The Efficacy of Worker Cooperatives
A popular idea today is the concept of worker cooperatives, or co-ops. These are often brought up in discussions regarding mistreatment of workers, and increasingly, c-suite executives allegedly profiting at the expense of the working class. Proponents posit that worker co-ops serve as a means of putting power back into the hands of the working class, and as a result, workers will be made better off. Worker co-ops do currently exist in the American economy, but are rare to come by.
What are worker cooperatives, and how do they differ from a typical company?
In this piece a worker co-op will be defined as a business that is owned and run entirely by workers; there is no hierarchy among anyone part of the company, all decisions are made collectively, and profits are evenly distributed to each and every worker.
There may be other variations of worker co-ops that people support, but since this is the system I have most often heard advocated, I will focus on this for the purposes of this piece.
Owners of a standard company maintain shares of said company, which fluctuate based on its assets and profits. If the company does well, the owners’ shares will appreciate in value, but if the company were to undergo severe losses, the owners’ shares would significantly depreciate. Shareholders are able to sell shares at any point, providing them with liquid money. On the contrary, laborers in a standard company receive a cyclical W-2 income, regardless of the well-being of the company, assuming employment is maintained.
In the setting of a worker cooperative, laborers take on the added role of being an owner of the company, thus entitling them to holding shares. This now means they are dealing with a level of uncertainty in their pay that they would not have faced in a standard business. While it’s easy to say that being a part of the decision making process and being granted an equal share of profits is attractive, we should ask whether this added uncertainty is worth those benefits.
Would workers really want to be part of a cooperative?
In my experience, and many of my peers, we were often advised to go to college so that we could enjoy a stable future with consistent and steady income. Whether that’s the reality or not is another discussion, but this is what was pushed by adults throughout K-12 education. For this reason, careers in medicine, law, and IT will always be sought after, as such industries will continue to need workers in years to come, 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, the vast majority of individuals desire a job where they receive a steady paycheck so that they are always able to provide for their families and themselves at any time. Of course, there are always exceptions to every generalization, and thus we are left with many risk-takers that wish to be the fruitful entrepreneurs that drive our economy. But when considering that roughly 20% of businesses fail during their two years, 45% during the first five, and 65% during the first ten, many people that would like to steadily provide food and shelter for their families, would feel uneasy knowing that their only source of income may quickly disappear if their business ordeal fails, which is clearly quite likely.
Given these circumstances, it may be rational for an individual to forgo such uncertain forms of payment for a stable income, even in spite of the added power one may receive over their work life.
All that being said, even if the assumptions I laid are disputed, or someone were able to convince most workers to support partaking in a worker cooperative, worker cooperatives still may not serve as an efficient means of doing business.
The lack of an entrepreneur inherently sets back co-ops
In a worker cooperative, all workers take on the role of being owners of the business, and essentially become entrepreneurs. Although this may sound empowering, this is not effective when getting into the nitty-gritty. It may be that a hierarchical structure is needed to allow the entrepreneur’s unique role.
First, an entrepreneur has a good or service that they believe others desire, and thus would like to provide it for them, at a reasonable price. The time of that individual is scarce, so if they would like to produce enough for many people to be able to purchase the good/service, they must utilize the labor of other individuals.
Now the question arises of how they are to fairly compensate those who are selling their labor to the entrepreneur at hand.
As explained above, most workers desire some sort of steady income, as opposed to an uncertain wage fluctuating with the success of the company. But how can an entrepreneur pay a steady wage to numerous workers, when they themselves are unsure of the profits they will be making? Frank Knight answers this best: “with human nature as we know it[,] it would be impracticable to or very unusual for one man to guarantee to another a definite result of the latter’s actions without being given power to direct his work.”
In essence, if the entrepreneur is to guarantee the laborer’s wage (the result of the laborer’s actions) considering the uncertainty surrounding profits, then the trade-off is that the entrepreneur must be able to dictate the terms of what the laborer ought to do, and how much they are compensated. For this reason, the laborer whose service was purchased cannot be treated the same as that of the entrepreneur. In a system where all workers are meant to be equal, hierarchy is lacking, and all profits are shared; there is no room for the necessary, distinct entrepreneur.
While the intentions behind improving a worker’s influence in a company may be in good faith, worker cooperatives are not a favorable nor effective means of doing so. In order to truly enhance working conditions, we must allow markets to be unhampered, and competition to reign so that companies must attract workers in order to put out their best product.
Siddharth Gundapaneni is an Economics and Math major at Binghamton University. His research interests lie around monetary theory & asset bubbles, spending restraint, and Public Choice Theory. In his free time, he maintains a monthly blog on substack titled “Macroscope – The Bigger Picture.”