how two out-of-a-job fellows introduced the entrepreneurial mode of labour utilization.
The tale about Joe and Bloe
When the employer takes the profit that the labour of his employee generates, he exploits his employee.
How the story starts.
The company needs to cut expenses. Joe and Bloe lose their jobs.
Joe suggests to Bloe to start a business together.
How much can you put forward? asks Joe.
I only have $50,000, says Bloe.
Fine, replies Joe, I will match it.
So, they start with $100,000. Rent premises, buy equipment. Hire no one, just the two of them.
They hit a marketable product people start buying it off their hands, with no inventory in stock for them to keep. They split the profit fifty-fifty.
A lawyer tells them that theyd better incorporate, because if someone were to sue them, they could lose more than their business. So, they incorporate.
Now Joe and Bloe become employees of their own company, so they get to set their own wages. They set their wages equal, at about the amount they made last month.
Most subsequent months the company makes profit above their wages. So, they divide the profit fifty-fifty. Occasionally, the profit hits below the sum of their two wages. Then they personally credit the company for the difference and pay back from their next months wages.
Bloe falls in love with a working girl and decides to marry. He needs money to arrange the wedding and a downpayment for a house. Joe offers to buy Bloe partially out: he offers to replace Bloes $30,000 with his own. First, Bloe will have enough for the wedding and for the downpayment. Second, his wage will not change, only instead of them splitting the profit/loss 50-50, they will be splitting it 20-80. Thats not bad, because in case of a loss, Bloe only will have to credit the company for 20% of it, not 50% as before. Joe will be taking more risk from now on 80%, not 50% as before. Bloes income becomes more stable. Joes takes on more risk.
Then Bloes wife gets pregnant. She has to quit her job. Bloe needs some extra money to get over the time his wife cannot hold a job. He asks Joe to buy him out completely. Joe obliges, and the $20,000 comes in handy. Bloes wage doesnt change; he just stops participating in profits and losses altogether. Joe has taken all the risk upon himself. Joe has proven again to be a really good friend: he never hesitates to extend a helping hand.
For a while, profits pile up in earnest, and Bloe grows a little jealous. Soon the market gets weaker. Bloe develops even more respect for his friend Joe for carrying all the risk, and he works overtime without pay to help Joe sell more stuff for lower prices to reduce losses. Beside the friendship, Bloe is concerned with how long Joe can keep losing money. Joe may decide to close the business while Bloe cannot afford to lose his job with Joe.
Then the market improves mightily and profits start rolling in. Naturally, they all go to Joe. For a few months, Bloe doesnt care about it. He is happy about not having to work overtime without pay anymore. The overtime is paying well now.
Profits continue to roll in. Joe buys a new sports car. Joe falls in love, pays cash for a huge wedding and moves into a decent house all paid in cash.
Bloe becomes a bit uncomfortable. He begins to think: After all, I am just as smart as Joe is. Why should Joe be making so much more? Joe couldnt have made all that money without me! If Joe is making so much more than I am, it must be for a reason! Joe, who used to be such a nice and generous guy before, is now living off my labour: Joe is exploiting his best friend now!
Bloe asks for a raise. Joe obliges. Bloe gets happy for a few months, but the memory of the raise wears off soon. Joes profits have caved in a bit due to Bloes raise, but that does not last for too long. Bloe continues to toil as hard as Joe does, and Joes profits take off again.
Bloes wages are excellent in comparison with an average workers of his skill, but Joes relentless success doesnt come easy for Bloe to bear. He asks for a raise again. Joe looks a bit surprised: he knows Bloe is well paid, better than average. But Joe doesnt want to lose his old friend, so he gives him a bit of a raise. That little raise hardly makes a dent in Joes profits. Neither does Bloe feel much happier.
As more profits continue to roll in for Joe, Bloe feels embarrassed to ask for yet another raise. He knows he is making more than average already and Joe will be even less generous this time. Joes rising profits are bringing sleepless nights to Bloe. After such sleepless nights Bloe is late for work. Joe always comes to work on time, and he doesnt like it when Bloe comes late. Joe feels sorry for Bloes inability to sleep well, and he does not reprimand Bloe too severely. Joe is working a bit harder to pick up the slack, and the profits keep on rolling in.
Bloes nights do not improve. He becomes irritable. At work, he starts to slow down and occasionally he skips days altogether. For the skipped days, Joe deducts from Bloes pay, but Joe cannot do anything about Bloes sluggishness at work. As Bloe grows more jealous, Joe grows more irksome. They stop being friends. Joe starts contemplating firing Bloe after all, a new broom will sweep cleaner! This thought isnt easy on Joe. He wonders if a way can be found to bring his old friend back in line.
