaced in economics by a metaphorical notion of "economic responsibility" (marginal productivity). After von Wieser, the point seems to have been entirely lost in the economics literature. Any school child knows that only persons instead of things can be responsible--that only burglars and not burglary tools can be responsible for a burglary. Yet the author has not been able to locate a single economics text which mentions the point--even though almost all texts have some supposedly earnest discussion of the hoary old "labor theory" based on that peculiar and archaic view that only labor was in some sense "creative." That makes it more difficult to see orthodox economics as being in the disinterested pursuit of truth.

Since the labor theory of property has been so thoroughly ignored or misinterpreted, we spent a chapter reviewing the role of the theory in Locke, Hegel, the Ricardian Socialists, Marx, and J.S. Mill. Two points of interest might be recalled. Following C.B MacPherson, we argued that Locke was not a Lockian. Locke was not an advocate of the labor theory of property that has always been read into his work. In our terminology, Locke was simply describing the operation of the laissez-faire mechanism of appropriation in a primitive state of society where labor was the only privately owned factor. In such a situation, the last owner of the used-up inputs that were not commonly owned (namely, labor) would have the legally defensible claim on the produced outputs. In that sense, a person would have the legal claim on the fruits of "one's labor" (i.e., the labor he owned, not the labor he performed). The interpretation of "one's labor" to mean the labor one owned rather that the labor one performed was called "Locke's pun." Locke's point that the produced outputs should be appropriated by the same party that bears the liability for the used-up inputs is correct but trivial. The normative question of appropriation is the question of who should appropriate both the output-assets and the input-liabilities, i.e., who should appropriate the whole product. If a certain party is designated to appropriate the whole product according to some criterion (such as de facto responsibility), and if the liabilities for the used-up inputs were at first borne by another party, then the liabilities would have to be reassigned along with the output-assets to the correct party. The fundamental theorem of property theory asserts that, under certain standard conditions, the laissez-faire mechanism imputes the whole product to the party that is correct according to the usual legal principle of imputation.

As is detailed in Part II, the contract to rent human beings (the employment contract) structurally violates those standard conditions.

Another point of interest in the intellectual history of the labor theory of property is how the theory survived under disguise in many of the treatments of the labor theory of value. The Ricardian Socialists developed the LTP explicitly as a property theory even though they also harbored value theoretic ambitions. After Marx, the labor theory of value held the dominant position. But there were always two very different strands in the labor theory of value--labor as the measure of value and labor as the "source" of value. The failure of the labor-measure theory is well known. We argued, however, that the labor-source theory was in fact a veiled and confused version of the labor theory of property, and thus was not a theory of value at all.

In the last chapter of Part I, we turn to a survey of misinterpretations of the labor theory of property.

This survey should be put in context by reiterating a relevant point about the sociology of knowledge. Consider a Defender of the Faith comfortable situated (in both work and thought) within the private employment system. What is the Defender's likely response when confronted with a well-reasoned critique of the system? If the Defender accepts the critique of renting human beings in favor of the self-employment ideal, then there is an unsavory choice. If he or she acts on the critique and espouses the self-employment alternative, then the person will be rejected by the status quo like an alien microbe. The person becomes a pariah. As an alternative, the person could accept the critique but not act on it--so the person becomes a cynic and a hypocrite. Thus being against renting human beings forces one into the choice of being a pariah or a hypocrite. Therefore, quite aside from any intellectual merits in the arguments, there are strong if not overwhelming social and practical reasons to reject any critique of the employment system. People will leap at any analysis or interpretation that maintains the comforting Faith and that reaffirms the Happy Consciousness.

Only this powerful inertia of the employment system can explain the amazing variety and mind-numbing persistence of the misinterpretations of the labor theory of property and of the de facto theory of inalienability (Part II). For instance, no matter how often one repeats, ad nauseam, in words and in symbols that the input-liabilities are included in the whole product, there will always be some Defenders of the Faith who will smugly point out that Labor cannot simple appropriate "the whole product" when there are scarce and costly inputs to be considered. Or no matter how often one reiterates that all entrepreneurs, working employers, and other managers are included in the party called "Labor," some Defenders will always question how one can think that only "workers" are responsible. And no matter how often one repeats that self-employment can only be "joint" in the (multi-person) self-employment firm, some people will always ask, "How can each person just be individually working for themselves in a firm?"

