E. F. Schumacher, Small is Beautiful: Economics as if People Mattered, 1973.
Organisation and Ownership
A Machine to Foretell the Future?
Lecture delivered at the First British Conference on Social and Economic Effects of Automation, Harroga June 1961.
The reason for including a discussion on predictability in this volume is that it represents one of the most important metaphysical -- and therefore practical -- problems with which we are faced. There have never been so many futurologists, planners, forecasters, and model-builders as there are today, and the most intriguing product of technological progress, the computer, seems to offer untold new possibilities. People talk freely about 'machines to foretell the future'. Are not such machines just what we have been waiting for? Ah men at all times have been wanting to know the future.
The ancient Chinese used to consult the I Ching, also called The Book of Changes and reputed to be the oldest book of mankind, Some of our contemporaries do so even today. The I Ching is based on the conviction that, while everything changes all the time, change itself is unchanging and conforms to certain ascertainable metaphysical laws. 'To everything there is a season.' said Ecclesiastes, 'and a time to every purpose under heaven ... a time to break down and a time to build up ... a time to cast away stones and a time to gather stones together'. or, as we might say, a time for expansion and a time for consolidation. And the task of the wise man is to understand the great rhythms of the Universe and to gear in with them. While the Greeks -and I suppose most other nations -- went to living oracles, to their Pythias, Casandras, prophets and seers, the Chinese, remarkably. went to a book setting out the universal and necessary pattern of changes. the very Laws of Heaven to which all nature conforms inevitably and to which man will conform freely as a result of insight gained either from wisdom or from suffering. Modern man goes to the computer.
Tempting as it may be to compare the ancient oracles and the modern computer, only a comparison by contrast is possible. The former deal exclusively with qualities; the latter, with quantities. The inscription over the Delphic temple was 'Know Thyself'. while the inscription on an electronic computer is more likely to be: 'Know Me', that is, 'Study the Operating Instructions before Plugging in', It might be thought that the I Ching and the oracles are metaphysical while the computer model is 'real'; but the fact remains that a machine to foretell the future is based on meta- physical assumptions of a very definite kind. It is based on the implicit assumption that 'the future is already here', that it exists already in a determinate form, so that it requires merely good instruments and good techniques to get it into focus and make it visible. The reader will agree that this is a very far-reaching metaphysical assumption, in fact, a most extraordinary assumption which seems to go against all direct personal experience. It implies that human freedom does not exist or, in any case, that it cannot alter the predetermined course of events. We cannot shut our eyes to the fact, on which I have been insisting throughout this book. that such an assumption, like all metaphysical theses, whether explicit or implicit, has decisive practical consequences. The question is simply: is it true or is it untrue?
When the Lord created the world and people to live in it -- an enterprise which, according to modern science, took a very long time -- I could well imagine that He reasoned with Himself as follows: "If I make everything predictable, these human beings, whom I have endowed with pretty good brains, will undoubtedly learn to predict everything, and they will thereupon have no motive to do anything at all, because they will recognise that the future is totally determined and cannot be influenced by any human action. On the other hand, if I make everything unpredictable: they will gradually discover that there is no rational basis for any decision whatsoever and, as in the first case, they will thereupon have no motive to do anything at all. Neither scheme would make sense. I must therefore create a mixture of the two. Let some things be predictable and let others be unpredictable, They will then, amongst many other things, have the very important task of finding out which is which."
And this, indeed, is a very important task, particularly today, when people try to devise machines to foretell the future. Before anyone makes a prediction, he should be able to give a convincing reason why the factor to which his prediction refers is inherently predictable.
Planners, of course, proceed on the assumption that the future is not 'already here', that they are not dealing with a predetermined -- and therefore predictable -- system, that they can determine things by their own free will, and that their plans will make the future different from what it would have been had there been no plan. And yet it is the planners, more than perhaps anyone else, who would like nothing better than to have a machine to foretell the future. Do they ever wonder whether the machine might incidentally also foretell their own plans before they have been conceived?
Need for Semantics
However this may be, it is clear that the question of predictability is not only important but also somewhat involved. We talk happily about estimating, planning, forecasting, budgeting, about surveys, programmes, targets, and so forth, and we tend to use these terms as if they were freely interchangeable and as if everybody would automatically know what was meant. The result is a great deal of confusion, because it is in fact necessary to make a number of fundamental distinctions. The terms we use may refer to the past or to the future; they may refer to acts or to events: and they may signify certainty or uncertainty. The number of combinations possible where there are three pairs of this kind is 2, or 8, and we really ought to have eight different terms to be quite certain of what we are talking about. Our language, however, is not as perfect as that. The most important distinction is generally that between acts and events. The eight possible cases may there fore be ordered as follows:
1 Act Past Certain
2 Act Future Certain
3 Act Past Uncertain
4 Act Future Uncertain
5 Event Past Certain
6 Event Future Certain
7 Event Past Uncertain
8 Event Future Uncertain
The distinction between acts and events is as basic as that between active and passive or between 'within my control' or 'outside my control'. To apply the word 'planning' to matters outside the planner's control is absurd. Events, as far as the planner is concerned, simply happen. He may be able to forecast them and this may well influence his plan; but they cannot possibly be part of the plan.
The distinction between the past and the future proved to be necessary for our purpose, because, in fact, words like 'plan' or 'estimate' are being used to refer to either. If I say: 'I shall not visit Paris without a plan,' this can mean: 'I shall arm myself with a street plan for orientation' and would therefore refer to case 5. Or it can mean: 'I shall arm myself with a plan which outlines in advance where I am going to go and how I am going to spend my time and money' -- case 2 or 4. If someone claims that 'to have a plan is indispensable', it is not without interest to find out whether he means the former or the latter. The two are essentially different.
Similarly, the word 'estimate', which denotes uncertainty, may apply to the past or to the future. In an ideal world, it would not be necessary to make estimates about things that had already happened. But in the actual world, there is much uncertainty even about matters which, in principle, could be fully ascertained. Cases 3, 4, 7, and 8 represent four different types of estimates. Case 3 relates to something I have done in the past; case 7, to something that has happened in the past. Case 4 relates to some- thing I plan to do in the future, while case 8 relates to something I expect to happen in the future. Case 8, in fact, is a forecast in the proper sense of the term and has nothing whatever to do with 'planning'. How often, however, are forecasts presented as if they were plans -- and vice versa! The British 'National Plan' of 1965 provides an outstanding example and, not surprisingly, came to nothing.
Can we ever speak of future acts or events as certain (cases 2 and 6)? If I have made a plan with full knowledge of all the relevant facts, being inflexibly resolve to carry it through -- case 2 -- I may, in this respect, consider my future actions as certain. Similarly, in laboratory science, dealing with carefully isolated deterministic systems, future 2vents may he described as certain. The real world, however, is not a deterministic system; we may be able to talk with certainty about acts or events of the past -- cases 1 or 5 -- but we can do so about future events only on the basis of assumptions. In other words, we can formulate conditional statements about the future, such as: 'If such and such a trend of events continued for another x years, this is where it would take us.' This is not a forecast or prediction, which must always be uncertain in the real world, but an exploratory calculation, which, being conditional, has the virtue of mathematical certainty.
Endless confusion results from the semantic muddle in which we find ourselves today. As mentioned before, 'plans' are put forward which upon inspection turn out to relate to events totally outside the control of the planner. 'Forecasts' are offered which upon inspection turn out to be conditional sentences, in other words, exploratory calculations. The latter are misinterpreted as if they were forecasts or predictions. 'Estimates' are put forward which upon inspection turn out to be plans. And so on and so forth. Our academic teachers would perform a most necessary and really helpful task if they taught their students to make the distinctions discussed above and developed a terminology which fixed them in words.
Let us now return to our main subject -- predictability. Is prediction or forecasting -- the two terms would seem to be interchangeable -possible at all? The future does not exist; how could there be knowledge about something non-existent? This question is only too well justified. In the strict sense of the word, knowledge can only be about the past. The future is always in the making, but it is being made largely out of existing material, about which a great deal can be known. The future, therefore, is largely predictable, if we have solid and extensive knowledge of the past. Largely, but by no means wholly, for into the making of the future there enters that mysterious and irrepressible factor called human freedom. It is the freedom of a being of which it has been said that it was made in the image of God the Creator: the freedom of creativity.
Strange to say, under the influence of laboratory science many people today seem to use their freedom only for the purpose of denying its existence Men and women of great gifts find their purest delight in magnifying every mechanism', every inevitability', everything where human freedom does not enter or does not appear to enter A great shout of triumph goes up whenever anybody has found some further evidence -- in physiology or psychology or sociology or economics or politics -- of unfreedom, some further indication that people cannot help being what they are and doing what they are doing, no matter how inhuman their actions might be. The denial of freedom, of course, is a denial of responsibility: there are no acts, but only events; everything simply happens; no-one is responsible. And this is no doubt the main cause of the semantic confusion to which I have referred above. It is also the cause for the belief that we shall soon have a machine to foretell the future.
To be sure, if everything simply happened, if there were no element of freedom, choice, human creativity and responsibility, everything would be perfectly predictable, subject only to accidental and temporary limitations of knowledge. The absence of freedom would make human affairs suitable for study by the natural sciences or at least by their methods, and reliable results would no doubt quickly follow the systematic observation of facts. Professor Phelps Brown, in his presidential address to the Royal Economic Society, appears to adopt precisely this point of view when talking about 'The Underdevelopment of Economics'. 'Our own science,' he says, 'has hardly yet reached its seventeenth century. Believing that economics is metaphysically the same as physics, he quotes another economist, Professor Morgenstern, approvingly as follows:
The decisive break which came in physics in the seventeenth century, specifically in the field of mechanics, was possible only because of previous developments in astronomy. It was backed by several millennia of systematic, scientific. astronomical observation.... Nothing of this sort has occurred in economic science. It would have been absurd in physics to have expected Kepler and Newton without Tycho -- and there is no reason to hope for an easier development in economics.Professor Phelps Brown concludes therefore that we need many. many more years of observations of behaviour, 'Until then, our mathematisation is premature.'
It is the intrusion of human freedom and responsibility that makes economics metaphysically different from physics and makes human affairs largely unpredictable. We obtain predictability, of course, when we or others are acting according to a plan. But this is so precisely because a plan is the result of an exercise in the freedom of choice: the choice has been made: all alternatives have been eliminated. If people stick to their plan, their behaviour is predictable simply because they have chosen to surrender their freedom to act otherwise than prescribed in the plan.
In principle, everything which is immune to the intrusion of human freedom, like the movements of the stars, is predictable, and everything subject to this intrusion is unpredictable. Does that mean that all human actions are unpredictable? No, because most people, most of the time, make no use of their freedom and act purely mechanically. Experience shows that when we are dealing with large numbers of people many aspects of their behaviour are indeed predictable; for out of a large number, at any one time, only a tiny minority are using their power of freedom, and they often do not significantly affect the total outcome. Yet all really important innovations and changes normally start from tiny minorities of people who do use their creative freedom.
It is true that social phenomena acquire a certain steadiness and predictability from the non-use of freedom, which means that the great majority of people responds to a given situation in a way that does not alter greatly in time, unless there are really overpowering new causes.
We can therefore distinguish as follows:
- Full predictability (in principle) exists only in the absence of human freedom, i.e. in 'sub-human' nature. The limitations of predictability are purely limitations of knowledge and technique.
- Relative predictability exists with regard to the behaviour pattern of very large numbers of people doing 'normal' things (routine).
- Relatively full predictability exists with regard to human' actions controlled by a plan which eliminates freedom, e.g. railway timetable.
- Individual decisions by individuals are in principle unpredictable.
