Review: Governing the Firm

GoverningtheFirmGregory K. Dow wrote Governing the Firm in order to answer a simple but fundamental question: if worker-owned businesses are typically more productive, more efficient, more stable and fairer than capitalist businesses, why do we still live in a capitalist world?  Worker ownership¹ is increasingly common but it still only represents a tiny fraction of the global economy.  If worker ownership is such a successful and desirably way to organize a business, then why isn’t worker ownership the dominant model?  Why isn’t the worker-ownership movement growing faster and why are we still stuck with corporate capitalism?  Is there perhaps something wrong with how the model is usually implemented?  Is there any way to make setting up a worker-owned business easier, and ultimately, more common?

Dow’s analysis is complex (in a poetic turn, he calls it his ‘causal tapestry’) and he resists naming a single factor to account for the rarity of worker ownership; nonetheless, he places most of the blame on the problem of capital supply:

One reason for a systematic bias toward capitalist firms at the formation stage is that workers have limited personal wealth and cannot easily attract external financing. (p. 208)

Drawing on evidence from worker-collectives around the world, Dow shows that worker-owned firms are rare and fragile, in large part, because they don’t have the same access to capital that capitalist firms enjoy.  Dow demonstrates that where worker-ownership has grown as a movement, worker-owners have found a way around this problem with capital.

Dow’s preferred solution to this problem is based on the example of the plywood cooperatives of the US Pacific Northwest.  At their height in the middle of the 20th century, the worker-owned plywood coops accounted for 20-25% of the total production in the industry (p. 52).  These coops were financed by a market in worker-owner shares.  New coops were financed by the workers themselves who would all contribute a set amount to the new firm and receive a share in the business.  When they retired or changed jobs, they would sell their share to the next worker hired at a fair market price agreed to by all parties.  It wasn’t a perfect system, but it apparently worked, and in the final chapters, Dow presents a more sophisticated model of a worker-owner share system as a way to finance employee buyouts of capitalist firms.

The Mondragon cooperatives in the Autonomous Basque Community in northern Spain have arrived at a different, and perhaps simpler solution to the capital problem: they started their own bank.  Like the plywood coops, the Mondragon cooperatives require new workers to pay an upfront fee when hired, but they also all subscribe to a central cooperative bank, the Caja Laboral, and rules of association with the bank require that the individual cooperatives retain a significant portion of their earnings for reinvestment. Without the bank and the strict rules it requires for membership, the coops might be tempted to pass these retained earnings on to worker-owners as higher wages, but instead, under the rules, these retained earnings supply the capital needed for the growth of the Mondragon cooperative movement as a whole. (pp. 57-66)

Dow also highlights the important role ideology plays in the success of the Mondragon cooperatives:

There was a strong emphasis on socialization [of new members] into the ethics of cooperation. (p. 59)

Dow explains that the Mondragon cooperatives, and indeed, many of the other successful cooperatives profiled, all worked hard to establish a clear social ideology in their businesses and promote an ethic of cooperative labor.  With both a well-thought-out cooperative business model that retains income as capital for reinvestment, and a strong culture of cooperation amongst the worker-owners, cooperative businesses are much more likely to succeed.

Dow profiles the Mondragon example, as well as Lega cooperatives in Italy, employee stock ownership plans in North America, and the codetermination system in Germany.  He carefully catalogues the advantages and disadvantages of these different examples, and as he builds his case, the reader is given a broad but detailed overview of the different factors that can lead worker-owned firms to succeed or fail.

Governing the Firm is an academic micro-economic analysis of the worker-owned firm written primarily for other professional economists, but readers can safely skim over most of the jargon and all of the math and still get the main gist of Dow’s arguments.  There are plenty of practical observations peppered through his analysis that will make this book valuable to any reader with an interest in worker-ownership, be it practical or theoretical.

Dow is unusual as an academic economist who takes a serious professional interest in the alternatives to capitalism.  Nonetheless, he is surprisingly pessimistic about the potential for worker-ownership as a model for a fairer economic system generally.  While expounding on the clear virtues of worker ownership on the one hand, on the other, Dow returns again and again to his conviction that worker-ownership is not a viable way to distribute wealth more fairly:

[…] I do not believe that labour managed firms are useful vehicles for the redistribution of income or wealth.  It is highly improbable that these firms will become common enough any time soon to have effects on the aggregate distribution of income that would rival those of familiar redistributive methods such as income taxation. (p. 44)

Toward the end of his book, Dow explains that his conviction against using worker-ownership for wealth redistribution is not just economic, but also political.  He believes that if worker-ownership ever did result in significant wealth redistribution, it would alienate the wealthy owning class that controls the economy, and also, significantly, the political establishment:

First, I steer away from strategies involving large redistributions of income or wealth, not because I oppose redistribution but because workers’ control is more likely to expand if it does not make politically influential segments of the population significantly worse off. (p. 261)

The growth of wealth and income inequality in the 21st century is clearly out of control. Electoral politics around the globe is now so dominated by money, there is little chance that inequality can be reigned in through legislation and taxation alone. We need to find new structural mechanisms that will distribute wealth and income more fairly. No fundamental change for the better will ever come to our sad world without a large redistribution of wealth downward, and while successes like the Mondragon Cooperatives should give us reason to feel much more optimistic than Dow is on the potential of worker-ownership as a mechanism for wealth redistribution, we can still appreciate Dow’s sober analysis of the cooperative economy, of both of its promises and its problems.  For his professional bravery and this well-researched, useful book, Dow deserves high praise.

Governing the Firm:  Workers’ Control in Theory and Practice.  Gregory K. Dow, 2003, University of Cambridge Press.  $37.99 US.


¹ Here at The Socialist Entrepreneur we are concerned with worker-owned and managed businesses, but Dow is careful to point out that worker ownership and worker management don’t always go together. Indeed, Dow explains that the whole question of control vs ownership of firms is complex and subject to debate. (pp. 2-8) Here, I use ‘worker-owned’ as a shorthand for businesses that are both worker-owned and worker-managed in the conventional sense, but in Governing the Firm, Dow uses the term, labor-managed firm (LMF), to designate a business that “assigns control by virtue of, and in proportion to, labor supply.” (p. 5) Also, I generally advocate a very different and much broader definition of socialism than Dow’s definition of the term. For Dow, socialism is narrowly defined as state ownership of the means of production.

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