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Why “Welfare Capitalism” Could Still Work For All

September 19th, 2011


Bleak. Desperate. Urgent. The words leap from almost every headline about the state of the American economy these days. Official unemployment is stuck north of 9%, while the effective rate is likely above 16%. Millions of people are suffering.

Meanwhile, businesses of all sizes are sitting on mountains of cash, reluctant to hire workers — even those laid off in the past three years — because they expect things are going to get worse. Corporate leaders say they want to protect employees, but it’s hard for most Americans to believe a CEO who argues that “we’re all in this together.”

There was a time in American history when a few firms — some, very big — tried, and often succeeded, in living by the creed that it is possible to protect people as well as profits.

The Rise of Welfare Capitalism

From the last two decades of the 19th century to the start of World War II, “welfare capitalism” was part of this country’s economic landscape. There was never a precise definition of what welfare capitalism comprised. But starting around 1880, some business leaders came to the conclusion that the incredible level of strife inside their companies — perpetual, sometimes violent, war between workers and management — was just too inefficient to continue. Endless strikes, employee turnover rates of 200% to 300% a year — neither side was coming out a winner.

Gradually, a few companies began to reshape day-to-day operations to improve both working conditions and the size of weekly pay packets in the hope that employees might see it in their interest to reciprocate by working more productively.

It’s also undeniable that many of these employers hoped to convince their workers that unions (then in the ascendency, terrifying most owners) were unnecessary. Coercive? Sometimes yes.

Harvard historian Lizabeth Cohen identified five basic elements of welfare capitalism:

1. A desire to improve workplace relations.
2. Financial incentives to raise productivity.
3. Experiments with shop-floor democracy (as long as it didn’t include unions).
4. Programs to help the lives of employees outside of work.
5. Shouldering greater civic responsibilities.

And of course, the prime directive: to make as much profit as possible over the long term.

Who Were Welfare Capitalist Firms?

Some of the biggest names in the country embraced many of the basic principles, including Kodak (EK), Sears Roebuck, Procter & Gamble (PG), and General Electric (GE). None were perfect employers, some bent the concepts to favor management, others intruded into the private lives of employees, but overall, the idea that a company could and should provide some degree of security for its workers — even for self-interested financial reasons — became fairly commonplace.

These companies were generally both profitable and innovative. Workers weren’t necessarily whistling happily as they trudged onto the factory floor each morning, but the basic employment bargain — work hard in return for a decent, secure wage — seemed fair to many.

John Commons, the economist often regarded as the “spiritual father” of the New Deal, said the best welfare-capitalist firms were “so far ahead of the game that trade unions cannot touch them. … Conditions are better, wages are better, security is better than unions can deliver.”

The Decline of a Good Idea

Sadly, during the Great Depression, most welfare-capitalist firms abandoned the key elements in order to survive.

Was that inevitable?” has been a rich topic for debate by scholars ever since, with some arguing that welfare capitalism was simply too new to weather such a storm, while others claim that the increased security offered to workers was inherently too costly.

Some did survive, of course, evolving with the times, like the privately held S.C. Johnson, the huge maker of household cleaning products. Cleveland’s Lincoln Electric (LECO), one of the most successful manufacturing firms in the country, has retained its technological leadership and profitability over the past 100 years while avoiding layoffs for nearly three-quarters of a century and paying wages that have consistently exceeded the industry average.

Nearly 30 years ago, Harvard economist Martin Weitzman wrote The Share Economy, in which he argued that if significantly more firms shared profits with their employees, it would go a long way to ensuring a much more stable national economy — to the mutual benefit of workers, investors, and the country as a whole. The New York Times called the book “the most important contribution to economic thought since Keynes.”

Still About the Bottom Line

More recently, the concept of shared capitalism, drawing on the insights and research of leading economists such as Richard Freeman and Doug Kruse, has been receiving increased public attention. (A major challenge, understandably, is developing the mutual sense of trust that short-term sacrifices are worth the pain for long-term gains.)

None of these ideas for running a successful business in America — from welfare capitalism to shared capitalism — are based on altruism. That’s a nonstarter in this economy (bemoan that as you wish).

But surely it’s time to revisit the idea that a corporation can remain highly profitable over the long term by providing a floor of economic security for its employees — given that far too many American employers are doing neither.

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