Some economic aspects of

industrial democracv *

Laurence Hunter argues that although there has been some reference to economic questions in the debate on industrial democracy, they have not received the attention that they deserve. Rather than to provide answers, the purpose of his article is to highlight the importance of the questions, in the hope that others might be encouraged to accept the presented challenge.

HE purpose of my paper is to explore some T economic issues that emerge from the dis- cussion of industrial democracy. The context is primarily the recent debate about the proper direction for the development of industrial democracy in Britain, with its particular blend and structure of institutions. In this debate there has of course been reference to economic questions, but I would argue that they have not received the attention they deserve, and far too often the conclusions drawn by one party or the other rest on surmise or speculation[ll. By the nature of some of these questions, this is perhaps inevitable in the present state of knowledge, and it is not my intention here to attempt to provide definitive answers to them. My purpose is rather to redirect attention to the questions and to indicate their importance, in the hope that others may be encouraged to pick up the challenge.

The questions arise on two different levels. The first, where most of the debate has so far

’ A revised version of the Shirley Lerner Memorial Lecture, delivered in Manchester on 10th May, 1979. Helpful comments on an earlier draft were provided by Phil Beaumont and Tom Schuller. 0 Laurence Hunter is Professor of Applied Economics at the University of Glasgow.

concentrated, is concerned with the practical economic consequences of industrial democracy. Putting the matter crudely, we can identify two camps, one of which marshals a series of arguments which assert that industrial democracy will be beneficial in economic terms, the other presenting arguments that it will produce economic loss - or disaster. As I will try to show, these ‘arguments’ are more often than not statements of belief, sometimes based on ‘experience of industrial life’ and sometimes on rather vague evidence from other countries.

The second level of discussion emerges out of the first and is more concerned with theoretical matters. In many other areas of inquiry, it is possible to use existing theory to predict the likely outcome of a defined change in arrangements. The robustness of theoretical understanding may of course be greater or less, depending on the extent and acceptability of empirical testing, and in some cases there may well be competing theories. Nevertheless, even in the latter case, there are at least some reasonably well structured sets of propositions, linked together in a logical framework, which yield testable predictions. As a result, given time, it should be possible to discard

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hypotheses which do not stand up and, in the meantime, the debate between competing theories can be conducted on a level which should be above that of counter-statements of belief and reference to “experience”.

In industrial democracy, it is difficult to identify any such body of theoretical thinking. Part of the problem is that the subject lies at the border of economics and industrial relations, where it is notoriously difficult to find a mutually acceptable body of theory. However, the problem is exaggerated in this case, partly because of the variety of theories which exist in relation to the economics of the firm, and partly because industrial relations has no effective theory of the firm at all. This, then, indicates the second focus of interest for this paper.

Before moving on, there is one other point to be made. It may be objected that industrial democracy is not an economic concept at all but, rather, one which derives from ideology or from precepts of social justice. In that case, it is said, economics really has little to contribute to the discussion, and economic arguments for or against should not be the determining factor in its progress. This argument is not one that 1 can accept. It is, of course, perfectly reasonable to decide that a particular social or political innovation is desirable in its own right and that whatever its costs in terms of side effects, these should be accepted. Even in that situation, however, it would seem sensible to inquire into the nature and extent of the costs so that at least one knows (however roughly) the dimensions of the sacrifice. Here, economics surely does have a part to play, though, in the last resort, the decision may be taken on non- economic grounds. Furthermore, there is a fairly clear and direct connection between the development of industrial democracy and the economic performance of companies affected by it, and, here again, the economic aspects deserve our attention. Of course, they have received some attention, but whether it is at all satisfactory is much more debatable. I shall proceed, therefore, on the basis that, whether or not decisions about the extent and form of industrial democracy are taken on explicitly economic grounds, any development of this kind will have important consequences which we ought to be able to examine empirically and, if we can, with the aid of a theoretical framework which should help us to pose the right questions as well as guide us towards satisfactory answers.

First, I will review the main economic

arguments which have been advanced for and against industrial democracy. This gives rise to some issues which seem worthy of further exploration, and these are considered before I draw my final conclusions.

The economic arguments relating to

industrial democracy It may seem a little strange to have come

even this far without defining industrial democracy itself. However, that omission is quite deliberate, for reasons which should now become clear. Industrial democracy is a term that goes back at least as far as the Webbs, but its meaning has changed considerably since that time. In its present British context, it has moved away from the basic question of workers’ rights to be represented by their trade unions in relations with employers, to the concept of participation by employees in the decision-making processes of their companies. (Even this, it should be noted, is not the only approach now, as the work of Einar Thorsrud[21 and his associates shows.) The problem is that the concept of participation is amenable to many different approaches, resting on different types of worker involve- ment, at different levels of decision-making, and implying different institutional forms. As a result, much of the debate has been about form and structure rather than about the broader issues.

