David P. Ellerman

Abolish Human Rentals

Support Worker Cooperatives

2015

http://www.abolishhumanrentals.org/

Welcome to AbolishHumanRentals.org home of the modern abolitionist movement.

This site examines the standard employment relationship, the human rental, and

shows that it is invalid on inalienable rights grounds. The human rental today

manifests itself as the voluntary exchange of personal labor for a salary or

wage. A legitimate arrangement requires workplace democracy and worker

ownership whenever human labor is involved. This site is an educational

resource that seeks to promote public awareness and understanding of the

problems associated with human rentals. Inquiry into the legitimacy of human

rentals has long been buried by a barrage of propaganda with the complicity of

the economic establishment.

Such a fundamental question is notably absent from our education system and

ignored by the mass media. These ideas must be revived in public discourse. The

theory of inalienable rights is only useful to the extent it is widely known

and consistently applied in practice. Inalienable rights are based on the

already broadly held principle of the non-transferability of responsibility for

one’s actions. That principle, taken to its logical conclusion, means the

rental of humans have no more legitimacy than their sale. The issue is not one

of coercion, willfully choosing to be rented, or the treatment and compensation

of workers. Humans cannot choose to be rented for the same reason people cannot

choose to sell themselves into slavery or sell their vote, regardless of their

consent or how much they are paid. The abolition of human rentals will be no

small task given their widespread prevalence and firm entrenchment in the

economic system. The modern abolitionist movement must begin by destroying the

false perception of legitimacy that human rentals currently maintain.

Inalienable rights arguments pose a lethal threat to the practice of renting

humans. At stake is nothing less than the employment system, the labor market,

and the stock market through which ownership of human rental contracts are

exchanged. As with slavery, inalienable rights issues cannot be addressed

directly by proponents of human rentals without inviting destruction of the

system. There are only two possible responses: Silence in the hope that

inalienable rights are never widely understood, or vilification and harassment

of the advocates in the event they gain traction. The strategy has thus far

been successful in diverting attention from a profound idea and its

revolutionary implications.

The alternative to human rentals is universal self employment in democratically

managed worker owned businesses, or worker cooperatives. Workplace democracy

eliminates the alienation of decision making power, and worker ownership means

workers appropriate any resulting profits or losses, thus bearing financial

responsibility for their actions.

What is a human rental?

Human rentals describes how most people earn a living, they rent themselves in

exchange for a salary or wage. The self rental typically describes the state of

being employed by a firm. Human rentals involves two key features.

The first aspect is the agreement to follow orders within terms of the rental.

For example some standard orders would be: produce this, provide this service,

design this, or manage these people. The employee generally concedes authority

over how the work is performed and under what conditions. The main issue is the

delegation of positive governing control. The employer has the ability to

command the worker to perform certain actions: work faster, work harder,

produce higher quality parts, etc. Or more commonly today, dump these toxins,

deny these medical claims, issue these predatory loans, or manage public

relations so we can continue doing these things. The rented person must obey,

or risk being fired.

The second aspect of a human rental is the transfer of responsibility for the

actions of the person while at work. The most obvious is the transfer of

responsibility for any profit or loss that results from the worker’s actions.

That responsibility is shifted to the owners of the business.

It is important to note that both the alienation of governing control at work

and the transfer of responsibility cannot in fact take place. A person can not

alienate their authority to a state or firm without a say in the governance, at

least if one believes in inalienable rights and democratic theory. At best a

person can choose to cooperate, which the legal system then pretends is an

actual alienation of authority and fulfillment of the rental contract. This is

precisely what our judicial system does with regard to human rentals today.

The transfer of responsibility for personal actions is clearly inalienable as

illustrated by the commission of a crime. The judicial system correctly traces

criminal responsibility back to all persons involved. It matters little if a

person is “hired” to commit a crime. Being contracted to provide services in a

crime does not shift responsibility and get a hired criminal off the hook.

However, responsibility cannot be transferred in the positive case either, that

of productive labor. In this case the legal system closes its eyes and pretends

that the employment contract actually transfers responsibility between parties.

It thus allows the transfer of profit resulting from labor to be appropriated

by another party not responsible for its creation.

Quotes

While rare, the description of the standard labor relationship as a human

rental is not new. Here’s what a few well known economists have said.

Paul Samuelson in Economics 1976 (10th edition).

One can even say that wages are the rentals paid for the use of a man’s

personal services for a day or a week or a year. This may seem a strange use of

terms, but on second thought, one recognizes that every agreement to hire labor

is for some limited period of time. By outright purchase, you might avoid ever

renting any kind of land. But in our society, labor is one of the few

productive factors that cannot legally be bought outright. Labor can only be

rented, and the wage rate is really a rental. [p. 569]

Here is the image of the relevant part of that page.

Samuelson's Economics, 10th ed., p. 569

Samuelson also points out:

Interestingly enough most of society’s economic income cannot be capitalized

into private property. Since slavery was abolished, human earning power is

forbidden by law to be capitalized. A man is not even free to sell himself: he

must rent himself at a wage. [p. 52, his emphasis]

And here is the direct image.

Samuelson's Economics, 10th ed., p. 52

The inability to capitalize labor is not strictly correct. The “marvel” of

modern finance is that labor is capitalized whenever businesses are sold for

more than their net asset value (for example a publicly traded firm whose

market value is greater than its net asset value). The value of a firm in

excess of its net asset value represents the capitalized value of the labor of

future employees. It is the prearranged theft of the profits of future workers.

A similar scheme in the past may have involved trading shares of a slave owning

firm, a deceptive way to deprive slaves of their inalienable rights by

packaging the transaction as the sale of a firm in a free market. It is an old

trick with continued application.

James Mill in Elements of Political Economy 1844.

The labourer, who receives wages, sells his labour for a day, a week, a month,

a year, as the case may be. The manufacturer, who pays these wages, buys the

labour, for the day, the year, or whatever period it may be. He is equally well

the owner of labour, with the manufacturer who operates with slaves. The only

difference is, in the mode of purchasing. The owner of the slave purchases, at

once, the whole of the labour, which the man can ever perform: he, who pays

wages, purchase only so much of a man’s labour as he can perform in a day, or

any other stipulated time. Being equally, however, the owner of the labour, so

purchased, as the owner of the slave is that of the slave, the produce, which

is the result of this labour, combined with his capital, is all equally his

own. In the state of society, in which we at present exist, it is in these

circumstance that almost all production is effected: the capitalist is the

owner of both instruments of production: and the whole of the product is his.

Fischer, Dornbusch, and Schmalensee in Economics 1988.

The commodity that is traded in the labor market is labor services, or hours of

labor. The corresponding price is the wage per hour. We can think of the wage

per hour as the price at which the firm rents the services of a worker, or the

rental rate for labor. We do not have asset prices in the labor market because

workers cannot be bought or sold in modern societies; they can only be rented.

(In a society with slavery, the asset price would be the price of a slave.) [p.

323]

Fischer, Dornbusch, and Schmalensee included a useful table.

Note that none of them, as well as most academics, can find anything wrong with

the rental of humans. As John Kenneth Galbraith said in The New Industrial

State 1967:

One of the small but rewarding vocations of a free society is the provision of

needed conclusions, properly supported by statistics and moral indignation, for

those in a position to pay.

A perceptive comment which certainly applies to the economic establishment, and

to which volumes of literature attest. Why question something as fundamental as

the validity of human rentals, when the foundation of the entire framework is

at stake.

As David Ellerman says

The “beauty” of an institutionalized fraud like the employment contract is that

there is no de facto transfer that fulfills the contract. The pseudotransfer of

labor (i.e., voluntary co-operation with the employer) has been accepted for

centuries by the legal authorities themselves as fulfilling the contract. The

“discovery” of the fraud thus requires extensive analysis to see that labor is

not de facto transferable after all. And any responsible scholar and respected

businessperson–being embedded in the institutions of the employment system–has

every incentive not to make that discovery.

The Great Debate

David Ellerman

The Great Debate between Capitalism and Socialism is at last over. The free

market and private property have decisively won. Does that mean the “end of

ideology” or the “end of history”? Can we rest assured that there are no

fundamental structural flaws in the western-style economy? Our legal system is

structured to forbid discrimination on the basis of race, but racism persists.

Is that the only type of social problem that remains—where the structure is

correct in principle but the implementation is flawed?

We shall argue that the current western-style economic system is fundamentally

and structurally flawed. The problems are not just in the implementation of

sound principles. Moreover, we shall argue that the system is flawed because it

violates the principles of the institutions that are usually associated with

capitalism. That is, it violates the basic principles of both private property

and democracy. From the conventional point of view, this will seem to be a

strange position. Isn’t capitalism usually identified with private property and

democracy? That identification has been based on the Great Capitalism-Socialism

Debate, on assuming that “the alternative” to capitalism is state ownership of

businesses and one-party dictatorships. But that debate is over, and

accordingly capitalism can now be evaluated in a new light.

Since “capitalism” is so often definitionally identified with a private

property market economy, we must give a more precise definition of “capitalism”

so that we are not just arguing about definitions. By “capitalism” we mean

production organized on the basis of the employer-employee relationship. We

shall also use “the employment system” or “employer-employee system” as more

accurate but less known names of the system based on the employer-employee

relation. The alternative is a private property market economy where everyone

is self-employed (individually or jointly) in their workplace. A firm where the

managers and workers are jointly working for themselves will be called a

“self-employment firm,” a “worker-owned firm” (where “worker” always includes

all who work in the business enterprise), or a “democratic firm” in contrast to

the conventional “capitalist firm” or “employment firm.” The basis question is

this—the employer-employee relation or universal self-employment in the

workplace?

We shall have more that one occasion to use a slavery analogy. Consider a

private property market economy where the workers were largely privately owned

slaves, like the American economy before the Civil War. Suppose the defenders

of such a system managed to restrict consideration of an alternative to a

system of state businesses with state or socially owned slaves. The “Great

Debate” would be between the “Athenian” model of privately owned slaves and the

“Spartian” model of publicly owned slaves. The Athenian model would most likely

be more efficient. Over the years, it would demonstrate its superior efficiency

while the Spartian model might eventually collapse under its own weight. Would

the victory of the Athenian model of private slave ownership signal the “end of

history”? Would the victory mean that the Athenian model contained no

structural flaws, only problems of implementing otherwise correct principles?

The Great Debate of our day has been similar except that the question has been

the voluntary private or public hiring (or renting) of workers instead of the

private or public ownership of workers. In spite of its political importance,

the public-private debate has been conceptually wrong-headed from the

beginning. The real question about slavery is not the public or private

ownership of slaves but whether the master-slave relationship should be allowed

(involuntarily or voluntarily) or should people always be self-owning (which

implies that the right of self-determination should be inalienable even with

consent). Today, the real question is not about the public or private

employment of workers (as it was in the capitalism-socialism debate). The

question is: should the hiring or renting of people be allowed at all or should

people always be self-employed in the their place of work?

Some would say that the universal self-employment system should be presented as

a variant of capitalism rather than an alternative. That may be; there is no

need to argue only about words. But there are conceptual and historical reasons

to use the word “capitalism” exclusively to represent the employer-employee

system so long as one is clear, precise, and explicit about that usage. When

people are self-employed in their firms, then the suppliers of capital are not

hiring the workers. Labor (in the sense of all the people, managers and

blue-collar workers, who work in the firm) is hiring capital. Since Labor would

then be the “residual claimant” (the party receiving the profits left from the

revenues after the costs are covered), it would be odd to call that arrangement

a variant of “capital-ism.”

In any case, the reader has been forewarned; “capitalism” herein refers to the

use of the employer-employee system. The alternative is a private property

market economy based on universal self-employment.

Intimations of Structural Flaws

The end of the capitalism/socialism debate also signals the triumph of

neo-classical economics over Marxian economics. Neo-classical economics now

reigns as a self-contained and virtually unchallenged scientific theory. How

could there be any deep-lying structural flaws in the capitalist (employment)

system without neo-classical economic theory discovering them? The answer is

that basic flaws in the paradigm have always been fairly clear but that

neo-classical economics has simply decided not to investigate them.

Take for example the simplest and most fundamental of insights in economics,

the mutual gains of voluntary trade between two or more parties. In the absence

of externalities that violate the rights of others, economics finds no reason

to prohibit a voluntary exchange between knowledgeable and consenting adults.

Yet no capitalist economy allows citizens to sell or buy their political votes.

Why not? There are certainly willing buyers and willing sellers so there would

be mutual gains from a voluntary exchange. It is easy to understand why

representatives are not allowed to sell their votes (since it would violate

their representative function). But why shouldn’t the ultimate primary citizens

be allowed to sell their votes?

The prohibition of vote selling is in direct contradiction with the simplest

recommendation of economic theory. Is the prohibition just an arcane practice

that should be removed in the interests of greater efficiency, or does it hint

at some deeper flaw in economic theory? What is the position of economics on

this conflict between received theory and the legal system? Does economics give

an uncontrived explanation of this prohibition as an “exception” to the

efficiency rule, or does economics recommend that citizens be allowed to sell

their votes? The reader is invited to inspect the economics texts of our day to

answer the question. We fear the reader will find little or no discussion of

vote selling. Economics tends to duck the issue.

Consider the voluntary contract to sell labor by the lifetime. The usual

employer-employee contract is a short-term contract to buy and sell labor. The

employer is hiring, renting, or employing the employee for some limited time

period. But just as one can rent or buy a car or an apartment, why can’t we

have the same choice with people? Buying a car is essentially buying all the

services the car can provide (like rental for the lifetime of the car) instead

of buying only a certain segment of services. Applying the same option to

workers, there could be a voluntary contract to “buy” a worker in the sense of

buying all the services (within the scope of the contract) the worker could

provide over his or her working lifetime. That would be a modern civilized form

of the old voluntary self-sale or self-enslavement contract. Yet such a

contract between knowledgeable and consenting adults is forbidden in all

capitalist economies.

Here again, does economic theory give any coherent account of the drastically

different treatment of short-term and long-term rental contracts (applied to

people)? Why is the long-term contract strictly forbidden when the short-term

contract is the foundation of the system? Do economists recommend consistently

with free market principles that lifetime labor contracts be allowed [like

Nozick 1974 and Philmore 1982], or do they give a coherent and uncontrived

explanation of this “exception”? The reader is again invited to consult the

economics books of our day, but we fear that economics again ducks the issue.

Or consider the voluntary collective contract for a people to give up and

transfer their right to govern themselves to an emperor or autocrat. In the

employment contract, the employees give up and transfer their right to manage

their activities within the scope of their employment to the employer or

“master” (the original legal name was “master-servant relation”). Why not allow

the same sort of collective contract in the political sphere? Indeed the

postulation of such a pactum subjectionis (pact of subjugation) was the

traditional sophisticated justification offered for nondemocratic governments

[e.g., Thomas Hobbes].

In the western political democracies, the right of political self-government is

considered to be inalienable (cannot be alienated even with consent) and is

vouchsafed in the political constitutions. If the analogous right was

considered inalienable in the workplace, then it would imply the adoption of

the system of universal self-employment. Collective self-employment in the firm

is the economic analogue of political self-government or democracy. Yet the

same societies consider it quite routine for the citizen-as-worker to alienate

that right in the workplace (the employer is not the representative or delegate

of the employees). Does economics give any coherent and uncontrived explanation

of how society can be partitioned into “spheres” [e.g., the political sphere

and the economic sphere] so the right to self-determination is inalienable in

one sphere while being routinely alienated in another sphere? Or does economics

consistently advocate that citizens be allowed the same latitude in “collective

bargaining” as workers? The reader is again invited to consult the texts of our

day to see whether or not economics avoids the issue.

Or consider the position of economics on the distinction between persons and

things. Economics recognizes no theoretically relevant distinction between the

actions of persons (namely, “labor”) and the services of things such as capital

goods and natural resources. Microeconomic models routinely do not even

recognize the distinction in their notation [e.g., in a production function

notation y = f(x1,...,xn)]; much less in the substance of the models. The

services of humans and the services of things are both causally efficacious;

both have a “marginal productivity” in the sense that production would decrease

if the services were withdrawn. Thus contemporary economics has dismissed as

misguided the earlier theoreticans who reserved a special place for the actions

of persons [e.g., in "the labor theory "].

Yet it is quite simple to differentiate human actions from the services of

things. Look at a court of law. The “tools” used in a crime are of course

causally efficacious. They have a “productivity”; otherwise there would be no

reason to use them in the commission of crimes. But the responsibility for the

crime is traced back through the tools to the human being who used them to

commit the crime. Only humans can be eligible for responsibility; not things.

The court of law attempts to insure that the legal responsibility for a crime

is imputed to the correct people, to the people who were de facto responsible

for the crime. No liability attaches to the tools, regardless of their

productivity. The people who commit crimes are to be made liable for the

negative fruits of their labor. This principle at the root of juridical

imputation is also at the root of private property. People should also have the

rights to the positive fruits of their labor. In this form, the principle is

called the “labor theory of property” and it is associated with John Locke, not

Karl Marx.

The “labor theory” is a standard topic in the history of economic thought, and

the question of “imputation” is part of the subject matter in the economic

theory of the firm. Yet the reader is invited to scan the entire corpus of

contemporary economics texts to find one which even mentions the basic legal

distinction between the actions of persons and the services of things–which

even mentions that only persons, never things, can be responsible for anything.

Responsibility seems to be the R-word which cannot be uttered (except perhaps

metaphorically). We have considered a number of areas where conventional

economics is directly at odds with the legal structure of the western

democracies. Modern legal systems

· prohibit vote-selling by citizens,

· prohibit voluntary self-sale contracts between adults,

· take basic political rights of self-determination to be inalienable,

· would not recognize any political pactum subjectionis, and

· impute responsibility only to persons (never to things regardless of their

“productivity”).

All these practices are in direct conflict with the most fundamental

recommendations of conventional economics. On the one hand, economics does not

advocate that these practices be changed to be consistent with economic theory

and, on the other hand, it does not give a coherent and uncontrived explanation

of why these practices should be considered as “exceptions.” In short,

economics tends to duck these basic issues. There have always been these

intimations of structural shortcomings, lacuna, and flaws in conventional

economics. Economics has only seemed to be coherent and complete theory because

it chooses to ignore the paradigm-threatening discrepancies between the theory

and the legal structure of the modern western democracies.

The Fundamental Myth of Ownership of the Firm

David Ellerman

We are presenting an analysis of economic organization quite different from the

perspective of the Great Debate between capitalism and socialism. The Great

Debate has focused on whether workers should be rented privately for profit or

should always be rented by the government and employed for the public good. The

view that people should not be rented at all was not a topic in the classic

capitalism/socialism debate.

We present an alternative analysis that juxtaposes employment in a private

capitalist or government-owned firm to membership in a democratic firm. There

are powerful barriers to this conceptual reconfiguration. There are fundamental

but flawed presuppositions shared by both sides in the classic

capitalism/socialism debate. Thus there has been little pressure to overthrow

those common assumptions. But it is only by moving beyond the shared myths of

the Great Debate that the ground can be cleared for a fresh start.

The Fundamental Myth is that the identity of the legal party undertaking a

given production opportunity is determined by a property right called

“ownership of the firm” or, in the Marxist tradition, “ownership of the means

of production.”

