This is a well thought-out post with many citations and you’ve addressed a lot of valid points.
There are, however, a few fatal issues that really undermine the long-term viability of this kind of company.
To begin with, the fact that there are so few successful socialist firms is a really big deal that you can’t simply hand-wave away. Yes, there might be a handful (dozen?) of co-op firms in the OECD that we can say are moderately ‘successful’ - but they are certainly the exception rather than the rule. If co-ops have all the advantages you clearly listed, then they will be the dominant form of enterprise. But they’re not. In no particular order:
Co-ops are quite incompatible with firm mobility. Somebody who has just joined the firm does not have the same ability to add-value, nor should they be afforded the same ‘voting’ right as a more experienced veteran. Very quickly, using any kind of practical measure, you can see that firm mobility and co-op equity quickly breaks down.
Funding becomes the next obvious point. At some point, all companies must raise funds. They have two choices: (1) Debt or (2) Equity. Many firms are capital intensive and simply will never be able to raise the required funds from their own workers to achieve growth. Therefore, they can either raise debt—which does not dilute the voting rights—or raise equity from external parties—which does. But it’s important to note that even under equity, this doesn’t really impact the day-to-day function of a business. Sure, shareholders will elect the board of directors and that can influence the broad direction of a company—but rarely does this deviate from “achieve as much profit as possible”. And if it does, then the company is unlikely to survive anyway.
But the fact that workers don’t sink their entire savings into their company’s shares (most people are employed by private companies) also demonstrate that most people don’t really care about ownership of the company they work for. And why would they? They want to maximise their retirement savings. Being diversified makes sense. You can’t be diversified if you’ve sunk all your money into the company you work for. And what happens if you want to move company?
To a certain extent, all firms are socialist—either implicitly of explicitly. Any publicly listed company can, and does have stock ownership by employees. Many privately listed companies are structured as partnerships (eg: any professional services firms). However, any business in the 21st century will be capital intensive in a manner which is simply beyond the ability. But regardless—the majority of decisions are made by groups, committees, panels of employees at similar ranks. CEO’s rarely make decisions in a vaccuum—they make decisions with their c-level executives and boards of directors because they have a comparable level of competence and preparedeness.
The problem is when minimum-wage workers insist on having the same ‘voting’ right or decision-making capability as a senior person who is far more competent. If this was a superior way to run a firm, it would already be the norm. The fact that it’s not is demonstrative that business decisions require competence and firms hire and promote to achieve this level of competence.
It’s entirely possible that there is some sort of co-op model out there that is genuine superior to traditional firms. I would like to see it in action before going down the path of trying to implement government incentives to achieve something that we’re not even sure is a good idea (and might actually destroy wealth of freedom of employees to move between jobs, or be hired into jobs they like).
It would be good of you as well to summarise the risks or genuine downsides of worker-owned co-ops. Mobility, personal wealth planning, firm decision-making, alignment of incentives to performance are very likely to be impacted.
It is an option, but it only allows for relatively slow growth, and only for businesses that aren’t capital-intensive. So it’s a good option for something like consulting firms or law firms, where there aren’t really any up-front costs that need to be paid off over time.
But imagine you invent a new type of power plant. Many plants benefit from economies of scale, and also take 10-20 years to pay off their up-front construction costs. How could a co-op finance building even a single plant? Similar arguments apply to most forms of manufacturing, or really anything that can be mass-produced.
Even in the case where organic growth is sustainable, it’ll usually have to compete with much faster inorganic, financed growth.
A sufficiently large co-op could raise lot of money. For example, if you have 10 000 employees, and they democratically decide to invest $100 per person into a new project, you have $1M. Not enough for a power plant, but perhaps for something smaller. I think Mondragon Corporation does similar things.
But this probably wouldn’t feel sufficiently pure (ideologically) to many people. Imagine that you have a system of mutually connected co-ops with 1M employees total, and they decide to invest $1000 per person, and build an actual power plant. On one hand, you have a co-op-owned power plant, yay! On the other hand, the power plant itself is not actually owned (exclusively) by its own workers; it is mostly owned by co-op employees working in other businesses. Many people would feel that this is a mockery of their ideas; that the people working at the power plant do not have the true co-op-ness.
Fast growth for growth sake expectations comes from jackpot seekers. I can see how loans are a justified way to get over that “first unit” hump. But if you have even a few actors like Uber that grow to big size fast and run at a loss, actors that prove their economic viability step by step can’t really exist. Consumers end up having the product cheaper than it can be produced and loaners (or whoever ends up being the sucker in stock poker) end up paying for it.
It seems very worrying if the “Does it make money?” is so fundamentally skippable that it is not worth considering. A worker that has found an activity they feel is meaningful and pays for their living is not in a big hurry to transmute it to another kind of activity, althought an attitude that a craft picked up should be developed exists.
The nice thing about loaners losing money on unprofitable businesses is that it’s a self-correcting problem to some degree—those loaners can only lose all their money once! And if consumers get part of that money, it’s effectively a charity.
Sometimes it seems like investors might not even consider whether their investments will make money, but most of the ones who last very long do care.
This is a well thought-out post with many citations and you’ve addressed a lot of valid points.
