Why not worker ownership?

Diane Coyle asks: why is profit-sharing not more common, given the evidence (pdf) that it increases productivity (pdf) and profitability (and well-being)?

To some extent, the premise behind the question is wrong: there are many more worker-owned firms than there are ones quoted on the stock market. Shared ownership is the norm for law, accountancy and medical practices - although they become less egalitarian as they get bigger. And in other cases, substantial worker-ownership is not feasible; I'm not sure workers should own their own oil rigs, for example.

Let's, though, grant the premise - which I think we should. There are several possible answers.

One is ambiguity aversion. The cost of profit-sharing is obvious and immediate, but the benefits are less salient and longer-term; more motivated workers, less staff turnover and so on. Given the cautiousness of many owners, this militates against shared ownership.

In other cases, such ownership is unnecessary. Yes, ownership motivates workers to either work hard or keep their hand out the till. But there is an alternative way of achieving this - direct oversight. And power biased technical change means this is more feasible in many work-places: containerization, tachographs, CCTV and computerization allow capitalists to control workers directly without the incentives of a profit share. It might be no accident that interest in shared capitalism peaked in the 70s and early 80s, before such technology became so available.  

In yet others cases, there's simply no desire for it. On the one hand, some firms are happy to pay peanuts and get monkeys: just compare service standards at John Lewis to those in quoted retailers. And on the other hand, many workers don't want it. If you want a job where you can skive off for a sly cigarette, you're ill-advised to work at John Lewis where everyone is a boss.

In this context, Diane hints at an overlooked cultural change. She notes, rightly, that a pioneer of paying good wages to improve corporate profits was Henry Ford.What she doesn't say, however, is that he had to do so to reduce horrific staff turnover. The great Harry Braverman quotes Keith Sward:

The turnover of his working force had run, [Ford] was to write, to 380% for the year 1913 alone. So great was labour's distaste for the new machine system that toward the close of 1913 every time the company wanted to add 100 men to its factory personnel, it was necessary to hire 963. (Labor and Monopoly Capital, p 149)

Since then, however labour has accommodated itself to drudge work, so there's less need to buy off discontent. And learned helplessness - or a desire for an easy life - means there's little demand for worker control. The fact that preferences are in part endogenous is a truth that mainstream politics cannot acknowledge.

Yet another reason for the lack of worker ownership or control is path dependency. Hierarchical capitalism made sense when companies had huge capital requirements and were staffed by illiterates - as was the case in the early phase of the industrial revolution. It makes less sense when capital is plentiful but when workers are highly skilled, as Luigi Zingales pointed out (pdf). However, it's often the case that ideas persist after their material justifications have disappeared. Hierarchical capitalism might therefore be an example of an idea that's outlived its usefulness.

Finally, one reason for a lack of worker ownership or control is simply capital constraints. Workers cannot afford to take a stake in their workplaces, and the first rule of investing - don't put all your eggs into one basket - urges them not to. The John Lewis Partnership was formed not by workers, but by a gift of shares from John Spedan Lewis. Few employers are so generous.

It might therefore be that the prevalence of hierarchical capitalism is a form of market failure.

Another thing: you might think my support for worker ownership and control is a Marxian idea. I'm not sure. It's also founded in a Hayekian scepticism about the efficiency of centralized knowledge and control, economics' agency theory and the mathematical diversity trumps ability theorem.

Comments

[TickyW]

"Finally, one reason for a lack of worker ownership or control is simply capital constraints. Workers cannot afford to take a stake in their workplaces..."

There's no need for worker ownership; control is all that is needed. Putting workers (worker directors) on company boards can be achieved quite easily with a modification to existing company law.

I doubt the boss class will like it though.

[1973GJWEcon]

Excellent article, full of lovely intuitive thinking - exactly the sort of thing I want to encourage my students to do.

[Nick Rowe]

Worker ownership is also the norm for one-person businesses. The owner and worker are the same person.

I think the question should be: why doesn't worker ownership scale up?

[Carol]

The fact that marginal productivity is allocated to the non-productive (managerial)class as a reward for controlling employees is a market inefficiency. The answer is to allocate it to the workers as shares in the business.

[Jim]

"Worker ownership is also the norm for one-person businesses. The owner and worker are the same person.

I think the question should be: why doesn't worker ownership scale up?"

Because of the fact that the initial business was created by the investment and hard work of one person - if another wishes to become a part owner they would have to make an investment of capital to compensate the owner. Most people have neither the capital to invest, nor the inclination to take the risks that ownership entail, and prefer to work for a fixed salary. And the initial owner is unlikely to want to give up partial control over something he or she created from scratch. Running a small business with 2 equal owners would be hard work enough for them to always be on the same page, scale that up to 5 or 6 and it would be impossible.

[Nick Rowe]

Jim: I think that's a pretty good answer.

There are exceptions, where we see partnerships of several worker-owners. But many are all in the same family (which creates its own, different, problems).

[FromArseToElbow]

You're right that the decline in interest in shared ownership coincided with the introduction of new technology in the 80s, but I suspect this was less about increased close inspection than other benefits arising from datacoms and databases.

For example, barcode scanners reduced employee theft, but they also enabled just-in-time inventory management. The key benefit to shop owners was not eradicating shrinkage but reducing re-ordering time. This cut inventory costs and also allowed shops to be more responsive to demand.

Improvements in inventory and supply-chain management allowed capitalists to sidestep the problem that had stimulated the original interest in shared ownership in the 70s, namely declining productivity growth. Having to scan your own basket in the supermarket suggests the search for productivity growth is as pressing as ever.

