In democratic capitalist companies, large or small, public or private, everyone has an opportunity to share in the profits and become an owner. This opportunity motivates the employees to superior performance. Consequently, they are sharing in an improvement that they have helped produce. Each individual is motivated and trained to reach full potential; the whole reaches full potential as the sum of each individual's reaching potential.

Government can encourage the spread of democratic capitalism through fiscal and monetary policies. Capital gains taxes and double taxation of dividends can be eliminated for low- to middle-income wage earners, and business taxes can be modified to encourage the spread of these plans. Low cost, ample, non-volatile, patient capital is needed to sustain growth. Governments can assure this by taxing and controlling speculation, not intruding in market disciplines in finance capitalism, and cooperating in a stable international monetary system.

The financial motivations of profit-sharing and ownership are effective only if integrated into the democratic capitalist culture. Education has a responsibility to present this integrated whole for student examination. Most will recognize that the economic and social logic provides young people with the opportunity for a contributory career in a moral environment.

With modest changes to the existing capitalistic structure these profit-sharing and ownership plans can resolve the traditional maldistribution-of-wealth problem. The wage-earner earns increased wealth through improved performance. This broader distribution of wealth, however, is the key to consumer demand, sustained economic growth and is crucial to making free trade work. It is the key to eliminating tension and finding the synergy between democracy and capitalism.

The economic arguments for worker-ownership are:

• The supply-side is enhanced by the productivity and innovation from wage-earners, motivated by profit-sharing and ownership.

• Broad wealth-distribution in all countries from profit-sharing, dividends, and equity appreciation is recycled into spending that is beneficial to the demand-side. Wage-earners buy the commodities with the greatest multiplier effect.

• Broad wealth-distribution from profit-sharing, dividends, and equity appreciation improves wage-earners' savings and supports the supply side with patient capital for investment in more growth.

• Broad wealth-distribution in all countries from profit-sharing, dividends and equity appreciation can provide the spendable income for reciprocal purchases necessary to make free trade a universal benefit.

The ways for wage earners to become owners are:

• Buy stock with payroll deductions: acquire stock from profit-sharing, and reinvest dividends in more stock. Make full use of the 401-K feature that allows this purchase from pre-tax earnings. This way for wage-earners to become owners can be used in any company, large or small, public or private.

• ESOPs (Employee Stock-Option Plans): Plans allow the wage-earner to acquire equity with borrowed money and give beneficial tax treatment for both the company and the lending bank. They have been frequently used in financial restructuring but are not conceptually limited to this use.

• Pension savings: Defined-benefit plans give a fixed amount at retirement with no ownership component. Defined contribution plans, however, include the wage-earner's money and provide an opportunity for democratizing capitalism, with a motivational connection between the wage-earner and company profits. This capital is now managed by institutional investor and is invested primarily for short-term benefit.

• Privatized Social Security: Privatization of Social Security could be an effective way to democratize capitalism but it could also be a new source of buy-pressure on an already overvalued stock market, making future value problematic. A plan for privatizing social security could be modeled after the Chilean experience since 1981. Although the average wage of the Chilean worker is half that of the United States, the average benefit from their privatized plan at retirement is now twice that of the United States from Social Security.

• 401-K Savings: Similar to defined-contribution pension money, these savings are a potential way to democratize capitalism but at present the institutional investor insulates the wage-earners from participation, motivation, and voting their shares. The wage-earner shares are

collectivized by the money managers into a pressure for short-term earnings, in many cases contrary to the long-term interests of the wage-earner.

• New financial instruments need to be designed that can flow the wage-earner's capital directly into job growth investment. With favorable tax treatment for dividends such instruments could earn 6% a year. Basic retirement income could be privately insured. Such new financial engineering recognizes that little of the money going to stock markets are recycled into job growth. Companies are putting more capital into the stock market with stock buy-backs and mergers than they are taking out in new capital.