In spite of this counsel of despair, we tried in Chapter 5 to dispel some of the more common misunderstandings of the labor theory of property--and some of the fallacious modes of thought used to defend the employment system.

Without repeating all the arguments and explanations here, we might emphasize a most common fallacy, namely, the failure to differentiate an institutional arrangement from the underlying non-institutional realities. On this score, one has some hope for optimism with economists since they are aware of the fundamental theorem of normative economics that presupposes a clear differentiation between the institutional notion of a competitive equilibrium and the non-institutional notion of an allocatively efficient (or Pareto optimal) state. Without knowledge of that paradigmatic example of clear thinking in social theory, the "intelligent reader" or "person in the street" has a harder time to separate institutional and non-institutional notions.

A more accessible example concerns the peasant farmer who needs both land and the consent of the landlord to raise his crop. But the consent of the landlord is only an institutional requirement while the land itself would be just as necessary in a non-institutional description of the farmer's activities. Failure to differentiate institutional and noninstitutional realities is part of the Happy Consciousness. The core of the Happy Consciousness is the uncritical acceptance of the ambient institutions as being part of the given furniture of the social universe. Whatever the property-owners or employers get within the system is the "results of their efforts," the "fruits of their labor."

* Contract

In Part II, we turn to questions of contract. Some of the main results in Part I, such as the non-ownership of the firm and the laissez-faire mechanism of appropriation, show that contracts are an integral part of the property system. In particular, the appropriation of the whole product of a business enterprise is determined by contracts via the laissezfaire mechanism, not by the "ownership of the firm."

There is one contractual relationship, the employer-employee relation, that is as central to the present economic system as was the master-slave relation in the system of the antebellum American South. Yet here again we found stunning false consciousness. When people live in an economic civilization founded on renting human beings, then the people might at least know it. But there is such a well-developed system of paraphrases, metaphors, and euphemisms that a simple bald-faced description like "renting people" finds little comprehension.

It is of some interest that only certain human activities are organized using the employment relation. When human actions are applied to economic goods, if economic value is added to the resources, that would be called "production" while "consumption" would best describe the value-subtractive activities where the end-products have less value than the original "inputs." The employment relation is mostly applied to production, not to consumption.

From the legal viewpoint, there could be a consumption employment relation. Instead of buying the inputs (consumer goods), self-managing the consumption process, and owning the less-valuable end-products, a consumer would pay a consumption-employer to employ the consumer to consume the goods. Instead of buying a watermelon, eating it, and owning the rinds, a person would pay someone else to "employ" them to consume a watermelon. The employer would buy the inputs, manage the consumption activity, and appropriate the end-products. In our society, self-employment in consumption is taken for granted while self-employment in production is more the exception to the rule. It might also be noted that the critique of the employment relation based on the labor theory of property and on the de facto inalienability of responsibility applies equally to employment in both production and consumption.

Another sphere of astonishing false consciousness is in the formulation of the basic social question as "consent or coercion"--so that the employment system can be presented as the economic parallel of political democracy (both being based on consent). This entails a remarkably selective reading of political theory in general and of the democratic theory developed out of the democratic revolutions of the eighteenth and nineteenth centuries in particular. Since Antiquity, there have been attempts in varying degrees to claim that non-democratic regimes were based on the "consent of the governed." In some cases, it was claimed that the consent was evidenced by longstanding political stability and was sealed by the prescription of time. Some political philosophers, such as Thomas Hobbes, urged that consent be expressed in an explicit pactum subjectionis. Through implicit or explicit social contracts, the people were seen as alienating any right of self-determination to the sovereign. Within this alienist liberal tradition, the superficial modern appeals to government based on the consent of the governed would have little force for democracy. The history of this much-neglected non-democratic tradition of liberal (i.e., consent-based) thought was reviewed at chapter length.