In practice all prediction is simply extrapolation, modified by known 'plans'. But how do you extrapolate? How many years do you go back? Assuming there is a record of growth, what precisely do you extrapolate -the average rate of growth. or the increase in the rate of growth, or the annual increment in absolute terms? As a matter of fact. there are no rules: [When there are seasonal or cyclical patterns, it is, of course, necessary to go back by at least a year or a cycle; but it is a matter of judgement to decide how many years or cycles.] it is just a matter of 'feel' or judgment.
It is good to know of all the different possibilities of using the same time series for extrapolations with very different results. Such knowledge will prevent us from putting undue faith in any extrapolation. At the same time, and by the same token, the development of (what purport to be) better forecasting techniques can become a vice. In short-term forecasting, say, for next year, a refined technique rarely produces significantly different results from those of a crude technique. After a year of growth -- what can you predict?
Now, it seems clear that the choice between these three basic alternative predictions cannot be made by 'forecasting technique but only by informed judgment. It depends, of course, on what you are dealing with. Which you have something that is normally growing very fast, like the consumption of electricity, your threefold choice is between the came rate of growth, a faster rate, or a slower rate.
- that we have reached a (temporary) ceiling;
- that growth will continue at the same, or a slower, or a faster rate;
- that there will be a decline.
It is not so much forecasting technique, as a full understanding of the current situation shat can help in the formation of a sound judgment for the future. If the present level of performance (or rate of growth) is known to be influenced by quite abnormal factors which are unlikely to apply in the coming year, it is, of course, necessary to take these into account. The forecast, 'same as last year', may imply a 'real' growth or a 'real' decline on account of exceptional factors being present this year, and this, of course, must be made explicit by the forecaster;
I believe, therefore, that all effort needs to be put into understanding the current situation, to identify and, if need be, eliminate 'abnormal' and nonrecurrent factors from the current picture. This having been done, the method of forecasting can hardly be crude enough. No amount of refinement will help one come to the fundamental judgment -- is next year going to be the same as last year, or better, or worse?
At this point, it may be objected that there ought to be great possibilities of short-term forecasting with the help of electronic computers, because they can very easily and quickly handle a great mass of data and fit to them some kind of mathematical expression. By means of 'feedback' the mathematical expression can be kept up to date almost instantaneously. And once you have a really good mathematics then the machine can predict the future.
Once again, we need to have a look at the metaphysical basis of such claims. What is the meaning of a 'good mathematical fit'? Simply that a sequence of quantitative changes in the past has been elegantly described in precise mathematical language. But the fact that I -- or the machine -- have been able to describe this sequence so exactly by no means establishes a presumption that the pattern will continue. It could continue only if (a) there were no human freedom and (b) there was no possibility of any change in the causes that have given rise to the observed pattern,
I should accept the claim that a very clear and very strongly established pattern !of stability, growth, or decline) can be expected to continue for a little longer, unless there is definite knowledge of the arrival of new factors likely to change it. But I suggest that for the detection of such clear, strong and persistent patterns the non-electronic human brain is normally cheaper, faster, and more reliable than its electronic rival. Or to put it the other way round: if it is really necessary to apply such highly refined methods of mathematical analysis for the detection of a pattern that one needs an electronic computer, the pattern is too weak and too obscure to be a suitable basis for extrapolation in real life.
Crude methods of forecasting -- after the current picture has been corrected for abnormalities -- are not likely to lead into the errors of spurious verisimilitude and spurious detailing -- the two greatest vices of the statistician. Once you have a formula and an electronic computer, there is an awful temptation to squeeze the lemon until it is dry and to present a picture of the future which through its very precision and verisimilitude carries conviction. Yet a man who uses an imaginary map, thinking it a true one, is likely to be worse o~ than someone with no map at all; for he will fail to inquire wherever he can, to observe every detail on his way, and to search continuously with all his senses and all his intelligence for indications of where he should go.
The person who makes the forecasts may still have a precise appreciation of the assumptions on which they are based. But the person who uses the forecasts may have no idea at all that the whole edifice, as is often the case, stands and falls with one single, unverifiable assumption. He is impressed by the thoroughness of the job done, by the fact that everything seems to 'add up', and so forth. If the forecasts were presented quite artlessly, as it were, on the back of an envelope, he would have a much better chance of appreciating their tenuous character and the fact that, forecasts or no forecasts, someone has to take an entrepreneurial decision about the unknown future.
I have already insisted that a plan is something essentially different from a forecast. It is a statement of intention, of what the planners -- or their masters -- intend to do. Planning (as I suggest the term should be used) is inseparable from power. It is natural and indeed desirable that everybody wielding any kind of power should have some sort of a plan, that is to say, that he should use power deliberately and consciously, looking some distance ahead in time. In doing so he must consider what other people are likely to do: in other words, he cannot plan sensibly without doing a certain amount of forecasting. This is quite straightforward as long as that which has to be forecast is, in fact, 'forecastable', if it relates either to matters into which human freedom does not enter, or to the routine actions of a very large number of individuals, or to the established plans of other people wielding power. Unfortunately, the matters to be forecast very often belong to none of these categories but are dependent on the individual decisions of single persons or small groups of persons. In such cases forecasts are little more than 'inspired guesses', and no degree of improvement in forecasting technique can help. Of course, some people may turn out to make better guesses than others, but this will not be due to their possessing a better forecasting technique or better mechanical equipment to help them in their computations.
What, then, could be the meaning of a 'national plan' in a free I society? It cannot mean the concentration of all power at one point, because that would imply the end of freedom: genuine planning is co-extensive with power. It seems to me that the only intelligible meaning of the words 'a national plan' in a free society would be the fullest possible statement of intentions by all people wielding substantial economic power, such statements being collected and collated by some central agency. The very inconsistencies of such a composite 'plan' might give valuable pointers,
Long-term Forecasts and Feasibility Studies
Let us now turn to long-term forecasting. by which I mean producing estimates dive or more years ahead. It must be clear that, change being a function of time, the longer-term future is even less predictable than the short-term. In fact, all long-term forecasting is somewhat presumptuous and absurd, unless it is of so general a kind that it merely states the obvious. All the same, there is often a practical necessity for 'taking a view' on the future, as decisions have to be taken and long-term commitments entered. Is there nothing that could help?
Here I should like to emphasise again the distinction between forecasts on the one hand and 'exploratory calculations' or 'feasibility studies' on the other. In the one case I assert that this or that will be the position in, say, twenty years' time. In the other case I merely explore the long-term effect of certain assumed tendencies. It is unfortunately true that in macro-economics feasibility studies are very rarely carried beyond the most rudimentary beginnings. People are content to rely on general forecasts which are rarely worth the paper they are written on.
It may be helpful if I give a few examples. It is very topical these days to talk about the development of underdeveloped countries and countless 'plans' (so-called) are being produced to this end. If we go by the expectations that are being aroused all over the world, it appears to be assumed that within a few decades most people the world over are going to be able to live more or less as the western Europeans are living today. Now, it seems to me, it would be very instructive if someone undertook to make a proper, detailed feasibility study of this project. He might choose the year 2000 as the terminal date and work backwards from there. What would be the required output of foodstuffs, fuels, metals, textile fibres, and so forth? What would be the stock of industrial capital? Naturally, he would have to introduce many new assumptions as he went along. Each assumption could then become the object of a further feasibility study. He might then find that he could not solve his equations unless he introduced assumptions which transcended all bounds of reasonable probability. This might prove highly instructive. It might conceivably lead to the conclusion that, while most certainly there ought to be substantial economic development throughout the countries where great masses of people live in abject misery, there are certain choices between alternative patterns of development that could be made, and that some types of development would appear more feasible than others.
Long-term thinking, supported by conscientious feasibility studies, would seem to be particularly desirable with regard to all non-renewable raw materials of limited availability, that is to say, mainly fossil fuels and metals. At present, for instance, there is a replacement of coal or oil. Some people seem to assume that coal is on the way out. A careful feasibility study, making use of all available evidence of coal, oil, and natural gas reserves, proved as well as merely assumed to exist, would be exceedingly instructive.
On the subject of population increase and food supplies, we have had the nearest thing to feasibility studies so far, coming mainly from United Nations organisations. They might be carried much further, giving not only the totals of food production to be attained by 1980 or 2000, but also showing in much greater detail than has so far been done the timetable of specific steps that would have to be taken in the near future if these totals are to be attained.
In all this, the most essential need is a purely intellectual one: a clear appreciation of the difference between a forecast and a feasibility study. It is surely a sign of statistical illiteracy to confuse the two. A long-term forecast, as L said, is presumptuous; but a long- term feasibility study is a piece of humble and unpretentious work which we shall neglect at our peril.
Again the question arises whether this work could be facilitated by more mechanical aids such as electronic computers. Personally, I am inclined to doubt it. It seems to me that the endless multiplication of mechanical aids in fields which require judgment more than anything else is one of the chief dynamic forces behind Parkinson's Law. Of course, an electronic computer can work out a vast number of permutations, employing varying assumptions, within a few seconds or minutes, while it might take the nonelectronic brain as many months to do the same job. But the point is that the non-electronic brain need never attempt to do that job, By the power of judgment it can concentrate on a few decisive parameters which are quite sufficient to outline the ranges of reasonable probability. Some people imagine that it would be possible and helpful to set up a machine for long-range forecasting into which current 'news' could be fed continuously and which, in response, would produce continual revisions of some long-term forecasts. No doubt, this would be possible; but would it be helpful! Each item of 'news- has to be judged for its long-term relevance, and a sound judgment is generally not possible immediately. Nor can I see any value in the continual revision of long-term forecasts, as a matter of mechanical routine. A forecast is required only when a long-term decision has to be taken or reviewed, which is a comparatively rare event even in the largest of businesses, and then it is worth while deliberately and conscientiously to assemble the best evidence, to judge each item in the light of accumulated experience, and finally to come to a view which appears reasonable to the best brains available. It is a matter of self-deception that this laborious and uncertain process could be short-circuited by a piece of mechanical apparatus.
When it comes to feasibility studies, as distinct from forecasts, it may occasionally seem useful to have apparatus which can quickly test the effect of variations in one's assumptions. But I have yet to be convinced that a slide rule and a set of compound interest tables are not quite sufficient for the purpose.
Unpredictability and Freedom
If I hold a rather negative opinion about the usefulness of 'automation' in matters of economic forecasting and the like, I do not underestimate the value of electronic computers and similar apparatus for other tasks, like solving mathematical problems or programming production runs. These latter tasks belong to the exact sciences or their applications. Their subject matter is non- human, or perhaps I should say, sub-human. Their very exactitude is a sign of the absence of human freedom, the absence of choice, responsibility and dignity. As soon as human freedom enters, we are in an entirely different world where there is great danger in any proliferation of mechanical devices. The tendencies which attempt to obliterate the distinction should be resisted with the utmost determination. Great damage to human dignity has resulted from the misguided attempt of the social sciences to adopt and imitate the methods of the natural sciences. Economics, and even more so applied economics, is not an exact science: it is in fact, or ought to be, something much greater: a branch of wisdom. Mr Colin Clark once claimed 'that long-period world economic equilibrium develop themselves in their own peculiar manner, entirely independently of political and social changes; On the strength of this metaphysical heresy he wrote a book, in 1941, entitled The Economics' of 1960.1 It would be unjust to say that the picture he drew bears no resemblance to what actually came to pass; there is, indeed, the kind of resemblance which simply stems from the fact that man uses his freedom within an unchanged setting of physical laws of nature. But the lesson from Mr Clark's book is that his metaphysical assumption is untrue; that, in fact, world economic equilibria, even in the longer run, are highly dependent on political and social changes; and that the sophisticated and ingenious methods of forecasting employed by Mr Clark merely served to produce a work of spurious verisimilitude.
I thus come to the cheerful conclusion that life, including economic life, is still worth living because it is sufficiently unpredictable to be interesting. Neither the economist nor the statistician will get it 'taped'. Within the limits of the physical laws of nature, we are still masters of our individual and collective destiny, for good or ill.
