In Defence of Public Ownership: A Reply to Frye

Socialist republicans claim that public ownership of productive property can curtail economic domination. Harrison Frye makes a lucid case for doubting this conclusion. ¹ Firstly, public ownership may decrease economic efficiency due to high negotiation and agency costs. When this results in fewer economic goods being available to meet people’s basic needs, then they will be more vulnerable to domination. Secondly, managers can evade the accountability that would keep their dominating power in check if groups with heterogeneous interests participate in economic governance, because these groups can be played against one another under conditions where criteria for judging managerial performance are muddied.

Frye is correct to think economic efficiency and managerial accountability are important considerations when evaluating our institutions from a republican standpoint. They join many other factors that can influence the extent of domination, including the health, education, and happiness of the citizenry; the distribution of wealth, power, and status among them; the presence of the conditions for security, solidarity, and political stability; and so on. Socialist economic prescriptions must ultimately be assessed from a republican perspective that takes the whole sweep of such factors into account. But even considered in isolation, Frye’s appeals to efficiency and accountability do not tell against socialist republicanism.

Does public ownership decrease economic efficiency? Frye suggests two familiar reasons why the form of public ownership that I recommend might do so. ² Negotiation costs are pushed down in investor-owned firms because shareholders tend to agree that profit matters most. When there are multiple stakeholders with heterogeneous goals, however, reaching collective decisions can be more onerous, with additional process costs reducing efficiency. Agency costs in investor-owned firms also tend to be relatively low because profitability provides a simple albeit imperfect criterion for monitoring the performance of managers to ensure that they are not pursuing their interests at the expense of the owners. But if there are numerous participants in economic governance whose goals diverge, then oversight of managers becomes more difficult, with a fractured group of stakeholders being easier to exploit.

Let us suppose these theorised effects are real. There are, however, reasons to think that alternatives to investor-owned firms can bolster economic efficiency in other respects. Even among champions of the transaction cost approach that Frye draws upon, there is acknowledgement that worker-owned enterprises may benefit from higher retention of experienced staff, better communication of worker preferences, and more effective oversight of workers. ³ Greater control by workers, without direct worker-ownership, might also increase efficiency in other ways. For example, the daily experience and expertise that workers acquire from their familiarity with the operations of their workplaces can make them better than distant and information-poor shareholders at monitoring management. Moreover, it has been argued that worker participation in economic governance will lead workers to be less alienated in their jobs and so be more productive. ⁴ The abstract theory of the firm does not give us a clear-cut answer then as to the relative efficiency of alternative models of ownership and control.

Looking to the real economy might help us fare better. Frye suggests that the preponderance of shareholder-owned firms in the modern economy could be explained by the efficiency costs of alternatives. But this hypothesis needs much greater empirical support to be convincing, since there are many other factors that could account for the dominance of this form—political opposition from capitalists or workers themselves, path-dependency effects, lack of institutional support, contingent systemic biases in the wider economy, and so on. ⁵ Furthermore, if we simply ask more directly whether public ownership in particular has actually been shown to be less efficient, the answer is no. As one recent wide-ranging survey of the empirical literature on economic efficiency concludes, “decades of studies have yielded no consensus as to the relative economic merits of public versus private ownership,” with many empirical assessments showing greater productivity growth and efficiency, or no significant deficits, when contrasted with investor-owned enterprises. ⁶

Public ownership does not, then, appear to often impose burdensome efficiency losses. Frye is careful not to commit to the contrary conclusion—simply maintaining that efficiency ought to be taken into account. Indeed, efficiency is to have special purchase in debates about domination, since wealth can insulate citizens from dominating power (as I myself argue). ⁷ While Frye recognises distribution as well as efficiency matters if high economic output is to contribute to reducing domination, this thought is not pursued in relation to public ownership specifically. Consider two scenarios: (i) high levels of public ownership leads to lower economic efficiency and total output, but workers have high levels of control in their workplaces and the citizenry as a whole has high levels of control over economic output; (ii) low levels of public ownership leads to higher economic efficiency and total output, but workers have little control in their workplaces and the citizenry has lower levels of control over economic output. On the assumption that greater control for workers and citizens will lead to a more egalitarian economic distribution, and in the absence of truly precipitous efficiency declines, then the first scenario could be significantly better at shielding citizens from domination purely in terms of the money in people’s pockets and the basic services readily available to them. This effect would be obtained even without further redistribution through additional fiscal measures, or the introduction of a universal basic income and services. In short, the distributional effects of public ownership itself on nondomination may more than offset potential efficiency costs.