Consent has long been the common coin of sophisticated liberal arguments for both non-democratic and democratic forms of government. The basic social question is thus not "consent or coercion" but the question of whether or not consent could alienate the basic human right of self-determination. The alternative to alienating a right is to delegate it to another person who can then act as a representative or delegate. In the Middle Ages, the question was formulated as "translatio" (to alienate) or "concessio" (to delegate).

The pactum subjectionis was an alienation or translation of the basic rights from the people to the sovereign; he did not rule as their representative or delegate. The same holds for the employment contract in the workplace. It alienates the rights of management of the employees from them to the employer; the employer is not the representative or delegate of the employees. The employer does not manage in the name of those who are managed.

The counter-arguments to contracts of subjection and individual self-enslavement contracts were developed under the banner of "inalienable rights" within the inalienist tradition of liberal thought. Yet even this development has been curiously muted or truncated. Inalienability arguments might be too robust and have "unwanted" applications.

A critique of the political pactum subjectionis has to be contained so that it does not also apply to the economic employment contract. Inalienability arguments against selling all one's labor in the self-enslavement contract must be tamed so they do not apply to the contract to sell one's labor in a more piecemeal fashion. Thus liberal thought, living within the employment system, has always been deeply ambiguous about the notion of inalienable rights.

Some ultra-liberals or libertarians, such as Robert Nozick, have tried to gut the notion of inalienable rights by interpreting it to mean a right that may not be alienated without consent (which is only a right as opposed to a privilege). Nozick has no concept of a right that is inalienable even with consent, and thus Nozick condones both a self-sale contract and a pactum subjectionis with a "dominant protective association." But the typical liberal treatment of inalienability is not so consistent as Nozick's analysis. "Inalienable rights" has become an empty slogan that can be selectively applied where it is comfortable, not a genuine theory that might have unwanted and embarrassing applications.

There is, however, a theory of inalienable rights that has descended in western thought from the Stoics through the Reformation and Enlightenment down to modern times. The theory is based on the facts of human nature. Anyone can understand the theory who can understand that a hired killer is still a murderer even though he sold his labor. A person cannot in fact alienate and transfer the "use of his own services" (decisions and actions) the way a person can in fact alienate the use of a thing. I can transfer a truck or van to you so that you can use it in a manner independent of me. You will be solely de facto responsible for the results of using the machine. Yet I cannot similarly alienate my own services. It is not that I "should" not: I cannot. It is a fact of human nature, not a normative judgment. I can at most agree to co-operate with you, in which case we are jointly de facto responsible for the results of our actions.

The basic point was illustrated with a number of "intuition pumps" such as the case of the criminous employee. In that example, an employer rented a van and rented a person for general services. In the course of normal activities, the employer used his "input services" to rob a bank. Upon being caught, the employee as well as the employer were charged with the crime. The van-owner was not so charged as he had no personal involvement in the enterprise; he had only the institutional role of owning the van. An attempt by the employee to argue that he was as innocent as the van-owner would force the legal system to explicitly recognize that labor is not de facto alienable like the services of a thing.

This de facto theory of inalienable rights was outlined in Chapter 8. Since the theory (as opposed to the language) of inalienable rights has, in spite of its simplicity and obviousness, been almost entirely neglected in modern thought, we again spent a chapter (Chapter 9) recalling the intellectual history of these ideas. If that tradition was to be represented by one sentence, then perhaps Luther's pithy statement would be appropriate.

As little as another can go to hell or heaven for me, so little can he believe or disbelieve for me; and as little as he can open or shut heaven or hell for me, so little can he drive me to faith or unbelief.

This religious doctrine of the liberty of conscience was transmuted, largely in Scotland and France, into the political doctrine of inalienable rights of the Enlightenment. Thomas Jefferson was influenced by the Scottish philosopher Francis Hutcheson's presentation of the de facto inalienability theory, and Jefferson injected the language of inalienable rights into the mainstream of western political thought and practice.

