The first man, who, after enclosing a piece of ground, took it into his head to say, “This is mine,” and found people simple enough to believe him, was the true founder of civil society. How many crimes, how many wars, how many murders, how many misfortunes and horrors, would that man have saved the human species, who pulling up the stakes or filling up the ditches should have cried to his fellows: Be sure not to listen to this imposter; you are lost, if you forget that the fruits of the earth belong equally to us all, and the earth itself to nobody!93
Jean-Jacques Rousseau, author of this impassioned plea that can be found in his A Discourse Upon The Origin And The Foundation Of The Inequality Among Mankind, was no opponent of private property. He knew that life was better in a society in which not just anyone can harvest your carefully tended strawberry field, ride your horse, or take your grandmother’s family jewels. But he also knew the difference between owning objects of daily use and owning land. In Rousseau’s times, farmland was the most important resource of a national economy. Those who owned a lot of land could command the work of others since they were dependent on this resource. Landowners were thus able to make large profits without working themselves. Rousseau disapproved of this kind of property that made it possible to profit at the expense of others.
Rousseau’s view is part of a long tradition in Western thought. Aristotle defended the legitimacy of private property in principle, but only to the extent that it served security and personal development. In this sense, there was a limit to how much property one should own, above which it ceases to be a good. The true task of the economic arts was finding the proper measure and right kind of property. Those, on the other hand, who valued goods solely in terms of their monetary value and who pursued the goal of a potentially unlimited increase in wealth, the Greek philosopher—much like the French enlightenment philosopher Rousseau—considered to be rather pathetic creatures.
Rousseau did not live to experience the French Revolution, but he could have felt vindicated. Questions of land ownership, the rights of owners, and the legitimacy or illegitimacy of government intervention in free property ownership were at the centre of political conflicts after the storming of the Bastille. In August 1789, the French National Constituent Assembly proclaimed its Declaration of the Rights of Man and of the Citizen. The Declaration defined as “natural and inalienable human rights” “the right to liberty, the right to property, the right to security, and the right to resistance against oppression”. A special article, Article 17, is dedicated to property as an “inviolable and sacred right”, that no one can be deprived of private usage “unless under the condition of a just and prior indemnity.”
The liberation of landed property from feudal fetters was one of the first acts of the French Revolution. Liberation of landed property meant that henceforth everybody was free to buy, sell, or mortgage land. Feudal authority and other feudal obligations were abolished, and lords had no more responsibility for dependants who were now free peasants. The old feudal taxes did not disappear but for the most part were transformed into land rents. Only church property and the property of emigrant nobility were confiscated by the state, subsequently to be sold to the highest bidders.
The laws of the French National Assembly made possible ownership of land, in the sense of the concept of property later defined by Article 544 of the Napoleonic Code: as the right to use a thing without any restrictions and to dispose of it. This expressly included the right to misuse one’s property, to use it for usury, the formation of monopolies, and speculation, and even the right to destroy it.
Private property as such had existed for a long time. Even in the darkest middle ages, anyone could buy a chicken or an axe, which would thus become their property and could not simply be taken away by others. If the peasant wanted to slaughter the chicken or toss the axe in the lake, he was free to do so. Different rules applied only to the crucial productive resource of the time, which was land.
Historically, the Romans were the first to consider land as something that could be freely bought and sold just like other mobile objects or slaves. They already defined property as a bundle of rights, the most important of which consisted in owners being able to use things in any way they desired and to exclude others from having any influence over them. An owner may use his property, sell, mortgage and bequeath it. No one has the right to interfere, not even the state. Like some American neocons today, the Romans originally considered imposing taxes as an inadmissible encroachment of property rights. In many respects, today’s civil law goes back to the old Roman law. Interestingly, the Romans used the same word for property as for rule: dominium, derived from dominus, master. An owner was thus a master.
As masters—this is precisely how the landowners in post-revolutionary France acted after they were freed from all former ties and obligations. In stark contrast to the hopes of peasants, property rights resulted above all in massive concentration of land ownership. True, French peasants now had the right to take over the land previously held by feudal lords and transform it into their own property. However, they had to pay a transfer fee of twenty times the amount they used to pay in annual taxes. For most of the peasants, the right to ownership therefore existed on paper only, since they had no opportunity to raise the money that would have turned them into landowners.
In 1792 and 1793, large producers and wholesalers were hoarding food in order to push up prices, thus causing famines and riots in the cities. In the National Assembly, a controversy started over what should be accorded higher value—the right to life or the inviolability of property. The Girondists defended the latter, while the Jacobins demanded government-imposed upper limits on food prices, an obligation to sell food, and laws protecting society from misuse of private property. Others went even further, claiming equality of ownership, redistribution of land, and a general law against owning more than was necessary for the satisfaction of one’s own needs.
The questions that occupied French politicians at that time are relevant to this day. Is property an inviolable human right that primarily needs protection from state interference? Or, on the contrary, is a free state obligated to defend the liberty of citizens against the arbitrary power of large landowners? When is property an indispensable tool for self-development and when does it mean “the power to produce without work”94, as the French social theorist Pierre-Joseph Proudhon argued in his book What is Property? What property is legitimate, and what property is not? And why is it that some have so much more of it than others?
The English philosopher John Locke was among the first to come up with the idea of defining the right to property as a universal natural right, independent of any state laws. Locke lived in the seventeenth century and is considered one of the fathers of political liberalism. His starting point was the thesis that every human was the natural owner of his or her body, and thus of her abilities and physical efforts. Owning the product of one’s labour was a natural consequence of this right. That is, those who turn an uncultivated piece of land not owned by anyone else into a field, applying industry and hard work, have the right to call this field their property and to enjoy its fruits.
Thus legitimate property is the result of work. That sounds attractive and revolutionary, particularly coming from a liberal. During Locke’s lifetime in Europe, most people toiled on fields they did not own and the fruits of which they were not able to enjoy, just as today a majority work in companies they don’t own and the profits of which flow to others. It was also evident in Locke’s time that large holdings such as the nobility’s huge feudal estates never came into existence as the result of their owners or even their ancestors ever having taken ownership of no-man’s land through individual labour. Was Locke’s theory demanding the expropriation of the nobility and the handing over of the land to the peasants?
It did not. Locke instead produced a particularly cunning legitimation of the property status quo of his time. His labour theory of property applies only to the state of nature. With the introduction of money, we leave the state of nature. With the help of money anyone can acquire more property than they themselves can work, since this property can be increased by using paid labour. The more property one owns, the more people can be employed and the faster this property increases.
According to Locke, this property is nevertheless legitimate, since anyone who does not approve of the existing order and the large inequality that goes with it is free to emigrate to areas of the world where unowned land is still to be had, which through one’s own labour can be turned into individual property. Thus no one has to toil on other people’s land. Those who still do, do so voluntarily, thus accepting the existing order. So much for the argument of Locke, who believed he had thus solved a problem that had defeated social contract theorists such as Hugo Grotius: contracts are binding only for those who have consented to them. In order to legitimate the property system, it was therefore necessary to show that the underlying contract concerning owning and not owning had been entered into voluntarily by all, including those who were left with the worst outcomes.
