Constitutional Enterprise

Volume 2 Number 3, September 1994

© 1994-1998, Richard L. Forschler, SeaTac, Washington. All rights reserved.

In This Issue

I had intended to use this issue of Constitutional Enterprise to continue defining the constitutional branch of the CE system. Again, however, comments by readers have convinced me to postpone that discussion in favor of another topic.

In Volume 1 Number 1 of Constitutional Enterprise I compared organizational business structures to socialistic and capitalistic systems. Unfortunately, the terms socialism and capitalism have such a wide variety of meanings to different people that for some readers the comparison was too ambiguous. So in this issue I'll define how I use the terms, and in that context explain how businesses, in a capitalistic society, with capitalists in charge, can indeed contain a socialistic structure. Recognizing that others may prefer different definitions, I'll try to use less ambiguous terms in the future.

Also in this issue of Constitutional Enterprise I'll elaborate on the consequences of choosing to pattern our businesses on a centrally controlled model and discuss how that choice has resulted in the growth of government.

The Capitalist

The key to understanding the various definitions of capitalism and socialism begins with understanding the concept of the capitalist. To the early social reformers, capitalists were seen as wealthy and greedy business owners who controlled the resources of industry and exploited their positions of power over employees. Exploitation is central to this concept. A capitalist was seen as unfairly using the workers to expand his own wealth while keeping them in perpetual poverty. Marx saw workers as being caught in a trap—wage slavery—needing work, but only receiving subsistence wages. Surplus value was the term he applied to the value created by workers above that compensated to them as wages. He claimed that capitalists expropriated surplus value which rightfully belonged to workers. [1]

Social reformers also observed capitalists engaging in various unethical stratagems to hold down competition. They believed that small businesses, and society in general, were victims of capitalist robber barons who exploited the weak to achieve their own selfish ends.

Socialism and Capitalism

In Constitutional Enterprise Vol. 1-1 I detailed the origins of socialism and showed how its founders intended it to be a social order patterned after businesses; only without capitalists. They wanted to retain the productivity and efficiency but eliminate the exploitation they saw within the system.

As these reformers envisioned a social structure to be like a "national workshop" they adopted one critical feature from business—the centralized control of production. Gradually, this became the most defining characteristic of socialism. Indeed, in his 1922 book entitled Socialism, Ludwig von Mises stated:

The essence of Socialism is this: All the means of production are in the exclusive control of the organized community. This and this alone is Socialism. All other definitions are misleading. [2]

Other definitions, however, often confirmed Mises' own. The dictionary definition of socialism is essentially the same—

A doctrine or movement calling for public ownership of factories and other means of production. [3]

This definition of socialism has an ironic twist when metaphorically applied to businesses. Most of our large businesses today, in capitalistic countries, have internally socialistic structures—production within them is centrally controlled. [4]

The significance of centralized control is easily overlooked. After generations of such control, both in governments and in businesses, it is difficult for many people to envision a workable alternative. They fail to see the order in de-centralized control systems, such as markets, even though the model for them is readily available—capitalism.

To many people capitalism simply means a system designed by, and for, the capitalists—a total system for exploitation of workers, and of society, by the wealthy. However, this view is primarily influenced by the concept of the capitalist. The dictionary definition of capitalism reads:

An economic system, marked by a free market and open competition, in which goods are produced for profit, labor performed for wages, and the means of production and distribution are privately owned. [5]

As far as it goes, this definition is accurate. But it is even more revealing to compare how production is controlled in capitalism with how it is controlled in socialism . In his book Bureaucracy, Mises stated:

Capitalism means free enterprise, sovereignty of the consumers in economic matters, and sovereignty of the voters in political matters. Socialism means full government control of every sphere of the individual's life and the unrestricted supremacy of the government in its capacity as a central board of production management. [6]

To me, the salient feature of capitalism is not that wealthy people are in positions of authority within businesses, but that consumer choices dictate production. A consumer or market-based control of production identifies a system as capitalistic. A centralized control of production identifies a system as socialistic. Thus, I view capitalism as customer-driven, and socialism as command-driven.

According to these meanings of socialism and capitalism if production in a business is governed by plans, rules, budgets, and quotas, it is socialistic. If it is governed by customer demand in an internal market system, it is capitalistic.

Just because a society is predominantly based on one model, doesn't mean its businesses can't be based on another. Most large businesses in capitalistic society are structured internally on a socialistic model, but externally they still need to compete for customers. The external system is capitalistic; the internal one, socialistic. [7]

The Employment Relationship

I need to clarify one point before moving on: The exploitation theory put forward by the social reformers is misleading. The employment relationship is simply a contract. The employer agrees to pay the employee a given wage provided he or she performs specific tasks as directed by the employer. As long as the employer does not ask the employee to do anything illegal or unethical, then he or she is bound to do as instructed, even if it is inefficient, unproductive, and personally unfulfilling. If the employee is not satisfied with the compensation, work environment, tasks assigned, use of resources, or anything else, the employee is free to re-negotiate the contract or leave the relationship and seek employment elsewhere.