All of these have a potential to democratize capitalism, but the simplest, quickest, and most universal way is for the wage-earners to become owners by buying shares through a profit-sharing and stock-purchase plan. (The Care and Share plan that I designed and implemented while CEO of ADT Inc. is described in Book Chapter 2). This type of plan has the greatest motivation, as it requires a financial sacrifice that builds a true owner's feeling. It also only works in a democratic capitalist culture that ensures the involvement and opportunity for continuous development of each individual.

ESOPs are an excellent way to build worker-ownership but have been usually applied as a part of a financial restructure. In many cases they were a method of last resort in a failing business with a predictably high failure rate.

The concept of worker-ownership received a great deal of attention in Congress in the 1920s and again during the 1970s, but then lost momentum. Growth of these plans was destroyed by the Great Depression in the 1930s and then in the 1980s by too many failures combined with the dominance of finance capitalism, where the motivation and reward of the worker was of little importance. ESOPs could have an important place in democratizing capitalism where they are part of a democratic capitalist environment.

Pension money, privatized Social Security, and 401-K savings can be lumped as an enormous opportunity, properly designed, to democratize capitalism. The opportunity is not being used; on the contrary, the capital is being used in support of ultra-capitalism. Jeff Gates describes the dichotomy: "$12 trillion in assets has come to be held by institutional investors as detached and disconnected capitalism that is largely ‘on automatic’ with investment decisions based on a ‘by the numbers’ process that is incapable of taking into account many longer-term concerns."

This phenomenon may be the ultimate contradiction in capitalism. The conflict between capital and labor should have been ended when labor became the prime source of capital; however, finance capitalism is still able to control money for its speculative purposes. As finance capitalism has captured this enormous amount of capital for its short-term purposes, and as long as it is successful, it can not be expected that wage-earner ownership will again receive the priority that it deserves in Congress. Unfortunately, the good capitalism will receive attention only after the economy suffers.

At that time, the only change required for the benefit of profit-sharing and stock-purchase plans is a significant reduction in capital-gains taxes for long-term holdings by the wage-earner, and elimination of double-taxation on dividends for the participating wage-earners. Both would accelerate the use of such plans and help position dividends as a key component of better wealth-distribution. The combination of proper tax treatment and a long-term view by the institutional investor can result in most companies' paying 6% dividends. Such a payout is possible if cash is used only for growth investment and dividends, and not for stock buy-backs or non-strategic acquisitions.

John Stuart Mill completed the definition of democratic capitalism initiated by Adam Smith and validated by Robert Owen. Mill did this by careful examination of both socialism and cooperative efforts. Mill was enthusiastic in support of the socialist demand for reform of mercantilism, the existing system, that demeaned the worker, but parted with the socialists on any abandonment of private property or competition: "While I agree and sympathize with Socialists in their aims, I utterly dissent from the most conspicuous and vehement part of their teachings, their declamations against competition."

Having placed private property and competition in their vital context within capitalism, Mill offered a manifesto (Chapter 3), integrating the power of capitalism to eliminate material scarcity with the elevation of the spirit attendant to and necessary for that accomplishment. Even with these enormous contributions, Mill was not through, however. He recognized that a cooperative of wage-earners might lack the managerial skills needed for success and that the most effective reform would be evolutionary, combining the motivations of a cooperative, with the experience and skills of managers, united in a new culture.

Mill agreed with Marx that the way to maximize the supply side was not only capital investment, but worker involvement in a work-culture contrary to mercantilism. Mill also saw the opportunity for the enterprise to reach its full potential when wage-earners reached their full potential. He knew that this synergistic realization would require a change in the nature of leadership, from top-down to bottom-up, and a change in attitudes, from fearful to cooperative. Mill foresaw that these changes could be expedited by the workers' gaining an opportunity to share in the continuous improvement through profit-sharing and opportunities to become part-owners.

That the relation of masters and work people will be gradually superseded by partnership, in one of two forms: in some cases, association of the laborers with the capitalist, in others, and perhaps finally in all, association of laborers among themselves.

