Effectiveness of worker cooperatives

A popular concept today is the concept of worker cooperatives or cooperatives. These are often raised in discussions of worker mistreatment and, increasingly, of C-suite executives profiting at the expense of the working class. Proponents believe that worker co-ops serve as a way to put power back into the hands of the working class and, as a result, workers will be better off. Worker co-ops currently exist in the American economy, but are rare.

What are worker cooperatives, and how do they differ from a normal company?

In this Part a worker co-op shall be defined as a business that is owned and operated entirely by workers; There is no hierarchy within any part of the company, all decisions are made collectively and profits are distributed equally to every worker.

There may be other variations of worker cooperatives that people support, but since this is the system I hear most often advocated, I will focus on it for the purposes of this piece.

Owners of a standard company hold shares in the company, which fluctuate based on its assets and profits. If the company does well, the value of the owners’ shares will increase, but if the company suffers serious losses, the owners’ shares will decrease significantly. Shareholders are able to sell shares at any time, paying them liquid. In contrast, workers at a standard company receive a cyclical W-2 income, regardless of the company’s well-being, assuming employment is maintained.

In a worker cooperative setting, workers take on the additional role of owning the company, thus entitling them to hold shares. This means they are now dealing with a level of uncertainty in their pay that they would not face in a standard business. While it is easy to say that it is attractive to be a part of the decision-making process and to be given an equal share of the profits, we should ask whether this added uncertainty is worth those benefits.

Do workers really want to be part of a cooperative?

In my experience, and that of many of my peers, we were often advised to go to college so that we could enjoy a stable future with a consistent and steady income. Whether that’s reality is another discussion, but it’s what was pushed by adults throughout K-12 education. For this reason, careers in medicine, law and IT will always be sought after, as these industries will continue to need workers in the coming years, regardless of trends and the health of the economy. These are industries where one knows if they work hard, they will be compensated not only well, but in a consistent and stable fashion. In my view, most people want a job where they get a steady paycheck so they can always provide for their family and themselves at any time. Of course, there are always exceptions to every generalization, and thus we are left with many risk takers who want to be the productive entrepreneurs that drive our economy. But time to consider 20% of businesses fail in their first two years, 45% during first five and 65% during first tenMany people who want to continuously provide food and shelter for their families, will be uncomfortable knowing that their only source of income could quickly disappear if their business ordeal fails, which is obviously quite likely.

Given this situation, it may be rational for an individual to forego such uncertain payments for a stable income, even with the additional capabilities that an individual may acquire during their working life.

That being said, even if the assumptions I make are disputable, or one manages to convince the majority of workers to participate in worker cooperatives, worker cooperatives still cannot function as an efficient way of doing business.

Lack of an entrepreneur inherently sets co-ops back

In a worker cooperative, all workers take on the role of business owners and essentially become entrepreneurs. While this may seem empowering, it doesn’t come in handy when getting into the nitty-gritty. It may be that a hierarchical structure is needed to allow for the unique role of the entrepreneur.

First, an entrepreneur has a good or service that they believe others want, and thus wants to provide for them at a reasonable price. That person has very little time, so if they want to produce enough for many people to be able to purchase the good/service, they must employ the labor of another person.

Now the question arises, how will they give fair compensation to those who are selling their labor to the entrepreneur at hand?

As explained above, most workers desire some kind of steady income as opposed to an uncertain wage that fluctuates with the company’s success. But how can an entrepreneur pay fixed wages to numerous workers, when they themselves are not sure what they will earn? Frank Knight answered it best: “With human nature as we know it[,] It would be impractical or very unusual for one person to guarantee the specific results of another person’s actions without giving them the power to direct their actions.”

In essence, if the entrepreneur wants to ensure the worker’s wage (the result of the worker’s work) given the uncertainty surrounding profit, the trade-off is that the entrepreneur must be able to set the terms of what the worker should do, and how much they are compensated. For this reason, the worker whose services were procured cannot be treated as an entrepreneur. In a system where all workers are treated as equals, there is a lack of hierarchy and all profits are shared; Essentially, there is no place for the individual entrepreneur.

While the motives behind improving a worker’s influence in a company may be in good faith, worker cooperatives are not an optimal or effective way to do this. To truly improve working conditions, we must allow markets to be unfettered, and competition to reign so that companies can attract workers to offer their best products.

Siddhartha Not a hooligan Economics and Mathematics major at Binghamton University. His research interests are around financial theory and asset bubbles, expenditure restraint and public choice theory. In his spare time, he maintains a monthly blog on substacks titled “Macroscope – The Bigger Picture”.

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