Both sides to the Great Debate shared the assumption that “firmhood” (the

identity of the firm) is determined by the “ownership of the firm.” The firm is

a “piece of property.” The difference of opinion was over who should own that

property. State socialists argued that only the government should own the

firms, while capitalists defended the private ownership of firms. Today, that

debate is replaced by the “privatization debate” [see Ellerman, Vahcic, and

Petrin, 1991] over how best to establish private ownership of the firms.

But firmhood is not determined by a property right; it is determined by the

pattern of contracts between factor suppliers. Being the firm is a contractual

role, not a property right.

Here again, there are many ways to misinterpret the argument. The assertion is

quite sensitive to the meaning of words and phrases such as “firm,” “company,”

“corporation,” “means of production,” “capital,” and so forth. The word “firm”

has a specific technical meaning in the assertion “There is no such property

right as the ownership of the firm.” The assertion would be nonsense if by

“firm” one meant “corporation” since clearly corporations are owned by their

shareholders.

A Corporation is Not Necessarily a Firm

Corporations are owned; that is no myth. But corporate capital can be hired out

just as labor and other factors can be hired in, so the corporation is not

necessarily the firm (i.e., the party undertaking production) even with respect

to its own plant and equipment. It is the pattern of those hiring contracts

that determines who is the firm.

Consider a production process for manufacturing widgets. The process is

currently being undertaken by a corporation, Widgets Unlimited, which owns the

land, factory building, and machinery. Finance is borrowed from a bank, raw

materials and subcomponents are purchased from suppliers, and labor services

are purchased from the employees. By the “firm” we mean the legal party

undertaking this widget production process. Widgets Unlimited is undoubtedly

the firm in the example. But why? Because of the ownership of the corporation

or because of the company’s contractual role of hiring (or already owning) the

requisite inputs to the widget production process?

The question is easily answered by considering a rearrangement or reversal of

the input contracts without any sale in Widgets Unlimited shares. Suppose the

workers (including managers) get together, borrow the money, lease the

production facilities for Widgets Unlimited, purchase the other inputs from the

suppliers, and undertake the widget production process. Then the firm (= widget

producer) changed hands from Widgets Unlimited to the new legal party of the

associated workers without any sale of corporate shares. The Widgets Unlimited

still own the same shares, but the corporation is no longer the firm (= the

widget producer). It is a factor supplier to the firm. Thus the ownership of

the corporation Widgets Unlimited was not the “ownership of the firm.”

Firmhood as a Contractual Role, Not a Property Right

There is no “ownership of the firm.” Being the firm (e.g., the widget producer)

is a contractual role, not a property right. What is the contractual role that

is equivalent to firmhood? It is being the party that has hired or already

owned all the factor services used up in production so that party bears those

costs and thus has the defensible claim on any appropriable products (e.g.,

widgets) produced in the process. That contractual role is called the role of

the hiring party (since it hires the other factors) or the residual claimant

(since it nets the value of the appropriable products minus the costs of the

inputs).

In a private property free enterprise market economy, firmhood is determined by

the outcome of the contest or conflict–the “hiring conflict”–over who hires

what or whom in the factor markets. In abstract terms, if Capital (= the

capital-owners) hires Labor (= the workers including the managers), then

Capital is the firm. If Labor hires capital, then Labor is the firm. A contract

reversal between Capital and Labor reverses who is the firm. There is no need

for Labor to “buy the firm”; it suffices to rent the capital. And if some third

party, an entrepreneur or the state, hires both the capital and the workers,

that party is the firm.

The winner of the hiring conflict is the hiring party, the party which becomes

the firm. If not already a corporation, the hiring party will organize the

“spoils of victory” by forming a corporation which it owns. For example, if the

widget workers successfully hired the other factors to undertake production,

they would legally encapsulate their operation in a corporation of some type.

If the workers lost the hiring conflict and remained employees, they would most

likely not form a corporation. In a free market economy, one tends to find a

one-to-one correlation between being the firm and ownership of a corporation

just as there is a perfect correlation between winning an Olympic event and

owning an Olympic gold medal. But it would be a mistake to think that someone

won the event because they own a gold medal. The causality was the reverse.

Examples of Contract Reversals

A major oil company might own the facilities of a gas station but not operate

the station as a business. The gas station facilities would be leased to an

individual who would run the station as an independent operator. In other

cases, an oil corporation might operate the station by hiring in the people to

run it. Following the Mideastern oil crisis of a few years back, gas prices

escalated and the profit potential of gas station operation increased. Some

major oil companies which had previously leased out their stations decided to

reverse the contracts and hire in the labor. The independent operators were

notified that their leases would not be renewed when they expired. However, the

oil company would be happy to hire them as employees to continue running the

gas stations.

One independent operator in the Southwest staged a protest that made national

television news. He barricaded himself into the station with a shotgun and

issued statements to the press. He said the oil company was “stealing my

business.” It couldn’t “just hire me”; it had to “buy me out.” The poor fellow

had bought the myth; he thought he “owned the firm.” In fact, he only had the

contractual role of being the firm, and more powerful market participants could

change that contractual role when they pleased. The oil company correctly

pointed out it didn’t need to “buy the firm” to take over the operation of the

station; it only needed to hire in the labor.

In another example, the owner of a department store chain decided to endow his

employees with “ownership.” But his shares were already locked into trusts for

his family and heirs. Thus he set up another corporation which was 100%

employee owned through an employee share ownership plan (ESOP). Then he leased

all the fixed assets of his company and sold the inventory to the new employee

owned company. All the employees switched over to the new corporation which

also acquired the contractual right to do business under the original

tradename. By these contractual rearrangements, the firm changed hands but the

original corporation didn’t. The shares were still in the family trusts. The

original corporation changed from being the firm (= the department store

operation) to being a factor supplier to the firm.

Yet another example is the leasing movement in the Soviet Union and some other

socialist countries [see Ellerman 1990]. Over a thousand state sector

enterprises in the USSR have leased their fixed assets to be operated by the

collectivity of workers from the original enterprise. The new legal entity with

the workers as its members takes over the role of being the residual claimant

(i.e., is the firm) even though the state still holds the ideological fetish of

the “ownership of the means of production.” The contract reversals in both

capitalist and socialist countries reveal the falsity of the common assumption

that “being the firm” is part and parcel of the ownership of the means of

production.

The Role of Bargaining Power

The argument that firmhood is determined by the contractual role does not

assume that factor suppliers actually have enough market power to change the

direction of the contracts. The argument is about the structure of the legal

institutions. It makes no assumption whatever about the respective bargaining

power of the market participants. That is entirely another question.

Typically large accumulations of capital have the market power to hire in labor

whenever desired. Democratic worker ownership within capitalist society is

often restricted to the nooks, crannies, and backwaters of the economy. The

bargaining power of the capital-owning class includes the social power of

having successfully indoctrinated workers and the workers’ trade union

representatives that “their role” is to hire out labor, not to hire in capital

and go into business. Thus the capital owners are the firm, but “being the

firm” is not an attribute of capital. The accumulation of capital and the

social conditioning give capital owners the power to win the hiring conflict

(which Labor rarely contests) by hiring in labor and becoming the firm.

Having a position of market power is not itself a property right. Parties often

lose positions of market dominance. This is the free play of market forces, not

a violation or confiscation of property rights. Capital’s actual property

rights (as opposed to imagined property rights) would not be violated if the

capital owners lost the market power to hire in the other factors, and thus

they had to hire out their capital in order to secure an economic return.

We are now in a position to appreciate the powerful ideological role of the

ownership-of-the-firm myth. Capital owners quite naturally do not want their

dominant social role as being the firms to be perceived as the result of mere

market power which could well be otherwise without violating their “property

rights.” They are accustomed to their contractual role as the firm so, like the

dominant classes of the past, they see it as their right, their “ownership of

the firm.” Capital is the firm because Capital “owns the firm.” Any change in

Capital’s role as the firm would violate “sacred private property rights.”

The ownership-of-the-firm myth has a fundamental role in capitalist ideology;

it transfigures a mere contractual role into a “sacred property right.” That,

in turn, allows a most miraculous transformation of capitalism into the

defender of the principles of private property. The natural basis for private

property appropriation is labor. Yet the employment system is founded on

denying people the right to the fruits of their labor by virtue of the

employment contract. The ownership-of-the-firm myth allows the system founded

on denying the labor basis for private property appropriation to present itself

as the embodiment of private property.

The Symbiotic Role of Marxism

Since the firm-ownership myth can be exposed by a simple contract reversal

argument, how has it been such a stable part of capitalist ideology? As if the

social power of Capital was insufficient to vouchsafe the myth, Marx vastly

increased its credibility by giving his imprimatur. In feudal times, the

governance of people living on land was taken has an attribute of the ownership

of that land. The landlord was Lord of the land. As Gierke put it, “Rulership

and Ownership were blent” [1958, 88]. Marx mistakenly carried over that idea to

capital. The command over the production process was taken as part of the

bundle of capital ownership rights.

It is not because he is a leader of industry that a man is a capitalist; on the

contrary, he is a leader of industry because he is a capitalist. The leadership

of industry is an attribute of capital, just as in feudal times the functions

of general and judge were attributes of landed property. [Marx 1977, 450-451]

Marx bought the myth.

Marx’s “ownership of the means of production,” indeed Marx’s notion of

“capital,” involves the mythical “ownership of the firm.” By “capital” Marx did

not simply mean financial or physical capital goods; he meant those goods used

by wage labor in capitalist production. Outside of capitalist production,

“capital” becomes just the “means of labor.”

In short,

Marx’s “capital” = “means of labor” + “contractual role of being the firm.”

If one wishes to use the word “capital” in that sense, then not all of what is

included in “capital” can be owned. There is the ownership of the means of

labor (financial and physical capital goods directly owned or indirectly owned

through the legal shell of a corporation), but there is no “ownership” of the

residual claimant’s contractual role of being the firm.

By agreeing that there is the ownership of “capital” (which includes being the

firm), Marx swallowed the Fundamental Myth of capitalist ideology even though

he took great pride and joy in exposing other aspects of capitalist mythology.

It should be carefully noted that this analysis of the “ownership of the firm”

is entirely descriptive; it is not normative. The point is not that the

“ownership of the firm” should not exist; the point is that it does not exist.

Marx accepted that the “private ownership of the firm” does exist as a part of

the capitalist system, and he argued that it should not exist.

By accepting the Fundamental Myth as a point of fact, Marxism becomes the

perfect symbiotic partner and the ideal foil for capitalist ideology. Then the

battle could rage without touching on the shared but mistaken assumption about

the nature of the capitalist system. Like Voltaire’s god, if Marxism didn’t

exist, capitalism would have to invent something like it as an ideological

foil. Autocrats find real or imagined bugbears to justify their power, and the

same psychological dynamic operates in the realm of ideology.

Marxism, which in governments means Marxist-Leninism, has been the perfect foil

for capitalism for other reasons as well. Perhaps another slavery analogy will

illustrate the point. The present-day capitalism/socialism debate is analogous

to a debate over slavery where the alternative proposed by the “abolitionists”

was the public ownership of the slaves. That would be a debate with real stakes

since the nationalization of the slave plantations would break the social power

of the private slave-owners. But this “Great Debate” over the private or public

ownership of the slaves would nevertheless miss the point; the real alternative

is for the slaves to be free and self-determining. Similarly, the current Great

Debate over whether workers should be privately or publicly rented misses the

point; the real alternative is for people to be jointly working for themselves

in democratic firms.

The Firm Ownership Myth in Democratic Theory

The argument for democratic worker ownership rests on two legs, democratic

theory and property theory. Our purpose here is to foreshadow how the firm

ownership myth has previously distorted both democratic theory and property

theory by shutting off certain avenues of investigation and shunting the debate

into irrelevant detours. The idea of applying democratic principles to the

economic enterprise is hardly a new idea. What principles behind the capitalist

firm must be changed in order to apply democratic principles? Where is the

conflict? If “rulership and ownership are blent” in the capitalist firm, then

replacing capitalist rulership with workplace democracy entails eliminating the

capitalist “ownership of the firm.” Thus democracy is perceived to be at war

with property rights in the capitalist firm.

Most modern political theorists ignore the question of applying democratic

principles to the firm. They are intellectually placated by being told that the

firm is “private” whereas democracy is “public.” The inalienable human rights

at the foundation of our political democracy do not reach the “private sphere.”

Those political theoris ts who take democratic principles seriously enough to

apply them to the firm still tend to misinterpret property rights by accepting

the firm ownership myth.

The owner of capital resources, or the agent who acts on behalf of the owner or

a number of associated owners, controls and determines, in virtue of such

ownership, the process of production and the action of the workers who are

engaged in the process. In its unqualified form, capitalistic organization is a

form of autocracy or absolutism. In practice it is never unqualified. . . We

may call it … a limited absolutism, which naturally seeks to escape its limits,

and on which (so long as it exists) combinations of workers will as naturally

seek to impose new limits. [Barker 1967, 105-106, emphasis added]

The preeminent democratic theorist, Robert Dahl, presented essentially this

analysis of democracy in conflict with the “ownership of the enterprise” in his

otherwise excellent book Preface to Economic Democracy [1985]. In this

conflict, Dahl holds that democratic principles should take precedence over

property rights, and thus he develops the case for economic democracy.

That analysis takes a contractual role as a property right. The firm ownership

myth includes the idea that the management rights (rulership) over the people

using capital goods are part of the ownership of the capital. But those

positive control rights over people are not included in capital ownership. The

negative control rights to exclude other people from using the property are

part of the property rights so we must digress on the distinction between

positive and negative control rights.

Another person may not use one’s property without the owner’s consent. Thus

ownership does give a right of negative control over other people’s actions,

the right to withhold consent and thus to specify how they will not use the

property. The owner can decide what others will not do with his or her

property. But that is quite different from the right to control what others

will do. They may have many other options not involving that property, and

those property rights give the owner no control rights over which of those

options the others will choose.

The right to tell others what not to do with one’s property is a negative

control right. The right to tell others what to do is a positive control or

management right. The negative control right over other’s activities is a part

of property ownership, but the positive control right to tell others what to do

is not a part of property ownership. How does one acquire the positive control

right over another person’s behavior–the right to tell them what to do? The

employment contract. Hire them.

If labor and land are to be mixed in productive work, there is no pre-existing

property right which specifies whether the labor-owner or land-owner directly

controls the process. Absent any contracts or agreements between the two

parties, the land-owner’s negative control rights can make the worker into a

trespasser if he tries to use the land without consent. But symmetrically, the

worker can make the land-owner into a kidnapper if he tries to force the worker

to work the fields without consent. Thus when the labor and land are mixed,

there must be a hiring contract one way or the other to determine positive

control of the process. If the worker rents the land, he manages the work

process. If the land-owner hires the worker, the land-owner manages the work.

In either case, it is the hiring party which controls the use of the

commodities in the production process. In neither case does the prior ownership

of one of the factors by itself give management rights over the production

process mixing the factors.

Or consider a factory owner who issues orders to the people working in the

factory. What is the legal basis for his positive control rights over the

workers’ actions? Absent an employment contract, the ownership of the factory

gives the factory owner the right to make the workers into trespassers by

denying consent. It does not automatically make the workers into servants or

employees; that requires the employment contract. The positive control rights

over the workers are not an attribute of capital; the employer buys those

rights in the employment contract.

Here again, many social theorists are mislead by hastily evoking that universal

explanatory factor, “power relations.” The ownership of the factory may well

give the factory owner the bargaining power to hire in labor. The sequence is:

factory ownership => bargaining power => positive control via employment

contract.

Some theorists collapse the sequence and infer that factory ownership is

“tantamount” to owning the positive control rights.

Returning to democratic theory, we find no structural conflict between

democratic principles and the negative control rights which are part of private

property ownership. In an economy run entirely on democratic principles,

consent would of course be required as usual to use other people’s property.

The alleged conflict between democracy and property is really a conflict

between democracy and the employment relationship.

Democracy is at war with the renting of human beings, not with private

property. In the mythical picture painted by capitalist ideology, private

property rights are the center of the capitalist universe. Our analysis shows

that the actual center of the capitalist universe is the employment contract.

The economic application of democratic theory (and the labor theory of

property) presented here is based on the Copernican paradigm shift to seeing

capitalism as revolving around the employment contract instead of around the

“private ownership of the means of production.”

The Firm Ownership Myth in Property Theory

The Fundamental Myth also distorted thought about property rights. It

influenced not only the “answers” but the way in which questions were posed, or

rather, ill-posed.

The basic property question about production is about the ownership of the

product.

How is it that one legal party rather than another owns the outputs of a

production process?

Where the firm ownership myth holds sway, the answer is simple; the “owner of

the firm” owns the product. The product ownership rights are part of the

ownership of the firm. That answer detours inquiry off in the direction of “How

is the ownership of the firm acquired?” And the standard answer is that the

owners bought it, inherited it, or started the firm from scratch. Even firms

which were bought or inherited must have been previously created. And thus all

questions about property ownership in products or firms are traced back to the

initial creation of property rights.

The creation or initiation of a property right is called the appropriation of

the property. Philosophical treatments of appropriation (e.g., John Locke’s

treatment) are usually set in some rather mythical original state of nature

when property was first privately appropriated from the common patrimony of

Nature. There is also the symmetrical matter of terminating property rights,

but that is ignored in the philosophical treatments which tend to be

non-technical and elementary.

That is the conventional story which begins by holding that the ownership of

the produced outputs is part of the “ownership of the firm.” But the “ownership

of the firm” is a myth. In the previous example, the widgets produced by the

same workers using the same machines and raw materials would be owned by

another party if there had been a prior rearrangement of the hiring contracts.

The product is owned by the party with the contractual role of the hiring

party. So how did the hiring party get the ownership of the outputs? Did that

party buy the outputs from a prior owner? No, there was no previous owner of

the outputs. The hiring party is the first owner. In other words, the hiring

party appropriated the outputs.

Thus the recognition that there is no “ownership of the firm” leads to the

recognition that normal day-to-day production is a site of appropriation. That

recognition changes the debate. It means traditional theories of appropriation

such as the labor theory of property can be applied to normal production, not

just to some original Lockean state of nature.

Why don’t the workers have the labor claim on the produced outputs (as well as

the symmetrical claim against them for the used-up inputs)? The firm ownership

myth is only the first line of defense. The real defense is the employment

contract which puts the employees in a non-responsible position of a hired

factor “employed” by the employer. But the labor theory of property is the

property theoretic expression of the usual juridical canon of assigning legal

responsibility in accordance with de facto responsibility. We shall see in an

intuitive example of the criminous employee how de facto responsibility is not

transferable and how the law only pretends that labor has been alienated (until

a crime has been committed). Thus the capitalist appropriation of the product

(including the liabilities for the used-up inputs) is based not on the “private

ownership of the means of production” but upon the legal validation of an

inherently invalid contract which pretends that human actions are transferable

like the services of things.

The discussion here is a prelude to show how the recognition that the

“ownership of the firm” is a myth opened up the intellectual space for the

analysis of appropriation.