The first of these forms of association has long been practiced, not indeed as a rule, but as an exception. In several departments of industry there are already cases in which every one who contributes to the work, either by labor or by pecuniary resources, has a partner's interest proportional to the value of his contribution. It is already a common practice to remunerate those in whom peculiar trust is reposed, by means of a percentage of the profits; and cases exist in which the principle is, with excellent success, carried down to the cause of mere manual laborers.

Mill's proposals, contrary to Marx, were extrapolations of the existing structure. In Mill's vision there was no tearing down, but a restructuring that could release the enormous latent power of the people. Associations have been tried and frequently failed, as they often lacked management skills. Many failed from a competence gap: good idea, but poor execution. Some of them, such as the Farmer's Alliance in the late nineteenth century, failed because of a deliberate conspiracy on the part of finance capitalism not to loan them funds, no matter how well collateralized.

Mill's capitalism is made up of three components: wage-earners who are owners, managers who are wage-earners, and capital. The only difference in late-twentieth-century capitalism is that the wage-earners are also the source of capital. Capital is no longer from a separate class but is produced, usually, internally to the operation, and is available from the wage-earners' savings, including pension investments.

In democratic capitalism, the managers are not a class apart either, they are the "aristocracy of talent and virtue," the product of meritocracy. Those known as workers and owners, employees and employers, are all associates in a cooperative effort, sharing in improved performance.

Mill then outlined the worker-ownership arrangement that followed the logic of the rest of his offerings:

The existing accumulations of capital might honestly, and by a kind of spontaneous process, become in the end the joint property of all who participate in their productive employment—a transformation which, thus effected, (and assuming of course that both sexes participate equally in the rights and in the government of the association) would be in the nearest approach to social justice, and the most beneficial ordering of industrial affairs for the universal good which it is possible at present to foresee.

The comment about the participation of women was consistent for Mill, as women's suffrage was his prime cause while in the British Parliament. Mill could not understand why society was being deprived of the creativity and energy of half of its population.

At the time that Mill provided this model for social progress, government and the economic world were dominated by finance capitalism and mercantilism, whose cultural conditioning was 180 degrees away from Mill's propositions. Unfortunately, the reform-minded intellectual community, sensitive to the human condition, defaulted in its role of examining Mill's alternative, and later did greater damage by encouraging Marx's flawed design.

If democratic capitalism has such impeccable economic logic, why is it not the prevalent system? It is contrary to the top-down, hierarchic, fearful organization of human affairs that dominated governments, the military, and commerce for centuries. Because of this history, democratic capitalism needs presentation and examination as an integrated and coherent system in education. This has not occurred. In fact, the educational message for most students is contempt for capitalism. Perhaps paraphrasing of Greek philosophers is appropriate: The unexamined life is not worth living and the unexamined capitalism is not worth using.

Despite impediments, there has been extensive growth in the number of worker-owner plans in the last quarter-century. Many of them are working well because they have been developed as a logical part of the whole democratic capitalist environment. Several ESOPs, however, have not worked well, and have given worker ownership a bad name, because they became a device for financing weak companies. Some other plans were weak, since they were presented more as new employee benefits than as part of a cultural change in the workplace that involved and motivated the wage-earner.

In the democratic capitalist culture, the sense that each can and should make his or her greatest contribution results in productivity and innovation that maximizes surplus which is then distributed broadly, sustaining motivation. Included in this culture are meritocracy and job security. Each person can go as far and as fast as his or her talents and hard work allow, and everyone knows it.

Job security is not a belief in a lifetime job, rather that the company will make major investments in people through attrition and retraining to minimize the hurt when restructuring is necessary. When there are major market shifts democratic capitalism companies demonstrate the belief that their people are their most important asset by providing the funds to restructure through attrition. This is the opposite from downsizing, where the CEO responds to Wall Street pressure and announces large and quick layoffs.

Democratic capitalism ownership is evolutionary; wage-earners buy stock steadily with the same stockholder rights as everyone else. Employees can nominate a candidate for Board membership, just as can any other group of stockholders. Competent management, meritocracy, and reasonable job-security build the feeling of individual opportunity and the satisfactions of group cooperation.

