April 20, 2009
On Feudalism, Capitalism, and "American Chopper"
I have been watching "American Chopper," a real reality show on the Learning Channel (formerly on its sister station, the Discovery Channel), since the show began several years ago. It follows the adventures of a real company, Orange County Choppers (Orange County, New York), which builds choppers... in this case, the word doesn't mean helicopters but rather heavily customized motorcycles.
The company, Orange County Choppers (OCC), is a family business; it's majority-owned by the father, Paul Teutul, Sr.. (or usually just "Senior"); I believe the middle son, Paul jr. -- "Junior," or just "Paulie" -- is a partner, but I don't know how much of the company he owns (if any). As this is a multi-million dollar manufacturing business -- started from scratch in a garage -- it's a perfect symbol of the American dream: achieving almost miraculous success from ingenuity, determination, skill, and the freedom to succeed (or fail). In other words, OCC is a paean to Capitalism.
From a small genesis, they have managed to expand from hand-building custom-designed choppers for a handful of fairly wealthy clients -- which they still do, though mostly for corporate clients -- to include a product line of already assembled bikes ready for sale to those of more moderate means who still want a cool chopper. They recently constructed their own huge building for fabrication, display, and sales; and they're now sailing the tricky waters of selling their products throughout the EU, navigating the dangerous coral reefs of European environmental and labor regulations.
But recently, a catastrophe befell them... one which is part of the implicate order of contemporary corporate culture in the world today -- per David Bohm, I mean it is inherent within the corporation even before being realized, much as an oak tree is part of the implicate order of an acorn. And the solution to this inherent dilemma/contradiction is frightening, awesome (in the sense of inspiring awe), and exhilarating in its implications for the future of the GOP, of America, for the completion of Western civilization, and for the expansion of the vistas of Capitalism.
This post is quite long, so I'm putting the rest into the "Slither on." I urge you to read it because the concept (not necessarily my discussion of it) is vital to the future of, well, everything.
So let's jump right in...
Like many family businesses, there is a growing disruptive rivalry between Senior and Junior at OCC. They sometimes have terrible arguments... not as often as they used to, in the beginning of the series; but while fewer in number they seem to have grown in intensity. That's hardly surprising; as Paulie has grown into his thirties, he naturally chafes under the total control of his father; and as Junior rebels, Senior clamps down ever harder, wanting to hold onto the company that he built.
But Paulie has a huge claim to the success as well, for two reasons:
- It was Paulie who persuaded his father, over a long period of time, to allow the Discovery Channel to create a reality show around their then-small company. It was the visibility gained from that very popular cable-TV show that led to their tremendous international success today.
- And more important, it was Paulie who designed and built the spectacular choppers that repeatedly won awards, nabbed the cover of any number of motorcycle magazines, and in fact, attracted the attention of the Discovery Channel in the first place. Without Junior's creative vision and amazing ability to fabricate sheets of metal into works of art in the medium of "motorcycles," the business would still just be a tiny wart on the nose of the custom-chopper industry.
At the beginning of this season, Junior and Senior got into a horrible screaming match (over nothing, as usual)... but this time it culminated in Paul, sr., firing his son: Paulie is terminated and no longer works for OCC.
I expect that in a few more episodes, Senior (who wants his son back) and Junior (who is going crazy doing nothing) will find some way to get back together in some fashion; in the meanwhile, they are going through terrible angst that may well end up destroying their family business, flinging their success to date into the dustbin of startup history, and even tearing them apart as a family.
The builds they have finished since Paulie was fired have been uninspired at best; they produced a bike for the Ringling Brothers Barnum and Bailey Circus, for example, that was a fairly standard chopper with a circus-like paint job. Wow. They also finished a build for the 20th anniversary of the B-2 stealth bomber; but in my opinion, the bike was a near ringer for the bike that Paulie designed and built several seasons ago for the Apache helicopter.
Compared to what Junior has been doing since the show began, this is junk. Not only that, but employees of OCC have admitted on camera (in the show) that with Paulie gone, all the builds are "taking twice as long as they should," and that they've fallen behind on other builds -- presumably the stock bikes that are almost certainly the bread and butter of Orange County Chopper. The company is being damaged and its reputation shredded, all because it's guiding spirit -- Junior, not Senior, even though the latter founded the company -- was unceremoniously ousted by his old-guard pop.
They're in serious trouble. If they don't soon come up with a workable solution to bring Paulie back, OCC will collapse under the weight of its own financial obligations, undertaken in the flush years... yet the "status quo ante" is unacceptable to both parties: Senior demands that his employees all follow certain standards, including his son; and Paulie is being driven mad by the increasingly autocratic demands of his father. What to do, what to do?
The real cause of the split is so painfully obvious to me that I wonder they didn't see it coming years ago; and to me, the solution is equally clear. The problem is that Senior runs his company like most corporations are run: as a feudal kingdom:
- The CEO is the king;
- He has his vassal lords -- his dukes, counts, and barons, the senior corporate officers;
- He has his parliament -- the board of directors, on which he may or may not sit, and which more or less controls the purse strings but not the company itself (unless the CEO is also the majority stockholder, as in this case);
- He has his sheriffs -- the managers, group leaders, and shop foremen;
- And the rest of the workers are basically serfs... they have no authority, generally no input, and like mushrooms, are kept in the dark and fed fertilizer.
This organization model works no better in a corporation than its counterpart did in national government. If you have a really good king, he can overcome the inherent inefficiency and inevitable scheming and backstabbing; if you have a mediocre to poor monarch, the company settles, collapses, and dies an ignominious death.
