Reference code: C26-07
This commentary is part two of a two-part set of commentaries that examines capitalism design.
One of the most persistent obstacles to thinking seriously about economic reform is not that people have carefully considered different ways of structuring capitalism and rejected them. Most people have never been asked to consider that question. They may be familiar with worker cooperatives, ESOPs, government-owned enterprises, or nonprofit organizations, but those are familiar categories. They do not require the more fundamental inquiry into whether the institutional structure of capitalism itself can be deliberately redesigned.
The deeper obstacle is that many people do not think capitalism is something that can be redesigned in the first place.
The existing structure is so familiar that it rarely appears to us as a design at all. It simply appears to be capitalism. Institutions that have existed throughout our lives acquire an appearance of permanence. We stop asking why they are structured as they are. More importantly, we stop distinguishing between what a capitalist economy actually requires in order to function and the particular institutions through which capitalism presently satisfies those requirements.
That distinction is critical because economic necessity and institutional design are not the same thing.
A functioning market economy requires productive capital. It requires enterprises capable of producing goods and services, employing workers, entering contracts, competing, earning profits, reinvesting, making decisions, bearing economic risk, and adapting to changing market conditions. Those are economic necessities.
But capitalism also supplies particular institutional arrangements through which those necessary functions are performed, such as private residual ownership, shareholder claims on accumulated productive wealth, and the distribution of surplus to private owners. These are institutional arrangements. But they should not automatically be confused with the economic requirements of a functioning market economy.
The distinction becomes difficult to see because the two have existed together for so long. When a particular institution performs an economically necessary function generation after generation, it is easy to begin assuming that the institution itself is economically necessary.
But the fact that productive capital must be accumulated does not establish that it must ultimately belong to private residual owners. The fact that enterprises require governance does not establish that governance must ultimately exist for the benefit of shareholders. The fact that businesses must earn profits does not establish that those profits must ultimately become privately owned wealth.
Once those distinctions are recognized, a design imperative follows.
The task is not to eliminate the economic functions that make productive enterprise possible. Capital must still be accumulated, preserved, and put to productive use. Enterprises must still be governed. Managers must still make decisions. Businesses must still compete, earn profits, reinvest, bear risk, and respond to changing markets. Those functions remain necessary.
The design question is how those necessary functions should be institutionally organized when private residual ownership is no longer treated as an economic necessity.
That is the institutional question at the heart of Commons Capitalism.
A Commons Capitalism Entity preserves the economic functions required of productive enterprise while changing the institutional destination of productive capital and surplus. Capital remains devoted to productive use. Profits remain necessary. Reinvestment remains necessary. Governance remains necessary. Market discipline remains necessary. What changes is the assumption that successful productive enterprise must ultimately create privately owned residual wealth.
The design imperative can therefore be stated simply: preserve what is economically necessary and redesign what is merely institutional.
That proposition is difficult for many people to accept because another powerful preconceived notion intervenes. If productive capital does not ultimately belong to private owners, the arrangement is often immediately characterized as socialism.
Frequently, the word is not being used as a careful description of an economic system. It is being used pejoratively. It evokes the idea that government has taken property from private owners and redistributed it to others. The assumption is that if private residual ownership disappears, someone must have confiscated the property of the former owners. Once a proposal is mentally translated into confiscation and redistribution, serious inquiry may stop before the proposed institution is ever examined.
That reaction is particularly misleading when applied to Commons Capitalism.
Commons Capitalism does not depend upon confiscating private property or forcibly redistributing existing wealth. A Commons Capitalism Entity acquires a privately owned business through an ordinary voluntary sale using private financing. The seller receives the agreed consideration, and the seller’s property rights are fully respected. The redesign concerns the institutional treatment of productive capital after it has been lawfully acquired, not the seizure of property from its previous owner.
A privately owned enterprise can therefore pass voluntarily from a private owner to an institution that does not create another private residual owner. Nothing has been confiscated. Nothing has been nationalized. The seller has sold property rather than had it taken.
