Socialist firms as a cause area

Introduction

It is an EA proverb that people spend 80,000 hours of their life at work.[1] That’s a lot of time where people could be happy and inventive, or miserable and unproductive. However, sixty percent of people reported being emotionally detached at work and 19% as being miserable. Only 33% reported feeling engaged. In the U.S. specifically, 50% of workers reported feeling stressed at their jobs on a daily basis, 41% as being worried, 22% as sad, and 18% angry.[2] This is not only terrible for the workers but also for the economy, since businesses with engaged workers have 23% higher profit, while employees who are not engaged cost the world $7.8 trillion in lost productivity, equal to 11% of global GDP.[3] Therefore, interventions that improve the workplace have the potential to alleviate a lot of misery.

When society went from hierarchical political structures to more democratic ones, it resulted in the populace gaining much more rights and liberties than before.[4] Yet in our everyday workplace we work in hierarchical structures that are much more authoritarian than we would ever accept from our government. If our governments tried to implement a system where the leaders had to face as little accountability to their underlings, while gaining as much monitoring and control as managers have, we would consider it a violation of our rights. While getting a job might be voluntary, everyone needs the resources and social status that jobs provide, so most people put up with the boring and repetitive work.[5]
There is an economic incentive for owners and managers to ensure the highest possible pay for themselves while establishing the lowest possible pay for their workers. Not to mention that employees don’t get a say in who gets hired or fired, despite it having a huge effect on their lives. No wonder then that employees don’t trust their companies and 75% of employees say they quit their boss, not their job.[6]

Is there an alternative? Could we perhaps socialize the workplace? Would that improve employee welfare? Would those firms become less productive? Has this been successfully done before? Let’s take a look at the literature.

What does it mean to socialize the workplace?

The idea is simple: Instead of the capitalist/​owner of the firm deciding who manages the workers, the workers become part owner and get a say in how the firm is run. There are a couple ways this could be achieved but this post will primarily focus on one well-known example: worker cooperatives. Let’s look at what the literature indicates as the benefits of socialist firms:

  1. Less inequality within firms[7]

  2. Less workers leaving the workplace[8] either voluntarily[9] or involuntarily[10]

  3. Workers put in more effort[11]

  4. Similar levels of productivity as conventional firms[12]

  5. Similar levels of investments as conventional firms[13]

  6. Workers report increased levels of trust[14]

  7. Lower rates of business failure[15]

There is also evidence that worker socialist firms pay their employees more than capitalist firms, but only in certain circumstances. I will return to this phenomenon later. I will not be looking at other types of cooperatives like consumer cooperatives, producer cooperatives and purchasing cooperatives. This limits the scope of the literature because while 800 million people are employed by cooperatives[16], only 100 million are employed by worker cooperatives.[17] When I use the word co-op in this post, assume I mean worker cooperative unless specified otherwise.

Do socialist firms work?

You might be asking yourself: Won’t workers stop putting in as much effort into a collectively owned enterprise since the output is shared with their colleagues, which means they only get a small proportion of the fruits of their individual labor? According to the the free-rider hypothesis, rational and self-interested agents will always have an incentive to put in less effort and be a parasite of the efforts of others.[18] The business will inevitably go under as people realize that they will gain the most from shirking their responsibilities. The economist Amartya Sen once called the people depicted in these models “rational fools”.

In the case of the free rider hypothesis, these ‘rational fools’ act based on such a narrow conception of self-interest that they don’t take into account the obviously damaging long-term consequences of their behavior, both to the firm and ultimately to themselves. Normal, reasonable people—who are different to rational economic man—are usually happy to put efforts into a collective endeavor that will deliver benefits for them in the long run, even if that means foregoing some short-term gains. Cooperation in worker democracies can be a challenge and a few people will try to free ride, but evidence illustrates this problem rarely becomes so bad it affects the performance of the workers and the firm [19]