But long ago, we found a much better way to organize society's resources, human capital, ingenuity, energy, and time; we call that new model Capitalism.
Enter the Mises ex machina
This is a true anecdote. No, really. I remembered an article I read many years ago about the feudal structure of most corporations; it advocated extending the principles of Capitalism into the workplace itself... but I couldn't quite remember exactly what the author suggested.
But then, while putting things into storage, I opened a box stored in our linen closet, and behold! There was the very article I'd been trying to resurrect in my memory. It's titled "New Work for Invisible Hands," by Richard Cornuelle (born 1927), and it appeared in the Times Literary Supplement almost exactly 18 years ago (April 5th, 1991). It was supposedly reprinted by the Cato Institute, but I can't find it online. (If somebody can, please let me know the URL in comments, and I'll include it here. Note that the TLS online archives only date back to 1994.)
The piece galvanized me as nothing on the subject had before. For years, I had struggled in the workforce, aware that something was terrible awry but not really knowing what to do about it. Rereading the piece today, I found the exact paragraph that made me leap to my feet back in 1991. (Remember, this was in the age of Papa Bush; the very idea of the piece was revolutionary):
Libertarian thought is wonderfully sound as far as it goes, but there are two gaping holes in it that now gravely threaten its relevance. For one thing, there is no very distinct libertarian vision of community -- of social as opposed to economic process -- outside the state: The alluring libertarian contention that society would probably work better if the state could somehow be limited to keeping the peace and enforcing contracts has to be taken largely on faith. Nor have libertarians confronted the disabling hypocrisy of the capitalist rationale which insists that while the capitalists themselves must have extensive freedom of action, their employees may have much less. Their explanation of how an invisible hand arranges economic resources rationally without authoritarian direction stops short at the factory gate. Inside factories and offices, the heavy, visible hand of management continues to rule with only token opposition. [All emphasis added.]
Mises! That point, which seems so obvious once stated, lit so many intellectual fires in my cerebral cortex that I'm still steaming.
Through much of the article, Cornuelle concerns himself with describing a culture of "imaginative voluntary action" (service organizations, churches and synagogues, private charities, and other forms of volunteerism) to take the place of government social action on poverty; disease control; illiteracy, innumeracy, and miseducation; environmental pollution; crime; drug addiction; cultural isolation; and so forth. This section is fascinating, but much work on this subject has already been published in the intervening two decades, so I won't go into it.
I'm more interested in the area that has been virtually bereft of creative, innovative libertarian and free-market thought before and after Cornuelle's article... and that is where the author truly illuminates the path forward.
This little piggie goes to market
The first task before creating the future is to describe the now, and Cornuelle does this beautifully; it's virtually impossible to argue with any sentence in this complex yet crystaline paragraph, as true today as in 1991:
When freemen went to work in factories, their status was not unlike that of the iron-collared serfs who had preceded them. Their employment was a kind of voluntary indenture, tacitly renewed each day, in which the worker agreed to submit to supervision for a certain number of hours for an agreed-to amount of pay. Workers were free in one sense, but painfully unfree in another. Feudalism had only moved indoors. The movement to civilize this relationship has been more or less continuous. Workplaces have been made safer, lighter, warmer and more agreeable. Wages are higher, hours shorter, and an accumulation of law and custom has elaborated the rights of employees and put limits on the prerogatives of employers. But the system has yet to be altered elementally. Working people are far, far freer than slaves or indentured servants, but they are not as free as their bosses and not nearly as free as they might be.
The economic and spiritual consequences of such "wage slavery" (to liberate a term from the Marxists) are devastating, not only to workplace productivity but to the soul of the employee... particularly in the case of what the Japanese call the "salaryman."
If you are employed by someone else, the odds are high that when you come home from work you are drained mentally and emotionally, which manifests physically as well (falling asleep in front of the TV at 9:00 pm). You often miss milestones in your children's development, much of your social life revolves around co-workers, you find it hard to talk about anything other than work at parties and other social gatherings; your life revolves around Work, and a terrible temptation arises to begin defining yourself in terms of your Work: "What are you?" Not "I'm a father of three," or "I'm a writer," or "I'm a Hasidic Jew," or "My husband and I are adventure racers;" but "I work for Lockheed."
There is little time to see a play, sing-along with your family, go hunting, read a book, or wrestle with your kids. And on the week-ends, you cram every chore that had to be postponed during the week-days into the few hours you have away from Work... so even that precious time is sucked dry by the corporation, like a fat, gouty aristo Hoovering the marrow from a pork bone.
Worse is the psychological effect: Saluting and obeying become the essential thread of your personality; you internalize the military-like regimentation of Work; you begin to think of yourself as a servant, not a free human with the capacity and potential to rise above your lot.
Thus does Work prime you for socialism; as Cornuelle puts it, paraphrasing Friedrich Hayek:
Employed people can scarcely be expected to revere qualities they have been carefully instructed to repress. Instead, they tend to become what the way they work requires: politicized, unimaginative, unenterprising, petty, security-obsessed, and passive.
These are not qualities that can sustain the American experiment of individual liberty and self-government.
Cornuelle gets a bit cryptic when he discusses practical treatments for the social disease he diagnoses; but I think I can flesh it out somewhat. He writes:
[N]ow there is a movement toward more elemental reform which would de-politicize workplaces entirely, make each worker self-supervising, and base compensation on some credible estimate of the value each person adds to whatever product or service the firm produces, in effect bringing the principle of the free market into the plant. But without a legitimatizing rationale, something the libertarians are best equipped to provide, this is bound to be a confused and halting process.
