Degeneration and Regeneration

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?

This spring, scholars published two separate studies of a particular case of degeneration that go some way toward answering these questions. Both papers are studies of the most renowned and admired group of worker-owned cooperatives in the world: the Mondragon Corporation in the Basque country in Northern Spain. With 74 thousand workers in 260 firms, the scale of the Mondragon Corporation is truly impressive. Further, the Mondragon cooperatives have pioneered a number of business practices that have significantly modernized and strengthened the cooperative business model. The Mondragon cooperatives are frequently praised by economists and activists as an example of how a broader worker-owned economy might feasibly work in the future.

But the Mondragon Corporation is not perfect. Since the 1990s, the Mondragon cooperatives have significantly degenerated away from their founding worker-ownership model in at least one key respect. In the 1990s, to compete with multinational corporations, the Mondragon cooperatives adopted a strategy of ‘internationalization’ and started acquiring subsidiary businesses both in Spain and around the world. This could have been an opportunity to spread the Mondragon model of worker-ownership globally, but critically, the Mondragon cooperatives decided not to convert their new subsidiaries into sister cooperatives, but rather, they continued to administer their subsidiaries as capitalist businesses. The employees of the subsidiaries in essence became employees of the Mondragon cooperatives, rather than worker-owners in their own right. By 2007, this degeneration had progressed so far that only 29.5% of the Mondragon cooperatives’ total workforce remained members-owners. (Storey et al. 2014, cited in Bretos & Errasti 2016, 2)

How did this happen? Why didn’t the Mondragon cooperatives use the opportunity that internationalization presented to grow their worker-ownership model outside of the Basque country? And now that this has been done, are the Mondragon cooperatives doomed to fully degenerate into capitalist businesses or can the damage be reversed? Can the Mondragon cooperatives ‘regenerate’ themselves back into full worker-owned businesses in the future? These two studies come at these questions from two contrasting perspectives, and as such, they are particularly interesting and useful if considered together.

The first study is by Sharryn Kasmir, an anthropologist from Hofstra University who has been strong critic of the Mondragon Corporation in the past. In her recent paper, “The Mondragon Cooperatives and Global Capitalism: A Critical Analysis,” Kasmir comes at the problem of degeneration in the Mondragon cooperatives via a case study of Fagor Electrodomésticos, a flagship business in the Mondragon group. In 2013, Fagor Electrodomésticos went bankrupt. The Mondragon cooperatives are famously resilient, and the bankruptcy of a flagship company was an unprecedented development. But more troubling still, Kasmir’s research shows that the different classes of workers in Fagor Electrodomésticos faired very differently after the failure of the business.

Kasmir describes how degeneration created three distinct classes of workers in the Fagor Electrodomésticos cooperative: full members in the Basque country (1,900), wage labourers on short-term contracts in the Basque country (200), and wage labourers in international subsidiaries (3,500). (Kasmir 2016, 54–5) After the bankruptcy, most of the full members transferred to other Mondragon cooperatives and remained employed, but in contrast, the wage labourers both at home and abroad simply lost their jobs.

Kasmir argues that the Mondragon cooperatives long ago created a labour aristocracy in the Basque country that has undermined working class solidarity in the region, a divide that has only deepened as the Mondragon cooperatives have degenerated. She contends that these failures demonstrate “the inescapable limits of the ability of cooperatives to challenge capitalist social relations.” (Kasmir 2016, 56)

But are these limits actually inescapable, or could Mondragon cooperatives find a way to extend solidarity to the workers in their subsidiaries? Is there any possibility that the Mondragon cooperatives could reverse this trend toward degeneration and extend membership to all their workers? Could the Mondragon cooperatives find a way to regenerate?

The second study by Ignacio Bretos and Anjel Errasti of the University of the Basque Country tries to answer these questions. In their paper, “Challenges and opportunities for regeneration of multinational cooperatives: Lessons from the Mondragon Corporation — a case study of the Fagor Ederlan Group”, they evaluate the success of the Fagor Ederlan cooperative in its efforts to convert its subsidiaries to worker-owned businesses. The Fagor Ederlan Group is an automotive supplier in the Mondragon Corporation comprised of eight factories located in the Basque country and six subsidiaries located in Spain, in Brazil, in Slovakia and in Kunshan, China. In 2003, the Mondragon Cooperative Congress approved a new strategy of ‘social expansion’ to try to reverse the trend toward degeneration in the Corporation as a whole, and shortly thereafter, the Fagor Ederlan Group began work on extending worker-ownership to its subsidiaries.

To date, Fagor Ederlan has had its greatest success with its Tafalla subsidiary in the neighbouring region of Navarre, Spain. By 2014, 485 of Tafalla’s total workforce of 688 had become member-owners. (Bretos & Errasti 2016, 9) Fagor Ederlan also had some success with two other subsidiaries in Spain, to the extent that worker-ownership in the Fagor Ederlan Group as a whole has risen from 36% in 2007 to 65% in 2015. (Fagor Ederlan 2009 and Koop 2015, cited in Bretos & Errasti 2016, 9)

However, Fagor Ederlan has been much less successful with its remaining subsidiaries, and has found its foreign subsidiaries particularly challenging to reorganize as worker cooperatives. In the second half of their paper, Bretos and Errasti ask why this is the case. Scholars have theorized that a number of external factors may make extending worker-ownership to employees of  subsidiaries difficult: extending membership to workers in subsidiaries is economically risky for the parent cooperative, particularly if the future viability of the subsidiary is uncertain; the legal framework in some countries may make establishing new cooperatives difficult or practically impossible; the work culture in some countries may make it difficult to establish cooperative values in a subsidiary firm; and members of the parent cooperative may also risk losing control of their investments if employees of subsidiaries become members.

In their research, Bretos and Errasti found evidence that all four external factors acted as barriers to regeneration in the Fagor Ederlan Group, but they also argue that internal factors may have been even more important. They contend that the reluctance to extend solidarity to the workers in subsidiaries may be more a result of a general weakening of the cooperative ideology in the Mondragon Corporation over time:

This is also consistent with research conducted by Heras (2014) who concludes that there is a clear decoupling between Mondragon’s principles and the daily activity of the worker members, and that the strongest tie binding them to the organisations is not their closeness to the cooperative model and culture, but rather job security. Ultimately, if the members of the Basque plants are not themselves strongly bound to the cooperative principles and values of Mondragon, it seems unlikely that strong interest in extending the cooperative model to foreign subsidiaries will arise.

(Bretos & Errasti 2016, 14)

And this I think that is the core message: ideology matters. Worker-owned businesses are not only creating jobs and building social wealth, they are also advancing an new ideology about social ownership, and this research suggests that unless this ideology is nurtured in each new generation that comes to work in a cooperative, degeneration is all but certain.

As islands of socialism in a capitalist sea, there will always be strong pressures on worker cooperatives that can push members to compromise on their values. The final bulwark against degeneration is a workforce that is committed to collective ownership and to work-place democracy.

Together, this research shows that while degeneration over time poses a real threat to the worker-ownership movement, full degeneration is not inevitable; with the right effort, regeneration is also possible. However, Bretos and Errasti’s research in particular shows that rebuilding solidarity in a degenerated cooperative is not easy, particularly across boundaries of geography, nation and culture. It would be far better to structure a cooperative so that degeneration did not take place in the first instance.

Cooperative education has been a central pillar of the cooperative movement since the Rochdale Principles were first agreed, and a strong ideological commitment to workplace democracy among worker-owners is the best long-term defense against degeneration, but this research raises the practical question: how is this commitment fostered in a worker-owned business as it grows over the years, decades, generations?

I am currently looking at research published on this question, and I plan to review this research in a future post. Stay tuned!

Bretos, Ignacio and Anjel Errasti (2016) “Challenges and opportunities for the regeneration of multinational worker cooperatives: Lessons from the Mondragon Corporation — a case study of the Fagor Ederlan Group.Organization.

Kasmir, Sharryn. (2016) “The Mondragon Cooperatives and Global Capitalism: A Critical Analysis.” New Labor Forum 25(1): 52-59.

A video of Sharryn Kasmir giving a brief talk on some of her research can be seen here.

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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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Review: Putting Democracy to Work

PuttingDemocracytoWorkWhile there are many tens of thousands of books in print about starting and running a traditional capitalist business, very few books have been published specifically about starting and running a worker-owned business, and those books that have been published tend to be relatively old. Previously, I reviewed the worker-ownership guide, We Own Itthat was published in several editions back in the late 1980s/early 1990s, and here I would like to take a look at another guide from around that same era, Putting Democracy to Work, A Practical Guide for Starting and Managing Worker-Owned Businesses, by Frank T. Adams and Gary B. Hansen. Both these business guides were written in a very different time and for a very different business environment, before the age of the internet and before the hyper-capitalist, neoliberal economic model completely conquered the world. When these two guides were first published, the Soviet Union was still with us, and the final revised edition of Putting Democracy to Work  from 1992 would have been written shortly before the end of the Cold War. But as I argued in my review of We Own It, I believe that even though much of the specific information in these guides is now outdated, the general advice they offer is still very valuable, and that they are definitely worth tracking down and reading if you are considering launching your own worker-owned start-up.