At one level of argument, it is true that different organisational forms will produce different outcomes and, at some point, it will become relevant to examine alternative struc- tures together with their likely economic con- sequences. However, it should be possible to distinguish general principles from detailed proposals, as a starting point for the discussion. We will then try to proceed as far as possible without getting caught up in the more detailed arguments. We may then work on the assump- tion that, in whatever form, industrial democracy will involve active participation by employees or their representatives in the decision processes of the firm. This still does not take us far enough: what decision pro- cesses? This is, in fact, one of the key issues in dispute, However, since at this stage we want to see how the different sets of arguments line up, it will suffice to refer to decision processes which relate to the control of work and its

Some economic aspects of industrial democracy

organisation. In using that definition, of course, we can observe a potential demarcation question between industrial democracy, as defined, and collective bargaining, which, in its broader sense, also incorporates job regulation and work control. That need not deter us, however, for the relationship between collective bargaining and industrial democracy is again one of the central problems, and there is additional merit in avoiding this sort of rigid distinction.

Given this working definition, what then can we make of the various arguments that have been presented? The main protagonists have been the CBI and the TUC and, while neither has been particularly consistent in its position with regard to the form of the increased participation it would like to see, the overall attitude of each has been clear enough.

The case against The CBI, while acknowledging the desira-

bility of greater participation by work people, see this as requiring emphasis on communica- tion and information, and extended consul- tation rather than greater worker control. Thus, “participative structures which do not conflict with established collective bargaining arrange- ments, and in which employees, on the basis of common working interest”, can contribute, are advocated as a means of achieving greater efficiency[3]. In line with its stance favouring flexibility, the CBI further advocates experi- mentation with financial participation, organ- isation and restructuring, and joint problem solving groups [4],

It is clear that the CBI, so far as economic argument is concerned, sees greater partici- pation - short of a sharing of control and quite separate from collective bargaining - as a factor with a potential for productivity improve- ment. They are, however, firmly against any imposition of participation schemes which go beyond this. For the present purpose there is little point in itemising their detailed arguments. Instead, it would seem more useful to try to pick out those that have a more general application, drawn from a variety of sources. They can be divided into two broad categories. 1. Those that affect the efficiency of internal

2.Those that spill over into the external

1. Internal effects (a) It is argued that speed is required in

decision-making and operation.

economy.

decision-taking at board or senior management level, and that employer participation in such decisions is likely to have a delaying effect, to the detriment of the company[51. Various reasons can be advanced for delay: greater time required by management to explain pro- posals to workers; lack of expertise on the part of employee representatives; the need for representatives to consult with members; and the possibility that proposals will be subject to protracted negotiation before an acceptable formula is arrived at.

Without wishing to minimise the possible consequences of these factors, one might observe that the lack of expertise is a general problem (which we must return to) but one which should be much reduced if adequate re- sources are directed to the training needs of employee representatives (and managers). Again, if the proposals are important, they are likely on any meaningful level of participation to be subject to consultative procedures, and it is at least arguable that the delay might well be reduced by having employee representatives involved in the decision process.

On the other counts, there is no apparent reason why the delay should be inordinate, and there is a TUC counter argument which admits that “the length of time taken to con- sider future policy might be extended, but that the acceptance and implementation would undoubtedly be assisted”, given the greater confidence in the process of decision-taking in which representatives are involved[6]. Any conclusion on this must be conjectural, as in many other areas, since much will depend on the particular decision: one can certainly think of major proposals which have run into the ground even without employee involvement in the decision process: or (some might say) be- cause of the lack of involvement! (b) A second argument is that the introduction of effective employee participation in the decision processes of a company would have adverse consequences on the confidence of investors (and one might add, customers) [71, particularly in the short run. This argument takes on its strongest form when related to a particular mechanism, such as the introduction of parity representation on boards, which if introduced ‘at a stroke’ might well have an effect on short-run confidence. Even without this, some effects on confidence might follow upon even marginal involvement of employee representatives in strategic decisions. There is a counter-argument that such involvement