Experiments have shown that people randomly allocated to do tasks in groups where they can elect their leaders and/​or choose their pay structures are more productive than those who are led by an unelected manager who makes pay choices for them.[20] One study looked at real firms with high levels of worker ownership of shares in the company and found that workers are keener to monitor others, making them more productive than those with low or no ownership of shares and directly contradicting the free rider hypothesis.[21] It turns out there are potential benefits to giving workers control and a stake in the running of the organization they work for. This allows workers to play a key role in decision making and reorient the goals of the organization.[22]

One explanation for this phenomenon is that of “localized knowledge”. According to economist Friedrich Hayek, top-down organizers have difficulty harnessing and coordinating around local knowledge, and the policies they write that are the same across a wide range of circumstances don’t account for the “particular circumstances of time and place”.[23] (For examples of this, read Seeing Like a State by political scientist James Scott) Those who make the top-down policies in a traditional company are different to those who have to follow them. In addition, those who manage the company are most often different to those who own the company. These groups have different incentives and accumulate different knowledge. This means that co-ops have two main advantages:

  1. Workers can harness their collective knowledge to make running the firm more effective.

  2. Workers can use their voting power to ensure the organization is more aligned with their values.

Interestingly enough, I have yet to come across a co-op that uses the state of the art of social choice theory, so they could potentially get a lot lot better.

Potential problems with Co-ops

One potential problem with the literature on socialist firms is that it might be suffering from selection bias. In other words, they might not accurately represent the attributes of co-ops in general because the sample size is so small. For example: some sectors have more co-ops than others. One study found that socialist firms have a better survival rate than conventional firms in the service sector, but the same in other sectors.[24] Co-ops may disproportionally start in sectors where they are more likely to succeed.[25] and people who start co-ops tend to be more motivated than the average worker.[26]
It might be that if we force people to change their firm to a co-op they are less motivated to make it work. We should probably focus on making it easier for people to transition to- or start a new- co-op voluntarily.
One issue that arises with starting a socialist firms is acquiring initial investing.[27] This is probably because co-ops want to maximize income (wages), not profits. They pursue the interests of their members rather than investors and may sometimes opt to increase wages instead of profits. Capitalist firms on the other hand are explicitly investor owned so investor interests will take priority.
Many co-ops opt instead to rely on member contributions, which can be thousands of dollars. Economist and content-creator Unlearning economics describes the problem that arises:

If co-ops are set up in lower income communities they may have trouble obtaining financing, but if they exclude these communities then they’re going to be a bit of a middle class thing excluding the people who arguably need them most.
The most obvious policy to help co-ops finance themselves would be direct grants and loans from local and national governments, as well as other financial incentives such as tax breaks, which play a big role in Uruguay. Not only could these be expanded, but the information about how to access them could be more widespread as currently what’s available isn’t always taken up. One example is the under-utilised Local Enterprise Assistance Fund or ‘LEAF’ in the USA, which offers credit to co-ops but gets few applications, even fewer of which are credible.

There are also a number of innovative ways people have got around the financing problem without direct state support. One option is to allow external shareholders who receive dividends but have partial or no voting rights, keeping the control in the hands of the workers. The successful US co-op Equal Exchange has provided these so-called Class B shareholders with annual dividends for more than 20 years. (The Class A Shareholders are the workers). In some cases financial institutions are also established as part of a concerted effort by a community to establish a democratic economy.[28]

Another avenue would be to get funding from credit unions, which are consumer co-ops. Having an economy with different types of co-ops could become crucial in making sure it can sustain itself longterm.[29] Co-ops tend to perform better with other co-ops around.[30] So it seems like starting a culture of socialist firm is hard, but once you get co-op leagues started it becomes easy to sustain.[31] Ex-youtuber Rose Wrist made an outline of some different types of co-ops:

  1. Complete Autonomous Cooperatives

    1. These firms operate with either direct or representative democracy

    2. These firms are completely owned by the workers at the firm

      1. No external shareholders

  2. Autonomous Cooperatives

    1. These firms operate with either direct or representative democracy

    2. These firms are majority owned by the workers at the firm

      1. External shareholder do not hold voting shares

  3. Majority Cooperatives

    1. These firms operate with either direct or representative democracy

    2. These firms are majority owned by the workers at the firm

      1. Some external shareholders may hold non-controlling voting shares

  4. ESOP (Employee Stock Ownership) Firms (Not a co-op)

    1. These firms may be operated in any way

    2. The workers at these firms all own some part of the company

      1. External shareholders may hold controlling voting shares

He identified some unconventional ways each of these could get funding[32]:

Are socialist firms good for employees?

