Progressive copartnership

Preface

BUSINESS men, who are so misguided as to attempt authorship, must suffer many disabihties, their proper penalty for breaking the rules of demarcation.

A business man, who has written a book, is quite certain, for example, to be called a hypocrite, if he does not happen to practise in his own business everything he may preach in his book. He ought properly to write " without prejudice " at the top of every page. Here, of course, the professional writer gets his full revenge ; indeed, it is usually he who makes the shocking discoveries of inconsistency.

And this enables me to say that for the views and opinions here expressed I am alone responsible, and that nothing I have written must be taken as involving any of the companies with which I am connected.

To which I hasten to add that my own interest and sincere belief in copartnership, as a practical plan suited for present needs, is based on personal

vii

PREFACE experience of actual copartnership for a number of years past.

Lastly, I have to express my obligation to the several copartnership firms, who have so kindly supplied me with the information and statistics required to bring a constantly changing story up to date.

E. W.

Vlll

Contents

FAaa

Preface ....... vii

CHAPTER

Chapter I

§ 1. The Problem

THE roots of the present industrial system strike down to the very beginning of civiHsation, to that remote age " when Adam delved and Eve span." The history of the industrial system is a record of development from the simple to the complex, and it includes the story of some of man's greatest triumphs — incidentally, of his greatest miseries

Industrial evolution has been continuous in the past, and there is no reason to suppose it will be otherwise in the future. The present world-fever of industrial strife, to all who can read the portents, is sure proof that we have reached another critical stage in this process.

In its ceaseless march, humanity is once more at the crossways, and its further journey lies all

B uncertain before it. Thus, the industrial problem can hardly be dissociated from the political — indeed, many would claim that they are identical.

The solutions offered by those schools which agree in condemning the present system, while they differ in the remedies proposed, all involve vast political changes — changes of the order of magnitude known as revolutions. Marx, the relentless enemy of the modern economic system, has bequeathed the doctrine of socialism — the common ownership of the means of production and the abolition of private property. His followers in Europe are divided into two parties — the one looking to revolution, the other to evolution, to attain this end. The demand for the nationalisation of industry by Act of Parliament, for example, is a demand of evolutionary socialism.

In France, Italy, Spain, and elsewhere. Syndicalism seeks to subvert industry by subtle methods of warfare — by " work to rule," sabotage, the general strike. Its method of organisation is through " industrial unionism." The end aimed at is the supreme control of each industry by the workers engaged in it, and the control of the State by councils of the industries — Soviet government, as it has come to be called.

In our own land of compromise, there has arisen the cult of Guild Socialism. The control of each industry by the workers is the aim of the Guild Socialists, as it is of the Syndicalists ; but the central government is still to remain under the control of the whole people, as distinct from a proletarian class. Thus would the Guild Socialists steer between the acknowledged tyranny of Soviet government, on the one hand, and the deadly inertia of bureaucratic control on the other.

The anarchist, of course, goes further still, and would lead us to a community where none imposed his will on any other.

These are some of the proposed alternatives to our present system.^ The doctrines involved are preached to-day by large bodies of men and women. In Russia they are being practised on an enormous scale, and in one form or another are being promulgated in every country of the world.

Whether we look on these doctrines as industrial or as political, it is certain that their origin is industrial.

The new era, which each revolutionary doctrine promises the worker, is pictured as an age where

1 See Roads to Freedom, Bertrand Russell, 1918. 3 he is free from many present discontents : unemployment, under-employment, an old age of poverty ; bad housing, poor education, insecurity of tenure ; but more than that, it will bring him, he is led to believe, a greater share in the sumtotal of the wealth he helps to produce, and therefore a better opportunity of sharing in the good things of his day and generation.

Whether in practice any of these ends would be attained is no part of our present enquiry.

It is, however, certain that these proposals involve the complete overthrow of the existing system, and that such a revolution, however desirable and excellent its ultimate aims might be, would be accompanied by a destructive upheaval of society and by civil war between opposed sections of the community.

These problems were not created by the Great War. They are old problems, shown up in their nakedness by the lurid light of the European volcano.

The inequalities and insecurities, which sometimes seem to be the sole birthright of the wage-earner, are ascribed by the revolutionaries to the existing capitalist system. The mouthpieces of revolution have always been most vocal when describing the evils of capitalism. Marx, in his classical work, Das Kapital,^ is much more occupied with carefully compiled examples of such abuses than with constructive doctrine.

And it is an interesting observation that many of the abuses detailed by Marx, who wrote in 1867, have in the meantime been swept away by political reforms. This fact does not destroy the Marxian philosophy, but it offers encouragement to those who believe that the capitalist system is a system in evolution, and that along the lines of that evolution we shall attain to true progress.

