From workers to shareholders: managing fluctuating demand in uncertain economic times
Updated: Nov 22, 2022
Over the past years I have written many articles pointing out the obsolescence of a debt based monetary system as we reach the physical limits of our planet, and especially, as we are entering into a period in our history, where it is highly unlikely that we will experience a nice and steady economic growth. The stability of a debt based monetary system is highly dependent on economic growth. Failure to sustain growth, the debt-to-GDP ratio may become unsustainable, and that causes plenty of problems, including a potential default on the debt. In my previous articles, I have focused on the monetary side (money creation) and examined alternatives such as the Relative Theory of Money. In this article I will address the other side of the equation, private companies and businesses.
There are no economic or business textbooks, to my knowledge, who present a situation where a business with a negative cash flow can function for any extended period of time, except under communism, where a failing business may be propped up by public subsidies or public support. However, in the years ahead, businesses can no longer count on steady and predictable demand, or in general, a stable economic and financial situation, which translates into a nice and steady cash flow.
Don’t get me wrong: there are plenty of initiatives and measures that have been put forward to deal with diminishing cash flows or fluctuating demand, but most if not all of them were to the detriment of workers. In essence, a failing business must first and foremost lower its fixed costs, once of which (and an important one), is it’s human capital expenditures (aka, employees and their salary). In many countries, labour laws have come under attack to break employee protection, to make it easier for businesses to fire people in dire times.
What I propose, in this article, is essentially to transform all employees into shareholders.
Let’s take a business with 100 employees. Instead of hiring people on a regular employment contract with a fixed salary, present them with a contract where automatically, each month, they receive a certain percentage of the company’s performance or cash flow. For instance, an entry level employee would earn 0,5% of the company’s gross profit for that month. Now, obviously, the methodology for calculating the amount a worker should get paid requires some deeper reflection. For instance, a worker could get 0.5% of last year’s gross profit, with an adjustment algorithm based on projections of the last 3 months of cash flow. Workers would therefore no longer receive a fixed salary, but a salary which depends very closely on the performance of the business. Such a system would allow a company to downscale in case of a drop in economic activity in realtime and without the necessity to fire employees.
Some of you may cry out against such a system since workers would be unable to project themselves into the future, given their fluctuating salary. Some things to keep in mind: such a system would be no more problematic than what we have at present. Fixed salaries are no more stable than the system I propose, since in periods of hardship, there is just as much chance that an employee will loose his/her job. Thus a fixed salary is only an illusory stability.
There are other mechanisms one can put in place to smooth the income curb.
First, since employee’s pay is fluctuating, so should their working hours. In case a business is experiencing a rough patch, the diminishing salaries should be matched with less working hours. Current businesses are created with a single idea in mind: infinite growth. Year over year, a business must grow, otherwise it’s dead. In the future, businesses should be created with the idea that while a product or service they offer is great, there may be periods of time where demand for such a product/service may disappear temporarily. In such a case, it wouldn’t make a difference whether employees work overtime, that wouldn’t make the “demand” reappear by magic! At present, most businesses are engaged in pro-actively creating a demand, by selling the illusion of desire for a product/service, via heavy marketing/advertising. It is doubtful, for instance, whether people absolutely need the very latest version of the iPhone. But advertising and marketing will make them believe that they do. This is linked to the above principle: infinite growth. Diminishing working hours can allow workers to earn money via other means, to compensate for the lower income stream coming from their main employment. In the future, I expect the old model of working full time for a single employer to gradually fade away. People will have multiple jobs, just like investors diversify their investment portfolio.
Second, treating employees like shareholders should extend beyond their salary. Employees should have the choice of opting for a system of automatic investment in a diversified portfolio of stocks/bonds in “good” times (for instance, via the purchase of ETFs), in order to have savings aside in case their salaries fluctuate lower. Payment of dividends from such investments could compensate their financial losses in case one of their jobs pays less.
Third, blockchain and smart contracts are ideally suited to implement such a system. It is quite easy to program a smart contract to transfer 0.5% of monthly gross profit automatically at the end of the month. This could save up lots of administrative burdens and costs in managing HR, employment contracts, salary management and payment etc.
In summary, given the challenges we will be facing ahead, such as climate change, inflation, economic crisis, pandemics, wars… it is doubtful that we will have an economic environment which will allow businesses to experience nice and steady cash flows. On the contrary, fluctuating demand will become the norm. This will require a complete revamp of the way people are compensated for their work.
However, keep in mind that the system I propose above will work best under a monetary system based on the Relative Theory of Money. If we stay in a debt based monetary system, then businesses will not benefit as much since a part of their fixed expenditure will remain: servicing their debt. And thus workers (or the taxpayer, via state aid) will have to shoulder the brunt of any economic shock.
See my other articles about economics: