An employee-owned firm seems to be basically equivalent to a firm that gives employees shares (common) and then indefinitely prevents them from selling them (rare). The latter step seems pretty harmful to the employees; they could always keep the shares if they wanted to, but the ability to sell is quite valuable. It allows them to diversify their portfolio, rather than having their savings and job tied up in the same firm. It also allows them to liquidate the shares to fund a large purchase (e.g. a house) if they wanted to. Given how desirable these things are, I’d be surprised if banning employees from selling their shares was net beneficial to them, and without the restriction the shares they sold would typically be to third party investors, so you would naturally end up with a traditional firm again. Similarly, employees at many public companies could, if they wanted to, buy stock in their employer—e.g. a firm with 10% margins, 20x PE, paying 30% of revenue as wages, could be entirely bought out by the employees in a few years… but wisely they chose not to do so!
You correctly identify the fact that coops struggle to raise capital for investment, but I think the solutions you suggest are sort of ‘cheating’. It’s true that, if a firm only has to pay workers and suppliers because the government is covering the capital, then it will probably be able to pay those groups more than a traditional firm that has to split its revenue three ways between workers, suppliers and capital. But the traditional firm, if it received similar sized subsidies (e.g. an exemption from payroll and sales taxes) would also pay workers more and lower prices for customers. When deciding on which form of economic organization is superior for the economy as a whole, we cannot fairly compare one which needs external support to one which is self-funding.
Finally, I roll to disbelieve on the idea that coops are more productive than traditionally organized firms. There is a reason these coops have over time been out-competed by normal firms, and have become smaller as a percentage of the economy. I haven’t read all the research you referred to, but I think a common problem is the mis-identification of comparison firms. Because traditional profit-orientated firms will re-invest and expand so long as marginal product is positive, their average productivity can look lower than that of firms whose growth has been artificially constrained by the coop structure, even though this growth is in fact a good thing!
A practical example of the failure of coops comes from the ACA/Obamacare insurance coops. These received generous funding from the federal government. However, despite the advantages they had over the for-profit (and tax paying) regular insurance companies, they almost all failed within a few years due to incompetence at underwriting. They often had to be rescued by the for-profit firms to prevent leaving people without health insurance.
An employee-owned firm seems to be basically equivalent to a firm that gives employees shares (common) and then indefinitely prevents them from selling them (rare). The latter step seems pretty harmful to the employees; they could always keep the shares if they wanted to, but the ability to sell is quite valuable. It allows them to diversify their portfolio, rather than having their savings and job tied up in the same firm. It also allows them to liquidate the shares to fund a large purchase (e.g. a house) if they wanted to. Given how desirable these things are, I’d be surprised if banning employees from selling their shares was net beneficial to them, and without the restriction the shares they sold would typically be to third party investors, so you would naturally end up with a traditional firm again. Similarly, employees at many public companies could, if they wanted to, buy stock in their employer—e.g. a firm with 10% margins, 20x PE, paying 30% of revenue as wages, could be entirely bought out by the employees in a few years… but wisely they chose not to do so!
While theoretically poor people can buy stocks, in practice we see that it’s mostly rich people having them, co-ops would change that. Some co-ops allow workers to sell their shares, but importantly, none allow them to sell their voting shares. This distinction is important, because a co-op is not “basically equivalent to a firm that gives employees shares and then indefinitely prevents them from selling them”, it gives them shares andcontrol. This control does allow the employees to actually sell non-voting shares if they want to (see table in the post). The difference is that they control the amount of stock in circulation. So a lot of conventional firms give their employees stock, but even if they aren’t pulling contract shenanigans, the owners still control the amount of stock that is sold. They very rarely give their employees preferred stock and they can dilute the value of employee stock at any time without their input. This is impossible in a co-op.
But the control aspect is not only important to protect the workers, it actually makes the firms perform better. Let’s take a look at source [9]: Do Broad-based Employee Ownership, Profit Sharing and Stock Options Help the Best Firms Do Even Better?, Blasi et al. They looked at firms in the USA, some of which had what they called ‘shared capitalism’ which includes stock options and other profit sharing practices. The study looks at the relationship of shared capitalism to outcomes like profitability and the likelihood employees will leave. Interestingly enough, they investigate how these things are affected by the combination of ownership and participation:
On the y-axis we have voluntary turnover, which we ideally want to be low. On the x-axis we have a measure of how empowered employees are (using the index of trust, participation, and information sharing constructed by the authors of the study). The red line shows the effect of employee empowerment on voluntary turnover for firms with no shared capitalism. The black line shows the same for firms with a high degree of shared capitalism. For the firms without shared capitalism, greater empowerment has no effect on workers’ likelihood of leaving, as shown by the flatness of the red line. Perhaps this is because workers do not value greater responsibilities without ownership. But for the firms with shared capitalism, greater empowerment is associated with lower voluntary turnover, as shown by the downward slope of the black line. All the while it doesn’t negatively affect the return on equity. In other words, under shared capitalism people are less likely to leave when they are given a bigger role in the firm’s decisions. It seems the combination of ownership through shared capitalism and of control through empowerment produces lower turnover rates than either one on their own. Merely owning stock is not enough; you have to be able to take part in the running of the organization to make the ownership meaningful.