The so-called capitalist system, as we know it to-day, is the product of little more than a century. It represents the highest organisation of economic society which mankind has ever attained. The vast extent of this organisation, the complexities which have arisen from it, to say nothing of its comparatively short history, all leave it an easy target for criticism.

When we look back on the economic history of England, from the age of feudalism to the present day — when we consider the many changes of the last hundred years — the evolutionary nature of the industrial system seems self-evident.

^ English translation, S. Moore and E. Ave ling (W. Glaisher, Ltd., 1918.)

The development of the existing system, therefore, along directions that enable its present defects to be eliminated, can be presented as a logical alternative to methods of revolution.

Such development has the merit (at least) that it involves no disorganisation of society and that it preserves the undeniable advantages which the community derives from the existing system, while offering good hope of eliminating or minimising its disadvantages.

As we said, the problem is not new. It takes us back to Mill and Mazzini, to Robert Owen and liOuis Blanc.

Mill himself first used the term !' partnership " to represent the development of the industrial system, which seemed to him to be the inevitable solution.

During the last fifty years, one employer after another has attempted the empirical solution of the industrial problem along the lines of copartnership.

The difficult industrial situations, which have constantly arisen during and since the war, have led politicians of varying schools of thought to consideration of copartnership as an open way to industrial peace.

We shall discuss copartnership, then, as a development of the existing individualist system of private ownership of capital.

Its root principle is a partnership between the elements called Labour and the elements called Capital.

It aims not merely at the improvement of the material well-being of the worker, but also to raise his status.

This evolutionary view of copartnership was well expressed by Earl Grey, one of the most earnest advocates of copartnership, paraphrasing Mazzini : " From slave to serf, from serf to hireling, from hireling to partner." ^

Our account of copartnership will be partly descriptive, taking account of actual copartnership schemes, past and present ; partly analytical, attempting to assign to copartnership a definite place in economic theory.

The term " progressive copartnership," used as the title of this book, implies that ideal copartnership contains within it all the elements of true growth, and thus provides a system, adaptable to changing conditions in the future, a constructive basis for those who succeed us.

1 Albert, Fourth Earl Grey, p. 49, Harold Begbie, 1918.

§ 2. Elementary Principles of Copartnership

Under the modern industrial system, " labour " and " capital " work together to produce goods or services. There should result a surplus, or product, of which " labour " and " capital " each takes a portion.

Neither the historical origin of this arrangement, nor the discussion of the right of " labour " to the whole product of industry — the Marxian doctrine of surplus value — need detain us at this stage of our enquiry.

We assume that " labour " and " capital " are each entitled to a share.

But when we come to attempt to set down the principles of division between the two partners, we find ourselves in a difficulty.

No definitive theory of the division of the proceeds of industry exists.

" Wages," the convenient term for labour's share, are fixed empirically, mainly by the process of haggling — limited in one direction by the vague term " cost of living," in the other by " supply and demand."

The "wage-earner" receives his wages — the salaried man his salary — and the " employer "

takes the residuum, if any. We will use these terms — "wage-earner" and "employer" — in our present discussion, since they more accurately represent the present-day relationship of the partners of industry, the terms " labour " and " capital " — never exactly correct descriptions— having now attained political meanings, from which it is difficult to dissociate them.

The division of the product, wages to wage-earner, residuum to employer, may be, for all we know, the most correct division possible. But, as it is based on no exact formula, it is open to suspicion. It is hardly too much to say, that the nebulous nature of the division of the product is the root cause of all the troubles, which have overcome the modern industrial system.

As an instance, take the demand for increased production, which has figured so largely in recent years. The increase in national real wealth during the last century was mainly due to increased productivity, the result of invention and invention's twin — organisation. That increase of productivity is the source of increase of real wealth is universally realised. But what avails it, the wage-earner of to-day is thinking, to increase production, in so far as increase of production is within his power, if the increased wealth which follows the increased production, simply swells the employer's " residuum " or profits ? And, indeed, labour has not hesitated to put forward a claim for the whole increase of wealth, following increased production. Consciously or unconsciously, such considerations are the background of all the present difficulties which are thwarting the increased production, which is admitted to be essential, if we are to restore our position in the markets of the world.

It is the primary merit of copartnership that it provides a division of the proceeds of industry which has a definite basis. It may not reduce the division to an exact formula, and indeed no formula may be possible. Nor does it follow that its method of division is rational, however definite it may be. But it is none the less true that, by defining the method of division, it clears the way for removal of many difficulties, founded on distrust and suspicion, and enables the discussion of the distribution of the proceeds of industry to be carried out on a higher plane and in a more scientific manner than has hitherto been possible.