Putting Democracy to Work is a thick book, but even at 324 pages it feels brief, and that is probably inevitable. There is simply so much ground to cover — you couldn’t really set up a business based on the business plan outlined in chapter 4 for instance; you would need much more specific guidance, but Putting Democracy to Work does flag up those issues particular to worker-owned businesses. In this way, Putting Democracy to Work would serve as a valuable complement to topic-specific business guides aimed principally at capitalist entrepreneurs. Socialist entrepreneurs would still need to read general guides — on writing business plans, for example — but could then supplement that research with the worker-ownership specific advice in Putting Democracy to Work.

When it was published, one of the best things about this book would have been the long list of contacts in the appendix for groups in each US state that helped start-ups, but of course, most of this information is now obsolete. Also, like We Own ItPutting Democracy to Work is very much aimed at a US audience, and would be less relevant to businesses in other parts of the world, in the details anyway. But it is more in the broad strokes that Putting Democracy to Work is valuable. The authors have years of practical experience with worker-owned businesses, and their advice on the special challenges that face a new worker-owned business is well worth the effort required to sort through the sections that wouldn’t apply.

Early on, the authors argue that socialist entrepreneurship, or as they call it labor entrepreneurship, is an integral part of successful worker-ownership:

This handbook is for women and men who want to own their labor. It is about creating good jobs, bringing democracy to the workplace, and promoting labor entrepreneurship. In a nutshell, it is about worker ownership.(1)

They define labor-entrepreneurship as a democratic version of the same culture of risk-taking and organization building that distinguishes successful capitalist entrepreneurs:

Labor-entrepreneurship means that the workforce or a group within it assumes the responsibilities of searching for profitable business opportunities, of obtaining productive resources, while engaging in risk-taking and organization building. (23)

Citing research by Ana Gutierrez-Johnson, the authors contend that this active, entrepreneurial approach to cooperative business is what makes modern worker-ownership so vital, and what distinguishes modern worker-ownership it from the classic, more-static Rochdale model of a cooperative, an insight apparently developed and advanced particularly by the Mondragon cooperatives in the Basque country:

Accordingly, the Basques created the doctrine of labor-entrepreneurship which, in addition to participation, includes risk-taking, enterprise building or growth, husbandry of productivity, and the search for new opportunities. (19)

The heart of this book is in chapters 8 and 9, “Managing Worker Democracy” and “Democracy on the Workfloor”. It is workplace democracy that really distinguishes the day-to-day operation of a worker-owned firm from the command-based organization of a capitalist firm. This is the sort of advice that you could only find in a start-up guide like this, one that is specifically targeted at worker-owners. This guide addresses a number of questions that only worker-owners have to face, such as: Practically, how do you make business decisions democratically as a group of worker-owners? How are worker-owners hired, and if needs be, how are worker-owners laid off (made redundant) or even fired? How do worker-owners locate capital to start up and to expand? And critically, how do successful worker cooperatives like the Mondragon cooperatives structure their businesses to generate their own sources of capital? And so on.

The authors sketch out a range of possible structures, ranging from, on the one hand, fully horizontal organizations that approve some or all decisions by vote of the whole workforce, to, on the other hand, more traditional pyramid-shaped organizational structures where top management ultimately answers to a worker-elected board of directors, but whatever management structure a worker owned firm selects, the authors make clear that it will be individual to that firm and a result of experimentation and evolution. There is no single right way:

How twenty-five worker-owners in small enterprises manage their work will differ greatly from the way twenty-five hundred worker-owners must tend to business. Size is only one factor which will shape the way workers govern the workfoor itself. The purpose a buisness is set up to accomplish influences how it is organized. So do the tools used or the markets served. Occupational skill of workers and managers leave their mark. In the end, each worker-owned cooperative — whether just getting started or a conversion — must undertake the sometimes painful process of fashioning the way work itself is governed. (156)

Putting Democracy to Work doesn’t offer a blueprint of a perfect worker-owned firm, but it does explore the key differences and particular difficulties of setting up and managing a worker-owned business, and it offers comprehensive advice on how workers can design an administrative structure for their start-up that will be both democratic and successful. As as a complement to more topic-specific (but capitalist) business guides, both Putting Democracy to Work and We Own It are invaluable resources for socialist entrepreneurs. Definitely worth buying and reading, despite their age.