Alas, that is all the guidance he gives us; nevertheless, let's extrapolate that out to a workable, practical reform and see what it looks like.
The military model of decentralization (?!)
Here I'll drag Donald Rumsfeld, willy-nilly, into the debate (probably against his will). Besides winning two wars (and almost losing two peaces), Rumsfeld will be best remembered, at least by military historians, for his reform of the American military. Boiled down to its essentials, he sought to do three things:
- Decentralize control of the troops to put as much responsibility and accountability as possible in the smallest units -- squads -- shifting power from the standard divisional structure to men with stripes on their sleeves, the actual war-fighters. Officers would set the goals, keep track of progress, and ensure that the units in contact with the enemy (or containing the enemy) have all the resources they needed to do their jobs.
- Break down the barriers between types of units, so that small, almost voluntary collectives of soldiers (I'm using the word "soldier" generically) with disparate specialities can integrate into a powerful, self-sustaining, and self-directed team. Thus, instead of having an infantry unit that depends upon a separate and not-very-well coordinated artillery unit -- controlled by a colonel "somewhere else" who is not necessarily even in communication with the general in command of the infantry brigade -- to bombard the enemy prior to a firefight, under the Rumsfeld reforms, small units could themselves call in airstrikes or artillery as needed from individual air-support or artillery squads, without waiting for the bird and the star to have a sit-down with each other.
- Uplink each soldier (ideally), or at least each squad-level unit, with a coordinated, networked virtual battlefield, allowing the brass to follow the entire conflict in a way that Napoleon could only dream of doing. As in Robert A. Heinlein's seminal novel Starship Troopers, the battle can now be mapped almost as a problem in fluid-flow. Commanders can zoom in on hot spots or widen the view to catch opportunities missed by the men on the ground -- or catch potential threats before they coalesce into devastation.
The decentralized, integrated, coordinated battlefield of today and tomorrow revolutionizes warfare as thoroughly as did air power, repeating arms, or even gunpowder itself. And this same model can revolutionize Work -- to the point where it may become unrecognizable.
Free the human 200 million!
We're already seeing the beginnings of decentralization in the increasing use of independent contractors in large businesses -- non-employees who pay their own medical insurance, retirement (including paying self-employment tax instead of having FICA contributions deducted), and other benefits in exchange for a higher rate of payment. But we'll cross a more vital threshold when companies cease paying contractors by the hour worked, and begin paying instead for projects completed.
Whenever a person is paid on the basis of time spent with butt in chair, he is an employee even if he is an ostensibly independent contractor: The client has every right and every motivation to clock the worker's every working moment, to ensure the client is not being cheated. After all, if he's being paid by the hour, the incentive is to take as long as he can possibly justify... the opposite of productivity. If he finishes your project early, his reward is to be paid less!
But if the contractor is paid according to what he produces, then his time is his own: So long as he finishes the project on time and within the budget (or can make a convincing case why he and the client had underestimated the original schedule and budget), the client has neither right nor reason to inquire about how the contractor spends his time... any more than you have reason to interrogate your dentist about how long a lunch break he takes or when he knocks off for the day.
Not only that, but the quicker he finished the first project (in a manner that the client approves), the quicker he can move to the next; being more productive means he makes more money, incentivizing productivity. This is a huge economic boost for the client as well as the contractor.
Of course it's important to recognize the most intractible limitation to Capitalism: Most people don't really want to be capitalists. They want to be told what to do and supervised closely; most folks really do want to be "wage slaves," because they enjoy the security they fancy it supplies.
Of course, after getting laid off a few times, they may change their minds; but as even Ayn Rand understood and depicted in Atlas Shrugged, for every independent, fully self-actualized Dagny Taggart, there are a thousand Eddie Willers -- competent, loyal followers who simply lack either the creative capacity or the will to become independent, fully-realized human beings.
In spite of that dreary reality, however, there are many more budding capitalists than the contemporary fascist structure of corporations allows to bloom; and even for the Eddie Willers, increasing the scope of Capitalism will benefit them indirectly by increasing the wealth of society and making the workplace more livable. But potential capitalists cannot truly revolutionize the workplace, let alone Work, without the next phase: integrating Capitalism into that corporate structure itself.
Just as the armed forces are moving rapidly towards small, self-contained military units that have all the capacity they need to independently accomplish their missions, corporations can move away from discrete and disconnected, overly specialized corporate departments to integrated business units or cells organized around products or projects. As Heinlein said, "specialization is for insects."
Why should Accounting, Personnel, Legal, Sales, Marketing, Operations, and Management all be separated from the productive departments? It may have made sense in the early days of industrialization, as perhaps did unions; but like unions, the time for a wall of separation between "creation" and "control" has passed.
A new, post-modern corporate structure would be organized into business units around the various products -- that which customers want to buy. A big company would have many business units; a small might have only one. Each business unit or cell would comprise an array of contractors (and some Eddie Willers-type employees) who are all assigned to the same project, which provides the organizing reason for the business unit itself.
Consider, for instance, a software company, and imagine this integrated work environment:
- One of the major product lines is an accounting application called Mercury. The Mercury team comprises software engineers, accountants, marketers, and salespeople.
- Each element has a team lead (an engineering team lead, an accounting team lead, and so forth). The team leads keep track of the progress of their piece of the project and the needs of their people, and they coordinate with each other to set schedules and allocate resources.