Summary

There is a “fundamental myth” accepted by both side in the Great Debate between

capitalism and socialism. The myth can be crudely stated as the belief that

“being the firm” is part of the bundle of property rights referred to as

“ownership of the means of production.” Any legal party that operates as a

conventional capitalist firm actually plays two distinct roles:

· the capital-owner role of owning the means of production (the capital assets

such as the equipment and plant) used in the production process; and

· the residual claimant role of bearing the costs of the inputs used up in the

production process (e.g., the material inputs, the labor costs, and used-up

services of the capital assets) and owning the producing outputs

The fundamental myth can now be stated in more precise terms as the myth that

the residual claimant’s role is part of the property rights owned in the

capital-owner’s role, i.e., part of the ownership of the means of production.

It is simple to show that the two roles of residual claimant and capital-owner

can be separated without changing the ownership of the means of production.

Rent out the capital assets. If the means of production such as the plant and

equipment are leased out to another legal party, then the leasor retains the

ownership of the means of production (the capital-owner role) but the leasee

renting the assets would then have the residual claimant’s role for the

production process using those capital assets. The leasee would then bear the

costs of the used-up capital services (which are paid for in the lease

payments) and the other input costs, and that part would own the produced

outputs. Thus the residual claimant’s role is not part of the ownership of the

means of production.

This “rent out the capital” argument is very easy to understand. But it is

astonishing how difficult the argument is to understand when the capital-owner

is a corporation. If an individual owns a machine, a “widget-maker,” then that

ownership is independent of the residual claimant’s role in production using

the widget-maker. The capital owner could hire in the workers to operate the

widget-maker and to produce widgets–or the widget-maker could be hired out to

some other party to produce widgets.

Now suppose the same individual incorporates a company and issues all the stock

to himself in return for the widgetmaker. Instead of directly owning the

widget-maker, he is the sole owner of a corporation that owns the widgetmaker.

Clearly this legal repackaging changes nothing in the argument about separating

capital ownership and residual claimancy. The corporation has the

capital-owner’s role and–depending on the direction of the hiring contracts–may

or may not have the residual claimant’s role in the production process using

the widget-maker. The corporation (instead of the individual) could hire in

workers to use the widget-maker to manufacture widgets, or the corporation

could lease out the widget-maker to some other party. The process of

incorporation does not miraculously trans-substantiate the ownership of a

capital asset into the ownership of the (net) products produced using the

capital asset.

The residual claimant’s role is a contractual role, not a property right. The

identity of the “firm” (in the sense of the residual claimant) is determined by

who hires what or whom in the markets for inputs. The “firm” is the legal party

which hires or already owns all the inputs to be consumed in production and

which bears those costs as the inputs are used up. Another party could take

over that contractual role through contract reversals (e.g., Labor hiring

capital) without having to “buy the firm.”

Traditional democratic theory and property theory have both been distorted by

the uncritical acceptance of the fundamental myth that residual claimancy was a

property right. There is in fact no structural conflict between private

property rights in capital and democratic principles. The conflict is between

the employment contract and democratic principles.

The Labor Theory of Property

Is Labor Peculiar?

David Ellerman

It is remarkable that the human science of “Economics” has not been able to

find or recognize any fundamental difference between the actions of human

beings (i.e., “labor”) and the services of things. Attempts by economists to

recognize the “peculiarities” of labor have been noticeably barren. For

instance, Alfred Marshall [1920, Chapter IV and V of Bk. VI] noted a number of

peculiarities:

1. workers may not be bought and sold; only rented or hired,

2. the seller must deliver the service himself,

3. labor is perishable,

4. labor-owners are often at a bargaining disadvantage, and

5. specialized labor requires long preparation time.

Professor Samuelson has also recognized the first peculiarity.

Since slavery was abolished, human earning power is forbidden by law to be

capitalized. A man is not even free to sell himself; he must rent himself at a

wage. [1976, 52 (emphasis in the original)]

Instead of being a characteristic of labor itself, Marshall and Samuelson only

give an observation about present-day legal institutions; it did not hold a

century and a quarter ago [see Philmore 1982]. Neither Marshall nor Samuelson

offer any basic institution-free differentiation of labor from machine services

which would account for why the services of a person may not (now) be sold all

at once. Quite to the contrary, the (first) “fundamental theorem of welfare

economics,” the theorem that a competitive equilibrium is allocatively

efficient (“Pareto optimal”), must assume away the first peculiarity by

presupposing that labor can be sold all at once. Complete future markets must

be assumed for all commodities to yield the optimality of competitive

equilibrium, and “labor is a commodity.”

Now it is time to state the conditions under which private property and free

contract will lead to an optimal allocation of resources…. The institution of

private property and free contract as we know it is modified to permit

individuals to sell or mortgage their persons in return for present and/or

future benefits. [Christ 1975, 334; quoted in Philmore 1982, 52].

Far from providing any analysis or rationale for Marshall’s first peculiarity

of labor, modern economics bases one of its proudest achievements (“A

competitive equilibrium is allocatively efficient”) on the assumption that the

perfectly competitive capitalist model incorporates what is essentially a

voluntary contractual form of slavery [see Philmore 1982].

The second peculiarity of labor, that the seller must personally deliver the

services, has no profound import. The employee plays two roles: the owner of

the entity being hired out, and the entity which is hired out. Thus the

services of the entity are the services of the owner of the entity. Marshall

notes how this peculiarity makes the laborowner particularly concerned with the

conditions under which the labor is employed. Moreover, the mobility of labor

is thereby as limited as the mobility of the laborer. But neither of these

consequences is of great importance. In addition, this peculiarity does not

even hold when there is a resale market for labor as in the ancient practice of

laborgang contracting–which in modern times is called “employee leasing.” The

ultimate employer contracts not with the workers but with the intermediate

agency or contractor who, in turn, hires the workers. The contractor selling

the labor to the employer does not personally deliver the services.

The third, fourth, and fifth “peculiarities,”

that labor is perishable,

that labor-owners are often at a bargaining dis advantage, and

that specialized labor requires long preparation time,

are not really unique to labor at all (as Marshall even indicates).

The inability of capitalist economics to recognize any unique and relevant

characteristic of labor is an ideological blind-spot based on the desire to

theoretically reflect the symmetrical fact that both labor services and the

services of land and capital are salable commodities in the employment system.

Any fundamental differentiation of labor from the other factor services would

threaten that symmetry.

Radical economists have also attempted to find a unique and relevant

characteristic of labor (“Only labor is creative”) that would differentiate it

from the other factor services. These attempts have not been particularly

fruitful.

Marx attached great importance to his “discovery” of the distinction between

labor power and labor time. Yet that distinction is not even unique to labor.

When one rents a car for a day, one buys the right to use the car (“car power”)

within certain limits for the day. The actual services extracted from the car

are another matter. The car could be left in a parking lot, or driven

continuously at high speeds. To prevent being “exploited” by heavy users of

“car time,” car rental companies typically charge not just a flat day rate but

have also a “piece-rate” based on the intensity of use as measured by mileage.

Marx touched on deeper themes when he differentiated human labor from the

services of the lower animals (and things) in his description of the labor

process.

We presuppose labour in a form in which it is an exclusively human

characteristic. A spider conducts operations which resemble those of the

weaver, and a bee would put many a human architect to shame by the construction

of its honeycomb cells. But what distinguishes the worst architect from the

best of bees is that the architect builds the cell in his mind before he

constructs it in wax. At the end of every labour process, a result emerges

which had already been conceived by the worker at the beginning, hence already

existed ideally. [Marx 1977, 283-284]

This conscious directedness and purposefulness of human action is part of what

is now called the “intentionality” of human action [see Searle 1983]. This

characterization does has significant import, but Marx failed to connect

intentionality to his labor theory of value and exploitation (or even to his

labor-power/labor-time distinction). This is in part because Marx tried to

develop a labor theory of value as opposed to a labor theory of property.

Other radical political economists of Marx’s day such as Pierre-Joseph

Proudhon, William Thompson, and Thomas Hodgskin were less successful at

developing a theoretical superstructure. But they did move in the right

direction by trying to develop the labor theory of property as expressed in the

claim of “Labour’s Right to the Whole Product” [see Hodgskin 1832 or Menger

(Anton) 1899].

Only Labor is Responsible

If we move from the artificially delimited field of “Economics” into the

adjacent field of Law and Jurisprudence, then it is easy to recognize a

fundamental and unique characteristic of labor. Only labor can be de facto

responsible. The responsibility for events may not be imputed or charged

against non-persons or things. The instruments of labor and the means of

production can only serve as conductors of responsibility, never as the source.

An instrument of labour is a thing, or a complex of things, which the worker

interposes between himself and the object of his labour and which serves as a

conductor, directing his activity onto that object. He makes use of the

mechanical, physical and chemical properties of some substances in order to set

them to work on other substances as instruments of his power, and in accordance

with his purposes. [Marx 1977, 285]

Marx did not explicitly use the concept of responsibility or cognate notions

such as intentionality. After Marx died, the genetic code of Marxism was fixed.

Any later attempt to introduce these notions was heresy. Moreover, these

notions would not supply an apologia for state ownership so they were of little

use to Official Marxism.

Nevertheless, while Marx did not use the word “responsibility,” he clearly

describes the labor process as involving people as the uniquely responsible

agents acting through things as mere conductors of responsibility. The

responsibility for the results is imputed back through the instruments to the

human agents using the instruments. Regardless of the “productivity” of the

burglary tools (in the sense of causal efficacy), the responsibility for the

burglary is imputed back through the tools solely to the burglar.

The human actor has the role of the “prime mover” without being a first cause.

Clear thinking in jurisprudence requires differentiating between responsibility

and causality.

If we say that a definite consequence is imputed to a definite condition, for

instance, a reward to a merit, or a punishment to a delict, the condition, that

is to say the human behavior which constitutes the merit or the delict, is the

end point of imputation. But there is no such thing as an end point of

causality. The assumption of a first cause, a prima causa, which is the

analogon to the end point of imputation, is incompatible with the idea of

causality, at least with the idea of causality implied in laws of classical

physics. The idea of a first cause, too, is a relic of that state of thinking

in which the principle of causality was not yet emancipated from that of

imputation. [Kelsen 1985, 365]

The natural sciences take no note of responsibility. The notion of

responsibility (as opposed to causality) is not a concept of physics and

engineering. The difference between the responsible actions of persons and the

nonresponsible services of things would not be revealed by a simple engineering

description of the causal consequences of the actions/services. Therefore when

economists choose to restrict their description of the production process to an

engineering production function, they are implicitly or explicitly deciding to

ignore the difference between the actions of persons and the services of things

[see Mirowski 1989 for the use of physics as a model for the human sciences].

The Juridical Principle of Imputation

The pre-Marxian classical laborists (“Ricardian socialists”) such as Proudhon,

Thompson, and Hodgskin tried to develop “the labor theory” as the labor theory

of property. The most famous slogan of these classical laborists was “Labour’s

Claim to the Whole Product.” This claim was hobbled by their failure to clearly

include the negative product in their concept of the “whole product.” This

allowed the orthodox caricature, “all the GNP would go to labor and none to

property” [Samuelson 1976, 626], as if there were no liabilities for the

used-up inputs. If Labor appropriated the whole product, that would include

appropriating the liabilities for the property used up in the production

process. Present Labor would have to pay Property (e.g., past Labor) to satisfy

those liabilities.

The classical laborists’ development of the labor theory of property was also

hindered by their failure to interpret the theory in terms of the juridical

norm of legal imputation in accordance with (de facto) responsibility. A person

or group of people are said to be de facto or factually responsible for a

certain result if it was the purposeful result of their intentional (joint)

actions. The assignment of de jure or legal responsibility is called

“imputation.” The basic juridical principle of imputation is that de jure or

legal responsibility is to be imputed in accordance with de facto or factual

responsibility. For example, the legal responsibility for a civil or criminal

wrong should be assigned to the person or persons who committed the act, i.e.,

to the de facto responsible party. Ronald Dworkin notes that this is

a principle about natural responsibility, and so, as a guide for adjudication,

unites adjudication and private morality and permits the claim that a decision

in a hard case, assigning responsibility to some party, simply recognizes that

party’s moral responsibility. [Dworkin 1980, 589]

In the context of assigning property rights and obligations, the juridical

principle of imputation is expressed as the labor theory of property which

holds that people should appropriate the (positive and negative) fruits of

their labor. Since, in the economic context, intentional human actions are

called “labor”, we can express the equivalence as:

The Juridical Principle of Imputation: People should have the legal

responsibility for the positive and negative results of their intentional

actions.

The Labor Theory of Property: People should legally appropriate the positive

and negative fruits of their labor.

In other words, the juridical principle of imputation is the labor theory of

property applied in the context of civil and criminal trials, and the labor

theory of property is the juridical principle applied in the context of

property appropriation.

Some individuals, such as infants or the insane, are not capable of de facto

responsible actions.

The statement that an individual is zurechnungfähig (“responsible”) means that

a sanction can be inflicted upon him if he commits a delict. The statement that

an individual is unzurechnungsfähig (“irresponsible”)– because, for instance,

he is a child or insane–means that a sanction cannot be inflicted upon him if

he commits a delict. … The idea of imputation (Zurechnung) as the specific

connection of the delict with the sanction is implied in the juristic judgment

that an individual is, or is not, legally responsible (zurechnungsfähig) for

his behavior. [Kelsen 1985, 364]

Regardless of their causal efficacy, things are, a fortiori,

unzurechnungsfähig.

De facto responsibility is not a normative notion; it is a descriptive factual

notion. The juridical principle of imputation is a normative principle which

states that legal or de jure responsibility should be assigned in accordance

with de facto responsibility. In the jury system, the jury is assigned the

factual question of “officially” determining whether or not the accused was de

facto responsible for the deed as charged. If “Guilty” then legal

responsibility is imputed accordingly.

Economics is always on “jury duty” to determine “the facts” about human

activities. These are not value judgments (where social scientists have no

particular expertise). The economist-as-juror is only required to make factual

descriptive judgments about de facto responsibility. In this chapter we are not

concerned with the normative principle of juridical imputation (i.e., the labor

theory of property applied in the courtroom), only the descriptive question of

responsibility. The normative and descriptive questions should be kept

conceptually distinct. That separation is difficult since, given the juridical

principle, de facto responsibility implies de jure responsibility.

In a given productive enterprise, the descriptive question asks what set of

people are de facto responsible for producing the product by using up the

various inputs? The economist-as-juror faces that question. The marginal

productivity of tools (machine tools or burglary tools) is not relevant to this

factual question of responsibility either inside or outside the courtroom. Only

human actions can be responsible; the services provided by things cannot be

responsible (no matter how causally efficacious). The original question

includes the question of who is responsible for using up those casually

efficacious or productive services of the tools .

The question of de facto responsibility, whether posed in a courtroom or

outside, presupposes the understanding that persons act and things don’t. Yet

it is precisely the presupposition that is “overlooked” in economic theory

which treats both the services of human beings and the services of capital and

land symmetrically as “input services.” Economists choose to limit their

description of the human activity of production to an engineering description

of the causally efficacy of the various types of input services. The unique

responsible agency of human activities is not acknowledged.

Contract

What is the Employer-Employee Relationship?

David Ellerman

Since we contend that the whole capitalism/socialism debate has been

wrong-headed, it is incumbent on us to answer the questions:

(1) what is the root problem in both capitalism and socialism, and

(2) how would the third alternative variously called economic democracy,

democratic worker ownership, or universal self-employment solve that problem?

The problem is the employer-employee relationship itself. Both capitalism and

socialism (as public enterprise capitalism) have assumed that basic

relationship and have debated whether workers should all be employed by the

government for “the Public Good” or whether they could also be privately

employed “for private greed.” Since the employment relation is so pivotal for

the negative appraisal of both capitalism and socialism, this chapter gives a

preliminary analysis of the employment relation.

The basic normative distinction is between:

(1) the democratic worker-owned firm (or self-employment firm) where labor

hires capital and the workers are jointly working for themselves, and

(2) the employment firm where capital hires labor using the employer-employee

relationship and where the equity capital can be privately owned (including

employee-owned) or publicly owned by the government.

The difference is the hiring relationship, capital hiring labor or labor hiring

capital. Capitalism is capital-ist not because it is private enterprise or free

enterprise, but because capital hires labor rather than vice-versa. Thus the

quintessential capital-ist aspect of our economy is neither private property

nor free markets but is that legal relationship wherein capital hires labor,

namely the employer-employee relationship. There is astonishing false

consciousness concerning the employment relationship in our society. This can

be illustrated by an experiment conducted with beginning Economics students.

First the students are told about the system of chattel slavery where workers

are bought and sold as movable property. But just as a house or a car can be

bought and sold, so one can also rent a house or car. Now instead of buying

workers as in a slavery system, suppose we consider a system of renting

workers. The students are asked if anyone knows an economic system based on the

renting of workers. There is usually a puzzled silence. A Black student points

out that during slack times, plantation slaves were rented out to work as

stevedores, as hands in factories (for example, turpentine or sugar mills), or

as common laborers. The Professor agrees that this happened but notes that it

was the exception rather than the rule. We need an example of a whole economic

system based on renting people. After another pause, some students offer,

“Well, what about feudalism?” The Professor responds that feudalism was a

system of indirect ownership of workers. Instead of being owned as chattel or

movable property, serfs had the security of being attached to the landed estate

which was then owned as real property. Thus we still need an example of a

system of renting people. After more embarrassed silence and shuffling feet,

finally a student, by the process of elimination if by no other logic, offers

the answer: “Well, isn’t that sort of like what we have now?”

Yes, the system of renting people is our system, the employer-employee system.

Of course, we do not say people are rented; we say people are “hired.” The

students would have had no difficulty thinking of an economic system where

workers are hired. The difference a word makes! When applied to things rather

than persons, the words “rent” and “hire” are synonyms. One could say either

“rent a car” or “hire a car” with the only difference being that Americans

favor “rent a car” while the British will tend to “hire a car.” But American

and British usage agrees that when people are rented, one says “people are

hired.”

From an abstract economic-legal viewpoint, the employer-employee relation is

the rental relation applied to persons. What do you buy when you rent

something? You buy its services, the right to employ or use the entity within

certain limits for a given time period. In terms of the stock-flow distinction

in economics, to rent the stock is to buy a flow of services from the stock.

When one rents an apartment or a car, one buys not the apartment or car itself

but some of its services. If one rents a car for three days, one buys three

car-days. If one rents an apartment for six months, one buys the services, six

apartment-months. Similarly when one rents a person for eight hours, one buys

the labor services of eight man-hours (or person-hours), i.e., the right to

employ or use the person within the limits of the contract for an eight hour

period.

The labor market is the market for the renting of human beings. Of all rental

contracts, the employment contract has been the most modified and attenuated by

social constraints. Labor legislation and the countervailing power of unions

have both worked to mitigate the commodity nature of labor services and to

insure that people are rented in a manner as “human” as possible. But all of

these socially mitigating circumstances should not be taken as an excuse to

obfuscate the basic fact that the employment contract to buy labor by the day,

the week, or the year is the contract to hire or rent the person by the day,

the week, or the year.

Wages as Rentals

We say that employees are “rented” rather than “hired” to awaken people (like

the Economics students) from the dogmatic slumber in which they do not realize

they live in an economic system based on the renting of human beings. Often

this statement is intentionally or unintentionally misinterpreted as being

hyperbole. For instance, the statement might be “embraced” as follows:

Yes, employees are rented and, indeed, we all sell our souls in this system of

wage slavery.