Such supposedly unowned land existed primarily in North America, where the land taken from the indigenous population was distributed to the settlers. That property arose from one’s own work was a personal experience for many. However, there was another reason why Locke’s theory enjoyed such popularity on the North American continent. It provided a welcome justification for the forced displacement of aboriginal people. If property comes into existence only by someone cultivating a field, the North American Indians—like the aboriginal people of other continents—did not have any property. No sacred human right was therefore violated when they were deprived of the land on which they had lived and which had sustained them.
By the early nineteenth century, all the land in the United States had been appropriated by someone—the same was true for the rest of the world. This in fact undermined Locke’s legitimation of the property status quo and its great inequality. There was no longer any place to emigrate for landless peasants or workers without capital as an alternative to selling their labour for meager wages.
Strictly speaking, the implication of Locke’s theory under such conditions was that only property based on one’s own labour could claim legitimacy by natural law. This would be in keeping with the original justification of human rights, the purpose of which was to protect the sphere of personal life from state interference and arbitrary authority rather than to protect social power. In reality, the theory of property as a human right preceding any public power and legislation was used as a mechanism to protect and defend precisely the property that could not be traced back to the individual work of its owner.
Starting in the nineteenth century, the hands of parliaments were tied and democratic decisions were overturned with reference to the inviolability of property and freedom of contract. In spectacular decisions, the U.S. Supreme Court time and again annulled State and Federal law which the judges considered to be in violation of the rights and liberties of economic property holders.
In this way, the Supreme Court declared as unconstitutional legislation against a monopoly of slaughterhouses, which was driving up meat prices, or the attempts of several states to restrict the ruthless exploitation of the railway monopoly and regulate railway prices. A Federal law designed to prohibit companies from discriminating against workers who were union members was rejected. The judges argued that this constituted an inadmissible interference in freedom of contract. A regulation restricting the daily working time of bakers to a maximum of ten hours as well as a minimum wage law for women were rejected for the same reason.
Not until the twentieth century did the concept of economic property change, and along with it the way the law was applied. The old inviolability clause was replaced by the formula of a property guarantee and the principle of social obligation. “Property entails obligation, its use should also serve the public interest”, according to the Basic Law, Germany’s post-World War II constitution.
In a decision from 1979, Germany’s Federal Constitutional Court explicitly recognized varying degrees of protection for private property, depending on whether property for personal use or extensive economic property is concerned. In a judgment on the question of co-determination (worker participation in decision-making) in enterprises, the judges explain: “In so far as the function of property is an element in securing an individual’s personal freedom, it enjoys particularly broad protection… Conversely, the authority of legislation with respect to determining the substance and limits of protection varies in proportion to the social relationship and social function of a piece of property.”
There is thus a distinction between personal property and its protection as an individual right and property in social contexts, which affects the rights of a large number of people. Property should be tied to obligations, but it can also destroy rights. According to the German Basic Law, this is where the state is called upon to intervene.
In recent history, however, the state has frequently done the opposite. Jurisdiction as well has strongly supported the rights of the economically powerful. Over the past two decades, the European Court of Justice has suspended social legislation of individual member states in a large number of cases with reference to property rights and other economic rights. In Germany as well, the freedom of economic property owners is receiving preferential treatment.
When, in 2009, the economics minister Rainer Brüderle tried to start a debate on a law on decartelization in order to counteract massive processes of economic concentration, legal experts were quick to produce a report that simply declared such a law unconstitutional. State measures curtailing the entrepreneurial decisionmaking powers of shareholders, according to this legal opinion, represented undue interference in property rights.95 The right to amass economic power as a constitutionally guaranteed fundamental right? The fathers of the Basic Law and the economists of the ordoliberal school must be turning in their graves. The project of decartelization at any rate was quickly filed.
Recent discussions about the protection of property are mostly about the protection of the power of corporations from employees or democracy. For example, in the fall of 2015, a strike by Lufthansa pilots was outlawed with the argument that it was not about wage rates but was directed against corporate strategy. Employees obviously should not involve themselves in a company’s strategy, even if, as in the case of Lufthansa, this strategy was the setting up of a subsidiary designed to lower wage costs.
With the free trade agreements CETA and TTIP, the economic rights of owners are to be assigned an even higher priority over government legislation. In these treaties the duty to protect property is extended to include the owners’ “legitimate profit expectations”. Any law that reduces profit expectations in this way becomes a case of “nationalization” and is as such inadmissible. This would undermine the strengthening of regulations for environmental or consumer protection, protection against wrongful dismissal, or a significant increase in the minimum wage. The government is not necessarily forced to cancel the law in question, but instead has to pay corporations full compensation. The predictable result will be—indeed, is supposed to be—that no state, regardless what government is in power at the time, will be able to afford adoption of such expensive legislation.
When a court can repeal laws with reference to individual rights, it presupposes that these are universal rights existing independent of any particular legal framework. Of course such rights do exist—the right to life, liberty, physical integrity, and security. But is it really a universal human right to be allowed to shut down a profitable enterprise in city X in order to resume production in city Y with cheaper workers? Or to saddle a corporation with constantly growing debt in order to increase the payout for shareholders? Or even to be shielded from a state seeking to strengthen employee protection or environmental laws?
As a matter of fact, property rights cannot be a right predating a state, since our very concept of property is defined by our laws. The object worthy of protection is something the lawmaker creates, which is why it has been constantly redefined. Today there are legally protected forms of “intellectual property” that our ancestors would have considered utterly absurd. While in the nineteenth century there were debates about whether or not it makes sense to have patents for technological inventions (German Chambers of Commerce at the time were opposed), today you can have microorganisms or gene sequences patented. Such property rights come into being as a result of legislation and legal practice, and it would of course be equally conceivable to have laws against making living nature the commercial property of particular corporations.
The same is true for the financial industry. In the United States, for a long time banks’ over-the-counter trade in derivatives was not legally protected. Today it is, which is why we are now dealing with property rights. If those business transactions were considered superfluous, we could simply withdraw their legal protection again. What property is and what is a proper object of property rights is therefore highly controversial, with corresponding laws repeatedly subject to change.
There were sound reasons why in the European Convention for the Protection of Human Rights and Fundamental Freedoms of 1950, property rights were relegated to a mere supplementary article. In the UN Human Rights Convention of 1966, they are completely absent. In the eighteenth century, David Hume, philosopher and friend of Adam Smith, advocated a conception of property rights opposed to Locke’s natural rights-based justification. For Hume property rights are simply the result of social conventions that emerged in the context of historical struggles and can be changed at any time. Thus for Hume there is no natural right, but rather a challenge for society to design property rights.
The Scottish philosopher argued in favour of designing a property order that advances the common good. Hume was not a particularly rebellious thinker, which is why in his view historically evolved property regimes should be respected as far as possible. His basic approach, however, is correct. What someone may call their property and how it can be increased is determined by laws. This includes tax laws. In a country with a high property tax, an owner is likely to have less money after ten years than in a country without property tax. For this reason tax laws cannot collide with property rights—they are part of them.
