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Catalyzing worker co-ops & the solidarity economy

Three Questions About the U.S. Worker Co-op Movement

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December 13, 2007
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By John Teta Luhman, University of New England (Dept. of Business Administration)

What an incredible experience! To spend a weekend in New York City attending the first membership meeting of the U.S. Federation of Worker Cooperatives, getting to know people from all around the country and the world while learning about the strength and vibrancy of the worker cooperative movement. As I reflected on my time at the conference, I kept returning to three questions that I heard again and again from participants. First, there was the question, are worker co-ops obliged to be actively a part of a larger social justice movement? Then there was the question, how do worker co-ops grow? And finally the question, if worker co-ops are so great, why aren't there more of them? I would like to address these questions from my own background as a scholar. I believe, as you will see, the answers to the first two questions logically flow from the answer to the third question.

There are many theories as to why there are not more worker coops in the United States (and the world for that matter). I will highlight the prominent ones. Most studies of worker owned cooperatives find coops existing in small niches of professional, craft, or service industries where specialized labor is a premium input.[i] Specialized labor has the so-called problem of â??high metering difficulty,' defined as a high cost of supervising the performance of workers due to the highly artistic, professional, or ambiguous nature of the work.[ii] This problem arises in a variety of situations such as in law firms, independent truckers, refuse scavengers, high-tech firms, and taxi drivers.

Related to this problem is the theoretical belief that self-management leads to inefficiency and the ineffective control of production. Basically, since workers are the ultimate decision-makers, a co-op will lack the discipline and the competitive drive necessary to â??exploit' their own labor. These theoreticians argue against the viability of worker co-ops because they believe it will promote shirking, reduce management power, waste resources, and thus decrease productivity.[iii] More specifically, there are the â??information cost'[iv] and the â??transaction cost'[v] models. Information on the performance of an individual's work effort is a monitoring cost of any business. Monitoring becomes less costly if one person with specialized skills takes on this function at each level in a hierarchy (i.e. a manager). Since worker co-ops share equally, and all employees participate in decisions, there is necessarily a high cost to monitoring caused by lack of effective information on individual performance. Transaction costs, on the other hand, arise when workers purposely try to conceal information about their job performance. This mainly occurs when workers have very specialized skills or when workers gain extensive knowledge in the course of their time in their jobs.

Accordingly, more worker coops do not exist because lenders of capital funds are aware of the concepts described in these two models. If they believe that co-ops do not have the â??proper' structures for organizational control they will be unsure if the value of their investment will be sufficiently protected.

One economist in particular believes that co-ops are endowed with an essential conflict between long time and newer members.[vi] Long time members will tend to focus on debt reduction for the firm prior to their retirement. Newer members will tend to be less concerned with debt reduction. Rather, they will be looking at capital improvements for future income generation. In addition, the long timers will want to be rewarded for all the hard entrepreneurial work they did that provided the new member with a job, whereas the new member will insist on an equal pay system. Also long timers will tend to not support capital investment in projects that extend beyond their tenure with the firm, and so will not look out for the long-term welfare of the firm.[vii]

Other economists propose that workers will under invest in their own coop and thereby limit long-term growth.[viii] There is a high risk of investment in any enterprise that has high transaction costs. These economists believe that workers are more interested in investing what little they have in enterprises of a low risk nature. Rather than re-investing profits back into their own firms, worker-owners will most likely take their shares and invest in other opportunities. Worker co-ops, therefore, unduly suffer from a shortage of capital.

Interestingly, Karl Marx was one of the first to critique the viability of worker co-ops in their attempt to sustain democratic management practices and structures. Marx believed that since coops were subject to the competitive forces of capitalism, they would eventually exhibit the non-democratic characteristics of all conventional businesses.[ix] Beatrice Potter described this reproduction of conventional management practices and structures as â??degeneration.'[x] Worker co-ops would, under the market pressures of economies of scale and organizational rationalization, would eventually depart from their core principles in three manners.

First, in the manner of â??constitutional degeneration' in which some workers eventually lose their property rights as members of the firm. Second, in the manner of â??goal degeneration' where the priority of the firm's members becomes purely profit seeking and all social goals are left behind. Third, in the manner of â??oligarchic or managerial degeneration' where an elite takes control over the members' decision making power. Sharryn Kasmir, in a provocative critique, believes that the famous Mondragon cooperatives have already started this degeneration process in all three manners.[xi]

A final theory as to why there are not more coops in the world is known as the â??cultural inertia theory.'[xii] This theory describes a fundamental social bias against the formation and expansion of worker owned cooperatives through the hegemony of taken-for-granted assumptions within out culture. Essentially, we are socialized in school, in church, in our first jobs, to want to work for others. We willingly accept the notion that workers cannot, or are unwilling to, take on self-management responsibilities. And even if they attempt to do that, their social preferences will eventually cause the degeneration described above. Yet, I personally believe, this hegemony is more than a contemporary cultural phenomenon. One can see from a book such as The Company[xiii] that this fundamental idea of the necessary separation between owners and workers goes back to ancient times. This idea, however, is not a taken-for-granted cultural assumption (in other words an unconscious motive) but a very conscious motive held throughout the ages by those with political and economic power. There is a very strong political antagonism toward anything that contradicts the belief that workers should not be owners.