This misinterprets the rental assertion as an example of hyperbole like

“selling our souls” or “wage slavery.” But by the standard economic notion of a

rental contract, the rental assertion is only a statement of fact couched in

jarring language so one might see an old reality from a different perspective.

When capital hires labor, the wage or salary payment is the rental payment.

One can even say that wages are the rentals paid for the use of a man’s

personal services for a day or a week or a year. This may seem a strange use of

terms, but on second thought, one recognizes that every agreement to hire labor

is really for some limited period of time. By outright purchase, you might

avoid ever renting any kind of land. But in our society, labor is one of the

few productive factors that cannot legally be bought outright. Labor can only

be rented, and the wage rate is really a rental. [Samuelson 1976, 569]

Much of the traditional criticism of the wage contract has centered on the size

of the wage payments or human rentals. However, the amount of the wages will

play no role whatsoever in our analysis. Indeed, one could imagine an equally

dehumanizing relationship where the payment would go from the employees to the

employer. That is, apply the idea of the employment contract to consumption

rather than production.

A “Consumption Employment Relationship”

Workers take inputs and add value to produce the outputs. Consumers do the

opposite; they take their consumer goods, consume them, and thereby produce

scrap or used goods of lower market value. Ordinarily consumptive labor is

self-managed; the consumers buy the inputs, make their own consumption

decisions, and own the outputs (scrap or used goods). Consumption could be

organized using the employment relationship. Since consumptive labor reduces

value, the consumers would have to pay someone to employ them to consume goods.

Instead of buying a turkey, consuming it, and owning the scraps, a family unit

would pay someone to employ them to consume a turkey. The family would not buy

the turkey or own the scraps. The analysis and critique developed here of the

employment relation in production can be applied, mutatus mutandis, to this

hypothetical consumption employment relation. The essence of the analysis is

the role of human beings in the relationship, not the money payments one way or

the other.

Human Leverage

Some of the implications of the employment relation can be appreciated by

considering the notion of capital “leverage.” If the owner of $5,000 can hire

or borrow $10,000 and put it all to work in an enterprise, the original $5,000

is called “equity capital” while the borrowed $10,000 is “debt capital” or

“loan capital.” The borrowing amplifies or magnifies the effects of the equity

capital. With only $5,000 invested, $15,000 is put to work. The equity holder

gets the profits and losses from three times the equity capital. Suppose the

net income before 10% interest on the loan capital is $2,000. Subtracting the

$1,000 interest (10% of $10,000) leaves a $1,000 profit on $5,000 equity for a

20% rate of return. If there was no leverage (i.e., all the $15,000 capital was

equity capital), then the $2,000 return on the $15,000 capital would be only a

13.3% rate of return (rather than 20%).

This amplification due to using hired capital is called “financial leverage”

(or “gearing” in England). It should be noted that losses are also amplified by

leverage. With less leverage, there are less interest expenses and the

remaining losses are thinned out over more equity capital. Who’s in, and who’s

out? Loan capital, like equity capital, is being used in an enterprise, but the

suppliers of the loan capital are outsiders to the enterprise. They are

creditors of the enterprise, while the suppliers of equity capital are the

“insiders” (from the legal or de jure viewpoint).

The same considerations can be applied to any resources including “human

resources” (to use a popular and telling expression from modern business

jargon). Since human beings may also be rented, there is the phenomenon of

human leverage. The net results of many peoples’ efforts can count as the

results of one person’s effort if the one hires the many. The employment

relation allows one or a small number of people to “leverage” their enterprise

by hiring tens, hundreds, or thousands of other people. The results of human

leverage show up in the income distribution. Some researchers found the income

distribution of the highest 1% of the population distinctly shooting off with a

different trend than the other 99%.

No one would dispute the fact that the wealthy differ from the lower 99% in the

manner that they accumulate income. While most people are paid by the hour, or

the number of widgets they produce, the wealthy frequently accumulate their

extra wealth by some amplification process; that process varying from case to

case. … Perhaps one of the most common lower-level modes of amplification is

for an individual to organize an operation with others working for him so that

his income is amplified through the efforts of others (a modest-sized business,

for example). [Montroll 1987, 16-17]

Using income data for 1935-36, the average amplification factor was estimated

at 16.8.

This number is not surprising since one of the most common modes of significant

income amplification is to organize a modest-sized business with the order of

15-20 employees. [Montroll 1987, 18]

In fact, the business is carried out by all the people working there, but in

law it is the enterprise of only the employer. The employees have a legal role

like that of an instrument, indeed that of a human lever, working as a means to

leverage or amplify the ends of the employer. The employees are not part of the

ends of the enterprise. The employer does not act as the representative of the

whole group of people working in the firm. The employer acts only in his own

name, and the employees are “employed” to that end. The possibility of human

leverage also supplies the simplest and most direct explanation for the

prevalence of employment firms in a free enterprise economy which allows the

employment relation and where there is a sufficient supply of labor willing to

accept the employee’s role. The choice of firm structure is exercised by the

entrepreneur or entrepreneurial group who organizes the firm. Since (by

hypothesis) the firm is expected to be profitable, it is in the self-interest

of the organizers to leverage the other people involved in the firm by

employing them.

The Comparison with Slavery: Voluntariness

It is crucial to understand the similarities and differences between the

employment system and slavery. When the details are stripped away, there are

two important differences (in spite of the rhetoric about “wage slavery”): the

voluntariness and the duration of the relationship.

In the conventional understanding, slavery was involuntary and the employment

relation is voluntary. We accept this standard understanding of the historical

facts. However, it is important to see how both assertions have been challenged

in various ways. One the one hand, there is a whole school of liberal thinkers

who argued that slavery was or could be considered as deriving from voluntary

contractual arrangements [viz. Philmore 1982]. One the other hand, there is an

old tradition prominently including Karl Marx which argued that the worker’s

“choice” to sell his or her labor was a Hobson’s choice, and that the

employment contract was “socially involuntary.” But the claim that slavery was

voluntary as a matter of historical fact is absurd. And the argument that

employment is “socially involuntary” is a rather weak special plea. The labor

contract would satisfy any workable juridical notion of voluntariness. The

worker, particularly the unionized worker, has considerably more bargaining

power than, say, the unorganized consumer who must take price as given.

The involuntariness argument is also not necessary for a critique of the

employment contract because voluntariness is a necessary but not a sufficient

condition for the juridical validity of a contract. Indeed, if slavery was

wrong because it was involuntary, then what about a system of voluntary

contractual slavery? In the years prior to the Civil War, there was explicit

legislation in six states “to permit a free Negro to become a slave

voluntarily” [Gray 1958, 527; quoted in Philmore 1982, 47]. But when slavery

was abolished, both involuntary and voluntary slavery was prohibited. The

contract to voluntarily sell oneself is no longer considered a juridically

valid contract.

We shall argue that the contract to voluntarily rent oneself out, i.e., the

employment contract, should also be considered a juridically invalid contract.

The immediate retort is that the abolition of renting people would violate the

“freedom of contract.” When one thus hears the rhetoric of liberal capitalism,

it is important to remember the invalidity of the self-sale contract. For

example, there is Sir Henry Maine’s high-minded dictum that the movement of

progressive societies has hitherto been a movement from Status to

Contract[1861, reprinted 1972, 100]. Yet the abolition of the self-sale

contract means precisely that one’s social position as a free person unowned by

another person is a matter of status and is not a question of contract. Do free

marketeers consider the invalidation of the self-enslavement contract as being

retrogressive rather than progressive because it moved personal freedom from

the realm of Contract to the realm of Status?

Or consider the oft-heard rhetoric about “free enterprise.” Several centuries

ago, enterprise was based on the freedom to own other human beings. And workers

even enjoyed the freedom to sell themselves. Those freedoms have now been

abolished. Enterprise isn’t as free as it used to be.

Since slavery was abolished, human earning power is forbidden by law to be

capitalized. A man is not even free to sell himself: he must rent himself at a

wage. [Samuelson 1976, 52 (his italics)]

This quotation from the predominant liberal capitalist economist of our time is

important for several reasons. Samuelson acknowledges a major limitation on the

“free enterprise” rhetoric, and he forthrightly recognizes that a person rents

himself out in the employment relation. Testimony against one’s own interest is

particularly valuable. Samuelson is not attacking the employment relation in

favor of democratic worker ownership. He is simply giving a no-nonsense

description of the employer-employee relation without the usual linguistic

sugar-coating involved in saying employees are “hired,” “employed,” “given a

job,” or “invited to join the firm. Given the conventional enthusiasm for the

freedom of enterprise to rent human beings, one might expect capitalist

philosophers and economists to promote extending these freedoms by revalidating

the self-sale contract. Robert Nozick of Harvard University, a leading moral

philosopher, has argued on libertarian grounds to allow all “capitalist acts

between consenting adults.” This includes the contract of political

subjugation, the Hobbesian pactum subjectionis, wherein people renounce their

democratic rights and voluntarily become the subjects of a ruler or ruling

association. A group of people might sell the right to self-government to a

“dominant protective association” and an individual might do likewise.

The comparable question about an individual is whether a free system will allow

him to sell himself into slavery. I believe that it would. [Nozick 1974, 331]

Conventional economists constantly make social recommendations based on a

utilitarian social philosophy that views all rights actually or potentially as

marketable property rights (ignoring inalienable personal or human rights) and

that views the efficiency gained from market exchange as the primary criterion

of institutional choice. As Nobel laureate James Tobin has noted:

Any good second year graduate student in economics could write a short

examination paper proving that voluntary transactions in votes would increase

the welfare of the sellers as well as the buyers. [Tobin 1970, 269]

Indeed, conventional economic philosophy implies: (1) that people should be

allowed to sell their political votes, (2) that people should further be

allowed to individually or collectively sell all their democratic rights in a

pactum subjectionis, and (3) that people should be allowed to sell all their

labor in a voluntary self-enslavement contract. All of these contracts could

find willing buyers and sellers among fully informed adults so they should be

permitted according to capitalist social philosophy. Yet there is enough social

acceptance of the natural rights philosophy descending from the political

democratic revolutions of the past that capitalist economists and philosophers

usually refrain from actually making such recommendations. Robert Nozick is the

exception either because he is more intellectually forthright or perhaps just

more fashionably naughty.

The Comparison with Slavery: Duration and Extent

In addition to voluntariness, the employment relation is distinguished from the

historical master-slave relation by the duration and extent of the

relationship. The difference is essentially the difference between renting and

buying. Buying a house gives one the right to the entire future stream of

services provided by the house, while renting only procures the housing

services for a discrete time period. The slave owner owned all of the slave’s

labor, while the employer only purchases certain labor services over a given

time period. This relation between owning and renting people has been

understood at least since antiquity. In the third century, the Stoic

philosopher, Chrysippus, held that

no man is a slave “by nature” and that a slave should be treated as a “laborer

hired for life,” … . [Sabine 1958, 150]

The comparison between slaves and “hirelings” was commonplace in the South

during the antebellum debate over slavery.

Our property in man is a right and title to human labor. And where is it that

this right and title does not exist on the part of those who have money to buy

it? The only difference in any two cases is the tenure. [Bryan 1858, 10; quoted

in Philmore 1982, Ê 43]

James Mill expounded on the distinction between buying and renting people from

the employer’s viewpoint.

The only difference is, in the mode of purchasing. The owner of the slave

purchases, at once, the whole of the labour, which the man can ever perform:

he, who pays wages, purchases only so much of a man’s labour as he can perform

in a day, or any other stipulated time. [James Mill 1826, Chapter I, section

II]

If the employment contract is compared not to the historical master-slave

relation but to a hypothetical self-sale contract, then the only basic

difference is the duration and extent of the two voluntary contracts.

Accordingly, a number of classical liberal writers condoned civilized versions

of the self-sale contract prior to the actual abolition of all slavery. In John

Locke’s influential Two Treatises of Government(1690), he would not condone a

contract which gave the master the power of life of death over the slave.

For a Man, not having the Power of his own Life, cannot, by Compact or his own

Consent, enslave himself to any one, nor put himself under the Absolute,

Arbitrary Power of another, to take away his Life, when he pleases. [Second

Treatise, section 23]

But once the contract was put on a civilized footing, it would be a rather

severe form of the master-servant relationship.

For, if once Compact enter between them, and make an agreement for a limited

Power on the one side, and Obedience on the other, the State of War and Slavery

ceases, as long as the Compact endures…. I confess, we find among the Jews, as

well as other Nations, that Men did sell themselves; but, ’tis plain, this was

only to Drudgery, not to Slavery. For, it is evident, the Person sold was not

under an Absolute, Arbitrary, Despotical Power. [Second Treatise, section 24]

With the exception of Nozick’s libertarian atavism, the self-sale contract has

not been a topic of active discussion since the abolition of slavery. Yet the

self-sale contract as a sell-labor-by-the-lifetime employment contract has had

a curious secret life in economic theory. A capitalist market economy cannot be

fully efficient if there are restrictions on trade for any commodities with

willing buyers and sellers. By removing the restrictions, trade will make the

buyers and sellers better off and efficiency will be improved. There is one

basic theorem which is so important in capitalist economics that it is called

the “Fundamental Theorem of Welfare Economics,” namely the theorem that a

competitive equilibrium in a capitalist economy is allocatively efficient. If

the sale of future-dated labor services was forbidden, the Fundamental Theorem

would not hold. A buyer and seller might each be made better off if labor were

sold over arbitrary time periods, e.g., by the lifetime. In theoretical models

of competitive capitalism, complete future markets are assumed to exist for all

commodities including labor. A consumer/worker

is to choose (and carry out) a consumption plan made now for the whole future,

i.e., a specification of the quantities of all his inputs and all his outputs.

[Debreu 1959, 50]

In such Arrow-Debreu models [Arrow and Debreu 1954], a consumer/worker is

viewed as making a lifetime of labor contracts all at that initial time (not

necessarily all with the same employer). Restrictions on the sale of

future-dated labor services would be market imperfections precluding the

allocative efficiency of competitive equilibrium. The fundamental efficiency

theorem of capitalist economic theory must assume that the self-sale or

lifetime labor contract is legally valid, even though the contract is now

legally invalid. It is not surprising that capitalist economists absolutely

loathe to admit this. One exception is the economist and econometrician Carl

Christ who made the point in no less a forum than Congressional testimony.

Now it is time to state the conditions under which private property and free

contract will lead to an optimal allocation of resources…. The institution of

private property and free contract as we know it is modified to permit

individuals to sell or mortgage their persons in return for present and/or

future benefits. [Christ 1975, 334; quoted in Philmore 1982, 52].

The efficiency of perfect competition is surely the most thoroughly analyzed

and discussed topic in mainstream economics. Yet in the textbooks or literature

of the “science” of economics, the author has not been able to find a single

other admission that capitalist efficiency requires that contract law be

“modified to permit individuals to sell or mortgage their persons in return for

present and/or future benefits.” In a society allegedly free of thought

control, one would expect to find at least one textbook that would mention such

a point.

The Language of the Employer-Employee Relation

This preliminary analysis of the employment relation must include consideration

of the language of employment because “words tell a story.” We previously noted

that a good many people are not even aware that they live in a society based on

the renting of human beings. But before we suggest that “The Big Lie” or

ideological false consciousness may also exist on this side of the erstwhile

Iron Curtain, we should check if people at least know the traditional legal

name of the employment relation. Slaves knew they were slaves, but do employees

know their legal name? “Employer-employee” is not the traditional name; it is

newspeak which has only come into English usage within the last century.

Society seems to have “covered up” in the popular consciousness the fact that

the traditional name is “master and servant.” Without special legal or

historical education, one would think “servant” refers only to domestics. But

domestic servants are only domestic servants, while all employees are servants

in the technical legal sense of the word. The master-servant language was used

by the 18th century Blackstone, but in the 19th century it had acquired such

negative connotations that it had passed out of common usage. For instance,

John Stuart Mill has no standard name for employee/servants in his classic

Principles of Political Economy (1848) since the oldspeak of “servants” was

unacceptable but the newspeak of “employees” had not yet been imported from the

French. Mill referred to employees as hired “operatives,” “workpeople,”

“labourers,” or even “the employed.” Even around the turn of this century, the

English version “employee” of the French “employ” was not fully accepted. In

1890, Webster’s Unabridged Dictionarynotes:

The English form of this word, viz., employee, though perfectly conformable to

analogy, and therefore perfectly legitimate, is not sanctioned by the usage of

good writers.

The traditional language of master and servant is still used today in the area

of agency law, the law governing the relationships between principal and agent,

and any involved third parties. The relevant distinction is between a servant

(i.e., an employee) and an independent contractor. A lawyer or plumber in

independent practice is an independent contractor while a lawyer or plumber on

the staff of a corporation would be a servant or employee. The Chicago

economist, Ronald Coase, quoted from a lawbook to describe the “legal

relationship normally called that of ‘master and servant’ or ‘employer and

employee’” [Coase 1937, 403].

The master must have the right to control the servant’s work, either personally

or by another servant or agent. It is this right of control or interference, of

being entitled to tell the servant when to work (within the hours of service)

or when not to work, and what work to do and how to do it (within the terms of

such service), which is the dominant characteristic in this relation and marks

off the servant from an independent contractor, or from one employed merely to

give to his employer the fruits or results of his labor. [Batt 1967, 8; quoted

in Coase 1937, 403]

In addition to not being independent (e.g., not paying for one’s inputs), the

servant is marked off from the independent contractor by the employer’s control

over the execution of the work. An agent could be either a servant or an

independent contractor. In agency law, the distinction is quite important for

the imputation of legal liability when a third part is injured within the scope

of the agent’s work. If the agent worked as a servant rather than as an

independent contractor, the injured party can also sue the master or employer

who would have a “deeper pocket” than the employee. The legal responsibility of

the employer is called “strict liability” or “vicarious liability” since the

injury to the third party was not actually the fruits of the employer’s labor.

Modern labor legislation uses the newspeak of “employer-employee.” The

continuing use of the traditional “masterservant” language in agency law is not

without controversy. Some writers consider the “master-servant” language to be

so archaic that it can be used as technical terminology without any undue

negative connotations. Other writers disagree.

Another interesting variation in the literature of vicarious liability relates

to the language in which the subject is discussed. Justice Holt spoke of

“masters” and “servants,” which were current coin in 17th century speech. These

terms are perpetuated today in many judicial decisions, and in the Restatement

of Agency. Students should be familiar with them but should not, we think,

acquire the habit of using them. Defenders of the Restatement contend that

these words, precisely because they are archaic, are neutral tokens of

communication. It is clear, however, that the terms are still alive enough to

be offensive to laborers and labor representatives. [Conrad, et.al. 1972, 104]

For our purposes it suffices to highlight the social adjustment mechanism

involved in the evolution from “masterservant” to “employer-employee.” When the

social role of being rented acquired excessive negative connotations, society

changed the name rather than change the relationship itself. There are other

examples of proposed or actual language changes to alleviate social stress. For

instance, in the slavery debates before the Civil War, some planters were quite

willing to admit that the “master-slave” language could be objectionable so

they suggested some newspeak.

Slavery is the duty and obligation of the slave to labor for the mutual benefit

of both master and slave, under a warrant to the slave of protection, and a

comfortable subsistence, under all circumstances. The person of the slave is

not property, no matter what the fictions of the law may say; but the right to

his labor is property, and may be transferred like any other property, or as

the right to the services of a minor or apprentice may be transferred…. Such is

American slavery, or as Mr. Henry Hughes happily terms it, “Warranteeism.”

