The last few weeks were the end of my semester, and in the frenzy I didn’t share summaries of everything I read. But today I thought I’d share the result of much of that reading: a little paper written for one of the best classes I’ve taken at Berkeley, on Political Economy in the United States. An important disclaimer: this is a paper about U.S. history, but I am not a historian! Apologies to all historians.
Not being a historian, I felt permitted to commit a minor sin of that profession, which is to choose a topic motivated predominantly by contemporary concerns. As you know from a recent post, I’m interested in “market socialism,” an umbrella term for economic systems that reconcile private enterprise with collective ownership. Thinking about market socialism got me thinking more generally about what happens when “regular people” or “workers” take on a new identity as capitalists. In this paper, I review what historians have uncovered about this phenomenon in the context of American history. The phenomenon (which I think includes everything from cooperatives to pension funds to labor banks) doesn’t have a single name, so I gave it a clumsy one: “socialized capital.” You can look at the (draft!) paper here, and I’ll summarize below (when I quote without attribution, it’s from the paper).
Amalgamated Bank is the nation’s oldest union-run bank and one of the major success stories in the history of socialized capital
The dominant tradition in the study of American social mobility and individual prosperity is labor history. “Whether Americans have succeeded or failed to achieve economic security, they have often done so as workers.” Within labor history, the most interesting questions often deal with the presence or absence of collective action, i.e. comparing the two left-most quadrants. A second tradition looks at Americans as property owners. Historically this usually meant ownership of land and housing, but a newer trend (“the new history of finance”) explores the importance of household financial assets in supporting consumption and providing security. But one quadrant remains empty: what about collective capital ownership?
You might respond: but public corporations are the very definition of collective capital ownership! Maybe. My suspicion is that shareholders cannot (or do not) exercise enough control to do justice to the word ‘collective.’ But I’m getting ahead of myself; I need to define what I think counts as socialized capital.
“Socialized capital, in my usage, refers to a community’s effort to advance its collective interest by pooling money and allocating it like an investor or a bank. In its ideal form, socialized capital has three necessary characteristics that distinguish it from other forms of capital.
- First, socialized capital is democratic. The extent of participation may vary, but participants in a collective fund have some input on how the money is to be used.
- Second, socialized capital seeks holistic returns. Socialized capital funds have investment objectives that are specific to the interests of their members. This feature distinguishes socialized capital from capital that seeks only a financial return without regard for the consequences of its investment on its members in their capacities as workers, consumers, or citizens.
- Third, as a consequence of the above, socialized capital exercises governance over the non-financial economy. Whether directly as private equity investors or indirectly as shareholders, social capitalists seek to discipline companies to behave in the interests of the fund’s members.”
“First, ownership does not guarantee control...Not only have small-time investors struggled to exert any control over the corporations in which they hold stakes, they have even struggled to control the professional investors who manage their assets.”
Second, capital can yield both financial returns and collateral benefits—but it is difficult to do both at the same time. Some citizen-capitalists have hoped to profit from the financial markets while also lending to favored businesses, inducing demand for their own labor, and enacting pro-worker policies. But difficult tradeoffs arise. Moreover, the very dynamics that make it possible to earn a market return—such as a large pool of contributors with diverse interests, or professional investment management—tend to impede these other benefits. As some citizen capitalists (notably, pension funds) havediscovered, the more capital you accumulate, the less there is to distinguish you from the rest of Wall Street. In this way, socialized capital is often privatized right back again.”
In the body of the paper, I show how these two challenges recur throughout seven major episodes of attempted and actual collective capital ownership. I’ll mention each episode briefly.
- Fraternal societies. In the three decades following the Civil War–“the Golden Age of Fraternity”–36% of adult men were members of a non-profit fraternal society, entitling them to cash benefits in the event of sickness, disability, or death. The most interesting aspect of the fraternals’ story is how they differentiated themselves from corporate insurance companies and why the insurance companies ultimately won out. The irony of the fraternals is that “in order to achieve freedom to use capital in their preferred ways, outside the reach of financial markets and their temptations, the fraternals had to hold no capital.” They simply charged a $1 assessment of all members whenever someone got sick. Insurance companies, meanwhile, convinced their customers that it was desirable to collect a large reserve fund, invest it, and then pay out a reward to lucky policyholders. Insurance transmuted into gambling. I was amused to see in this week’s NYT that Chinese insurance companies are now doing the same thing. Jonathan Levy’s Freaks of Fortune includes a very good introduction to the fraternal movement and its relation to the insurance industry.
- Populist agricultural collectivism. While the fraternal movement was an urban phenomenon, the Populist movement was the 19th century’s key episode of rural collectivism. Historians love to argue about Populism: whether it was progressive or reactionary, a project of the petit bourgeois or the proletariat, etc. I was persuaded by two books that emphasize the Texas branch of Populism known as the Farmers Alliance, which sought to free farmers from reliance on Eastern credit by replacing the for-profit financial system with local, state-run development banks that would lend to farmers on friendly terms. In The Populist Vision, Charles Postel shows that the Texas Populists’ ideology, confusing to modern eyes, was both pro-monopoly and anti-bank. They thought small farmers should band together in cooperative cartels (as the California fruit growers did most successfully) and that credit allocation should be a political process subject to democratic oversight. Their financial vision went nowhere, but it bears greater resemblance to 21st century calls for breaking up the banks than anything else I’ve seen in American history.