In this environment, ownership by the wage-earner builds steadily. With 60% profit-sharing in stock and an average 4% payroll deduction to buy stock, the associates can own more than 10% of the company in a decade. At ADT, with Care and Share the associates owned about 13% after ten years. The associates can take money out in dividends or reinvest it in more stock which is very patient capital and accelerates the level of ownership.

Peter Drucker wrote about pension-plan socialism in the 1970s, describing the enormous shift of the source of capital from the capitalist to worker's money because of the law requiring full funding of future pension benefits. He observed, however, that this capital provided little motivation to excel or to exercise voting rights, as the workers could not relate their individual effort to total corporate performance. This enormous capital flow has gone largely to the stock market, and contributed to its revaluation.

Presently the institutional investors support ultra-capitalism, as their money managers are graded on short-term criteria. They have, however, an enormous constituency with the power to spread the benefit of Democratic Capitalism. Some government officials have suggested "do-good" pension investment, but it is vague and has little meaning in the face of the short-term earnings pressure. If democratic capitalism becomes better understood, and after the damage from ultra-capitalism becomes clear, then the institutional investor can assume the democratic responsibility to invest the workers' money in a fashion that benefits the worker. Large institutional investors have increasingly influenced corporate policies, but most of it is in support of short-term goals and deals that produce quick value but no long-term benefit (Chapter 13).

A vital part of the work culture needed for successful worker-ownership is a general sense that compensation is fair at all levels. In the 1990s, corporate CEO compensation is a feeding frenzy of too many plans and too much money. Many companies have abandoned any effort at logic between what the CEO makes and what the others in the organization make. By abandoning logic, they contaminate the cooperative team environment prerequisite to maximizing productivity and innovation in worker ownership plans. Institutional investors have the power, and should have the long-term interest, to pressure companies for performance plans that reward both CEOs and all wage-earners in a consistent way. Associates can then have the potential to be millionaires on retirement as part of the same profit improvement formula. For example, Jeff Gates reports on a profit-sharing ownership plan: "At the Lowe's companies, a Southeastern chain of home-improvement stores, sales managers routinely retire with $1 million and truck drivers with $500,000."

In the late nineteenth century, the Knights of Labor had a vision of the worker's leaving the wage-slave condition, and becoming an educated and dignified participant. The Farmers' Alliance tried to allow farmers to become entrepreneurs. Both failed as they were opposed by the mercantilists where profits were considered proportionate to wage suppression and by finance capitalists that regarded cooperatives as subversive.

This determination to keep workers, both agricultural and factory, in the traditional wage-slave condition began to change through democratic momentum in the United States in the 1920s. Congress encouraged the concepts of democratic capitalism with the new Revenue Act of 1921, that gave tax-favored status to stock-bonus and profit-sharing plans.

The importance of this concept was lost in the speculative excitement of the bull market in the twenties. It was then lost for another decade in the Great Depression of the thirties when the concern became economic survival. Worker-ownership came alive again from 1973 to 1987, when Senator Russell Long (Democrat, Louisiana) promoted the passage of 15 different worker-ownership laws.

Louis Kelso, an advisor to Long, was dedicated to a version of democratic capitalism, and, in 1958, with Mortimer Adler, wrote The Capitalist Manifesto. Adler and Kelso proposed ways for the worker to borrow money in order to become a capitalist and enjoy the benefits of ownership. Kelso was an investment banker and thought in terms of leveraged buy-outs where the employees borrowed and owned a significant percentage of the company. In Kelso's plan, profit-sharing is not used as a way to build equity. Only borrowings are used, which has a motivational component, but is not as strong as worker-owners who make a financial sacrifice to buy ownership in a payroll-deduction plan. The architecture of ESOPs fit the financing mechanism for LBOs (leveraged buy-outs), spin-offs, or restructuring.

Senator Long was evangelistic about employee stock ownership, and he challenged Congressional interest: "Employee ownership should and would broaden and expand ownership, encourage capital formation and innovative corporate finance; improve labor-management relations, productivity and profitability in firms, help the economy accommodate developments in technology, the spread of transfer payments, and inflation, and create an economic democracy."

