The Socialist Entrepreneur

Like all businesses, cooperatives can fail. Cooperatives can go bankrupt, but they can fail in another way too. Over time, cooperatives can degenerate. Cooperatives are said to degenerate when, under economic pressure, they abandon their cooperative principles and start adopting capitalist business practices and structures. In the worst case, given enough time and economic pressure, cooperatives can fully degenerate into privately-owned, capitalist businesses. Such businesses might still be economically viable ― they will have avoided bankruptcy ― but they can no longer be considered successful cooperatives.

This can easily happen. Cooperatives have been described as islands of socialism in a capitalist sea, and the pressures to make compromises with the surrounding capitalist business environment can be very difficult to resist, particularly if the economy is in recession. Given that degeneration is such a danger, is there any way that the founders of a worker-owned firm could structure their new business to make this less likely to happen? Are their lessons we can learn from other cooperatives that might help us build new worker-owned firms that are more resistant to degeneration as they grow over time?

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)

In order to have a growing and sustainable cooperative business ecology you need at least two things: first, you need a continuous stream of newly founded worker-owned firms entering the ecology, either through conversions or as startups; and second, you need a growing cooperatively-owned financial sector in the ecology, to help these worker-owned firms manage their capital. The Kibbutz experience in Israel has shown that, given the chance, capitalist banks will use their financial leverage to force cooperative businesses to adopt capitalist structures over time; in other words, for purely ideological reasons, capitalist banks have been shown to use restrictive loan terms to progressively force cooperatives to convert back into capitalist businesses. (Simons and Ingram 1997) Capitalist banks don’t trust cooperatives, they don’t like to work with them, and when they do, they often insist that cooperatives restructure themselves to operate more like capitalist businesses as a precondition for loaning cooperatives money. A healthy cooperative economy requires a financial sector that shares its cooperative structure and philosophy so that worker-owned firms have access to investment capital from banks that understand what cooperatives are about and on terms that fit the worker-owned business model. That’s why it is so discouraging to see that the number of credit unions in the United States continues to drastically decline:

Ross Brown at the University of St. Andrews and his colleagues recently published research demonstrating that Scottish employee-owned businesses outperform capitalist firms as measured both by growth in employee numbers and by growth in turnover. It is a small study – just twelve worker-owned businesses are compared with a matched sample of capitalist firms – but nonetheless, it adds to the ever-growing body of evidence demonstrating that worker-owned businesses perform at least as well, and often better, than their capitalist competitors. And it is particularly interesting to see this research carried out in Scotland where worker-ownership seems to be growing unusually rapidly. You can read the full report here:

Brown, R, McQuaid. R, Raeside, R & Canduela, J (2014) “The performance of employee-owned businesses in Scotland: some preliminary empirical evidence.” Fraser of Allander Institute Economic Commentary 37 (3), 108–117.