37

greater commitment to the company[8], resulting in an improved performance which would increase investors’ confidence. How- ever, this latter argument, though it may apply in the longer term, is probably not an adequate answer to the doubts about the short- term effect. The Bullock Committee, itself, evaded a direct answer on this, and slid out on the view that there are many other economic and political forces which affect business con- fidence, alongside which short-term shocks to confidence from increased participation will be marginal and immeasurable. Perhaps all that can be said here is that the more extreme the form of industrial democracy, and the more sharply it is introduced, the greater the risk that it will adversely affect business confidence. (c) Closely associated with the previous prob- lem is a potentially much larger problem, the supply of capital to the ‘democratised’ firm. The basic argument is that not only in the short run but in the longer term also, investors’ con- fidence will be strained, and investible funds will be diverted to non-democratised firms, or to government stock, or perhaps overseas. Be- fore this argument can be taken any further, it is necessary to consider how important external funds are in comparison with retained profits and depreciation. This was a matter fairly fully investigated by Bullock, and the evidence is that a substantial majority of the funds of larger quoted companies throughout British industry comes from internal sources, averaging about 75% between 1955-75. Bank borrowing has shown a tendency to rise, from about 5 % on average in 1955-69 up to 15% in 1970-74. The remaining 10%-15% is in the form of ordinary preference shares or long-term loans issued for cash. This is not to say that this 1046-1546 is unimportant, and, in addition, there is probably a significant variation among the larger companies, with some depending much more on share issues. However, the evidence points strongly towards a primary reliance on internal funding of investment, which reduces, but does not negate, the risk of some investment funds being diverted from firms that need them. Whether this risk will be materially affected in the longer run by increased involvement by employees in decision-taking, will surely depend on the performance of the firms under increased participation. Investors, particularly institu- tional investors, are unlikely to be unfavourably influenced by blind prejudice if the financial

~~ ~~

results are good. Thus, in the last resort, investible funds should continue to flow to firms which turn in good results, and if democratised companies can d o this, they should have little to fear.

Two subsidiary points may be made here. The first is that, even on the latter argument, high-performance firms will continue to acquire external capital at a sufficient rate, and it is still arguable that these firms might d o better with- out worker participation. If this is so, and it always will be difficult to prove, then there will be a loss of economic welfare which will be one of the costs to be weighed against the other economic and non-economic advantages. Secondly, no mention has been made here of the possible contribution of government finance. While this is likely to be minimal under a Conservative Government, the pre- vious Labour Government advocated the intro- duction of planning agreements in the corpor- ate sector, which would have encouraged union participation in strategic decision-taking, in association with governmental involvement in the finance of development programmes. (d) A further argument emerges from this. With a significant majority of funds coming from internal sources, there may be increased pressure for firms to divert part of the de- preciation provision or retained profits to improve conditions for the employees. In short, it is argued, the involvement of em- ployees in top-level decisions will intensify the traditional struggle over the share between capital and labour. While this is a perfectly possible outcome, our view on its likelihood must depend on closer investigation of the mechanism by which such a redistribution would occur, as well as its implications for the relation between short and long-term interests for employees. So far as the mechanism is con- cerned, two possibilities seem open. One is that the increased information available to em- ployee representatives through participation will enable them to bargain more effectively within conventional collective bargaining channels. The other is that employees in- fluence on top-level decisions about investment and funding will change the distribution of profits or alter the level of investment directly (i.e. outside the realm of collective bargaining). Of these, the second seems the more signifi- cant, for the former seems just as likely to emerge from increased disclosure of inform- ation, whatever its motivation (and there is a growing number of employers voluntarily

Some economic aspects of industrial democracy

extending the flow of information to their workers and the unions who negotiate for them). The real question, then, is whether democratisation of decision-making , by altering the balance of control (rather than of bargain- ing advantage) will result in a change in the investment situation. Here, the trade-off between short and long-term employee bene- fits becomes important. The argument that investment will suffer must depend on some judgment that employees or their represen- tatives will be more concerned about short- term wage improvements than longer term benefits, including security of employment. That is not, of course, a trade-off that is new to collective bargainers. However, there may well be a difference in this instance because of the locus of the decision in the management- control area rather than in the collective bargaining framework. On this analysis, then, the critical question may well be whether the time-horizon of employees and their representatives is shorter than that of management: to the extent that this is the case, the criticism will be justified. We will further consider this at a later stage.

This completes, for the moment, the main arguments relating to the internal disadvan- tages of democratisation in the defined sense. We now turned to consider the arguments on the external side.

2. External effecte (a) The first argument here is that industrial democracy will be inflationary, at least in the sense that it will augment any existing ten- dencies towards inflation. From a monetarist standpoint, this argument carries no weight, for on that analysis any increase in the rate of growth of money wages through a change in the decision process would quickly be translated into offsetting employment changes: only an accommodating expansion of the money supply would result in a rising rate of inflation. However, there still remains the influential wage-push school, which might argue that industrial democracy, by introducing (or increasing) a bias in decisions about income distribution in favour of labour, would ex- aggerate inflationary tendencies. This bias is, however, a debatable point, and has already been discussed in our analysis of the internal effects.