In 1975, Senator Jacob Javits (Republican, New York) supported the concept of worker ownership to "improve the financial condition of working Americans and at the same time improve the productivity of American industry." Tax benefits were subsequently approved by Congress for ESOPs and for banks loaning money to ESOPs.

Congress was reacting to the evangelism and wonderful energy of Kelso. They could have promoted worker-ownership in a simpler and more universal way by providing capital-gains and dividend benefits to wage-earner participants. Special tax benefits for companies are always an opportunity, but they are used now, not for worker ownership, but rather for maximizing profits.

Another enormous source of worker capital came with the passage of ERISA in 1974, requiring fully funded pensions. This new law had the net effect of taking growth capital out of companies and directing it to Wall Street. Prior to ERISA, pensions would be paid out of future earnings, but for the present the capital was available for growth. The point is not questioning the necessity to protect pensions; rather, a question of where the capital flows, to a more direct and motivational type of ownership or mainly to add buy-pressure to the stock market. A demographic analysis will show this buy pressure's changing in time to a sell pressure.

About $100 billion a year, equally divided between private and public plans, initiated the bull market. The opportunity to combine this new cash flow with the mission of employee ownership was not explored. For the last quarter-century, much of industry was dominated by the bull market and ultra capitalism. Those with a mercantilist attitude seized on world-wide opportunities for wage arbitrage and took bargaining power away from the unions while instituting a long period of wage suppression.

The argument that this was simply a response to world competition was true, but ignored the fact that superior results could have been accomplished by democratic capitalism. It was an uneven pattern; at the same time that some companies were discovering that to be "world class," they had to release the latent energy of all of their employees, others were destroying the requisite spirit by treating the employees, again, as cost commodities.

Republicans like President Reagan and Democrats like Vice-President Hubert Humphrey provided political symmetry for the mission of employee ownership. Reagan opposed economic and political power-concentration and Humphrey coupled full employment and widespread ownership of capital resources.

President Reagan interpreted the intentions of our founding fathers:

They knew that the American experiment in individual liberty, free enterprise and republican self-government could succeed only if power was widely distributed, and since in any society social and political power flow from economic power, they saw that wealth and property would have to be widely distributed among the people in the country ... Could there be anything resembling a free enterprise economy, if wealth and property were concentrated in the hands of a few?

Despite this rhetoric, Reagan policies shifted taxes from capital to labor, contributing to record wealth-concentration. His point however is still crucial: Diffusion of political power was a mission of the founding fathers, but this will not be accomplished unless there is first a diffusion of economic power.

Hubert Humphrey described the twin pillars: "Capital and the question of who owns it and therefore reaps the benefit of its productiveness, is an extremely important issue that is complimentary to the issue of full employment."

Republican and Democratic leaders alike showed this awareness of the power of democratic capitalism and how perfectly it fits the liberal promise of this democratic republic. Unfortunately, their enthusiasm was not interpreted in fiscal and monetary policy. The latter tended to be dictated, instead, by the lobbying power of finance capitalism. Concentrated wealth concentrates political power, that then prevents the diffusion of economic power through broad wealth distribution.

The title of a book on worker-ownership by Joe Blasi was taken from a magazine article, Revolution or Rip Off. The article was written after the failure of so many ESOPs that their broad mission had become tarnished. There are many success stories of successfully integrating a democratic capitalism culture with profit-sharing and opportunities to buy ownership; on the other hand, there are many stories about weak companies that tried ESOPs as a last chance before bankruptcy. There are even stories about owners and managers dumping failing companies on the workers through ESOP financing.

These stories are reminders that even democratic capitalism cannot succeed if there are a lack of management skills and a mismatch of products and markets. These stories are also a reminder that democratic capitalism must be applied as a coherent whole, that is, financial motivation alone will not work if the rest of the culture is not dedicated to the development of the individual in a harmonious whole.

