With the concept of inequality returning to economic and political discourse, people have been exploring both new and old ideas to deal with this age-old economic dilemma. However, much of the debate is focused on redistribution – Thomas Piketty’s main suggestions were to increases taxes, especially wealth taxes – and as such there has been little discussion of the sources of inequality and how we might solve the problem of inequality at a fundamental level. Worker cooperatives could be one such solution.
To see why worker cooperatives might reduce inequality, at least in theory, one must remind themselves of Marx’s theory of surplus value. Regardless of whether you subscribe yourself to the labour theory of value or subjective theory of value, it’s reasonable to suggest that the amount of value created during production is often a lot greater than the amount those workers actually receive. This ‘surplus value’ is retained by those who own the enterprise, often in the form of profits. There is also a lack of incentive for the workers employed to work any more efficiently than they need to be to remain employed. Although many firms now offer some form of commission or bonus to more productive workers, this still does not represent the total amount of value, nor does it deal with the lack of incentive for others within the business.
Worker cooperatives can potentially resolve this. Worker cooperatives are firms which are owned and managed by their workers, those who have an internal relationship with the firm, unlike investors, customers or the state all of which hold an external relationship with the inner dealings of the firm. As owners of the company, the workers essentially become the shareholders, who are consequentially responsible for the distribution of the surplus value they create. This also resolves the issue concerning individual incentives: in order to receive a higher net-income (wages plus profits), workers are more likely to work more efficiently and in some cases are more likely to develop innovative techniques and technologies using the tacit knowledge they have developed (Smith, 1994).
Worker cooperatives are also inherently democratic. Although larger cooperatives still require management to make decisive decisions, these managers remain democratically accountable to all worker-members of the firm. Market discipline is also present, ensuring that employees don’t give themselves excessive wages via higher prices, or by failing to take often unpopular decisions, such as enabling labour-saving technologies that will otherwise threaten the firm’s competitiveness.
However, there are potential problems. As ownership of the firm is tied entirely to the workforce, the enterprise cannot offer equity in return for investment. As worker cooperatives are thus unable to facilitate investment (e.g. via the stock market), they have to find investment through other channels. Existing worker cooperatives have found numerous ways to address this: the John Lewis Partnership, the UK’s largest employee-owned firm, offered investment bonds to workers and customers in order to facilitate investment (BBC News, 2011). Another example is the Mondragon Corporation in Spain, which established its own financial institution to offer investment capital to new or existing worker cooperatives in its company. If a worker cooperative economy is to develop, it must develop the financial institutions that are not currently in place to facilitate investment.
Although worker cooperatives are no panacea for solving the issue of rising inequality, they could provide an interesting alternative to the many ills of the contemporary capitalist firm. Please see the additional materials below, that highlight other potential benefits and limitations of worker cooperatives that we have not had time to discuss. Next times blog will focus on Islamic Finance, however, in the meantime please post your thoughts on worker-ownership, or perhaps other alternative business models.
BBC News. (2011) John Lewis to offer customers investment bond. Available at: http://www.bbc.co.uk/news/business-12659718
Mayfield, C., Purnell, J. and Davies, W. (2012) ‘Why aren’t there more companies like John Lewis?: The difficulties of breaking the stranglehold of shareholder capitalism’, Public Policy Research, 18:4, pp. 216-221.
Pencavel, J., Pistaferri, L. and Schivardi, F. (2006) ‘Wages, Employment, and Capital in Capitalist and Worker-Owned Firms’, Industrial and Labor Relations Review, 60:1, pp. 23-44.
Smith, S. C. (1994) ‘Innovation and market strategy in Italian industrial cooperatives: Econometric evidence on organizational comparative advantage’, Journal of Economic Behavior and Organisation, 23, pp. 303-320.
Vanek, J. (1970) The General Theory of Labour-Managed Market Economies. London: Cornell University Press.