But the know-how of the economist, the statistician, the natural scientist and engineer, and even of the genuine philosopher can help to clarify the limits within which our destiny is confined. The future cannot be forecast, but it can be explored. Feasibility studies can show us where we appear to be going, and this is more important today than ever before, since 'growth' has become a keynote of economics all over the world.
In his urgent attempt to obtain reliable knowledge about his essentially indeterminate future, the modern man of action may surround himself by ever-growing armies of forecasters, by ever-growing mountains of factual data to be digested by ever more wonderful mechanical contrivances: I fear that the result is little more than a huge game of make-believe and an ever more marvellous vindication of Parkinson's Law. The best decisions will still be based on the judgments of mature non-electronic brains possessed by men who have looked steadily and calmly at the situation and seen it whole. 'Stop, look, and listen' is a better motto than 'Look it up in the forecasts'.
1. The Economics of 1960 by Colin Clark (The Macmillan Co. of Canada, Ltd., Toronto, 1940)
Towards a Theory of Large-Scale Organisation
First published in "Management Decision," Quarterly Review of Management Technology, London, Autumn 1967.
Almost every day we hear of mergers and takeovers: Britain enters the European Economic Community to open up larger markets to be served by even larger organisations. In the socialist countries, nationalisation has produced vast combines to rival or surpass anything that has emerged in the capitalist countries. The great majority of economists and business efficiency experts sup- ports this trend towards vastness.
In contrast, most of the sociologists and psychologists insistently warn us of its inherent dangers -- dangers to the integrity of the individual when he feels as nothing more than a small cog in a vast machine and when the human relationships of his daily working life become increasingly dehumanised; dangers also to efficiency and productivity, stemming from ever-growing Parkinsonian bureaucracies.
Modern literature, at the same time, paints frightening pictures of a brave new world sharply divided between us and them, torn by mutual suspicion, with a hatred of authority from below and a contempt of people from above. The masses react to their rulers in a spirit of sullen irresponsibility, while the rulers vainly try to keep things moving by precise organisation and coordination, fiscal inducements, incentives, endless exhortations and threats.
Undoubtedly this is all a problem of communications. But the only really effective communication is from man to man, face to face. Franz Kafka's nightmarish novel, The Castle, depicts the why. He tries to get his position clarified, because the people he devastating effects of remote control. Mr K, the land surveyor, has been hired by the authorities, but nobody quite knows how and meets all tell him: Unfortunately we have no need of a land surveyor. There would not be the least use for one here.'
So, making every effort to meet authority face to face, Mr K approaches various people who evidently carry some weight; but others tell him :'You haven't once up till now come into real contact with our authorities. All these contacts are merely illusory, but owing to your ignorance ... you take them to he real.
He fails utterly to do any real work and then receives a letter from The Castle: 'The surveying work which you have carried out thus far has my recognition.... Do not slacken your efforts! Bring your work to a successful conclusion. Any interruption would displease me ... I shall not forget you.
Nobody really likes large-scale organisation: nobody likes to take orders from a superior who takes orders from a superior who takes orders.... Even if the rules devised by bureaucracy are outstandingly humane, nobody likes to be ruled by rules, that is to say, by people whose answer to every complaint is: 'I did not make the rules: I am merely applying them.'
Yet, it seems, large-scale organisation is here to stay. Therefore it is all the more necessary to think about it and to theorise about it. The stronger the current, the greater the need for skilful navigation.
The fundamental task is to achieve smallness within large organisation.
Once a large organisation has come into being, it normally goes through alternating phases of centralising and decentralising, like swings of a pendulum. Whenever one encounters such opposites, each of them with persuasive arguments in its favour, it is worth looking into the depth of the problem for something more than compromise, more than a half-and-half solution. Maybe what we really need is not either-or but the-one-and-the-other-at-the- same-time.
This very familiar problem pervades the whole of real life, al- though it is highly unpopular with people who spend most of their time on laboratory problems from which all extraneous factors have been carefully eliminated. For whatever we do in real life, we must try to do justice to a situation which includes all so-called extraneous factors. Find we always have to face the simultaneous requirement for order and freedom.
In any organisation, large or small, there must be a certain clarity and orderliness; if things fall into disorder, nothing can be accomplished, Yet. orderliness. as such, is static and lifeless; so there must also be plenty of elbow-room and scope for breaking through the established order. to do the thing never done before, never anticipated by the guardians of orderliness, the new, unpredicted and unpredictable outcome of a man's creative idea.
Therefore any organisation has to strive continuously for the orderliness of order and the disorderliness of creative freedom, And the specific danger inherent in large scale organisation is that its natural bias and tendency favour order, at the expense of creative freedom.
We can associate many further pairs of opposites with this basic pair of order and freedom. Centralisation is mainly an idea of order; decentralisation, one of freedom, The man of order is typically the accountant and, generally, the administrator: while the man of creative freedom is the entrepreneur. Order requires intelligence and is conducive to efficiency; while freedom calls for. and opens the door to, intuition and leads to innovation.
The larger an organisation, the more obvious and inescapable is the need for order. But if this need is looked after with such efficiency and perfection that no scope remains for man to exercise his creative intuition, for entrepreneurial disorder, the organisation becomes moribund and a desert of frustration.
These considerations form the background to an attempt towards a theory of large-scale organisation which I shall now develop in the form of five principles.
The first principle is called The Principle of Subsidiarity or The Principle of Subsidiary Function. A famous formulation is this principle reads as follows: 'It is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organisations can do. For every social activity ought of its very nature to furnish help to the members of the body social and never destroy and absorb them.' These sentences were meant for society as a whole, but they apply equally to the different levels within a large organisation. The higher level must not absorb the functions of the lower one, on the assumption that, being higher, it will automatically be wiser and fulfil them more efficiently. Loyalty can grow only from the smaller units to the larger (and higher) ones, not the other way round -- and loyalty is an essential element in She health of any organisation.
The Principle of Subsidiary Function implies that the burden of proof lies always on those who want to deprive a lower level of its function, and thereby of its freedom and responsibility in that respect; they have to prove that the lower level is incapable of fulfilling this function satisfactorily and that the higher level can actually do much better. "Those in command (to continue the quotation) should be sure that the more perfectly a graduated order is preserved among the various associations, in observing the principle of subsidiary function. the stronger wilt be the social authority and effectiveness and the happier and more prosperous the condition of the State.''1
The opposites of centralising and decentralising are now far behind us: the Principle of Subsidiary Function teaches us that the centre will gain in authority and effectiveness if the freedom and responsibility of the lower formations are carefully preserved, with the result that the organisation as a whole will be 'happier and more prosperous'.
How can such a structure be achieved? From the administrator's point of view, i.e. from the point of view of orderliness, it will look untidy, comparing most unfavourably with the clear- cut logic of a monolith. The large organisation will consist of many semi-autonomous units, which we may call quasi-firms. Each of them will have a large amount of freedom, to give the greatest possible chance to creativity and entrepreneurship.
The structure of the organisation can then be symbolised by a man holding a large number of balloons in his hand. Each of the balloons has its own buoyancy and lift, and the man himself does not lord it over the balloons, but stands beneath them, yet holding all the strings firmly in his hand. Every balloon is not only an administrative but also an entrepreneurial unit. The monolithic organisation, by contrast, might be symbolised by a Christmas tree, with a star at the top and a lot of nuts and other useful things underneath. Everything derives from the top and depends on it, Real freedom and entrepreneurship can exist only at the top;
Therefore, the task is to look at the organisation's activities one by one and set up as many quasi-firms as may seem possible and reasonable. For example, the British National Coal Board, one of the largest commercial organisations in Europe, has found it possible to set up quasi-firms under various names for its opencast mining, its brickworks, and its coal products. But the process did not end there. Special, relatively self-contained organisational forms have been evolved for its road transport activities, estates, and retail business, not to mention various enterprises falling under the heading of diversification. The board's primary activity, deep-mined coal-getting, has been organised in seventeen areas, each of them with the status of a quasi-firm. The source already quoted describes the results of such a structurisation as follows: 'Thereby (the centre) will more freely, powerfully and effectively do all those things which belong to it alone because it alone can do them: directing, watching, urging, restraining, as occasion requires and necessity demands.'
For central control to be meaningful and effective, a second principle has to be applied, which we shall call The Principle of Vindication. To vindicate means: to defend against reproach or accusation: to prove to be true and valid; to justify; to uphold; so this principle describes very well one of the most important duties of the central authority towards the lower formations. Good government is always government by exception. Except for exceptional cases, the subsidiary unit must be defended against reproach and upheld. This means that the exception must be sufficiently clearly defined, so that the quasi-firm is able to know without doubt whether or not it is performing satisfactorily.
Administrators taken as a pure type, namely as men of orderliness, are happy when they have everything under control. Armed with computers, they can indeed now do so and can insist on accountability with regard to an almost infinite number of items -- output, productivity, many different cost items, non- operational expenditure, and so on, leading up to profit or loss. This is logical enough: but real life is bigger than logic. If a large number of criteria is laid down for accountability, every subsidiary unit can be faulted on one item or another; government by exception becomes a mockery, and no-one can ever be sure how his unit stands.
In its ideal application, the Principle of Vindication would permit only one criterion for accountability in a commercial organisation, namely profitability. Of course, such a criterion would be subject to the quasi-firm's observing general rules and policies hid down by the centre. Ideals can rarely be attained in the real world, but they are none the less meaningful. They imply that any departure from the ideal has to be specially argued and justified Unless the number of criteria for accountability is kept very small indeed, creativity and entrepreneurship cannot flourish in the quasi-firm.
While profitability must be the final criterion, it is not always permissible to apply it mechanically. Some subsidiary units may be exceptionally well placed, others, exceptionally badly; some may have service functions with regard to the organisation as a whole or other special obligations which have to be fulfilled without primary regard to profitability. In such cases. the measurement of profitability must be modified in advance, by what we may call rents and subsidies.
If a unit enjoys special and inescapable advantages, it must pay an appropriate rent. but if it has to cope with inescapable disadvantages, it must be granted a special credit or subsidy. Such a system can sufficiently equalise the profitability chances of the various units, so that profit becomes a meaningful indication of achievement. If such an equalisation is needed but not applied, the fortunate units will be featherbedded, while others may be lying on a bed of nails. This cannot be good for either morale or performance.
If. in accordance with the Principle of Vindication, an organisation adopts profitability as the primary criterion for accountability -- profitability as modified, if need be, by rents and subsidies -- government by exception becomes possible. The centre can then concentrate its activities on 'directing. watching. urging, restraining, as occasion requires and necessity demands'. which, of course, must go on all the time with regard to all its subsidiary units.
Exceptions can be defined clearly. The centre will have two opportunities for intervening exceptionally. The first occurs when the centre and the subsidiary unit cannot come to a free agreement on the rent or subsidy, as the case may be, which is to be applied. In such circumstances the centre has to undertake a full efficiency audit of the unit to obtain an objective assessment of the unit's real potential. The second opportunity arises when the unit fails to earn a profit, after allowing for rent or subsidy. The management of the unit is then in a precarious position: if the centre's efficiency audit produces highly unfavourable evidence, the management may have to be changed.
The third principle The Principle of Identification. Each subsidiary unit or quasi-firm must have both a profit and loss account and a balance sheet. From the point of view of orderliness a profit and loss statement is quite sufficient, since from this one can know whether or not the unit is contributing financially to the organisation. But for the entrepreneur, a balance sheet is essential, even if it is used only for internal purposes. Why is it not sufficient to have but one balance sheet for the organisation as a whole?