In retrospect, although there were many experiences that validated the enormous power of worker-ownership, the ESOP technique had too high a predictable failure rate as it was part of a high rate of change. The fourth element in the template of democratic capitalism is competence, particularly in the difficult management of change. The safer test of worker-ownership is the gradual accumulation of equity through profit-sharing and stock-purchase plans with no radical change in the structure. Their relationship to ESOPs, however, is not mutually exclusive; they can each democratize capitalism, but in different circumstances. Success of either should encourage greater use of the other.

One of the themes of this book is that ultra-capitalism contains the seeds of its own self-destruction. At the end of the century, too many folks are still happily spending their speculative gains, ignoring the fact that the Ponzi scheme has become too big to keep paying off old investors with new investors' money. If the bear market begins in 2000 or soon after, then and, unhappily maybe only then, will democratic capitalism and broad wage-earner ownership be recognized as the solution.

After the orgy of ultra capitalism the world can get back on the road to economic common purpose, back on the road to improving all lives. Except who will define the solution? Who will define what "a common ideology of free markets" really means? The need for new leaders who are motivated by the morality of democratic capitalism but also understand and can apply its protocols will be even more critical.

The answer is continuous education about democratic capitalism using all of the traditional strengths of education combined with the exciting new technology to teach and communicate world-wide and instantaneously.

In 1998, an important book was presented by Jeff Gates that can benefit this purpose. The book is a comprehensive examination of the power of participation through ownership, but it also presents the reasons that ownership is a universal, international solution that can be grafted onto every culture from America to the Muslim, Chinese, or European. It is hard for communist countries to argue against the whole's succeeding through the greatest self-development of each person, it is right out of the Communist Manifesto. It would be hard for the Muslims to argue against patient capital not short term loans as the key component of the economic system. It is right out of the Koran.

Gates' book is properly named, as it does present solutions. The support that it has received both validates its thesis and dramatizes the thirst for a "third way." This support is also extraordinary in a polarized and gridlocked country, where political opposites seem incapable of truth-seeking. The following quotes from all parts of the political spectrum give new optimism that the world is ready for solutions, that the educational process will do its job, and that the political process will be subject to the revolution that it deserves.

• Expansion of ownership and greater access to capital will both strengthen and spread democracy and market economies throughout the world. This is a compelling account of how to help bring it about. Republican Jack Kemp, former Senator and Presidential candidate.

• "The Ownership Solution succeeds brilliantly in showing how broad-based personal ownership can strengthen communities and make global sustainable development possible." Democrat Dick Gephardt, Minority Leader, U. S. House of Representatives.

• "This book focuses on the central issues that have to be addressed if the twenty-first century is to transcend the simplistic dilemma of capitalism versus socialism and create a new, sustainable civilization." Mikhail Gorbachev, Former Russian leader and author of perestroika.

• "Ownership is a sine qua non of sustainable development. An interesting intellectual contribution to the evolving debate." James D. Wolfensohn, President of the World Bank.

• "Long-term, sustainable development requires a balancing of economic, social, fiscal, and environmental goals. In The Ownership Solution, Jeff Gates provides a thoughtful and thought-provoking approach to understanding these goals and how broad-based capital ownership can help to achieve them." Bill Bradley, U.S. Senator 1979-1997, and candidate for President in 2000.

• "Somewhere in between unbridled capitalism and the welfare state, there has to be a more just and equitable economic system which provides genuine opportunities for all citizens, while preserving incentives for investment. In The Ownership Solution, Jeff Gates outlines a creative, yet credible strategy for empowering working people with a more vital interest in private enterprise. If capitalism can indeed have a human face, the reforms proposed in this provocative book merit careful consideration." Coretta Scott King, founder of the King Center and widow of Martin Luther King.

Is it possible that this appeal of democratic capitalism can be converted into the economic common purpose that unites people in a nation and among nations? Are there reasons at the beginning of a new millennium that have not existed before, that can bring in rational order and stop the violence? Are there reasons that this superior economic system can move from theory to practice better in the new century, than in 1921 or 1975? Is the power of this democratic ideal sufficient to overcome the lobbying power and privileges of finance capitalism, to break the gridlock between the concentrated power of finance capitalism and the concentrated power of the collectivists?