J. K. Galbraith has spoken of private affluence and public squalor. It is significant that he referred to the United States, reputedly, and in accordance with conventional measurements, the richest country in the world. How could there be public squalor in the richest country, and, in fact, much more of it than in many other countries whose Gross National Product, adjusted for size of population, is markedly smaller?
— E.F. Schumacher, the opening lines of the final chapter
We do not yet know what combination of social forces brought down the Berlin Wall, and the de-legitimatized communist structures in Eastern Bloc countries. Maybe similar forces will de-legitimatize the unacceptable faces of capitalism and exploitation. I would like to believe that the forces developing trusteeship principles will be paramount in transforming industrial society in the next century.
— Godric Bader, Scott Bader Commonwealth, in the 25th anniversary edition (1999).
A community land trust is a not-for-profit organization with membership open to any resident of the geographical region or bioregion where it is located. A community land trust acquires land by gift or purchase and then develops a land-use plan for the parcel, identifying which lands should remain forever wild and which should support low-impact development. The land trust then leases sites for the identified purposes. The lease runs for 99 years and is inheritable and renewable on the original terms. The leaseholder owns the buildings and any agricultural improvements on the land, but not the land itself. Upon resale, leaseholders are restricted to selling their buildings and improvements at current replacement cost, excluding the land’s value from the transfer. The resale restriction ensures that the land will never again be capitalized and will provide affordable access to land for future generations. The land-use plan ensures that the resource base is maintained and enriched, not depleted. By restructuring our formal relationship to the land from one of owner to one of steward, a community land trust encourages proper long-term care…
— Bob Swann, Co-founder of the Schumacher Center, (1999).
This final chapter is far more practical than the rest of them – because it looks at one proposal which Schumacher believes has the capacity to change the world for the better: the Scott Bader Commonwealth.
What the chapter says…
Schumacher starts the chapter by posing a number of rhetorical questions:
“If economic growth to the present American level has been unable to get rid of public squalor – or, maybe, has even been accompanied by its increase – how could one reasonably expect that further ‘growth’ would mitigate or remove it? How is it to be explained that, by and large, the countries with the highest growth rates tend to be the most polluted and also to be afflicted by public squalor to an altogether astonishing degree? If the Gross National Product of the United Kingdom grew by, say, five per cent — or about £2,000 million a year — could we then use all or most of his money, this additional wealth, to fulfil our nation’s aspirations?”
“Assuredly not,” he says explaining that all the wealth, as it arises, gets snaffled off privately by the owners. So much so that their public authorities have hardly any income of their own:
“Wealth, as it arises, is immediately reduced to extracting from the pockets of their citizens monies which the citizens consider to be rightfully their own.”
This leads to what he calls an “endless battle of wits between tax collectors and citizens, in which the rich, with the help of highly paid tax experts, normally do very much better than the poor. In an effort to stop ‘loopholes’ the tax laws become ever more complicated and the demand for —and therefore the income of — tax consultants becomes ever larger. As the taxpayers feel that something they have earned is being taken away from them, they not only try to exploit every possibility of legal tax avoidance, not to mention practices of illegal tax evasion, they also raise an insistent cry in favor of the curtailment of public expenditure.”
Schumacher is at least clear-sighted enough to understand that “’More taxation for more public expenditure’ would not be a vote-catching slogan in an election campaign, no matter how glaring… the discrepancy between private affluence and public squalor.”
He also sees clearly that a great deal of public spending helps business in particular:
“It is not merely a question of public squalor, such as the squalor of many mental homes, of prisons, and of countless other publicly maintained services and institutions; this is the negative side of the problem. The positive side arises where large amounts of public funds have been and are being spent on what is generally called the ‘infrastructure’, and the benefits go largely to private enterprise free of charge… The truth is that a large part of the costs of private enterprise has been borne by the public authorities – because they pay for the infrastructure and that the profits of private enterprise therefore greatly overstate its achievement.”
The Scott Bader Commonwealth
Originally Swiss, Ernest Bader launched Scott Bader Co Ltd in 1920, at the age of thirty, together with his wife Rose Scott. By 1951, he had a “prosperous medium-scale business employing 161 people, with a turnover of about £625,000 a year and net profits exceeding £72,000. Having started with virtually nothing, he and his family had become prosperous.”
The Scott Bader company was by then established as a leading producer of polyester resins and also other sophisticated products.
The young Bader had “resented the very ideas of a ‘labour market’ and a ‘wages system’, and particularly the thought that capital employed men, instead of men employing capital,” says Schumacher:
“Finding himself now in the position of employer, he never forgot that his success and prosperity were the achievements not of himself alone but of all his collaborators and decidedly also of the society within which he was privileged to operate.”