Putting Democracy to Work: A Practical Guide for Starting and Managing Worker-Owned BusinessesFrank T Adams and Gary B. Hanson, 1992, Berrett-Koehler Publishers.

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Interview: Yochai Gal, Boston TechCollective

humanoid-chaotic-goodYochai Gal has been instrumental in founding two worker cooperatives: the San Francisco TechCollective, and more recently, the Boston TechCollective in Somerville, MA. Yochai was born in Israel but raised in California and started repairing computers when he was 17. He has long had an interest in worker-ownership, and when he couldn’t find a worker-owned tech business that needed his skills, at 23 years old, he decided to set up his own.

He and his fellow co-owners opened the San Francisco TechCollective in May, 2007, with a 20K line of credit from Wells Fargo, 14K of which they used and then successfully paid off. The business has a storefront in the Mission District of San Francisco out of which they handle consumer and small-business IT support and specialize in data recovery.  The collective currently has six worker-owners and they are successful enough to pay themselves above-average wages and excellent benefits. They are the highest-rated IT company on Yelp in the Bay area.

In 2011, Yochai relocated with his wife to Boston, and in May of 2013 he launched the Boston TechCollective with a new group of co-owners, assisted by a 70k loan from the Cooperative Fund of New England. The Boston collective currently has six worker-owners and hopes to pay off their loan in about another year.

Recently, the two TechCollectives and C4 Tech & Design in New Orleans have partnered to form the Technology Cooperative Federation as a purchasing cooperative, allowing them to compete in purchasing power with larger private IT companies and corporations.

Yochai kindly agreed to an interview by email:

First, I first wanted to ask you about what sort of fears you faced before you launched your collective? Looking back to when I was younger, I think one of the reasons that I never got involved in starting a full-blown worker-owned collective myself was that I was afraid that trying to make a living from my own business would be really daunting, but in a recent interview you said that starting a business actually isn’t that hard, that regular people do it all the time, and I was wondering if you could expand on that comment a little? What concerns did you have before you started the first TechCollective and how was your actual experience different from your initial fears?

What fear? I was 23 years old, healthy and full of venom! I mean, I’d been through worse: I’d never finished high school or college, and had lived/worked at hostels around the country! Heck, just a few years before I’d moved to a city I’d never been to with $11 to my name, and I turned out OK! How could starting a business be harder?  The arrogance of the youth, I suppose.

And it really isn’t hard – you fill out some paperwork, hire a CPA for 2 hours and viola! You’ve got a business going. The hard part is having something to sell. And in that sense, I was lucky – the world of IT is very unique, I think. People often talk about how there is this veneer of meritocracy (as long as you’re male, of course) – and that’s very much true: if you can do it, you’re in. Of course, there’s the added benefit that if you don’t have a degree/diploma, nobody seems to care! I was once hired for a very serious corporate gig; they didn’t even ask me where I went to school! And there’s one last benefit: everyone needs what I’m selling. Have a business? How about an apartment? Do you own a computer? Maintain a website? Do you have data you care about?

My parents (lapsed communists with a dash of anarchism) raised us on Kibbutz values; e.g. anti-religious, pro-equality and above all anti-power. We didn’t have any money, but they always had a place for me if anything didn’t work out. Maybe that’s what it’s all about: I’ve always had somewhere to go to; even though I had no money.

It occurs to me now that part of it might be cultural: my father came to the US without any education, money, or grasp of the English language. Yet he took more risks than most of the Americans I’ve met – including leaving his family behind, starting a business (which he runs by himself to this day) and raising a family in a foreign land. He told me once, “When I die, put on my tombstone: this man was not afraid to fail.”

Maybe that’s why I did it.

I can’t really recall what earlier concerns were – I think the biggest was perhaps the fact that I had no clue what I was doing! I had no business experience, and frankly didn’t know a 1/10th of what I know now – about business, about computers, about being an adult. And I made a lot of mistakes, of course. But in many ways I was especially lucky to form a co-op – my co-owners would share the load, ease my burden. I was never alone. They also brought their own skills and experiences along, and worked often just as hard, if not harder than I. Lastly, I was fortunate to connect with the local co-op community (; we had an immediate customer base, as well as technical support for all things co-op.