Once the theory is again brought to light, the social forces that pressed to neglect it in the first place will then work to sustain misunderstandings and misinterpretations of the theory. Two misunderstandings, one superficial and one rather subtle, might be recalled here. Several intuition pumps (criminous slave, tortious servant, and criminous employee) all involve a person who occupies the legal role of a thing and who breaks the law. The response of the legal system is to remove the fiction and to legally treat the individual as a responsible person.

One common and somewhat superficial response to these intuition pumps is to claim that there is no legal inconsistency involved here (as if that were the problem). For instance, the employee was only "protected" from responsibility for the results of his actions when he operated within the scope of the employment contract. To be legal, such a contract could not contemplate illegal acts such as robbing a bank. Hence when the employee robbed the bank, he detoured or stepped outside of the employee role and acted only as a private individual. Hence the Law was being quite consistent in treating him as a normal responsible person acting individually or in concert with others to rob a bank.

That is a fine legalistic argument, but it misses the original point. The point of the intuition pumps was not that the person should always be legally treated in the same way. The point was that the de facto person never did fit the legal role of a thing in the first place. That fiction was highlighted by the sudden reversal in legal treatment of the self-same person when the actions broke the law. This point was illustrated using the analogy of a square peg not fitting in a round hole. This analogy is based on the following identifications:

- "square peg" = de facto person,
- "round hole" = de jure role of a thing, and
- "square hole" = de jure role of a person.

The intuition pumps highlight cases where the fiction that the square peg fits the round hole is dropped, and the square peg is straightaway reassigned to the square hole where it fits. The problem is not whether or not the sudden switch is legally justified. The problem is that the square peg never fit the round hole in the first place. A set of deeper misunderstandings of inalienability theory result from inattention to the differentiation between institutional and non-institutional realities. Since the de facto inalienability argument is based on (non-institutional) facts, it could never forbid any (non-institutional) voluntary transaction that could actually take place. What the theory criticizes are institutional superstructures based on factual impossibilities (e.g., legal contracts to alienate de facto responsibility). This point can be illustrated by considering the law against fraudulent conveyances.

Consider a contract wherein the buyer B contracts to buy a widget from the seller S. B pay the price of a widget but receives in return a worthless but similar-looking pseudo-widget. This is a simple fraud forbidden by the law on frauds. But does the law really forbid any non-institutionally described "voluntary acts between consenting adults"? No, it does not. If B voluntarily agreed to pay a widget price and to receive only a pseudo-widget in return, then no fraud would have been committed. Why would a fraud be committed against B if the same transaction in favor of S could take place without fraud? For the simple reason that B would probably not consent. The point of the fraud was to get agreement to a widget contract (the institutional reality) but to substitute a different factual performance (delivery of a pseudo-widget). It is that mismatch between the institutional superstructure (contract) and the noninstitutional or factual reality that is ruled out in the statute against frauds.

There is always a mismatch between the legal contract for the sale of labor and the factual non-transferability of labor. If the contracts were rewritten to match the facts, then all business enterprises (like all criminal conspiracies) would be legally constituted as jointly self-employed partnerships. The financial end-result of the employment firm is that the employer receives the profits, the value of the whole product. There is nothing wrong with that end-result if obtained voluntarily without fraud. The members of a jointly self-employed partnership are always free to donate their profits to a charity or to a person who might have otherwise been their employer. But they might not be so charitable. The point of the employment firm is that it obtains that end-result without consent on the part of the employees. The employees do not own the profits to give away so their consent to a profit give-away is legally irrelevant. The whole product is legally appropriated by the employer in the first place.

  • Property and Contract in Economics

Capital theory contains some of the simplest examples of biased and fallacious reasoning in economics. Suppose proponents of the self-employment ideal assumed an institutional setting where Labor was the residual claimant, and then they defined the "yield" or "productivity" of labor to include the profit that Labor received as the residual claimant. Defenders of orthodox economics would be quick to seize upon the special assumption--that the profit return to the residual claimant was a return to Labor. Yet the analogous assumption for Capital is routinely made in capital theory with not a sound heard from the guardians of scientific reasoning in economics. Concepts such as the "capitalized value of a capital asset" and the "yield of a capital asset" are defined under the assumption that the owner of the asset is the residual claimant. The return to the capital owner in that role is counted as part of the "yield" or "productivity" of the capital asset itself.