There is really no more exploitation in the employment relationship than in any other market exchange. When people buy and sell they voluntarily give up something they value less for something they value more. They are literally exploiting the differences in perceived value. If there isn't surplus value in every market transaction then buying and selling won't occur. Surplus value is essential to any exchange, including employment. If an employee feels he or she is not receiving adequate compensation for a given level of effort then two choices exist: Either petition for a higher salary or exchange labor with a different party. Perhaps another employer will value that person's labor more highly.

The concept of the capitalist uses terms implying wickedness on the part of the owners—exploitation, greed, expropriation, etc. However, there is nothing inherently unethical about controlling production within a business centrally, or, using my terms, structuring it on a socialistic model. In fact, for small businesses there is evidence to suggest that it is actually a very efficient method. It is in large businesses that the inefficiency, stagnation, labor unrest, and a lack of motivation become evident. As long as the owners are willing to accept the consequences of using a centralized model, there is nothing wicked in doing so.

What If...?

When social reformers thought they saw greed and exploitation in capitalism they sought for methods to counterbalance the power of capitalists in favor of workers and society. Their primary tool was government. Some overthrew their existing governments and installed communist regimes. Others simply sought to gain legislative support for the concerns of working people, or to create regulatory agencies for controlling businesses. In virtually all these cases social reformers were motivated by their concept of the capitalist. [8]

How would history have progressed differently if business organizations had implemented internal market and constitutional systems 150 years ago? Because business owners chose to structure their organizations on a centrally-controlled model social reformers responded with attempts to weaken their power. But what would have happened if the owners had originally chosen to use a different model for their businesses? In other words, what if Constitutional Enterprise had existed as a widely-used business methodology 150 years ago?


Both socialism and communism are grounded in the concept of employee exploitation. How successful would The Communist Manifesto have been if employees were already making most of the significant decisions in the businesses of their day? If stockholders were simply investors and employees were managing themselves the concepts of surplus value and wage slavery would have been impossible to make popular. The words "Working men of all countries, unite!" would have rung hollow. Instead of motivating world-wide revolutions The Communist Manifesto would have faded away in obscurity.

It is possible that billions of Russians, Eastern Europeans, and Chinese would never have tasted the bitterness of communism. It is equally possible that millions would have lived in peace instead of perishing in the numerous communist purges and labor camps.

How many costly Western measures could have been avoided if communism had never gained strong-holds in the East?—the cold war, the nuclear arms race, the Korean and Vietnam wars, etc. etc. How much more prosperous would we be today if our capital and talent could have been applied to productive rather than destructive use?

Labor Movement

The term sweat-shop brings to mind poor immigrants or young children working long hours in a dingy and unsafe factory. The image often includes a wealthy business owner who cares little for the opinions of his employees and even less for their safety. According to the typical view of this concept such exploitation is possible only because of the unequal power relationship between the owner and his employees.

The labor movement sought to bring greater equality to labor and management, but they had limited success until they obtained government support for their cause. The major issues included: child labor, the eight or ten-hour day, health and safety measures, and employee benefits. Literally thousands of examples could be cited to illustrate the loss of productivity and capital, not to mention the loss life, related to employer and employee disputes. Unethical and illegal acts were often committed on both sides. Motivated by the turmoil surrounding labor and management issues numerous laws have been passed to equalize power within businesses. But the cost of unrest continues.

According to the United States Bureau of Labor Statistics the number of days lost in 1993 due to labor-related work stoppages, involving 1,000 or more workers per occurrence, was 398,900. That number represents a great loss in productivity for businesses and approximately $47.8 million dollars in lost wages for employees. In fact the community at large lost as well, since those wages could have gone to purchase other goods. And 1993 was not unusual, the loss in 1992 was even greater. [9]

These statistics cannot measure morale in the workplace, or the effect it has on productivity. Labor disputes take a long-lasting toll on the initiative and drive of employees. Undoubtedly, the effect amounts to millions of dollars more in lost production potential.

By contrast, employees of businesses using the CE model would have no need or desire for a labor union. They would have far more authority within the organization than a union could possibly provide from the outside. If employees chose to work long hours, or to use methods which were unsafe or hazardous, it would simply be their choice to do so. No one would force them to work under such conditions. Like any self-employed person the working conditions chosen are the result of balancing the desirability of better conditions with the expense necessary to bring them about.

If CE had been implemented long ago, the conditions in the factories would probably have been better, and the term sweat-shop, probably unknown. But even if conditions were the same, or worse, no one could accuse business owners of forcing such conditions on their employees. It is unlikely they would have gained adequate support to pass all the laws which exist today to benefit the interests of labor. The violence and high cost of work stoppages would have been avoided.

