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The Unseen Revolution: How Pension Fund Socialism Came to America Hardcover – June, 1976
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We are still today grappling with the long run political-economic implications of what the French call les trente glorieuses - the 'thirty glorious years' of the postwar boom. Keynesian expansionism and the mass influx of workers into unions and politics in the aftermath of the victory over fascism strengthened greatly the hand of labor vis-a-vis capital. As ordinary people reaped the benefits of rising real wages and enhanced overall compensation packages one of the unanticipated consequences was the rapid growth of 'labor's capital.' By 1974, U.S. pension funds had a portfolio of about $150 billion, compared with a total list price for the stock market of under $500 billion, representing 30 percent of the total value of listed companies. It was not uncommon for occupational pension schemes to have a fund of far, far greater worth than the companies that actually ran them. Today, pension funds have accumulated global value in the trillions of dollars.
Here we have the elephant in the living room, the 800-pound gorilla loose in the financial heart of corporate capitalism. If workers were ever to exercise their collective ownership rights over these deferred earnings - and to express their social and economic priorities through their funds' investment decisions - it could shake our present economic system to its very core. And if there is to be a serious attempt by the left to reconstruct and rehabilitate an alternative political economy for the twenty-first century then 'pension fund socialism' could have an early and significant strategic role to play.
In "The Unseen Revolution," Peter Drucker began to fret and ponder the implications of this rise of 'labor's capital.' His book made the bizarre claim that "if 'socialism' is defined as 'ownership of the means of production by the workers' - and this is both the orthodox and the only rigorous definition - then the United States is the first truly 'Socialist' country." His argument rested on the above noted stratospheric rise of the employee pension fund as a significant owner of corporate equity, which, he claimed, represented a "bigger shift in ownership than any that has occurred since the end of feudalism. In fact, one could argue that it represents a more radical shift in ownership than Soviet communism." Thus, Drucker mischievously suggested, we had already witnessed the shift to an entirely new economic system, "a twentieth-century version of the 'Philansteries' and of the utopias of the French 'Romantic Socialists' of the early nineteenth-century--Fourier, for instance, and in particular Saint-Simon, whom both classical economists and marxists thought they had committed for good to the lunatic asylum of history." And no-one had even noticed!
What really got Drucker excited, however, was the idea that Pension Fund Socialism had outflanked the Left - in particular, was about to make the trade union obsolete - as workers abandoned shop-floor solidarity and became more loyal to their capital than to their labor. For a conservative mind, the joy of this 'unseen revolution' was that, after all the apprehension on the Right about the coming of socialism, it had actually required relatively little real change overall. Socialism was here, and it looked just like... capitalism. But, in his premature declaration of the arrival of Pension Fund Socialism, Drucker had neglected to pay attention to the vast and crucial difference between ownership and control of pension fund assets.
Though he had been among the first to point to the enormous potential inherent in the growth of labor's capital, Drucker could hardly have been more wrong in his predictions about its effects. A significant new element in the struggle, the pension funds by their very nature emerged as weapons which, if not wielded by workers toward their own ends, were destined to be wielded against them. The result was not Drucker's Romantic utopian socialism but, instead, the nihilism and destructiveness of an overcaffeinated and brutalizing neoliberalism. The rise of pension funds - and the resulting shift from capital markets made up of individuals to those dominated by big institutional investors - helped fuel the major economic restructurings of the 1970s and 1980s, in which workers in declining industrial areas (the British manufacturing towns and coalfields or the rustbelt of the American Northeast and Midwest) were subjected to massive downsizings and layoffs on behalf of a blind and aggressive pursuit of shareholder value. That it was the workers' own savings that were being mobilized against them - used by the financial services industries of London and New York as capital to fuel the export of their jobs through overseas investment and the deposing of old-line managements in hostile takeovers - while excruciating, made little difference: the huge shift in the ownership of capital did not result in a shift in the control of capital.