He knew that no major change could be made without two things:
- “A transformation of ownership – mere profit-sharing, which he had practised from the very start, was not enough.”
- “The voluntary acceptance of certain self-denying ordinances.”
For the first, he set up the Scott Bader Commonwealth in which he handed over 90 per cent of the company in 1951 (the final ten per cent he gave in 1963).
For the second, he agreed with his former employees to draft a constitution to define the distribution of the power which private ownership implies, and to impose the following restrictions on their freedom of action in the future:
- The company should not grow beyond 350 people. If it looked likely to do so, then they would set up new, independent units, organized along the lines of the Scott Bader Commonwealth.
- The pay gap between the highest and the lowest paid should never go beyond a ratio of 1:7, irrespective of age, gender, function or experience.
- Since members of the Commonwealth are partners and not employees, they can’t be dismissed by their co-partners for any reason other than gross personal misconduct.
- The Board of Directors of the firm, Scott Bader Co Ltd, should be fully accountable to the Commonwealth. Under the rules laid down in the constitution, the Commonwealth has the right and duty to confirm or withdraw the appointment of directors and also to agree how much they should be paid.
- A maximum of 40% of the net profits of Scott Bader would be taken by the Commonwealth — at least 60% would be kept by the company for taxation and self-financing. The Commonwealth would devote half of its share for paying bonuses to members, and the other half to charitable purposes outside Scott Bader.
- None of their products would be sold to anyone known to use them for war-related purposes.
Schumacher then tells the story:
“When Mr Ernest Bader and his colleagues introduced these revolutionary changes, it was freely predicted that a firm operating on this basis of collectivized ownership and self-imposed restrictions could not possibly survive. In fact, it went from strength to strength, although difficulties, even crises and setbacks, were by no means absent.”
Between 1951 and 1971, it had increased its annual sales to £5 million and net profits had grown to nearly £300,000 a year. By then staff had also increased to 379 and they had set up a number of new companies.
“And yet,” writes Schumacher, “although Mr Bader’s quiet revolution should be ‘generally acceptable to the private sector of industry’, it has, in fact, not been accepted. There are thousands of people, even in the business world who look at the trend of current affairs and ask for a ‘new dispensation’. But Scott Bader —and a few others— remain as small islands of sanity in a large society ruled by greed and envy.”
New methods of socialization
The rest of this chapter is devoted to how to spread similar ideas throughout business. The idea that there is a choice just between private ownership of the means of production and, alternatively, various types of public or collectivized ownership, is nonsense, he says. In fact, there are eight models which mix freedom, totalitarianism, planning, markets, private and public ownership, in different ways:
- Case 1 Freedom
Market Economy
Private Ownership - Case 2 Freedom
Planning
Private Ownership - Case 3 Freedom
Market Economy
Collectivized Ownership - Case 4 Freedom
Planning
Collectivized Ownership - Case 5 Totalitarianism
Market Economy
Private Ownership - Case 6 Totalitarianism
Planning
Private Ownership - Case 7 Totalitarianism
Market Economy
Collectivized Ownership - Case 8 Totalitarianism
Planning
Collectivized Ownership
Schumacher then explains:
“It is absurd to assert that the only ‘possible’ cases are 1 and 8: these are merely the simplest cases from the point of view of concept-ridden propagandists. Reality, thank God, is more imaginative.”
So devising an ownership ‘system’ for a wider ownership economy would produce a truly mixed economy, says Schumacher:
“For it is ‘mixture’ rather than ‘purity’ which is most likely to suit the manifold exigencies of the future, if we are to start from the actual situation in the industrialized part of the world, rather than starting from zero, as if all options were still open.”
He suggests that the ‘public hand’ should get half the distributed profits of large-scale private enterprise, and that it should get this – not from taxing profits – by by owning half the equity in these enterprises.
“Since every business loses its private and personal character and becomes, in fact, a public enterprise once the number of its employees rises above a certain limit, minimum size is probably best defined in terms of persons employed. In special cases it may be necessary to define size in terms of capital employed or turnover.”
They must all be joint-stock companies.
“It would be desirable to transform all shares of these companies into no-par shares after the American pattern.”
Next, “the number of shares issued, including preference shares and any other pieces of paper which represent equity, should be doubled by the issue of an equivalent number of new shares, these new shares to be held by ‘the public hand’ so that for every privately held old share one new share with identical rights will be held publicly.”
