Capitalism and Employee Ownership

Employee Share Ownership Plans & Capitalism

Louis Kelso is the founding father of the modern ESOP movement. He was a merchant banker who believed deeply in democracy. His fear was that if the economy continued along its current path it would result in 10% of the people owning 90% of the wealth of the country which would destroy the middle class and result in the total demise of democracy.

“Kelso long believed that he had not originated a new economic theory but simply discovered a vital fact that the classical economists had somehow overlooked. This fact was the key to understanding why the private property, free market economy was notoriously unstable, pursuing a roller coaster course of exhilarating highs and terrifying descents into economic and financial collapse.

This missing fact, which Kelso had uncovered over years of intensive reading, research and thought, drastically modifies the classical paradigm which has dominated formal economics since Adam Smith. It concerns the effect of technological change on the distributive dynamics of a private property, free market economy. Technological change, Kelso concluded, makes tools, machines, structures and processes ever more productive while leaving human productivity largely unchanged. The result is that primary distribution through the free market economy (whose distributive principle is “to each according to his production”) delivers progressively more market-sourced income to capital owners and progressively less to workers who make their contributions through labor.” (Wikipedia)

Capitalism is an economic system. In it the government plays a secondary role. People and companies make most of the decisions, and own most of the property. The means of production are largely or entirely privately owned (by individuals or companies) and operated for profit.

Socialism, on the other hand, is a political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community i.e. the state as a whole.

The difference between capitalism and socialism is that socialism believes the state, or the government, should own everything while capitalism believes that individuals should own productive assets. The latter is what Kelso believed as well and based his ESOPs on the capitalism ideal of individual ownership over assets.

Many owners and CEOs of large private organizations have formally begun to redefine capitalism in today’s terms. A more recent term “the purpose corporation” has made its way into guiding an overarching philosophy on how companies operate and compete in the free market. In August 2019 “181 major company CEOs who call themselves “The Business Roundtable” got together to talk about the role, purpose, and impact of companies in and on contemporary society.” (Mark Nevins, Leadership Strategy, Forbes) The group worked over topics like organizations’ relationship with their employees (training/development, compensation, etc.) and defined what an organization’s social responsibilities should be.

The result was a revised “Statement on the Purpose of a Corporation” which reverses the group’s longstanding position that “corporations exist principally to serve their shareholders.” There is a shift in this point of view and more companies are now asserting that they must consider all stakeholders—including customers, employees, suppliers, and local communities—and not just its shareholders.

Joanna Phillips CHRL, CVB
Vice President
Perry Phillips CPA, CA, CBV COTF,
ESOP Builders Inc.
1 (877) 995-ESOP (3767) or (416) 645-0512
4646 Dufferin Street, Suite 6, Toronto ON M3H 5S4