- The accountants actually use the Mercury application to do their accounting; they're usually a version behind, because they need it to work. But they regularly alpha-test the current software.
- The engineers work closely with the accountants, ensuring that the product is oriented around what accountants actually do, rather than around the software modules that make up the application code: That is, the program menus and functions reflect the real-world work of accountants... not the way the code happens to be divided up and distributed for purposes of efficient program design.
- The marketing people within the Mercury team have input into the product design; they too consult with the accountants, so they can more effectively find out what the target market wants to see in the product.
- The sales people use the product in their own work (updating their sales targets and such), so they too can better sell the product to the target market.
- Lawyer members of the Mercury legal team would focus on the project's legal issues, whether it's software compliance with the tax code (a product issue) or collections, lawsuits anent the application, team-member disputes, and so forth (corporate issues).
- More important, the entire team (as a unit) must "buy" its resources -- manpower, computers, packaging, printing, and even utilities and office supplies -- from the parent company, using company scrip; but they keep a royalty (in scrip) from the product sales, which is used to pay for these resources... and leftover scrip becomes real money, paid to the team members as bonuses.
(Note another important point: A single person can be assigned to multiple projects... and he gets paid for each. Thus, an engineer might work on the Mercury project, but he might also write code for a tax-filing application, a workflow application, or a customer sales-contact application. Each contractor must manage his own time to ensure timely completion of all the projects to which he's attached. The current corporate structure tends to infantalize employees; a more internally capitalist structure matures and expands the abilities of its independent contractors.)
You see the point? We need to create little mini-companies within the parent corporation to institutionalize Capitalism in the belly of the beast; and each independent contractor team member has a monetary incentive to maximize sales (by making the best possible product) and minimize cost (because bonuses are paid based upon the "profit" earned by the team).
"The part that they forgot to kill went on to organize!"
Finally, the project officers who "run" the Mercury project are actually clients of the team member contractors... and their incentive is to get the best application out the fastest they can to be as profitable as possible -- not to waste time supervising every minute of every "employee's" day, attending endless (and useless) meetings, or writing detailed reports of everything the vice president demands to justify his own phony-baloney job.
Similarly, the higher-up corporate officers have the same incentive: Their only bonuses, perhaps their only income, would come from direct ownership (stock holdings in the company) or profit-based bonuses; no more question about whether they truly "earned" their money... if they don't, they don't get any.
And the best part, from my perspective, is that independent contractors, being their own bosses, don't need industrial unions; in fact, the very idea of an involuntary union of independents is self contradictory. Thus the only "union" possible would in fact be the very type of voluntary organization that we want to train people to accept and rely upon, in order to wean our larger society away from government control of every social issue towards a more robust volunteerism and self-help. Capitalism leads directly to more social interaction between people -- and more volunteerism.
Enchained of the world unite; you have nothing to lose but your Work
You may have noticed that I use the word Work, capitalized; this signifies what I think it means to most people in the country: the central component of their lives. They spend more time at Work than anywhere else. Work supplies the lion's share of their human relationships; and many bosses believe Work should take precedence over everything else in their employees' lives -- over recreation, over sleep, even over their families.
In Judeo-Christian (and probably Islamic) cultures, Work is penance, a punishment assumed to atone for the original sin of disobeying God's order not to eat of the Tree of Knowledge of Good and Evil. In Tanakh, the Jewish bible, Genesis 3:19 covers it pretty well: "By the sweat of your brow shall you get bread to eat, until you return to the ground -- for from it you were taken. For dust you are, and to dust you shall return." The King James and Catholic bibles are equally grim.
(I believe the whole problem stems from mistaking the natural consequences of maturity for a curse. As a child, your parents do everything for you; the price of growing up is that you must scratch for your own seed. In fact, I see the entire Old Testament as a parable of this same dynamic, applied to human civilization as a whole... but developing this theme further is beyond the scope of this post.)
Work becomes a God to be worshipped; to speak against "hard work" (meaning Work) is blasphemy. To reject Work is heresy that is punished by casting out the heretic. That is why so many people routinely refer to the self-employed as "lazy bums," even if they in fact work (small-w) harder than an employee would: The fact that they work for themselves, are not employed by a boss-man, means that they don't really Work... so the time they spend and the products they create are meaningless. How can they be productive? They don't suffered the way I do!
Capitalism is pro-work, but it is inherently anti-Work; Work is a remnant from the early days of modern industrialization in the heavily repressed Victorian era. Pleasure is the opposite of Work; but work (small-w) can and should be a pleasure, and it can and will happily co-exist with non-work related pleasures, strengthening family ties and mentally heathful recreation away from the workplace and one's co-workers.
Ideally, increasing automation will drastically reduce the amount of time we must spend at work -- which violates a central tenet of Work-as-God. At the event horizon, we would need to spend only a few minutes per day doing things to create wealth, and the rest of our time we will spend enjoying that wealth.
But first, we must eliminate Work in favor of work; that is the first step. We must rise up as a culture and abolish Work, at least for anyone who aspires to be more than an Eddie Willers.
Chopping the chopper
But in case you've forgotten in all the excitement of Capitalist revolution, this has all been a tangent; we were really talking about Orange County Choppers, Paul Sr., and his son Paulie... remember?
Senior is the boss, and he sets very strict rules for his employees. He monitors their movements like a hawk monitors the movements of mice. Every employee must show up at 7:00 am on the dot; lunch and other breaks are short and strictly enforced; I believe they work 10-hour days.
Worse, if Senior looks out the glass wall of his office and sees people talking or walking around instead of actually banging metal, he comes storming out to scream at them in front of everybody... and he doesn't even accept the defense that such non-physical activities as thinking, designing, sketching, and communicating with other employees can also constitute Work. It was only with a lot of tooth-pulling that Paulie got his father to hire a computer graphic designer, Jason Pohl; and even now, Senior treats Jason as a bad joke -- except when he forces him to bend metal, a task for which he really is not suited.
But when Paulie was there, he would spend many hours conversing with Jason before even touching any tools, coming up with increasingly fantastic designs as the seasons passed. And a lot of times, Paulie comes in late, leaves early, and takes long lunches. Bad "employee," right? But his father also berates him for taking too long thinking about the build before starting to hammer out gas tanks or bend tubing for handlebars.
To me, the solution is so obvious, it's actually frustrating that neither Senior nor Junior gets it... so much so that if this Hamlet-like indecision continues much longer, I may cease watching the show: Paulie is simply not meant to be an employee; he is a Capitalist at heart.
Paulie should come back to OCC -- as an independent contractor. He should incorporate himself, and Senior (his father) should contract with that company to design and build the special bikes, plus the stock bikes when there is time. In other words, he should do the same job he was doing as an employee, but as a non-employee.
OCC would not pay him a salary, nor would it pay any benefits at all. Instead, it would pay a contracting fee, and Paulie would pay all those other things himself -- for himself, and also for his employees. Yes, OCC should let other employees go; they already realize they must lay people off, due to the bad financial times (which curtail both corporate sponsorship of elaborate motorcycles and also ordinary people buying the stock choppers, which are after all luxuries). Paulie's design company should hire some of these laid-off employees -- especially including Jason Pohl.
The benefits to OCC are obvious: They don't have all the overhead of so many employees, and they only have to pay Paulie when he's actually working for them. They pay a lump sum, which is just as deductable as a business expense as were Paulie's salary and bennies when he was an employee. And most important, Senior can relax, because Junior's work habits are no longer his business -- literally.
The benefits to Paulie are equally clear: He can come and go as he pleases, work however he wants in order to create the build, and isn't under the thumb of his father. But at the same time, since he doesn't want his business to fail, he has a gigantic incentive to ensure that come what may, the build is completed on time, within budget, and to the customer's satisfaction... because if he doesn't, Senior can easily contract with a different bike designer for the same product.
In addition, Paulie can use all the machines at OCC -- from lifts and compressed air for power tools to the FlowJet and its five-axis bigger cousin to the CAD setup for Jason -- to design and create his choppers, along with the actual physical space; Paulie doesn't have to buy all those things for himself. In fact, even if he contracts with some other company in the future, if it doesn't interfere with OCC's own work, he might be able to lease access to OCC's infrastructure; again, everybody benefits.
Having his own employees will force Junior to start understanding and confronting the same pressures that his father has to deal with, which will probably bring them closer together as a family (a serendipitous effect of the market). But since his will be a much, much smaller company, his employees -- the Eddie Willers who really do want and need to be told what to do -- will have much more input, responsibilty, accountability, and access than they would as employees of the larger company as a whole. They will be happier and will have a financial incentive to be more innovative and creative; they will likely be paid with both straight compensation and with company stock, as most startups do, so Paulie's success is the employees' success in a very direct way.
Then in the future, when even Paulie's company gets too big and begins to emulate a government (and a feudal one at that!), key employees of Paulie can split off and become independent contractors to him, just as he did with OCC.
Back to the future
This corporate reform would introduce a dose of real Capitalism into the work relationship... which is exactly what has been missing from the Mediaeval structure of nearly every corporation in America (and the world). A number of companies have in fact been experimenting with just such an arrangement of business units, with varying success. (Contrary to libertarian rhetoric, freedom does not come naturally to people: One must command them to be free.)
But once people get a taste for liberty, you cannot take it away without a fight. As that is our greatest strength as a country and society, it makes sense for us to incorporate it into every facet of America that we can... and most especially, we must ditch the "command economy," at all levels, in favor of economic freedom, Capitalism, and the ownership society.
Else we will end up in just as dire a straite as Orange County Chopper, as our most creative minds will simply pack up and find somewhere more congenial to work -- small-w.
Hatched by Dafydd on this day, April 20, 2009, at the time of 5:21 PM
TrackBack URL for this hissing: http://biglizards.net/mt3.36/earendiltrack.cgi/3588
The following hissed in response by: Chris G.
Wow, that was really something! Very well-written. In fact, so well written that it didn't seem to be long at all. Thanks for a great post.
The following hissed in response by: Dick E
It’s been a while since I looked at the rules about independent contractor vs. employee status. (Yes there are rules about that.) Unless things have changed a lot in the last few years, you can’t just choose which you want to be. And if the company makes the wrong decision, they face penalties.
As I recall, there was a long list of criteria -- 18, I think -- and you had to decide which were deciding factors for a particular category of workers.
Paying people based on time worked (whether via wages or salaries), requiring them to work particular hours or in a particular place, and requiring work to be performed in a particular manner, all argue for treating someone as an employee.
Independent contractors generally work on projects (like your Mercury group), they usually provide their own tools and provide similar contracting services to more than one company, and the company isn’t supposed to care who does the work as long as it gets done -- the independent contractor can have employees or subcontractors of their own. (The latter is an example of a criterion that may apply in some cases but not in others. If you hire Johnnie Cochran, you might object if he assigns a first year associate as first chair in the defense of your murder case. But of course, you don’t expect Johnnie to do all the work on your case -- he’s way too expensive to do all the legal research.)