People go into to debt for hundreds of thousands of dollars for school and they don’t blink an eye; it’s just ‘what you do’ here in the US. And that to me is even more ridiculous as most of the people I know who have degrees don’t even USE them at their current job! What I’m getting at is that there are always acceptable risks, and we as a society seem to assume some are OK and others are not. For what it’s worth, I’ll be debt-free long before many of my friends who went to college – and I’d wager that they feel less happy with their ROI to boot.

One more thing: I once called into a (disappointing) radio show about co-ops; some kind of forum thing. And on the call, I said something along the line of, “Don’t just listen to what we’re saying, and then go out there and keep living your normal life, working somewhere you don’t want to be, all the while dreaming of working at a co-op” – I’m paraphrasing, of course. Anyways, a year later I ran into someone at a conference, and they told me that they heard me on that show, and after hearing what I said decided to go out and do it, and now they did have a worker co-op of their own. This made me very happy, and while I know it isn’t easy for everyone – and for good reason – I still love stuff like that, it gives me a feeling of hope and inspires me.

On a related theme, you also said in a recent interview that it is actually easier to start a business as a cooperative group, rather than as a sole owner. What are some of the advantages to starting a business as a team of worker-owners?

As I mentioned before, creating a business as a worker co-op is a shared experience; you never feel completely alone – you have a group of (usually) like-minded, committed individuals right there with you. Their shared resources, skills and experience makes the process of starting a business unlike anything I’ve ever encountered.

There are more practical reasons as well – taking out a loan is a bit easier if you have a wider range of personal credit to lean on. There is also the concept of the buy-in: each worker upon becoming an owner must pay an amount, ranging from $50 and up every paycheck, until the agreed upon amount has been paid. A $3,000 buy-in ensures seriousness in the business, creates equity, and increases over time – so if a worker eventually leaves (as I did) they will receive a chunk of cash greater than they put in. The obvious question is: how does one pay this amount if they have no money? We do not require the full amount right away – in fact you are not required to pay anything until you receive your first raise. The worker can pay as little or as much as they like. This process is a great litmus test for finding good employees! Another strength of our model is our open-book approach to business: all employees know the financial situation, and are empowered to make decisions “as a boss” when they need to. Workers are working to benefit themselves as well as the business – it is built-in! Further, a traditional business would typically ignore any good ideas non-owners had; at a co-op all voices are given a chance to speak – and the business benefits. Voting itself is a useful tool: I’ve been wrong about many, many things – and when I was overruled and we went a different way, I could see that fact. But if I were the sole owner, I would have only found that out the hard way!

There is another tangible attraction for new personnel (an advantage in my eyes): the patronage model. If at the end of the year we are profitable, our bylaws stipulate that we may take 75% of our profits (the other 25% is working capital – an idea from Mondragon) and distribute them amongst our employee-owners; in many states this is untaxed income! There are a few other business-specific benefits I could mention (though they aren’t very interesting, I think). For example, many co-ops are formed by immigrants that use the LLC model: this allows them to hire non-citizens and pay them – legally. It also employs a similar method for patronage (returns) as a cooperative corporation/employee cooperative.

The second co-op I formed received a loan (line of credit, really) from the Cooperative Fund of New England. Obviously we would not have been able to receive this loan (or the many, many grants we’ve applied for) had we not been a democratic workplace! If that’s not an advantage to starting out over a traditional business, I don’t know what is! We are part of a larger movement that help one another; we share resources, trade work, and connect in the most equitable fashion imaginable. Our co-op could not exist without the larger movement.

People sometimes say things like, “What about the geniuses, the Steve Jobs of the world – don’t they need to be “in charge” and dictatorial to do their great works?” And to that, I say, “What about all the rest, the regular workers who are given no chance to have their ideas heard, to join in creation?” How much have we as a society lost out on as a result of how we do business?  A co-op is thus made stronger as a result of our model – both as a business and as a part of the community. We will never outsource ourselves, we will never poison our backyards, or allow one of our own to do so. We create workers that take democracy to the workplace – where we spend the majority of their time – and apply it elsewhere in their lives – it empowers us to grow and stand tall; I definitely see this is an advantage and benefit.

And finally, you’ve said that one of the biggest challenges in the beginning was locating suitable co-owners to staff your new businesses. What have you learned about the challenges of finding and vetting potential fellow co-owners and what advice would you give on the process?