Another possible argument is that industrial democracy would generate an increase in trade union membership, and that this, either by

increasing the density of unionisation in bargaining units, or by introducing unionisation and collective bargaining where none pre- viously existed, will increase the bargaining strength of the unions; and this in turn will lead to a higher rate of wage increase. This, of course, is essentially the militancy argument advanced by Hined91, but considerable doubt has been cast on the validity of Hines’ results by Purdy and Zis[lOl and, more recently, by Mulvey and Gregory[lll.

In any case, all the evidence suggests that the growth in unionisation is occurring primarily in the white-collar field, extending through the professional and managerial ranks of the labour force. This may or may not be a defensive reaction to the power of the manual unions, but it is extremely doubtful if this sort of development in unionisation will materially increase the national bargaining power of the traditional unions in such a way as to add significantly to any wage-inflationary effect already present. Thus, this argument probably has to be discounted, but perhaps not dis- carded [121. (b) We have already considered the possibility that the supply of capital to the democratised firm may be adversely affected. There is also a macro-economic aspect to this question, nameIy that the overall supply of capital in the economy may decrease. There are several possibilities. First, on the domestic front, preferences by worker board-members for a diversion of profits either from dividends or from retained earnings for reinvestment, on a general scale, might seriously erode the amount of capital available for investment.

Secondly, to the extent this occurs, or if democratisation raises the risk premium for investors, institutional and individual investors may be less willing to make funds available. We have earlier discounted the second of these arguments, and the first was seen to depend on whether the time-horizon or worker represen- tatives was shorter than that of management decision-takers.

A third aspect is the effect on incoming investment from abroad, which has been a sig- nificant element in Britain in the post-war period; not least, in some of the more depressed regions such as Scotland. There must be some possibility that this third argument will be important, for, North American companies in particular (but others also) are likely to be wary of making substantial investments in an economy where the control

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e of the operation must be shared with the employees. This is another area in which the form of the democratisation proposals will be particularly relevant, and the whole problem of industrial democracy in multinational and inter- national companies is a thorny one into which we cannot venture here. However, there is some feeling in countries like Sweden, which have more extensive representation of workers on boards, that foreign investment may well have been reduced; and this problem cannot be easily dismissed.

Thus, on at least two counts, there is some possibility of threat to the aggregate supply of capital, and that, in turn, introduces the possibility of alternative sources of funds. Here again, Swedish developments are of interest. Various proposals have been advanced to develop investment funds, financed either out of a company’s profits or out of wages, but managed (reinvested) collectively. The best known proposal is the Meidner Plan[l31, but current developments appear to be envisaging a broader and more varied strategy. It is also true that the prime motivation for such investment funds is a democratic one, as a counter-balance to the concentration of wealth and as an attempt to achieve more equal dis- tribution of wealth (as well as income) among the wage-earning sector of the population. Thus, employee investment funds are seen as an essential element in the industrial democracy process, in many ways just as im- portant as having employees on the board. Yet, there is a sense in which the adequate supply of capital is also seen to be an important adjunct to democratisation objectives. TO quote from Meidner:

“the demand for a high leuel of capital formation . . , is an essential condition for high and rising employment. The Swedish economy is very ex- posed to foreign competition, and a high invest- ment ratio must accordingly be sustained in order to defend our position in foreign markets. Probably few trade union movements are as posi- tive as the Swedish one in their attitude to a high level of investment, to the steady expansion and technological regeneration of the apparatus of production” [ 141.

While one should be cautious in the extreme about translating Swedish ideas and practice to a British context, there is no doubt that the economies d o have similarities, and the problem of continued high unemployment and low investment is more serious here than in Sweden. Quite apart from the merits of the argument for democratisation through wider

capital ownership, there is obviously scope to introduce a form of investment fund in Britain, should the supply of capital overall be inhibited by greater worker participation in the economic control of companies. The consequences of this for the overall structure of the economy, and its secondary effects on the traditional capital market would, of course, have to be carefully considered, as indeed would the source of the investment fund, and the nature of its control, and the distribution of its proceeds. Nevertheless, it is part of the point 1 wish to make, that unless the proper economic analysis of industrial democracy is undertaken, the identification of such problems, and the commencement of serious study of approaches to them, will not be made. (c) Mention of the current unemployment problem and the issue of low growth and low investment serves to introduce a third argument: that an extension of participation will tend to decelerate economic expansion and the recovery of employment in the upswing of the business cycle. One aspect of this argument can be quickly dismissed. The economic theory of the labour managed firm predicts precisely that, in such a firm, employment expansion will cease in the upswing before the equilibrium point obtain- able in the conventional entrepreneurial firm. That depends essentially on a concept of the firm where the workers themselves hire capital and additional labour. This is quite a different situation to one where there is joint control over economic decisions (however the balance of that control is established), and the prediction cannot be translated from one to the other.