The decisive question therefore is: Which property order will increase our prosperity and which property rights will damage it? There are good reasons to guarantee and protect, as a fundamental right, property that results from one’s own work and constitutes an individual’s personal sphere of life. This applies also to the free and arbitrary disposal of this property, assuming that third parties will not be harmed.
On the one hand, we are dealing with the private sphere of every individual in which the state is not allowed to interfere. On the other hand, there is a large number of examples for the fact that people who cannot be sure that the fruits of their labour will be protected against arbitrary seizure quickly lose the motivation to work. Adam Smith formulated this in drastic but correct terms: “A person who can acquire no property can have no other interest but to eat as much and to labour as little as possible.”96
Property rights should protect one’s private sphere rather than society’s power structure. They should motivate effort, creativity, and performance rather than be an instrument for enrichment at the expense of others. Let’s see to what extent the current property rights order is compatible with this principle.
One of the most widely used justifications for the dynamism and irreplacability of capitalism rests on the argument that people are most committed when caring for their personal property. What belongs to them without anyone else having a say, what they may grow for their personal benefit, load up with debt at their own risk, and finally pass on to their children—this will be the object of their greatest determination, care, and commitment. It follows that if we want well-managed, successful enterprises, we must not under any circumstances call into question private economic ownership. Until 1989 in Eastern Europe and the Soviet Union, the argument continues, we saw what happened when the state or other forms of collective ownership take the place of personally responsible and liable owners—slovenliness, lack of economic discipline, and technological stagnation. And who would want to return to those conditions?
True, we don’t want to go back in time. But this doesn’t change the fact that the argument in defense of capitalism according to which the solely responsible owner-operator guarantees successful management and economic dynamism is mistaken. For if that were true, capitalism would have been a huge economic failure. It is true that the age of capitalism was preceded by the liberation of property from old feudal restrictions and dependencies as well as the legal guarantee of free enterprise. But the original contribution of capitalism was not that of free, fully accountable property, which already existed under Roman law. Capitalism’s original contribution to property rights was limited liability ownership, such as incorporated companies and public limited companies enjoy—a somewhat peculiar property rights construction which guarantees owners full access to all profits made by the company while holding them liable for the risks they take only up to their initially invested capital.
The legal model operating under the heading of joint stock company is, on further inspection, a rather peculiar thing. Actors in a market economy are usually liable with all of their assets for any contractual obligations they enter into. Thus if I have incurred debt and can no longer make my payments, at some point the bailiff will show up at my door to check if I own any valuables that could be sold for the benefit of the creditor. Even if it is an heirloom with a high personal value for me, it will not make any difference.
If I act as an individual entrepreneur or set up a business partnership with others, the same rules apply. Let’s assume that a young man full of ideas wants to open up a restaurant. He will rent the premises, buy the furniture, and hire a cook and three waiters. For this he’ll use all his savings accumulated over several years, as well as a bank loan for his additional expenses—a loan for which he qualifies because he has just inherited a house from his uncle. If the venture fails, this will have serious consequences for the young man. Not only does he stand to lose the savings he invested, but he will be liable for the loan with all his assets, from his own car to the house he inherited. If that is not enough, he may have to work for years to pay back the bank, or until personal bankruptcy will finally allow him to make a new start.
The risk he is taking is therefore very high. On the other hand, if the young entrepreneur has made a lucky choice with his cook and the restaurant has been a success, all the profits will belong to him. The cook and the waiters receive a wage, but as the owner he may become quite wealthy. He can use the profits and an additional bank loan to open up more restaurants. He will be the owner and recipient of all the returns they generate. This is the case even though their success depends at least as much on his staff’s performance as on his management skills. What would a restaurant be without skilled cooks and friendly waiters? Our young entrepreneur of course had the original idea, found a market niche, and chose the staff. He is responsible for keeping the place going, and he is liable for all its debts. If his successful run comes to an end, he may very quickly lose everything—not only his restaurants, but all of his assets. Unless our young entrepreneur is a gambler, he will be careful not to take on excessive debt.
Things would be different if our young entrepreneur were really smart and set up a joint-stock company or corporation. He would have the same advantages. Strictly speaking, he would no longer be the owner of the restaurant—it is now owned by the corporation. But as its only shareholder, he controls everything that his cooks and waiters generate, minus the costs, and the same would be true for any additional restaurants. Thus he can increase his personal assets by releasing profits to himself, replacing his modest house with a villa on the lake and a yacht, and living a life of luxury. And if at some point his restaurant chain goes under, he will lose—nothing! Merely the relatively small amount he initially invested in the corporation in order to open the first restaurant is lost. In the meantime, of course, he has made that investment many times over. A pretty good setup.
Corporations—which includes joint-stock companies and limited liability companies—have, on the one hand, unlimited control of the profits generated by the business, while on the other, they carry the limited risk of losing the initial investment in case of bankruptcy. Once the capital contributors have recovered their initial investment, there is basically no further risk for them. In the worst case, they may lose the goose that lays the golden eggs, i. e. that is generating fresh profits all the time. Once shareholders or partners have the profits in their private accounts, they cannot be held liable in the case of future losses. Suppliers, creditors, and possibly society as a whole, will get the short end of the stick. Imagine if during the most recent financial crisis, the global financial elite had been held liable with their private assets! That would have reduced the wealth of the top 1 percent much more significantly than any property tax, and states would not have incurred billions in debt.
We are so used to limited liability for economic property that the question never arises, let alone do we call the principle into question. But on closer inspection limited liability is a contradiction in terms. That’s why this legal institution was always rejected by consistent defenders of the market economy, from Adam Smith to Walter Eucken.
It did take quite some time for the corporation to become a generally available legal form of enterprise. The first share company in the world was the Dutch East India Company (VOC) established in 1602. This was by no means a normal commercial enterprise but rather a semi-state entity with a publicly guaranteed trade monopoly and quasi-state powers in the colonies. Following the model of the VOC, additional share companies were set up for the purpose of colonial trade in the sixteenth and seventeenth centuries. They had a special status and therefore also a unique legal form.
In general, until the nineteenth century share companies were permitted only for actual or presumed “public purposes”. In addition to long-distance trade with the colonies, these included the construction of transport routes such as canals and railway lines. In England until 1844, parliament had to vote on the licensing of every share company. In the United States as well, the legislature reserved the right of control. It authorized concessions for particular commercial projects, such as the construction of a canal. The company was not permitted to be active in any other area, and the concession expired after a certain number of years.
General permission to establish share companies had to wait until the nineteenth century. In the United States, the corresponding laws were adopted in 1811, in England in 1844. In Germany too, the law for share companies was liberalized in the nineteenth century, with the creation of an additional legal form, the limited liability company (GmbH), in 1892. There was a need for limited liability ownership because, contrary to a widely held myth, the owner-entrepreneur was in fact not the typical representative of capitalism.
As we saw in the chapter on “robber barons”, industrialization quickly drove up the minimum of capital an enterprise needed in order to operate efficiently. This rapidly rising need for capital could only be provided by external financiers. To attract investment capital from third parties carrying full liability is difficult, since the risk for capital providers under these conditions is very high. In addition, there was a growing appetite for credit among rapidly expanding enterprises, which in case of bankruptcy threatened the owner with complete and life-long ruin.
