Bernie Sanders would confiscate 20 percent ownership stakes in 22,000 companies, distributing the stocks to workers through shared employee ownership funds. His “Corporate Accountability Plan,” announced yesterday, should lay to bed any lingering doubts that “democratic socialism” is just about social democracy, or a bigger welfare state. Rather, it amounts to a fundamental attempt to re‐​order the American economy through federal government edicts.

Under Sanders’ “Democratic Employee Ownership Funds,” all publicly traded companies and those with at least $100 million in annual revenue would have to contribute 20 percent of their stock to “workers” over a decade, creating an “employee‐​controlled fund” that distributes any dividends to employees. Unlike ordinary stocks, workers couldn’t sell or transfer the stocks in their name. Instead, the fund would be managed by elected worker representatives, with ordinary voting rights. Worker representatives would also make up at least 45 percent of boards in firms with at least $100 million in annual revenue, $100 million balance sheets, and publicly traded companies.

There are some obvious economic problems with this combined plan:

If we force businesses to compensate employees via collective stock donations, then employers will look to reduce remuneration costs in other ways, most likely reducing wages to offset the cost of said donations. We’d expect Bernie’s plan then to change the composition of remuneration, but not its overall level.

If this is correct, most ordinary risk averse employees would be worse off under this plan. They would have preferred the extra wage income for diversification purposes (i.e. the ability to invest their extra income elsewhere). Because the stock is locked in the fund, a company failure now means they lose their jobs’ wages AND the value of the stocks they notionally “own.”

True, some companies and employees clearly do prefer stock compensation, especially in Silicon Valley start‐​ups. This can make economic sense in firms with limited cash that are trying to attract talented workers in businesses with the potential to grow rapidly. It’s evidence from these types of exceptions that is usually used to “prove” that employee ownership improves incentives and business outcomes.

If co‐​operatives and mutuals really did harness dispersed information and align incentives to engender more business success across the board though, then why don’t socialists actively create such firms and outcompete ordinary stockholder businesses, rather than seeking coercive government mandates to facilitate their idea? Indeed, why don’t more businesses decide to mutualize anyway?

The reason, surely, is that this ownership structure would create big problems for many companies. Most obviously it would risk inefficient decision‐​making by worker board members and create severe difficulties in raising new capital (it’s little surprise that most advocates of this type of plan worldwide also suggest new government “investment banks.”) In Yugoslavia, where such market socialism was rolled out extensively, academic research suggests the country became afflicted with the same inefficiencies, stagnation and impaired capital allocation as seen in other socialist economies.

This is unsurprising. Elected worker‐​owner representatives and board members will result in a political system in business decisions. Workers and their ownership and board representatives have their own self‐​interests (not least being re‐​elected) and interest groups would quickly form for both (e.g. worker representation for those with stronger interests in shoring up the pension plan, those workers resisting a plant closure etc.) Since workers aren’t generally tied to a business for life, short‐​termism might become a problem – trying to raise overall remuneration rather than longer‐​term investment. Or else investment might be biased towards protecting jobs even though any profits might be socially better invested elsewhere.

Of course, firms may seek to also avoid the measures by restructuring businesses to avoid public listing, or separate parts of the company to avoid exceeding the $100 million revenue threshold. Other board members may try to resist dividend payouts until a new president and Congress would overturn the measures too, significantly distorting business decisions.

Employee‐​owned businesses, mutuals, and co‐​ops are a perfectly normal part of the rich tapestry of a free economy. Mandating this structure and confiscating and redistributing stock to achieve it is another matter entirely.