Those are only a few of the criteria I can remember off the top of my head; there are obviously many more. The problem is, when the IRS looks at the way a company has categorized people, they lean heavily toward calling them employees if at all possible. And the rules, unfortunately, are structured in their favor. Somehow, they think when people get 1099’s with no FICA withholding, there is a temptation not to report the income as subject to self employment tax. I know -- that’s hard to believe, but I’ve heard there are some scofflaws out there.
So if you want to expand the universe of independent contractors, either be very careful how you do it or write your Congressman to change the law.
Then there’s the issue of the project oriented work (or is that Work?) environment. It can function in a company that is naturally project oriented -- like your Mercury group or, although I haven’t seen the show, perhaps OCC. I’m not sure how well it would work, though, in a typical process-oriented manufacturing company.
I once worked at a toy company that received raw steel at one end of the plant and ran it through a limited number of enormous, very expensive punch presses; the parts were then painted. At the other end of the plant, raw plastic came in the door and went through injection molding machines. In the middle of the plant, the steel and plastic parts were assembled and packaged. That’s a vast oversimplification, but I think you get the idea. How do you organize that around projects? And why would you want to?
I’ve seen quite a few manufacturing plants in my day, and I can’t think of one that would readily lend itself to management by project, rather than by process.
The following hissed in response by: k2aggie07
Dick E took the words right out of my mouth. I think that we'll see what you're describing more and more with professionals -- in fact, there was an article a few months ago in ASME's monthly about "engineering without walls", essentially what you're describing: teams of engineers or other professionals contracting and coalescing around a project through the internet, working together, and then moving on.
I work in a weld & machine shop right now that fixes multimillion dollar rotating equipment components. Our welders work 12 hours a day, 6-7 days a week. Most of them love their work, the money, or both. We also hire contractors to perform project labor for us from time to time. The difference is that when the projects go away, so do the contractors -- when you're faced with steady work, you want to retain the best labor you kind find. The other problem with rewarding work on a per project basis is the folly of expecting A while rewarding B. You (presumably) want quality and craftmanship but are rewarding on time delivery. How do you punish a contractor after the work is done? Sure, no repeat business -- but if they're all contractors, how do you protect yourself?
Finally, and this is all anecdotal to my own industry, how do you protect trade secrets? Many of the repairs we perform are proprietary. Our tooling and even the order in which we perform the repairs are what gives us an edge on the competition. If we hire a contractor (be it engineer, welder, or mechanic) who then goes to another company for another job, how do we protect ourselves?
We do, however, organize our company internally to accomodate the maneuver warfare speed and reaction times of the USMC -- push autonomy down, ensure the boots on the ground understand both the end state object and the framework for their decision making process (e.g., commander's intent).
I think the real outcome of the ideas expressed in your post is a widening "right to work" expectation and a more mobile work force. I believe, too, that we're already seeing that -- people are changing jobs more frequently in America than ever before. Competition between employers for the best will ensure that more efficient business models rise to the top.
The following hissed in response by: Dafydd ab Hugh
First, not every business fits this model; some especially older manufacturing industries cannot reorganize around a "project" model. C'est la vie.
But second, employees of that sort of industry are a much smaller part of the workforce than ever before and getting smaller all the time. We are very much a post-industrial country now... and so even are second-generation technological countries like Japan. As automation innovation continues, there will eventually be no such giant machinist factories in the Western world that employ thousands (or tens of thousands) to turn out identical widgets.
That doesn't mean we won't manufacture things, just that such large-scale manufacturing will employ so few human beings (the rest being CAD-CAM) that it won't be a significant part of the workforce.
There will still be many, many people employed working with their hands; but they will work at more boutique-oriented manufactories, like Orange County Chopper, where a personal human touch is what customers pay for. That kind of manufacturing absolutely lends itself to project-oriented Capitalism.
Third, as I said, there will always be a large number of workers, perhaps even a majority, who do not want to be independent capitalists; they want to be told what to do, to be supervised -- they want to be employees. Fine; they will simply be employees in smaller companies, companies within companies, or even contractors who are paid by the hour (say receptionists, secretaries, help-desk engineers -- jobs for which a primary component is physically being present for an entire shift).
Fourth, since the trend is towards smaller businesses anyway, many small companies don't need to organize around projects; and they can still pay according to accomplishment, rather than hours spent at work.
Fifth, you are correct that it would be bad business to pay a contractor for timely delivery and not care about quality of work. But this is not a problem created by independent contractors; there are plenty of employees today who are paid by the hour, but all they do is sit around and bless us with their physical presence; they don't ever actually do anything. (I guarantee you have known people like that.)
That's an obvious quality-control problem with that company... and the solution is to return to the core element of free-market Capitalism: If a company screws up and isn't able to deliver the goods, then customers stop using that company and it founders. And if a company founders and begs the government for a bailout -- then the government should let it sink.
That is our primary protection; and it's a much surer guarantee. Hoping that a huge corporation (or the government) will have a heart and do the right thing is pretty forlorn, as we have all had occasion to experience. What keeps people honest is the fear that if they are dishonest, something bad will happen to them -- whether that punishment comes from the State (a fine or prison time) or from the market (the collapse of the business). We will still have a quality-enforcement mechanism; it will simply be more the latter than the former.
The only way to give people the right to succeed is to simultaneously give them the right to fail; without the latter, there is no former, because they are the two sides of the same coin. In exactly the same way, if the obverse is liberty, the reverse is duty: You cannot have "rights" floating in mid air without a corresponding duty to respect the rights of others, to live up to one's contracts, and to band together in case of emergencies.