You correctly identify the fact that coops struggle to raise capital for investment, but I think the solutions you suggest are sort of ‘cheating’. It’s true that, if a firm only has to pay workers and suppliers because the government is covering the capital, then it will probably be able to pay those groups more than a traditional firm that has to split its revenue three ways between workers, suppliers and capital. But the traditional firm, if it received similar sized subsidies (e.g. an exemption from payroll and sales taxes) would also pay workers more and lower prices for customers. When deciding on which form of economic organization is superior for the economy as a whole, we cannot fairly compare one which needs external support to one which is self-funding.
They struggle to raise initial investing[27], but after that they actually become more resilient than conventional firms and don’t need “constant government intervention”[15][13]. That’s why I advised to make it easier to turn existing firms into conventional firms, that would remove the initial hurdle. It’s interesting that you chose sales taxes and payroll taxes, both of which are regressive taxes that I would be in favor of abolishing anyway (although I would be okay with a sales tax on things like yachts). Even if the payroll taxes fall on the employer, they can just pass it off to employees in the form of lowerwages. With other taxes (like LVT) you can’t pass it on to the populace. In practice we observe that employers don’t spend more money on wages when they make more profits, but instead invest them in stock buybacks. This makes investors richer while worker wages stagnate, despite workers becoming more productive. This is one of the main reasons inequality is rising.
Finally, I roll to disbelieve on the idea that coops are more productive than traditionally organized firms. There is a reason these coops have over time been out-competed by normal firms, and have become smaller as a percentage of the economy. I haven’t read all the research you referred to, but I think a common problem is the mis-identification of comparison firms. Because traditional profit-orientated firms will re-invest and expand so long as marginal product is positive, their average productivity can look lower than that of firms whose growth has been artificially constrained by the coop structure, even though this growth is in fact a good thing!
They are not outcompeted everywhere. In places where there are already lots of co-ops (like France, Uruguay and Italy) co-ops are very competitive. Capitalist firms do better when there are more capitalist firms around, co-ops do better with more co-ops around.[30] Also, just because a firm is more productive doesn’t mean it’s more competitive in a capitalist system. Capitalists favor capitalist firms (obviously): if a startup co-op can turn $10 of investment into $1000, but will split that $500 with the workers and $500 with investors, while a capitalist startup can turn $10 into $900 that goes purely to the investors, of course the investors will invest in the capitalists startup even though it’s less productive. And yes, the scientific literature does show that co-ops are at least as, if not more productive than capitalist firms.[17][33](this one is a meta-analysis, not just a study) The reason I put similar levels of productivity in my post, is that the increase in productivity, although significant, is small, and I want to make conservative claims.
A practical example of the failure of coops comes from the ACA/Obamacare insurance coops. These received generous funding from the federal government. However, despite the advantages they had over the for-profit (and tax paying) regular insurance companies, they almost all failed within a few years due to incompetence at underwriting. They often had to be rescued by the for-profit firms to prevent leaving people without health insurance.
They are consumer co-ops, not worker co-ops. Different type of co-op.
An employee-owned firm seems to be basically equivalent to a firm that gives employees shares (common) and then indefinitely prevents them from selling them (rare). The latter step seems pretty harmful to the employees; they could always keep the shares if they wanted to, but the ability to sell is quite valuable. It allows them to diversify their portfolio, rather than having their savings and job tied up in the same firm. It also allows them to liquidate the shares to fund a large purchase (e.g. a house) if they wanted to. Given how desirable these things are, I’d be surprised if banning employees from selling their shares was net beneficial to them, and without the restriction the shares they sold would typically be to third party investors, so you would naturally end up with a traditional firm again. Similarly, employees at many public companies could, if they wanted to, buy stock in their employer—e.g. a firm with 10% margins, 20x PE, paying 30% of revenue as wages, could be entirely bought out by the employees in a few years… but wisely they chose not to do so!
You correctly identify the fact that coops struggle to raise capital for investment, but I think the solutions you suggest are sort of ‘cheating’. It’s true that, if a firm only has to pay workers and suppliers because the government is covering the capital, then it will probably be able to pay those groups more than a traditional firm that has to split its revenue three ways between workers, suppliers and capital. But the traditional firm, if it received similar sized subsidies (e.g. an exemption from payroll and sales taxes) would also pay workers more and lower prices for customers. When deciding on which form of economic organization is superior for the economy as a whole, we cannot fairly compare one which needs external support to one which is self-funding.