Just as Joe is mulling over what to do about Bloe, he picks up a flyer about Motty Perels FREE talk at the local university premises called How to Stop Exploiting People and Profit from Doing So. Joe is certain that the exploitation part has nothing to do with him (he is paying a decent wage to Bloe), but he doesnt mind finding a way to extra profits.
Only the whole thing about the flyer looks fishy. He has found the flyer on a park bench. He never heard about the guy who claims to know all about How to Stop Exploiting People and Profit from Doing So. When someone teaches you to make more profit, he always charges money, big money. Who would give away knowledge like that for free?! Only someone whose talk is worthless. Also, the name Motty sounds Jewish. Who was the other Jew to talk about exploitation? Right, Karl Marx! He also didnt charge for the talk. But, boy, what came out of it! His ideas brought half a hemisphere to ruin.
Yet, the title of the talk sounds intriguing to Joe. He becomes curious enough to attend. However, by the time Joe arrives to the talk, he is sure he has come for nothing.
Yet Joe is in for a surprise. Wow! Joe realizes what has been on Bloes mind! Bloe has been feeling exploited and, in fact, he has been, because all the profit from Bloes investment of labour has been going to Joe. Sure, Joe is entitled to the whole profit on his means of production, as well as on his own labour. But Bloes labour is an investment in the business as well, and Bloe is likewise entitled to the whole profit on the labour he invests in the production process. As the profit on Bloes investment of labour is all going to Joe, Bloe does not perceive the value of his labour as an investment for profit, but rather as a commodity for sale to Joe. Bloe is selling his labour to Joe. Like any arms length vendor, Bloe is trying to sell less value for as high a price as he can get! Is Bloe to blame? Would Joe, or anyone else for that matter, act any differently under the circumstances?
So where has Joe gone wrong? Joe recalls how he and Bloe used to hate their former boss, because they knew that the boss lived off Bloes, Joes and all the other workers labour. Joe would never exploit anyone. Nonetheless, it turns out that he is!
When Joe bought out Bloe from their business completely, it never occurred to Joe that from that point on Bloe would be selling his labour to Joe for a wage, rather than investing his labour for profit, Joes profit. For Bloes labour to continue being invested, Joe should add to Bloes wage any profit (or subtract from it any loss) attributed to Bloes labour by the market, just as before, when they both used to credit their company from their wages in low months.
If Joe will let Bloe collect all the due profit and sustain all due loss on Bloes investment of labour, they can become friends again! Moreover, it wont cost Joe a penny to introduce all this arrangement.
Bloe will become a businessman again, with his investment equal to the market value of his labour, i.e., to his wage. Bloe will be trying to make as much profit on his labour as he can by trying to do as good a job as he can, just as in the old days when they were fifty-fifty owners. Bloe will not be exploited anymore, because Bloes profit on his investment will be all his own. Bloe will not be jealous of Joe for the larger profit Joe is making, because Joe is investing more than just his labour. Joes investment in means of production is entitled to a profit after all. Part of that profit could be Bloes as well, had he not withdrawn his money from the business.
What Joe is doing now is taking to himself all the profit on Bloes investment of labour, and by doing so he is losing Bloes cooperation and good will. He is exploiting Bloe to his own dire detriment.
Joe is impressed with his discovery.
Rather than telling the whole story to Bloe, he suggests that Bloe come to Mottys next talk. Bloe obliges.
From the talk, Bloe understands what has actually happened between him and Joe. He is happy that he came to the talk on Joes advice. That means Joe has understood things the way Bloe understands them now.
Bloe makes a copy of the A-Option Contract. He comes to work next day and approaches Joe, his right hand extended for a handshake and his left hand carrying an A-Option contract, signed. He hands in the contract to Joe. Without saying a word, Joe signs the contract. They shake hands again, and from then on they work together happily and prosperously ever after.
How the story ends.
Now, with their friendship restored, Joe and Bloe are enjoying each others company more than ever. They cant enjoy enough of each others cooperation. Bloe forgets about his sleepless nights. His sluggishness at work vanishes. The two friends keep dreaming up new ways of manufacturing their product for speed, quality and safety.
Their teamwork soon brings pleasant results: their product acquires the reputation of superior quality, and they become known for prompt delivery. Customers start paying for their product a premium over the competitions price.
There is plenty of competition.