One problem with modern firms that I already mentioned is how alienated employees are from their work. There’s already a great post about how important meaning is in someone’s life so I won’t go into too much detail. Suffice to say that a better working environment would alleviate this problem.
Giving employees stock in a company seems to boost their performance.[33] Research has shown that employees getting more ownership of the company is associated with higher trust, perception of fairness, information sharing and cooperation.[34] There seems to be a small increase in companywide productivity[33], while employee retention is boosted.[35] Perhaps capitalist firms could slowly be eased into becoming socialist firms by first giving the employees more stakes in the company and then expanding their participation rights.

While the average employee makes more in a co-op, those at the top may earn less. Similarly, switching to a socialist firm gives the average employee higher pay, but not those at the top. This could potentially lead to a brain drain.[7] Even if we made every firm a co-op, there would still be inequality between firms, so top earners might shift to a couple of high paying co-ops. When there is an economic downturn socialist firms also tend to lower wages instead of firing people, which is once again great for the average worker but not for the top earners.[36] Volatile pay probably explains why some studies show that socialist firms pay less.[37] But while getting payed less in a recession still sucks, it is preferable to getting fired. This will also have a positive effect on the family members of employees, since they also suffer when said employees are fired.[38]

Conclusion and policies

Socialist firms are a powerful tool to improve the lives of the workforce. They reduce inequality within firms while maintaining similar (or even higher) levels of productivity as conventional firms. They improve the wage and mental health of the average worker while reducing the turnover rate. They are more resilient than conventional firms and make employees more connected with, and work harder for, their workplace.

They probably won’t slow down the rise of global inequality since inequality between firms is still possible. Co-ops may also be more risk averse since the workers livelihoods are strongly tied to the performance of the firm, which might lead to less innovation. One way co-ops can still be bad for it’s workers is if firms only hire workers for a short time and fire them before they get their vote. To prevent this governments will have to shore up their worker protection laws.

To incentivize the creation of socialist firms, governments can draft legislation to make it easier (and give tax incentives) for owners to turn their firm into a co-op. The government can also give loans to employees who want to buy firms from the owners or give preferential purchasing rights for employees of a firm that is facing closure/​sale. These policies are good for co-ops because they bypass the difficulty of finding initial funding. The costs to the government can be recouped by lower mental healthcare costs and reduced need for government redistribution programs (especially during economic downturns). If the literature is correct and socialist firms are indeed more productive than capitalist firms it could also be seen as an investment into creating an economy that generates more tax revenue.

Once more co-ops get created it will also become easier to start cooperative leagues, which aid in the creation of new co-ops. Due to vertical integration they might also be able to counteract a brain drain. More importantly, they facilitate the acquisition of equity through economies of scale which gives cooperatives more capital to fall back on. This could mitigate or eliminate the (unproven) risk aversion of socialist firms.

Given the recent discussion surrounding the structuring and transparency of EA organizations, perhaps the community could consider turning their EA organizations into socialist firms. Not only would this grant all the advantages mentioned in this post, it would also have two additional advantages:

  1. It spreads the word about co-ops, making them less obscure in the collective consciousness

  2. It would allow us to study them closely which:

    1. Allows us to be able to draft more pointed legislation which can capitalize on their benefits while mitigating their limitations

    2. Allows us to find ways in which they can be improved

References

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    The empirical performance of orthodox models of the firm: Conventional firms and worker cooperatives, Pencavel & Craig