Efficiency arguments against socialist republicanism are not ultimately convincing. Potential efficiency costs of public ownership need to be weighed against potential efficiency benefits from greater worker participation and oversight of management. There is no conclusive argument to demonstrate that alternatives to investor-owned firms are currently sparse because of low efficiency. The actual empirical evidence in relation to public ownership is itself mixed and does not give us a strong reason to think there will be prohibitive declines in efficiency. Moreover, the egalitarian distributional effects of public ownership with significant worker and citizen control are likely to outweigh efficiency costs with respect to the influence on dominating power. None of this requires us to take the further step of shifting the focus from technical and productive efficiency to consider social efficiency and the externalities that investor-owned firms impose on citizens.

Frye raises another line of objection to socialist republican remedies that—although emerging from concerns about agency costs—can, it seems to me, be articulated independently of the threat of low technical or productive efficiency under public ownership. It emphasises the difficulty of ensuring that managers are held accountable when multiple stakeholders with heterogeneous interests are participants in economic governance. Let us grant that managers and some degree of managerial discretion are needed in any large-scale economic enterprise. If domination is not to result, this necessitates mechanisms for accountability in the exercise of managerial power, because “discretion opens up the possibility of using that power in a way that does not track the interests of those over which they have power.” ⁸ But the polyarchic form of public ownership that I advocate is thought to impede this accountability “by both complicating the metric of wrongdoing and allowing managers to play politics.” ⁸ When there is no single simple criterion like profitability to use to judge a manager’s performance, then the business of assessing and holding them accountable for wrongdoing becomes messier. Furthermore, if multiple principals with different aims and interests are tasked with monitoring an agent, then that agent can use the lack of a unified front among the principals to avoid oversight.

My suspicion is that a fatal equivocation has occurred here in how accountability is understood. There can indeed be difficulties in ensuring managers are accountable when multiple stakeholders with different and sometimes competing interests are tasked with governance. But the problems this introduces are primarily those of accountability to the stakeholders rather than accountability that tracks the interests of everyone that managerial power is held over. Take investor-ownership, where the shared profit-motive of the principals can make it easier for them to take a stand against behaviour that can hurt the bottom line—shirking, nepotism, recklessness, stealing, and other forms of financial mismanagement. The power of managers is thus more easily made to track the interests of shareholders, who are thereby less subject to the arbitrary will of management. But what about others subject to managerial power—such as workers who encounter this power more intimately and viscerally in their daily lives? We might hope a monomaniacal focus on profit or dividends will lead shareholders to keep in check some of the managerial excesses that harm workers—for instance, sexist or racist discrimination that would lead valuable employees to leave unnecessarily. But the accountability of managers to shareholders in investor-owned firms very often drives a rapacious and arbitrary exercise of power over workers rather than shielding them from it. If the one thing shareholders care about is profit, then managers will have free reign to use the tremendous power at their disposal to pressure, bully, exploit, and lie to workers in pursuit of these ends. How is this form of managerial accountability forcing their power to track the interests of the workers over whom it is held?