The problem is that, in our quasi-capitalist social-welfare state, we have tried to eliminate the right to fail... therefore few people have the right to succeed anymore: We almost have to ask the State's permission to make a profit; thus the profusion of lobbyists and lawyers at any company larger than a restaurant or a gas station.
Sixth, one point of personal interest: I have worked as an employee, and I have also worked as an independent contractor (invoicing the company, receiving a 1099, paying SE tax) -- often side by side with employees doing exactly the same work. In most work environments today, there is no legal impediment to hiring independent contractors to do the same work as employees; it's just a different way of accounting.
And of course, you must pay your SE tax... which seems very large, twice as much as FICA deductions.
But even as an employee, you are really paying the entire FICA withholding: If your employer didn't have to pay his share of the 13%, or however much it is, that money would be available to employees as salary -- and they would get it, because wages rise to the level demanded by the market.
Since, by definition, the employer in question needs to pay a total compensation package of $X (including what it has to pay in benefits and SS taxes) -- "by definition" because if it could get away with paying less, it would already be doing so -- then even if it were "employing" independent contractors, it would have to offer them the full $X... or it would lose them to competitors. That's the market; c'est la guerre.
The only difference is that the contractors could decide how much to spend on insurance, how much to invest for retirement, and would pay the full SE tax out of their (much larger) take-home pay; while the employees reside in a one-size-fits-all world where if they get any choice at all, it's very limited.
These are all minor considerations in the larger scheme of things. In the final analysis, if we were to shift to greater Capitalism, three things would happen:
- Companies would devise equitable ways to handle the new environment, just as they did to handle the industrial-worker employee environment; that's what they do.
- As government loses control of the people (independent contractors are much harder to corral than employees of giant corporations), the people will begin to demand smaller government -- it interferes with their ability to get rich -- rather than larger government; for one thing, we will stop training and propagandizing our citizens to expect to suckle at the government teat their whole lives. That itself is worth price of admission!
- Finally, as we slip the surly bonds of government's black hole, the actual wealth of Western civilization will rise precipitously, faster than we have ever seen before; this will be true even for more traditional companies, which will still benefit from a lighter touch by the State. We will see an even steeper increase in the net wealth of the world in the era of independent-ownership Capitalism than we saw even over the last two hundred years, the era of industrial-worker Capitalism, because we will expand the base of capitalists beyond the pool of business owners to the larger pool of everyone who creates wealth (including those Eddie Willers employees).
And that is truly worth fighting for.
The above hissed in response by: Dafydd ab Hugh at April 21, 2009 2:01 PM
The following hissed in response by: abstractedengineer
You have to be careful how you spin the Teutuls, OCC didn't just start as "two-guys and a truck" per se, they already had a multi-million dollar steel manufacturing business that is currently run by the "other brother." This gave them the financial security to take risks with their chopper designs that wouldn't have been feasible otherwise.
The above hissed in response by: abstractedengineer at April 21, 2009 2:22 PM
The following hissed in response by: Dick E
I agree with most of what you say, including the part about project vs. process orientation. We are, indeed, rapidly moving away from the traditional manufacturing model.
That said, moving individuals from employee to independent contractor status is, unfortunately, a matter of hidebound rules that the IRS interprets to their advantage (real or perceived). And they are holding all the cards. Unlike other venues, in tax cases, whether in Tax Court, other Federal courts or on appeal, you are guilty until proven innocent. If the IRS says you owe the tax or must, for example, change the way you classify your workers, it is up to you to prove the IRS is wrong.
Don’t like that? Write your Congressman.
Finally, if you worked “side by side with employees doing exactly the same work” then it is highly probable that the company erred in treating you as an independent contractor. If the IRS saw that happening, they would certainly argue this way. It is most assuredly NOT “just a different way of accounting.” I learned this through bitter experience at a company (not the toy mfr.) that had hundreds of people reclassified by the IRS from independent contractor to employee status.
(I’m not saying that what you experienced doesn’t happen with some frequency, but it is a matter of following rules, not choosing among options. Companies that continue such practices probably are not subject to frequent, in-depth IRS audits.)
(BTW, the rules on this subject are in Revenue Ruling 87-41. That’s 87 as in 1987, and there are 20 factors, not 18 as I had misremembered. And in a case like the one you experienced, the specific rules would be far less persuasive to the IRS than would the treatment of similar workers as employees.)
The following hissed in response by: Dafydd ab Hugh
All right, let's run through the twenty factors:
(1) Instructions. An employee must comply with instructions about when, where and how to work.
Contractor: I mostly worked from home, coming in only when I had to work with the actual employees (e.g., editing the documentation, conferences, etc.) I was doing the same work as some of the employees and some other contractors; my project manager was another contractor who would probably answer all these questions the same way. It was she who brought me in; the company merely looked over samples of my previous work and agreed to pay me.
(2) Training. An employee receives on-going training from, or at the direction of, the employer.
Contractor: The only training I got was from my manager, another independent contractor.
(3) Integration. An employee’s services are integrated into the business operations because the services are important to the business.
Contractor (I think): I'm not sure what this means, but the only thing integrated into the business was the product I produced.
I think this must mean a job title like secretary or receptionist, where the physical work done by the person is what is integrated... not the end product of that work. Otherwise every contractor would be an employee: By definition, every contractor's end product is naturally integrated into the business... else they wouldn't need to hire a contractor!