The copartnership method of division is very simple. As usually practised, it consists in payment of wages to the wage-earner in the usual way, payment of simple interest on capital, and distribution of the balance, if any, between wage-earners and shareholders, in accordance with definite rules, which are fixed at the outset.

Copartnership is therefore built on the existing wages system, though wages do not constitute an essential of its plan.

It is, none the less, convenient to retain wages under a copartnership. At the present time, when copartnership practice is but sparsely spread throughout industry, any scheme which eliminated wages would be unworkable for many and obvious reasons.

And, further, we will find that in an ideal copartnership scheme — such a scheme as might be worked out for a nation, starting out in industry, with no trammellings of tradition and precedent — some payment to employees, closely analogous to wages, is a necessary part of the division.

We therefore assume wages as an integral part of a practical copartnership scheme, under present conditions. Their place in the copartnership formula can be defined very simply.

Copartnership, as its name implies, regards industry as a joint enterprise of two necessary components — a supply of capital and a supply of labour. Both these components are essential under any organisation of society which we can conceive. Readjustment of the present ownershi'p of capital is advocated by many people ; but, whether this is right or wrong, the necessity of capital for industrial enterprise still remains.

If we delve a little deeper, we find that the supply of labour, which is equally essential in industry, is also in reality a supply of capital. Machinery, materials, are supplied by money capital — labour is supplied by human capital.

Every man who is engaged in industry has thrown himself — so much human capital — into the partnership. Simple interest is paid on money capital invested in the partnership, and we know that such payment is necessary to enable constant supplies of capital to be forthcoming. Wages are closely parallel, and are, in effect, simple interest on the human capital invested in the partnership. Since each man varies in ability and productivity, his capital value also varies ; from which it follows that wages payments will vary with the individual.

If we accept this reasoning we arrive at the elementary formula of copartnership.

THEORY

OF COPARTNERSHIP

Industry

Human capita

Money capital

Interest

As stated, copartnership accepts existing wages as representing the correct payment under this head, mainly because it is most convenient to do so. The additional copartnership payments have the effect of adjusting any inequalities which may arise through acceptance of the present methods of calculating wages.

The essential feature of the above formula is the parallelism between wages and interest. In practice, it arrives at the same result as the current system, but the consideration of wages as a definite share of the product of industry, representing interest on human capital and sharing alongside with the money capital, which is paid simple interest, is in itself a considerable advance. This first simple formula of copartnership recognises and provides for the joint partnership of the two forms of capital. It gives the worker a status which he has never before enjoyed, and it enables us to approach the consideration of wages from a totally different angle.

§ 3. Human Capital

After application of the simple formula of copartnership, there may remain a further residuum. We shall assume that both forms of capital have assisted to produce this residuum, and we have therefore to provide a method of division, which will allot a fair share to human capital, in the form of an extra payment over and above wages, and a fair share to money capital, in the form of an extra payment over and above simple interest.

It is necessary, however, to point out that the assumption on which we proceed may not be correct. The current industrial system, for instance, is based on the assumption that human capital is not entitled to a further share in the residuum — a point of view rejected by advocates of copartnership.

Again, industry is but a means to an end, namely, to provide the community with the commodities and services which it requires for its existence. Both partners in industry are themselves servants ; they are servants of the consumer. The product of industry, which we are attempting to allot, only arises when there is a net margin between cost of production and selling price. It is the consumer, therefore, who actually provides the product of industry. In an ideal system of copartnership it may be necessary to introduce a third copartner, the consumer. This complication we leave on one side for future discussion, and for the present merely note it. We proceed to allot the residuum between human capital and money capital, leaving the consumer entirely out of our calculations.

Let us consider a commodity, produced by an industrial concern and sold at a price which is just and reasonable to the public. We have taken, out of the net proceeds, wages and simple interest, in accordance with our first formula.

A residuum still remains. We assume that the usual reservations for depreciation, etc., have been made.

Who produced the residuum ? It is impossible to give a general answer to this question. The operations of industry are so complicated, and values so transitory, that any exact analysis is entirely beyond our reach.

If we compare the costs of production of several firms engaged in the same industry we will find, over any given period, an extraordinary diversity.

The product may be made from the same raw materials and sold at the same price, but the actual costs, both in total and in detail, will show considerable variation.

