Leviathan and Worker Coops

[krazy_kaju]

Reasons why syndicalism is not a rational way to organize economic behavior:

1. Not all workers are willing to take on the risk of entrepreneurs. Entrepreneurs take on risk, and in return for labor, they provide their workers with a relatively risk-free wage/salary.

2. Entrepreneurs seek to satisfy consumers, which benefits everyone in the long run; worker coops might seek to satisfy workers at the expense of consumers, which hurts everyone in the long run. Whereas a profit-driven entrepreneur would not resist new technology or capital that displaces the need for workers, a worker coop might resist such new development because some of the workers might not like it. This ultimately reduces production and profitability and might be one reason why worker coops are not popular in most of the world (since they all drive themselves bankrupt based on worker whims).

3. An expansion on the above is that entrepreneurs could be more forward looking than worker coops. After all, an entrepreneur might own a business for life, whereas a worker might only be only working at a given coop temporarily. The entrepreneur has an incentive to keep his firm profitable in the long term - that means the entrepreneur has an incentive to obey the laws, respect private property rights, and make continual investments in order to expand the profitability of the firm. The worker, on the other hand, might prefer to extort the firm for high wages at the expense of investment, only to move on to another job when the firm finally flounders. In other words, entrepreneurs are more likely to have low time preferences whereas the workers are more likely to have high time preferences when it comes to their place of employment.

4. Sometimes, ownership by a single individual makes the most sense. It doesn’t make sense to organize many small businesses as worker coops. After all, they might employ only a few workers part-time, whereas the majority of the work is done by the owner/entrepreneur.

5. Sometimes, a corporate entity is most efficient. This is because issuing stock can be a very good method for financing business activities. Worker coops would lose this option for business financing.

All quotes culled from this thread (have any good sources on cooperatives? - #6 by Leviathan) and this post (Best arguments for socialism - #55 by Leviathan).

@Leviathan

If you’re referring to information about the labor cooperative being a more efficient/productive form of organization than the orthodox hierarchical capitalist firm, consistent with the fact that some degree of horizontal management is necessary to yield Pareto optimality and the centralized firm is subject to the same distributed and tacit knowledge problems that Hayek identified, the empirical literature on the topic virtually provides a consensus…

If worker coops were as efficient as you claim, then they would be a more popular form of economic organization.

@Leviathan

Cohen and Burczak’s Socialism After Hayek are both excellent choices. What’s ironic is that as Burczak in particular illustrates, the Austrian critique of central planning has been turned on its head in the case of the labor cooperative. The orthodox capitalist firm is rigidly hierarchical, meaning that there will be impediments to the acquisition and transmission of distributed knowledge and tacit knowledge.

You’re simply highlighting the benefits of worker coops without looking at the costs, which I outlined above. Ultimately, individuals force a trade-off between costs and benefits. The costs associated with worker coops (less innovation, less risk taking, less efficient forms of business financing, incentives for workers to pillage a firm) most likely outweigh the light benefits you provide here.

@Leviathan

The far more horizontal structure of the labor cooperative largely minimizes this problem, and eliminates principal-agent problems caused by asymmetric information by unifying ownership and management. Since workers are both owners and managers, there is no longer a divergence of interests between the two.

Both of these problems are also eliminated by businesses owned by individuals, families, and partners.

@Leviathan

Let’s consider the typical rightist claim that voluntary workers’ ownership and enterprise would be introduced by market forces if it were truly a more productive form of organization. Although workers’ ownership and management has an empirically proven record of greater efficiency than the orthodox capitalist firm, it won’t spontaneously emerge as the dominant form of firm organization. Many anti-socialists are confused as to why that is, insisting that markets would be forced to introduce something if it was more efficient, since anyone could simply gain a competitive edge by using it. This is an indication of their economic utopianism and failure to consider the all-important factor of market concentration. True libertarians understand the unjust, restrictive nature of such conditions. For example, the point is well illustrated in a letter of libertarian social theorist John Stuart Mill that attacked established sellers that created an unfair barrier to firm entry through underselling

First of all, if your claim of market concentration is true, then worker self-management would be introduced to the market regardless. After all, if worker self-management is as profitable as you claim, then corporations, partnerships, and individually owned businesses would all be instituting worker self-management in order to reap the benefits from such a program. Since they aren’t, it shows that there are several problems with such a method of economic organization and that the costs associated with these problems probably outweigh the benefits.