Ernst Abbe, founder and head of the Carl Zeiss Foundation, which will be further discussed in the following section, noted the reaction to these challenges in the second half of the nineteenth century. “It has become an almost regular phenomenon in recent economic development that industrial enterprises, once they have passed a certain size, are sold off by their personal owners and … usually transformed into share companies or other similar forms.”97
In the United States today, corporations have revenues five times those achieved by companies with full owner liability. In Germany as well, value creation in corporations exceeds value creation in personal liability companies many times over. The corporation is the typical ownership form of capitalism, since the separation of investor and entrepreneur is the typical form of doing business in this economic order.
Of course, not every corporation is managed by a non-owner. Among small and medium-sized enterprises, there are many owner-managed companies that take advantage of the benefits of this legal form, for instance in the area of taxation. For most small enterprises, however, limited liability is not helpful since banks will usually demand personal property as security. Only once the enterprise has grown and initial loans are paid off will the owner benefit from this peculiar legal construct that offers unlimited prospects for profit with limited risks of loss.
Globally, large enterprises almost exclusively take the legal form of corporation. In most of them, the large shareholders limit themselves to a controlling function. They are present at annual shareholder meetings or dominate the board of directors. This is where they decide on corporate strategy, instruct management, and exchange top personnel. The actual work of operational management is left to others.
The popular phrase “family business” may suggest intimacy and patriarchal obligations. But many enterprises that go by that name have little to do with actual family-managed firms. Family businesses exist in the artisanal sector, the restaurant sector, or in micro firms. With three exceptions, on the other hand, the CEOs of the 80 largest German companies that have majority family ownership are not drawn from the owner family. In large family-owned corporations, the owners tend not to get involved directly in management. Only among lower-ranked companies are CEOs or top management made up of members of the owner family. But even in that group it is not the rule. Even among the so-called “hidden champions” of the German economy, i. e. mid-sized companies that are market leaders in global niche markets, less than half are managed by their owners.
Heirs limiting themselves to a controlling function, leaving operative management to professionals, help to facilitate the continued existence of the company. It would make little sense for highly gifted mathematicians to bequeath their university positions to their children. Similarly, it is unlikely that a company founder will raise children with the same exceptional abilities he possesses. True, it may happen in some cases, but the alternative of the firm declining will occur more frequently. And the larger the enterprise, the more demanding its management. It is a talent you have or you don’t—it can’t be learned.
It is therefore problematic if a company is passed on to heirs who are unwilling to accept this limitation, or warring heirs who all think they are destined to be the CEO. Incapable heirs or family feuds may destroy hundreds or even thousands of jobs. Tom A. Rüsen from the Witten Institute for Family Enterprises maintains that “about 90 percent of crises in family firms originate in family conflicts rather than in market conditions.”98 Roughly 80 percent of those are succession conflicts.
Such conflicts of course may also occur in shareholders meetings or on the board of directors, with potentially equally damaging results. Giving up management does not mean that the owners lose their influence on the company. On the contrary, thanks to the legal form of corporation, they are able to exercise influence over much larger companies than their billion-dollar assets would otherwise allow them to do.
Under the headline of “New Germany Inc.”, the business daily Handelsblatt recently discussed the fact that large shareholders from family dynasties continue to control many German corporations. The authors point out that “in almost half of the 30 blue chip corporations listed on the German Stock Market Index (DAX), there are anchor shareholders that practically single-handedly determine the fate of the corporation.” Handelsblatt also noted the downsides of this feudal capitalism. Whether the model had positive or negative effects on the company depended on whether the interests of the firm and those of the family did or did not coincide. If they have the same interests, it’ll work. “If large shareholders act completely in their self-interest, it’s a curse.”99 Well, much the same was true for the old feudal lords.
In other EU countries as well, families control major parts of the industrial sector. The Wallenberg family, for example, controls one in three of Sweden’s largest corporations, and in total about 40 percent of market capitalization of Swedish industrial enterprises. The family exercises this control exclusively through Investor AB, a corporation of which it owns half. The corporation as a legal form not only has the benefit of limited liability for the owners but, based on complex legal constructs, also provides the opportunity to directly dominate far more sectors of the economy than its own capital would allow them to do.
Many companies today are owned by corporations, anonymous shareholders, or private equity firms. We’ve become used to the fact that not only individuals and families, but also hedge funds and other financial investors may be the owners of companies, trading them, buying and selling them as they see fit, or breaking them up and cannibalizing them. This is only possible thanks to the corporation as a legal form and should therefore not simply be taken for granted.
No more than 15 percent of shares listed on the DAX today are held by private individuals, while 70 percent belong to so-called institutional investors. They may be a front for family dynasties or just profit-obsessed financial vehicles from anywhere in the world. One large investor with shares in almost every DAX-listed company is the U.S. asset manager BlackRock, which has 6,000 high-capacity computers and a data analysis system by the name of Aladdin in charge of its portfolio decision-making.
This is what the responsible owners in today’s capitalism look like—the kind that in the interest of innovation and successful management we supposedly couldn’t do without. Already in the early 1940s, Schumpeter criticized that, with the advent of the corporation, “the traditional role of the owner and with it its specific ownership interest had vanished.”100 We should therefore stop rationalizing capitalism with the erroneous argument about the irreplaceability of the owner-entrepreneur who in large parts of the economy was phased out long ago.
The legal construct of the corporation is also responsible for the growing concentration of economic power, since it makes it possible to set up and oversee a large number of firms from a central locus of control. Without this effect, economic units today would be much smaller and competition between them more intense. It is admittedly true that industrial production as well as the delivery of many services have to occur on a large scale. However, the reach of today’s global corporate giants significantly exceeds what is necessary to achieve economies of scale. The legal form of the corporation facilitates economic concentration simply by making possible the exchange of shares between companies. A personal liability company, on the other hand, would find it difficult to raise the capital needed to buy up a company with billions in revenue.
The corporate model also makes tax evasion and money-laundering easy, since it permits concealing ownership structures and setting up faceless foundations, investment firms, or offshore companies. To this day, the establishment of a European company register even just listing who are the economic actors legally in charge has failed—among other reasons because the German government blocked it. Obviously this is a way of obscuring and anonymizing economic power, which is very much in the interest of manufacturing, finance, and service industry oligarchs.
But is all of this desirable? Are ownership conditions of this kind in fact the precondition for a dynamic, innovative economy that increases prosperity for all—or do they not themselves constitute a major barrier? What would alternative arrangements look like? We will address these questions in the final section.
A foundation has a charter and manages an asset for a particular purpose. However, a foundation does not have owners. Companies that are completely in the hands of a foundation are thus companies without external owners. Someone of course oversees such companies, charting their strategy and hiring management. Frequently these are the heirs of the former owners who live on the money transferred to them by the foundation. In such cases, the foundation model simply reinforces the old feudal conditions and income flows. In some cases, however, things are different, as will be further explained below. The important point is: foundations demonstrate that control—in a positive sense and a negative sense—can also be exercised without ownership.