Similar lessons apply to arbitrary managerial power over consumers and citizens. The discretion to engage in price gouging with respect to an important medicine will not be rendered nonarbitrary by accountability to shareholders who agree that profit maximisation is the primary metric for assessing managerial performance—at least, in the absence of sufficient reputational damage to the firm. Nor will accountability to profit-hungry shareholders be a restraint on the arbitrary power of managers to shut down a factory, supermarket, or utility that the local community relies upon. The decision-making process in these cases is indifferent to the interests of a great many of those over whom managerial power is held. Workers, consumers, and citizens alike are not, then, effectively shielded from domination by managerial accountability to shareholders. Indeed, the opposite is true; this form of economic governance lets arbitrary power run wild. A narrow focus on the principal–agent relationship merely between stakeholder and manager can blind us to this fact.

Socialist republicans believe we can reduce economic domination by ensuring that control of economic institutions more closely reflects those affected by their activities. The idea that many different interests will have to be negotiated is therefore no surprise. As Hélène Landemore and Isabelle Ferreras tell us, “it is precisely because of the heterogeneity of interests at play that more democracy and more workers’ participation is needed.” ⁹ Whatever the limitations of the investor-owned firm in stemming domination, does the multiplicity of voices under an inclusive form of public ownership nevertheless create such a cacophony that domination goes undetected and unchecked? Frye worries that such an approach will overcomplicate the metric of wrongdoing for managers, whereas I have suggested that profit alone is simply the wrong measuring stick if we care about domination. I do not deny that more democratically responsive standards of accountability are likely to be more difficult to quantify. But Amartya Sen’s maxim for social measurement is salutary here: “it is undoubtedly more important to be vaguely right than to be precisely wrong.” ¹⁰

There may be some truth to Frye’s related claim that managers or other potential dominators could play stakeholders with different interests off against one another in an attempt to escape effective monitoring and regulation. Against this should be weighed some of the possible benefits of being able to draw upon a larger and more diverse group in the oversight of potential dominators. Aristotle recognised some of these merits of collective governance when he observed that “each individual among the many has a share of excellence and practical wisdom, and when they meet together, just as they become in a manner one man, who has many feet, and hands, and senses, so too with regard to their character and thought.” ¹¹ What may be lost in cohesiveness of vision and purpose in this transformation may be gained in the expansion of capacities for scrutiny, deliberation, and action.

Nevertheless, socialist republicans should be attentive to some of the trade-offs that might be involved in pursuing an inclusive form of public ownership that seeks worker, consumer, and citizen participation, when contrasted with a more centralised and top-down “Morrisonian” model of public ownership through nationalisation and state control. ¹² When public ownership is polyarchic then it avoids placing dominating concentrations of power in the hands of the few, but the lack of a single stakeholder like the state may mean that the socialist republican has to think more creatively about institutional mechanisms that could dampen the ability of other potential dominators to slip through the cracks. But this is an instance of a general tension in republican governance: a highly unified power that could quash domination—whether in the hands of private shareholders or the state—risks being overmighty enough to constitute domination. My view is that an economy based on investor-owned firms not only does not escape this tension, but succumbs to it in a particularly egregious way, since the stakeholder power it grants to a homogenous group of profit-seeking shareholders tends to accelerate rather than block domination elsewhere in the firm in addition to being directly dominating itself. In short, it is the worst of both worlds.

In conclusion, I am not convinced on grounds of efficiency or accountability that socialist republicanism would fail to curtail the economic domination rife in capitalist societies. Frye’s critique can be restated in terms of three searching questions for the form of public ownership I favour. Will it significantly reduce economic efficiency? Would such a reduction increase domination? Will a lack of managerial accountability increase domination? My answer to all three questions has been no. I have argued that neither theoretical considerations nor the empirical evidence establishes that public ownership is particularly susceptible to a decline in technical or productive efficiency. Even if we did find this effect empirically, the egalitarian distributive effects of public ownership are likely to be more decisive in ensuring that the needy are not left so economically vulnerable that they are susceptible to domination. Finally, the managerial accountability imposed by investor-owned firms takes the wrong form to shield workers, consumers, and citizens from dominating managerial power, even if it protects the financial interests of shareholders. Frye has presented some interesting challenges—but socialist republicanism passes the test.