This distinction - between nominal ownership and real control - and the high stakes at play in the deployment of workers' retirement funds was definitely not lost upon the next "prophets" of Pension Fund Socialism, Jeremy Rifkin and Randy Barber, who approached the subject very much from the Left in their 1978 book "The North Will Rise Again: Pensions, Politics and Power in the 1980's." The question for workers, they argued, "is whether they will continue to allow their own capital to be used against them, or whether they will assert direct control over these funds in order to save their jobs and their communities." The stark consequences for communities that have failed (despite some desperate attempts) to seize control of their collective assets in the face of economic restructuring are inscribed in the bleak landscapes of industrial decline and the 'double alienation' of their workers.
This said, the prospect of a strategy for using labor's capital in support of labor's values and interests remains as potentially transformative today as it was when Drucker first identified it. It has been taken up by Robin Blackburn in his magnificent book "Banking on Death: Or, Investing in Life: The History and Future of Pensions" and is reflected in renewed interest today in the Swedish Meidner Plan, which was the road not taken by the social democratic left in Europe of moving decisively to the left in the face of the crisis of the 1970s rather than acquiescing in the ascent of neoliberalism. To understand the origin of these arguments and ideas, this odd and contrarian book by Peter Drucker remains indispensable.
As part of an in-depth study of all books by and about Peter Drucker this book raised my full attention when I read it in 2007.
Despite the time that passed since its first publication I want to highlight some parts of this book which are still very interesting and relevant.
It starts with the subtitle: “How Pension Fund Socialism Came to America.”
“Chapter 1: The Revolution No One Noticed.
If ‘socialism’ is defined as ‘ownership of the means of production by the workers’ – and this is both the orthodox and the only rigorous definition – then the United States is the first truly ‘Socialist’ country. Through their pension funds, employees of American business today own at least 25 percent of its equity capital, which is more than enough for control.” Pg. 1.
My comment (MC): I assume this is still unknown to citizens in USA and Europe.
To understand “control” I refer to Peter Drucker’s book “Post-Capitalist Society” published in 1993: “One of the most influential American books of this century was published in 1933: The Modern Corporation and Private Property, by Adolph A. Berle and Gardner Means.” Pg. 71.
Berle and Means explain clearly that ownership is not necessarily identical with control and vice versa, which opens wide space for interpretation of USA as a “socialist” country. I am pretty sure that Americans have seen this quite differently.
Peter Drucker was fully aware of this discrepancy – see Chapter 2 Pension Fund Socialism: the Problem of Success, Page 82:
“The emergence of the pension fund makes final the divorce of traditional “ownership” from “control,” which has been a favorite topic of writers on the industrial and postindustrial economy since Berle and Means’s pioneering book, written forty-five years ago. The pension funds are not ‘owners,’ they are investors. They do not want ‘control’; indeed, they are disqualified from exercising it. The pension funds are ‘trustees.’”
However, Thomas J. Watson, Jr., the son of the founder of IBM, intended to transform IBM employees into shareholding employees. He did not succeed with his humanistic concept; employees did not follow this invitation on a large scale.
Peter Drucker on Page 40:
“Ironically, both Sik [Ota Sik (11 September 1919 – 22 August 2004) was a Czech economist and politician. He was the man behind the New Economic Model (economy liberalization plan) and was one of the key figures in the Prague Spring.] and the Scandinavians present their plans as ‘Europe’s answer to capitalist America.’ And when someone tells them of the American development (as I did at a congress in Malmö, Sweden, several years back), no one believes it:
‘We would have heard of it if it were true.’
Indeed, no one seems to have heard of it in the United States. The worker knows that there is a pension fund, and workers over forty-five or fifty years of age are vitally interested in it. But not one in a thousand seems to realize that through his pension plan he actually owns American business.”
MC: it confirms to me that we have to be very careful when we comment on other countries’ systems, especially when we talk about USA from a European perspective – and vice versa.
“Chapter 3. Social Institutions and Social Issues Under Pension Fund Socialism …
A hundred years ago, Karl Marx based his prediction of the inevitable and imminent collapse of what we now call ‘capitalism’ or the ‘free-enterprise system’ (both terms were, of course, not coined until after Marx’s death) on the ‘law” of the diminishing productivity of capital.