At this point you may think every economist is opposed to the worker cooperative movement. Although mainstream economists and business scholars are generally opposed, there are many theoreticians who are swimming against this stream. For example, research has been done that compares bottom line performance between conventional firms and worker owned co-ops. The evidence demonstrates that neither type of firm is statistically different in levels of efficiency.[xiv] In fact, the co-op with the highest productivity levels, the longest lives, and which fail to degenerate, are the ones with the most â??cooperative features.' Meaning members within the co-op agree to not hire non-members, promote active participation of the rank and file, and diligently protect the principle of one-member/one-vote.[xv]

There is also research on solutions to many of the disadvantages worker cooperatives face. For instance, the problem of competing interests between long time members and newer members. One suggested solution is to issue shares to new members based on the value of labor's marginal revenue, not based on average earnings.[xvi] Another solution is to require new members to pay competitive entry fees, provided there are mechanisms to assist them (i.e. pay deductions, subsidized loans). Both of these suggestions may encourage job creation by long time members.[xvii]

Now that I have highlighted the many theories as to why there aren't more worker cooperatives in the world, it is time to answer the other two questions. As I said before, the answers to the first two questions logically flow from the answer to the third. First there is the question of growth. Growth in the size of an existing worker co-op, or the development of new worker co-ops, will only occur through the deliberate efforts of co-op members. That sounds like I am stating the obvious, but what the material I highlighted above should point out to you is that the cards will always be stack against the worker co-op movement. Until there is a critical mass of worker cooperatives here, and elsewhere, we will always be on our own. So we must do a lot, lot more of what some of us have been doing in regards to creating â??spin-offs' as a core principle.

For example, look to the success of the Cheese Board Collective's replication program through its Arizmendi Cooperative. And understand that growth means more than just getting larger is size and operations, it can also mean diversifying your line of products and services or growing up and down your supply chain. One area in which the fresh energies of conference members might focus on is the creation of a national credit union for all worker cooperatives based on Mondragon's Caja Lobaral Popular (or Working People's Bank). As Roy Morrison puts it, "if Mondragon has succeeded in beginning to tame and limit the abuses of the market, the cage within which the beast has been controlled"[xviii] is the CLP - a necessary tool for any large-scale attempt at cooperative growth and development.

Second there is the question of political activism. Political activism is a necessary requirement for the long-term survival of the worker coop movement. Whether it is done on an individual basis or done as a co-op-wide effort, the success of the world co-op movement requires a continuous and concerted attack against the politically entrenched idea that the separation between ownership and workers has no viable alternative. But before we rush ahead, we should take time to learn and reflect on the many histories of workers uniting their economic and political interests. Take a look at, say, the history of the Spanish Civil War when, after years of consciousness raising and political activism, the â??anarcho-syndicalist' movement took over and re-organized factory and community life on principles of personal freedom, local autonomy, and regional cooperation.[xix] Or look at the U.S. history of utopian communities and small-scale collectives as well as the earlier attempts at a national cooperative movement.[xx]

Having written this essay based on answering three questions, I think it appropriate to end with a final question: what should be the priorities for the immediate future? As I stated above, we might focus on dealing with the chronic shortage of funds for coop development and expansion by beginning in earnest to organize a national cooperative credit union. The history of worker coops shows us that there is no better tool for success.

The conference might also look at supporting growth by creating a low-cost system of technical and managerial assistance for all members. However, I believe that the highest priority should be in the area of creating awareness of worker coops. We need a large-scale social marketing campaign. Something in the order of the public health initiatives we've seen over the past few decades. We also need a high quality documentary of U.S. co-ops. In teaching my business students about worker ownership I am left with either a 1986 film, "The Mondragon Experiment," made by the BBC, or a 2004 film, "The Take," which takes place in Argentina. Although both documentaries are great, they really don't excite the general public. In fact, they may even be seen simply as foreign experiments that wouldn't work in our own culture. We need something that shows the history, the vibrancy, and the viability of worker ownership in the United States.

Whichever priorities members choose to focus on, they will make for a lot of work for all of us. But thanks to the USFWC, we are together, we are organized, and most importantly, we are energized!