Business operates with a certain economic substance, and this substance diminishes as a result of losses, and grows as a result of profit, What happens to the unit's profits or losses at the end of the financial year? They flow into the totality of the organisation's accounts: as far as the unit is concerned, the; simply disappear. In the absence of a balance sheet, or something in the nature of a balance sheet. the unit always enters the new financial year with a nil balance, This cannot be right,
A unit's success should lead to greater freedom and financial scope for the unit, while failure -- in the form of losses -- should lead to restriction and disability. One wants to reinforce success and discriminate against failure. The balance sheet describes the economic substance as augmented or diminished by current results. This enables all concerned to follow the effect of operations on substance. Profits and losses are carried forward and not wiped out. Therefore, every quasi-firm should have its separate balance sheet, in which profits can appear as loans to the centre and losses as loans from the centre. This is a matter of great psychological importance.
I now turn to the fourth principle, which can be called The Principle of Motivation. It is a trite and obvious truism that people act in accordance with their motives. All the same, for a large organisation, with its bureaucracies, its remote and impersonal controls, its many abstract rules and regulations, and above all the relative incomprehensibility that stems from its very size, motivation is the central problem. At the top, the management has no problem of motivation, but going down the scale, the problem becomes increasingly acute, This is not the place to go into the details of this vast and difficult subject.
Modern industrial society, typified by large-scale organisations. gives far too little thought to it. Managements assume that people work simply for money. for the pay-packet at the end of the week, No doubt, this is true up to a point, but when a worker, asked why he worked four shifts last week. answers: 'Because I couldn't make ends meet on three shifts' wages.' everybody is stunned and feels check-mated.
Intellectual confusion exacts its price. We preach the virtues of hard work and restraint while painting utopian pictures of unlimited consumption without either work or restraint. We complain when an appeal for greater effort meets with the ungracious reply: 'I couldn't care less.' while promoting dreams about automation to do away with manual work, and about the computer relieving men from the burden of using their brains.
A recent Reith lecturer announced that when a minority will be 'able to feed, maintain, and supply the majority, it makes no sense to keep in the production stream those who have no desire to be in it'. Many have no desire to be in it, because their work does not interest them, providing them with neither challenge nor satisfaction, and has no other merit in their eyes than that it leads to a pay-packet at the end of the week. If our intellectual leaders treat work as nothing but a necessary evil soon to be abolished as far as the majority is concerned, the urge to minimise it right away is hardly a surprising reaction, and the problem of motivation becomes insoluble.
However that may be, the health of a large organisation depends to an extraordinary extent on its ability to do justice to the Principle of Motivation. Any organisational structure that is conceived without regard to this fundamental truth is unlikely to succeed.
My fifth, and last, principle is The Principle of the Middle Axiom. Top management in a large organisation inevitably occupies a very difficult position. It carries responsibility for everything that happens, or fails to happen, throughout the organisation, although it is far removed from the actual scene of events. It can deal with many well-established functions by means of directives, rules and regulations. But what about new developments, new creative ideas? What about progress, the entrepreneurial activity par excellence?
We come back to our starting point: all real human problems arise from the antinomy of order and freedom, Antinomy means a contradiction between two laws; a conflict of authority: opposition between laws or principles that appear to be founded equally in reason.
Excellent! This is real life, full of antinomies and bigger than logic. Without order, planning, predictability, central control, accountancy, instructions to the underlines, obedience, discipline -- without these, nothing fruitful can happen, because everything disintegrates. And yet -- without the magnanimity of disorder, the happy abandon, the entrepreneurship venturing into the unknown and incalculable, without the risk and the gamble, the creative imagination rushing in where bureaucratic angels fear to tread -without this, life is a mockery and a disgrace.
The centre can easily look after order; it is not so easy to look after freedom and creativity. The centre has the power to establish order, but no amount of power evokes the creative contribution How, then, can top management at the centre work for progress and innovation? Assuming that it knows what ought to be done: how can the management get it done throughout the organisation? This is where the Principle of the Middle Axiom comes in.
An axiom is a self-evident truth which is assented to as soon as enunciated. The centre can enunciate the truth it has discovered -- that this or that is 'the right thing to do'. Some years ago, the most important truth to be enunciated by the National Coal Board was concentration of output, that is, to concentrate coal-getting on fewer coal faces, with a higher output from each. Everybody, of course, immediately assented to it, but, not surprisingly, very little happened.
A change of this kind requires a lot of work, a lot of new thinking and planning at every colliery, with many natural obstacles and difficulties to be overcome. How is the centre, the National Board in this case, to speed the change-over? It can, of course, preach the new doctrine. But what is the use, if everybody agrees anyhow? Preaching from the centre maintains the freedom and responsibility of the lower formations, but it incurs the valid criticism that 'they only talk and do not do anything'. Alternatively, the centre can issue instructions, but, being remote from the actual scene of operations, tile central management incur the valid criticism that 'it attempts to run the industry iron, Headquarters', sacrificing the need for freedom to the need for order and losing the creative participation of the people at the lower formulations -- the very people who are most closely in touch with the actual job Neither the soft method of government by exhortation nor the tough method of government by instruction meets the requirements of the case. What is required is something in between a middle axiom, an order from above which is yet not quite an
When it decided to concentrate output, the National Coal Board laid down certain minimum standards for opening up new coalfaces, with the proviso that if any Area found it necessary to open a coalface that would fall short of these standards, a record of the decision should be entered into a book specially provided for the purpose, and this record should contain answers to three questions:Why can this particular coalface not be laid out in such a way that the required minimum size is attained?
Why does this particular bit of coal have to be worked at all?
What is the approximate profitability of the coalface as planned?
This was a true and effective way of applying the Principle of the Middle Axiom and it had an almost magical effect. Concentration of output really got going, with excellent results for the industry as a whole. The centre had found a way of going far beyond mere exhortation, yet without in any way diminishing the freedom and responsibility of the lower formations.
Another middle axiom can be found in the device of Impact Statistics. Normally, statistics are collected for the benefit of the collector, who needs -or thinks he needs -- certain quantitative information. Impact statistics have a different purpose, namely to make the supplier of the statistic, a responsible person at the lower formation, aware of certain facts which he might otherwise over- look. This device has been successfully used in the coal industry, particularly in the field of safety.
Discovering a middle axiom is always a considerable achievement. To preach is easy so also is issuing instructions. But it is difficult indeed fur top management to carry through its creative ideas without impairing the freedom and responsibility of the lower formations.
I have expounded five principles which i believe to be relevant to a theory of large-scale organisation, and have given a more or less intriguing name to each of them. What is the use of all this? Is it merely an intellectual game? Some readers will no doubt think so. Others -- and they are the ones for whom this chapter has been written -- might say: 'You are putting into words what I have been trying to do for years.' Excellent! Many of us have been struggling for years with the problems presented by large-scale organisation, problems which are becoming ever more acute. To struggle more successfully. we need a theory, built up from principles. But from where do the principles come? They come from observation and practical understanding.
The best formulation of the necessary interplay of theory and practice. that I know of, comes from Mao Tse-tung. Go to the practical people, he says, and learn from them: then synthesise their experience into principles and theories; and then return to the practical people and call upon them to put these principles and methods into practice so as to solve their problems and achieve freedom and happiness.2
1. Encyclical "Quadragesimo Anno"
2. Selected Works by Mao Tse-tung, Vol. III
Both theoretical considerations and practical experience have led me to the conclusion that socialism is of interest solely for its non- economic values and the possibility it creates for the overcoming of the religion of economics. A society ruled primarily by the idolatry of enrichissez-vous. which celebrates millionaires as its culture heroes, can gain nothing from socialisation that could not also be gained without it.
It is not surprising, therefore, that many socialists in so-called advanced societies, who are themselves -- whether they know it or not -- devotees of the religion of economics, are today wondering whether nationalisation is not really beside the point. It causes a lot of trouble -- so why bother with it? The extinction of private ownership, by itself, does not produce magnificent results: everything worth while has still to be worked for, devotedly and patiently, and the pursuit of financial viability, combined with the pursuit of higher social aims, produces many dilemmas, many seeming contradictions, and imposes extra heavy burdens on management.
If the purpose of nationalisation is primarily to achieve faster economic growth, higher efficiency, better planning, and so forth, there is bound to be disappointment. The idea of conducting the entire economy on the basis of private greed, as Marx well recognised, has shown an extraordinary power to transform the world,
The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations and has left no other nexus between man and man than naked self- interest....
The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. (Communist Manifesto)
The strength of the idea of private enterprise lies in its terrifying simplicity. It suggests that the totality of life can be reduced to one aspect -profits. The businessman, as a private individual, may still be interested in other aspects of life -- perhaps even in goodness, truth and beauty -- but as a businessman he concerns himself only with profits. In this respect, the idea of private enterprise fits exactly into the idea of The Market, which, in an earlier chapter, I called 'the institutionalisation of individualism and non-responsibility'. Equally, it fits perfectly into the modern trend towards total quantification at the expense of the appreciation of qualitative differences; for private enterprise is not concerned with what it produces but only with what it gains from production.
Everything becomes crystal clear after you have reduced reality to one -one only -- of its thousand aspects. You know what to do -- whatever produces profits; you know what to avoid -- whatever reduces them or makes a loss. And there is at the same time a perfect measuring rod for the degree of success or failure. Let no one befog the issue by asking whether a particular action is conducive to the wealth and well-being of society, whether it leads to moral, aesthetic, or cultural enrichment. Simply find out whether it pays: simply investigate whether there is an alternative that pays better. If there is, choose the alternative.
It is no accident that successful businessmen are often astonishingly primitive; they live in a world made primitive by this process of reduction. They fit into this simplified version of the world and are satisfied with it. And when the real world occasionally makes its existence known and attempts to force upon their attention a different one of its facets, one not provided for in their philosophy, they tend to become quite helpless and confused. They feel exposed to incalculable dangers and 'unsound' forces and freely predict general disaster. As a result, their judgments on actions dictated by a more comprehensive outlook on the meaning and purpose of life are generally quite worthless. It is a foregone conclusion for them that a different scheme of things, a business, for instance, that is not based on private ownership, cannot possibly succeed. If it succeeds all the same, there must be a sinister explanation -'exploitation of the consumer, 'hidden subsidies', 'forced labour', 'monopoly', 'dumping, or some dark and dreadful accumulation of a debit account which the future will suddenly present,
But this is a digression The point is that the real strength of the theory of private enterprise lies in this ruthless simplification, which fits so admirably also into the mental patterns created by the phenomenal successes of science. The strength of science, too, derives from a 'reduction' of reality to one or the other of its many aspects, primarily the reduction of quality to quantity. But just as the powerful concentration of nineteenth-century science on the mechanical aspects of reality had to be abandoned because there was too much of reality that simply did not fit, so the powerful concentration of business life on the aspect of 'profits' has had to be modified because it failed to do justice to the real needs of man. It was the historical achievement of socialists to push this development, with the result that the favourite phrase of the enlightened capitalist today is: 'We are all socialists now.
That is to say, the capitalist today wishes to deny that the one final aim of all his activities is profit. He says: 'Oh no, we do a lot for our employees which we do not really have to do, we try to preserve the beauty of the countryside; we engage may not pay off,' etc. etc. All these claims are very familiar; sometimes they are justified, sometimes not.
What concerns us here is this: private enterprise 'old style', let us say, goes simply for profits: it thereby achieves a most powerful simplification of objectives and gains a perfect measuring rod of success or failure. Private enterprise 'new style', on the other hand (let us assume), pursues a great variety of objectives; it tries to consider the whole fullness of life and not merely the money- making aspect; it therefore achieves no powerful simplification of objectives and possesses no reliable measuring rod of success or failure. If this is so, private enterprise 'new style', as organised in large joint stock companies, differs from public enterprise only in one respect; namely that it provides an unearned income to its shareholders.
