Constitutional Enterprise

Volume 1 Number 1, July 1993

© 1993-1998, Richard L. Forschler, SeaTac, Washington. All rights reserved.

A New Newsletter

This is the first edition of Constitutional Enterprise—a newsletter for explaining and communicating the concepts of the Constitutional Enterprise approach to structuring businesses. Each issue will explain key elements of the CE methodology, strategies for implementation, and the philosophical foundations supporting it. Constitutional Enterprise is currently authored, edited, and published by Richard L. Forschler, SeaTac, Washington, (206) 246-2676.

The Constitutional Enterprise Approach

Constitutional Enterprise is the name of this newsletter and the name of a new business methodology. As a method of structuring businesses organizations it embodies the lessons we have learned from balancing authority in a limited government. It is patterned after the model originally established by the Constitution of the United States. Inherent in this model is the existence of the free market—the free enterprise system—hence the name Constitutional Enterprise.

Three primary features of the CE approach set it apart from other business methodologies.

  1. Rather than simply flattening or eliminating the hierarchy within a business, as many other current methodologies recommend, the bottom-up flow of authority creates an inverted hierarchy.
  2. The flow of goods and capital investments within the firm are regulated by an internal market system.
  3. A "separation of powers" and explicitly defined checks and balances are used to protect against abuse within the system. Due to these features of CE even large businesses can compete effectively and remain highly efficient.

In This Issue

This first issue of Constitutional Enterprise examines economic and governmental systems for the purpose of better understanding what changes are needed in business systems. To some people the revelation that most businesses are internally structured like a socialistic government comes as a shock. But recognizing this fact, and recognizing the great inefficiencies which occur in such systems, is the first step toward effecting a positive change. This issue will focus on the following key points:

The Direction of Control—Both traditionally structured large businesses and socialistic systems share the same inefficient mode of control—top-down.

The Foundations of Socialism—A common misconception regarding businesses has fueled the ill-conceived creation and perpetuation of the socialist movement.

Social and Economic Symbiosis—Systems of top-down control can exist only in symbiosis with systems of bottom-up control.

The Direction of Control

Socialism, in all its varieties, is very possibly the most influential ideology in the history of human kind. Today, no country is totally outside of its influence. And perhaps, from the dispassionate gaze of history, it is a fitting commentary on the human race that such is true. For the supreme irony of socialism is this: From a sincere and heart-felt desire to ease the misery of the masses, their misery has increased.

Capitalism, in contrast, is possibly the most despised of all social ideologies. Today, the influence of capitalism is likewise felt in all countries, but typically practiced with apology. Ironically, those features of capitalism which have been most responsible for making it unpopular are, in fact, socialistic in nature.

While countless diverse ideologies have been grouped under the title socialism, it is generally defined by both supporters and detractors as socialized [or communal] ownership of the means of production. [1] For purposes of this article we need to focus on a feature of socialism even more salient than ownership—control. Ownership of the factories, machines, and other capital goods used in the process of production is less significant than how the system is controlled. Joseph Schumpeter, in his book Capitalism, Socialism and Democracy, defined socialism as, institutional pattern in which control over the means of production and over production itself is vested with a central authority... [2]

Thus, the most identifiable characteristic of a socialistic structure is the centralized, or top-down, system of control within it. This includes any centrally controlled institution, whether it is a government or a business.

Because democratic elections are held in many socialistic countries socialism is often thought to be based upon "government by the people." This would imply a bottom-up system of control. But whether or not a socialistic government is democratically elected, the consumers, and therefore the citizens, are truly sovereign only within a market society—capitalism. In the economic democracy of capitalism, every dollar of every consumer represents a vote. Not so in socialism, where a central authority oversees production—top-down. It is the presence or absence of a market system, not just the form of government, which defines a system as capitalistic or socialistic.

But a market for consumer goods is not enough. A market must exist for investment capital as well. A high standard of living can be achieved for the mass of the people only in a system where capital naturally seeks its most productive use. In a capitalistic system investors wisely restrict their investments to only those firms which can produce as high a return as possible. To achieve this profit the firms must produce a product the customers are willing to buy. Leaders in a socialistic system of communal or state ownership seek other goals, such as social equality, or steady employment, largely irrespective of any profit produced. Investment capital, therefore, is not competed for and thus does not flow to its most productive use. The standard of living for the masses remains low in a socialistic system while in capitalism it is notably higher.

In virtually all socialistic countries the control of production and distribution is assigned to government. Capitalism, in contrast, relies on the government for only one thing: to protect the individual rights of its citizens, including property rights, thus protecting the environment in which the free-market operates. [3]

The motivating well-spring of all socialistic quests has been a revulsion for top-down control of businesses by the wealthy—ironically, a socialistic structure itself. Marx referred to the "exploitation" of workers by the business owners as wage slavery. Neither he nor other socialists could see the bottom-up control by the consumers acting as a check on the power of the wealthy. Attempting to end top-down control of the masses by the wealthy, socialist visionaries achieved top-down control by their own governments. In other words, they ended wage slavery by installing literal slavery. Small comfort to the masses!