The property fallacies in the theory of the firm are also rather simple to understand--given an appreciation of the contractual determination of firmhood. The determination of who is to be the firm by who hires what or whom in input markets adds an extra market-endogenous degree of freedom to economic theory. That extra degree of freedom forbids competitive equilibrium in the case of positive profits. In the presence of positive pure profits in a productive opportunity, an arbitrageur could offer slightly higher prices to input suppliers and thus take over production with slightly lower but still positive profits. Hence there could not be a competitive equilibrium with positive profits in any productive opportunity.

The argument just given is not terribly profound or deep; it assumes only the barest knowledge of economic behavior in the idealized competitive model. Yet for over a third of a century, the pinnacle of received truth in economic theory has been the Arrow-Debreu model which purports to show the possibility of competitive equilibrium with positive pure profits.

There has been much facile criticism of the Arrow-Debreu model on empirical grounds. But the real point is that the model fails at the conceptual level to model an idealized competitive private enterprise economy. The modelling error is property-theoretic. Arrow and Debreu misinterpret the ownership of a corporation as the "ownership of a firm."

Prior to resolving the contractual question of who hires what or whom in input markets, owning a corporation is only an indirect way to own economic resources. Inputs owned by a corporation could be hired out (in which case the corporation is not the firm) just as a complementary set of inputs could be hired in. Any proposed equilibrium with positive profits could be upset by arbitrageurs bidding up input prices. Yet Arrow and Debreu do not allow such arbitrage in their model of a so-called competitive private enterprise economy. Each productive opportunity is "owned" by a corporation and only that corporation is allowed to demand the inputs necessary for the productive opportunity.

The key to understanding the modelling error in the Arrow-Debreu model is seeing that corporations are inputowners that can hire out their inputs just as well as hire in complementary inputs. The inability of the economics profession to apply this simple reasoning to the Arrow-Debreu model for over a third of a century provides a striking example of intellectual intimidation. The simplest conceptual errors are protected if wrapped in enough higher mathematics and backed by enough professional prestige.

Another tactic used to block arbitrage, aside from the "firm=corporation" misidentification, is to postulate a "hidden factor" in each profitable opportunity--like a speck of dirt in each oyster to produce a pearl. But if each profitable firm must be jerry-rigged with a hidden epicycle, then the model has become an intellectual shambles. Since each hidden factor is hidden from market forces, there is no assurance that profit is maximized or that the factor is efficiently utilized. If socialist economists in the past tried to prove the efficiency of some socialist-market hybrid with certain non-marketed factors, they would immediately receive a stern lecture from western economists. How could efficient utilization of the resources be obtained if they were not exposed to market forces? Yet the same western economists turn around and routinely "prove" the Pareto optimality of competitive equilibrium in models with hidden factors [e.g., Arrow and Hahn 1971].

Moreover, since the hidden inputs are arbitrarily assumed to be unmarketable (to block arbitrage), the pretense that the model has competitive markets for all inputs is not plausible. Perhaps future generations of economic theorists, less beholden to current orthodoxy, can glean some amusement from the contemporary attempts to prop up a purported "competitive equilibrium" by using various devices to prevent (!) rather than encourage competitive arbitrage.

The important implication for equilibrium theory is the market-endogenous nature of firmhood in any economy where all inputs are marketable. In such an economy, there be no competitive equilibrium with positive pure profits. A competitive equilibrium can only exist in the case of universal zero profits where firmhood is a matter of economic indifference (and where there are no non-economic aspects of firmhood).