    New evidence on wages and employment in worker cooperatives compared with capitalist firms, Burdín & Dean

  11. ^

    Employee Vs. Conventionally Owned and Controlled Firms: An Experimental Analysis, Frohlich et al
    Workplace Democracy in the Lab, Mellizo et al

  12. ^

    Productivity, Capital and Labor in Labor-Managed and Conventional Firms, FakhFakh et al
    Are Cooperatives More Productive Than Investor-Owned Firms? Cross-Industry Evidence From Portugal, Monteiro & Straume

  13. ^

    Shadow price of capital and the Furubotn–Pejovich effect: Some empirical evidence for Italian wine cooperatives, Maietta & Sena
    Productivity, Capital and Labor in Labor-Managed and Conventional Firms, FakhFakh et al

  14. ^

    Do cooperative enterprises create social trust?, Sabatini et al

  15. ^

    Survival Rate of Co-operatives in Québec, OCA

    Co-op Survival Rates in Alberta, Stringham & Lee

    Co-op Survival Rates in British Columbia, Murray

    The Relative Survival of Worker Cooperatives and Barriers to Their Creation, Olsen

    Scale, Scope and Survival: A Comparison of Cooperative and Capitalist Modes of Production, Monteiro & Stewart

  16. ^

    Trust, Inequality and The Size of The Co-Operative Sector: Cross-Country Evidence, Jones & Kalmi

  17. ^

    Productivity in cooperatives and worker-owned enterprises, Logue & Yates

  18. ^
  19. ^

    Employee Vs. Conventionally Owned and Controlled Firms: An Experimental Analysis, Frohlich et al

  20. ^

    Workplace Democracy in the Lab, Mellizo et al

  21. ^

    Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, Kruse et al

  22. ^

    Productivity, Capital and Labor in Labor-Managed and Conventional Firms, FakhFakh et al
    Quote comes from this unlearning economics video, which was the basis for this blogpost.

  23. ^

    The Use of Knowledge in Society, Hayek

  24. ^
  25. ^

    Worker Cooperatives: Pathways to Scale, Abell

  26. ^
  27. ^

    Survival Rate of Co-operatives in Québec, OCA

  28. ^

    Worker Democracy, by Unlearning Economics this post could be seen as an adaptation of that video

  29. ^

    Productivity in cooperatives and worker-owned enterprises, Logue & Yates p20

  30. ^
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  32. ^
  33. ^

    Employee ownership and firm performance: a meta-analysis, Boyle et al

  34. ^

    Do Broad-based Employee Ownership, Profit Sharing and Stock Options Help the Best Firms Do Even Better?, Blasi et al

    Causal linkages between work and life satisfaction and their determinants in a structural VAR approach Coad et al

  35. ^
  36. ^

    New evidence on wages and employment in worker cooperatives compared with capitalist firms, Burdín & Dean

  37. ^

    What do we really know about worker co-operatives?, Pérotin

  38. ^

Afterword

In my experience, rationalists can be quite negative towards socialism (If you disagree with my assessment, or need some examples before you believe me, feel free to message me). I don’t even blame the capitalists on this forum, it’s the karma-systems fault.
Since there was an initial majority of capitalists they had an easier time accumulating voting power, while socialists were disproportionally downvoted. The same thing would have happened in reverse if the socialists had held the initial majority. To illustrate, let’s get away from the tribal mindset and show that this is not even a politics thing.

Right now this is an English speaking forum and thus non-english posters/​posts have more difficulty accumulating votes. This affects the people that are attracted to the forum, which increases the initial majority. Imagine what would have happened if the initial majority were Spanish speakers. It would probably have been a Spanish language forum with more references to Latin-American culture. The forum doesn’t become Spanish because Spanish is a more rational language than English, it becomes Spanish because Spanish speakers get more votes on their posts which gives them more voting power which creates a feedback loop. (And that’s without getting in-group biases involved)
If we want to counteract groupthink I propose we make the karma system more democratic. After all, isn’t this forum kind of a workplace?