The Foundations of Socialism

The socialist concept of the ideal society was from its beginnings modeled after business. Social reformers, from the early Utopian Socialists to the Marxists, were literally awed by the tremendous success of capitalistic industrial production. In The Communist Manifesto Karl Marx stated:

The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalization of rivers, whole populations conjured out of the ground—what earlier century had even a presentiment that such productive forces slumbered in the lap of social labor. [4]

The socialists did not want to disrupt this technological miracle, but merely to distribute the profits of it more fairly. They observed the workers earning profits for the wealthy business owners and maintained they were being unfairly exploited. Believing the strength of the system was in its structure, they didn't want to eliminate businesses, but merely to replace the wealthy business owners with the state.

As early as 1791 Talleyrand, in France, compared the ideal society to a National Workshop. [5] In the 1820s Saint-Simon envisioned the ideal society as one large factory.[6] After his death, his followers, calling themselves the Saint-Simonians, devised a system in which all of society would be organized like a single factory and socialism was the word they chose to represent it. [7] This was the origin of socialism—the conception of a centrally-planned society run like a business.

Throughout socialist writings the theme is recurring. Thomas More, Etienne Cabet, Louis Blanc, Robert Owen, Wilhelm Weitling, Karl Marx, Friedrich Engels, Sydney Webb, William Clarke, and Nikolai (V.I.) Lenin all relied on a top-down structure, like that used in businesses, as the model for socialist society.[8] While they didn't all express their philosophies the same way, their line of reasoning was basically this: Capitalism, with its scientific approach, had developed the methods of production to such a degree, that they had become routine tasks. The wealthy capitalists, desiring to live by the labor of others, had divorced themselves from the day to day duties by training others to perform those tasks. The role of the capitalists had therefore become superfluous, and production could go on without them, thus eliminating the exploitation of the workers.

In his work The State and Revolution, Lenin states:

Capitalism simplifies the functions of 'state' administration; it makes it possible to have done with 'bossing' and to reduce the whole business to an organization of proletarians (as the ruling class) which will hire 'workers, foremen and bookkeepers' in the name of the whole of society. [9]

And The Communist Manifesto proclaims:

The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie, therefore, produces, above all, is its own grave-diggers.... [10]

And, these views were not just restricted to socialists. Even scholars who were avowedly against socialism, believed the success of businesses, with centralized and top-down controls, proved the viability of socialism. In 1942 Joseph Schumpeter—Chairman of the American Economic Board—saw in large business enterprise all the ear-markings of a socialistic structure, and from this he surmised that capitalism could readily be replaced by socialism. [11]

The passage of time has revealed a conclusion quite different from that of Schumpeter's. The naive belief that capitalistic efficiency is due to the top-down structure within businesses is simply grist for the mills of social reformers.

Social and Economic Symbiosis

In his modern-day classic The Fatal Conceit, F.A. von Hayek discusses two social forms—the small group and the extended order. Hayek identifies the small group with small top-down hierarchies such as families and tribes while the extended order he identifies with the spontaneous unplanned social order, capitalism. He states:

If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilization), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of worlds at once. [12]

Profit is not the motive for engaging in the myriad voluntary organizations which give charm to our lives. Charitable organizations, community athletic teams, clubs or associations of common interest, and especially our families; these are the reasons we engage in capitalistic pursuits. The workings of our most cherished institutions are bastions of centralized control and communal ownership. They are not capitalistic in nature, but must be supported and funded by capitalistic methods. Workers are not just one-dimensional machines of production, but interested members of families and communities. Such associations have rewards outside of wages and profits. To use Hayek's words, "we must learn to live in two sorts of worlds"—social and economic—and learn to protect the unique features of each.

An economic system cannot function efficiently on a social model. When we extend the workings of the small-group to large-scale enterprise, socialism emerges.

Socialistic structures of control can be successful only in very small businesses, where inefficiencies are obvious and the natural affections between individuals tend to compensate for the disagreements and injustices which are bound to occur. Indeed, some of our most successful business experiences come about from the esprit de corps present in a small team of individuals with common goals.

Large organizations are not efficient under socialism because, in a system without consumer-driven prices, no measures exist to guide production. Without such measures the well-meaning participants work at cross-purposes with each other and lost opportunities become increasingly difficult to identify. While people in such a system may fervently desire greater prosperity, the injustice of the system itself becomes a demotivator. Frustration turns to resentment and suspicion. Someone, they feel, must be incompetent or selfish. Unable to see flaws in the overall system they search for villains and saviors.

Here it is necessary to distinguish between the organizational structure inside of businesses and the organizational structure of the environment outside—the state. The Soviets desired to achieve socialistic socialism— socialistically structured businesses within a socialistic state. They soon found the laws of human nature and economics prevented a successful implementation of such a scheme. The inevitable episodes of under-producing what was desired and over-producing what was not forced underground economies to emerge. Black markets supplied what was necessary to keep the people from starving. Repeatedly they had to retreat from socialist ideals and allow some private production to take place. The result was capitalistic socialism—small capitalistic enterprises within a socialistic environment.