Clearly, the protagonists of capitalism cannot have it both ways. They cannot sag 'We are all socialists now' and maintain at the same time that socialism cannot possibly work. If they themselves pursue objectives other thaIl that of profit-making, then they cannot very well argue that it becomes impossible to administer the nation's means of production efficiently as soon as considerations other than those of profit making are allowed to enter. If they can manage without the crude yardstick of money-making, so can nationalised industry,
On the other hand, if all this is rather a sham and private enter- prise works for profit and (practically) nothing else: if its pursuit of other objectives is in fact solely dependent on profit-making and constitutes merely its own choice of what to do with some of the profits, then the sooner this is made clear the better. In that case, private enterprise could still claim to possess the power of simplicity. Its case against public enterprise would be that the latter is bound to be inefficient precisely because it attempts to pursue several objectives at the same time, and the case of socialists against the former would be the traditional case, which is not primarily an economic one, namely, that it degrades life by its very simplicity, by basing all economic activity solely on the motive of private greed.
A total rejection of public ownership means a total affirmation of private ownership. This is just as great a piece of dogmatism as the opposite one of the most fanatical communist. But while all fanaticism shows intellectual weakness, a fanaticism about the means to be employed for reaching quite uncertain objectives is sheer feeble-mindedness.
As mentioned before, the whole crux of economic life -- and indeed of life in general -- is that it constantly requires the living reconciliation of opposites which, in strict logic, are irreconcilable. In macro-economics( the management of whole societies) it is necessary always to have both planning and freedom -- not by way of a weak and lifeless compromise, but by a free recognition of the legitimacy of and need for both. Equally in micro- economics (the management of individual enterprises): on the one hand it is essential that there should be full managerial responsibility and authority; yet it is equally essential that there should be a democratic and free participation of the workers in management decisions, Again, it is not a question of mitigating the opposition of these two needs by some halfhearted compromise that satisfies neither of them, but to recognise them both. The exclusive concentration on one of the opposites -- say, on planning, produces Stalinism; while the exclusive concentration on the other produces chaos. The normal answer to either is a swing of the pendulum to the other extreme. Yet the normal answer is not the only possible answer. A generous and magnanimous intellectual effort -- the opposite of nagging, malevolent criticism -- can enable a society, at least for a period, to find a middle way that reconciles the opposites without degrading them both.
The same applies to the choice of objectives in business life. One of the opposites -- represented by private enterprise 'old style' -- is the need for simplicity and measurability, which is best fulfilled by a strict limitation of outlook to 'profitability' and nothing else. The other opposite -- represented by the original "idealistic' conception of public enterprise -- is the need for a comprehensive and broad humanity in the conduct of economic affairs. The former, if exclusively adhered to, leads to the total destruction of the dignity of man; the latter, to a chaotic kind of inefficiency.
There are no 'final solutions' to this kind of problem. There is only a living solution achieved day by day on a basis of a clear recognition that both opposites are valid.
Ownership, whether public or private, is merely an element of framework. It does not by itself settle the kind of objectives to be pursued within the framework. From this point of view it is correct to say that ownership is not the decisive question. But it is also necessary to recognise that private ownership of the means of production is severely limited in its freedom of choice of objectives, because it is compelled to be profit-seeking, and tends to take a narrow and selfish view of things. Public ownership gives complete freedom in the choice of objectives and can therefore be used for any purpose that may be chosen. While private owner- ship is an instrument that by itself largely determines the ends for which it can be employed, public ownership is an instrument the ends of which are undetermined and need to be consciously chosen.
There is therefore really no strong case for public ownership if the objectives to be pursued by nationalised industry are to be just as narrow, just as limited as those of capitalist production: profitability and nothing else. Herein lies the real danger to nationalisation in Britain at the present time, not in any imagined inefficiency.
The campaign of the enemies of nationalisation consists of two distinctly separate moves. The first move is an attempt to convince the public at large and the people engaged in the nationalised sector that the only thing that matters in the administration of the means of production, distribution, and exchange is profitability; that any departure from this sacred standard -- and particularly a departure by nationalised industry -- imposes an intolerable burden on everyone and is directly responsible for anything that may go wrong in the economy as a whole. This campaign is remarkably successful. The second move is to suggest that since there is really nothing special at all in the behaviour of nationalised industry, and hence no promise of any progress towards a better society, any further nationalisation would be an obvious case of dogmatic inflexibility, a mere 'grab' organised by frustrated politicians, untaught, unteachable, and incapable of intellectual doubt. This neat little plan has all the more chance of success if it can be supported by a governmental price policy for the products of the nationalised industries which makes it virtually impossible for them to earn a profit.
It must be admitted that this strategy, aided by a systematic smear campaign against the nationalised industries, has not been without effect on socialist thinking.
The reason is neither an error in the original socialist inspiration nor any actual failure in the conduct of the nationalised industry -- accusations of that kind are quite insupportable -- but a lack of vision on the part of the socialists themselves. They will not recover, and nationalisation will not fulfil its function, unless they recover their vision.
What is at stake is not economics but culture: not the standard of living but the quality of life. Economics and the standard of living can just as well be looked after by a capitalist system, moderated by a bit of planning and redistributive taxation. But culture and, generally, the quality of life, can now only be debased by such a system.
Socialists should insist on using the nationalised industries not simply to out-capitalise the capitalists -- an attempt in which they may or may not succeed but to evolve a more democratic and dignified system of industrial administration, a more humane employment of machinery, and a more intelligent utilisation of the fruits of human ingenuity and effort. If they can do that, they have the future in their hands. If they cannot, they have nothing to offer that is worthy of the sweat of free-born men.
All quotations in this chapter are from The Acquisitive Society by R. H. Tawney.
'It is obvious, indeed, that no change of system or machinery can avert those causes of social malaise which consist in the egotism, greed, or quarrelsomeness of human nature. What it can do is to create an environment in which those are not the qualities which are encouraged. It cannot secure that men live up to their principles. What it can do is to establish their social order upon principles to which, if they please, they can live up and not live down. It cannot control their actions. It can offer them an end on which to fix their minds. And, as their minds are, so in the long run and with exceptions, their practical activity will be.'
These words of R. H. Tawney were written many decades ago, They have lost nothing of their topicality, except that today we are concerned not only with social malaise but also, most urgently, with a malaise of the ecosystem or biosphere which threatens the very survival of the human race. Every problem touched upon in the preceding chapters leads to the question of 'system or machinery', although, as I have argued all along, no system or machinery or economic doctrine or theory stands on its own feet: it is invariably built on a metaphysical foundation, that is to say, upon man's basic outlook on life, its meaning and its purpose. I have talked about the religion of economics, the idol worship of material possessions, of consumption and the so-called standard of living, and the fateful propensity that rejoices in the fact that 'what were luxuries to our fathers have become necessities for us'.
Systems are never more nor less than incarnations of man's most basic attitudes. Some incarnations, indeed, are more perfect than others. General evidence of material progress would suggest that the modern private enterprise system is -- or has been -- the most perfect instrument for the pursuit of personal enrichment, The modern private enterprise system ingeniously employs the human urges of greed and envy as its motive power, but manages to overcome the most blatant deficiencies of laissez-faire by means of Keynesian economic management, a bit of redistributive taxation, and the 'countervailing power' of the trade unions.
Can such a system conceivably deal with the problems we are now having to face'? The answer is self-evident: greed and envy demand continuous and limitless economic growth of a material kind, without proper regard for conservation, and this type of growth cannot possibly fit into a finite environment We must therefore study the essential nature of the private enterprise system and the possibilities of evolving an alternative system which might fit the new situation
The essence of private enterprise is the private ownership of the means of production, distribution, and exchange Not surprisingly, therefore, the critics of private enterprise have advocated and in many cases successfully enforced the conversion of private ownership into so-called public or collective ownership Let us look, first of all, at the meaning of 'ownership' or 'property'.
As regards private property the first and most basic distinction is between (a) property that is an aid to creative work and (b) property that is an alternative to it. There is something natural and healthy about the former -the private property of the working proprietor; and there is something unnatural and unhealthy about the latter -- the private properly of the passive owner who lives parasitically on the work of others. This basic distinction was clearly seen by Tawney who followed that "it is idle, therefore, to present a case for or against private property without specifying the particular forms of property to which reference is made."
For it is not private ownership, but private ownership divorced from work, which is corrupting to the principle of industry; and the idea of some socialists that private property in land capital is necessarily mischievous is a piece of scholastic pedantry as absurd as that of those conservatives who would invest al~ property with some kind of mysterious sanctity.
Private enterprise carried on with property of the first category is automatically small-scale, personal, and local. It carries no wider social responsibilities. Its responsibilities to the consumer can be safeguarded by the consumer himself. Social legislation and trade union vigilance can protect the employee. No great private fortunes can be gained from small-scale enterprises, yet its social utility is enormous.
It is immediately apparent that in this matter of private owner- ship the question of scale is decisive. When we move from small- scale to medium scale, the connection between ownership and work already becomes attenuated; private enterprise tends to become impersonal and also a significant social factor in the locality; it may even assume more than local significance. The very idea of private property becomes increasingly misleading.
- The owner, employing salaried managers, does not need to be a proprietor to be able to do his work. His ownership, therefore, ceases to be functionally necessary. It becomes exploitative if he appropriates profit in excess of a fair salary to himself and a return on his capital on higher than current rates for capital borrowed from outside sources.
- High profits are either fortuitous or they are the achievement not of the owner but of the whole organisation. It is therefore unjust and socially disruptive if they are appropriated by the owner alone. They should be shared with all members of the organisation. If they are 'ploughed back' they should be 'free capital' collectively owned, instead of accruing automatically to the wealth of the original owner.
- Medium size, leading to impersonal relationships, poses new questions as to the exercise of control. Even autocratic control is no serious problem in small-scale enterprise which, led by a working proprietor, has almost a family character. It is incompatible with human dignity and genuine efficiency when the enterprise exceeds a certain -- very modest -- size. There is need, then, for the conscious and systematic development of communications and consultation to allow all members of the organisation some degree of genuine participation in management.
- The social significance and weight of the firm in its locality and its wider ramifications call for some degree of 'socialisation of ownership' beyond the members of the firm itself. This 'socialisation may be effected by regularly devoting a part of the firms profits to public or charitable purposes and bringing in trustees from outside.
There are private enterprise firms in the United Kingdom and other capitalist countries which have carried these ideas into successful practice and have thereby overcome the objectionable and socially disruptive features which are inherent in the private ownership of the means of production when extended beyond small- scale. Scott Bader & Co Ltd, at Wollaston in Northamptonshire. is one of them. A more detailed description of their experiences and experimentation will be given in a later chapter. When we come to large-scale enterprises, the idea of private ownership becomes an absurdity. The property is not and cannot be private in any real sense. Again, R. H. Tawney saw this with complete clarity:Such property may be called passive property, or property for acquisition, for exploitation, or for power, to distinguish it from the property which is actively used by its owner for the conduct of his profession or the upkeep of his household. To the lawyer the first is, of course, as fully property as the second. It is questionable, however, whether economists should call it "property" at all ... since it is not identical with the rights which secure the owner the produce of his toil, but is the opposite of them.The so-called private ownership of large-scale enterprises is in no way analogous to the simple property of the small landowner, craftsman, or entrepreneur. It is, as Tawney says, analogous to 'the feudal dues which robbed the French peasant of part of his produce till the revolution abolished them',
All these rights -- royalties, ground- rents, monopoly profits, surpluses of all kinds -- are "property". The criticism most fatal to them ... is contained in the arguments by which property is usually defended. The meaning of the institution, it is said, is to encourage industry by securing that the worker shall receive the produce of his toil. But then, precisely in proportion as it is important to preserve the property which a man has in the results of his labour, is it important to abolish that which he has in the results of the labour of someone else.
To sum up:
- in small-scale enterprise, private ownership is natural, fruitful, and just.