The competitions bosses are behaving very differently. They are buying automatic equipment in order to reduce their workforce and supervisory staff. That also helps to solve the problem of the shortage of qualified workers who, due to the high demand, must be paid just about any wage they ask. The demand for the product is high enough for every shop to prosper. The competition does not care much about their unit production costs being much higher than Joes and Bloes, nor about the quality of the product being slightly lower than our friends, because the competitions bosses are making it up in bulk. That way they are making more profit than our friends Joe and Bloe are.
Bloes hourly wages stay constant, but the profit on them is growing from month to month. The market is wild. Customers are demanding delivery yesterday. The two friends are working long hours to meet the demand. Naturally, they pay themselves overtime wages, plus the growing profit on these wages.
When the mortgage on Bloes house comes up for renewal, Bloe just pays it off in one lump sum. Now he owns his house clear. Money begins to linger in his savings account and he starts contemplating alternatives: to buy a new car? to invest in the stock market?
Joes company is privately incorporated. It has issued 100 shares of stock and it could accommodate up to 25 shareholders. As the sole owner, Joe owns all of the 100 shares. The shares are not publicly traded.
With all this production rush, our friends could use some more equipment in order to enable them to raise their productivity and increase the quality of their product. Their goal is not to work less but to make more profit. They trust their own hands and minds for speed and quality more than they could ever trust an automatic machine that replaces manpower.
Rather than spending his own or corporate money, Joe offers to sell to Bloe some shares and buy the new equipment for the money raised. Bloe uses the opportunity to invest his accumulated savings and becomes a partial owner of the company again.
Joe proves his unwavering friendship to Bloe again: he hires an independent appraiser to determine the companys market value, and charges the entire cost of the appraisal to the corporate account, rather than having Bloe share the expense. Joe divides this value by 100. That is the price for Bloe to buy a share of the company from Joe. Not only could Joe have charged Bloe at least a part of the appraisers fee, but he could also have charged him a premium over the corporate asset value per share, because the companys prospects are great. However, Joe expects, and receives, such an outpouring of gratitude from his friend Bloe for this generosity, that the gesture pays off plentifully for him.
Bloe buys a few shares for all the savings he has accumulated. For the next couple of years he spends every spare dollar to buy more of the companys shares. He learns that, as the market value of corporate assets grows, every next share costs him more to buy. So, he is in a hurry to buy shares earlier, rather than postpone the purchase in favour of buying luxury items for his family.
To accommodate the growing number of equipment items the partners rent the next-door industrial unit. They are still not hiring any extra help. Profits continue rolling in royally, but the daily overtime and working weekends start catching up with them. Despite the great money, their wives start complaining.
Suddenly the bottom falls out of the market. A recession begins to loom. Customers start cancelling orders. In about a week the partners complete their entire backlog. There are no more new entries in their Order Book. They just as well could take a vacation, but they dont out of worry.
Next month some new customers come in with orders. Rumour has it that some competitors went bankrupt. This time, the customers are bargaining for every dollar. Have they forgotten about Joe and Bloes superior quality, about their prompt delivery? The customers are bargaining so badly, that the price they are ready to pay barely exceeds the production costs. However, our friends have little in the way of choice. The alternative is to have their shop standing idle. They accept every order, regardless of the low profit margin.
As our friends Joe and Bloe toil over the new meagre margin orders, their Order Book starts to fill with orders from new customers. At first, the partners are surprised, but then they find out that their competition shops are closing doors one after another: their production costs have been way above the price their old customers were ready to pay, and they couldnt afford to take the orders any more. This is where our friends have acquired new customers from.
The meagre-margin orders are filling the Order Book faster than in the good times. Now Joe and Bloe are working overtime and weekends again, and even this hard work hardly brings them any profit above their wages.
Suddenly, unemployed workers start appearing in droves at the partners doorstep, looking for jobs. These are the workers downsized by the competition. Joe and Bloe are overworked. Now they can hire the best skill for peanuts. They do offer fair market wages but these are as low as they could ever be. Every new hire is happy to get any job and plunges into work eagerly.
Our friends realize that this eagerness will last just as long as the economy is depressed. As soon as profits show any sign of improvement, these guys will be asking for a raise and/or leaving for greener pastures. With this realization in mind, Joe and Bloe explain A-Option to every new hire and offer him an opportunity to sign up for it at the end of the next quarter. Joe and Blow stand by their word. The next quarter passes and the company offers every worker a chance to join A-Option. The partners notice that those workers who have been exhibiting intelligence from the start accept A-Option as soon as it is offered. The less talented decide to wait until the market definitely improves, so the threat of losing money off their wages disappears.
