Why Thomas Jefferson Favored Profit Sharing

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President Obama's State of the Union speech last week focused on America's severe and growing inequality, but he stopped short of repeating the Founding Fathers' many warnings that this condition could doom American democracy.

The founders, despite decades of rancorous disagreements about almost every other aspect of their grand experiment, agreed that America would survive and thrive only if there was widespread ownership of land and businesses.

George Washington, nine months before his inauguration as the first president, predicted that America "will be the most favorable country of any kind in the world for persons of industry and frugality, possessed of moderate capital, to inhabit." And, he continued, "it will not be less advantageous to the happiness of the lowest class of people, because of the equal distribution of property."

The second president, John Adams, feared "monopolies of land" would destroy the nation and that a business aristocracy born of inequality would manipulate voters, creating "a system of subordination to all... The capricious will of one or a very few" dominating the rest. Unless constrained, Adams wrote, "the rich and the proud" would wield economic and political power that "will destroy all the equality and liberty, with the consent and acclamations of the people themselves."

James Madison, the Constitution's main author, described inequality as an evil, saying government should prevent "an immoderate, and especially unmerited, accumulation of riches." He favored "the silent operation of laws which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigents towards a state of comfort."

Alexander Hamilton, who championed manufacturing and banking as the first Treasury secretary, also argued for widespread ownership of assets, warning in 1782 that, "whenever a discretionary power is lodged in any set of men over the property of their neighbors, they will abuse it."

Late in life, Adams, pessimistic about whether the republic would endure, wrote that the goal of the democratic government was not to help the wealthy and powerful but to achieve "the greatest happiness for the greatest number."

Professor Joseph R. Blasi and Douglas L. Kruse of Rutgers and Richard B. Freeman of Harvard gathered many of the founders' writings on this topic for their new book, The Citizen's Share: Putting Ownership Back into Democracy. Copies are currently circulating among congressional staffers in both parties as politicians brace themselves to face what polls show is a rapidly rising concern among voters over economic gains concentrating at the top.

Since 1993, almost a quarter of all income growth in the U.S. has gone to the top 1 percent of the 1 percent, about 16,000 households. At the same time, the bottom 90 percent, more than 280 million people, reported less total real income in 2012 than in 1993.

Among countries with modern economies and solid democratic traditions, America has by far the worst child poverty. Its distribution of income puts America far from European allies and Canada, but in the same zone as Brazil, Mexico, Russia and Venezuela.

The authors' most significant discovery may be that one of the first laws enacted by Congress, a 1792 subsidy to revive a cod fishing industry ravaged by the British Navy, directed most of the money not to the wealthy ship owners, but to a class of fisherman known as "sharesmen." They earned a portion of the profits, under contracts negotiated in advance, somewhat like modern unions bargaining with management.

Blasi learned of this during a brief 2006 stay at an old sea captain's cottage in Boothbay Harbor, Maine. "No electricity, no TV, but I found this old book that told this story, which I did not believe," says Blasi, who has studied worker ownership of businesses for four decades.

Years of digging through 18th century records fleshed out the story, showing the founders' sustained interest in promoting yeoman farmers who owned their land. Research commissioned by Thomas Jefferson found that, when fishermen bargained for their pay in advance and shared in the profits, the operations were highly efficient. (My research assistants at Syracuse University College of Law have for years dug into colonial era and late 18th century American business records, and they have made similar findings.)

Washington and Jefferson recommended giving sharesmen five eighths of the subsidy, with the rest to ship owners. Owners who paid a fixed wage got nothing. It was a government carrot promoting both bargaining power for workers and more profitable enterprises.

Blasi suggests that Congress embrace that 1792 model. For example, he says Congress could allow accelerated depreciation - quickly writing off the cost of new buildings and equipment for tax purposes - only at companies that pay workers in part with a share or profits or shares of stock. Companies that declined would still get the full write-off, but it would take longer, costing them more taxes in early years.

Madison once extrapolated the U.S. population into the early 1900s and concluded that not everyone could farm. But he wrote that since no limit existed on businesses, government could encourage ownership shares to counter what he wrote were the "evils" of concentrated wealth.

Blasi and his co-authors show that in the late 19th century, paying workers a share of profits helped build the fortunes of many of the most successful businessmen. John D. Rockefeller of Standard Oil, George Eastman of Eastman Kodak, William Cooper Procter of Procter & Gamble and grain merchant Charles A. Pillsbury all used profit-sharing to attract the best workers, discourage unions, reduce turnover and give employees a greater incentive to make their businesses prosper. "They did it, for sure, out of self-interest," Blasi says, "but it was an enlightened self-interest that benefitted society as a whole."

Profit-sharing plans are rare these days and often meager. Except for some high-tech startups, few workers get stock as part of their compensation. Since the early 1990s, American companies have given almost 30 percent of stock options to their top five executives. "Nearly all of the rest of the options go to the top 2 percent or so of company employees," Blasi says.

There are nearly 140 million business employees in America, but just 19 million own stock in their companies, and most of that is as a match in a 401(k) plan. Management typically restricts the rights to these shares: Managers vote the shares and workers cannot sell before age 55 or leaving the company.

Employee Stock Ownership Plans (ESOPs), created in 1956 in what is now Silicon Valley, are out of fashion, even though companies with ESOPs tend to be significantly more profitable. San Francisco financier Louis O. Kelso, who taught that every worker should be a capitalist, invented the ESOP. Critics called him a Marxist and worse. Kelso's lawyer, Robert Ashford, says that the idea of owning shares and sharing in profits has been lost on most Americans, although millions of them are grumbling that the economy is growing, but their paychecks are not.

Ashford, a professor at Syracuse's College of Law, teaches that if more Americans could buy stocks with the dividends paid by companies, the whole country would benefit. The wider distribution of capital, he says, would give most Americans a direct stake in the success of business.

And that, say Ashford and Blasi, is exactly the future envisioned by the framers more than two centuries ago - an America in which every worker is a capitalist.