- In medium-scale enterprise, private ownership is already to a large extent functionally unnecessary. The idea of 'property' becomes strained, unfruitful, and unjust. If there is only one owner or a small group of owners, there can be, and should be, a voluntary surrender of privilege to the wider group of actual workers -- as in the case of Scott Bader & Co Ltd. Such an act of generosity may be unlikely when there is a large number of anonymous shareholders, but legislation could pave the way even then.
- In large-scale enterprise, private ownership is a fiction for the purpose of enabling functionless owners to live parasitically on the labour of others. It is not only unjust but also an irrational element which distorts all relationships within the enterprise. To quote Tawney again:
If every member of a group puts something into a common pool on condition of taking something out, they may still quarrel about the size of the shares ... but, if the total is known and the claims are admitted, that is all they can quarrel about..; But in industry the claims are not all admitted, for those who put nothing in demand to take something out.
There are many methods of doing away with so-called private ownership in large-scale enterprise; the most prominent one is generally referred to as 'nationalisation'.But nationalisation is a word which is neither very felicitous nor free from ambiguity. Properly used it means merely ownership by a body representing ... the general public of consumers. No language possesses a vocabulary to express neatly the finer shades in the numerous possible varieties of organisation under which a public service may be carried on.A number of large industries have been 'nationalised' in Britain. They have demonstrated the obvious truth that the quality of an industry depends on the people who run it and not on absentee owners. Yet the nationalised industries, in spite of their great achievements, are still being pursued by the implacable hatred of certain privileged groups. The incessant propaganda against them tends to mislead even people who do not share the hatred and ought to know better. Private enterprise spokesmen never tire of asking for more 'accountability' of nationalised industries. This may be thought to be somewhat ironic -- since the accountability of these enterprises. which work solely in the public interest, is already very highly developed, while that of private industry, which works avowedly for private profit, is practically nonexistent.
The result has been that the singularly colourless word "nationalisation" almost inevitably tends to be charged with a highly specialised and quite arbitrary body of suggestions. It has come in practice to be used as equivalent to a particular method of administration, under which officials employed by the State step into the position of the present directors of industry and exercise all the power which they exercised. So those who desire to maintain the system under which industry is carried on, not as a profession serving the public, but for the ad- vantage of shareholders, attack nationalisation on the ground that State management is necessarily inefficient.
Ownership is not a single right, but a bundle of rights. 'Nationalisation' is not a matter of simply transferring this bundle of rights from A to B. that is to say, from private persons to 'the State', whatever that may mean: it is a matter of making precise choices as to where the various rights of the bundle are to be placed, all of which, before nationalisation, were deemed to belong to the so-called private owner. Tawney, therefore, says succinctly: 'Nationalisation (is) a problem of Constitution-making.' Once the legal device of private property has been removed, there is freedom to arrange everything anew -- to amalgamate or to dissolve, to centralise or to decentralise, to concentrate power or to diffuse it, to create large units or small units, a unified system, a federal system, or no system at all. As Tawney put it:The objection to public ownership, in so far as it is intelligent, is in reality largely an objection to over-centralisation. But the remedy for over-centralisation is not the maintenance of functionless property in private hands, but the decentralised ownership of public property.
'Nationalisation' extinguishes private proprietary rights but does not, by itself, create any new 'ownership' in the existential -- as distinct from the legal -- sense of the word. Nor does it, by itself, determine what is to become of •the original ownership rights and who is to exercise them. It is therefore in a sense a purely negative measure which annuls previous arrangements and creates the opportunity and necessity to make new ones. These new arrangements, made possible through 'nationalisation', must of course fit the needs of each particular case. A number of principles may, however, be observed in all cases of nationalised enterprises providing public services.
First, it is dangerous to mix business and politics. Such a mixing normally produces inefficient business and corrupt politics. The nationalisation act, therefore, should in every case carefully enumerate and define the rights, if any, which the political side, e.g., the minister or any other organ of government, or parliament, can exercise over the business side, that is to say, the board of management. This is of particular importance with regard to appointments.
Second, nationalised enterprises providing public services should always aim at a profit -- in the sense of eating to live, not living to eat -- and should build up reserves. They should never distribute profits to anyone, not even to the government. Excessive profits -- and that means the building up of excessive reserves -- should be avoided by reducing prices.
Third, nationalised enterprises, nonetheless, sh6uld have a statutory obligation 'to serve the public interest in all respects'.! The interpretation of what is the 'public interest' must be left to the enterprise itself, which must be structured accordingly. It is useless to pretend that the nationalised enterprise should be concerned only with profits, as if it worked for private shareholders, while the interpretation of the public interest could be left to government alone. This idea has unfortunately invaded the theory of how to run nationalised industries in Britain, so that these industries are expected to work only for profit and to deviate from this principle only if instructed by government to do so and compensated by government for doing so. This tidy division of functions may commend itself to theoreticians but has no merit in the real world, for it destroys the very ethos of management within the nationalised industries. 'Serving the public interest in all respects' means nothing unless it permeates the everyday behaviour of management, and this cannot and should not be controlled, let alone financially compensated, by government. That there may be occasional conflicts between profit-seeking and serving the public interest cannot be denied. But this simply means that the task of running a nationalised industry makes higher demands than that of running private enterprise. The idea that a better society could be achieved without making higher demands is self-contradictory and chimerical.
Fourth, to enable the 'public interest' to be recognised and to be safeguarded in nationalised industries, there is need for arrangements by which all legitimate interests can find expression and exercise influence, namely, those of the employees, the local community. the consumers, and also the competitors. particularly if the last-named are themselves nationalised industries. To implement this principle effectively still requires a good deal of experimentation. No perfect 'models' are available anywhere. The problem is always one of safeguarding these interests without unduly impairing management's ability to manage.
Finally, the chief danger to nationalisation is the planner's ad- diction to over-centralisation. In general, small enterprises are to be preferred to large ones. Instead of creating a large enterprise by nationalisation -- as has invariably been the practice hitherto -- and then attempting to decentralise power and responsibility to smaller formations, it is normally better to create semiautonomous small units first and then to centralise certain functions at a higher level, if the need for better co-ordination can be shown to be paramount.
No-one has seen and understood these matters better than R. H. Tawney, and it is therefore fitting to close this chapter with yet another quotation from him:So the organisation of society on the basis of functions, instead of on that of rights, implies three: things. It means, first, that proprietary rights shall be maintained when they are accompanied by the performance of service and abolished when they are not. It means, second, that the producers shall stand in a direct relation to the community for whom production is carried on, so that their responsibility to it may be obvious and unmistakable, not lust, as at present, through their immediate subordination to shareholders whose interest is not service but gain. It means, in the third place, that the obligation for the maintenance of the service shall rest upon the professional organisations of those who perform it, and that, subject to the supervision and criticism of the consumer, those organisations shall exercise so much voice in the government of industry as may be needed to secure that the obligation is discharged.
New Patterns of Ownership
J. K. Galbraith has spoken of private affluence and public squalor. It is significant that he referred to the United States, reputedly, and in accordance with conventional measurements, the richest country in the world. How could there be public squalor in the richest country, and, in fact, much more of it than in many other countries whose Gross National Product, adjusted for size of population, is markedly smaller? If economic growth to the present American level has been unable to get rid of public squalor -- or, maybe, has even been accompanied by its increase -- how could one reasonably expect that further 'growth' would mitigate or remove it? How is it to be explained that, by and large, the countries with the highest growth rates tend to be the most polluted and also to be afflicted by public squalor to an altogether astonishing degree? If the Gross National Product of the United Kingdom grew by, say, five per cent -- or about Pounds 2,000 million a year -- could we then use all or most of his money, this additional wealth. to fulfil our nation's aspirations'?
Assuredly not; for under private ownership every bit of wealth, as it arises, is immediately and automatically privately appropriated. The public authorities have hardly any income of their own and are reduced to extracting from the pockets of their citizens monies which the citizens consider to be rightfully their own. Not surprisingly, this leads to an endless battle of wits between tax collectors and citizens, in which the rich, with the help of highly paid tax experts, normally do very much better than the poor. In an effort to stop 'loopholes' the tax laws become ever more complicated and the demand for -- and therefore the income of -- tax consultants becomes ever larger. As the taxpayers feel that some- thing they have earned is being taken away from them, they not only try to exploit every possibility of legal tax avoidance, not to mention practices of illegal tax evasion, they also raise an insistent cry in favour of the curtailment of public expenditure. 'More taxation for more public expenditure' would not be a vote- catching slogan in an election campaign, no matter how glaring may be the discrepancy between private affluence and public squalor.
There is no way out of this dilemma unless the need for public expenditure is recognised in the structure of ownership of the means of production.
It is not merely a question of public squalor, such as the squalor of many mental homes, of prisons, and of countless other publicly maintained services and institutions; this is the negative side of the problem. The positive side arises where large amounts of public funds have been and are being spent on what is generally called the 'infrastructure', and the benefits go largely to private enterprise free of charge. This is well known to anyone who has ever been involved in starting or running an enterprise in a poor society where the 'infrastructure' is insufficiently developed or altogether lacking. He cannot rely on cheap transport and other public services; he may have to provide at his own expense many things which he would obtain free or at small expense in a society with a highly developed infrastructure; he cannot count on being able to recruit trained people: he has to train them himself; and so on. All the educational, medical, and research institutions in any society, whether rich or poor, bestow incalculable benefits upon private enterprise -- benefits for which private enterprise does not pay directly as a matter of course, but only indirectly by way of taxes, which. as already mentioned, are resisted, resented, campaigned against, and often skilfully avoided. It is highly illogical and leads to endless complications and mystifications, that payment for benefits obtained by private enterprise from the 'infrastructure' cannot be exacted by the public authorities by a direct participation in profits but only after the private appropriation of profits has taken place. Private enterprise claims that its profits are being earned by its own efforts, and that a substantial part of them is then taxed away by public authorities. This is not a correct reflection of the truth -- generally speaking. The truth is that a large part of the costs of private enterprise has been borne by the public authorities -- because they pay for the infrastructure and that the profits of private enterprise therefore greatly over- state its achievement.
There is no practical way of reflecting the true situation, unless the contribution of public expenditure to the profits of private enterprise is recognised in the structure of ownership of the means of production.
I shall therefore now present two examples of how the structure of ownership can -- or could -- be changed so as to meet the two fundamental criticisms made above. The first example is of a medium-sized firm which is actually operating on a reformed basis of ownership. The second example is a speculative plan of how the structure of ownership of large-scale firms could be re- formed.
The Scott Bader Commonwealth
Ernest Bader started the enterprise of Scott Bader Co Ltd in 1920, at the age of thirty. Thirty-one years later, after many trials and tribulations during the war, he had a prosperous medium-scale business employing 161 people, with a turnover of about Pounds 625,000 a year and net profits exceeding Pounds 72,000. Having started with virtually nothing, he and his family had become prosperous. His firm had established itself as a leading producer of polyester resins and also manufactured other sophisticated products, such as alkyds, polymers, and plasticisers. As a young man he had been deeply dissatisfied with his prospects of life as an employee: he had resented the very ideas of a 'labour market' and a 'wages system', and particularly the thought that capital employed men, instead of men employing capital. Finding himself now in the position of employer, he never forgot that his success and prosperity were the achievements not of himself alone but of all his collaborators and decidedly also of the society within which he was privileged to operate. To quote his own words:I realised that -- as years ago when I took the plunge and ceased to be an employee -- I was up against the capitalist philosophy of dividing people into the managed on the one hand, and those that manage on the other. The real obstacle, however, was Company Law, with its provisions for dictatorial powers of shareholders and the hierarchy of management they control.He decided to introduce 'revolutionary changes' in his firm, 'based on a philosophy which attempts to fit industry to human needs'.The problem was twofold: (1) how to organise or combine a -- maximum sense of freedom, happiness and human dignity in our firm without loss of profitability, and (2) to do this by ways and means that could be generally acceptable to the private sector of industry.
