China's Shareholding Cooperative System

From P2P Foundation
Jump to navigation Jump to search


The John Stuart Mill and the Socialist Origins of the Limited Liability Modern Enterprise System

Cui Zhiyuan:

"Few have noticed that Petit-Bourgeois Socialism was at the heart of the genealogy of the “modern enterprise system.” In fact, a petty bourgeoisie socialist J.S. Mill was the key figure to bring one of the main features of the “modern enterprise system” – limited liability for shareholders – into existence.

It was due to the concern for the development of workers’ cooperatives of his time that John Stuart Mill started to study the issue of limited liability. He first analyzed the so-called “en commandites” form of partnership. This special form of partnership had many proponents in England, the Christian Socialists perhaps being the most prominent among them. In this form of organization the “active” partners were subject to unlimited liability, staying with the idea of tying liability to responsibility, while the “sleeping” partners were subjected to limited liability, since they were not responsible for running the business. John Stuart Mill advocated this form of partnership because it would have allowed workers to form associations to “carry on the business [with] which they were acquainted” and also allow the “rich to lend to the poor.”

Mill argued:

- No man can consistently condemn these partnerships without being prepared to maintain that it is desirable that no one should carry on business with borrowed capital. In other words, that the profits of the business should be wholly monopolized by those who have had time to accumulate, or the good fortune to inherit capital, a proposition, in the present state of commerce and industry, evidently absurd.

In 1850, Mill testified before the Select Committee on Investments for the Savings of the Middle and Working Classes of the British Parliament. He proposed to establish the corporate regime with generalized limited liability for shareholders, because it would induce the wealthy to lend more freely in support of projects by the poor. The poor would also benefit by having the opportunity to invest their savings in producers’ or consumers’ cooperatives. As a result of the efforts of Mill and others, the British Parliament passed the 1855 Act of general limited liability for corporations.

This genealogy of limited liability has been almost forgotten by the contemporary economists. The point of retelling this forgotten chapter of economic history is to highlight that the “modern enterprise system” is not necessarily capitalist. If shareholders have only “limited liability”, it implies that they are not taking the full risks as “private owners” are supposed to do; therefore they should not enjoy all the profits of the enterprises.8 In other words, the shareholders are not the only risk-bearing group. The employee’s firm-specific human capital also runs at a risk. Moreover, shareholders can diversify their shareholding through a portfolio of different firms’ shares, but a single worker cannot work for several firms all at the same time. In this light, it may be argued that employees’ human capital runs a higher risk due to the lack of diversification. This opened the door to our understanding of the widespread institutional innovation in China’s rural industry – a “shareholding-cooperative system.”

  • Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [1]

The Origin of China's Shareholding-Cooperative Enterprise Property System in the Liberal Socialism of James Meade

Cui Zhiyuan on James Meade and the Chinese “shareholding-cooperative system:

"James E. Meade, the 1977 Nobel Laureate in Economics, is one of the founders of modern GNP accounting. As a student of Keynes, Meade was inspired by the tradition of petty bourgeoisie socialism.9 He always calls his program “liberal socialism.” Meade’s program aims to combine the best features of liberalism and socialism.

It has two main components in its institutional design: “labor–capital partnerships,” and “social dividend.”

  • Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [2]

James Meade's Proposals for Labor–Capital Partnership

Cui Zhiyuan:

"In Meade’s design, outside shareholders own capital share certificates and inside workers own labor share certificates. The operational mechanism of the program is roughly as follows:

  • the Labour–Capital Partnership, whereby the workers and those who provide

risk capital jointly manage the concern as partners. The capitalists own Capital Shares in the business, which are comparable to Ordinary Shares in a Capitalist Company. The worker partners own Labour Shares in the partnership; these Labour Shares are entitled to the same rate of dividend as the Capital Shares, but they are attached to each individual worker partner and are cancelled when he or she leaves the partnership. If any part of the partnership’s income is not distributed in dividends but is used to develop the business, new Capital Shares, equal in value to their sacrificed dividends, are issued to all existing holders of Labour as well as of Capital Shares. These partnership arrangements greatly reduce the areas of conflict of interest between workers and capitalists, since any decision which will improve the situation of one group by raising the rate of dividend on its shares will automatically raise the rate of dividend on the shares of the other group. (Meade 1993, 85–86)

In addition to this benefit of aligning interests of outside shareholders and insider workers, Meade’s labor–capital partnership has an added main advantage of introducing flexibility into the labor market. The current social democracy in the Western European style suffers from a major problem: the high wage of workers on the job is maintained at the cost of rigidity of the labor market, thus implying an inefficient reduction of output and a level of employment below the potential full employment. When the labour–capital partnership uses a labor share certificate to replace a fixed wage arrangement, a degree of flexibility is introduced into the labor market which is formerly characterized by downward rigidity of wages.