Handling personnel is definitely the most important part of running any business, I think. But it is especially important at a co-op because you are not simply hiring for an employee; you’re looking for future co-owners. Someone who will share the frustrations, difficulties and benefits of being an owner – with you, of course! Our society teaches us to be slaves; to accept our exploitations – even to yearn for our chance at being the exploiters! This isn’t just rhetoric – it is compounded into every aspect of our lives, as well as our education. As a result, most candidates have either:

  1. Never heard of a worker co-op.
  2. Have a vague notion, but would never consider searching for one.
  3. Love co-ops, but probably don’t have the relevant job requirements (this happens quite often).

Loving co-ops is not in any way a requirement – in fact, very few people we’ve hired have known what they were.

So our approach has been to find candidates who meet the personality requirements; we have a full matrix of skills we look for as well. If we are faced with one candidate that can do the job but has an incompatible personality, we will not hire them. If however we can hire someone who has the personality we’re looking for, but none of the skills – we’ll probably hire them and train them. You can not change a person’s personality but you can certainly give someone whatever knowledge they need! Problem solving, critical thinking, etc are all very important; but what we really care about is whether they work well with others, particularly in a democratic and equitable fashion. The co-op is also not for everybody; we don’t simply think “How well do they work for our purposes?” – we also ask them “How well do we work for you?”

Long-term, my advice is to build employee reviews (ours are quarterly) into the job – if you keep everything out in the open, people are more likely to change and grow; this includes the co-op itself. At what is a co-op really, but a growing group of people, working together towards a common goal? Is there anything more beautiful?


Christian, Jon (2014) “New co-op brings bossless business model to tech support in Somerville”, The Boston Globe, May 08, 2014.

Halash, Jeff (2014) “Yochai Gal from”, Podnutz Daily 400, November 03, 2014.

Jones, Erica (2014) “Hello Neighbor: a look at Boston TechCollective”, SCATV Somerville, July 30, 2014.

Wolff, Richard (2015) “The Worker Co-Op Alternative”, Economic Update, April 12, 2015

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Credit unions

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:

credit-unions-over-timeSource: The Credit Union National Association via the Internet Archive Blog.
This data was compiled by the folks at the Internet Archive. In 2011, one of the founders of the archive, Brewster Kahle, launched a new credit union, the Internet Archive Federal Credit Union, explicitly to offer low-income members affordable financial services. Sadly, after a frustrating five years, Kahle and his partners have recently decided to close the project, and they blame the regulatory body, The National Credit Union Administration, for putting so much needless regulatory bureaucracy in their way that the credit union never managed to get off its feet. By the Archive’s estimates, 200-300 credit unions are forced to close each year in the US and only a tiny handful are allowed to start. Whatever the problem, from the evidence above it is clear that something is very wrong.

Someday, if we ever achieve a sustainable global cooperative economy, much of the change required will be ideological, but much will also be structural. Among the structural changes, it is clear that the laws that govern credit unions need to be re-written, at least in the US and undoubtedly elsewhere, so that they encourage rather than discourage the foundation of cooperative financial institutions. As Kahle points out in his blog post, the technical tools required to start a cooperative bank have never been easier to use. There is really no technical reason that the curve above should be going down. Indeed, by all rights, given internet-based technical advances in providing financial services, it should be going up, and after the catastrophe of the last global recession — caused in large part by the capitalist financial sector — there is even more reason to see that the cooperative financial sector starts growing again.

Kahle, Brewster (2015) “Difficult Times at our Credit Union.” Internet Archive Blogs,, 24-11-2015.

Popper, Nathaniel (2015) “Dream of New Kind of Credit Union Is Extinguished by Bureaucracy.” New York Times, 24-11-2015.

Simons, Tal and Ingram, Paul (1997) “Organization and Ideology: Kibbutzim and Hired Labor, 1951–1965.” Administrative Science Quarterly 42, 784–813.


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Scottish employee-owned firms outperform capitalist firms

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.

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Review: We Own It

we_own_it(small)This was one of the first books I ever owned on cooperatives and worker-ownership. I bought it in hard-cover in the middle 90s, and it served then as a simple introduction to the practical and legal issues involved in founding a cooperative. There are surprisingly few books on the market today to help with the practical side of running a worker-owned business, so I thought I would reread We Own It and see how well this old guide has weathered the years. You can find used copies fairly easily on the internet, but is it still worth reading?