[Elliott 1860, vii]

The “warrantor-warrantee” newspeak for “master-slave” did not take hold since

the relationship itself was soon abolished. The same social pressures are at

work today. It “sounds bad” to say that people are rented so one is supposed to

say s omething else.

Labor History: Servus, Serf, Servant

The etymology of the word “servant” is of interest. Western history has seen

three general types of economic systems: slavery in ancient times, feudalism in

the Middle Ages, and capitalism (private and public) in modern times. The

worker’s role in this evolution can be traced in the evolution of his name. The

Latin word for slave “servus” evolved into the French “serf” (and Italian

“servo”) under feudalism, which in turn became “servant” under capitalism. If

the three word version of Economics is “Supply and Demand,” the three word

version of Labor History is “Servus, Serf, Servant.” During the Middle Ages in

France and Italy, there were a few slaves, often of Eastern European origin, in

addition to the multitude of serfs. The presence of the lowly slaves caused

some linguistic dissonance since “serf,” “servo” and sometimes even the

original “servus” were used to refer to the serf who had a higher station. In

this case, language readjusted by renaming the actual servi as “slaves.”

By the end of the thirteenth century and perhaps in imitation of the Italians,

they were called by a name that recalled the origin of many of them and that

gradually slipped from its ethnic meaning to a purely juridical one: slaves,

i.e., Slavs. [Bloch 1975, 64]

The disturbing linguistic association of “serf” and “servus” also led to

newspeak for “serf.”

In order to prevent any misunderstanding and although everyday language,

unafraid of confusion with Roman law, continued to use daily the word serf,

many notaries henceforth carefully avoided servus, judged inconveniently

equivocal, and replaced it in deeds by various synonyms, notably homme de

corps. [Bloch 1975, Ê63-64]

In the course of its career, the word “servant” has denoted workers from the

slave to the modern employee as if its own ontogeny had to recapitulate the

servus-serf-servant phylogeny. Although servants are never called “slaves”

(except as hyperbole), slaves were often called “servants” in premodern times.

Even within recent decades, some dictionaries such as the 1959 Webster’s New

Collegiate lists “A slave” as a second definition of “servant.” At the same

time, lawbooks use “servant” as the technical legal term for the modern

employee. Thus the three word version of Labor History could be shortened to

one word, “Servant.”

Summary

Most people who work, work as employees. Yet they do not know employment is the

rental relation applied to persons and they do not know the traditional name of

the relationship. The system of social indoctrination has been so successful

that the employer-employee relation is not even perceived as something that

could be different. “To be employed” has become synonymous with “having a job,”

to be “unemployed” is to be without work so “employment” has become the same as

work. The employment relationship is accepted as part of the furniture of the

social universe. We have even described the opposite system without the

employment relationship as “universal self-employment” [which is akin to

describing the opposite of the slavery system as universal self-ownership].

How could this happen? Part of the answer must be Marxism. Capitalism has been

able to define its distinguishing features by the contrast with Marxism. The

debate with Marxism has been focused on so many sideline issues that it gives

new meaning to the phrase “red herring.” Since Marxist socialism models the

economy as one big capitalist firm, the worker has the choice of being a cog on

a private wheel or a cog on one big public wheel. It is as if slavery

apologists had been able to successfully redefine the issue as the choice

between public or private slave plantations. By diverting the debate, Marxism

has been an absolute godsend to capitalist apologetics. If Marxism did not

exist, capitalist ideology would have to invent it. The capitalism/socialism

debate has not only diverted attention away from the renting of human beings,

it has allowed capitalism to be positively identified with democracy, equality,

justice in property, and treating people as persons rather than things. Yet the

employment relation inherently denies all these ideals in the workplace.

Slavery has been abolished both as an involuntary or as a voluntary

relationship. But instead of creating a form of enterprise where people are

treated as persons rather than things, we only have a system where workers are

rented rather than owned. The transition from workers being an owned input to

their being a hired input was certainly a moral improvement. But the

capitalism/socialism debate has paid little attention to the alternative form

of work where the human element is not “employed” at all by public or private

employers where people rent only things rather than the owners of things

renting people.

Consider equality. There is a basic equality of rights in the political sphere.

But prior to the democratic revolutions, there was a fundamental political

inequality between ruler and the ruled where the ruler governed in his own

name, and was not selected by and did not represent the ruled. Today in the

economic sphere, that same type of authority relationship exists between the

master and servant where the employer governs in his own name, and is not

selected by and does not represent the employees. Or consider democracy. The

capitalist democracies stands for democracy, but not in the workplace [viz.

Dahl 1985].

In the next chapter, we will review the non-democratic tradition of liberal

thought which founded autocracy on a voluntary contract, the pactum

subjectionis. With the triumph of the democratic revolutions inspired by the

natural rights philosophy of the Enlightenment, that non-democratic liberalism

retreated to the capitalist workplace where it has flourished ever since as

part of capitalist ideology. The employment contract is the pactum subjectionis

of the employment firm. Or consider justice in the private property system.

Under capitalism, doesn’t everyone get what they produce, the fruits of their

labor? We will see quite the opposite, that when labor is hired, the fruits of

labor go elsewhere. Labor is the natural basis for the appropriation of newly

produced property; the natural “wages” of labor are the fruits. Instead of

somehow being the economic system realizing justice in private property,

capitalism systematically violates the basic labor principle of private

property appropriation. It is again the employment relation which sets up the

misappropriation of private property. In each case, we trace the root cause of

the problem to be the renting of human beings, the employer-employee

relationship.

The alternative to the employment relation is not having everyone employed by

the state. It is having everyone working for themselves (individually or

jointly). This means restructuring companies so the membership rights are

personal rights attached to the functional role of working in the firm. Then

there is no human “employment” since working in the firm makes one a member so

people are always jointly working for themselves.

Capitalization of Labor

The Marvel of Modern Finance

Since the abolition of slavery, humans ownership has been banned. People are no

longer allowed to sell their labor by the lifetime. Instead they must rent

themselves temporarily for a salary or wage. As Paul Samuelson says in

Economics

Interestingly enough most of society’s economic income cannot be capitalized

into private property. Since slavery was abolished, human earning power is

forbidden by law to be capitalized. A man is not even free to sell himself: he

must rent himself at a wage. [p. 52, his emphasis]

We focus here on the capitalization of labor which Samuelson says is legally

forbidden. However, the statement that labor cannot be capitalized is not

strictly true. Human labor is forbidden to be capitalized through direct human

ownership. But through the marvel of modern finance human labor continues to be

capitalized. Labor capitalization today is carried out through the ownership of

businesses. The most familiar example today is the stock market where pieces of

businesses are regularly bought and sold.

Labor capitalization is also present in private (non worker-owned) business

that are not actively traded on a public exchange. Labor which was once sold

through slave markets, is today packaged with other assets and sold as a

business. By owning a business, human labor can now be owned, sold, and traded.

The clever packaging of labor and assets into business ownership is the marvel

of modern finance through which labor is currently capitalized. It also serves

another function useful to maintaining the perception of legitimacy of the

employment system, obscuring the ownership of labor. It is fairly

straightforward to see that owning a slave is owning the labor of person. But

intermixing the labor of many people on an interchangeable basis and combining

it with other assets in a firm diverts attention from the underlying labor

ownership. Owners (stockholders) of a typical business today own the labor of

the employees. The value of the employees’ future labor is incorporated in the

price of the business. Labor ownership is represented by the difference between

the market value of a business (the number of shares outstanding times the

current price) and its net asset value (assets minus liabilities). That

difference, called “goodwill” is the capitalized value of labor. A few examples

will clarify the issue.

First consider a business with some assets and liabilities, but no employees.

What is the value of the business? In this case the answer is obvious, the

business is worth its net assets value (assets minus liabilities). A business

with no employees cannot produce any goods or services, and therefore had no

expected future profit. This is true both under the current system of human

rentals or if they were abolished.

Now consider a business with no assets or liabilities but with employees. What

is the value of the business? Under the current system of human rentals the

value of the business is equal to the future stream of profits discounted to

its present value. This can be calculated if one assumes the future profits are

known along with a risk free interest rate. With the abolition of human rentals

the value of the business would be identically zero since only the members

(employees) of the business could appropriate the profit.

More generally, the value of any business in the absence of human rentals is

equal to its net asset value. This has significant implications for the stock

market as share prices would collapse to net asset value with the abolition of

human rentals. By analogy, one can imagine the impact of the abolition of

slavery on the share price of a slave owning firm. The assets of the firm would

be reduce by the value of the slaves, thus lowering the net asset value. Other

(non-human) assets of the firm would still be owned. In a market economy the

value of the slaves would already account for the expected future value of

labor over their lifetime.

Goodwill Accounting I

The implications from applying simple inalienable rights arguments are far

reaching. Take for example the requirement of worker profit appropriation. In a

firm, only the current workers (members) are allowed to appropriate the profit.

This has dramatic implications regarding the valuation of businesses. Standard

finance theory teaches that the present value of a business equals the

discounted future stream of profits. But this assumes the current “owners” are

going to appropriate the future profits, not the current members at that time.

Clearly the profits from the future labor of workers cannot be owned in the

present, so the standard valuation method is not correct. If the future profits

cannot be owned in the present, then what is the value of a business? The only

possible answer is that a firm is worth its net asset value, or the value of

its assets minus its liabilities. This is sometime approximated at the book

value of a firm for accounting purposes. The supposed value of a firm above its

net asset value is called goodwill. Goodwill is an intangible asset, and as we

have seen it can’t actually exist if member are to appropriate profit.

Generally goodwill is linked to the reputation of the firm, its brand name, or

customer loyalty which is assumed to enhance future profits. Whether these

profits materialize is uncertain and in any case cannot be appropriated in the

present before they are earned. In our “market” economy the sale of goodwill

through equity trading is actually the prearranged theft of the labor of future

workers, in violation of their inalienable rights. Accounting practices are

inconsistent on the issue of goodwill. Earned goodwill is not permitted as an

asset on a firm’s the balance sheet. This makes sense because a firm can’t

record its future expected profits as a current asset. Yet purchased goodwill

(when another firm is acquired for more than its net asset value) is counted as

an asset. Something than cannot be earned in the first place obviously can’t be

sold, but this is exactly what the accounting permits. For illustrative

purposes, take the example of a sole proprietorship, a single person firm.

Let’s say the sole proprietor built up a good reputation and decided to sell

their firm under the current valuation methods based on the expected future

stream of profits. After the sale the sole proprietor (also the sole employee)

decides to quit. The firm’s value immediately collapses to the net asset value

since there are no longer any expected future earning. Adding employees and

wrapping the firm in a formal legal entity has allowed the underlying

transactions to be obscured. The inalienable rights arguments dictate that

future earnings must be appropriated by the current workers, so the value of

all legitimate (worker owned democratically managed) businesses should be their

net asset value. Were inalienable rights of workers to be protected, the value

of common stock would be converted to debt equal to the net asset value of the

businesses and stripped of voting rights. Of course enormous reparations to

past workers should also be paid.

Goodwill Accounting II

Property rights versus going-concern contractual roles

David Ellerman A basic characteristic of a property right is that it may not

rightfully be taken away from a person without the person’s consent. A

going-concern business is typically at the center of a nexus of market

contracts which have a rather limited duration. When a current contract

expires, then a customer or supplier may decide for whatever reason to

terminate the contract and take their business elsewhere. This does not require

the consent of the business operator. The business operator has no property

right to force customers and suppliers to continually renew past contracts.

Future profits may have been anticipated from the continuation of the old

contracts, but no rights were violated if the customers or suppliers decided

not to renew the contracts. The anticipated future property rights that would

result from the continued contracts, e.g., future profits, might not

materialize but that is quite different from some present property right of the

business operator being violated. The root of the controversy about “goodwill”

is this basic distinction between:

presently owned property rights, and

possible future rights (presently not owned) resulting from a contractual

position.

Unfortunately the confusion has been “canonized” into the basic capitalization

formulas of finance theory. The standard formulas for the capitalized value of

a capital asset routinely capitalize into the value of the asset the possible

future profits that depend on a “non-owned” contractual position of the

residual claimant in some productive opportunity. Hence our task to tease apart

the two parts of the so-called “capitalized value” into:

the part that does represent present property rights, and

the part representing anticipated but not presently owned future profits.

It is this latter part, the capitalized value of anticipated future profits,

that is called goodwill.

The capitalized value of an asset

Consider a simple example of a capital asset, e.g., a widget-maker machine,

providing capital services K per period with which the labor services L will

produce Q units of the product per period. Assume the asset provides these

services for n periods with no maintenance required and then is finished with

no salvage value. Let r be the competitive rental rate per unit of capital

service so rK would be the competitive rental for the asset’s services per

period. Anyone desiring to use the asset’s stream of capital services, K, K,…,

K, for n periods would have the market choice to rent or buy. Competitive

arbitrage would equate the present value of the rentals and the market cost C

of the asset. If is the interest or discount rate per period, then the equation

of the market cost and the discount present value of the rentals is:

Market cost of the asset = Present value of rentals (no salvage value)

What is the “value” of such a machine to the its owner? If no other contracts

were available, then the owner might have to rent out the machine at its rental

rate and then the value C would accrue to the owner. But suppose the machine

owner, for whatever reason, is able to make another set of market contracts,

namely to hire in the labor L per period at the wage rate w, and to sell the

outputs of Q per period at the unit price p. Then the net revenue accruing to

the business operator per period is pQ – wL. Assuming the continuation of these

supplier and customer contracts for n periods, the net present value accruing

to the business operator is:

Present value of anticipated business operation to asset owner

So far the analysis is straightforward and unproblematic. But now a subtle

error creeps into the standard treatment in capital theory and finance theory.

The present value V is characterized as the “capitalized value of the asset” as

if the combined results of using the asset’s services K per period and the

assumed supplier and customer contracts were all part of the property rights of

the asset owner. The standard formulas for capitalized asset values and

business valuation are all more complex versions of this simple formula. To

make the point explicit, one has to parse the formula into the two parts: the

present value representing (the future recovery of the value of) present

property rights plus the present value of future profits resulting from the

assumed “going concern” continuation of beneficial supplier and customer

contracts, i.e., the goodwill. In our simple example, the profit each period

is:

Anticipated profit per period

so the discounted present value of the profit, namely the goodwill, is:

Goodwill = Present value of future anticipated profits

Then since pQ – wL = rK + , the capitalized value V is easily parsed into the

sum of the asset’s market value C plus the goodwill GW:

“Capitalized value of asset” = market value of asset + goodwill. Thus the

standard capitalized value formulas for business assets or businesses are not

just the value of present property rights but include the value of certain

anticipated but presently not owned future profits.

Examples in the literature

The confusions about capitalized value are also expressed in the rather muddled

idea that these anticipated future profits are somehow “attached” to the

physical assets or the “business.”

When a man buys an investment or capital-asset, he purchases the right to the

series of prospective returns, which he expects to obtain from selling its

output, after deducting the running expenses of obtaining that output, during

the life of the asset. [Keynes 1936, 135]

But the buyer of the asset buys no such right against the customers and

suppliers who may freely decide not to continue the past contracts and thus to

change the “series of prospective returns” which the asset owner “expects to

obtain”. Unfortunately these confusions about the property rights involved in

owning a capital asset are carried over in modern corporate finance theory to

the valuation of an entire going-concern business as an “asset”.

There, in valuing any specific machine we discount at the market rate of

interest the stream of cash receipts generated by the machine; plus any scrap

or terminal value of the machine; and minus the stream of cash outlays for

direct labor, materials, repairs, and capital additions. The same approach, of

course, can also be applied to the firm as a whole which may be thought of in

this context as simply a large, composite machine. [Miller and Modigliani 1961,

415]

Miller and Modigliani [1961] give four equivalent formulas for corporate

valuation. The formulas can be shown equivalent [Ellerman 1982, 154-5] to a

fifth formula that gives the parsing of the capitalized value into the value of

the property rights in the underlying assets plus the goodwill (present value

of assumed future profits). The essentials of the proof are captured in the

simple example used here.

Accounting for goodwill

Accounting rules typically do not allow “unpurchased” goodwill to be listed on

the balance sheet as an asset, and our analysis indicates this is correct if

the balance sheet is to give the value of present property rights. But some

accounting rules rather mysteriously allow “purchased goodwill” to be recorded

as an asset. This is reminiscent of the old joke about a country bumpkin who

comes to New York where a con man sells him the Brooklyn Bridge. Can the buyer

then put the Brooklyn Bridge on his balance sheet since he “purchased those

rights”? Surely the point is that the buyer cannot purchase a right which the

seller does not own in the first place. Hence “purchased goodwill” is no more a

present property right than unpurchased goodwill since the seller had no such

property right to sell. Capital expended to “purchase” such a non-right should

not be recorded as an owned asset but as a debit to equity. Some accountants

have courageously argued for this correct procedure, e.g., George Catlett and

Norman Olson in Accounting for Goodwill.

The amount assigned to purchased goodwill represents a disbursement of existing

resources, or of proceeds of stock issued to effect the business combination,

in anticipation of future earnings. The expenditure should be accounted for as

a reduction of stockholders’ equity. [Catlett and Olson 1968, 106]

The debit to equity would then be replenished if and when the anticipated

future profits were earned, i.e., were realized as present property rights.

However, one should not expect conceptual clarity in the standard literature on

this issue anytime soon. It is not just an issue about accounting for goodwill.

As we have noted, the issue involves very basic ideas about just what is owned

in the ownership of an asset or a corporation, and the confusion is embedded in

the standard asset capitalization formulas of finance theory.

References

Personal Responsibility

The inalienability of personal responsibility is the foundation of the

abolitionist argument from which all else follows. If one believes in the

principle of personal responsibility the rest can be deduced in a

straightforward manner. The basic idea is that responsibility for a person’

actions cannot be transferred to another party. This distinguishes humans who

have personal responsibility for their actions from things which don’t. The

responsibility for the action of things are imputed to their human user. To

transfer responsibility from a person would be to make them less than human.

The legal system clearly recognized this principle in the prosecution of

crimes. All participants in a crime are held responsible. The law does not

excuse a hired criminal because they were following orders. Hiring contracts

cannot negate responsibility for participating in a crime because a human

cannot alienate control of their actions, at best they can choose to cooperate.

The inalienability of responsibility for ones actions does not disappear when a

crime is not being committed. It holds in all cases where human action is

involved. In particular it applies to productive labor. However, the legal

system pretends otherwise when production is involved. It allows financial

responsibility for profits or losses resulting from labor to be contractually

transferred violating a principle it readily acknowledges in the commission of

a crime. It is a massive institutional fraud on par with the judicial support

of slavery. With regard to human rentals the fraud is much more extensive,

being truly global in scope.

Consent

“Inalienable” Means Inalienable Even With Consent

David Ellerman

Many political theorists have taken natural rights to be alienable. The last

chapter sketched an intellectual history of the non-democratic alienist liberal

tradition which emphasized the transferability of natural rights. That

pervasive tradition has tried to reinterpret and appropriate the phrase

“inalienable rights” to mean rights which cannot be taken without the consent

of the owner.