One firm may have bought raw materials at the bottom, the other at the top, of the market ; one firm may employ inventions which reduce working costs ; one firm may be better " organised"—that is to say, the numerous interdependent processes between raw materials and delivered product may be so planned as to involve a minimum of extra cost due to delay, duplication, wasteful arrangements ; one firm may have a large output, another a small output, compared with capacity ; one firm may have subsidiary departments, eliminating " middle " profits. One firm may have a greater technical efficiency ; one may have developed its selling organisation more extensively ; or an old and established business may have low distribution costs, as against a new and developing business.

Again, through organisation, tradition, liberal remuneration, or other circumstances, the individual productivity of the workers may be greater in one factory than another.

Luck, an element which figures more largely in industrial enterprise than is generally admitted, may have favoured the one firm as against the other.

Again, most large businesses are departmentalised, and some departments may be profitable, others unprofitable; the net available profits, in two analogous businesses, may be totally different from this cause ; or one firm may have to pay a higher rate of interest on borrowed money, and so on.

These instances, which could be greatly expanded, suggest, incidentally , that if we are seeking to assign a share in profits to individuals, the term "wage-earner " will require some extension. Management plays an increasing part in the production of profits. In the earlier stages of the industrial system, management and ownership of capital were synonymous, and the owner of a business, in appropriating the profits as his own, was in reality carrying on the duties of management, in return for a fluctuating payment, namely, the profits of the business, after interest had been paid on capital invested. This dual function, performed by the older employers, undoubtedly led to much confusion, and to unfair deductions by the critics of the capitalist system.

We will need, therefore, in our analysis to deal with the claims on the residuum, both of wage-earners and of management. In our further c 17 discussion, we will use the term " employees " as comprehending both classes, wage-earners and management.

It is equally clear that, while wage-earners could not produce goods without the materials, machinery and other provisions of capital, no more could management organise the production without the same provisions.

It may be argued that capital has already obtained sufficient remuneration in the simple interest, which it receives. But the same argument would be available to limit employees to their wages and salaries, leaving the residuum as no man's property — treasure-trove for the State.

Copartnership is based on individualism as an inherent trait in human action. If this assumption is correct, the residuum, under the circumstances just mentioned, would tend to disappear. Neither employee nor employer w^ould receive it, for it would never be produced. The residuum of industry is, and always has been, the result of increased productivity on the part of one or all of the factors concerned, whether wage-earner, management, or capital. The residuum may have been unfairly assigned, but if none could share in it, it would never have been brought into existence.

Copartnership aims to evoke increased productivity of all the factors concerned in industry, wage-earners, management, and capital alike, by guaranteeing to each factor its reasonable share of the product. This dynamic view of copartnership is essential. Copartnership is above all a productive scheme, not a mere sharing-out device.

And it will thus be seen that, by applying the conception of " human capital," contributed by the human copartners, in further copartnership with " money capital," the savings of the community, as the basis for the division of the proceeds of industry, we have arrived at a theory of the industrial system which, whether acceptable or not, is, at any rate, rational.

The essential feature of the industrial revolution was the severance of the worker from ownership and control of the instruments of production. In so far as the old domestic system in manufacture and agriculture may have been excellent, it could only be restored to-day by a reversion to the conditions of that time — in other words, by returning to a debased standard of living.

Under the old system, the craftsman applied his human capital, in conjunction with his material capital (his tools and simple stock-intrade) and the two forms of capital being vested in the one owner, no question of division of the proceeds arose.

The complexity of the modern system — and incidentally that development of division of labour, which separates the employee from ownership of capital — has created the problem of distribution. Copartnership aims to solve this problem by recognising " human capital " alongside " money capital," and thereby goes a long way towards restoring the ancient status of the worker.

Under the old domestic system, each individual worker put into his art or craft both human capital and money capital. When the domestic system gave place to the industrial system, the full claims of human capital were lost in the process. Copartnership reinstates those claims. True, the ownership of the two forms of capital has become separated : copartnership aims, further, at restoring this position, in so far as it is possible, under the conditions of modern industry. Copartnership implies not merely a division of the residuum by a recognition of the claims of human capital, but it seeks to make every owner of human capital an owner of money capital also.

Copartnership is quite different from profit-sharing. Profit-sharing is nothing more than extended wages, the share of profits being fixed on an arbitrary basis by the employer. The share of profits received by the copartner, on the other hand, has a rational basis, such as we have outlined.

But, beyond that, copartnership provides for the acquisition of capital holding by the copartner. Any scheme which does not provide for such acquisition on simple, easy terms cannot be described as a copartnership, but belongs to the category of bonus payments, one of the many devices, with which the wages system has been bolstered up. Successful as these devices have often been, they have no assurance of permanence. They embody all the defects of the simple wages system. They carry with them no proof that a square deal has been made.