The market-endogeny of firmhood changes the concept of the market process. The received notion of the market process is an orderly interaction between consumer-resourceholders on the one hand and "firms" on the other hand where the interaction is on two fronts, input markets and output markets. But if the "firms" are not given at the outset of the market process, then there is in general a game theoretically indeterminate struggle over who hires what or whom in input marketsÑa struggle that is only determinate in the pinpoint special case of universal zero profits. Property theory was applied to capital theory and general equilibrium theory to show some of the property fallacies in received orthodox economics. But now we turn to marginal productivity (MP) theory which has an interpretation that directly competes with the legal imputation principle (labor theory of property). MP theory has a proper role as a theory of input demand in analytical economics. Our analysis is of the Clark-Wieser interpretation of MP theory which attempts to show that "each factor gets what it produces" in capitalist competitive equilibrium. The controversy is not over the normative question of whether or not each factor should get what it produces; that is agreed upon by both sides to the controversy. The question is the descriptive-analytic question within the theoretical model of competitive capitalism of whether or not "each factor gets what it produces."

The Clark-Wieser interpretation is based on two tenets:

(1) that each unit of a factor produces the marginal productivity of the factor, and

(2) that each unit of a factor gets its marginal productivity in the competitive imputation.

Each tenet turns out to be metaphorical. The first tenet is based on the pathetic fallacy (active-inputs view). Things are metaphorically endowed with the responsible agency that is in fact a unique attribute of persons. But machines (for example) do not "produce" a part the product in the sense of having responsibility. Machines are used by people to produce the product, and the people are also responsible for using the machines.

The second tenet is based on the distributive shares metaphor which pictures the product as being imputed to the various factor suppliers. But that is not the shape of the legal imputation which takes place in production. The legal imputation, via the laissez-faire mechanism, assigns all the positive product as well as all the negative product (inputliabilities) to the same legal party who would thereby be called the "firm."

By reinterpreting both responsibility and property rights at a metaphorical level, the Clark-Wieser version of MP theory entirely avoids actual property-theoretic questions. It is a flight of fancy that gives no account of the actual pattern of responsibility (where only persons can be responsible) nor of the actual pattern of property appropriation (the whole product appropriated by the same party). Here again the response of defenders of orthodox economics is of interest. Many economists have so enamored of seeing things as "producing" a part of the product that they are reluctant to recognize the unique responsibility of persons. It is as if the social sciences should be seen as a branch of physics which would be "marred" by any basic differentiation between persons and things. Moreover, they shun the "superficial legalistic" facts about the actual imputation of property rights and liabilities in favor of the "deep" metaphor of distributive shares. When "deep metaphors" are favored over "superficial facts" then it is not difficult to judge whether science or ideology is in command.

Before leaving MP theory, it may be of interest to recall the dual metaphorical interpretation. Instead of animating the inputs (active-inputs view), animate the outputs with responsible agency (active-outputs view) and picture them as using up the inputs. Will each unit of an output be charged for the liabilities it produces? Each unit of output, as the marginal unit, is pictured as using up the inputs whose cost is the marginal cost. In the competitive firm, the marginal cost is equal to the market price of each unit of output, so indeed each unit of output (or its buyer) is charged for the liabilities it creates. The dual metaphor "works" too.

The dual treatment of producing and imp uting the negative product is just as metaphorical as the original Clark- Wieser treatment of producing and imputing the positive product. Things produced as outputs or used as inputs are not responsible agents, and both the positive and negative products are appropriated by the one legal party who has the contractual role of being the firm.