If rights were viewed as property, then inalienability might mean only that a

man must consent to what is done with them. [Lynd 1968, p. 45]

Thus theorists professing “inalienable natural rights” could actually be laying

the groundwork for slavery and autocracy.

And as Rousseau shrewdly observed, Pufendorf had argued that a man might

alienate his liberty just as he transferred his property by contract; and

Grotius had said that since individuals could alienate their liberty by

becoming slaves, a whole people could do the same, and become the subjects of a

king. Here, then, was the fatal flaw in the traditional theories of natural

rights. [Davis 1966, 413]

In our own time, Robert Nozick’s opening proclamation, Individuals have rights,

and there are things no person or group may do to them (without violating their

rights) [Nozick 1974, ix] is often taken as a declaration of inalienable

natural rights. But the significance is just the opposite as Nozick goes on to

condone both voluntary slavery [331] and voluntarily alienating the right of

self-determination to a nondemocratic “dominant protective association” [e.g.,

15]. Nozick has no notion of rights that are inalienable in spite of consent. A

right which requires consent to be alienated is not an “inalienable right”; it

is a right as opposed to a privilege. Any legal capacity which could be taken

away without the consent of the bearer would hardly qualify as a “right” at

all; it would only be a privilege granted and removable by others. In what

follows, “inalienable rights” will, unless otherwise indicated, always mean

rights which may not be alienated even with the consent of the holder of the

rights.

The Case of the Criminous Slave: An Example of Inalienability

The theory of inalienability presented here will be illustrated with several

intuitive examples of inalienability. Examples that illustrate a point in an

intuitive and paradigmatic fashion are called “intuition pumps.” When analyzing

the employment system, analogies with slavery can provide powerful intuition

pumps. We have not been socialized into accepting slavery as part of the

furniture of the social universe so we should be able to see it dispassionately

and objectively. A legal system of chattel slavery is but one example of a

legal system of a system that legally treated persons as nonpersons or things.

The ethical condemnation of the system should be based not on utilitarian

considerations about how well or poorly the slaves were treated but on that

fundamental contradiction or mismatch between the slave’s legal role as a thing

and the underlying fact of the slave’s personhood. Did the legal system really

believe that slaves were in fact not persons, or was it an official pretense or

fiction? The fraudulent nature of the legal system was openly realized when the

slaves committed criminal wrongs. For instance, an antebellum Alabama court

asserted that slaves

are rational beings, they are capable of committing crimes; and in reference to

acts which are crimes, are regarded as persons. Because they are slaves, they

are … incapable of performing civil acts, and, in reference to all such, they

are things, not persons. [Catterall 1926, 247]

The pretense of the slave’s thinghood was the basis for the economic system of

slavery. But that pretense served no purpose when slaves stepped outside the

appointed role and committed crimes.

The slave, who is but ‘a chattel’ on all other occasions, with not one solitary

attribute of personality accorded to him, becomes ‘a person’ whenever he is to

be punished! [Goodell 1853, 309]

The “talking instrument” in work becomes the person in crime. There are two

contradictions here which should not be confused: (1) the formal

“inconsistency” in a legal system that treats the same individual legally as a

thing in normal work and legally as a person when committing a crime (in the

diagram, the formal inconsistency is trying to fit the same peg in both a round

hole and a square hole), and (2) the substantive contradiction in a legal

system that accepts a de facto person as fulfilling the de jure role of a thing

(in the diagram, the substantive contradiction of trying to fit the square peg

in the round hole). The merely formal inconsistency could be resolved by always

legally treating a slave as a thing, e.g., by treating a criminous slave like

an errant beast of burden that caused an injury. The problem of the two

contrasting legal roles for the self-same slave is different from the

substantive inconsistency between the legal role of the non-criminous slave and

the factual status of the slave as a person. The legal-role/legal-role contrast

is highlighted not to register any moral complaint but to point out the

system’s selfincriminating testimony about the factual-status/legal-role

mismatch for the non-criminous slave. In a court of law, testimony against

one’s own interests will tend to have the most credibility. In the case of the

criminous slave, the legal system of slavery revealed the bankruptcy of its own

juridical foundations; it acknowledged that the slave was in fact a responsible

person in spite of the slave’s usual legal role as a thing. Sir Henry Maine

asserts that “the movement of the progressive societies has hitherto been a

movement from Status to Contract.” [1861, reprinted 1972, p. 100], so let us

progress to the case where the slave’s legal role resulted from a

self-enslavement or self-sale contract. That would not change the essentials of

the case. The voluntary contractual slave, like the involuntary slave, would

still be legally treated as a person when charged with a crime, and would still

embody the fundamental contradiction between the legal role of the

non-criminous (contractual) slave and the slave’s factual status as a person.

Outline of the Theory of Inalienability

Here is the core of the theory of inalienability. A person cannot in fact by

consent transform himself or herself into a thing, so any contract to that

legal effect is juridically invalid—even though it might be “validated” by a

system of positive law (e.g., the antebellum South). A right is inalienable

(even with consent) if the contract to alienate the right is inherently

invalid. The self-enslavement or self-sale contract is an old example of such a

contract, while the self-rental or employment contract is a current example. In

general, any contract to take on the legal role of a thing or non-person is

inherently invalid because a person cannot in fact voluntarily give up and

alienate his or her factual status as a person. I can in fact give up and

transfer my use of this pen (or computer) to another person, but I cannot do

the same with my own human actions—not for a lifetime and not for eight hours a

day. The “square peg” can consent to fit into the “round hole” but it

nevertheless does not fit. Yet a legal system can “validate” a contract

treating human activity as an alienable commodity, and the system can also

pretend that obedient co-operating workers “fulfill” the contract—until the

revealing moment of unlawful activity. That is, the legal system can pretend

that the “square peg” fits into the “round hole.” This argument is called the

de facto inalienability argument since it is based on the factual

inalienability of essential human characteristic such as responsibility and

decision-making.

The Case of the Tortious Servant

When an employee or servant commits a tort out of negligence, the employer or

master can be held liable. The controversy in the field of agency law

surrounding this “vicarious liability” of the employer affords us another

illuminating example of the peculiarities of the employer-employee

relationship. Justice Oliver Wendell Holmes Jr. outlined the usual norm of

imputing or assigning legal responsibility to the de facto responsible party—a

norm which emerges as the labor theory of property when applied to property

appropriation.

I assume that common-sense is opposed to making one man pay for another man’s

wrong, unless he actually has brought the wrong to pass according to the

ordinary canons of legal responsibility,—unless, that is to say, he has induced

the immediate wrong-doer to do acts of which the wrong, or, at least, wrong,

was the natural consequence under the circumstances known to the defendant.

[1952, 101]

But in the doctrine of respondeat superior, the master may be held liable for

the negligence of a servant even if the wrongful act was not commanded by the

master and the master exercised due caution in hiring and instructing the

servant. The servant’s act is manifestly not the master’s act, so the master is

not de facto responsible for the act. The assignment of legal responsibility to

the master does not follow the usual canon of legal responsibility so it is

called “vicarious liability” or “strict liability.” The controversy over

vicarious liability is not as live today as in the past due to workers’

compensation insurance. But there are several points of interest both in what

is said and in what is not said by the jurists commenting on vicarious

liability. We begin by reviewing the legal responsibility of the employer and

the employee in normal lawful work. Employees bear no legal responsibility for

the positive and negative results of their actions within the scope of their

employment. The employer bears all the responsibility. Employees are “employed”

as if they were instruments which serve as “perfect conductors” transmitting

the responsibility back to the employer. When the employer is a corporation,

the natural persons who legally fill the employer’s role are the members or

owners of the company, the shareholders. Absentee shareholders, particularly in

a corporation with publicly traded shares, have only a notional connection with

the productive process in the corporation. Yet the shareholders are the final

residual claimants in the corporation; they have the ultimate legal

responsibility for the positive and negative results of the lawful actions of

the hired hands and heads of the people (managers and workers) working in the

firm. What happens when an employee commits a negligent tort? As one would

expect from the case of the criminous slave, the tortious servant emerges from

the cocoon of non-responsibility metamorphosed into a responsible human agent.

That is to say, although it is contrary to theory to allow a servant to be sued

for conduct in his capacity as such, he cannot rid himself of his

responsibility as a freeman, and may be sued as a free wrong-doer. This, of

course, is the law to-day. [Holmes 1952, 79]

An employee may be sued for a tort or civil wrong and “being an employee” is

not a defense or shield against legal responsibility for wrongful actions. The

law also allows the victim to sue the employer or master, although the

plaintiff cannot collect damages twice. If the employer is found legally

liable, then it is only liability in a “strict” legal sense since the master

was presumed not to be de facto responsible. Justice Holmes attacked strict

liability—”I therefore assume that common sense is opposed to the fundamental

theory of agency” [1952, 102]—because it violated the usual juridical principle

of assigning legal liability in accordance with de facto liability, a liability

established strongly by intentional action or weakly by negligent behavior.

Others supported vicarious liability because the employer has a “deeper pocket”

and because liability for employee negligence should be part of the costs of

modern business enterprise [e.g., "The Basis of Vicarious Liability" in Laski

1921]. There has been such a focus on the employer’s liability that one is apt

to forget the employee’s liability.

We have noticed that students sometimes slip into the fallacious assumption

that because the employer is liable, the employee is not. This idea is wholly

false. The law of agency, which makes employers liable, does not repeal the law

of torts, which makes negligent individuals liable. [Conrad, et. al. 1972, 168]

The employee, after all, is the de facto responsible person. Perhaps the most

astonishing aspect of the vicarious liability debate is the complete failure to

apply the “ordinary canons of legal responsibility” to the normal employment

relation. Jurists are perturbed when legal liability is assigned to the

employers who have no de facto responsibility. But there is not a word about

the fact that the employees are jointly de facto responsible, together with a

working employer, for the results of normal lawful work, and yet the employees

have zero legal responsibility for the results of those actions. The employer

has all the legal responsibility for the positive and negative results of the

employees’ actions within the scope of lawful employment. No one in the debate

notices that the employment relation seems to “repeal” the ordinary canons of

legal responsibility. No deep analysis of the sociology of knowledge is

required to fathom this blind spot in legal analysis. The basic social

institutions structure the horizons of thought. The application of the ordinary

canon of legal responsibility would reveal an inherent flaw in the employment

relation—a result clearly beyond the pale of responsible jurisprudential

analysis in an economic civilization based on that relationship.

Employees Versus Independent Contractors

Normative principles such as the ordinary canon of legal responsibility (a.k.a.

the labor theory of property) and the principle of democratic

self-determination all converge to attack the institution of renting human

beings, viz. the employer-employee relationship. The alternative to employment

is (individual or joint) self-employment. That is, the alternative to the

private or public enterprise employment firm is the democratic business

enterprise where working in the firm qualifies one for membership in the firm.

The smallest examples of democratic businesses are independent business-people

operating without the benefit of hired labor. If those independent operators

produce and/or sell a tangible appropriable product, there is no possibility of

considering them as employees of their customers. When one buys a pumpkin from

a farmer, there is no possibility of taking the farmer as one’s employee. When

the product, however, is not a separate, tangible, and appropriable commodity,

then the possibility does arise of confusing the independent contractor with

the employee. The two legal roles are fundamentally different in theory even

though some grey-area cases can arise in practice. It will be useful to review

the distinction which is particularly important in agency law since the

customer is not vicariously liable for the negligent torts of an independent

contractor. The legal role of the independent contractor does not violate

democratic principles or the labor theory of property. The independent

contractor self-governs his or her work. Indeed, the “control test” (testing

non-self-government) is one of the most important legal tests used to

distinguish employees from independent contractors. Ronald Coase quotes from a

legal reference book in his classic article on the nature of the (employment)

firm.

The master must have the right to control the servant’s work, either personally

or by another servant or agent. It is this right of control or interference, of

being entitled to tell the servant when to work (within the hours of service)

and when not to work, and what work to do and how to do it (within the terms of

such service) which is the dominant characteristic in this relation and marks

off the servant from an independent contractor, or from one employed merely to

give to his employer the fruits of his labour. In the latter case, the

contractor or performer is not under the employer’s control in doing the work

or effecting the service; he has to shape and manage his work so as to give the

result he has contracted to effect. [Batt 1929, 6]

The individual independent contractor is self-managing so that legal role does

not violate the principle of democratic self-determination. The independent

contractor does not alienate or transfer control over his or her actions. The

employee sells his capacity to work during a certain time period, or, in

Marxian terms, his labor power; the employer controls the execution of the

services. An independent contractor is not rented by the customer; only a

certain service or effect is sold. This is particularly confusing because the

word “hired” is sometimes applied to independent contractors as well as to

employees. When someone “hires” a lawyer in independent practice, that lawyer

is an independent contractor. If a corporation hires a lawyer onto its legal

staff, that lawyer is an employee of the corporation. The independence of the

role of independent contractors means that they legally appropriate the

positive and negative fruits of their labor. They appropriate and sell the

positive fruits, typically an intangible service or effect (e.g., repairing a

faucet or painting a house). They also directly bear their costs (appropriate

the negative fruits of their labor) even though the costs are passed on to the

customers as part of the price of the product. For instance, an independent

house painter might present the home owner with a bill itemizing so many hours

of labor and so many gallons of paint. But the homeowner has not purchased the

painter’s labor as an employer; the painter has simply itemized the labor and

paint to “justify” the price of the entire paint job.

The Identity Fiction

The case of the tortious servant also gives us the occasion to examine some of

the legal fictions surrounding the employer-employee relationship. We saw in

the case of slavery how jurists could be quite explicit in describing the slave

as having the legal role of a thing (for lawful activities). Such candor is the

exception. There are more subtle ways to legally treat a person as a

non-person. One legal strategy to deny an individual’s legal personality is to

“identify” the individual with another person. The baron-feme relationship

established by the coverture marriage contract exemplified the identity fiction

in past domestic law. A female was to pass from the cover of her father to the

cover of her husband; always a “feme covert” instead of the anomalous “feme

sole.” The identity fiction for the baron-feme relation was that “the husband

and wife are one person in law” with the implicit or explicit rider, “and that

one person is the husband.” A wife could own property and make contracts, but

only in the name of her husband. For the employment relation, the identity

fiction states that “the master and servant are considered as one person” or

“the act of the servant is the act of the master.”

The identity fiction expresses an older mode of legal thought about the

employment relation; it is not needed to understand or explain the employment

relation in modern terms. But it does catch the sense of the employee’s

instrumentality. Within the scope of lawful employment, an employee does not

have the legal role of a responsible person. The employer has all the legal

responsibility for the results of the acts of the employees so “the acts of the

servants are the acts of the master.” A variation on the identity fiction is

given by the phrase: Qui facit per alium facit per se (that which is done

through another is done oneself). This also captures the instrumental role of

the employee. The employer “acts through” the employees. For the sake of legal

clarity, it is unfortunate that the identity fiction is also applied to

situations where no fiction is appropriate and it is quite unnecessary. The

master-servant relation is usually defined to be a subset of the principal

agent relation (hence the name “agency law”) so that a blue-collar production

worker is technically an “agent.” But an independent contractor, such as a

lawyer in private practice, can also be an agent. When a lawyer acts as a

properly authorized agent to negotiate a contract, the principal is also said

to “act through” the agent. A principal, however, “acts through” an independent

lawyer in quite a different sense than an employer acts through, say, a

production worker. The lawyer conveys information and can perform symbolic

legal acts (e.g., signing a contract) for the principal. The direct physical

act of an independent contractor would, however, never count as the direct

physical act of the principal. As Justice Holmes observed, “the precise point

of the fiction is that the direct act of one is treated as if it were the

direct act of another” [1952, 111-112]. Therefore the identification fiction is

not required to account for the relationship between a principal and an

independent contractor as agent—even though sloppy habits of legal thought

might apply identification language to that case. The identity fiction only has

a role when the legal personality of an individual (e.g., an employee or a feme

covert) is “subsumed” under the legal personality of an alien legal party

(“alien” in the sense that the individual is not included in the legal party).

What is the alternative to the employment contract or to any other contract to

alienate and transfer control over certain of one’s activities such as the

now-abolished self-enslavement contract or the coverture marriage contract? The

alternative is membership—so the individual is not alien to the redefined

broader legal party. For instance, the alternative to coverture is marriage as

a type of domestic partnership. Each spouse is an equal partner and can make

contracts for the partnership. The alternative to the employment contract is

the democratic firm (also a type of generic “partnership”) where work gives

membership. In a democratic firm, there is identification without fiction; the

worker/member is a part of the firm.

The case of the tortious servant has given us the opportunity to make a number

of points. It allowed us to introduce the distinction between employees and

independent contractors. It also showed how the identity fiction was used in

the legal conceptualization of relationships which depersonalized certain

individuals by identifying them with another individual or an alien legal party

(of which they are not a part). Historical examples include the master-slave,

baron-feme, and employer-employee relationships. The overall theme of this

chapter is inalienability. The employee contracts into a legal role where some

other alien party has all the legal responsibility for the results of the

employee’s lawful actions. The ordinary canon of assigning legal responsibility

in accordance with de facto responsibility is violated. But when the employee

commits an unlawful act such as a tort or civil wrong, the law sees no point to

insulating the employee from that responsibility. The employee is said to have

stepped outside the employee’s role. Then the usual legal canon applies and the

employee may be sued for the tort. In de facto terms, the employee is, if

anything, more responsible for the fruits of the perfectly deliberate and

intentional actions of lawful work than for an unintentional but negligent

tort. That capacity for de facto responsibility is in fact inalienable. The law

pretends it has been alienated. The law pretends the act of the servant is the

act of the master so long as the pretense is not abused by unlawful actions.

The Case of the Criminous Employee

The unique property of labor, namely responsible agency, is not factually

transferable. The case of the criminous employee is another parable or

“intuition pump” which illustrates that key idea in the theory of

inalienability. Suppose that an entrepreneur hired an employee for general

services (no intimations of criminal intent). The entrepreneur similarly hired

a van, and the owner of the van was not otherwise involved in the

entrepreneur’s activities. Eventually the entrepreneur decided to use the

factor services he had purchased (man-hours and vanhours) to rob a bank. After

being caught, the entrepreneur and the employee were charged with the crime. In

court, the worker argued that he was just as innocent as the van owner. Both

had sold the services of factors they owned to the entrepreneur. “Labor Service

is a Commodity” [Alchian and Allen 1969, 469], as one can learn from economics

texts. The use the entrepreneur makes of these commodities is “his own

business.” The judge would, no doubt, be unmoved by these arguments. The judge

would point out it was plausible that the van owner was not responsible. He had

given up and transferred the use of his van to the entrepreneur, so unless the

van owner was otherwise personally involved, his absentee ownership of the

factor would not give him any responsibility for the results of the enterprise.

Absentee ownership of a factor is not a source of responsibility (a point which

should not be forgotten in our later discussion of marginal productivity theory

in economics). The judge would point out, however, that the worker could not

help but be personally involved in the robbery (unless he, per imp ossible, was

totally unaware of what he was doing, or rather as an economist might say, of

what was being done with his man-hours). Man-hours are a peculiar commodity in

comparison with van-hours. The worker cannot “give up and transfer” the use of

his own person, as the van owner can the van. Employment contract or not, the

worker remained a fully responsible agent knowingly co-operating with the

entrepreneur. The employee and the employer share the de facto responsibility

for the results of their joint activity, and the law will impute legal

responsibility accordingly.