“What precisely is meant by the ‘public hand’?” asks Schumacher. He proposes that the newly created shares, representing fifty per cent of the equity, should be held by a local body in the district where the enterprise either the locally elected politicians nor the local civil servants are “necessarily the most suitable people to be entrusted with the exercise of the rights associated with the new shares.”
He calls this the ‘Social Council’. It should be formed locally along broadly fixed lines without political electioneering and without the assistance of any governmental authority, as follows: one-quarter of council members to be nominated by the local trade unions, one-quarter by local professional associations, and one-quarter to be drawn from local residents in a manner similar to that employed for the selection of persons for jury service. “Members would be appointed for, say, five years, with one-fifth of the membership retiring each year.” It might be sensible to give the local authority the right to send its observer to the Social Council and, in the event of serious conflict of dissatisfaction, to apply to an appropriate ‘court’ for temporary powers of intervention.
“No questions of compensation arise, because the half-share in equity is being ‘purchased’ by the abolition of company profits taxes and all companies above a certain size are treated the same. The size definition can be set so that initially only a small number of very large firms is affected, so that the ‘transition’ becomes both gradual and experimental. If large enterprises under the scheme would pay as dividends to the ‘public hand’ a bit more than they would have paid as profit taxes outside the scheme, this would act as a socially desirable incentive to avoid excessive size.”
Finally, Schumacher says that: “The above proposals may be taken as nothing more than an exercise in the art of ‘constitution-making’. Such a scheme would be perfectly feasible; it would restructure large-scale industrial ownership without revolution, expropriation, centralization, or the substitution of bureaucratic ponderousness for private flexibility. It could be introduced in an experimental and evolutionary manner – by starting with the biggest enterprises and gradually working down the scale, until it was felt that the public interest had been given sufficient weight in the citadels of business enterprise. All the indications are that the present structure of large-scale industrial enterprise, in spite of heavy taxation and an endless proliferation of legislation, is not conducive to the public welfare.”
What happened next?
So what happened to Scott Bader over the past 50 years? Well, you will be glad to hear that they thrived.
They have set up independent businesses all over the world, which are co-ordinated from the country house in rural Northamptonshire where they were evacuated from London during the Blitz in 1940. That means that, via these independent businesses, they employ over 800 people. In 2022, they made £2.1m profit on a turnover of £306m.
Ernest Bader died in 1982, but his son Godric took over as chair of the board: “We have pretty well kept to 350 persons or thereabouts in Wollaston,” he write in the 25th anniversary edition (1999):
“We are developing companies in other countries that we hope eventually will practice our principles. At the 1986 general meeting, we voted – albeit by a narrow margin – to drop the fixed pay ratio in favor of the community council deciding whether the highest pay is excessive in relation to the lowest. This happened mainly by pressure of management to adopt comparative market rates for jobs to be able to recruit people with necessary commercial and technical skills and knowledge for higher positions. The board of the operating company remains accountable to members of the Commonwealth via the community council, the Commonwealth board, and general meetings. The community council has the right to confirm or initiate the removal of the company directors; and the Commonwealth board has the right of approving or removing membership of the Commonwealth. However, management pressure has ensured that these responsibilities are only timidly exercised. Profit distribution remains as originally conceived and has settled down recently to 90 per cent plow back, five per cent to employees and five percent to charity…”
The original quotation with which Schumacher begins the chapter is by the American economist John Kenneth Galbraith, from his 1957 critique The Affluent Society: “In a community where public services have failed to keep abreast of private consumption, things are very different. Here, in an atmosphere of private opulence and public squalor, the private goods have full sway...”
But even if we don’t really have an answer to Schumacher’s rhetorical questions arising out of those words, new economists have tended to go for mutualism (co-ops), to tackle the problem in practice for the poorest.
The Schumacher Center in Great Barrington is itself an example of this, since its headquarters nestles in a community land trust of its own on the side of Jug End mountain in Western Massachusetts.
Community land trusts – where the underlying land remains in trust, and only the ownership of the building on top of it can change hands – they were a brainchild of Bob Swann, who founded the E. F. Schumacher Society there in 1980.
Mary Flynn of the Community Housing Land Trust Foundation (CHLTF) in Canada wrote in the 25th anniversary edition (1999): “Since its inception in 1993, the CHLTF has explored ways to implement the land trust model in British Columbia. It finds properties already used for affordable housing where residents are threatened with rising rents and unstable tenure, then attempts to negotiate a discounted purchase price with the owner. Once purchased, the properties are offered on a long-term, nonprofit basis to residents. CHLTF supports housing co-ops, with their mixed income and diverse resident populations, and works with residents to establish housing co-ops where appropriate.”