Mr Bader realised at once that no decisive changes could be made without two things: first, a transformation of ownership -- mere profit-sharing, which he had practised from the very start, was not enough; and, second, the voluntary acceptance of certain self-denying ordinances. To achieve the first, he set up the Scott Bader Commonwealth in which he vested (in two steps: ninety per cent in 1951 and the remaining ten per cent in 1963) the ownership of his firm, Scott Bader Co Ltd. To implement the second, he agreed with his new partners. that is to say, the members of the Commonwealth, his former employees, to establish a constitution not only to define the distribution of the 'bundle of powers' which private ownership implies, but also to impose the following restrictions on the firm's freedom of action:
First, the firm shall remain an undertaking of limited size, so that every person in it can embrace it in his mind and imagination. It shall not grow beyond 350 persons or thereabouts. If circumstances appear to demand growth beyond this limit, they shall be met by helping to set up new, fully independent units organised along the lines of the Scott Bader Commonwealth.
Second, remuneration for work within the organisation shall not vary, as between the lowest paid and the highest paid, irrespective of age, sex, function or experience, beyond a range of 1:7, before tax.
Third, as the members of the Commonwealth are partners and not employees, they cannot be dismissed by their co-partners for any reason other than gross personal misconduct. They can, of course, leave voluntarily at any time, giving due notice.
Fourth, the Board of Directors of the firm, Scott Bader Co Ltd, shall be fully accountable to the Commonwealth. Under the rules laid down in the Constitution, the Commonwealth has the right and duty to confirm or withdraw the appointment of directors and also to agree their level of remuneration.
Fifth, not more than forty per cent of the net profits of Scott Bader Co Ltd shall be appropriated by the Commonwealth -a minimum of sixty per cent being retained for taxation and for self-finance within Scott Bader Co Ltd -- and the Commonwealth shall devote one-half of the appropriated profits to the payment of bonuses to those working within the operating company and the other half to charitable purposes outside the Scott Bader organisation.
And finally, none of the products of Scott Bader Co Ltd shall be sold to customers who are known to use them for war-related purposes.
When Mr Ernest Bader and his colleagues introduced these • revolutionary changes, it was freely predicted that a firm operating on this basis of collectivised ownership and self-imposed restrictions could not possibly survive. In fact, it went from strength to strength, although difficulties, even crises and setbacks, were by no means absent. In the highly competitive setting within which the firm is operating, it has, between 1951 and 1971, increased its sales from Pounds 625,000 to Pounds 5 million; net profits have grown from Pounds 72,000 to nearly Pounds 300,000 a year; total staff has increased from 161 to 379; bonuses amounting to over Pounds 150,000 (over the twenty-year period) have been distributed to the staff, and an equal amount has been donated by the Commonwealth to charitable purposes outside; and several small new firms have been set up.
Anyone who wishes to do so can claim that the commercial success of Scott Bader Co Ltd was probably due to 'exceptional circumstances'. There are, moreover, conventional private enterprise firms which have been equally successful or even more so, But this is not the point. If Scott Bader Co Ltd had been a commercial failure after 1951, it could serve only as an awful warning: its undeniable success, as measured by conventional standards. does not prove that the Bader 'system' is necessarily superior by these standards: it merely demonstrates that it is not incompatible with them. Its merit lies precisely in the attainment of objectives which lie outside the commercial standards of human objectives which are generally assigned a second place or altogether neglected by ordinary commercial practice. In other words, the Bader 'system' overcomes the reductionism of the private ownership system and uses industrial organisation as a servant of man, instead of allowing it to use men simply as means to the enrichment of the owners of capital. To quote Ernest Bader:Common Ownership or Commonwealth, is a natural development from Profit Sharing, Go-Partnership or Co-Ownership, or any scheme where individuals hold sectional interests in a common enterprise. They are on the way to owning things in common, and, as we shall see, Common-Ownership has unique advantages.
While I do not intend to go into the details of the long evolution of ideas and new styles of management and co-operation during the more than twenty years since 1951, it is useful here to crystallise out of this experience certain general principles.
The first is that the transfer of ownership from a person or a family -- in this case the Bader family -- to a collectivity, the Commonwealth, changes the existential character of 'ownership' in so fundamental a way that it would be better to think of such a transfer as effecting the extinction of private ownership rather than as the establishment of collective ownership. The relationship between one person, or a very small number of persons, and a certain assembly of physical assets is quite different from that between a Commonwealth, comprising a large number of persons, and these same physical assets. Not surprisingly, a drastic change in the quantity of owners produces a profound change in the quality of the meaning of ownership, and this is so particularly when, as in the case of Scott Bader. ownership is vested in a collectivity, the Commonwealth, and no individual ownership rights of individual Commonwealth members are established. At Scott Bader, it is legally correct to say that the operating company, Scott Bader Co Ltd, is owned by the Commonwealth; hut it is neither legally nor existentially true to say that the Commonwealth members, as individuals, establish any kind of ownership in the Commonwealth. In truth, ownership has been replaced by specific rights and responsibilities in the administration of assets.
Second, while no-one has acquired any property, Mr Bader and his family have nonetheless deprived themselves of their property. They have voluntarily abandoned the chance of becoming inordinately rich. Now, one does not have to be a believer in total equality, whatever that may mean, to be able to see that the existence of inordinately rich people in any society today is a very great evil. Some inequalities of wealth and income are no doubt 'natural' and functionally justifiable, and there are few people who do not spontaneously recognise this. But here again, as in all human affairs, it is a matter of scale. Excessive wealth, like power, tends to corrupt. Even if the rich are not 'idle rich', even when they work harder than anyone else, they work differently, apply different standards, and are set apart from common humanity. They corrupt themselves by practising greed, and they corrupt the rest of society by provoking envy. Mr Bader drew the consequences of these insights and refused to become inordinately rich and thus made it possible to build a real community.
Third, while the Scott Bader experiment demonstrates with the utmost clarity that a transformation of ownership is essential -- without it everything remains make-believe -- it also demonstrates that the transformation of ownership is merely, so to speak, an enabling act: it is a necessary, but not a sufficient, condition for the attainment of higher aims. The Commonwealth, accordingly, recognised that the tasks of a business organisation in society are not simply to make profits and to maximise profits and to grow and to become powerful: the Commonwealth recognised four tasks, all of equal importance:(A) The economic task: to secure orders which can be designed, made, and serviced in such a manner as to make a profit.
(B) The technical task: to enable marketing to secure profitable orders by keeping them supplied with up-to-date product design.
(C) The social task to provide members of the company with opportunities for satisfaction and development through their participation in the working community.
(D) The political task: to encourage other men and women to change society by offering them an example by being economically healthy and socially responsible.
Fourth: it is the fulfilment of the social task which presents both the greatest challenge and the greatest difficulties. In the twenty-odd years of its existence, the Commonwealth has gone through several phases of constitution-making, and we believe that, with the new constitution of 1971, it has now evolved a set of 'organs' which enable the Commonwealth to perform a feat which looks hardly less impossible than that of squaring the circle. namely, to combine real democracy with efficient management. I refrain here from drawing diagrams of the Scott Bader organisation to show -- on paper -- how the various 'organs' are meant to relate to one another; for the living reality cannot be depicted on paper, nor can it be achieved by copying paper models. To quote Mr Ernest Bader himself:I would very much prefer to take any interested person on a tour of our forty-five-acre, ancient Manor House Estate, interspersed with chemical plants and laboratories, than to laboriously write (an) article which is bound to raise as many questions as it answers.The evolution of the Scott Bader organisation has been -- and continues to be -- a learning process, and the essential meaning of what has been happening there since 1951 is that it has enabled everyone connected with Scott I3ader to learn and practise many things which So far beyond the task of making a living, of earning a salary, of helping a business to make a profit, of acting in an economically rational manner 'so that we shall all be better off'. Within the Scott Bader organisation, everybody has the opportunity of raising himself to a higher level of humanity, not by pursuing, privately and individualistically, certain aims of self-transcendence which have nothing to do with the aims of the firm -- that he is able to do in any setting. even the most degraded -- but by, as it were, freely and cheerfully gearing in with the aims of the organisation itself. This has to be ]earned, and the learning process takes time. Most, but not all, of the people who joined Scott Bader have responded, and are responding, to the opportunity.
Finally, it can be said that the arrangement by which one-half of the appropriated profits must be devoted to charitable purposes outside the organisation has not only helped to further many causes which capitalist society tends to neglect -- in work with the young, the old, the handicapped, and the forgotten people -- it has also served to give Commonwealth members a social consciousness and awareness rarely found in any business organisation of the conventional kind. In this connection, it is also worth mentioning that provision has been made to ensure, as far as possible, that the Commonwealth should not become an organisation in which individual selfishness is transformed into group selfishness. A Board of Trustees has been set up, somewhat in the position of a constitutional monarch, in which personalities from outside the Scott Bader organisation play a decisive role. The Trustees are trustees of the constitution, without power to interfere with management. They are, however, able and entitled to arbitrate, if there should arise a serious conflict on fundamental issues between the democratic and the functional organs of the organisation.
As mentioned at the beginning of this account, Mr Ernest Bader set out to make 'revolutionary changes' in his firm, but 'to do this by ways and means that could be generally acceptable to the private sector of industry'. His revolution has been bloodless: no-one has come to grief, not even Mr Bader or his family; with plenty of strikes all around them, the Scott Bader people can proudly claim: 'We have no strikes'; and while no-one inside is unaware of the gap that still exists between the aims of the Commonwealth and its current achievements, no outside observer could fairly disagree, when Ernest Bader claims that:the experience gained during many years of effort to establish the Christian way of life in our business has been a great encouragement: it has brought us good results in our relations with one another as well as in the quality and quantity of our production.
Now we wish to press on and consummate what we have so far achieved, making a concrete contribution towards a better society in the service of God and our fellowmen.
And yet, although Mr Bader's quiet revolution should be 'generally acceptable to the private sector of industry', it has, in fact, not been accepted. There are thousands of people, even in the business world who look at the trend of current affairs and ask for a 'new dispensation'. But Scott Bader -and a few others -- remain as small islands of sanity in a large society ruled by greed and envy. It seems to be true that, whatever evidence of a new way of doing things may be provided, 'old dogs cannot learn new tricks'. It is also true, however, that 'new dogs' grow up all the time; and they will be well advised to take notice of what has been shown to be possible by The Scott Bader Commonwealth Ltd.
New Methods of Socialisation
There appear to be three major choices for a society in which economic affairs necessarily absorb major attention -- the choice between private ownership of the means of production and. alternatively, various types of public or collectivised ownership: the choice between a market economy and various arrangements of 'planning'; and the choice between 'freedom' and 'totalitarianism'. Needless to say, with regard to each of these three pairs 0[ opposites there will always in reality be some degree of mixture -- because they are to some extent complementariness rather than opposites -- but the mixture will show a preponderance on the one side or on the other.
Now, it can be observed that those with a strong bias in favour of private ownership almost invariably tend to argue that non- private ownership inevitably and necessarily entails 'planning' and 'totalitarianism', while 'freedom' is unthinkable except on the basis of private ownership and the market economy. Similarly, those in favour of various forms of collectivised ownership tend to argue, although not so dogmatically, that this necessarily demands central planning; freedom, they claim, can only be achieved by socialised ownership and planning, while the alleged freedom of private ownership and the market economy is nothing more than 'freedom to dine at the Ritz and to sleep under the bridges of the Thames'. In other words, everybody claims to achieve freedom by his own 'system' and accuses every other 'system' as inevitably entailing tyranny, totalitarianism, or anarchy leading to both.