All who participate in a crime with a guilty intent are liable to punishment. A

master and servant who so participate in a crime are liable criminally, not

because they are master and servant, but because they jointly carried out a

criminal venture and are both criminous. [Batt 1967, 612]

It should be particularly noted that the worker is not de facto responsible for

the crime because an employment contract which involves a crime is null and

void. Quite the opposite. The employee is de facto responsible because the

employee, together with the employer, committed the crime (not because of the

legal status of the contract). It was his de facto responsibility for the crime

which invalidated the contract, not the contractual invalidity which made him

de facto responsible. The commission of a crime using a rented van does not

automatically invalidate the van rental contract. The legality or illegality of

a contract cannot somehow create de facto responsibility that would not

otherwise exist.

Defenders of the Received Truth about the employment system will have much

difficulty understanding this argument. They might take the legal

superstructure as the reality, and thus they would lose sight of the underlying

factual situation. It is as if one identifies guilt and innocence with what is

decided in a court of law (i.e., with legal guilt or innocence). Such a

“legalistic” viewpoint ignores the factual question of whether the defendant

was de facto responsible for the accused act. It is a miscarriage of justice

when there is a mismatch between legal and factual responsibility, i.e., when

an innocent person is found legally guilty or when a guilty person is found

legally innocent. A similar neglect of the underlying factual reality is

involved in the standard argument that “responsibility” is determined by the

employment contract (when only legal responsibility is so determined).

Employees voluntarily give up their responsibility for the products of their

labor in the employment contract. There is no inconsistency involved in holding

the “criminous employee” responsible because he is not really an employee. A

contract involving the commission of a crime is null and void, so he stepped

outside of the employment contract when he committed the crime. In the

democratic firm, the workers don’t give up their responsibility to an employer;

they are jointly selfemployed. Thus it is quite proper in that case for them to

have the ownership of the product, but not in the case of a normal capitalist

firm.

That argument stays at the legal level of responsibility and does not touch the

question of the underlying factual responsibility. The point is that de facto

responsibility is not transferable; the non-criminous employee in a normal firm

is just as de facto responsible as the criminal. It might be helpful to

(roughly) translate the above argument into pegs-and-holes language.

Square pegs consent to fit into round holes in the employment contract. There

is no inconsistency involved in holding the criminous peg responsible (i.e.,

being in the square hole) since he was not really in the round hole. By

committing the crime, he stepped outside the round hole and thus fit in the

square hole. In the democratic arrangement, the square pegs do not agree to fit

in the round holes, so it is quite proper in that case for them to be in the

square holes—but not in the normal capitalist arrangement (where they have

agreed to be in round holes and have not stepped outside by committing crimes).

“Consent” does not improve the fit of the square peg in the round hole. The

point is that the square peg does not fit into the round hole regardless of

whether it is legally agreed to or not. It is again helpful not to confuse (1)

the formal “inconsistency” in a legal system that treated the same individual

legally as a thing (e.g., in normal work) and legally as a person when

committing a crime, and (2) the substantive contradiction in a legal system

that accepts a de facto person as fulfilling the de jure role of a thing (e.g.,

the employee in normal work). By rendering the criminous employment contract

null and void, the law escapes the formal “inconsistency” of having an

individual simultaneously in the legal role of a responsible person and in the

legal role of an employed instrument. That keeps the bookkeeping straight at

the legalistic level. The problem is not with the imputation of legal

responsibility to the criminous employee. That is a correct assignment since

the worker was de facto responsible together with the entrepreneur for the

results of their joint activity. The problem is with normal work when the

employment contract is treated as being “valid.” When the “venture” being

“jointly carried out” is non-criminal, the employee does not suddenly become an

instrument like the van. The worker is still jointly de facto responsible, but

then the employer gets all the legal responsibility. The problem is that

substantive contradiction in the normal employment relation wherein a de facto

responsible person has the legal role of a “non-responsible” instrumentality

being “employed” by the employer.

Those who place great stock in the voluntariness of the labor contract should

heed these examples of inalienability. The criminous employee would most

certainly voluntarily alienate his responsibility for the fruits of his labor,

i.e., for robbing the bank. He would love, for once, to be legally treated as

just an instrument employed by the employer. But the law says no. The law would

not validate such a contract, and yet, with no hint of personal involvement,

there is no reason to invalidate the van owner’s contract. Why the difference?

Does the law arbitrarily decide to validate some contracts and to invalidate

others? No, the difference is quite clear. The van owner can in fact give up

and alienate the use of his van; the worker cannot do the same with his person.

It is that factual inalienability and nontransferability of the responsible

agency of human action (a.k.a. labor services) that is the foundation of the de

facto theory of inalienable rights.

The Case of the Part-time Robot

The example of a person who functioned as a part-time robot is another

intuition pump to illustrate the de facto inalienability argument. Since the

argument is based on the facts about human nature, we might assume that science

fiction technology can modify human nature enough to defeat the argument.

Suppose that it were possible to electronically implant a small computer in a

person’s brain so that by flipping a switch the individual was “taken over” and

“driven” by the computer under the control of an external user or employer.

When in the robot mode, the individual would have no ability to deliberately

terminate or even influence his or her “actions” (or rather behaviors). When

the computer was externally switched off, the individual would regain conscious

control and be able to act in the usual deliberate and responsible manner. One

could vary the example by imagining some drugs that would temporarily turn a

person into a part-time zombie, but we will stick to the high-tech imagery of a

computer-driven part-time robot. The part-time robotization would change human

nature to make it safe for the employment system. The person as a part-time

robot would not be de facto responsible for the positive or negative fruits of

“its” services. The person as a part-time robot would not have decision-making

direct control over “its” services. Those labor-services would be de facto

transferable like the services of a van—so the legal validation of the

employment contract for the transfer of those robot services would not be an

institutionalized fraud. The examp le of the part-time robot is illuminating

from another viewpoint. Since the employment contract fits the part-time robot

without involving any fraud, that means the employment contract applied to

ordinary persons treats them as if they were such part-time robots within the

scope of their employment. That is, the employment contract imputes zero legal

responsibility to the employees for the positive or negative fruits of their

labor as if they were part time robots employed by an employer. In short,

renting people treats them as if they were things.

The Inalienability of Decision-Making

The inalienability of de facto responsibility is central to the labor theory of

property and to the analysis of the employment contract as it affects the

property relations of the firm. But the labor theory of property is only one

leg of the analysis of the employer-employee system and of the alternative of

democratic worker ownership or universal self-employment. The other leg is

democratic theory. It analyzes the employment firm and the democratic or

self-employment firm as governance systems, and it views the employment

contract in the employment firm as an instrument of governance. The general

point of the de facto inalienability analysis is that a person’s factual status

as a person is unchanged by consent or contract. Hence any legal contract to

take on the legal role of a non-person or thing cannot be fulfilled and is

inherently null and void. The law can only pretend that certain appropriate

behavior “fulfills” the contract— and that pretense is dropped when the person

commits a crime. The intuition pumps of the criminous slave, the tortious

servant, the criminous employee, and the part-time robot have illustrated the

argument by focusing on responsibility, the central theme in the labor theory

of property. The inalienability argument can also be illustrated by focusing on

decision-making, the central theme in democratic theory. The employment

contract does not “short-circuit” or bypass an individual’s decision-making

capacity just as it does not bypass the person’s responsible agency. The

employee is inexorably a co-decision-maker just as he or she is inexorably

co-responsible for the results of voluntary joint activity with the employer.

For instance in the bank robbery example, the entrepreneur may well have taken

the initiative to rob the bank. But the employee participates in the robbery as

a (by assumption) conscious voluntary human activity. Thus the employee must

have also made the decision to participate in that activity. “Taking orders” to

do X is only another way of deciding to do X. The van owner, by way of

contrast, can in fact alienate the decisions about the specific uses of the

van. In the example of the part-time robot, the person qua person has the role

of the van-owner, and the part-time robot has the role of the van. The

entrepreneur makes the decision to use the van to rob a bank rather than, say,

to move furniture, and the van owner is not involved in that decision. Both the

employee and the van owner alienate the legal control rights over the specific

uses of their man-hours and van-hours (within certain limits) in their

respective rental contracts. The difference is at the factual level, not the

legal level. The van owner can in fact give up any involvement in those

specific use decisions; the employee cannot.

The legal relationship of hiring an entity (i.e., buying the entity’s services)

may be applied without any inherent fraud to the hiring of a van (or part-time

robot); it cannot be similarly applied to hiring a responsible human being. In

a joint or social human activity such as most production processes, individual

responsibility may be difficult or impossible to determine, and individual

decision-making may be equally infeasible. Responsibility is joint, and

decision-making needs to be coordinated, often around a unified center. How

then should a joint human activity be organized recognizing that all human

participants are de facto coresponsible and de facto co-decision-makers? There

needs to be a unified legal party to be legally responsible for the results of

the joint activity and to be the locus of unified decision-making authority.

The employment firm provides a unified legal entity for the joint human

activity of production, but it legally denies the employees’ co-responsibility

and their co-decision-making (for lawful activities). It is not “their

business.” The alternative to employment is membership in a jointly

self-employed group or team. The alternative to the nonresponsible instrumental

role of the employee is not individual legal responsibility (since it is a

joint activity) but membership in the unified legal party that is legally

responsible for the results of the joint activity. Thus the analysis focusing

on responsibility leads to the notion of the democratic worker-owned firm, a

firm where the members are the people working in the firm. The analysis of

decision-making leads to the same conclusion. The employment contract legally

alienates decision making just as it legally alienates responsibility—even

though both are factually inalienable. The alternative to alienating

(“translatio”) decision-making is the delegation (“concessio”) of

decision-making authority to a unified center such as the management in a

democratic firm. Then the decisions are made for and in the name of those who

are managed. Thus the alternative to non-democratic management in the

employment firm is not the chaos of individual decision-making but democratic

management which unifies and coordinates decision-making using authority

delegated from those who are managed. By delegating that authority and

ultimately accepting and ratifying the decisions in action, the workers are

jointly (not individually) self-governing their activities in a democratic

firm.

Misinterpretations of the De Facto Inalienability Argument

David Ellerman

There are a number of common misunderstandings of the de facto inalienability

argument. For example, it is possible to misunderstand the point of the case of

the criminous slave particularly when stated in contractual terms. A contract

which involves the commission of a crime is not enforceable and is null and

void. Hence when a contractual slave committed a crime, he or she voided the

contract and thus stepped outside of the contractual role of a thing. Thus the

legal system could without any actual inconsistency or embarrassment hold the

person legally responsible for the crime. There is a right and proper legal

reason to move the square peg from the round hole to the square hole. This

point is quite correct but irrelevant to the substantive mismatch, the

contradiction between the legal role of the non-criminous contractual slave and

factual status of the person [the square peg not fitting in the round hole in

the first place]. Obviously the non-criminous slave was not in fact a thing

that (who?) suddenly blossomed into personhood when he, she, or it detoured

into crime. The non-criminous contractual slave had the factual status of a

person just as the criminous slave. The real issue is the

factual-status/legal-role mismatch for the contractual slave (square peg/round

hole mismatch). When a legal system recognizes such a contract as valid, then

the legal system is adopting a pretense or fiction. There always seem to be

other misunderstandings of the inalienability argument.

Surely you are arguing that the self-sale contract is invalid because the

worker is paid too little. What adequate compensation can there be for a

lifetime of labor? Freedom is priceless so there can be no real quid pro quo in

a self-sale contract.

That is a complete misunderstanding of the de facto inalienability argument, an

argument which never considers the terms of the contract. The argument is

similarly independent of assertions that slaves or servants were or are

mistreated, overworked, and exploited. The mistreatment arguments are only

qualitative variations on the more quantitative underpayment argument. The

underpayment analysis of the self-sale contract is as superficial as the

official Marxist argument that the problem with renting human beings is that

they are not paid the full value of the labor they actually perform. Another

misunderstanding concerns the role of voluntariness in the inalienability

analysis.

Surely you are arguing that a self-sale contract is invalid because it is

really involuntary in spite of the surface characteristic of formal consent.

Look at the historical examples. Fearing the example set by free blacks, there

was agitation in several slave states in the years immediately preceding the

Civil War to require that free blacks select a master and voluntarily resubmit

to slavery or else leave the state [see Franklin 1969; Gray 1958]. Any such

re–enslavements would hardly pass muster as “voluntary contracts.”

The analysis is totally independent of the historical question of the degree of

involuntariness in the self-sale contracts of the past. The de facto

inalienability critique assumes a perfectly voluntary contract. An involuntary

“contract” would be a fortiori null and void. If “the problem” with historical

self-sale contracts was their involuntariness, then the presupposition is that

the contract would be acceptable if it were genuinely voluntary. Because if the

contract embodied some deeper flaw that would render it invalid even if

perfectly voluntary, then there is no need to consider degrees of historical

voluntariness. Yet the alienist liberal tradition that reached its apogee in

Nozick’s acceptance of voluntary self-sale contracts [1974, 331] sees no deeper

flaw, and thus it focuses on voluntariness. The mirror-image of this liberal

superficiality is the official Marxist fallback argument that the wage labor

contract is socially involuntary. If the labor-theory-of-value argument that

wage workers are exploited because they are paid too little is found

unconvincing, then perhaps one will accept the backup argument that the

contract is socially involuntary because workers born with only their labor

power to sell have no other real choice. Yet another misunderstanding of the

argument concerns the rationality of the contract.

Surely you are arguing that a self-sale contract is invalid because no rational

person would enter into such a contract. Only a person not in possession of

their faculties would agree to the contract, and a contract by a legally

incompetent person is invalid.

Again, the de facto inalienability argument makes no presumption about which

contracts are considered “rational” or “irrational” by the standards of the

day.

Surely you are expressing a value judgment that a self-sale contract should be

invalid, and thus that the right to self-determination should be inalienable.

The de facto inalienability argument is rooted in facts–not in value judgments.

It is a fact that I can voluntarily alienate the use of this writing instrument

(my pen or my computer), and it is a fact that I cannot do the same for my own

personal actions. To use the language of the employment contract, I am

inexorably the “employer” of my intentional actions (a.k.a. “labor services”).

I can at most agree to co-operate with other people, and then we are jointly

responsible for the results. Yet the contractual framework for the sale and

transfer of a commodity is applied to human labor as it is applied to pens and

computers. The law pretends that the responsible co-operation of the employee

with the employer “fulfills” the contract for the transfer of labor. The

employer enjoys the sole de jure responsibility for the (positive and negative)

results of the human actions. But the legal fiction of the transferred labor

must not be abused for the commission of a crime. Then the fiction is set aside

in favor of the facts. The worker whose labor was sold by the lifetime or by

the hour is now recognized as co-responsible with the master for the results of

their joint activity. The instrument in work is promoted to a partner in crime.

A Misunderstanding of the Criminous Employee Example

One of the principal intuition pumps of de facto inalienability theory is the

criminous employee example. There is not one but two “inconsistencies,” and

they should not be confused; (1) the formal or legalistic inconsistency of

treating the same person legally as a thing (e.g., in the normal employee’s

role) and legally as a person (e.g., when committing a crime), and (2) the

substantive inconsistency in a legal system that accepts a de facto person as

fulfilling the de jure role of a thing (e.g., the employee in normal work).

These inconsistencies could be restated using the analogy of the square peg (de

facto person), the round hole (legal role of a thing), and the square hole

(legal role of a person). In terms of the hole/peg analogy, one should not

confuse: (1) the formal or legalistic inconsistency of treating the same peg as

fitting in both a round hole and a square hole, and (2) the substantive

inconsistency in a legal system that accepts a square peg as fitting in the

round hole. It is argued that once the employer and employee commit a crime (or

conspire to do so), they step outside of and invalidate the employment

contract. They become partners carrying out a joint venture, and the law treats

them both as being legally responsible for the results of their actions. Thus

there is no legal inconsistency in treating the criminous ex-employee as being

legally responsible. That is correct, and that was not the point of the example

of the criminous employee. The fact that the criminous activity invalidates the

employment contract does indeed keep the legal bookkeeping straight. The

substantive inconsistency is the point of the criminous employee example. The

employee does not suddenly burst into personhood when committing a crime and

then lapse into automatism in normal work (e.g., as in the hypothetical

part-time robot example). The person is just as much de facto responsible for

non-criminous work as for committing a crime in co-operation with the employer.

It is a factual point, not a legal point. The example of the criminous employee

forcefully brings this fact to light. The foundation of the legal framework for

the employment system is the legal validation of the employer-employee

contract, the acceptance of the employees’ de facto responsible cooperation

with their employer as fulfilling the labor contract. It is an

institutionalized fraud. There is no testimony about this fraud as telling as

the testimony of the legal system itself in the case of the criminous employee.

In order to hold the employee legally responsible for his or her de facto

responsible actions, the legal system has to render that employment contract

null, void, and invalid. That is the correct juridical response, and we have

only argued that it should be extended to all employment contracts. People

should always be held legally responsible for the positive and negative results

of their de facto responsible actions, and thus the employment contract should

always be considered null, void, and invalid.

De Facto Inalienability Theory as a “Value Judgment”

Economists are much more comfortable about a normative argument if they can

label it as a “value judgment”–as in “I hate pink plastic flamingos.” Then the

interpretation of the de facto inalienability argument is as follows.

Everyone has a right to their value judgments. You think that pink plastic

flamingos should be banned, that anchovy pizzas should be banned, and that

employment contracts should also be banned. There are already laws against

selling various items (e.g., certain controlled drugs, rare animals, and

dangerous firearms), and you are expressing the value judgment that labor

should also be made non-transferable.

That is a misunderstanding of the de facto inalienability argument. Controlled

drugs, rare animals, and dangerous firearms are all de facto alienable and

transferable. The de facto inalienability argument was never used as an

argument against the legal sales of those items [see Rose-Ackerman 1985 for

some of the arguments]. Labor is different. It is not a value judgment that

labor is de facto inalienable and nontransferable; that is an empirical factual

judgment. If true, then the legal contract to transfer that which is inherently

non-transferable would be fraudulent. There is a value judgment involved here,

namely that inherently fraudulent contracts should not be legally validated.

But the Defenders of the Received Truth would rather not defend the employment

contract by taking issue with that value judgment.

“Interpreting” Employees as Independent Producers

One strategy for the Defense is simply to “reinterpret” the employment contract

in some more palatable form–as if the contract was putty that could be remolded

at will. For example, let’s “say” the workers are selling their outputs instead

of their labor. However, that is not the way the employment firm is legally

structured. In order to sell their outputs, the workers must first own them,

and that requires paying for the inputs. One could also “say” the workers

bought the inputs–but that is only more “flapping one’s wings in the void”–so

let’s try another tack. Another flight of fancy is to “interpret” all employees

as independent producers of labor. The labor services themselves are

“interpreted” as the only fruits of their labor, so in that sense the workers

can be “said” to produce, own, and sell the fruits of their labor. In terms of

the stylized model, the labor services L are taken as the only fruits of the

workers’ labor; the tangible product Q is taken as being produced by the

employer who set up all the contracts. The basic idea is to sever–at the level

of legal interpretation–the connection between the performance of the labor L

and the production of the product Q. The employees produce only L, while the

employer produces Q. Independent producers pay for their own inputs. Thus to

continue the “reinterpretation,” one must also sever the connection between

performing L and using up the non-labor inputs K. Let’s “say” the employer uses

up K. The only activity the employees are performing is the production of the

labor services L, and they do pay for the food, clothing, and shelter involved

in producing that labor. Independent producers also have direct control of

their services. Therefore, let’s “reinterpret” the employment relationship as

not involving authority.

