Worker-owned Firms: Five Myths

I just read a wonderful review article entitled “Worker Cooperatives: Good, Sustainable Jobs in the Community.” It was authored by Virginie Pérotin from the Leeds University Business School and was published in the Journal of Entrepreneurial and Organizational Diversity. In this article, Pérotin reviews recent research on worker cooperatives and uses the latest data to puncture some persistent myths about worker ownership. Below I have summarized Pérotin’s main points in list form, with the notion that this information will be helpful to socialist entrepreneurs, not only in planning their own worker-owned ventures, but also in discussions with other stake-holders, e.g. community members, potential fellow worker-owners, and particularly, banks, credit unions, building societies or other potential sources of start-up capital. The first four of these misconceptions are fairly common and are therefore likely to come up in discussions about your venture with future partners and backers. While Pérotin’s article discusses some of her own research, it is a review, so most of the data comes from other researchers’ work. I have included the page numbers from Pérotin’s article so that you can easily follow the citation trail to the original data if you are interested.

Five common myths:

1. Worker-owned firms tend to be small, niche businesses.

There are not a lot of comprehensive data on worker-owned firms as a population, but where this data exists, it appears that worker-owned firms tend to be just as large or even larger than capitalist firms on average. Even though huge worker-owned cooperatives like Mondragón or John Lewis are relatively rare, it is also true that most capitalist firms tend to be small and that massive capitalist firms are also statistically rare. There is no evidence that worker-owned firms are any smaller than average, and while it varies from country to country, globally, it also does not appear that worker-owned firms tend to cluster in any one specific sector of the economy. You can find worker-owned firms in most industries. When you look at the data, it turns out that worker owned firms are more ‘normal’ in these respects than many assume. (pp. 36–7)

2. Worker-owned firms tend to be less capital-intensive.

Researchers have long assumed that worker-owned firms would tend to be involved in less capital-intensive businesses (food coops vs airlines for example) because socialist entrepreneurs would tend to have less access to capital (i.e. be poorer) than capitalist entrepreneurs and would find it harder to start businesses where large capital investments are required (buying airplanes to start an airline for instance), but again, looking at the data, it does not appear that worker-owned firms are any less capital-intensive in general than capitalist firms. (p. 37)

3. Worker-owned firms tend to fail.

Again, the data is patchy, but in cases where good population data exists for both worker-owned and capitalist firms, worker-owned firms appear to be at least as robust as their capitalist counterparts, and in some instances, may actually survive better than equivalent capitalist businesses. (p. 37)

4. Worker-owned firms tend to under-invest in the long term.

This is perhaps one of the most persistent theories in research on worker-ownership. The idea is that since in many cases workers can’t take their stock in their cooperative with them when they retire, they will tend to think of investment in the company only in the short-term and will be more likely to spend profits on wage increases rather than plowing profits back into the company as an investment in the future. Pérotin discusses two common solutions to this perceived problem: tradable membership shares and compulsory profit plow-back rules. Both of these ideas relate to initial coop design and this topic is so important to the subject of this blog that I plan to revisit it in detail in a future post. In this review, Pérotin presents some interesting ideas on the relative merits of these two design options, but she also notes that, regardless of what micro-economic models might predict in theory, it does not appear that there is any evidence for under-investment in worker-owned firms in practice. Worker-owned cooperatives appear to invest in themselves at the same rate as capitalist businesses everywhere this has been studied. (pp. 37–9)

5. Worker owners will be tempted to fire their fellow workers in order to raise their personal incomes.

This is another academic critique of worker-ownership, and while this theory is probably less common outside of academic circles, it is still worth discussing. Based again on micro-economic analysis and modeling, the theory is that when prices for a particular cooperative’s product rise, worker owners in that cooperative will be tempted to exploit the opportunity and fire fellow workers in order to capture the extra profits as higher wages for themselves. On the face of it, this doesn’t sound likely, and even the name of the theory suggests that it is a fairly counter-intuitive idea: “the perverse supply response”. And indeed, whatever the models might predict in theory, there is no evidence that this actually happens in practice. Pérotin suggests that this may be because worker-owners are not solely trying to maximize personal income (as theorists assumed), but rather, that they manage their businesses to also maximize job-security. Pérotin argues that worker-owners in a cooperative will probably understand their business more as a general social good rather than simply and narrowly as a profit opportunity, and therefore, they will work to preserve that social good for themselves and for their fellow workers into the future. Indeed, all of the evidence suggests that worker-owned cooperatives are actually better at avoiding lay-offs (redundancies) in times of economic crisis than are capitalist firms. (pp. 39–41)

In general, Pérotin’s review article is short and delightful to read. I strongly recommend it, and best of all, it is open-source so anyone can access it. Here is the citation:

Pérotin, Virginie (2013) “Worker Cooperatives: Good, Sustainable Jobs in the Community.” Journal of Entrepreneurial and Organizational Diversity 2(2), 34–46.

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2 Responses to Worker-owned Firms: Five Myths

  1. It is perhaps understandable when worker co-op members do not understand the Mondragon system of internal capital accounts–which is the answer to #4 the under-investment problem. But it is depressing that a specialized scholar like Perotin does not even mention it and instead only mentions two non-solutions, tradeable membership shares and compulsory profit plow-backs.

  2. davidellerman says:

    It is depressing that a worker co-op scholar like Perotin does not seem to know about or understand the solution to the underinvestment problem (#4) which is the Mondragon system of internal capital accounts. Neither tradable membership shares nor compulsory profit plow-backs are solutions.
    The discussion of #5 is good, and it should be noted that one can make the same argument for a “perverse supply response” in a conventional firm if you make the analogous assumption about the capital members (shareholders). Both points are made in this review of a book by Pencavel about the “plywood” worker co-ops.

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