I reread the revised 1991 edition, and even at that date, the book was old. The first edition came out in 1981, and many of the old black-and-white pictures that illustrate the pages appear as though they were taken sometime in the late 1970s. To be sure, much of the detailed legal advice will probably be well out of date by now, but in general, the authors do an admirable job of clearly and simply explaining the differences between various types of partnerships and corporations, models of cooperatives, and the myriad of tax issues involved in these different business structures. In the USA, the laws governing businesses vary significantly from state to state. Any group planning to start a new worker-cooperative would need to research local laws and possibly hire a lawyer before starting up in any event, so while some of the detailed advice in We Own It might be out of date or not apply in a particular area, all of the basic information presented on different types of business structures will still be valid and very useful today.

We Own It covers all kinds of cooperatives: consumer coops, producer coops, housing coops, worker collectives, and employee stock-ownership plans. In the 1990s, I was mostly interested in the sections on consumer and housing cooperatives, but rereading it now, I am happy to see that a good portion of the book is devoted specifically to worker-owned businesses, and as the authors explain, many of the issues discussed in the book are shared by all kinds of cooperatives, so even the sections not directly relating to worker-owned businesses would still be of interest to socialist entrepreneurs.

This is definitely a book written for people interested in starting a cooperative in the USA, and it would not be nearly as helpful to worker-owners in other countries, but for those living in the States, We Own It remains a comprehensive overview of the legal and practical issues involved in starting a cooperative, some 35 years after it was first published. I particularly enjoyed some of the brief sections drawn from interviews with worker-owners from a variety of cooperatives, mostly based in California. Several worker-owners, like the following founder of a solar-energy instillation company, make mention of the importance of a clear ideological focus for sustaining their businesses:

We had two primary objectives: to help make solar energy a reality in the San Francisco Bay Area, and to demonstrate that an employee owned business could compete successfully with conventional businesses. These somewhat idealistic motives — rather than the expectation of making a quick buck — are what spurred us into action and sustained us through many hard months. (34)

There also is some discussion of the problem of capital supply and the difficulty of working with traditional capitalist banks:

We once made an application for a bank loan and were turned down. We actually heard a rumor that we didn’t get it because we were an employee-owned business. They would never come out and say that to us, but they suggested that to us.

The interviews are fascinating and I wish there was more interview material alongside the discussion of the legal nuts and bolts. We Own It is strong on the legal side of starting a cooperative, but I would have liked even more discussion of some of the many interpersonal challenges that can face a group founding and running a worker-owned business. I’d wager that more cooperatives fail because of problems with group dynamics than for any other reason, so in a practical guide, a thorough discussion of these challenges and of potential solutions would be particularly valuable.

But leaving that one critique aside, I would definitely recommend We Own It as a comprehensive introduction. It shows its age, and you will still need to hire a lawyer, but the book is very useful.

We Own It: Starting and Managing Cooperatives and Employee Owned Ventures, Revised and Updated. Jim Beatty, Peter Honitsberg, and Bernard Kamoroff, 1991, Bell Springs Publishing.

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Shizuko and Kuniyo Iwane: Japanese Socialist Entrepreneurs

seikatsuclubIn the March 2014 issue of the journal Organization Studies, Aegean Leung, Charlene Zietsma, and Ana Maria Peredo have published a fascinating case study of a Japanese cooperative network that is little-known in the English-speaking world: the Seikatsu Club.

Founded in 1965 in Tokyo as an all-woman consumers’ collective, the Seikatsu Club has grown over the past 50 years into a network of 30 consumers’ cooperatives with 300,000 women members and annual sales of one billion US dollars.  As it grew, the Seikatsu Club also diversified, branching into electoral politics and worker ownership.  In 1979, the Club established the Seikatsusha Network, a grassroots political organization founded to advance the Club’s social and environmental agenda.  To date, the Seikatsusha Network has successfully elected some 150 members to local government.  Then in 1982, the Club established Ninjin, the first of 600 worker-owned businesses in the network that now employ 17,000 women, with a combined total annual sales of 150 million US dollars. (Leung et al. 2014: 427, 450)