The second form of the argument is the now familiar one which maintains that labour, through its share of economic control in the company, will be more able to shift the trade- off between profits and wages in favour of the latter, and hence, by raising wage levels, to choke off employment expansion. Again, this depends on the assumption of a shorter time- horizon on the part of workers involved in economic control - though this formulation also brings out the possible significance of trade union concern for the consequences of their actions on the internal labour market as well as the external labour market. This argument, then, cannot be discounted, although to the extent that it is valid, it could be counteracted to some degree by the introduction of some form of employee investment funds.

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Some economic asDects of industrial democracy

The case for industrial democracy

We now turn, much more briefly, to the arguments in favour of industrial democracy. There is, of course, a view that participation in itself is ‘a good thing’, providing opportunities for individuals to achieve greater self-fulfillment and for an improved social organisation. How- ever, our focus here is on those arguments which relate particularly to the economic bene- fits of an extension of industrial democracy. Again, we can divide the arguments into internal and external.

1. Internal effects A number of arguments may be advanced

here, but I would suggest that they all have a common basis. Consider the following pro- positions[l5]:

An extension of worker participation will increase the acceptance by the workforce of change. An extension of worker participation will reduce the amount and seriousness of in- dustrial conflict and time lost in industrial disputes. Greater involvement by workers in decision processes affecting their work will ‘release’ additional energies or motivation and improve productive performance. Greater involvement by workers will improve the performance of manage- ments by obliging them to take greater care over decisions, the planning process, and so on.

Probably a variety of other similar statements could be produced, but it is clear that existing industrial organisation is seen, in one way or another, as reducing productive performance below its full potential. Whether this is attri- buted to poor industrial relations, to low morale on the part of individuals, to fears of insecurity in the face of change, or to inadequate management, all the arguments suggest a common root in the contemporary industrial organisation. They also suggest that some

’ What may appear more likely is that labour participation will be effective in maintaining employment in the down- swing, for example, by minimising layoffs and redund- ancies, In many cases, of course, this is already achieved by collective bargaining, and it is well known that employers also derive benefits from labour hoarding. This, together with any consequences for employment recovery in the upswing, will tend to smooth out employment fluctuations over the cycle.

improvement in the position can be achieved by greater worker involvement; and, indeed, this is acknowledged even by the CBI and many prominent employers, who (despite antipathy to worker directors) see merit and productivity gains to be had from enhanced worker involvement in decision-making.

It is necessary to probe this rather more deeply. Were we to adopt a typical neo- classical stance, based on strong and vigorous competition for the entrepreneurial firm, then at least in the long run we could expect that such inefficiencies would be removed in the surviving firms. That really does not take us very far in the modern world of the corporate economy. The symptoms observed above are, in one way or another, evidence of what has been termed ‘control loss’ or in Leibenstein’s term X - inefficiency, which is believed to be fairly common in the large managerially- directed corporation. ‘Control loss’ is perhaps the most useful concept to adopt here, since the arguments about industrial democracy are primarily about the nature of control and the sharing of rights to exercise it.

Despite their imperfections, perhaps the most useful approaches to the analysis of the economics of the modern corporation are those which depend on the study of managerial discretion[l61, effectively the ability of management, freed from the strict governing forces of competition, to exercise discretion over the use of resources by the firm. That discretion, according to the theories, will reflect the make-up of the managerial utility function, but will always be subject to the forces of competition on the one hand, and to the con- straints imposed by shareholders or by ‘raiders’ eager for takeovers of firms operating below their real potential. The less effective are these constraints, the greater are the opportunities for management to pursue individual or group objectives, and the greater is the scope for the evolution of a degree of control loss which will be reflected in less-than-maximum profits and sub-optimal productivity. This margin for discretionary behaviour, where it exists, is an area within which managerial objectives could, through bilateral control involving workers, become modified in such a way as to include worker aims and satisfactions as well. To some extent, collective bargaining probably has some effect in this direction already, by providing a further constraint within which management needs to operate. Indeed, effective collective bargaining probably needs precisely some

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margin of this kind before it can yield any net gain for those covered by agreements. But, collective bargaining works through negotiation rather than through a sharing of control: it provides a constraint, rather than an expanded utility function.

It is, of course, always debatable whether participation in general, or any specific form of democratisation of decisions, will in fact release an element of unfulfilled productivity potential; but that is a matter for empirical examination. What this argument shows is that, following through a widely accepted line of economic analysis, there is scope in the corporate economy for the sort of productivity gains and reduction of X-inefficiency which the pro- ponents of industrial democracy envisage. And that for the moment is as far as we need take it.