The partners cant help but witness an unusual phenomenon unfolding before their eyes at the production floor: the A-Option members start watching the non-members for attendance, tidiness, speed and quality of work. The members are full of humour and good comradery, while the non-members dont smile and shun the members. The impression is as if the workers have split into two camps. Joe and Bloe know exactly what segregates the two groups. The members have become entrepreneurs who are up to investing their labour in most productive ways for maximum profit, while the non-members have become their employees who are up to selling to those entrepreneurs as little of their labour as they can get away with for the highest possible wage. The members are not being exploited, whether their income is above or below their wage, whereas the non-members are exploited whenever the members make any profit over their wages, so the non-members are eager to prevent this from happening. This is going on, despite the fact that the wages of the non-members are assured in full, while the incomes of the members are fluctuating with the profit from operations.
This peculiar situation goes on for a full quarter. At the end of the quarter, a few non-members join A-Option. A few quarters get by and all but a few employees join as well. The rest quit the job. They have found the pressure too heavy to bear.
The company resembles a beehive. As the Order Book keeps on swelling with orders as meagre-margined as before, the workers come up with a new idea. The shop is too crowded with people and equipment. People are running into each other. Buying more equipment to fill all the orders would make the place even more crowded, beside the point that the cost of the new equipment would increase the cost of production.
So, this is what they come up with.
They will work the old equipment around the clock in several shifts without breaks. They will arrange the shifts and their duration among themselves to suit individual preferences, but the company will pay wages for eight-hour shifts regardless of how long the actual shift of an individual worker is. That way, the floor will no longer be crowded, no time will be wasted for breaks, and the increased intensity of equipment use will make up for the cost of the shorter shifts. As a bonus, delivery time will get three times shorter, it will be possible to fill more orders without renting additional premises, and the old equipment will be depreciated faster so that new, more modern equipment can be purchased sooner.
The partners grab onto the idea: it solves so many problems in one shot, and at a negative cost.
Boy, was that an exciting time! And all that in the midst of a severe recession. Profits grow just a little and everyone gets his profit over and above his wage.
But what a spirit this change has created! The competition is now dead within driving distance. The company is covering all the orders for the product within the area. Every worker is proud about the high quality and prompt delivery. Kudos keep coming from customers. Workers enjoy reciting them.
The recession continues for a long while, but gradually comes to an end. The Order Book begins to swell ever heavier, and the prices begin to crawl up. The old equipment comes to its last breath, carefully as it has been maintained along the years, and the company cheerfully replaces it with the latest word in technology. Productivity keeps on growing, and so do the profits.
The two partners are running a tight ship with little guidance and no supervision. Workers share among themselves every bit of production knowledge and experience each one of them is in possession of, so the skill of the workforce is growing rapidly. Only occasionally do the workers seek advice from Joe or Bloe.
Every worker keeps an eye on his fellow professionals outside the shop. Whenever a need for extra help arises, he invites such a professional to join on a part- or full-time basis, and becomes responsible for the quality of his work. If the new hire turns out to be successful, his friend gains in reputation among the workers. If, however, the new hire does not work out, his friend quietly withdraws him with no sweat for the partners. That cuts the partners hiring function.
The partners are not concerned with any discipline issues either. Workers are doing their best anyway, to maximize their profit. An occasional inadvertent digression of an individual worker meets with an appropriate reaction of his colleagues and the damage gets promptly corrected, usually without the partners knowledge.
Here and there a request for a wage hike comes from an individual worker. Before coming to the partners, the worker has already signed up a few of his co-workers under his request. These are the colleagues who stand to forego a few dollars from their profit due to their friends raise, but who are still sure their friend deserves the raise because the ideas he shares with them boosts their profit and increases their qualification. When approving the raise, the partners are not worried about all the workers coming next day with similar requests. The decision to raise the particular workers wage comes easily, without a concern about a possible riot. In addition, the raise is paid off largely through A-Option, by an automatic reduction in the workers profit component of their income.
That way, the personnel function is taken care of by the workers themselves.
The partners have farmed out the accounting function since incorporation.
The time comes when taking orders and taking care of an occasional delicate job is all the partners are doing. They are not old yet, but are starting to contemplate retirement.
Comradery, cooperation, personal and professional growth of the workers is keeping them loyal to each other and the company. They see their future with it. For many, buying a piece of the company looks as a reasonable idea. The partners also start looking for opportunities to cash in their shares. Hence, when an expansion begins to look as the next natural step, the partners offer their shares for sale to the workers.
Within a few years, the workers buy up Joes and Bloes shares at a handsome premium over the underlying assets of the company.
Meantime, Joes and Bloes expertise becomes redundant to the professional knowledge within the company. The order-taking function also gets delegated to a worker who is good at it.
Joe and Bloe retire to travel and to enjoy their grandchildren.