Finally, I roll to disbelieve on the idea that coops are more productive than traditionally organized firms. There is a reason these coops have over time been out-competed by normal firms, and have become smaller as a percentage of the economy. I haven’t read all the research you referred to, but I think a common problem is the mis-identification of comparison firms. Because traditional profit-orientated firms will re-invest and expand so long as marginal product is positive, their average productivity can look lower than that of firms whose growth has been artificially constrained by the coop structure, even though this growth is in fact a good thing!
A practical example of the failure of coops comes from the ACA/Obamacare insurance coops. These received generous funding from the federal government. However, despite the advantages they had over the for-profit (and tax paying) regular insurance companies, they almost all failed within a few years due to incompetence at underwriting. They often had to be rescued by the for-profit firms to prevent leaving people without health insurance.
While theoretically poor people can buy stocks, in practice we see that it’s mostly rich people having them, co-ops would change that. Some co-ops allow workers to sell their shares, but importantly, none allow them to sell their voting shares. This distinction is important, because a co-op is not “basically equivalent to a firm that gives employees shares and then indefinitely prevents them from selling them”, it gives them shares and control. This control does allow the employees to actually sell non-voting shares if they want to (see table in the post). The difference is that they control the amount of stock in circulation. So a lot of conventional firms give their employees stock, but even if they aren’t pulling contract shenanigans, the owners still control the amount of stock that is sold. They very rarely give their employees preferred stock and they can dilute the value of employee stock at any time without their input. This is impossible in a co-op.
But the control aspect is not only important to protect the workers, it actually makes the firms perform better. Let’s take a look at source [9]: Do Broad-based Employee Ownership, Profit Sharing and Stock Options Help the Best Firms Do Even Better?, Blasi et al. They looked at firms in the USA, some of which had what they called ‘shared capitalism’ which includes stock options and other profit sharing practices. The study looks at the relationship of shared capitalism to outcomes like profitability and the likelihood employees will leave. Interestingly enough, they investigate how these things are affected by the combination of ownership and participation:
On the y-axis we have voluntary turnover, which we ideally want to be low. On the x-axis we have a measure of how empowered employees are (using the index of trust, participation, and information sharing constructed by the authors of the study). The red line shows the effect of employee empowerment on voluntary turnover for firms with no shared capitalism. The black line shows the same for firms with a high degree of shared capitalism. For the firms without shared capitalism, greater empowerment has no effect on workers’ likelihood of leaving, as shown by the flatness of the red line. Perhaps this is because workers do not value greater responsibilities without ownership. But for the firms with shared capitalism, greater empowerment is associated with lower voluntary turnover, as shown by the downward slope of the black line. All the while it doesn’t negatively affect the return on equity. In other words, under shared capitalism people are less likely to leave when they are given a bigger role in the firm’s decisions. It seems the combination of ownership through shared capitalism and of control through empowerment produces lower turnover rates than either one on their own. Merely owning stock is not enough; you have to be able to take part in the running of the organization to make the ownership meaningful.
They struggle to raise initial investing[27], but after that they actually become more resilient than conventional firms and don’t need “constant government intervention”[15][13]. That’s why I advised to make it easier to turn existing firms into conventional firms, that would remove the initial hurdle. It’s interesting that you chose sales taxes and payroll taxes, both of which are regressive taxes that I would be in favor of abolishing anyway (although I would be okay with a sales tax on things like yachts). Even if the payroll taxes fall on the employer, they can just pass it off to employees in the form of lower wages. With other taxes (like LVT) you can’t pass it on to the populace. In practice we observe that employers don’t spend more money on wages when they make more profits, but instead invest them in stock buybacks. This makes investors richer while worker wages stagnate, despite workers becoming more productive. This is one of the main reasons inequality is rising.
They are not outcompeted everywhere. In places where there are already lots of co-ops (like France, Uruguay and Italy) co-ops are very competitive. Capitalist firms do better when there are more capitalist firms around, co-ops do better with more co-ops around.[30] Also, just because a firm is more productive doesn’t mean it’s more competitive in a capitalist system. Capitalists favor capitalist firms (obviously): if a startup co-op can turn $10 of investment into $1000, but will split that $500 with the workers and $500 with investors, while a capitalist startup can turn $10 into $900 that goes purely to the investors, of course the investors will invest in the capitalists startup even though it’s less productive. And yes, the scientific literature does show that co-ops are at least as, if not more productive than capitalist firms.[17][33](this one is a meta-analysis, not just a study) The reason I put similar levels of productivity in my post, is that the increase in productivity, although significant, is small, and I want to make conservative claims.
They are consumer co-ops, not worker co-ops. Different type of co-op.