(4) Services rendered personally. If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees, an independent contractor may assign the work to others.
Contractor: I don't think so; since I mostly worked at home, they wouldn't even have known whether I did the work myself. I did, but if they didn't know they couldn't have cared. (Everybody doing it must sign an NDA, of course.)
(5) Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee.
Contractor: I don't think this applies; I had no assistants hired by the employer or anyone else.
(6) Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists.
Employee: I suppose so; I worked fairly continuously for them until the company went belly-up. (I hope those two points are not related!)
(7) Set hours of work. A worker who has set hours of work established by an employer is generally an employee.
(8) Full time required. An employee normally works full time for an employer.
Contractor: I billed them for hours worked. As it happens, I only worked for them; but there was nothing in my contract requiring that.
(9) Work done on premises.
Contractor: Only occasionally did I work on site.
(10) Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee.
Contractor: Nothing about order or sequence in my contract; I had a manual to produce, and I produced it.
(11) Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicates a degree of control by the employer.
Maybe: I did have to report now and again what progress I was making, but it wasn't a regular, scheduled requirement.
(12) Payments by hour, week or month.
Employee: I was paid by the hour, invoiced them every two weeks, and received a check.
(13) Payment of expenses.
(14) Furnishing of tools and materials.
Contractor: I really have to say no to this; I used my own computer, though they gave me a copy of FrameMaker so that all the documentation would be in the same software. Other than that, the only materials I received were the products I was documenting... for which I had no use other than to write about them.
(15) Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.
Yes, but with an explanation: I did actually invest in the company... but that was their IPO; I had to beg and plead to be allowed to invest in it (it was supposed to be for employees). Then as it turned out, it was pretty much of a scam. I lost a lot of money, only making it back (with a profit) as a result of a class-action lawsuit filed by someone else, from which I chose not to opt out. So that doesn't really help me on the "contractor" question.
(16) Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor. Employees are typically paid for their time and labor and have no liability for business expenses.
Employee: Other than the above, which was not required, I was paid by the hour.
(17) Working for more than one firm at a time.
Contractor: As it happens, I didn't; but there was nothing in my contract requiring exclusivity. I could have if I'd wanted to.
(18) Making services available to the general public.
Contractor: If by "general public" the IRS means other software companies who need documentation, then yes; I whored out to anyone who would pay my exorbitant rates.
(19) Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee.
???: What the heck? It's even easier to dump a contractor than fire an employee! What does the IRS mean?
(20) Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.
I have no idea: I had no intention of quitting. I don't recall if there was a performance guarantee.
So out of the twenty criteria, I score as follows:
- 13 factors point towards contractor;
- 3 factors point towards employee;
- 1 maybe;
- 1 explanation;
- 1 what the heck;
- 1 I have no idea.
If that adds up to "employee," then the IRS is deliberately trying to read independent contractors out of existence.
But this is silly anyway, since the law will follow the trend: If more and more people start working as independent contrators (in the rational sense), and if the IRS starts cracking down on them, the hue and cry will force Congress to pass legislation to tell the IRS to go jump in a lake.
We are moving in that direction; the IRS can either get out of the way -- or be run over by the Zamboni of historical inevitability.
The above hissed in response by: Dafydd ab Hugh at April 22, 2009 12:10 AM
The following hissed in response by: Dick E
I’m not in a position to determine where you fell on each of the 20 factors -- although I think you might have gotten a couple wrong. The main point is, it’s not a matter of counting how many check marks you have in column A and how many in column B, then letting the majority rule.
Just because most of the factors point in the direction of “independent contractor” does not mean the IRS will accept this designation. The factors are not weighted equally, but you’ll never know which are more important than others until after your case has been audited.
The Feds approach this issue with the assumption that everyone is an employee unless the company can demonstrate otherwise. (I’m sure that’s not their official position, and it’s probably not stated that way in their manuals, but it’s the way I’ve seen them operate.)
Your comment that you worked “side by side with employees doing exactly the same work” was what I relied on in making my assessment above. If you would care to revise and extend your remarks, fine. But if that statement is accurate, then no flogging of 20 factors is going to convince the IRS that you were a contractor while your co-workers were employees.
(As far as I know, there is no down side to the worker for having been reclassified from independent contractor to employee -- unless, of course, they failed to pay self-employment tax. The company is subject to penalties.)
The following hissed in response by: Dafydd ab Hugh
First, I'll bet I can win that case in court; the IRS doesn't have the final say.
But second, why would they be so anxious to reclassify me in the first place? I paid my SE tax every year. Are they going to refund half of it to me for each year that I worked as a contractor -- then try to collect it from a company that had gone out of business in the meantime?
Somehow I think that when I pointed out that practical limitation to collections, and the necessity of rebating my overpayment, the auditor would abruptly lose all interest in the proceedings... <g>
The above hissed in response by: Dafydd ab Hugh at April 22, 2009 11:22 PM
The following hissed in response by: Dick E
First (and second, for that matter), it’s highly unlikely that you would be a party to a court case -- or any IRS action for that matter. As I said, the IRS is after companies, not individuals. Why? From companies they can collect penalties, unemployment taxes and, if the company can’t prove workers paid self employment tax, they can hit them for employer’s and employee’s share of FICA and Medicare.
If a case were to occur, the company would almost certainly lose, for the reason (you) stated. The judge would not play “20 Questions.”
That said, if the former company went kaflooey, the likelihood of legal action is, as you say, essentially nil. (Note, however, that my legal credentials are about on a par with yours -- although I once had some fair tax chops.)
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