There are, however, a few fatal issues that really undermine the long-term viability of this kind of company.
To begin with, the fact that there are so few successful socialist firms is a really big deal that you can’t simply hand-wave away. Yes, there might be a handful (dozen?) of co-op firms in the OECD that we can say are moderately ‘successful’ - but they are certainly the exception rather than the rule. If co-ops have all the advantages you clearly listed, then they will be the dominant form of enterprise. But they’re not. In no particular order:
Co-ops are quite incompatible with firm mobility. Somebody who has just joined the firm does not have the same ability to add-value, nor should they be afforded the same ‘voting’ right as a more experienced veteran. Very quickly, using any kind of practical measure, you can see that firm mobility and co-op equity quickly breaks down.
Funding becomes the next obvious point. At some point, all companies must raise funds. They have two choices: (1) Debt or (2) Equity. Many firms are capital intensive and simply will never be able to raise the required funds from their own workers to achieve growth. Therefore, they can either raise debt—which does not dilute the voting rights—or raise equity from external parties—which does. But it’s important to note that even under equity, this doesn’t really impact the day-to-day function of a business. Sure, shareholders will elect the board of directors and that can influence the broad direction of a company—but rarely does this deviate from “achieve as much profit as possible”. And if it does, then the company is unlikely to survive anyway.
But the fact that workers don’t sink their entire savings into their company’s shares (most people are employed by private companies) also demonstrate that most people don’t really care about ownership of the company they work for. And why would they? They want to maximise their retirement savings. Being diversified makes sense. You can’t be diversified if you’ve sunk all your money into the company you work for. And what happens if you want to move company?
To a certain extent, all firms are socialist—either implicitly of explicitly. Any publicly listed company can, and does have stock ownership by employees. Many privately listed companies are structured as partnerships (eg: any professional services firms). However, any business in the 21st century will be capital intensive in a manner which is simply beyond the ability. But regardless—the majority of decisions are made by groups, committees, panels of employees at similar ranks. CEO’s rarely make decisions in a vaccuum—they make decisions with their c-level executives and boards of directors because they have a comparable level of competence and preparedeness.
The problem is when minimum-wage workers insist on having the same ‘voting’ right or decision-making capability as a senior person who is far more competent. If this was a superior way to run a firm, it would already be the norm. The fact that it’s not is demonstrative that business decisions require competence and firms hire and promote to achieve this level of competence.
It’s entirely possible that there is some sort of co-op model out there that is genuine superior to traditional firms. I would like to see it in action before going down the path of trying to implement government incentives to achieve something that we’re not even sure is a good idea (and might actually destroy wealth of freedom of employees to move between jobs, or be hired into jobs they like).
It would be good of you as well to summarise the risks or genuine downsides of worker-owned co-ops. Mobility, personal wealth planning, firm decision-making, alignment of incentives to performance are very likely to be impacted.
Why is not the income from the business activity of the firm an option for the growth?
It is an option, but it only allows for relatively slow growth, and only for businesses that aren’t capital-intensive. So it’s a good option for something like consulting firms or law firms, where there aren’t really any up-front costs that need to be paid off over time.
But imagine you invent a new type of power plant. Many plants benefit from economies of scale, and also take 10-20 years to pay off their up-front construction costs. How could a co-op finance building even a single plant? Similar arguments apply to most forms of manufacturing, or really anything that can be mass-produced.
Even in the case where organic growth is sustainable, it’ll usually have to compete with much faster inorganic, financed growth.
A sufficiently large co-op could raise lot of money. For example, if you have 10 000 employees, and they democratically decide to invest $100 per person into a new project, you have $1M. Not enough for a power plant, but perhaps for something smaller. I think Mondragon Corporation does similar things.
But this probably wouldn’t feel sufficiently pure (ideologically) to many people. Imagine that you have a system of mutually connected co-ops with 1M employees total, and they decide to invest $1000 per person, and build an actual power plant. On one hand, you have a co-op-owned power plant, yay! On the other hand, the power plant itself is not actually owned (exclusively) by its own workers; it is mostly owned by co-op employees working in other businesses. Many people would feel that this is a mockery of their ideas; that the people working at the power plant do not have the true co-op-ness.
They could incrementally buy it back for “purity”. Ends up being a kind of crowdsourcing.
Fast growth for growth sake expectations comes from jackpot seekers. I can see how loans are a justified way to get over that “first unit” hump. But if you have even a few actors like Uber that grow to big size fast and run at a loss, actors that prove their economic viability step by step can’t really exist. Consumers end up having the product cheaper than it can be produced and loaners (or whoever ends up being the sucker in stock poker) end up paying for it.
It seems very worrying if the “Does it make money?” is so fundamentally skippable that it is not worth considering. A worker that has found an activity they feel is meaningful and pays for their living is not in a big hurry to transmute it to another kind of activity, althought an attitude that a craft picked up should be developed exists.
The nice thing about loaners losing money on unprofitable businesses is that it’s a self-correcting problem to some degree—those loaners can only lose all their money once! And if consumers get part of that money, it’s effectively a charity.
Sometimes it seems like investors might not even consider whether their investments will make money, but most of the ones who last very long do care.