How 'Welfare Capitalism' Can Save Our Country

Welfare capitalism can save the United StatseBleak. 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.

Motley Fool guest contributor Frank Koller is the author of Spark: How Old-Fashioned Values Drive a Twenty-First-Century Corporation. Frank does not own shares of any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Procter & Gamble.



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27 Comments

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wdcarterjr

Anybody that makes more than me is GREEDY. Anybody that makes less than me is a SLACKER.

September 22 2011 at 3:42 PM Report abuse rate up rate down Reply
Bert

Sam Walton, Google, microsoft etc. are counter to your argument about sharing . Welfare capitalism is a loaded term that republican advocates are using to justify the status quo. Prodcutive companies have always invested in working conditions , incentive payments , corporate responsibilty , training and worker input to improve their profits in the long term ,retain the best employees and improve worker satisfaction and prodcutivity . I have no evidence but would suggest that much of what you call welfare capitalism is really throwing workers a few tokens to hide other abuses . For example the gift from Facebook to newark to improve their image and defer attention from their other publicity .

September 20 2011 at 12:39 PM Report abuse rate up rate down Reply
surfr45

We tax payers are being forced to give $5,000 "signing bonus" to every GM employee. When are you people going to learn that the Demoncrats are nothing more than a bunch of corrupt thugs?

September 20 2011 at 6:27 AM Report abuse +2 rate up rate down Reply
1 reply to surfr45's comment
rini1946

I do not mind the signing bonus but it's the profit sharing that i dislike they are making over 20 dollars an hour for work you can get a machine to do. So the auto makers are getting machines to do the work. So to sum it up by getting all that money they are getting rid of jobs because it is cheaper to get a machine to do the work or ship it out of the country like chrysler did shipping trucks to mexico and minivans to canada . If I had stock in the company I should get as much as they do .

September 20 2011 at 12:42 PM Report abuse +1 rate up rate down Reply
theironduke

Having worked for both Johnson's Wax AND Proctor and Gamble, I can say with some confidence the author has worked for neither. Also, having worked in Silicon Valley, I have watched the demise of any number of firms, such as Sun and Silicon Graphics, that started out at least, as Google still does, offerring their employees lavish working conditions. Sadly, having worked side by side with employees in these environments, and watched others, I can say with some confidence that this long term "paterialistic" appoach to employees is not sustainable in a public market. The Johnson family can do it because it is private. As other commenters have noted, Lincoln is falling further and further behind in the welding marketplace. The problem is basic human nature. When the employees are not threatened or driven or worried, they become complacent even if content. And definitely protective of the "status quo." Change is difficult to impliment in ANY environment where most people like things just as they are. You can appeal to their larger wisdom and say the firm needs to stay competitive, but this seldom works for long or on any scale. As Marx discovered, idealogy makes for poor practical solutions.

September 20 2011 at 5:22 AM Report abuse +3 rate up rate down Reply
1 reply to theironduke's comment
rini1946

You are right it is like the auto industries with unions there is basic no incentive to work I get the profit sharing bonus or raise every year did not matter if I worked my butt off or I sat on my butt. This is not to say all union workers are lazy because they are not. but because of the unions the ones that are not keep thier job.

September 20 2011 at 12:51 PM Report abuse rate up rate down Reply
boarsnest9

Did this "artical" come fron N.P.R. ?

September 20 2011 at 4:50 AM Report abuse +1 rate up rate down Reply
lenguss

Kodak is falling apart, Sears is failing, Lincoln Electric's stock is static or declining and GE practically invented time and motion studies to record every action by every worker to improve efficiency. You seem to forget that public corporations belong to the stockholders, not the employees, and the stockholders are entitled to make money on their investment. Private corporations can pay what they like, do what they like. I believe your concept of history is deluded. This was the time when children were chained to the machinery in the mills, women were forced to live under many restrictions as conditions of their employment, and men were delighted to work for a couple of dollars a day. Welfare capitalism? Give me a break. Why do you think the New Deal came into being?

September 20 2011 at 1:14 AM Report abuse +2 rate up rate down Reply
1 reply to lenguss's comment
BABIN

Without employes any company can't do anything and all stockholders can kiss my a**,and let just say what ''if'' all employes completly stop go in any work and no replacement at all...I mean all employers in the whole world can do anything if go together and no way any rich guy, any stockholders, any company can't do anything about that...for that only reason Capitlism destroy Communism...if all working people stick together can do anything about wages, about workplace, about insurance about anything at all....oweners or stockholder is not going to work and replace this all working peoples...so in the end is going to pay what working person deserve or pay stockholder person who do nothing at all...you can have all the money in the whole world no help if you don't have somebody to make for you things for which you need...so pay real money to that person not for yourself...AMEN...

September 20 2011 at 4:25 AM Report abuse -3 rate up rate down Reply
1 reply to BABIN's comment
rini1946

sorry but without stockholder there would be no company. Not all stock holders are rich most are middle class and are looking to make a profit off thier money. better than the few % that banks offer. I was a working person now retired. And the dividens which are not making me a millionare dos help a little.

September 20 2011 at 12:33 PM Report abuse rate up rate down
franzlabowski4

Microsoft and Intel certainly meet Ms. Cohen's definition of welfare capitalism. They both are highly profitable, but their share prices have been stuck in the gutter for years, so where does that leave us? Well, let's see, I think the article is telling us to pamper the employee but screw anybody who has saved enough money to invest in stocks. How far left does that make the author? Bright red, or only pink?

September 20 2011 at 1:04 AM Report abuse rate up rate down Reply
Jeff Johnson

They lost me with 'New York Times' quote "Most important contribution to economic thought, since Keynes". Hell, why stop at Keynes, they should just come out and tell us how much they adore Marx and Mao. They could follow it up with the shining examples of the worker's paradise that the USSR became....

September 19 2011 at 11:16 PM Report abuse rate up rate down Reply
Geoff

GARBAGE Article. Call WM to pick up the trash!

September 19 2011 at 7:55 PM Report abuse +5 rate up rate down Reply
wdcarterjr

Why do we all have to work? Let those that want do so and pay everything into the government and let the government evenly distribut it to everybody.

September 19 2011 at 7:22 PM Report abuse rate up rate down Reply
1 reply to wdcarterjr's comment
dabrownman

I still want twice as much as those stupid workers get, 3 times more than you get and 10 times mire than ex wife gets who can't seem to live on less than 100 grand a year :-)

No I want all of Warren Buffets money. He seems to be aching to give it away and why Bill Gates would need it is beyond me. I'll take Bills Money too. If I could have all of Bolls money I would just take the billion dollars that Warren owes the IRS for nit paying taxes at one of his companies they have owed but haven't paid since 2002.

September 19 2011 at 7:57 PM Report abuse rate up rate down Reply