[i] Dow, G. K. (1993). Why capital hires labor: A bargaining perspective. American Economic Review, 83 (1), 118-134.

[ii] Russell, R. (1993). Organizational theories of the labor-managed firm: Arguments and evidence. Research in the Sociology of Organizations, 2, 1-32.

[iii] Alchian, A. A. & Demsetz, H. (1972). Production, information costs, and economic organization. American Economic Review, 62, 777-795.

Jensen, M. C. & Meckling, W. H. (1979). Rights and production functions: An application to labor managed firms and codetermination. Journal of Business, 52 (4), 469-506.

[iv] Alchian, A. A. & Demsetz, H. (1972). Production, information costs, and economic organization. American Economic Review, 62, 777-795.

[v] Williamson, O. E. (1975). Markets and hierarchies: Analysis and antitrust implications, New York, NY: Free Press.

Williamson, O. E. (1981). The economics of organization: The transaction cost approach. American Journal of Sociology, 87, 548-577.

Williamson, O. E. (1985). The economic institutions of capitalism, New York, NY: Free Press.

[vi] Meade, J. E. (1972). The theory of labour managed firms and of profit sharing. Economic Journal, 82, 402 428.

Meade, J. E. (1980). Labour, co operatives, participation, and value added sharing. In A. Clayre (Ed.), The political economy of co operation and participation, (pp. 89 108). Oxford, UK: Oxford University Press.

[vii] Ellerman, D. P. (1986). Horizon problems and property rights in labor managed firms. Journal of Comparative Economics, 10, 62 78.

[viii] Furubotn, E. (1976). The long-run analysis of the labor-managed firm: An alternative interpretation. American Economic Review, 66, 104-123.

Jensen, M. C. & Meckling, W. H. (1979). Rights and production functions: An application to labor managed firms and codetermination. Journal of Business, 52 (4), 469-506.

[ix] Cornforth, C., Thomas, A., Lewis, J. & Spear, R. (1988). Developing successful worker co operatives. London, UK: Sage Publications.

[x] Potter, B. (1891). The co-operative movement in Great Britain, London, UK: George Allen & Unwin Ltd.

Webb, S. & Webb, B. (1914). Special supplement on co operative production and profit sharing. The new statesman, 2 (45), 1 31.

[xi] Kasmir, S. (1996). The myth of Mondragon: Cooperatives, politics, and working-class life in a Basque town. Albany, NY: State University of New York Press.

[xii] Doucouliagos, C. (1990). Why capitalist firms outnumber labor managed firms. Review of Radical Political Economics, 22 (4), 44 67.

Doucouliagos, C. (1995). Institutional bias, risk, and workers' risk aversion. Journal of Economic Issues, 29, 1097-1118.

Doucouliagos, C. (1996). Conformity, replication of design and business niches. Journal of Economic Behavior and Organization, 30, 45 62.

[xiii] Micklethwait, J. & Wooldridge, A. (2005). The company: A short history of a revolutionary idea, New York, NY: The Modern Library.

[xiv] Jones, D. C. (1986). Participation in worker co operatives in Poland. In R. N. Stern & S. McCarthy (Eds.), International yearbook of organizational democracy, vol. 3: The organizational practice of democracy, (pp. 431 451). New York, NY: John Wiley & Sons, Ltd.

[xv] Jones, D. C. (1986). Participation in worker co operatives in Poland. In R. N. Stern & S. McCarthy (Eds.), International yearbook of organizational democracy, vol. 3: The organizational practice of democracy, (pp. 431 451). New York, NY: John Wiley & Sons, Ltd.

[xvi] Nuti, D. M. (1992). On traditional cooperatives and James Meade's labor capital discriminating partnerships. Advances in the Economic Analysis of Participatory and Labor Managed Firms, 4, 1 26.

[xvii] Dow, G. K. (1993). Why capital hires labor: A bargaining perspective. American Economic Review, 83 (1), 118-134.

[xviii] Morrison, R. (1991). We build the road as we travel. Philadelphia, PA: New Society Publishers.

[xix] Bookchin, M. (1994). To remember Spain: The anarchist and syndicalist revolution of 1936. San Francisco, CA: AK Press.

Bookchin, M. (1998). The Spanish anarchists: The heroic years 1868-1936. San Francisco, CA: AK Press.

GuÄ?rin, D. (1970). Anarchism: From theory to practice (translated by M. Klopper). New York, NY: Monthly Review Press.

[xx] Curl, J. (1980). History of work cooperation in America: Cooperatives, cooperative movements, collectivity and communalism from early America to the present. Berkeley, CA: Homeward Press.

Gunn, C. E. (1984). Workers' self management in the United States. Ithaca, NY: Cornell University Press.




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