Imitation is the sincerest form of flattery. By trying to pose as a counterfeit imputation principle, Clark-Wieser MP theory has always paid a silent tribute to the labor theory of property. We have seen that the labor theory of property can be formulated in two parallel languages: the fruits-of-one's-labor language of property theory and the responsibility-language of the legal imputation principle. MP theory recognized the parallel languages by imitating both. John Bates Clark was the marginalist Locke who imitated the fruits-of-one's-labor language while Friedrich von Wieser independently developed the interpretation of MP theory imitating the language of the legal imputation principle. It is heartening to see support for the principle that people should get what they produce, and one must hope that this support will not wane when the principle is applied without the benefit of metaphors. There were always two strands in the labor theory of value, labor as the measure of value and labor as the source of value. The labor-source theory was essentially a confused and ill-formulated version of the labor theory of property. While some property theoretic overtones can be found in (read into?) Marx, he focused on developing the labor measure theory. That theory has been logically completed in recent years using the machinery of input-output theory. This theory gives a treatment of "capitalist exploitation" so it was necessary to analyze this modern marxian labor theory of value and exploitation (in Chapter 13). The results were surprising and amusing. This modern theory turned out to be the old scholastic idea that charging interest is exploitative dressed up in the heavy garments of marxist jargon. The fundamental marxist theorem (in the modern theory) states that the rate of exploitation is positive if and only if the rate of interest is positive. Marxists interpret this as showing that the "deep inner meaning" of charging interest is exploitation. We showed that the meaning was the reverse; the "deep inner meaning" of this notion of marxian exploitation is simply the charging of interest. Hence the modern logical completion of Marx's exploitation theory ends up as an interest grumble. It leaves untouched the analysis and critique of capitalist property relations since that would require a property theory. Marx sent only a value theory to do the job of a property theory.

In Chapter 13, the simplest corn-and-labor input-output model is developed to allow a precise comparison of MP theory, modern marxian value theory, and the labor theory of property all within the same model. With all the theories presented in one model, it will perhaps be more difficult to misunderstand the labor theory of property or to confuse it with the labor theory of value.

The fundamental theorem of property theory, presented in Chapter 14, pulls together the institutional and noninstitutional elements of property theory to describe what might be called the "natural system of property and contract." The laissez-faire mechanism of appropriation is an institution that like any institution might function correctly or incorrectly (according to some given principle) depending on the circumstances. Given the legal principle of imputation, when would the laissez-faire mechanism satisfy that norm?

The question of correctly assigning legal responsibility for accidents, where by assumption there is no de facto responsible party, is moot so we restrict attention to deliberate human activities. Moreover, the laissez-faire mechanism used contracts between parties to assign legal responsibility to parties. Hence we must explicitly assume the connection; a party cannot be de facto responsible for consuming or producing a good without de facto possessing the good. That was called the "no-action-at-a-distance principle."

Under these assumptions, the fundamental theorem states that a matching of de jure and de facto transfers of goods between parties will imply that de jure responsibility is laissez-faire assigned to parties according to de facto responsibility. That is, the legal imputation principle will be implemented by the laissez-faire mechanism of appropriation if all legal transfers between parties are fulfilled by de facto transfers (i.e., all contracts are fulfilled) and that all de facto transfers between parties are covered by de jure transfers (i.e., no ownership externalities).

The fundamental theorem describes the operation of what Adam Smith would call the "system of natural liberty." But one of our main themes was that today's private enterprise market economies are structurally different from that natural system. Today's market economies are flawed by one basic fraudulent contract, a contract for the de jure transfer of labor when there can be no matching de facto transfer of labor. Thus in an economy dominated by the employment contract (herein called the "employment system"), the laissez-faire mechanism will malfunction. The whole product is produced by one party ("Labor") but is laissez-faire misappropriated by another party, the employer.

To arrive at the natural system of property and contract, the contract to de jure transfer that which is de facto nontransferable would have to be abolished. That is, the whole system of renting human beings in the employeremployee relation would have to be replaced by a system where everyone was (individually or jointly) working for themselves in the workplace. Self-employment in business is the economic parallel of political self-determination or democracy." (

More Information

By the same author:

Ellerman, David P. 1982. Economics, Accounting, and Property Theory. Lexington MA: D.C. Heath.

---1985. On the Labor Theory of Property, Philosophical Forum. No. 4, Vol. XVI (Summer 1985), 293- 326.

--- 1985b. The Mathematics of Double Entry Bookkeeping. Mathematics Magazine. Vol. 58, No. 4 (Sept. 1985), 226-233.

---1986a. Double Entry Multidimensional Accounting, Omega, No. 1, Vol. 14 (January 1986), 13-22.

---1986b. The Employment Contract and Liberal Thought. Review of Social Economy. XLIV (April 1986), 13-39.

--- 1990. The Democratic Worker-Owned Firm: A New Model for the East and West. London: Unwin Hyman Ltd.