Secondly, your claim of market concentration is (empirically) not true. The majority of businesses in the United States are small businesses.

Thirdly, your claim of market concentration and underselling is logically fallacious. Basically, you’re saying that “competition begets monopoly” or “oligopoly.” That’s a contradiction - how can competition between many produce a monopoly or some kind of oligopoly? The fact of the matter is that the market works the other way around - usually, one entrepreneur starts by providing a new product to the market, and that entrepreneur has a monopoly. When that product proves profitable, other entrepreneurs enter the market, no matter how large economies of scale the original entrepreneur has and no matter how hard he tries to “undersell” them. Though there might be firms with large shares of market power, these firms will always be subject to consumer demand. If they increase prices or lower quality, consumers will simply go elsewhere, driving the “monopolistic” firm out of business.

Fourth, the site you use as evidence for your claim of worker coop superiority is nothing but an excerpt of a paper that looks over several studies. At best, what it provides is evidence that worker coops that already succeed in the market are better than their competitors. But that doesn’t convey any new information to us at all, since those worker coops were successful on a (relatively) free market, which simply provides us with more evidence that markets will choose the most efficient form of economic organization. At worst, the excerpt of the paper that you provided proves absolutely nothing and is nothing but an intellectual sham. We cannot know either way, since it is only an excerpt and not an actual paper that we can look over.

@Leviathan

That illustrates market socialist economic theorist Jaroslav Vanek’s point that "[t]he capitalist economy is not a true market economy because in western capitalism, as in Soviet state capitalism, there is a tendency towards monopoly.

This monopoly fallacy is ancient and has been refuted many times over. The history of capitalism has been a history of overcoming monopolies and increasing competition through the creative genius of entrepreneurs.

Economic democracy tends toward a competitive market."

Translation: we need to restrict competition from other forms of economic organization in order to enforce syndicalism in the name of “competition.”

The consolidation of the private ownership of the means of production by the financial class prevents fair market competition and maximization of efficiency.

What consolodiation of ownership by what financial class? As I’ve already shown, the majority of businesses are small businesses that are sole propietorships with less than 500 employees. That doesn’t sound like some financial elite to me.

[krazy_kaju]

Mises on Syndicalism in Human Action:

The root of the syndicalist idea is to be seen in the belief that entrepreneurs and capitalists are irresponsible autocrats who are free to conduct their affairs arbitrarily. Such a dictatorship must not be tolerated. The liberal movement, which has substituted representative government for the despotism of hereditary kings and aristocrats, must crown its achievements by substituting “industrial democracy” for the tyranny of hereditary capitalists and entrepreneurs. The economic revolution must bring to a climax the liberation of the people which the political revolution has inaugurated.

The fundamental error of this argument is obvious. The entrepreneurs and capitalists are not irresponsible autocrats. They are unconditionally subject to the sovereignty of the consumers. The market is a consumers’ democracy. The syndicalists want to transform it into a producers’ democracy. This idea is fallacious, for the sole end and purpose of production is consumption.

What the syndicalist considers the most serious defect of the capitalist system and disparages as the brutality and callousness of autocratic profit-seekers is precisely the outcome of the supremacy of the consumers. Under the competitive conditions of the unhampered market economy the entrepreneurs are forced to improve technological methods of production without regard to the vested interests of the workers. The employer is forced never to pay workers more than [p. 814] corresponds to the consumers’ appraisal of their achievements. If an employee asks for a raise because his wife has borne him a new baby and the employer refuses on the ground that the enfant does not contribute to the factory’s effort, the employer acts as the mandatary of the consumers. These consumers are not prepared to pay more for any commodity merely because the worker has a large family. The naivete of the syndicalists manifests itself in the fact that they would never concede to those producing the articles which they themselves are using the same privileges which they claim for themselves.