Many large multi-billion dollar corporations in Germany are nowadays in the hands of foundations. The Alfred Krupp von Bohlen und Halbach Foundation, which owns 25 percent of Thyssen-Krupp Inc. and has been in existence for half a century, or the Robert Bosch Foundation, which holds 92 percent of the shares of the Bosch Corporation. Also well known are the Bertelsmann Foundation as major shareholders of the Bertelsmann corporation and the Else Kröner-Fresenius Foundation, which owns almost one-third of shares of the medical technology and hospital corporation Fresenius.
But there are lesser known foundations owned by large companies with multi-billion dollar revenues. The Zeppelin Foundation, for instance, is a major shareholder of Germany’s third-largest auto parts manufacturer, ZF, and the Mahle Foundation is owned by the Mahle Inc., one of the world’s twenty largest corporations in the auto industry supply business. Then there is the Carl Zeiss Foundation, established in 1889 to administer the precision optics manufacturer of that name in Jena, the Montan Foundation Saar which controls the steel industry of the Saarland, the Diehl Foundation which among others owns a large arms manufacturer, the Körber Foundation which runs an international technology corporation, and many others. In the retail industry as well, the foundation model is flourishing. Aldi Süd and Aldi Nord, as well as the discount retailer Lidl and the drugstore chain dm, are today owned by foundations.
Some of these foundations carry the label “charitable”, and a small number of their founders were in fact interested in promoting the common good. A majority of charitable organizations, however, were not launched for the altruistic objective of channelling the company’s profits towards general welfare. Often more important was the convenient “side effect” that company profits received by a charitable foundation are exempt from most taxes and are not subject to inheritance tax when the next generation takes control of the company.
The setting up of such charitable foundations follows a simple calculus. In large corporations, annual returns on only 5 or 10 percent of shares will be in the tens or hundreds of millions. That’s enough to guarantee a family dynasty, unless overly extended, a life of luxury for a lifetime. Most charitable foundations owning companies are set up so they do not receive any voting rights in the company, or they are controlled by the family itself. Transferring a major part of the company to a charitable foundation by way of such a construction kills three birds with one stone. It ensures that part of the company’s profits will not be subject to taxation; it further ensures that the family retains full control of the company and can impose its will; and third, it guarantees a virtually tax-free transfer of the company to its heirs. If, moreover, the foundation facilitates business that helps the company make money, the virtuous circle is closed.
The Bertelsmann Foundation, for instance, has perfected the art of using foundation funds in ways that pay off for the company. Thus the Foundation developed models for the privatization of municipal affairs, implementation of which would then fill the order books of company affiliate Arvato. But even if the funds were spent “only” on the financing of campaigns, think tanks, and other services for influencing public opinion, it would have served its purpose. The fact that today the interests of the richest 1 percent determine political agendas in most countries is of course also a result of who in these countries is capable of financing campaigns and who is not.
Many owners transfer their shares to a foundation without worrying about charitable organization status. There will still be tax benefits, such as in the case of inheritance. In such cases, however, tax savings are usually not the main goal. The purpose is to prevent the company from subsequently being stripped, broken up or sold by its heirs, without depriving those same heirs of the benefits of economic feudalism. That’s why the statutes of such foundations specify that company profits have to flow to the generation of heirs. The Siepmann Foundation, owned by the retail corporation Aldi Süd, spells out the following in the Bavarian register of foundations: “the purpose of the foundation is that the assets of the foundation and its returns are to be administered according to the will of the founder in order to undertake ongoing or one-time payments … to the recipients …” The recipients are the heirs of Aldi founder Karl Albrecht.
For this reason, growth in the number of foundations of course does not mean the end of capitalist management philosophy according to which the goal of companies is to pursue maximum profits, and it certainly does not mean an end to capital incomes without work. For the most part, the purpose of foundations is precisely the opposite: protecting the incomes and control of the company for future generations in a tax-optimal fashion.
As mentioned earlier, there is a small number of foundations that are set up in a different way, since their founders were pursuing different goals. One of them is Germany’s oldest corporate-supported foundation, the Carl Zeiss Foundation. In 1866, the physicist Ernst Abbe, who was responsible for the foundation’s establishment and founding statutes, joined the precision optics works of Carl Zeiss in Jena. Abbe’s technological achievement was the construction of a new generation of microscopes of hitherto unknown precision, which meant rapid growth for the company. In 1876 Carl Zeiss promoted his most talented engineer to part owner of the firm. When the founder died twelve years later, Ernst Abbe and the Zeiss heirs became wealthy people.
In the following year, Abbe established the Carl Zeiss Foundation, to which he transferred his own shares and those of the other shareholders that he bought at a premium. With the Zeiss Foundation as the corporate supporter, which in its statute determined management priorities as well as many details concerning worker-employer relations, Abbe created one of the most successful and at the same time socially responsible companies of his time.
Abbe’s ideas are surprisingly relevant for our discussion of the basic elements for a model of the modern corporation. In light of the wave of share companies being set up at the time, Abbe was also thinking about what he called the “de-personalization” resulting from the rapid growth of enterprises and what legal model might be appropriate for this situation. He considered both cooperatives and share companies as fitting the bill. “One [i. e. the cooperative] would place the future under the rule of momentary, ephemeral, and to some extent disparate interests of the individuals who happen to be co-members, while the other [i. e. the share company] would end up under the dictate of accumulating money.”101 He considered both ideas wrong.
Abbe saw that the success of a company consists in joining together of the work of many people, both past and present employees, the management skills of upper management, and the technical knowledge and know-how of skilled workers, the results of university research, as well as many decades of society’s accumulated knowledge and experience. He was therefore convinced that company profits “ought be viewed and approached from a conception of property as a ”public good“ based on strict moral standards. The monetary claim of the founder and enterprise director should be limited to ”a fair wage for his personal activity.”102
In Abbe’s view, the entire workforce is entitled to a share of company profits. In addition, the company should support those disciplines in the natural sciences from which the optical industry benefited. This is why Abbe decided to transfer the enterprise to a foundation, and in this way make “this third economic factor, i. e. the organization as such”103, the owner of the enterprise.
With the establishment of the Carl Zeiss Foundation, the founder’s heirs lost any influence on the company and any claims for an income without work from company profits. At the same time, the foundation assumed the economic risks, putting an autonomous organization rather than the state in charge of managing the enterprise. However, the statute specified as well that not only Jena University, but also many social institutions in the city would benefit. Thus the Carl Zeiss Foundation financed new university buildings, an evolutionary natural history museum, an anatomical institute, several clinics, and a community centre with a large library.
The charter of the Carl Zeiss Foundation formulated by Ernst Abbe contains a number of ingenious articles of interest to us that certainly contributed to the enterprise’s success. Article 40, for example, specified that the goal of the enterprise was not the maximization of profit but rather “an increase in the overall economic return the enterprise is able to guarantee all its members, including the foundation as the owner, with the prospect of its existence in the long run.”104 The foundation statute directed the enterprise to accumulating reserves, internal financing of investments, and strictly limited external debt. In comparison to total profits, the expenditures on common-good objectives were quite limited and significantly lower than returns paid by normal share companies to its shareholders. This model proved its value in economic crisis situations, in particular during the world economic crisis, which on account of its reserves the Carl Zeiss company was able to survive relatively unscathed and with a barely reduced workforce.
