Co-ops: a reply to Matthew

The country's best Toryblogger challenges me on the desirability of an economy based upon co-ops. I've a few problems with some of his claims.

I'm quite open to forms of corporate ownership other than the public limited company. However, that is still the way most sizeable firms are organised (small companies often are owned by their workers - the corner shop is a classic example). Firms like John Lewis are very much the exception.

It is true that big firms are typically publically quoted. But this is because they have huge capital requirements which can only be met by external shareholders. But these are only a minority of all firms. There are vastly more worker-owned firms than there are firms listed on the stock market; think of all those law and accountancy firms. In this sense, co-ops (partnerships) are the norm and external shareholder ones the exception.

To own the company they work for exposes [workers] to greater risk.

True. But this doesn't distinguish a co-op-based economy from a capitalist one. If a worker has lots of job-specific human capital but no financial assets, he's exposed to lots of firm-specific risk in a capitalist economy.
The problem here is a lack of markets in occupational or industry risks. This is separate from the capitalist vs co-op question.

If workers owned the firms they work in they would not reallocate their capital if an opportunity for greater profit arose. New industries could be neglected as they are unable to build a critical mass of workers invested in them.

I  don't see this at all. One effective way for new firms to attract workers is precisely to offer them ownership stakes: ask Bonnie Brown. The problem with co-ops is not so much that new ones won't start, but that existing ones don't like to expand, as workers don't like seeing their control diluted; Waitrose competes on quality, not price.

Having external shareholders drives the need for a hierarchy. Shareholders need to be able to appoint someone who will manage their company for them. They then need to be able to hold that person accountable for delivering results. That really needs to be one person.

External shareholders are not the key issue here. Instead, the case for hierarchy is that there has to be someone to coordinate (pdf) different assets within a firm and resolve disputes. In principle, internal shareholders - co-op members - can appoint this person.
What's more, coordination needn't be a strongly hierarchical function. It can be done partly by market-based management rather than by using leadership and "judgment." And often, if a firm has lots of different assets, it might be better off selling some than managing them.
I should stress that I'm not saying that all privately-owned firms should become co-ops over night. It could be that a more co-op-based economy might emerge "naturally" over time if physical capital-intensive firms shrink in importance relative to human capital-intensive ones. Indeed, market forces suggest there is strong demand for coops. It's amazing how how many people with money prefer to work as partners rather than employees, shop at Waitrose and Peter Jones, and invest in hedge funds (typically partnerships) rather than conventional funds (typically hierarchically owned).   
And what Matthew hasn't done is successfully controvert the idea that public services - schools and hospitals - should become some type of co-operative organizations.

Comments

[dsquared]

Chris, two points:

1. Partnerships aren't co-ops and they aren't worker-owned. Have you ever worked for one? A partnership is about the most rigid hierarchy you can get, with a massive gulf between the partners and the employees and much less chance of promotion to the partnership for a non-partner. If your model of a worker-owned firm is something like Clifford Chance then it's very, very not like John Lewis.

2. I am not at all sure that "Market Based Management" in the sense you've linked to means what you're implying it does. It's the personal philosophy of Charles Koch, an extremely right-wing American who owns a big company. It's basically one part kaizen to one part "act like you own the business" to one part bullshit bingo.

[dearieme]

I can see that schools and hospitals aren't "public services" in the way that the M25 is. In what way are they "public services" that Tesco and Sainsbury aren't? Or are you using "public services" just to mean "government-owned business where the government controls client access"?

[chris]

D2 - Yes, the larger partnerships are hierarchical. But this is in large part a result of their earlier success as smaller, more egalitarian firms. As these expand, they often have to employ people with less/no ownership rights, as this is cheaper and less risky than giving them full partnership. And the prospect of getting partnership is often a fantastic way of motivating staff - resulting in an efficiency less available to firms with external shareholders.

[Mark Wadsworth]

It is a bit of an empty debate.

If co-op's were so great, why aren't there more of them? Why did all the building societies merge and demutualise? Look at the history of ASDA and all these other big companies that may have been farmers' co-op's in the dim and distant past.

In any event, lawyers choose partnerships (rather than limited company) a) because it is much more flexible and b) because it is usually much better for tax. They are not co-op's by any stretch of the imagination, they are 'owner-managed'.

[james c]

John Lewis is a historical accident, which was the result of the wishes of its founder. It persists as a partnership, because the top management gain more through it being a partnership, and keeping their jobs, than if it were sold.

[Roger Thornhill]

IIRC the Building Societies demutualised by offers of shares to the members - i.e. liquidating an asset they did not know they "had". I do recall the banking regulations changing around that time, Banks getting interested in mass selling of mortgages and BSocs getting interested in becoming banks.

I still have my 100 shares in Abbey/Santander from the float. I liked Abbey because it was a mutual. I now use Nationwide, which still is. I would use the Co-Op bank if they did not give money to that bunch of crooks in the Labour Party.

The Tory plan is peculiar, as voluntary collectives should form by themselves. Are the Tories proposing some fundamental change in business or tax legislation to change the balance?

[dsquared]

[But this is in large part a result of their earlier success as smaller, more egalitarian firms. As these expand, they often have to employ people with less/no ownership rights, as this is cheaper and less risky than giving them full partnership]

but "expand" in this context means "take on a third person". They move to a hierarchy at a very, very early stage.

[Jim Donovan]

Chris,
While not a fan of socialist capitalism, I have to acknowledge the success of the co-op model for New Zealand dairy farmers. These guys are not renowned for their socialist principles - it's all about self-interest (a la law, accounting, engineering, IT partnerships, etc). But they've done well from the capitalist/co-op model

As you imply, co-ops work until they need big bucks, so you'll be interested in their move towards stock-markets and mainstream capitalism.

http://jimdonovan.net.nz/2007/11/15/fonterra-board-recommends-sharemarket-flotation/

[Laurent GUERBY]

Jim, French Credit Agricole is also a coop (legally, not really in spirit :) with some capital on the stock market.

Chris, an easy reply to Sinclair "To own the company they work for exposes them to greater risk and is not in their interests." is that in (most/all at least in France?) coop owning one share is the same as owning millions of shares so worker don't have to put all their wealth in the coop shares, they just need to put a bit and they can invest the rest of their savings outside their employer owned coop.

[Kevin Carson]

Mark Wadsworth,

You might as well ask why if capitalist enterprises are so great, why were there so few of them in the old USSR.

Maybe the fact that there are so few co-ops, despite their being more efficient, has something to do with the fact that this is not a free market.

State capitalism starts with certain structural assumptions that rule out residual claimancy by workers, despite the fact that it is the most efficient form of organization. For one thing, it is built on a foundation of massive expropriation of the working classes, including the enclosure of the open-field system in the late middle ages, the nullification of copyhold tenure in the 17th century, and the Enclosures of commons in the 18th. The result was an economy in which most property was concentrated in a few hands, and the majority of people were driven into the wage labor market against their will. That meant that the industrial economy developed under conditions of concentrated capital ownership and the absentee ownership of enterprises, which made hierarchy necessary to elicit effort from workers who had no rational interest in maximizing effort or productivity.