The syndicalist principle requires that the shares of every corporation should be taken away from “absentee ownership” and be equally distributed among the employees; payment of interest and principal of debts is to be discontinued. “Management” will then be placed in the hands of a board elected by the workers who are now also the shareholders. This mode of confiscation and redistribution will not bring about equality within the nation or the world. It would give more to the employees of those enterprises in which the quota of capital invested per worker is greater and less to those in which it is smaller.

It is a characteristic fact that the syndicalists in dealing with these issues always refer to management and never mention entrepreneurial activities. As the average subordinate employee sees things, all that is to be done in the conduct of business is to accomplish those ancillary tasks which are entrusted to the managerial hierarchy within the frame of the entrepreneurial plans. In his eyes the individual plant or workshop as it exists and operates today is a permanent establishment. It will never change. It will always turn out the same products. He ignores completely the fact that conditions are in a ceaseless flux, and that the industrial structure must be daily adjusted to the solution of new problems. His world view is stationary. It does not allow for new branches of business, new products, and new and better methods for manufacturing the old products. Thus the syndicalist ignores the essential problems of entrepreneurship: providing the capital for new industries and the expansion of already existing industries, restricting outfits for the products of which demand drops, technological improvement. It is not unfair to call syndicalism the economic philosophy of short-sighted people, of those adamant conservatives who look askance upon any innovation and are so blinded by envy that they call down curses upon those who provide them with more, better, and cheaper products. They are like patients who grudge the doctor his success in curing them of a malady. [p. 815]

[pklein]

“You’re simply highlighting the benefits of worker coops without looking at the costs.” Yes, this is exactly the point I’ve made in my exchanges with Roderick Long:

http://organizationsandmarkets.com/2008/12/01/government-and-the-corporation/

[Esuric]

Nice. Bump

[Zeddicus]

@krazy kaju

What consolodiation of ownership by what financial class? As I’ve already shown, the majority of businesses are small businesses that are sole propietorships with less than 500 employees. That doesn’t sound like some financial elite to me.

And worker coops have actually shown to be a pretty efficient way of running small business.

Every family business is essentially a worker coop.

Also syndicalists like consumer coops too I think. To which several of these problems don’t apply, even in a large corporation.

[Stranger]

@krazy kaju

The consolidation of the private ownership of the means of production by the financial class prevents fair market competition and maximization of efficiency.

What consolodiation of ownership by what financial class? As I’ve already shown, the majority of businesses are small businesses that are sole propietorships with less than 500 employees. That doesn’t sound like some financial elite to me.

Actually that’s kind of a good point. Fractional reserve inflation allows banks to purchase proportionately more of the capital of the economy and earn rents on this capital. If the debtor is unable to pay the rent, then the bank simply forecloses on the asset.

The end-game of this process are a few financial pirates taking over every single enterprise and ruining it.

[Jon_Irenicus]

BTW in spite of all this meandering about “concentration” and “democracy” &c. in the end, many of the larger firms are publicly traded with widely dispersed ownership to begin with… now, modern corporations deviate heavily from free market capitalism in many ways, but some criticisms of them are just downright idiotic.

3. An expansion on the above is that entrepreneurs could be more forward looking than worker coops. After all, an entrepreneur might own a business for life, whereas a worker might only be only working at a given coop temporarily. The entrepreneur has an incentive to keep his firm profitable in the long term - that means the entrepreneur has an incentive to obey the laws, respect private property rights, and make continual investments in order to expand the profitability of the firm.

Meaning the agent-principle problem is exacerbated. Some ‘workers’ might have more long-term views, and thus will end up playing the role the capitalist does today, others less so. CEOs themselves are in the end ‘workers’ who exhibit exactly the outlined tendency to deviate from the firm’s best interests due to more short-term concerns.