The charter prohibited the patenting of inventions made within the enterprise if they had significant value for education and research. The foundation’s participation in companies outside the precision optics industry was ruled out. Also of interest is the fact that the charter limited the salaries of management personnel to no more than ten times the average wage. Management was thus only able to achieve higher salaries if it succeeded in raising the wage rates of all employees in the enterprise. In addition, there were a number of regulations for limiting working hours, and establishing holiday and pension benefits, which for the time were revolutionary.
Abbe did not think of himself as being on the Left—in fact, he wasn’t even a supporter of Social Democracy. His goal was simply to launch a successful enterprise in which profits would be distributed fairly and based on performance rather than following the feudal model. Already in his lifetime, the model worked very well. While in 1875, Carl Zeiss had just 60 employees, at the time of Abbe’s death in 1905 the number was more than 1,400. In subsequent decades the enterprise kept growing consistently until it had to be broken up as a result of the Cold War. But neither the absence of external owners nor the relatively narrow spread of income differences were obstacles to success—on the contrary.
Volkswagen started its reconstruction after World War II as an ownerless enterprise under public supervision with strong employee co-determination. Only in 1960 was the auto manufacturer transformed into a private share company, except for the minority veto rights held by the state of Lower Saxony. There is no reason to assume that Volkswagen would be building lower-quality cars if this transformation had not occurred.
We have examined the growing role of foundations in the economy today, and specifically the legacy of Ernst Abbe, in such detail because both demonstrate that there is a host of other possibilities for structuring economic property and the charter of enterprises in addition to the unfruitful choice between private economy and state economy. The key to a more innovative, productive and at the same time more just economy does not lie in the transformation of commercial enterprises into state-owned ones, just as the private owner entrepreneur is not the main actor in our capitalist economy today.
After World War II, a number of West German economists, such as Alfred Weber, discussed whether the Carl Zeiss Foundation might not serve as a general model for a modern, democratic arrangement of economic ownership. This debate, later picked up by Czech reformer Ota Šik and even parts of the German Free Democratic (liberal) Party, occurred in part under the heading of “capital neutralization”. For Ota Šik, the neutralization of capital meant “transferring monetary and productive capital into an indivisible asset”105 belonging to the enterprise as a whole, that cannot be bought, sold, bequeathed, or arbitrarily destroyed by anyone. This capital would thus no longer be an object of ownership in the traditional sense—rather, ownership rights would be neutralized.
The argument is based on the basic observation already formulated by Ernst Abbe, that an enterprise is fundamentally different from a car or a residential home. Enterprises are not things, but organizations that grow on account of the labour and the knowledge of many people, and the continued existence of which determines the fate of these people as well as of entire regions. For normal items of use, in addition to being an individual right, it makes sense to leave it up to the owner’s whim whether to sell, bequeath, give away, or destroy them. With respect to larger enterprises, such individual rights are difficult to defend. The situation becomes completely absurd when such ownership rights are claimed for enterprises that benefit from public funds in one way or another.
Enterprises, along with their assets, grow mainly as a result of reinvesting profits and on account of additional purchasing power from loans. External infusions of capital may occur at times of rapid growth or in crisis situations. However, as a rule, in larger enterprises only a minimal share of total capital derives from external capital investments. The rest emerges within the enterprise from the work performed—and in part thanks to diverse state subsidies.
The demand for “capital neutralization” refers to this newly formed capital, which according to current law is automatically transferred to the external capital investor. “Capital neutralization” would mean that instead this newly formed capital becomes the distinct property of the enterprise, while external capital investors as well as external creditors will receive an interest yield on their capital, which in case of higher risk would be correspondingly higher. Such an arrangement would be the logical counterpart to limited liability.
We will return to these proposals in our model of a modern economic order. But first let us restate the basic question: What should a productive, innovative, and at the same time just economic order be able to provide? The answer can be summed up in one sentence: It should guarantee the freedom of entrepreneurial initiative while at the same time avoiding the neo-feudal consequences of today’s economic ownership—incomes without work and the possibility to inherit control over an enterprise. In concrete terms, this means that talented founders with workable ideas will get a chance irrespective of their origin—that is, access to capital would be democratized. Once capital is no longer a monopoly asset of a small segment of society, capital incomes will also disappear. In addition, a modern economic order needs barriers to prevent economic property rights from turning into instruments of power, circumventing democracy and imposing the interests of a privileged group on society as a whole.
Based on these criteria, I will suggest four legal forms of enterprise that are designed to replace the share company: personal liability company, employee-owned enterprise, public corporation, and common-good enterprise. They differ from each other, since different sectors of the economy present different requirements for firm size and public participation.
Personal liability companies are already in existence. These are enterprises in which the owner usually starts out with her own money and is fully liable for any obligations incurred by the enterprise. For starting a cafe, an artisanal firm, or a domestic services company, as a rule no external venture capital or public subsidies are needed. Often personal savings plus bank loans are enough, especially if several people join together. For the owners, choosing this approach to starting an enterprise means taking on the full risk. If the start-up fails, they will often lose everything they have. Taking on this kind of risk and in the end succeeding give you the opportunity to get rich. A free entrepreneur, however, will not receive any public funds, credit guarantees, grants, or other subsidies as long as the enterprise remains the private property of a personal liability company.
If at some point the owner would like to take advantage of public funding, it will be necessary to transform the enterprise into a employee-owned company. In a healthy enterprise, this step can be taken at any time for other reasons as well, for instance that the founder is no longer willing to carry the risk of personal liability in a growing enterprise, or because there is a need for more capital as a result of the firm’s rapid expansion. Of course, another motive is also conceivable, one that plays a role today in the establishment of foundations—to keep heirs from breaking up the business, or not to burden its substance with a high inheritance tax. In the move from a personal liability company to an employee-owned company, the original owner is paid back the initially invested capital (but not its growth in the business) with interest, paid out gradually over time.
An employee-owned company is not an enterprise in which employees own private shares. An employee-owned company does not have any external owners—like a foundation, nobody owns it. An enterprise in the legal form of an employee-owned company thus belongs to itself, and in this sense it is owned by its workforce as a whole. However, it is not individual property in the current understanding of ownership rights that can be sold or bequeathed.
In an enterprise without any external owners, only three things will change immediately. First, there is nobody who could sell the enterprise or parts of it, and therefore nobody is able to buy it. It thus ceases to be a commodity and a takeover target that financial investors or competitors could get their hands on and cannibalize. Second, there will be nobody who can claim profits as a result of ownership. This eliminates the pressure to pay out dividends, which can be put to better use for investments into a long-term growth strategy. A third difference is that in an enterprise without external owners, a new solution has to be found for who will direct the enterprise, decide on its goals, and control it. Because this is precisely what those who own the business, or their representatives on the board of directors, do today.