The scope and scale of the Seikatsu Club is astounding and it is a shame that it isn’t better-known outside of Japan, but most of the primary information about the club is (not surprisingly) published in Japanese.  There has been very little published about the club in English, and in this respect, this article by Leung et al. is particularly welcome.  Leung et al. have mined the social history of the club to build a case study that examines how membership in the club changed the lives of the women involved.  Most of the members of the Seikatsu club are middle-class Japanese housewives who perform a very traditional role in Japanese society.  The Seikatsu Club originated as a buyers’ club where housewives cooperated to source safe and inexpensive milk for their families.  The safety of domestic goods was a principal concern of the Club in the beginning, and as the Club expanded, the members were drawn ever deeper into the production and supply-chain for these goods, eventually setting up their own businesses to produce better, safer products. (Leung et al. 2014: 436–9)

Leung and colleagues argue that involvement in the Club provided Japanese housewives with an opportunity to enact their traditional role as managers and protectors of the family but in a way that ultimately changed that role and gave the women far greater control over their own lives and a chance to make a significant mark on the Japanese economy and Japanese society outside of the home.  As one member wrote:

Working in the collective gave me a good feeling that I could make a contribution and have a place in society, not as a mother or a wife of so-and-so, but as myself … We create our own work and we are in charge.

(Kutsuzawa 1998: 100; quoted in Leung et al. 2014: 440)

Leung et al. demonstrate in their article that through the Seikatsu Club, Japanese women are democratizing the Japanese economy, and ultimately, altering the structure of Japanese society, but also, conversely, the Seikatsu Club is changing its members, expanding their role-identity as Japanese housewives into new domains: out of the home and into politics, the public sphere, and the economy.  For these authors, social structure and individual agency are linked.  Social structure delimits the choices we have in our lives and determines what social roles we can take, but at the same time, within the boundaries set by the structure of our society, we do have choices, and how we live our lives and how we choose to enact our roles can ultimately reflect back and alter the structure of society, particularly if we choose to act collectively.

The authors explain that the middle-class housewives who joined the Seikatsu Club were not initially seeking to change Japanese society:

It is important to note the divergence between the aspirations of the founders and the goals of the women who became members of the Seikatsu Club in its early days.  While there as a clear intention from the founders at the starting point of the Seikatsu Club to bring about social change by unleashing the power vested in the institutionalized role-identity of the housewives, most members joined the club to purchase better-quality products at lower prices.  At least initially, the women were not seeking to challenge the traditional boundary of their roles.

(Leung et al. 2014: 435–6)

The authors don’t explore this point much, but it is clear from their analysis that the founders were key.  This transformational identity work could never have happened – indeed, the Seikatsu Club would never have existed – without the initial involvement of ideologically committed founders.  The Seikatsu Club was founded by a young socialist couple, Shizuko and Kuniyo Iwane, (Leung et al. 2014: 434) and in 1965, these two socialist entrepreneurs organized a cooperative buyers’ club of 200 women (Leung et al. 2014: 427) that has since grown into a billion-dollar, economy-transforming cooperative network.

It would be fascinating to learn more about this couple, but again, most of the primary information is only available in Japanese.  Kuniyo Iwane wrote a memoir (1979) but unfortunately it was never translated into English.  Still, there is some secondary information on the couple available in English, and from these sources, it seems as though Shizuko and Kuniyo Iwane founded the Seikatsu Club after becoming disillusioned with established socialist politics in Japan.  Kuniyo Iwane was a member of the Japan Socialist Party, and within the Party, he became involved in a group that espoused ‘structural reform’, the notion that the best path to socialism was to progressively change the structure of society from within.  Kuniyo eventually quit the JSP, and with his wife, concentrated on developing the grass-roots cooperative economy in Japan (Avenell 2010: 220–22), and it is clear from the analysis in Leung and colleagues’ article that they were remarkably successful.  Through the network of cooperative consumer clubs and worker-owned businesses that they founded, Shizuko and Kuniyo Iwane initiated a movement that is significantly restructuring Japanese society in radical new ways.

Avenell, Simon Andrew (2010) Making Japanese citizens: Civil society and the mythology of the Shimin in postwar Japan. Berkeley: University of California Press.

Iwane, Kuniyo (1979) Seikatsu kurabu to tomone. [Together with the Seikatsu Club]. Tokyo: Shinjidaisha.

Kutsuzawa, K. (1998) Gender, work and the politics of identity: Work collectives and social activism among middle-class housewives in contemporary Japan. PhD dissertation, Department of Anthropology, University of Connecticut.

Leung, Aegean, Zietsma, Charlene, and Peredo, Ana Maria (2014) “Emergent Identity Work and Istitutional Change: The ‘Quiet’ Revolution of Japanese Middle-Class Housewives.” Organization Studies 35(3), 423–450.

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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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