What has changed is the institution that holds the productive capital after the transaction.
Ordinarily, when a privately owned business is sold as a continuing commercial enterprise, the residual economic claim passes from one private owner to another. The identity of the owner changes, but private residual ownership continues. There are, of course, existing institutions such as charitable or nonprofit organizations that can own productive assets without private residual owners. Their existence itself demonstrates that private residual ownership is not an indispensable condition of productive enterprise. Commons Capitalism applies that insight to a different institutional purpose.
It asks whether productive capital acquired through ordinary voluntary transactions can remain permanently outside the chain of private residual ownership while continuing to operate through ordinary competitive businesses.
Its answer is yes.
A Commons Capitalism Entity acquires productive capital through voluntary market transactions and thereafter holds that capital without creating a new private residual claimant. The capital remains productive. The business remains in the market. Workers remain employed. Customers continue buying. Suppliers continue supplying. Managers continue managing. Profits continue to matter. Reinvestment continues to matter. Economic performance continues to determine whether the enterprise succeeds or fails.
The economic necessities remain intact.
But the institutional arrangement changes.
Under Commons Capitalism, accumulated productive capital and productive wealth are no longer the private wealth of shareholders, members, partners, workers, or some other ownership cohort. They remain within the Commons Capitalism Entity and are stewarded across generations for the workers served by the institution and for the preservation and expansion of its productive capacity.
That is the redesign.
Seen from this perspective, Commons Capitalism is not proposing that capitalism cease performing the functions that make productive enterprise work. It separates those functions from one institutional arrangement that has come to seem inseparable from them: private residual ownership of productive capital.
The history of the corporation itself demonstrates why that separation is possible.
The corporation was not created once in a finished and immutable form. Corporate law has changed repeatedly. The powers of corporations have changed. The relationship between the corporation and its owners has changed. The rules governing governance and control have changed. Most importantly, limited liability developed as a legal characteristic of the modern corporation, fundamentally changing the relationship between shareholders and the obligations of the enterprise.
Limited liability now seems so familiar that it can appear to be an inherent characteristic of the corporation. It is not. It is a legal design choice that developed over time and became embedded in the corporate form.
The same is true of many other characteristics of modern corporations. They are not laws of nature. They are institutional arrangements created and modified through law.
The corporation itself is therefore evidence that capitalism can be redesigned. One of capitalism’s most important institutions has been redesigned repeatedly throughout its history.
Commons Capitalism continues that process of institutional design but directs it toward a different question. Instead of asking how private ownership of the corporation should be structured, it asks whether productive enterprise requires a private residual owner at all.
Capital is necessary; private residual ownership of that capital is not. Governance is necessary; governance directed ultimately toward the enrichment of shareholders is not. Profits are necessary; the conversion of those profits into privately owned residual wealth is not.
Once those distinctions are made, the existing structure no longer appears inevitable. It becomes an institutional design rather than an economic necessity.
This is why the most difficult barrier to understanding Commons Capitalism may arise before anyone examines its governance, acquisitions, worker benefits, or long-term viability. A reader must first recognize something more basic.
Capitalism is not a law of nature with a fixed institutional structure.
It operates through institutions created by human beings. The corporation is one of the most important of those institutions, and its history demonstrates that its characteristics can be deliberately changed.
Some features of productive enterprise reflect economic necessities. Others reflect institutional choices about how those necessities will be organized.
Failing to distinguish between the two makes the existing form of capitalism appear inevitable.
Making the distinction makes redesign possible.
Capitalism can be redesigned because its institutions have been redesigned before. Commons Capitalism proposes another such redesign: preserving the economic functions of productive enterprise while ending the assumption that productive capital and the wealth it creates must ultimately become the private property of residual owners.
The serious question is not whether capitalism can be redesigned.
It can.
The serious question is whether this redesign works.
That is where the examination of Commons Capitalism should begin.