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Southwest Airlines' profit-sharing payout: What capitalism should be

April 17, 2014: 12:09 PM ET

The Dallas-based airline is giving employees a meaningful stake in the company, just as America's earliest presidents probably envisioned.

By Joseph Blasi and Richard Freeman

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FORTUNE -- Earlier this week, Southwest Airlines (LUV) announced workers will share in a record $228 million profit-sharing payout this year. That's nearly double the $121 million payout a year ago, and an example to everyone of what American capitalism should be.

Southwest has a long history of broad-based cash profit sharing, broad-based employee stock ownership, and even, for many years, broad-based stock options among all of its employees. One can look at the Dallas-based airline's actions using a "small ball" perspective, and think they are simply incentives to get people to work harder, or that it's just a story about compensation. But what Southwest is really doing is setting the example of how all U.S. corporations should behave in a capitalist system that is inclusive to employees.

A little U.S. history will explain why: On Feb. 16, 1792, President George Washington himself, in what was probably one of the first pieces of legislation on business, signed a law that encouraged just the type of cash profit sharing that Southwest Airlines practices. The century was different. The industry was different. But the issues were as important then as they are today.

During the just-finished American Revolution, the British had gone out of their way to destroy the fourth-largest export industry of the American colonies, the cod fishery. Dried cod was then a world commodity that the colonies exported around the world, and it was important to the economy. The British destroyed the cod ships, their ports, their warehouses, and arrested American sailors on the ships. Washington asked Secretary of State Thomas Jefferson to figure out a way to encourage the industry to grow itself again. Their solution was to offer tax credits, allowing the cod fishermen and ship owners to cut the taxes paid on their supplies to run the industry.

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Washington's law, the first American law on profit sharing, said that the tax credits would be divided 5/8 to the crew and 3/8 to the owners, recognizing that both workers and shareholders play an important role in building up an industry. Furthermore, the law said that the ship owners could only benefit from the tax credits if they honored the broad-based profit sharing on profits on the entire catch that was common in this industry for well over a century. When Jefferson asked the largest ship owner in Philadelphia about the practice, he said that the ships with profit sharing were more productive and more efficient than the ships with simply fixed wages.

Today, Southwest is likely also gaining loyalty and productivity as a result of their profit-sharing, as well as the broad-based employee stock ownership they encourage among workers. The idea of employees owning shares through Employee Stock Ownership Plans (ESOPs) or receiving parts of profits grew and evolved throughout American history. Southwest Airlines is well within this interesting tradition by recognizing that its employees should have a direct stake, beyond their salaries, in the success of the airline and any good fortune that accrues as a result of how customers regard the company.

The earliest U.S. presidents -- George Washington, John Adams, Thomas Jefferson, and James Madison -- all firmly held that the best economic policy for the young American Republic was for citizens to have some ownership stake in the land. They approved a series of pieces of legislation, which promoted the "yeoman" farmer idea in American economic life -- namely, that citizens should have sufficient land to be able to support their families and their future. After former U.S. President Abraham Lincoln signed the Homestead Act into law in 1862, he took an important step toward finally expanding the broad-based property ownership idea to women and then later to African-Americans.

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As with Southwest Airlines, the amounts Lincoln dealt with were not minor or paltry. Southwest is sharing $228 million of the corporation's total $754 million in profits. That is 30% of its profits. Lincoln shared 20% of public land and 10% of the entire land mass of the U.S. in the Homestead Act. Other firms with significant profit-sharing and ownership plans include the financial services firm owned by its employees, Edward Jones, the Ford Motor Company(F), the Lincoln Electric Company, and Procter & Gamble (PG).

So what does all of this have to do with the future of capitalism?

American capitalism is now in crisis because most financial assets, most ownership of stock, and most capital income from dividends and interest and capital gains are concentrated in the top 1%, 5%, and 10% of the population. As these levels of concentration approach 80%, our society could soon arrive at the level of ownership that English lords and ladies had of all English land before the American Revolution.

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Today, living standards for most employees have not improved even as productivity has risen and wages adjusted for inflation have been generally flat since the 1980s. Only those with access to capital income are seeing their wealth increase.

If more corporations did what Southwest is doing, meaningful citizen shares could provide capital ownership and capital income to reverse the march toward feudalism. To stimulate this process, corporations and wealthy individuals whose companies provide shares should themselves receive new increased tax benefits for doing so as this would be beneficial to the companies and society as a whole.

The U.S. Government and the states should encourage the founder's vision of citizen's shares once again.

Joseph Blasi of Rutgers University and Richard Freeman of Harvard University are the co-authors of The Citizen's Share with Douglas Kruse of Rutgers.

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