2. External effects A clear statement of the more generalised

effects of industrial democracy can be found in the Bullock Report itself:

“if we look beyond our immediate problems it appears to us certain that the criterion of efficiency in the world of tomorrow, even more than in that of today, will be the capacity of industry to adapt to an increasing rate of economic and social change. We are convinced that this in turn will depend upon the extent to which the measures of adaptation that are necessary are recognised and adopted with the assent of a workforce whose representatives are involved equally and from the beginning in the processes of decision-making” (p. 161).

There is, in this statement, a clear expression of the view that the longer term survival of the British economy in its present form depends on participation by workers, through their rep- resentatives, in industrial decision processes. That is, of course, a conjectural statement, but it does suggest a parallel with other observable trends in the British economy. Over the last decade, the greatest extension of union power has come through the concern of governments to contain the growth of wages in an in- flationary situation. This has increasingly brought the trade unions into national level discussions on economic policy as a whole, and was instrumental in bringing about a package under the former Labour Government which included - along with a promise of self- restraint on wages - the introduction of the Employment Protection Act, instituting a legal basis to many employee rights which were hitherto matters for collective bargaining. These developments have probably increased

the degree of centralisation in industrial relations and may represent an important step towards an annual collective bargaining ‘con- sensus’ on the economic outlook. This was foreshadowed in the joint TUC-Labour Government statement of February 1979, but it is interesting to note that, recently, the CBI has been advocating a similar development.

This might be taken to suggest a growing recognition that the seemingly chronic economic problem can best be resolved by attempts to develop consensus. If this is so, it is likely that this view will be reflected at the micro as well as at the macro-level of decision-taking. In other words, the major changes in structure and behaviour that the economy requires to remain as an effective competitive force will need assent, not only at national but at industry and company level also, and machineries will have to be evolved which will allow this assent to be expressed.

Such a view is of course a belief rather than an established fact, and many may disagree with it. In that sense, its basis differs from other arguments that have been considered and its main support lies in observable trends at the national level.

Further reflections With this review behind us, the main

economic arguments for and against adoption of industrial democracy, in the defined sense, may usefully be summarised. We have seen that there may be some risk to business con- fidence if an extreme form of joint control is introduced or if a major shift in control takes place sharply. We have suggested that there need be little difficulty over the supply of capital to democratised firms if the firms produce good results. However, the overall supply of capital could be adversely affected, either if democrat- isation frightens away some foreign investment, or if workers newly sharing in control have a relatively short time-horizon and direct re-investable funds towards worker benefits of one form or another. Likewise, such a limited time-horizon could lead to a slower expansion of output and employment in the upturn of the cycle. We have seen, however, that some counterbalance to these adverse effects might be achieved by the development of some sort of employee investment fund which would serve an additional purpose of redistributing more widely the ownership of corporate wealth.

Some economic aspects of industrial democracy

On the positive side, there appears to be scope for improved efficiency in the use of resources, though there is no guarantee that any specific form of industrial democracy will achieve this. It is also arguable that a sharing of control by workers or their representatives is an essential condition for the recovery of the British economy: but that too is conjectural, even if at the macro-economic level there are indications of a tendency in that direction.

This leaves the debate on industrial democracy fairly wide open. To play the game safely it may be necessary to adopt a gradualist approach, and it is worth observing that neither the Swedes nor the Germans have attempted to go so far as Bullock suggested, or at so rapid a pace. This turns the argument back on the form of industrial democracy, but I d o not want to pursue that further here.

Instead, there are two other issues which seem worthy of further exploration. The first is the critical nature of the hypothesis that worker representatives will have a shorter time-horizon than management - with its implications for the distribution between capital and labour. The second relates to the deficiency of our theoretical apparatus in industrial relations when faced with this sort of problem.

Time-horizon At first sight, this may seem an odd hypo-

thesis. On closer examination one can, however, see at least a plausible a priori basis for such a view. To begin with, management have an explicit identification with a particular company and it is presumably in management’s interest to preserve its own security. Thus, it is not surprising that in the economic analysis of the firm, security plays an important role, either as an objective in its own right, or as a constraint on the pursuit of some other objective[ 171. Even in the neo-classical profit rnaximising approach, there is an influential school which sees the objective of profit maximisation as a long-run aim, recog- nising that automatic pursuit of every short-run profit possibility may be to the long-term detriment of the firm. Thus, in the first place, management, in exercising control over the firm, has a direct self-interest in the long-run survival and prosperity of the firm in which it is employed.

Secondly, the management function is essentially one of planning, the development of an organisational strategy for the deployment of resources ovdr a period of time. Different

levels of management have different time- horizons for their planning responsibility, and more senior managers exercise a longer term responsibility. At senior executive level, this will include the planning of investment, expansion and closures, product development and a whole range of issues which are likely to have material consequences for the company work- force. Such decisions will normally be based on detailed management information on markets, cost performance and other budgetary inform- ation, technological change, etc., all of which will have a long-term orientation, supported by a variety of ongoing information-gathering and processing systems. Thus, the function of management is primarily long term, it depends on a forward-looking assessment, and it is backed up by the allocation of resources to a number of systematic devices for the forecast- ing of future trends.