The arguments along these lines generally generate more heat than light, as happens with all arguments which derive 'reality' from a conceptual framework, instead of deriving a conceptual framework from reality. When there are three major alternatives, there are 25 or 8 possible combinations. It is always reasonable to expect that real life implements all possibilities -- at one time or other, or even simultaneously in different places. The eight possible cases, as regards the three choices I have mentioned, are as follows: (I arrange them under the aspect of freedom versus totalitarianism, because this is the major consideration from the meta- physical point of view taken in this book.)
Case 1 Freedom Market Economy Private Ownership
Case 2 Freedom Planning Private Ownership
Case 3 Freedom Market Economy Collectivised Ownership
Case 4 Freedom Planning Collectivised Ownership
Case 5 Totalitarianism Market Economy Private Ownership
Case 6 Totalitarianism Planning Private Ownership
Case 7 Totalitarianism Market Economy Collectivised Ownership
Case 8 Totalitarianism Planning Collectivised Ownership
It is absurd to assert that the only 'possible' cases are 1 and 8: these are merely the simplest cases from the point of view of concept-ridden propagandists. Reality, thank God, is more imaginative; but I shall leave-it to the reader's diligence to identify actual or historical examples for each of the eight cases indicated above, and I should recommend to the teachers of political science that they suggest this exercise to their students.
My immediate purpose, here and now, is to speculate on the possibility of devising an ownership 'system' for large-scale enterprise, which would achieve a truly 'mixed economy'; for it is 'mixture' rather than 'purity' which is most likely to suit the manifold exigencies of the future, if we are to start from the actual situation in the industrialised part of the world, rather than starting from zero, as if all options were still open.
I have already argued that private enterprise in a so-called advanced society derives very large benefits from the infrastructure -- both visible and invisible -- which such a society has built up through public expenditure. But the public hand, although it defrays a considerable part of the cost of private enterprise, does not directly participate in its profits; all these profits are initially privately appropriated, and the public hand then has to try to cover its own financial requirements by extracting a part of these profits from private pockets. The modern businessman never tires of claiming and complaining that, to a large extent, he 'works for the state', that the state is his partner, inasmuch as profit taxes absorb a substantial part of what he believes to be really due to him alone, or to his shareholders. This suggests that the public share of private profits -- in other words, the company profits taxes -- might just as well be converted into a public share of the equity of private business -- in any case as far as large-scale enterprises are concerned.
For the following exposition T postulate that the public hand should receive one-half of the distributed profits of large-scale private enterprise, and that it should obtain this share not by means of profit taxes but by means of a fifty per cent ownership of the equity of such enterprises.
1. To begin with, the minimum size of enterprises to be included in the scheme must be defined. Since every business loses its private and personal character and becomes, in fact, a public enterprise once the number of its employees rises above a certain limit, minimum size is probably best defined in terms of persons employed. In special cases it may be necessary to define size in terms of capital employed or turnover.
2. All enterprises attaining this minimum size -- or exceeding it already -must be joint-stock companies.
3. It would be desirable to transform all shares of these companies into no-par shares after the American pattern.
4. The number of shares issued, including preference shares and any other pieces of paper which represent equity should be doubled by the issue of an equivalent number of new shares, these new shares to be held by 'the public hand' so that for every privately held old share one new share with identical rights will be held publicly.
Under a scheme along these lines, no question of 'compensation' would arise, because there would be no expropriation in the strict sense of the word, but only a conversion of the public hand's right to levy profit taxes into a direct participation in the economic assets from the use of which taxable profits are obtained. This conversion would be an explicit recognition of the undoubted fact that a major role in the creation of 'private' economic wealth is in any case played by the public hand, that is to say, by non-capitalist social forces, and that the assets created by the public contribution should be recognised as public, and not private, property.
The questions that would immediately arise may be divided into three groups. First, what precisely is meant by the 'public hand'? Where are the newly issued shares to be placed and who is to be the representative of the 'public hand' in this context? Second, what rights of ownership should possession of these new shares carry? And, third, questions relating to the transition from the existing system to the new, to the treatment of international and other combines, to the raising of new capital, and so forth.
As regards the first set of questions, I should propose that the newly created shares, representing fifty per cent of the equity, should be held by a local body in the district where the enterprise in question is located. The purpose would be to maximise both the degree of decentralisation of public participation and the integration of business enterprises with the social organism within which they operate and from which they derive incalculable benefits. Thus, the half-share in the equity of a business operating within District X should be held by a local body generally representative of the population of District X. However, neither the locally elected (political) personalities nor the local civil servants are necessarily the most suitable people to be entrusted with the exercise of the rights associated with the new shares. Before we can go further into the question of personnel, we need to define these rights a little more closely.
I therefore turn to the second set of questions. In principle, the rights associated with ownership can always be divided into two groups -managerial rights and pecuniary rights.
I am convinced that, in normal circumstances, nothing would be gained and a great deal lost if a 'public hand' were to interfere with or restrict the freedom of action and the fullness of responsibility of the existing business managements. The 'private' managers of the enterprises should therefore remain fully in charge, while the managerial rights of the public half-share should remain dormant, unless and until special circumstances arise. That is to say, the publicly-held shares would normally carry no voting rights but only the right to information and observation The 'public hand' would be entitled to place an observer -- or several -- on the Board of Directors of an enterprise, but the observer would not normally have any powers of decision. Only if the observer felt that the public interest demanded interference with the activities of the existing management, could he apply to a special court to have the dormant voting rights activated. A prima facie case in favour of interference would have to be established in front of the court, which would then activate the publicly-held voting rights for a limited period. In this way, the managerial rights of ownership associated with the new, publicly-owned equity shares would normally remain a mere possibility in the background and could become a-reality only as a result of certain specific, formal, and public steps having been taken by the 'public hand'. And even when in exceptional cases these steps have been taken and the voting rights of the publicly-owned shares have been activated, the new situation would persist only for a short time, so that there should be no doubt as to what was to be considered a normal or an abnormal division of functions.
It is often thought that 'the public interest' can be safeguarded in the conduct of private business by delegating top or medium- grade civil servants into management. This belief, often a main plank in proposals for nationalisation, seems to me to be both naive and impractical. It is not by dividing the responsibilities of management but by ensuring public accountability and transparency that business enterprises will be most effectively induced to pay more regard to the 'public interest' than they do at present. The spheres of public administration on the one hand and of business enterprise on the other are poles apart -- often even with regard to the remuneration and security offered -- and only harm can result from trying to mix them.
While the managerial rights of ownership held by the 'public hand' would therefore normally remain dormant, the pecuniary rights should be effective from the start and all the time -- obviously so, since they take the place of the profits taxes that would otherwise be levied on the enterprise. One-half of all distributed profits would automatically go to the 'public hand' which holds the new shares. The publicly-owned shares, however, should be, in principle, inalienable (just as the right to levy profit taxes cannot be sold as if it were a capital asset). They could not be turned into cash; whether they could be used as collateral for public borrowings may be left for later consideration.
Having thus briefly sketched the rights and duties associated with the new shares, we can now return to the question of personnel. The general aim of the scheme is to integrate large-scale business enterprises as closely as possible with their social surroundings, and this aim must govern also our solution of the personnel question. The exercise of the pecuniary and managerial rights and duties arising from industrial ownership should certainly be kept out of party political controversy. At the same time, it should not fall to civil servants, who have been appointed for quite different purposes. I suggest, therefore, that it should belong to a special body of citizens which, for the purpose of this exposition, I shall call the 'Social Council'. This body should be formed locally along broadly fixed lines without political electioneering and without the assistance of any governmental authority, as follows: one-quarter of council members to be nominated by the local trade unions; one-quarter, by local professional associations; and one-quarter to be drawn from local residents in a manner similar to that employed for the selection of persons for jury service. Members would be appointed for, say, five years, with one-fifth of the membership retiring each year,
The Social Council would have legally defined but otherwise unrestricted rights and powers of action. It would, of course, be publicly responsible and obliged to publish reports of its proceedings. As a democratic safeguard, it might be considered desirable to give the existing Local Authority certain
'reserve powers' vis-a-vis the Social Council, similar to those which the latter has vis-a-vis the managements of individual enterprises. That is to say, the Local Authority would be entitled to send its observer to the Social Council of its district and, in the event of serious conflict of dissatisfaction, to apply to an appropriate 'court' for temporary powers of intervention. Here again, it should remain perfectly clear that such interventions would be the exception rather than the rule, and that in all normal circumstances the Social Council would possess full freedom of action.
The Social Councils would have full control over the revenues flowing to them as dividends on the publicly-held shares. General guiding principles with regard to the expenditure of these funds might have to be laid down by legislation; but they should insist on a high degree of local independence and responsibility. The immediate objection that the Social Councils could scarcely be relied upon to dispose of their funds in the best possible way provokes the obvious reply that neither could there be any guarantee of this if the funds were controlled by Local Authorities or, as generally at present, by Central Government. On the contrary, it would seem safe to assume that local Social Councils, being truly representative of the local community, would be far more concerned to devote resources to vital social needs than could be expected from local or central civil servants.
To turn now to our third set of questions. The transition from the present system to the one here proposed would present no serious difficulties. As mentioned already, no questions of compensation arise, because the half-share in equity is being 'purchased' by the abolition of company profits taxes and all companies above a certain size are treated the same. The size definition can be set so that initially only a small number of very large firms is affected, so that the 'transition' becomes both gradual and experimental. If large enterprises under the scheme would pay as dividends to the 'public hand' a bit more than they would have paid as profit taxes outside the scheme, this would act as a socially desirable incentive to avoid excessive size.
It is worth emphasising that the conversion of profit tax into 'equity share' significantly alters the psychological climate within which business decisions are taken. If profit taxes are at the level of (say) fifty per cent, the businessman is always tempted to argue that 'the Exchequer will pay half' of all marginal expenditures which could possibly have been avoided. (The avoidance of such expenditure would increase profits; but half the profits would anyhow go as profit taxes.) The psychological climate is quite different when profit taxes have been abolished and a public equity share has been introduced in their place; for the knowledge that half the company's equity is publicly owned does not obscure the fact that all avoidable expenditures reduce profits by the exact amount of the expenditure.
Numerous questions would naturally arise in connection with companies which operate in many different districts, including international companies. But there can be no serious difficulties as long as two principles are firmly grasped: that profit tax is converted into 'equity share', and that the involvement of the public hand shall be local, that is, in the locality where the company employees actually work, live, travel, and make use of public services of all kinds. No doubt, in complicated cases of interlocking company structures there will be interesting work for accountants and lawyers; but there should be no real difficulties.
How could a company falling under this scheme raise additional capital? The answer, again, is very simple: for every share issued to private shareholders, whether issued against payment or issued free, a free share is issued to the public hand. At first sight this might seem to be unjust -- if private investors have to pay for the share, why should the public hand get it free? The answer, of course, is that the company as a whole does not pay profit tax; the profit attributable to the new capital funds, therefore, also escapes profit tax: and the public hand receives its free shares, as it were, in lieu of the profit taxes which would otherwise have to be paid.
Finally, there may be special problems in connection with company reorganisations, takeovers, windings-up, and so forth. They are all perfectly soluble in accordance with the principles already stated. In the case of windings-up, whether in bankruptcy or otherwise, the equity holding of the public hand would, of course, receive exactly the same treatment as those in private hands.
The above proposals may be taken as nothing more than an exercise in the art of 'constitution-making'. Such a scheme would be perfectly feasible; it would restructure large-scale industrial ownership without revolution, expropriation, centralisation, or the substitution of bureaucratic ponderousness for private flexibility. It could be introduced in an experimental and evolutionary manner -- by starting with the biggest enterprises and gradually working down the scale, until it was felt that the public interest had been given sufficient weight in the citadels of business enterprise. All the indications are that the present structure of large scale industrial enterprise, in spite of heavy taxation and an endless proliferation of legislation, is not conducive to the public welfare.