Capital-owning Democracy

What is a Worker-capitalist?

A worker-capitalist is working person, either entrepreneur or wage earner, whose primary form of property ownership is a liquid capital base.

To the best of my knowledge the term worker-capitalist, as used here, was first coined by Jose Pinera, the former Minister of Labor in Chile. He is the architect of their highly successful private social security pension system. He used it to describe a new type of property owner whose wealth consisted primarily of ownership of financial capital. To make the meaning a bit clearer, it stems from the historical attempts to create a society less polarized in terms of wealth owned by the haves versus the have-nots. Karl Marx's solution was to have the state own everything and to effectively abolish all ownership of private property, by violent overthrow of the government if necessary. His theory was that if the state owned everything, the working taxpayer would own the capital assets in the economy.

In the 1930s Franklin Delano Roosevelt tried another tack, a socialst-style old-age pension system(Social Security) and a push to create a real-property owning democracy by jiggering the tax laws to exempt real estate from most income taxation and subsidizing mortgage loans to low-income borrowers. His theory being that if one didn't own his own home, one could not feel connected to the general economy. By biasing the tax system toward home ownership, he was making it less expensive. By encouraging home ownership, FDR thought, he was shoring up democratic, free-market sentiment. At the same time, FDR also imposed a state-run, pay-as-you-go pension system(Social Security) modeled after that created by Chancellor Otto Von Bismark in Germany.

Both Marx and FDR were attempting to create a property-owning democracy in which the middle and lower clases have a tangible stake and the ability to actively participate in the broader economy. With the demise of the Soviet Union and communist-bloc Eastern Europe, Marx's answer clearly didn't work. When everyone owns something, nobody actually owns it, and nobody cares to work to maintain or improve it. The real estate crash of 2008 and the ongoing deficits in the U.S. Social Security trust fund show that FDR's solution, while it makes credit easier to get, doesn't really solve the problem of encouraging home ownership among the lower income groups. At worst, as we all saw in 2008, making credit easier to get can can encourage home ownership so much that home prices rise sharply, causing a real estate price bubble that makes houses less affordable in the process and causing far wider hardship when the inevitable day of reckoning arrives in the housing market. Social Security has been able to stay solvent until recently only by cutting benefits in real terms and raising taxes. Like all such systems, it sows the seeds of its own destruction because there the retirement population eventualy outstrips the ability of workers and taxation to continue supporting it. This is the same flaw in a Ponzi scheme writ large.

Pinera inherited the mess after the coup led by Augost Pinochet which ousted Salvador Allende in 1973. Allende had tried Communism with the effect of bankrupting the country and instigating his own demise. Pinochet was not a saint by any stretch of the imagination. He tortured and killed thousands of people as suspected communists for little more than disagreeing with him. However, having taken over a bankrupt nation from  the communist Allende regime and not wanting to become the target of a coup himself, he adopted a staunch free-market capitalist economic policy. Pinera, a student of economist Milton Friedman, realized that the Bismarkian, socialist-style social security system was simply untenable. There simply were too few workers, and no amount of taxes, that would provide enough money to cover the pensions payments the government owed to the workers. He proposed instead a privately funded system in which each worker contributes to a personal retirement account(PRA) similar to a mutual fund to which he or she would have legal title, not the federal governemnt. If a worker contributed for twenty years and failed to reach the legally defined minimum retirement equity by the legal retirement age, the government would pay the difference into their retirement account to bring it to the legal minimum. This is called a top-up subsidy. Thus, workers would be effectively guaranteed a minimum montly pension paid partly by their PRA and the government covering the difference between the minimum and what their PRA could afford. 

What this plan did was create a new type of property owners whose primary asset was a capital base with which they could invest. As more and more workers joined and contributed to the system, more and more of the Chilean GDP was effectively owned by workers and retirees. Thus Pinera referred to them as worker-capitalists. Unlike the Marx and FDR solutions, Pinera's solution works for two reasons: it rewards thrift and hard work at the individual level, and it allows people to keep what they earn rather than attempt to redistribute it from those who have earned it to those who have not. Workers and retirees actually own their own small capital base and are free to invest it. There are restrictions on what investments are allowed to prevent excessive speculation, but the system works and provides billions each year in ongoing, debt-free, market-driven(as upposed to politically/crony driven) economic stimulus. As more and more people accumulate equity in their PRAs, they acquire greater econimic self-sufficiency. It is a brilliant application of the concepts promoted on this site, so I stole the term.

Becoming a worker-capitalist doesn't require a government pension or government support. You can do it on your own, though you will need to pay attention to the tax consequenses. This site is dedicated to the creation of as many worker-capitalists as possible.