It is important for the “progressive” forces in China and other post-communist countries not to imitate social-democratic policies pursued in Western Europe.

There, the social-democratic parties had long lost their radical inspiration. Instead of challenging and reforming the institutions of the existing forms of market economy and representative democracy, the social-democratic program merely seeks to moderate the social consequences of structural divisions and hierarchies. We need more radical institutional innovations like the labor–capital partnership to make up for the deficiencies of conventional social-democratic policies. The flexibility in the labor market is just one case which illustrates this general point."

  • Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [3]

James Meade's Proposals for a Social Dividend

Cui Zhiyuan:

The second feature of Meade’s program of “liberal socialism” is “social dividend:

”every citizen is paid a tax-free Social Dividend according to the citizen’s age and family status but without any other conditions. Two basic reasons for instituting social dividend are:

(1) promotion of equality by providing everyone with the same basic unconditional income;

(2) the reduction of risks by providing some part of income that is unaffected by variations required by flexibility in the labor market.

The intuitive core of the idea of social dividend lies in the attempt to replace the demand for job tenure by an enhancement of the resources and capabilities of the individual citizen.

One of the advantages of social dividend over the conventional socialdemocratic policy of “conditional benefit” is that the former improves the incentives of recipients of low-earning jobs. This may appear counter-intuitive at first sight, because “unconditional social dividend” seems to reduce the incentive to accept low-paid jobs more than conditional benefit (based on unemployment or illness). However, intuition is wrong in this case.

Meade argues against intuition with the following simple example:

- a recipient of a Social Dividend of 80 supplemented by a Conditional Benefit of 20 will have an incentive to take outside earnings so long as those earnings after deduction of Income Tax are greater than 20; but if he or she had relied for the whole 100 on a Conditional Benefit, there would be no incentive to accept any outside earnings less than 100."

  • Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [4]

The Shareholding–Cooperative System in China

Cui Zhiyuan:

In their effort to create a proper ownership form for rural enterprises, the Chinese “peasant-workers” and their community governments have designed an ingenious one: a “shareholding–cooperative system (SCS).”11 It is similar to James Meade’s “labor–capital partnership” in that both systems have a labor share and a capital share;12 however, the Chinese SCS is distinct in that the capital share itself is mainly collective in the sense of belonging to the representative of the community – the township and village governments. Thus the SCS in China’s rural industry may serve to harmonize the interests of inside workers and outside members of the same community. To give a sense of its working mechanism, I now describe briefly one of the earlier experiments with the SCS in rural China.

In one locality where I conducted preliminary field research in the summer of 1993, Zhoucun District of Zibo (Shangdong Province), the SCS was invented in 1982 as a response to the difficulties of dismantling the collective properties of the People’s Commune. The peasants found some collective properties (other than land) to be simply physically indivisible. They decided to issue shares to each “peasant-worker” on equal terms, instead of destroying the collective property (such as trucks) to sell them in pieces (which had happened in many other regions).

Soon after, they realized (or conceded) that they should not divide up all collective properties into individual shares to distribute to the current workforce, because the older generation of “peasant-workers” had left the enterprises and the local government had made prior investments. Thus they decided to keep some proportion of “collective shares” which would not go into individual labor shares. These collective shares are designed to be held by outside corporate bodies, such as local governmental agencies, other firms in and out of the locality, banks, and even universities and scientific research institutions.

The following figures show the flow of profits of SCS in Zhoucun District:

  • 10 per cent: Workers’ welfare fund
  • After-tax profits of SCS firm – 30 per cent: Firm development fund
  • 60 per cent: Share fund (collective and individual shares)

Clearly, the development of SCS is the joint product of two factors:

(1) accumulated change of Chinese rural institutions (such as the dissolution of the commune), and

(2) accidental solutions to the indivisibility of People’s Commune’s property.

Therefore, the SCS has created an attitude of ambiguity among the Chinese practitioners and scholars on China as to how to evaluate the potential of this new form of property. As Karl Polanyi once said: “the contemporaries did not comprehend the order for which they were preparing the way.”

As for James Meade’s “social dividend,” there is so far no Chinese experiment in a similar spirit. However, it is my belief that China can benefit from considering seriously Meade’s program of “social dividend” in establishing her own social welfare system."

  • Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [5]


  • Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [6]