What has happened instead is that for a century after the 1860s the productivity of capital in the developed countries – or rather, in developed countries with a market economy – kept going up, except during the most severe depression years. This was one of the major achievements of modern business. The achievement was in part entrepreneurial: a result of the steady shifting of capital from old and rapidly less productive areas of investment into the new, more highly productive areas of technical or social innovation which, as Joseph Schumpeter [8 February 1883 – 8 January 1950) was an Austrian-American economist and political scientist. He briefly served as Finance Minister of Austria in 1919. In 1932 he became a professor at Harvard University where he remained until the end of his career. One of the most influential economists of the 20th century, Schumpeter popularized the term ‘creative destruction’ in economics] convincingly demonstrated sixty years ago, are the true ‘free capital’ of a modern economy. …
According to such figures as are available, the same increment of capital investment produces five to eight times as much additional output in a free-enterprise, market-based economy as it does in the Soviet-Union or the Soviet-Union’s European satellites.”
MC: today, we all know, that the Soviet Union was declared as dissolved on December 8, 1991.
Russia, Ukraine and Belarus established the Commonwealth of Independent States (CIS) in its place. Today CIS has nine full member states – Ukraine is no member state anymore.
However, these negative experiences should not be forgotten when “capitalism” is criticized in an undifferentiated way.
On Page 139 Drucker wrote asked “Can the Labor Union Survive Pension Fund Socialism?”
MC: in the communist countries there were no Labor Unions what explains the fundamental differences compared with the democratic and pluralist Western World.
“Chapter 4. The Political Lessons and Political Issues of Pension Fund Socialism …
The crucial moment in the disintegration of ‘socialism’ as the alternative to the ‘system’ was probably August 1, 1914, when the proletariat, despite its highly organized and disciplined Socialist parties – the dominant parties in France, Germany, Austria, and Italy – enthusiastically joined an ‘imperialist war’ rather than make common cause with its working-class brethren across national boundaries.
But the decisive event, the event that destroys the intellectual foundations of ‘socialism’ as a creed, is surely American pension fund socialism. For if the American experience proves anything it is that the fundamental conflict in the developed countries – for all that it invokes the old battle cries and waves the old banners – is not about ‘capitalism’ and ‘socialism’ at all; it is about power. It is a conflict between a decentralization of power, in which a substantial number of pluralist power centers make decisions, thus leaving a meaningful sphere of freedom for the individual; and a monopoly power by a small clique one might call the ‘military-intellectual complex’ which likes to usurp for its own use the term ‘socialism,’ and which keeps itself in power by buying, through ‘transfer payments,’ the support of the less productive or non-productive groups. Marx would have called it a cabal of the ‘lumpen intellectuals’ and the ‘lumpen proletariat.’
The ‘isms’ will of course continue to be invoked; nothing dies more slowly than an old slogan. But policies can no longer be based on them. … The socialism of Marxist theory has indeed been realized, and for the first time, on American soil. But in realizing genuine pension fund socialism, the American development has invalidated and made meaningless the nineteenth century’s ‘ism.’”
MC: Drucker’s book written in 1976 confirms his “timelessness”. As the twentieth century is over now since 15 years Drucker’s findings can be extended to the “isms” of the last century.
The risks of developing into a socialist system are still alive. Therefore it is important to keep in mind this book as well as Drucker’s first book “The End of Economic Man” published in 1939, “The Road to Serfdom” by Sir Friedrich August von Hayek (May 8, 1899 in Vienna, Austria - March 23, 1992 in Freiburg im Breisgau, Germany, Nobel Memorial Prize 1974 in Economic Sciences with Gunnar Myrdal) published in 1944, and “The Open Society and its Enemies” by Sir Karl Raimund Popper (28 July 1902 in Vienna, Austria – 17 September 1994 in London, UK, an Austrian-British philosopher and professor. He is generally regarded as one of the greatest philosophers of science of the 20th century).
Drucker continues on Page 172:
“And we know today that it is not true that there is one ‘right’ educational system or philosophy for every youngster. … But there is no reason today why we should not have choice and competition – and indeed every reason for both.”
MC: many policy makers today have not read and should read Drucker’s books including "The Unseen Revolution."
It is never too late, where is life, there is hope.
The pensioner, who no longer contributes to the economy of city and state, enjoys generous benefits.
Russia's collapse was not caused by Reagan (although his PR team would want the world to think so). As predicted by Drucker and others it was an economic collapse of a declining work productive labor force and an increasing bureaucratic pensioner populace.