That is as good an example of the commons in action anywhere. In the UK, there is a similar story, which makes co-ops one of the most successful elements of the new economics in practice.
“We live in collapsing ecological and socioeconomic systems based on developments since the Industrial Revolution that were motivated largely by gain and power,” wrote Godric Bader in the same 25th anniversary edition. “So it is not surprising that such systems are unable to reflect or sustain our true needs, purpose and identity. Trusteeship essentially means having faith and confidence in a process of taking responsibility for assets and social values and administering their rightful and creative usage for the benefit of others – now and in coming generations.”
Bader’s parents, Ernest and Dora (Scott) were in that respect following in the path laid down originally in the UK by the great retailer Spedan Lewis.
Spedan had been given a quarter share of the business started by his father when he was 21, in 1906, the heady year of the UK Liberal landslide and the Dreadnought, shortly after his father, old John Lewis. famously walked across London with £20,000 in his pocket to buy the ailing store Peter Jones in Sloane Square.
Spedan was appalled by the way his father was running the business. Huge family rows began to disrupt the household, but it was Peter Jones that was to be the cause of the greatest row of all – and the canvas on which Spedan would create his vision of what future business might look like. In 1914, when Peter Jones was on the verge of collapse, his father asked him to take over as chairman of their new acquisition, on condition that he carried on his full day’s work at the headquarters store, and didn’t work at Peter Jones until after 5pm.
He accepted and immediately raised the staff wages, launched a pooled commission scheme and set up department talk committees with direct access to himself. Sales immediately began to rise.
Doubts about these revolutionary business ideas reached his father, who warned him to give up his wild theories or hand back control of Peter Jones. If not, his quarter partnership in the John Lewis company would end. Spedan agreed he could give up his share of the business in return for control of Peter Jones.
In business terms, it was an insane deal – giving up a quarter of a reliable fortune in return for a small store on the verge of collapse. Everyone, from his mother to his bankers, urged him not to do it. But he did and, by the end of the war, the turnover of Peter Jones had multiplied by five.
The challenge was now to find a way to turn these ideas into a permanent settlement for the whole dysfunctional company.
The contrast between Peter Jones and John Lewis in the 1920s could not have been sharper. While Spedan Lewis was pushing his profit-sharing scheme through recalcitrant Peter Jones shareholders, his father was facing his first and only strike.
Four fifths of his 500 staff came out in a bruising contest of wills. The management side was so unpopular that even Queen Mary asked her ladies-in-waiting to put money into the strikers’ collecting box.
John Lewis was not yet geared up for the kind of expansion that took place in retailing at the end of the First World War, divided as they were between father and son.
It wasn’t until 1926, the year of the General Strike, that the two men were reconciled, two years before the old man’s death (aged 92), leaving Spedan Lewis in full control of the group, and able to put his partnership ideas fully into effect.
He had certainly had long enough to think about it, testing and tinkering with different aspects while his contemporaries were dying on the Somme and at Ypres. But Spedan’s luck held. He floated the company on the stock market just in time before the Wall Street Crash – at the top of the market for £1.5m. A settlement trust was then formed guaranteeing the employees the right to the future profits of the company.
As the Great Depression spread gloom over the future, and the dole queues lengthened, it was a system that Spedan believed would inevitably take over the world. He wrote a book called Fairer shares : a possible advance in civilization and perhaps the only alternative to communism (1954), which is a kind of revealing title and may have been why Schumacher did not use him as an example.
That is certainly what Spedan Lewis believed half a century ago. “Few, if any, want to live on a volcano but more and more we are doing so,” he wrote. “Our world of millionaires and slums is more and more volcanic.”
Lewis was absolutely right – and it is still growing in its vulcanicity.
These days, when having a Waitrose supermarket – also part of the John Lewis Partnership – is regarded as the best way of regenerating a rundown neighbourhood, John Lewis maybe too big to exemplify Schumacher’s vision of the ‘commons’ – he must have been aware of it – but it is still a beacon of hope to all those who seek out alternatives.
Which must be why, in 2002, a BBC poll voted him Britain’s top business leader – narrowly beating Andrew Carnegie.
My final example is Ricardo Semler, a Brazilian businessman, though he is actually half Austrian, who took over his father’s company at the age of 21. As Spedan Lewis found, this was not a comfortable experience for either of them. He was frustrated with the traditional hierarchy of the company, Semco, and determined that it should diversify out of the shipbuilding industry (they made pumps) before it was too late.
When he told his father he had to leave, Antonio Semler was deeply upset. He decided to give his son a majority share of the company and to go on a prolonged holiday. “Whatever changes you want to make in the organization,” he told him, “do them now.”