In order to guard against negligent or simply underperforming executives and managers, there is no need for external owners, as successful companies fully owned by foundations demonstrate. What is needed are controlling organs staffed by people whose fate is closely connected with that of the company, and whose interests are in line with a positive, stable, and successful development of the enterprise.
For today’s owners of enterprises, this is often not the case. Financial funds, private equity and other institutional investors who keep moving from one company to the next, are above all interested in short-term profits. In the ideal case, family heirs are interested in the company’s long-term success, but they frequently exert pressure for increased dividend payments, want to be bought out, which negatively affects the firm’s substance, or create uncertainty as a result of drawn-out family feuds.
If instead the different parts of the workforce—from unskilled workers to skilled workers and higher-level employees—send elected representatives to the controlling organ, this will ensure that the interests of the workforce as a whole will be taken into account. Smaller enterprises up to 50 employees can do without elected representatives. There the employees simply are the general assembly, which decides who will lead the enterprise and sets company goals.
Larger companies of course need what they already have today: clear lines of authority and hierarchies based on qualification. The operative management, like any other professional activity, should be in the hands of individuals with the necessary skills and knowledge. But this is not directly related to the question of the firm’s ownership. Obviously, employees are not able to manage their enterprises by way of majority decisions in daily general assemblies.
Of the classical ownership rights, an employee-owned enterprise will retain only one—the right to control the enterprise and its management. Whereas today this authority is in the hand of external owners, in an employee-owned enterprise it is exercised by the workforce.
Since all employees will earn more if the business is doing well, and less if sales take a plunge, and since all have an interest in job security in the long run, directions to management would look something like this: strong sales, solid profits, though not at the price of pitiful wages and precarious jobs, a high rate of investment, and long-term growth of the enterprise rather than short-term pursuit of high profits.
A manager who is able to double the company’s net worth while reducing the workforce by half in all likelihood will not be celebrated as a hero in the general assembly. The CEO, on the other hand, who compensates for the use of labour-saving technologies by reducing working hours or through employee retraining and new growth strategies will stand a good chance of having his contract renewed.
This does not mean that an employee-owned company that is in the red for an extended period of time may not have to eliminate jobs. However, under such conditions cutting jobs would be the last measure rather than, as is the case today, the first and preferred means of saving the enterprise. And where today job cuts have driving up capital returns as their only purpose, they would be ruled out in the future. The same applies to replacing well-paid, regular jobs with temporary and contract workers, or relocating in order to save wage costs.
There are strong arguments that this form of enterprise would motivate employees much more strongly to do good work than is the case in the current system. “When a firm is transformed into a community as a result of greater participation, productivity increases as well,” Richard Wilkinson, a scholar of inequality, has found in numerous studies. In an employee-owned company, employees would not only participate in decision-making, but would work exclusively for themselves instead of underwriting the company heir’s Porsche.
Individual cases demonstrate that employee-owned companies can function even under legal conditions that are quite unfavourable to this model. For the most part, these are cases with particularly poor starting conditions. Company takeovers by employees occurred in most cases after former owners drove the enterprise into bankruptcy, with employees attempting to save what they could. In the 1980s, for instance, there were 40 cases of such employee takeovers in Germany, 15 of which were successful in securing jobs in the long term.
On the whole, there are 7,000 enterprises in Germany with complete or majority employee ownership, among them 1,800 cooperatives. A problem of current legal ownership forms is that as a rule ownership is not tied to active participation in the enterprise, but rather represents personal ownership. Thus it is possible to take away shares when leaving the enterprise and also for others to inherit them. The same is true when employees receive shares in a limited liability company or employee shares. In addition, in all of these ownership forms it is possible to pay out part of the profits, and as a result there is pressure to do just that. It is not really what our model is about. What such examples demonstrate conclusively is that successful management is also possible in enterprises owned by its employees, even under generally adverse legal and economic conditions.
Those who on their own or along with others take the initiative to set up an employee-owned company would have an opportunity to receive the necessary starting capital from a public risk fund. Such a fund should be made available at the level of 1 percent of GNP, to be financed from a profit tax levied on all businesses. Alternatively, an employee-owned company could be set up using—in addition or exclusively—private funds which would be paid back with interest once the enterprise is up and running. This would be an obligation to be fulfilled independently of the shareholder assembly’s decisions, comparable to the right of banks to receive back their loans with interest.
The larger an enterprise becomes, the stronger its effects on the interests of society as a whole, not just on its own employees. In addition to employee representatives, enterprises of a certain size should include municipal representatives, and further down the road individuals appointed by other levels of government, to participate and vote in employee assemblies. Especially if enterprises benefit significantly from public funding, this should go hand in hand with greater influence of public interests.
For large enterprises operating in oligopolistic markets that are almost by definition economically powerful, the employee-owned company is not an appropriate model. For enterprises of this kind I suggest the legal form of Public Company. Like employee-owned enterprises, public companies do not have external owners. Here too, the company owns itself rather than being owned by the state. What distinguishes a public company from an employee-owned enterprise is the composition of the controlling body. It would have a board of directors, only half of whom will be employee representatives. The other half will consist of representatives of the general public, appointed by municipalities and regions in which the company conducts its operations.
Of course, determining such limits of size that specify at what size a company becomes a public concern is always fraught with difficulty and to some extent arbitrary. However, no one can deny that there is a difference between a window manufacturer and the Volkswagen Corporation, or between a cafe in one city and the global Starbucks chain. An enterprise with 2,000 employees is a major actor in its community. In order to play a key role at the level of a country as a whole, however, the enterprise needs to be significantly larger.
Employee-owned companies with more than 1,000 employees would be required to include a municipal representative in their employee assembly, while larger companies or those with public funding would have a proportionately greater number of municipal representatives. Enterprises with more than 20,000 employees could not take the legal form of employee-owned company or personal liability company (few of the latter type currently exist). This would be the domain of public companies. Public companies will also be commercial enterprises under professional management and with a profit orientation. In contrast to employee-owned companies, their goals and investment priorities cannot be established without the endorsement of public representatives and thus the public at large. This is a way of taking into account the public weight of such enterprises, which on account of public share ownership would also have public representatives on their boards of directors.
At present, there are a number of enterprises that as a result of public share ownership have representatives of the public on their boards. The most famous example is the Volkswagen Corporation, in which the state of Lower Saxony has minority veto power. It would be difficult to make the case that this public influence has ever constituted an obstacle to successful management. At the same time, it is obviously no guarantee for proper management, as the current emissions scandal shows.
The fourth legal form of enterprise proposed here is the common-good company. It would be appropriate for any sector that is not suitable for commercial management—such as those tied to networks or where network effects occur (or both)—and that have a tendency towards monopolization, or where goods and services concern basic human needs that should be equally accessible to all rather than being based on purchasing power.
Common-good companies are established with public funds and, much like non-state social agencies as well as some municipal enterprises today, are not profit-oriented. They should fulfil their mandate on a cost recovery basis. Common-good companies are also not owned by the state, but are in self-ownership. They operate according to specific rules and under public control, but no one is allowed to arbitrarily interfere in their work. Since the state does not own them, the state cannot sell them, i. e. they cannot be privatized.