- Interwar labor capitalism. The historian Dana Frank (in Purchasing Power) argues that the post-World War I period was the first time in American history when (white) workers were both prosperous enough and well-organized enough to think about “politicizing” their savings. As Frank and others show, workers in the interwar years pooled their money to start cooperatively-owned businesses, buy out the businesses that employed them, and even start union-run banks. The Amalgamated Bank, created by Amalgamated Clothing Workers president Sidney Hillman, was the most successful such project and still exists today (see picture above). This quote from Hillman cut directly to the point: “To enter the banking business seemed the highroad to social control, a peaceful way of penetrating the holy of holies of the capitalist system.”
- Social Security trust fund. The history of Social Security is a massive topic; here, I focused specifically on issues surrounding the Social Security trust fund, the largest investment fund held by the federal government. During the 1930s as Social Security was being hammered out, the insurance industry and its Republican allies in Congress were horrified by the idea that the federal government might manage a large fund. Most troubling to Senator Arthur Vandenberg was the possibility that it might invest in private securities: “That would be socialism.” As far as I can tell, historians do not think the prospect of such publicly-directed investment (essentially using Social Security like a sovereign wealth fund) was ever taken seriously. I do note that when he first started writing about Social Security in the 1970s, Harvard economist Martin Feldstein (a major proponent of privatization) did talk about investing the trust fund in corporate bonds. It seems to me that the history of Social Security privatization efforts should consider why this possibility–of the government managing the investment choices, rather than spinning off private individual accounts–has been so peripheral.
- Alaska Permanent Fund. The notion of government as investment manager might be more farfetched if not for the prominent example of the Alaska Permanent Fund, which the state of Alaska has managed and paid dividends out of since 1982. “In one of the most conservative states, the Permanent Fund fuses two left-wing policy fantasies: collective capital ownership and a universal basic income. And while public investment funds have thus far been confined to seven Western states with resource extraction profits, no law of nature prevents such funds from forming on the basis of other tax proceeds.” One interesting theme of the Permanent Fund is that voters have repeatedly rejected efforts to use it for local, Alaska-themed investment projects like taking an ownership stake in pipelines. “The voters’ preferences suggest that across such a large, diverse community, the shared interest in collective capital ownership is limited to the least common denominator. When smaller, more homogeneous groups control an investment fund, more idiosyncratic choices become possible. This has been part of the promise, and occasional reality, of employee-owned pension funds.”
- Pensions. Pension funds were probably the most important test case for socialized capital in the 20th century. “At the end of 2015, U.S. pension funds held $21.7 trillion in assets and owned over 20% of domestic public company stock.” In 1976, the management scholar Peter Drucker noticed this trend and “set off a debate by claiming that “pension fund socialism” had come to America. If workers owned their stakes in pension funds, and pension funds owned so much of the stock market, therefore workers owned the means of production.” Subsequent analysts of the pension system have sharply disagreed with Drucker’s premise (even perhaps while wishing it were true) because Drucker failed to distinguish ownership and control. Jennifer Klein’s book For All These Rights shows how unions were defeated in their original vision for controlling their healthcare and pension funds. In Labor’s Capital (the best book I’ve found on the pension economy), Teresa Ghilarducci shows how “unions relinquished their demands for joint control of pension assets in favor of bargaining solely over benefits.” Pension funds are invested by professional managers who have little connection or responsibility to the rank-and-file contributors. This is both a legal consequence of the conservative, anti-union bent of the relevant legislation (Taft-Hartley and ERISA), but it is also the “least common denominator” phenomenon: one of the few things all plan members can agree on is a high return. One might think that public employee pension funds might have a more distinctive, leftist investment philosophy, but analyses of CalPERS, the most activist public fund, suggest an approach only slightly less conservative than the mainstream.
- Union building funds. Even in light of the least common denominator principle, there are rational, self-interested reasons for fund contributors to oppose certain investments. Private equity, which often turns companies profitable by closing plants and firing workers, might be an unwise asset class for unions. On the flipside, unions might wish to invest in industries that tend to employ their own workers. This has been the approach for several buildings trades unions like the national Sheet Metal Workers, who invest in union-built construction projects, and the Union Labor and Life Insurance Company, which operated the only private equity fund (Separate Account P) dedicated to preserving union jobs. These alternative, union-run investment funds are a clear exception to the norm, and the little information I could find on them made it unclear whether they have been able to sustain themselves.
But to make sense of socialized capital’s limits, one also needs to account for the financial services industry. Insurance companies and asset managers lobby the state to protect their exclusive right to invest certain pools of capital, often under the pretext of responsible, professional management. A closer look at the relationship between professional asset managers and the gleaming pot of retirement savings is probably necessary to understand why “pension fund socialism” never came to pass.
Finally, I would love to see more research on the “motivations and influences under which workers, savers, and retirees have considered (or rejected) becoming citizen-capitalists.” “What do pension holders think about the investment decisions of their fund? What do depositors in the Amalgamated Bank hope their money will accomplish? What do union members expect from union-owned businesses? In both historical and contemporary settings, these questions may shed light on why socializing capital has been only a minor strategy in working class politics, and whether it could be a major one in the future.”