To speak of managing, directing, or assigning workers to various tasks is a

deceptive way of noting that the employer continually is involved in

renegotiation of contracts on terms that must be acceptable to both parties.

Telling an employee to type this letter rather than to file that document is

like my telling a grocer to sell me this brand of tuna rather than that brand

of bread. I have no contract to continue to purchase from the grocer and

neither the employer nor the employee is bound by any contractual obligations

to continue their relationship. [Alchian and Demsetz 1972, reprinted in

Putterman 1986, 112]

Thus each employee is interpreted as an independent self-employed job shopper

producing either typing-labor or filing-labor according to what the customer

wants. This continuous-renegotiation view of the labor contract goes back to

John R. Commons.

The labor contract is not a contract, it is a continuing renewal of a contract

at every successive moment, implied simply from the fact that the laborer keeps

at work and the employer accepts his product. . . [The employee] does not own

the job–his employer is under no duty to keep him–he owns the liberty to be

continuously bargaining with his employer to be kept on the job by virtue of

continuously delivering a service which the employer continuously accepts,

thereby impliedly renewing continuously the contract. [Commons 1968, 285-286]

This is true of any at-will rental contract, such as an at-will lease of an

apartment, so it does not address the specific critique of the labor contract.

The important part of the Alchian-Demsetz argument is not the point about

continuous renegotiation but the reinterpretation of the employment relation as

a non-authority relation like a contract with an independent producer. The

customer is not in an authority relationship with the grocer. The typing-labor

or filing-labor is the only product of the worker that the employer decides to

buy (like the can of tuna or the loaf of bread). The worker produces and sells

that labor in a made-to-order fashion in his or her labor-job-shop. This

interpretation of the labor contract can be stated using our description of

Labor’s Product.

Labor’s Product = (Q, –K, 0) = (Q, –K, –L) + (0, 0, L) = Whole Product + Labor.

The interpretation of the employees as independent producers of labor, in

effect, makes an incision and cuts the causal connection between the labor (0,

0, L) and the whole product (Q, –K, –L). The workers are pictured as only

producing and selling the labor L; the whole product is produced by the

employer. Like the watchmaker who assembles the watch so that it will run

correctly, the employer makes all the right contracts for L and K so that the

whole product (Q, –K, –L) will be produced as the result. This

independent-producer interpretation of the employee’s role looks, at first,

like a novel theory, but it turns out to be only an ingenious and elaborate

restatement of the conventional theory. The usual theory is that the employees

sell the labor L as a commodity, and that the employer employs the labor L and

the other inputs K to produce the product Q. The problem with the theory never

was its legal coherence; it hangs together beautifully. The problem was at the

factual level. Labor did not fit the mold of a transferable commodity; labor

services are not transferable like a can of tuna, a loaf of bread, or the

services of an apartment or a van.

Take, for example, the idea of severing the connection between performing the

labor L and producing the product Q. There are times when an individual wants

to be severed from the results of his actions. For instance, the hired killer

does not want responsibility for the fruits of his labor. That even shows in

the language; he is a “trigger-man.” The hired killer bears no personal animus

against the victim; he is only hired to “pull the trigger.” He would like to

sever the labor–”pulling the trigger”–from the resulting murder. But the facts

cannot be so easily “reinterpreted.” He together with the “entrepreneur” is de

facto responsible for the murder. In contrast, consider the de facto

transferable services of a truck or van. A van and its owner can be parted. The

services of the van can be severed from the owner and de facto transferred into

the employment of another person. The van user’s employment of the van is not

an authority relation over the will of the van owner. If the van owner chooses

to continue the at-will rental contract when the van user chooses to use the

van to go shopping for a can of tuna instead of going to mail a letter, then

the van owner is, in effect, supplying the van user with

tuna-shopping-van-services rather than letter-mailing-van-services. If labor

services could in fact be similarly severed and de facto transferred into the

employment of another person, then there would be no de facto inalienability

critique of the contract. But that is not the case. The imaginative restatement

of the employee as an independent producer of labor does nothing to change

those facts.

“Voluntary Acts Between Knowledgeable Consenting Adults”

Liberalism, and particularly libertarianism, argues that at least a prima facie

case can be made for allowing any voluntary acts between knowledgeable

consenting adults. Does the de facto inalienability argument rule out any such

voluntary acts between consenting adults? The (surprising) answer is “No” [at

least not at the underlying noninstitutional level]. Understanding this answer

requires a keen appreciation of the difference between the institutional (de

jure) overlay and the underlying non-institutional (de facto) realities. The de

facto inalienability argument does not rule out the de facto transfer of labor

since it takes that to be impossible in the first place. What it rules out is

the institutional overlay of the employment contract superimposed on the

reality where labor has in fact not been transferred. What the argument

excludes is at the institutional level, not at the underlying non-institutional

level. It forbids the legal validation of an inherently unfulfillable contract.

It does not forbid any non-institutionally described voluntary acts between

knowledge consenting adults. Nozick pointedly uses the expression “capitalist

acts between consenting adults” [1974, 163]. The adjective “capitalist” is

institutional so Nozick is not simply arguing for allowing voluntary acts

between knowledgeable consenting adults. He is arguing for certain

institutional superstructures to be laid over those voluntary acts. Nozick,

with admirable consistency, argues not only for “capitalist acts” but also for

the slavish acts involved in the voluntary self-enslavement contract [331]–as

if there were no problem for a person to de facto fit the legal role of a

non-person. The abolition of the employment contract, like the abolition of the

self-sale contract, does not infringe on the freedom to make (non-fraudulent)

contracts; it only restricts the “freedom” to make inherently unfulfillable and

naturally invalid contracts. The employment contract is, like the self-sale

contract was, a subtle fraud vouchsafed by the legal system itself. Yet the

point about “voluntary acts” can be illustrated by considering a simple fraud.

There are widgets and cheap pseudo-widgets, and it is difficult to tell them

apart. A buyer B legally buys a widget from the seller S and pays its price,

but S transfers a pseudo-widget to B to “fulfill” the contract. There is a

mismatch between the legal transfers and the factual transfers. In this case,

there are two ways to restore a transfer matching:

change the factual transfers–S furnishes a genuine widget to replace the

pseudo-widget–or,

change the legal transfers–rewrite the legal contract as a contract to buy a

pseudo-widget–which may or may not be agreeable to B.

The point is that there is no fraud involved if B knowingly agrees to the

rewritten contract to buy the pseudo-widget for the same money (the price of a

real widget). If the same de facto transfers could be carried out with no fraud

involved, then what is the point of a fraud? The point is that–without the

fraud–the defrauded party would very likely not agree to the same de facto

transfers. For example in a democratic firm, Labor might not want to make a

gift of the profits to Capital. What in fact is ruled out by the prohibition

against frauds? No voluntary acts between knowledgeable consenting adults are

prohibited. It is the mismatch between the legal transfers and the factual

transfers to fulfill the contract that is prohibited. In the example, the

voluntary act of knowingly exchanging the price of a genuine widget for a

pseudo-widget was not prohibited. While the de facto inalienability argument

does not rule out any voluntary acts between knowledgeable adults, it does rule

out “capitalist acts between consenting adults.” The employment contract

involves a transfer mismatch. But, since labor is de facto non-transferable,

there is only one way to remedy the mismatch, namely rewrite the legal

transfers in some fulfillable form. Consider the simple model of the employment

firm involving the parties Labor and Capital. In the non-institutional factual

description of the transfers, the non-labor inputs K and a sum of money M

(e.g., the wages wL) are factually transferred from Capital to Labor, and Labor

produces the outputs Q and factually transfers them away (say) to Capital. Let

us now rewrite the contracts to fit these realities of “capitalist production,”

and let us further suppose that both parties knowingly agree to these new

contracts. Then there would be no fraud. What do we have? Not an employment

firm, but an example of worker-managed production possibly with transactions at

non-market prices. The non-labor inputs K have been legally purchased by Labor

from Capital, and the outputs Q have been legally appropriated by Labor and

sold to Capital. The net payment $M goes from Capital to Labor. If the

transfers were at market prices then $M = $pQ – rK, but parties may knowingly

agree to exchanges at non-market prices. Or such non-market transactions can be

interpreted as a market transaction followed by a voluntary gift. For instance,

Labor could knowingly agree to buy K and sell Q all for the net payment of the

money $M = $wL. That, in effect, is the market transaction with the net payment

$M = $pQ – rK followed by the voluntary gift of the profits pQ-rK-wL = p from

Labor to Capital. And that, in effect, is what the fraudulent employment

contract induces Labor to do in conventional production. In a democratic firm,

if the workers want to knowingly donate their profits to Capital or any worthy

cause, they are free to do so. These points serve to mark the

non-consequentialist nature of the de facto inalienability critique of the

employment contract. With a different legal overlay, the same de facto

transfers could knowingly and voluntarily take place without involving any

fraud. This also serves to emphasize that there is no inherent conflict between

the de facto inalienability argument and allocative efficiency or Pareto

optimality (applied to non-institutionally specified states of affairs). In a

simple garden-variety fraud, it is presumably always possible to ascertain that

the de facto transfer does not correspond to the agreed-to legal transfer,

e.g., to tell the difference between a pseudo-widget and the genuine article.

The “beauty” of an institutionalized fraud like the employment contract is that

there is no de facto transfer that fulfills the contract; in effect, there is

no genuine widget to contrast with the pseudo-widget. The pseudotransfer of

labor (i.e., voluntary co-operation with the employer) has been accepted for

centuries by the legal authorities themselves as fulfilling the contract. The

“discovery” of the fraud thus requires extensive analysis together with heavy

use of intuition pumps like the case of the criminious employee to see that

labor is not de facto transferable after all. And any responsible scholar and

respected businessperson–being embedded in the institutions of the employment

system–has every incentive not to make that discovery.

Voluntarily Following Orders

The analysis has emphasized the property structure of production, but the same

remarks can be applied, mutatis mutandis, to the parallel governance structure

of production. In the employment relation, the worker W decides to do X because

the employer or boss B says to do X. Here again, the problem does not lie in

the factual reality of W choosing to do what B says; the problem lies in the

legal overlay. In the employment relation, the reality, namely a rather

one-sided form of voluntary co-operation between autonomous decision-making

individuals, is legally interpreted as B “employing” W with B as the sole

decision maker. B is the “head,” W is the “hand.” The head makes the decision

and then employs the hand to carry out the decision. The hired hand is the

conductor of B’s intentions, the instrument of B’s will; it has no “head” of

its own. In terms of the legal transfers between W and B, the employment

contract transfers the use-rights over W’s time, the direct control rights over

W’s services, to the employer B. It is a transfer, not a delegation, of

decision-making authority. But the factual transfers cannot match that legal

transfer. Short of some part-time robot concoction, W remains the de facto

decision-maker over W’s actions. All W can do is to voluntarily co-operate with

B by deciding to do as B says. The facts cannot be changed to eliminate the

mismatch (science fiction aside); human decision-making capacity is not de

facto transferable. The legal contract should be rewritten in a non-fraudulent

form to fit the facts. The legal relationship between W and B is then one of

delegation, not an alienation or transfer of decision-making capacity. W and

all of W’s colleagues in the work process (including B) are the

decision-makers; B acts as their delegate or representative. B’s decision

initiatives are taken in the name of the whole group, in the name of the

governed. When the workers decide to do X because the boss B says to do X, that

would legally as well as factually be their decision–even when X is not a

crime. Similar remarks apply to vote selling. The inalienability critique

argued against W being permitted to sell his or her vote to B so that it became

B’s vote. There was no inalienability critique of W casting W’s vote as B says.

That may indicate what Hutcheson called a “weak mind” but it would not pretend

to alienate the de facto inalienable capacity for decision-making. Would the

abolition of the employment contract impair workers’ freedom? Workers would not

be prevented from performing the same (non-institutionally described) voluntary

acts as before, namely deciding to do what B says. But criminals are today

denied the “contractual freedom” to voluntarily contract into the legal role of

an instrument, the de jure role of a non-decision-making non-responsible tool

employed by the employer. With the abolition of the employment contract, that

“contractual freedom” would also be denied to all de facto responsible

decision-making persons.

Slavery

Why was Slavery Wrong? Involuntariness or Treating Persons as Things?

“Involuntariness” is the usual answer.

David Ellerman

Indeed, classical liberalism takes the most basic framing of a social question

as: “consent or coercion?” In this view, democracy is characterized as

government “with the consent of the governed” so slavery and non-democratic

government were both condemned for the lack of consent.

This common condemnation of slavery on the basis of involuntariness has caused

a large amount of intellectual history to just go “down the memory hole.” Those

who routinely condemn involuntary slavery have either forgotten or never knew

that from Antiquity down almost to the present there have always been those

pro-slavery writers who: (1) presented a defense of slavery based on consent or

contract, and (2) interpreted much of historical slavery as being based on

implicit or explicit contracts.

My focus here is not on (2), the empirical question of whether or not any

historical slavery could be interpreted as being voluntary, but (1), the fact

of intellectual history that so many classical authorities defended slavery if

based on consent.

Intellectual history of the voluntary slavery contract

The Old Testament of the Bible is a convenient starting point. The Old

Testament law was that, after six years of service, any Hebrew slave was to be

set free in the seventh year, the year of the Jubilee.

But if he says to you, “I will not go out from you,” because he loves you and

your household, since he fares well with you, then you shall take an awl, and

thrust it through his ear into the door, and he shall be your bondman for ever.

[See Deut. 15:16-17; also Exodus 21:5-6.]

Much of Western jurisprudence was developed out of Roman law. In the Institutes

of Justinian, Roman law provided three legal ways to become a slave.

Slaves either are born or become so. They are born so when their mother is a

slave; they become so either by the law of nations, that is, by captivity, or

by the civil law, as when a free person, above the age of twenty, suffers

himself to be sold, that he may share the price given for him. [Institutes Lib.

I, Tit. III, 4]

In addition to the third means of outright contractual slavery, the other two

means were also seen as having aspects of contract. A person born of a slave

mother and raised using the master’s food, clothing, and shelter was considered

as being in a perpetual servitude contract to trade a lifetime of labor for

those past and future provisions. In the natural rights tradition, Samuel

Pufendorf (1632-94) explicitly gave that contractual interpretation.

Whereas, therefore, the Master afforded such Infant Nourishment, long before

his Service could be of any Use to him; and whereas all the following Services

of his Life could not much exceed the Value of his Maintenance, he is not to

leave his Master’s Service without his Consent. But ’tis manifest, That since

these Bondmen came into a State of Servitude not by any Fault of their own,

there can be no Pretence that they should be otherwise dealt withal, than as if

they were in the Condition of perpetual hired Servants. [Pufendorf 2003 (1673),

186-7]

Manumission was an early repayment or cancellation of that debt. And Thomas

Hobbes, for example, clearly saw a “covenant” in this ancient practice of

enslaving prisoners of war.

And this dominion is then acquired to the victor when the vanquished, to avoid

the present stroke of death, covenants either in express words or by other

sufficient signs of the will that, so long as his life and the liberty of his

body is allowed him, the victor shall have the use thereof at his pleasure. …

It is not, therefore, the victory that gives the right of dominion over the

vanquished but his own covenant. [Hobbes 1958 (1651), Bk. II, chapter 20]

Thus all of the three legal means of becoming a slave in Roman law had explicit

or implicit contractual interpretations.

In addition to giving a contractual interpretation to the slavery of a child

born of a slave mother, Pufendorf noted that an explicit slavery contract was a

lifetime version of the master-servant contract (employment contract in modern

terms) where a servant could be hired or rented for a certain time and would

receive wages.

But to such a Servant as voluntarily offers himself to perpetual Servitude, the

Master is obliged to allow perpetual Maintenance, and all Necessaries for this

Life; it being his Duty on the other hand to give his constant Labour in all

Services whereto his Master shall command him, and whatsoever he shall gain

thereby, he is to deliver to him. [Pufendorf 2003 (1673), 185]

John Locke’s Two Treatises of Government (1690) is a classic of liberal

thought. Locke gave a ringing condemnation of a contract which gave the master

the power of life or death over the slave.

For a Man, not having the Power of his own Life, cannot, by Compact or his own

Consent, enslave himself to any one, nor put himself under the Absolute,

Arbitrary Power of another, to take away his Life, when he pleases. [Second

Treatise, §23]

Locke is ruling out a voluntary version of the old Roman slavery where the

master could take the life of the slave with impunity. But once the contract

was put on a more civilized footing, Locke saw no problem and nicely renamed it

“drudgery.”

For, if once Compact enter between them, and make an agreement for a limited

Power on the one side, and Obedience on the other, the State of War and Slavery

ceases, as long as the Compact endures…. I confess, we find among the Jews, as

well as other Nations, that Men did sell themselves; but, ’tis plain, this was

only to Drudgery, not to Slavery. For, it is evident, the Person sold was not

under an Absolute, Arbitrary, Despotical Power. [Second Treatise, §24]

Moreover, Locke agreed with Hobbes on the practice of enslaving the captives in

a “Just War” as a quid pro quo exchange based on the on-going consent of the

captive.

Indeed having, by his fault, forfeited his own Life, by some Act that deserves

Death; he, to whom he has forfeited it, may (when he has him in his Power)

delay to take it, and make use of him to his own Service, and he does him no

injury by it. For, whenever he finds the hardship of his Slavery out-weigh the

value of his Life, ’tis in his Power, by resisting the Will of his Master, to

draw on himself the Death he desires. [Second Treatise, §23]

Locke seemed to have justified slavery in the Carolinas by interpreting the

raids into Africa as just wars and the slaves as the captives [See Laslett

1960, notes on §24, 325-26].

William Blackstone’s (1723-1780) codification of common law was quite important

in the development of English and American jurisprudence. Like Locke,

Blackstone takes a seemingly modern moral stand to rule out a slavery where “an

absolute and unlimited power is given to the master over the life and fortune

of the slave.” Such a slave would be free “the instant he lands in England.”

Yet, with regard to any right which the master may have lawfully acquired to

the perpetual service of John or Thomas, this will remain exactly in the same

state as before: for this is no more than the same state of subjection for

life, which every apprentice submits to for the space of seven years, or

sometimes for a longer term. [Blackstone 1959 (1765), 72, section on "Master

and Servant"]

The Debates about American Slavery

An interesting case study in the selectiveness of liberal intellectual history

is the treatment of the proslavery writers in the American debates. The

proslavery position is usually presented as being based on illiberal racist or

paternalistic arguments. Considerable attention is lavished on illiberal

paternalistic writers such as George Fitzhugh [See, for example, Genovese 1971;

Wish 1960; or Fitzhugh 1960] while consent-based contractual defenders of

slavery are passed over in (embarrassed?) silence.

For example, Rev. Samuel Seabury [1969 (1861)] gave a sophisticated

liberal-contractarian defense of ante-bellum slavery in the Hobbes-Pufendorf

tradition of alienable natural rights theory.