Economist;

His "share economy" may be the best new idea since Keynes: substituting profit sharing for fixed wages as a cure for unemployment.

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High unemployment and high inflation are the Scylla and Charybdis of Keynesian economics. It used to be that capitalist economies tacked dangerously close to one, then to the other. But with the cold winds of stagflation in the late 1970s, the straits between recession and inflation became nearly impassable, and the traditional instruments of Keynesian economic navigation were largely ineffective.

Now, the U.S. economy looks to be on a smoother course. But Massachusetts Institute of Technology economist Martin Weitzman still remembers stagflation, and fears its return when the business cycle takes its predictable turn downward. In anticipation, he's devised a method to better protect the economy from inflation and unemployment. And right now his new idea is hotly debated by fellow economists and thinkers.

He calls it the "share economy." Instead of paying workers a fixed wage, he proposes a lower base wage plus a bonus to reflect the profitability of the company at any given time. In boom times, that would mean pay would rise with profits. In bad times, all workers would suffer lower pay. The beauty of it all, says Weitzman, is that it would build into the capitalist economy a strong inclination to avoid layoffs and keep prices low. In short, an antidote to stagflation.

Weitzman's New York accent and flair for simple explanations camouflage the serious macroeconomic analysis that lies behind his proposal. He spoke about his findings and conclusions in The Share Economy (Harvard University Press) with INC. senior writer Tom Richman and journalist Tom Bethell late last year.

INC.: How did you stumble upon this new idea?

WEITZMAN: I was diddling with theory -- theories about unemployment. Unemployment is a perpetual problem for economists. For a long time, ever since Keynes, it's been a puzzle why a market economy should have unemployment in the first place. It sounds like a very simple sort of thing to which there ought to be a simple answer. But it's not, because the market for labor is different from the market for bread or potatoes or orange juice, where we don't see surpluses, where we don't see the analog of excess supply. Why is it different?

In some economic modeling I was doing, I began to see that an awful lot was hinging upon our wage mechanism -- this idea that the firm has to pay its workers, not with something denominated in what it produces or anything related to that, but in an outside unit of account. That is typically money, although it could be anything. But I didn't know what to make of this observation.

Then -- it must have been in early 1982 -- there was some talk between the UAW and General Motors. The union proposed a deal. They said something like, "Look, if GM will lower the price of its cars, then we will stick with our moderate demands. But if it raises the price of the cars, our wages have to go up correspondingly." Now that is what economists call a product-wage. In effect, the worker is being paid in terms of automobiles, because the automobile price index is being used to pay his wage.

I saw immediately that this would have a dramatic effect on GM management. If every worker, say, produced three automobiles and was paid the equivalent of two automobiles for his services, then the natural inclination would be for GM to hire more and more workers to produce more and more automobiles, even if it meant lowering the price to the consumer. And I began to think that if everyone was doing something like that, it would have very beneficial effects on the economy as a whole. It would encourage more employment, and it would keep a lid on inflation.

All of a sudden, the theories about the nature of unemployment were not just abstract math anymore. I could see that a lot of schemes -- a product-wage scheme but, even better, a profit-sharing scheme -- would have these beneficial effects.

INC.: Are there any examples where something like this has worked?

WEITZMAN: Sure there are. Japan is a place where there is a widespread bonus system. It is a huge feature in their economic landscape. Roughly one-quarter of a worker's pay is in the form of a bonus, typically handed out twice a year. And that bonus looms large in national income accounts -- it is bigger than profits, for example. Korea and Taiwan also have very strong bonus systems.

INC.: Are you saying that is the key to the Japanese economic miracle?

WEITZMAN: It is hard to pull out just exactly what role these bonus systems play, because there are a lot of things going on in those economies. But sharing is one contributing factor.

In the United States, you have isolated companies that do profit sharing, and the impression one gets in talking with such firms is that they are more employment stable -- and often more profitable. There is a book called The 100 Best Companies to Work for in America, and fully half of those companies have something they call profit sharing, as compared with about 15% of all corporations.

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