If we can prove, argue the advocates of copartnership, that the principles of copartnership division are just and equitable, even though there may be no considerable redistribution in consequence, and though the relative economic position of most employees may be unchanged, none the less, the substitution of just and equitable principles for the uncertainties of the wages system will breathe a new spirit into industry, and men will be able to devote to production and invention the energy, which at the present time is so largely dissipated in industrial strife and dissension.

§ 4. The Basis of Copartnership Division

We have stated the fundamental basis of copartnership to be recognition of the rights of two forms of capital — money capital and human capital.

It now remains to devise a formula for division of the residuum, amongst these two copartners.

Money capital is represented in £ s. d., but human capital is more difficult to define. In the various copartnership schemes which are in existence, and which are described in later chapters, the methods of dealing with this problem vary considerably. In general, it may be said that copartnership schemes have been created by generous employers, desirous of improving the existing system. They have rarely, if ever, been based on any theory, and the formulae for the distribution have been arrived at empirically.

The general method, adopted in existing copartnerships, is to share the residuum, or surplus, on the basis of the total of the wages and salaries bill, or pay-roll.

A definite £ s. d. total is thus allotted to the employees as a group.

The individual apportionment is then made on a similar basis of individual earnings, which may be weighted in various ways to allow for grading.

We can distinguish, in existing schemes, three separate formulae for the division of surplus between shareholders and employees. After all profit-and-loss account adjustments and payment of interest on the capital employed :

(1) The surplus is divided equally between shareholders and employees ; or,

(2) The surplus is divided proportionately to capital and pay-roll ; or,

(3) The surplus is divided proportionately to interest on capital and pay roll.

For example, in a business — capital £500,000, total net earnings available for dividends £48,000, pay-roll £100,000— the division would be as follows :

after payment of, say, 5 per cent, interest on the capital, there remains a surplus of £23,000, divided thus :

Method. To shareholders. To employees.

1 . . . £11,500 £11,500

2 . . . 19,167 3,833

3 . . . 4,600 18,400

The third method of calculation, it will be observed, reverses the proportionate payments to the shareholder and employee eopartners.

In the second method, the result is usually stated as a dividend on wages. By this method obviously the division results in the same percentage dividend on wages, as on capital. In the above example, the division yields a 3-83 per cent, dividend to both copartners ; in the case of the shareholders, this is, of course, additional to 5 per cent, reserved as interest, and paid out prior to the copartnership division. The first method gives equal total shares, but different dividends to shareholders and employees.

In the above example the total dividend on capital would be :

Method per cent.

1 . . . .7-3

2 . . . . 8-83

3 . . . . 5-92 Non-copartnership division . 9-6

The dividends on wages would be :

Method. per cent. Eqmvalent to estra weeks' wages.

1 . . . 11-5 598

2 . . . 3-83 1-99

3 . . . 18-4 9-56

We have assumed that the whole of the capital is homogeneous, and not divided into blocks. This is, however, unusual, and it is common in profit-sharings and copartnerships to associate with the pay-roll in the division, not the whole capital, but the ordinary capital, or common stock, which in a non-copartnership business would receive the whole of the residuum.

Where the first formula, equal division of the total residuum, is adopted, this makes no difference to the sharing.

In the other formulae, where the division is proportionate, the amount of capital in proportion to pay-roll is reduced, and the proportionate share of employees thereby increased.

Thus, in the foregoing example, dividing with ordinary capital, in varying proportions of the total capital, we get the following results :

Ordinary capital.

To shareholders method 2.

To employees method 2.

To shareholders method 3.

To employees method 3.

£100,000

£11,500

£11,500

£1,100

£21,900

200,000

15,340

7,660

2,100

20,900

300,000

17,250

5,750

3,000

20,000

400,000

18,400

4,600

3,833

19,167

500,000

19,167

3,833

4,600

18,400

(i.e. the whole

The division of capital into preference shares, ordinary shares, and other groupings is entirely a matter of financial organisation. In effect, the owners of priority shares give up their chances of higher dividends against the increased security and priority, which they obtain.

The capital employed in the business may earn an overall dividend in excess of fixed interest rates, in which case the ordinary shareholders receive the whole of the excess in accordance with arrangement.

It would seem the most equitable method of applying formulae (2) and (3) to a copartnership business, with its capital divided into blocks, to bring the whole of the capital into the calculation, and not merely the ordinary capital. The share of surplus allotted to capital would, of course, be distributed to the ordinary shareholders only.^