I’ll start by considering an argument against co-ops which I consider to be quite weak.
A common argument against co-ops is that they have a bias against growth. This is because if a co-op is to expand, it must take on more workers or customers and this dilutes the ownership stake of incumbent workers (or customers if these own the firm). And workers/customers will be reluctant to do this.
Just look at food retailing. The Co-op has lost market share down the years, whilst Waitrose stays up-market rather than pursues discounting-led growth of Lidl or Tesco.
A co-op dominated economy will therefore grow more slowly than a shareholder-dominated economy.
Even if we concede that growth is a good thing, however, this argument, however, is not as strong as it looks.
This is because existing firms, on average, don’t often grow anyway, whatever their ownership. Bart Hobijn and Boyan Jovanovich show (pdf) that the value of firms that were on the stock market in 1972 fell relative to GDP, even though falling discount rates alone should have raised it.
In other words, all of the US’s massive stock market boom between the early 70s and late 90s came because of new firms. Aggregate economic growth occurs not so much because existing firms expand, but because new ones enter.
One big reason for this is that, often, only new firms can fully use new technologies. For example, it was Dell that made a better go of selling PCs than IBM. It’s Amazon, not Waterstones, that dominates online book retailing.
Of course, quoted firms invest millions of pounds worth of management time in looking for growth opportunities. But much of this is wasted. As Alex Coad shows, firm growth is “largely a random process.” Nothing much predicts which firms will expand and which won’t - not profits, size, productivity nor even innovation.
If you doubt this, just think of the number of ways the pursuit of growth can backfire. Growth can be bought merely at the price of increasing risk; Bradford and Bingley and Northern Rock expanded rapidly after demutualizing. And look what happened. Or growth cannibalizes sales of existing outlets, as DSG and Starbucks have found. Or there are just good old diseconomies of scale. Growth is often a bosses’ ego trip, rather than a viable or efficient strategy.
All this raises the question: why do we think quoted firms are an engine of growth? In part, because of cognitive biases. They talk incessantly about pursuing growth, and we mistake talk for deed. And, of course, there’s the salience effect. We see the tiny minority of successful growth stories whilst the many failures get forgotten; everyone knows Tesco, but few remember Fine Fare.
The bottom line here is simple. The tendency for co-ops not to grow is no argument against them, relative to quoted firms. If you want economic growth, the key thing is to ensure that barriers to entry for new firms are low. Growth comes from market structure, not ownership structure.