Social reformers long considered employer-provided benefits as another way to compromise the power of capitalists. Forcing the employer to pay for such benefits as sick leave, vacation, and medical insurance was advertised as being more humane, but it also provided another source for recovering surplus value for the employees. Initially, labor unions had little success forcing such measures on employers. It wasn't until pre-World War II labor legislation was passed that unions gained adequate power to achieve such goals. Then post-World War II conditions changed the perspective of employers as well. Wage and price controls, coupled with the increasing percentage of income tax, made it difficult to attract and keep good employees. Employers turned to tax-free benefits, outside the scope of wage controls, as an effective means of compensating employees. Gradually, providing such benefits came to be expected as an employer duty.

An unexpected consequence of employer-provided benefits is increased cost. By requiring employers to pay for employee benefits the normal economizing behavior of individuals in the free-market is diminished. This is particularly evident in the area of health care. Because employees regard health care as free, they have little motivation to conserve it. Like any common resource, it is in each individual's personal interest to use as much of it as possible, and, like any other service in the market, increased competition for health care services naturally results in increased cost.

It is difficult to know how strongly the concept of the capitalist influences the desire for employer-mandated benefits, including health care. Are people really concerned over the benefits, or do they see them simply as another means of bleeding the employer? A recent employee health care survey, conducted in New York, may suggest an answer. Similar to other surveys reported by the media, they found 73% of those surveyed were in favor of employer-mandated health care, with 22% against and 5% expressing no opinion. But another question was also included in the survey which is even more revealing when compared to the first. They asked, how many of the respondents would support legislation forcing employers to provide free ice cream for the employees each day. To this question, 68% said they would support employer-mandated ice cream, 24% against, and 8% no opinion. One respondent clearly stated, "I would support anything that my boss would have to pay for." [10]

In the CE model it is clear to all employees where the cost of such benefits comes from. They may still choose to collectively organize group insurance packages, but payment would be an individual responsibility. The escalating cost of health care would be evident to them as their payments increased, and it would be obvious to them they were only bleeding themselves if they used it carelessly.

Additional Consequences

More than any other single cause, the reaction of social reformers to the concept of the capitalist fueled the increase in government size and control. Indeed, creation of many regulatory agencies was motivated by a zealous belief that wealthy business leaders needed to be controlled by government in the interest of society. The Interstate Commerce Commission (1887) was intended to regulate railroads, dominated by the wealthy; the Federal Trade Commission (1914) was created to settle the issue of trusts and thus control the actions of robber barons; the Security and Exchange Commission (1934) was designed to control the actions of Wall Street executives who were thought to be the cause of the Great Depression; the Equal Employment Opportunity Commission (1966) was established to administer and enforce affirmative action programs for the civil rights of workers; the Environmental Protection Agency (1970) was intended to abate and control pollution, primarily thought to be the result of capitalistic enterprises; the Occupational Safety and Health Administration (1970) was supposed to protect employees against unsafe conditions in the workplace, and the Consumer Product Safety Commission (1972) was created to protect consumers from the irresponsible actions of manufacturers. The list of examples could go on endlessly. While it is impossible to know precisely what would have happened if CE had been implemented 150 years ago it is very unlikely there would have been adequate public support for such dramatic increases in government.


Market solutions exist for nearly all problems which social reformers have tried to solve using government. In virtually every case where business owners acted in a way that reformers objected to, they also introduced inefficiencies which left themselves vulnerable to more efficient competitors. The CE system is designed to maximize efficiency and is capable of driving out other systems perceived as exploitive; hence, eliminating a multitude of excuses for expanding government.


  1. Marx , Karl; and Engels, Friedrich, The Communist Manifesto 1848, Penguin Books Ltd., Middlesex, England, 1986, introduction by J.P. Taylor. See especially pages 31, 37, 88, and 93.Return

  2. Mises, Ludwig von. Socialism. (1922/1981) Liberty Fund Inc. Indianapolis, Indiana, p. 211. (Joseph Schumpeter also defines socialism in similar terms. See Capitalism, Socialism, and Democracy. 1942. New York. Harper & Roe. 1950., p. 167.)Return

  3. The American Heritage Desk Dictionary, Houghton Mifflin Company, Boston, MA, 1981, p. 156Return

  4. Most businesses today are based upon the same structural model as socialism—centralized control. It is probably more accurate to say that socialism is based upon a businesses model, but today it is more alarming to say that businesses are based upon a socialistic model. In the interest of being persuasive, I've chosen the latter.

  5. The American Heritage Desk Dictionary, (above), p. 883Return

  6. Mises, Ludwig von, Bureaucracy. (First printing 1944) ©1983 by Margit von Mises. Published by Center for Futures Education, Inc.. Cedar Falls, Iowa, p. 10Return

  7. See Constitutional Enterprise Volume 1 Number 2 for more discussion about the various combinations of socialism and capitalism.Return

  8. In an interesting twist of irony social reformers had some powerful allies in their quest—wealthy capitalists. See Constitutional Enterprise Volume 1 Number 1, p. 3, for an explanation.Return

  9. Monthly Labor Review, June 1994, Volume 117, Number 6, p. 90-92.Return

  10. Spy Magazine, Sep-Oct 1994 , p. 28.Return

In The Next Issue

The next issue of Constitutional Enterprise will describe the Constitutional system of CE and how it is applied inside businesses.

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