What happened next is one of the strangest stories in business, leading to a whole new model, which obliterates all the divisions and hierarchies, and with dramatic success. It is one of those ubiquitous case studies that are learned, almost by rote, in Harvard Business School, but which has been hardly copied anywhere.
The young Semler responded to his father’s challenge. Summoning up all his courage, he sacked most of the company’s executives, including his father’s closest friends, and set about changing Semco, eventually turning it upside-down and creating a whole new model of doing management— in effect, creating a democratic company.
The company not only survived the experience — though it did so by the skin of its teeth — but it became one of the most successful companies in Brazil, making white goods and a range of other related products and services. From revenues of $4m in 1982, when the young Semler took over, it now earns over $200m a year, with an annual growth rate of up to 40 per cent a year. It employs 3,000 workers, and has managed to sustain that growth through Brazil’s years of hyper-inflation and its years of disastrous deflation as well.
There were a whole series of false starts, but the real turning point came when Semler suffered a series of fainting fits when he was 25 and was told by his doctor that he had to simplify his life. It coincided with the sense of frustration that he was feeling about the conventional ways of controlling companies. “Semco appeared highly organized and well-disciplined,” he said. “But we still could not get our people to perform as we wanted, or be happy with their jobs.”
He decided that, not only was his own work-life balance completely flawed, but that his employees were working far too hard as well. A semi-autonomous unit he set up inside the company to develop new products and business ideas was so successful that it provided a template for re-organizing the whole company.
By the 1990s, Semco had emerged with a revolutionary new structure, with semi-independent units and factories run largely democratically, where the employees worked in teams without job titles. They choose the hours they work, and even choose their own salaries.
Semco organizes regular courses for employees in accounting just so that they can understand all the financial information they are given. For very big decisions, like moving factories or buying companies, the whole workforce votes. When they move a factory, they hire buses and everyone goes and inspects the sites. All their internal meetings are voluntary, and anyone can come if they have got something to say. If they get boring, people can go. In fact, if nearly everyone has left by the time they come to the question of what people should do as a result, they ask themselves if the project was really worth doing in the first place.
As Schumacher implies, all this is anathema to most business lobby groups in the world – almost as much as letting staff choose their own hours and salaries. Other companies around the world have followed in the same direction of complete openness, including regular open evaluation of managers by the people they manage, but the democratic element is very unusual.
In small, family firms, including my own (I am the only employee) then the same flexibility and democracy applies. In big companies, it is almost unique, though there are mutually owned companies like John Lewis and Scott Bader, where the staff own the organization.
Semler jokes about his own shrinking role, and his own shrinking office. After ten years of taking no decisions at all, he held a reception to celebrate the occasion. This understates the struggle he has undergone to transform Semco into a model of people power, against the rigorous opposition of the Brazilian business community, the sophisticated business media, but also – less predictably – the unions, who were deeply suspicious of the idea of people choosing their own working hours.
But the key to Semco’s success is their intricate networks of self-organized teams. Once the teams were in charge of the separate units, the company’s systematic organizational chart had to go out of the window. People took on the roles of leaders and conveners because they had natural authority to do so, and to achieve different tasks.
But the other crucial factor was size. To discuss properly, in such a way that everyone could bring what skills they had to bear, the units had to be small enough for everyone to know each other’s first names and to feel they belonged.
Semler’s new sub-divided factories began to innovate faster. They also managed to deliver products the day after orders were made, which had never happened before. They bounced back from problems quicker.
“I have come to believe that economies of scale is one of the most over-rated concepts in business,” wrote Semler. “It exists, of course, but it is overtaken by dis-economies of scale much sooner than most people realise.”
Schumacher would definitely have agreed.
Thanks partly to Liberal Democrat legislation in 2014, the UK’s mutual sector is now very much bigger than it was, and more successful than it was before.
This is despite the loss of so many mutuals under Margaret Thatcher in the 1980s, when so many of the UK’s mutually-run building societies were de-mutualized and their assets stripped and given to members. Even so, Scott Bader is now only among the 50 biggest co-ops in the UK.
Questions for discussion…
- Why have these examples not been copied all over the world?
- It is obvious why people haven’t given up their rights to their enterprises willingly. How might we persuade them to do so, when – without money – the prospects for themselves and their families might be dire?
- Is it sensible of society to pay entrepreneurs so much more than we need to do to keep them experimenting? How can we avoid it?
- Is it your experience, like Schumacher’s , that the countries with the highest growth rates are also the most polluted? If so, what are the implications of that for economics?
Proceed to Epilogue | Return to Study Guide Table of Contents
