Let’s say you have a 10 person workers’ co-op which shares income equally. Each person now gets paid 1/10th the firm’s profit. Thanks to diminishing marginal returns, if you add an 11th worker who is otherwise identical, they will contribute gross revenue/have a marginal product of labor that is less than the previous added worker’s. When you divide the income by 11, everyone will make less.
This is a well-known problem in the econ lit. Of course, in real life, workers are not homogenous, but the point remains that in general you get diminishing returns by adding workers.
This might be a dumb question, but wouldn’t this theory imply that smaller companies are on average more efficient than larger companies (holding worker quality constant)? And isn’t the very existence of pretty large companies some degree of evidence against this?
The point he is making is about worker cooperatives, rather than firms in general. A widely recognised problem with worker cooperatives is that there are disincentives to scale because adding more workers is a cost to the existing coop owners. So, the point doesn’t apply to privately owned companies because adding workers do not get a share of the business
As presented, the efficiency claims seem to be agnostic about firm structure, while the worker coop-specific parts are about credit/profit allocation. (As usual, I could of course be misreading)
Yeah, I think this is an important point to make: There are lots of instances where adding more workers allows specialization. When it comes to literally an entire economy, though, things can get weird/complicated—which is why I think there are much better ways to explain why welfare-heavy states and open borders don’t mix well than by appealing to diminishing marginal returns to labor.
This might be a dumb question, but wouldn’t this theory imply that smaller companies are on average more efficient than larger companies (holding worker quality constant)? And isn’t the very existence of pretty large companies some degree of evidence against this?
The point he is making is about worker cooperatives, rather than firms in general. A widely recognised problem with worker cooperatives is that there are disincentives to scale because adding more workers is a cost to the existing coop owners. So, the point doesn’t apply to privately owned companies because adding workers do not get a share of the business
As presented, the efficiency claims seem to be agnostic about firm structure, while the worker coop-specific parts are about credit/profit allocation. (As usual, I could of course be misreading)
Yeah, I think this is an important point to make: There are lots of instances where adding more workers allows specialization. When it comes to literally an entire economy, though, things can get weird/complicated—which is why I think there are much better ways to explain why welfare-heavy states and open borders don’t mix well than by appealing to diminishing marginal returns to labor.