When we turn to consider the time-horizon of the union, some important differences begin to emerge. First, we have to clarify the different interests within the union itself. The indepen- dent trade union will obviously have its own organisational objectives, including its continuity and viability. But this will be primarily of concern to the central union organ- isation and its paid officials. At plant or company level, the primary objectives may be framed quite differently, being much more specifically orientated to the particular plant or company, and more partial and self-centred than the aims for the union as a whole. Furthermore, these specific objectives will be formulated and expressed through the shop steward organisation at plant or company level.

In conventional cases, these objectives will be pursued through collective bargaining, in the course of which the negotiators will be faced with a range of choices, many of which may raise issues of time preference. Thus, for example, in the classic situation where a given increase in wages is projected by management as inhibiting employment expansion or even leading to redundancy, the union negotiators need to appraise not only the validity of this claim but also the balance between a current wage increase and future employment pros- pects. Without, at present, trying to unravel the problems of preference in this situation, we can probably accept that this problem almost cer- tainly appears on a time scale different from that of management on the same issue. In the contemporary collective bargain, at least, the agreement horizon is typically one year and,

L , while union representatives in a particular com- pany may have long-term objectives, casual empiricism suggests that the ruling philosophy is ‘one step at a time’. For the union representatives, this is likely to be reinforced by other relevant considerations in the bargaining process which do not enter into the manage- ment planning process: for example, the extent to which employment cuts would affect mem- bers of that union, the increases in wages sought or obtained by other groups in the company or by comparator groups outside, the ease of obtaining alternative employment, and so on.

This sort of example may perhaps not be too typical, in the sense that much collective bargaining appears to take on a rather short- run, ad hoc form, with representatives res- ponding to immediate pressures and problems. Management in its bargaining role will tend to respond in a similar fashion, but in its planning role, management is likely to have a more ex- tended time perspective, into which short-run changes as a result of collective bargaining will have to be accommodated.

This, to be sure, is speculative and might, in fact, provide a basis for some worthwhile research. But even so, it takes us only so far. For it may legitimately be argued that the reason for a short-run horizon on the part of union negotiators is simply that they have no access to the longer-term data available to management (and if this is disclosed, it is liable to be selective to suit management’s case). Thus, as a start, substantially greater disclosure of information for bargaining purposes would tend immediately to lengthen the horizon of the bargaining process. Again, we have been dis- cussing this issue solely in terms of bargaining which, even if it can be regarded as a form of joint control or regulation, is still quite a different entity from a true form of industrial democracy in which joint decision-making on work management issues is involved. That sort of participation, arguably, with its associated access to longer-term data and to the resources which monitor and evaluate trends, need not suffer from any of the myopic problems presently attached to much of collective bargaining.

One further thought can be added here, namely that education may surely have a major role to play in this area. Current efforts to extend the scope of collective bargaining and, still more, any developments towards joint control of enterprise, must require a parallel

thrust on the educational side, one aspect of which has to be related to an extended time- horizon. The TUC has already built up a con- siderable educational programme for shop stewards, but this is so far directed mainly at plant-level negotiations, health and safety issues, and the like. The development of this to a primarily company-orientated context is now beginning to be explored, but the vast bulk of the work in that area remains to be done.’ Whatever else, if industrial democracy in Britain is to take hold, the educational develop- ment must be given a place of importance; to relegate it to a secondary position is almost certain to guarantee the prediction made by many opponents of industrial democracy that the worker representatives will have no effective contribution to make.

Theoretical deficiencies This brings me to my final point, which can

be made quite briefly. In attempting to analyse this area of joint control at company level, there are very few theoretical landmarks to guide one. From a strictly economic point of view, once we depart from a pure profit maximising assumption on the one hand, o r a worker self-management model on the other, we find ourselves in something of a no-man’s land. We have, here, been able to make limited progress by use of behavioural theory which lies at the interface between economics and industrial relations, but that progress is itself rather questionable insofar as it depends on hypotheses concerning the nature of the objective functions of the participants. As we have seen, there is no necessary requirement that the objective function appropriate to collective bargaining need be identical with that appropriate to joint decision taking; indeed, the bargaining objectives might well be influenced by an extension of participation.