In the so-called capitalistic countries a different irony emerged. The free market reflected consumer preferences extremely well. Shortages and overages were rare and the standard of living blossomed. But the success convinced the leaders of industry that their business structures were efficient as they were. They could not see the inefficiencies of socialistic systems working right within their own firms. They had achieved socialistic capitalism—socialistically structured businesses within a capitalistic environment. But to add irony upon irony, many of these successful business leaders, believing their own systems to be efficient, tried to infuse the same socialistic practices into the external society. And they were not alone in their attempts. Socialist and communist organizations of all sorts, subversive and blatantly open, tried to accelerate the slide toward a totally socialistic system. Universities, labor unions, the news media, the entertainment industry, and even well-intentioned religious leaders all lent a hand at smiting the capitalist monstrosity. Had it not been for the impossibility of achieving total socialism, as the Soviet Union has so vividly demonstrated, we would have arrived there long ago. In his book Socialism, Ludwig von Mises observed:

We know that socialist enterprises in single branches of production are practicable only because of the help they get from their non-socialist environment. State and municipality can carry on their own enterprises because the taxes which capitalist enterprises pay, cover their loses. In a similar manner Russia, which left to herself would long ago have collapsed, has been supported by finance from capitalist countries. [13]

Socialism can exist only in the presence of capitalism, either internal to businesses or external. Someone has to pay for every socialistic measure. In the past, while the society outside of our large businesses was largely capitalistic, the inefficiencies of socialistic structures inside could be coped with. But today our large businesses are being forced to break up into smaller and smaller units because the external society has long been in the process of becoming more and more socialistic. The internal and external overhead of socialistic measures will no longer support large bureaucratic enterprises. Breaking them up reintroduces capitalistic measures—infusing the economic calculation of market exchange. Professor Mises put it this way:

In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. Since a socialist order of society cannot exist, unless it be a fragment of Socialism within an economic order resting otherwise on private property, each step towards Socialism must exhaust itself in the destruction of what already exists. [14]

So here is the all important point at which we have finally arrived: Though socialism can survive only in the presence of capitalism, capitalism, at least in governmental and business realms, does not need socialism! What we need is capitalistic capitalism—capitalistic businesses within a capitalistic social environment. Not only will our businesses prosper within, but we will stop seeding socialistic practices into the external society and poisoning the well of our own prosperity.

In the long run the top-down, centrally planned, hierarchy of large businesses is just as certain to "wither away" as is the socialist state. Our task is to design and implement a new business structure based upon bottom-up control. This is Constitutional Enterprise.


  1. See Laidler, p. 874, and Mises, p. 9-10, in references noted below. Return

  2. Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. 1942. New York. Harper & Roe. 1950., p. 167. (Mises also defines Socialism in similar terms see Socialism, noted below, p. 211.)Return

  3. At least this would be true if capitalism existed, anywhere on the planet, untainted by socialist ideology. Return

  4. Marx , Karl; and Engels, Friedrich, The Communist Manifesto, 1848, Penguin Books Ltd., Middlesex, England, 1986, p. 85.Return

  5. M. Talleyrand-Périgord, Charles Maurice, Rapport sur l'instruction publique fait au nom du comité de constitution de l'Assemblée Nationale, les 10,11, et 19 septembre 1791, Paris, 1791, p. 7-8. Return

  6. Manuel, Frank E., The New World of Henri Saint-Simon, Harvard University Press, Cambridge, Massachusetts, 1956, p. 308-309, 367. Return

  7. Hayek, Friedrich A., Individualism and Economic Order, The University of Chicago Press, Chicago, Ill. 1948, p. 3.Return

  8. Laidler, Harry W., History of Socialism, 1968, Thomas Y. Crowell Company, New York. Although Laidler's socialist leanings clearly show through, as a single source of diverse socialist viewpoints this 900+ page book is superb. See particularly, p. 28, 48, 62, 95-96, 108, 109, 197-202, 416, 658, and 660. Return

  9. Lenin, Vladimir Ilich, The State and Revolution, 1917, Penguin Books, New York, 1992, p. 44 See also p. 40, 42-46, 56, 61, 86-87, 90-91, and 98-99. Return

  10. Marx and Engels, The Communist Manifesto, (noted above), p. 94. Also, p. 85-86. Return

  11. Schumpeter repeatedly makes claims such as these in Capitalism, Socialism, and Democracy (noted above). See particularly p. 61, 132-134, 186, and 214-215. He also believed managers of American businesses were suitably trained for future roles as leaders in a socialist society, p. 186, 204-205, and 207. Return

  12. Hayek, Friedrich A., THE FATAL CONCEIT The Errors of Socialism, 1988, University of Chicago Press, Chicago, p. 18. Return

  13. Mises, Ludwig von, Socialism, 1922, Liberty Fund Inc., Indianapolis, Indiana, 1981, p. 118. Return

  14. Ibid. p. 414. Return

In The Next Issue

The next issue of Constitutional Enterprise will describe why constitutional structures are ideally suited to promoting creativity, productivity, and prosperity; both in businesses and in society as a whole.

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