We have witnessed for many years how a range of negative effects emerge when handing over a municipality’s water supply or hospitals to commercial enterprises interested primarily in turning a profit. Where markets do not work and where there can be no serious competition, different rules have to be applied. As discussed in the chapter on common-good banks, on account of its key economic position, the banking sector should be dominated by institutions under the legal form of common-good companies.
The same should apply to communication services and particularly the infrastructure of the digital economy. In Germany and other countries the expansion of high-speed networks has slowed because thinly populated regions are not attractive for profit-oriented suppliers. Wireless connections too are weak or overloaded in many locations. In fact, this sector is a perfect example for the theory of economist Harold Hotelling. The cheapest alternative for supplying Internet, telephony, and television is the public construction of networks in the hands of a non-profit common-good company. Under such conditions, Internet access would not have to be restricted but could be available to anyone anytime. Each household would pay a monthly fee that would be considerably lower than the communications expenses of an average household today, while nevertheless guaranteeing cost-effective maintenance and ongoing updating of the network structure.
The digital world also needs common-good oriented suppliers. We saw earlier that there are two ways to make money with digital information: either artificial reduction of the supply and sale of information (so far not a very successful variant), or storing the personal data of customers and users,which can then be profitably exploited. If something that can be multiplied at no cost is kept artificially scarce, this is not a particularly good solution—even if in certain areas, such as for maintaining quality journalism on the Internet, there may be no other way. If, on the other hand, our life is stored more and more comprehensively and exhaustively on the servers of data monopolists, we will lose even more—our freedom and our privacy.
“There will be no escaping once surveillance systems have taken over our residences, cars, and electronic appliances,”106 writes IT expert Yvonne Hofstetter. This kind of excessive surveillance can be prevented only through strict regulations ensuring automatic and prompt deletion of all data. It is high time for laws on what and for how long the servers of the data monsters are permitted to store our data. One idea would be a commitment to delete our digital tracks automatically and completely within a few days—with the exception of what we ourselves have explicitly decided to store. However, this would eliminate the basis of the commercial business model in many areas of the digital economy. This model would therefore have to be replaced by publicly financed, non-profit oriented providers. Otherwise we might be required to pay for every click on a search engine or for opening an account on a social network, which would be the commercial alternative to the use of our data.
This is also about avoiding dependency and the concentration of power. The digital networks are the most important infrastructure for future industry. With every further step in the digitalization of the value-added chain, the question who controls these networks will become more pressing. If control is left to private monopolists, their power position may be exploited in a way that is lethal for any market economy. There is in fact no rational alternative to strictly regulated common-good providers. Why, for example, should internet trading not occur on a public portal that simply provides a smart software for connecting buyers and sellers without making a large profit and exploiting our data? The more digitalization is advancing in our cars, homes, and life in general, the more urgent is a common-good oriented new beginning in dealing with digital technology.
The economic order proposed here would be characterized by four basic types of enterprises, depending on the composition of the market and the public relevance of individual sectors: Personal-liability companies, employee-owned companies, public enterprises, and common-good enterprises. Transforming current corporations into these new legal forms would be relatively simple. The externally provided capital in a company will be calculated with interest. Payments received in the past will be subtracted. If this calculation shows that an investor has put more money into the company than she has withdrawn, the difference will be paid from profits. The internally generated capital belongs to the company. In reality it is unlikely that there will be many cases where future payments will be due since normally—especially in the case of older companies—past payments have far exceeded the capital invested.
All enterprises with the exception of common-good companies will be commercial, profit-oriented businesses. A modern economic order therefore needs a market constitution that reduces enterprises to their smallest technologically feasible size. Of course, in many economic sectors, only large enterprises will survive. But there is no need for global manufacturing or trading giants with interlinked ownership structures that are profitable for their shareholders primarily because they eliminate competition, dominate suppliers, and reduce choices for customers.
In order to provide incentives for enterprises to adopt innovative, cost-effective, and productive technologies, open markets and intense competition are needed. Market actors that want to stay ahead of their competition should achieve this through technological superiority, high quality, or simply the discovery of a new market niche. At the same time, strict (rather than today’s strongly diluted) environmental and consumer protection legislation should ensure that cost-cutting technologies at the expense of the public will not be permitted. This degree of control is something that the market and competition cannot produce.
The transformation of corporations into employee-owned enterprises or public companies should be linked directly to a process of deconcentration. This would finally fulfil the demand that Walter Eucken, head of the liberal Freiburg School of Economics, had formulated already at the end of World War II: “Conglomerates, trusts, and monopolistic enterprises should be broken up or dissolved unless there are technological or economic conditions that would make this impossible.”107 The first draft of a new cartel law, the Josten proposal drawn up under Ludwig Erhard between 1946 and 1949, explicitly called for measures of deconcentration. “Individual companies with economic power” were to be broken up into self-sustaining enterprises. As was to be expected, economic lobbyists strongly opposed this idea—successfully so. In a government proposal published in 1952, deconcentration measures had already disappeared. Ludwig Erhard had buckled under the opposition of powerful economic actors, much to the dismay of his former liberal friends and their supporters. But the problem remains relevant, even more so today than in the 1950s. The largest enterprises of that time were small compared to the global giants of today.
Reducing the size of companies and eliminating overlapping and interlinked ownership structures would also make it easier to collect taxes from companies. Taxes on profits should be high enough to contribute to the financing of common-good companies. Individuals caring for others in hospitals and care facilities, for example, would as a result no longer earn less than engineers.
Such enterprises reduced in size should easily be able to survive competition with the remaining global giants with which they would be forced to compete until other countries have instituted similar changes. Precisely because they will not be pressured by shareholders siphoning off capital, expecting minimum returns of 16 percent, they will be able to make better and more durable products based on larger investments in quality and innovation. The Saarstahl steel company, which is relatively small in its sector, is in the hands of a foundation. Precisely for this reason it has more investment funds available and so far has been able to survive competition with large steel corporations without serious problems. The monetary order proposed here would represent another competitive advantage as a result of improved funding opportunities.
The model of a modern economic order proposed here would pave the way for an economy in which property can in fact only come into being as a result of personal work and in which feudal structures and incomes without work will be a thing of the past. Our economic life would become more innovative, more flexible, and at the same time more socially just. No one would be in a position to become rich from the work of others and at the expense of others. Genuine markets and free competition would be much more relevant than they are today—but of course only where they can work and are ethically defensible. We could run our polity democratically again, without the uncontrollable meddling of corporate giants.
Capitalism is not without an alternative. On the contrary, if we want to live in a free, democratic, innovative, prosperous, and just society, we have to overcome capitalist economic feudalism. Based on a new economic ownership system, which limits greed and simply makes unrestrained self-enrichment at the expense of others impossible, we will ultimately all be more prosperous.
Only on the basis of a new economic order will we succeed in making digital technologies useful for a better life for us all and in getting closer to the goal of producing our wealth in harmony with our natural environment.