Rather curiously, it seems to me, it is from the economic side that some of the more useful suggestions have come. For example, there is a long tradition, going back at least to the Ross- Dunlop controversy, of attempts to formulate the objectives of trade unions in collective bar- gaining. These efforts, particularly those of Alan Cartter[lSl and of Levinson[l9], offer sc:ne useful insights into the problems, though almost certainly the Cartter type of approach

* A study of this is currently being conducted at Glasgow University’s Centre for Research in Industrial Democracy and Participation, with support from SSRC and assistance from the TUC

44

Some economic aspects of industrial democracy

- and still more that of Dunlop - is too general to give more than a start on the analysis of aggregate behaviour. Again, the economists have done much more to develop alternative theories of the firm in its economic setting, yet there are few examples of similar attempts to develop a better understanding of the firm in its industrial relations context [ZO]. Bargaining theory has been studied as much by be- haviourists as by economists, but it is far from clear how helpful this is when the emphasis is switched from bargaining to more explicit arrangements for joint control.

It may be replied by the sociologist that what is at stake here is ultimately an issue of power and its distribution, and that the economist has little to contribute on that aspect. Certainly this present paper does not do justice to this, since its terms of reference are avowedly economic, though that is not to say that some aspects of power at least cannot be absorbed in an eco- nomic framework. But that, in any case, is rather beside the immediate point, namely that there seems to be a serious gap in the theory of industrial relations, which centres on the nature of industrial relations behaviour in the firm and on the activities of the firm in an industrial relations context. It would seem to be an im- portant challenge for the next decade of in- dustrial relations research to recognise explicitly that the firm is the focus for a great deal of industrial relations activity, yet the pre- dominant analysis tends to be either at the plant or at the system level.

Conclusion The conclusion to this paper can be briefly

stated. Whatever the arguments for or against an extension of worker participation in re- source management at the level of the com- pany, the economic effects should be taken into account more than they have been. An attempt to explore this problem does reveal some suggestive pointers, but a good deal of conjecture still surrounds the issues. This in turn points to a deficiency. in the analytical apparatus at ou r disposal and, while there are some helpful signposts, there would seem to be a need for a much more systematic mapping of this territory.

References

1. There are of course important exceptions. The Bullock Committee report devoted some attention to economic matters. Report ofthe Committee of Inquiry on Industriol Democracy, London, HMSO. 1977, Cmnd. 6706. A useful contribution, from which the present paper has benefited, and which covers some of the same ground, is Richard Clifton’s The Eco- nomic Implications of Industriol Democracy, Govern- ment Economic Service Working Paper No. 7 , NOV. 1978.

2 . Thorsrud. Einar, for example, in Emery, F. E. and Thorsrud, Einar, Form and Content in Industrid Democrocy, Tavistock, 1969.

3. Britoin Means Business 1978, CBI, p 57. 4. Britoin Meons Business, op. cit., p .51. 5. See, for example, Bullock, loc. cit., p.49, CBI, Britoin

Means Business 1978, pp. 50-1. 6. TUC supplementary evidence to Bullock Committee,

para. 14: this actually referred to a particular proposal involving a two-tier board, but the point may reason- ably be taken more generally.

7 . Bullock Report, op. cit., pp. 51-2. 8. See below, pp. 14-15. 9. Hines, A. G. , “Trade Unions and Wage Inflation in

the UK 1893-1961”, Review of Economic Studies, 1964, No. 2.

10. Purdy, D. L. and Zis. G. , “Trade Unions and Wage Inflation in the UK: A Re-Appraisal’’ in Ladler and Purdy (eds.), Inflotion ond Lobour Markets, 1976.

11. Mulvey, C. and Gregory, M., “The Hines Wage In- flation Model”, Monchester School, 1977, No. 1.

12. For further discussion of this point, see Clifton, Richard, loc. cit.. pp. 12-15.

13. Meidner, Rudolf, “Employee Investment Funds”, An Approoch to Collective Copital Formation, London, Allen and Unwin, 1978.

14. Meidner, op. cit., pp. 16-17 - italics in original. 15. These views are found clearly expressed in Chapter 6

of the Bullock Committee Report. 16. E.g., Marris, Robin, The Economic Theory of

Monogeriol Copitolism, London, Macmillan, 1964, and Williamson, 0. E., The Economics of Dis- cretionary Behouiour, Chicago, Markham, 1967.

17. Cf. Baurnol, W. J . , Business Behouior, Vaiue ond Growth, New York, Macmillan. 1959, whose sales revenue maximisation model includes a security con- straint; and Manis, R., op. cit.. whose utility maximis- ing model envisages a growth maximisation objective subject to a security condition in the form of the valuation ratio.

18. Cartter, A. M . , Theory of Wages and Employment, Illinois, Irwin, 1959.

19. Levinson. H. M . , Determining Forces in Collective Wage Borgaining, New York, Wiley, 1966.

20. But see Gospel, H. F., “An Approach to a Theory of the Firm Industrial Relations”, BJIR, Vol. XI No. 2, July 1973.