[Brett]

There's three big reasons for it:

1. Risk. It's risky enough starting your own business, where you're only investing your own capital and managing your own time. Partnerships are even riskier, since you're co-owning with someone else who might act irresponsibly or run off with the company's funds (that happened to a business one of my cousins started up with a friend). Unsurprisingly, partnerships are much less common than solo proprietorship.

2. Size Management: So far, no one has figured out how to run large organizations outside of the "military" model of hierarchy and bureaucracy. Even the large cooperative companies like Mondragon have it - Mondragon is basically a representative democracy whose "legislature" selects managers.

3. Liability: There's no real for-profit limited liability set-up specifically for worker-owned firms, short of simply setting them up as corporations and giving each worker a non-sellable share of stock (which is what Publix does in the US). There's nothing like Mondragon where the firm is a separate legal person and people can act as its agents but don't actually hold equity to be sold.

[Sion Whellens]

Distinguish please between a) purely formal ownership (trust-based like John Lewis, or with perhaps an element of individual, transferrable worker share ownership, as at Tullis Russell Papermakers); and b) 'real' ownership, either share based or through worker common ownership, where workers actually control the terms and organisation of their own work, at least at the level of the firm (although plenty of examples of powerful federations of worker co-ops, cf empresas recuperadas in Argentina, Mondragon Corporation, Emiglia Romagna).

Broadly, a) is espoused by the Employee Ownership lobby, and looked on with some favour by the political and 'progressive' managerial class. The alleged benefits are increased productivity and enhanced industrial peace, although not much evidence that conventionally organised but 'enlightened' businesses that invest heavily in worker induction and engagement, do any worse on these measures. Workers themselves don't get so excited, for the reasons you set out above.

b) - type worker ownerships - which we call worker co-operatives - often have an element of common capital and a highly democratic and egalitarian culture. There is a relatively small group of these businesses in the UK, perhaps a few hundred, mainly small / medium sized; Suma (Triangle Wholefoods Collective) is perhaps the largest - 140 worker members and growing, turnover £30m ish, equal pay, very successful. However this cohort isn't growing, and doesn't scale up to French, Spanish, Argentinian numbers; although larger than Dutch, German, Scandinavia worker coop sector. Why? In addition to the above mentioned, I'd suggest:

- The baleful and lingering ideological aftereffects of the conquest of the British left by Fabianism in the C20th, which was explicitly hostile to worker co-operation (Labour's flirtation with worker control in the 70s was a minor aberration).

- The hostility of most of the UK trade union movement (with a few notable exceptions (e.g. BECTU)

- The current low state of working class confidence. When not driven by sheer necessity (cf ArgentIna), worker control and industrial democracy tend to do better when workers are doing better. This is the biggest factor right now in my view, even though it might seem so obvious as to be a tautology.

[Sion Whellens]

My posts on worker co-operation are at bethnalbling.blogspot.com (soz, mistyped when posting comment)

[Brett]

The "recovered factories" movement in Argentina offers a potential alternative to full plant closure if the owners want to get out or move to a different place while the plant is still profitable at some level, but not really much more. None of them are competitive with more conventionally structured firms.

[Sion Whellens]

Check out the 'Worker Co-op Code' published 2012. Contains the claim that the 'recovered factories' accounted for 10% of Argentina GDP. http://www.uk.coop/sites/storage/public/downloads/worker_co-operative_code_2nd_edition_0.pdf

[Peter Dorman]

There's a longstanding literature on "why not more worker coops?" Lots of ideas, fragmentary evidence, no consensus, but very much worth reading.

[Icarus Green]

Automation and the internet are almost making the consumers the workers. The have to self advise on purchase, self manage logistics and self design products in some cases. This trend might make this debate moot in many industries.

The other more prosaic reason is that unlike doctors, lawyers or accountants most workers are not concentrated or intelligent enough to organise and run a business collectively.

[Jim]

@Icarus Green: The other reason the professions can get away with being partnerships, is that they are heavily regulated businesses, with outside control over how the business may be run. Yes a firm of lawyers can decide to concentrate of a certain aspect of law - commercial, divorce, human rights, property etc, but if you join a divorce lawyers business, you know what you're aiming to achieve. Same for accountants, they might specialise in small clients, or multinational corporations. But the accounting methods are set by outside bodies. There's just less scope for argument over the way forward for the business.

Whereas if you are a builder, or a manufacturer of widgets, or a retail business, there's a myriad of ways forward for that business. Do you open a new shop or not? Or invest in new widget manufacturing equipment that may reduce costs, but result in lower profitability for a period of time? Or take on a big building contract that will involve significantly extra risk (but larger profits) over the work done previously? In such circumstance partners who also workers will undoubtedly have differing views on the way forward, resulting in nothing but trouble and strife.

[Donald A. Coffin]

One thing I did not see mentioned (I may have missed it) is the desire for diversification. In worker-owned businesses, not only are the returns to one's human capital tied up in your place of work, so are the returns to what is likely to be a large share of one's savings/assets. And these returns move together. Standard portfolio theory suggests that this increases risk.

[Sion Whellens]

@icarusgreen what's the evidence for workers not being 'concentrated or intelligent' enough to run a firm collectively? Sounds like you're channelling Beatrice Webb. Pretty offensive, too.

Collective-type worker co-ops deploy a high level of networked intelligence, while dispensing with many of the costs associated with professional (as distinct from delegated) managers, whose core function is maintaining discipline. Collectively-run firms make fewer disastrous decisions, innovate in a more careful way, and are therefore more resilient than conventional companies (as well as meeting the needs and aspirations of their worker members). Look at Essential Trading, Calverts, Suma. These are not tiny or conservative businesses.