Worker Cooperatives in the Classroom

"Was John Stuart Mill wrong?" This is the question of an exercise of the e-book The Economy (CORE Project), which I discussed last week with my introudctory economics students in the new degree on History, Politics and Economics at my university. Mill had said that in his times, there were no more worker cooperatives because workers lacked a good enough education, but he added that with the universalization of education, workers would be better prepared and worker cooperatives would expand. However, the puzzle remains today about why in a democratic society with universal education, the working majority have not been able to generalize an economic organization where this majority has the power.

My students had to do some research and they came up with some standard reasons: the combination of scale economies and financial imperfections, the accummulation of risk for worker-owners, the fate of takeovers by conventional forms, incentive problems because of free-riding in team effort, and the improved outside options (as compared to Mill’s times). They also pointed out systemic effects: competition with lower salaries from conventional firms, lack of accompanying institutions…

These problems are compensated by many benefits, otherwise it is hard to understand why there are still so many cooperatives or firms with intermediate forms, like those with worker representatives in relevant boards (like in Germany), or those with participation of workers in the ownership of an otherwise capitalist organization (shared capitalism).

Cooperatives are still more democratic than conventional firms, and in some cases they are more efficient or at least not less. In the knowledge and care economy, where intangibles are more important than in the past, they may increase their relative importance. As Dani Rodrik said, firms with worker participation may be better at internalizing the effects of production in local communities and at creating good jobs in complementarity with place-based policies.

Specific cases, like self managed firms in Yugoslavia, may have ultimately failed not because of self-management being a bad idea, but because of the weight of a single-party system and the lack of outside options.

A student said that a social revolution is necessary to make cooperatives sustainable. That’s perhaps too strong a statement, but he is probably right in that to have an environment more friendly to cooperatives some global changes are necessary.

There IS such thing as society

There is a famous quote by Margaret Thatcher, where she said that “There is no such thing as society.” Although what she exactly said was more nuanced than the literal interpretation that is usually given, the sentence came to symbolize the idea of an atomistic and individualistic human world, where each one should basically care for him or herself. 

The Covid-19 pandemic has shown instead that there IS such thing as society. It is precisely because we live in society for many good reasons (and in contact with non-human animals), that we are vulnerable to diseases. And only through collective action we can defeat the pandemic, that is through a combination of the coercive action of government at all levels and the consent and civic participation of citizens.

John Gowdy has the opposite view of Thatcher, and he argues that we are an ultrasocial species. Like ants and other social insects, according to this scholar the human individual is now subordinated and guided by the blind will and reproductive instincts of the species, to the detriment of free will and happiness.

Whether we are a social or an ultrasocial species, we have at least cooperative instincts, and that is key to understand why we have adapted to most of the Planet, and also why we may be in the course of destroying our own life in it. The expanded role of government that even the liberal magazine The Economist (in its last issue) has come to accept as a necessary fact of life with the pandemic, will if anything consolidate with the need to stop climate change.

Our social instincts have their origins in the hunter-gatherer groups of our ancestors, and have been applied with success in families, nations and other groups. The challenges ahead force us to apply the same instincts to the whole planet. Following Amartya Sen in “Identity and Volence,” it would be the wrong kind of federalism to accept that we live in a federation of pre-defined communites, cultures or religions. We all have multiple identitities, and it is this pluralism (and not a naïve view that we are all the same) that can make us aware that we share some identity dimension with someone with whom perhaps we do not share other dimensions.

We need more socialdemocracy in a multi-ethnic society: we should have the solidarity of Scandinavian countries in communities that are as diverse as the USA. Eventually, and as soon as possible, we should have world solidarity –or face extinction.

Teaching economics as if nothing happened inside the firm?

For many decades, economics textbooks treated firms (and government agencies, and other organizations) as black boxes. It is strange that a person who studies economics in the university can be introduced in microeconomics, and in the discipline in general, without analyzing the relationship between employers and workers, which is, perhaps, the core relationship that defines our economic system. It is as if one wanted to keep youth protected from intellectual and political debates, and the ideologies that have shaken mankind in the last two hundred years. 

All they will see, if they use any of the so far dominant textbooks (until the publication of the CORE’s Project free e-book The Economy) is the same graph of supply and demand in a perfectly competitive market, typical of some consumer goods, applied to the supply and demand of labor. Apart from this graph, in the up to now dominant textbooks, nothing is said about what occurs within the firm between owners or managers, and the workers, nor on the implications that this relationship has for the structure of the whole society. 

However, as Coase and Simon stressed, many, perhaps most, of the relevant trasactions and decisions in an economy take place inside the firm and not in markets. Decisions about working conditions, job allocation, promotions, hiring, outsourcing, plant closing… take place inside the planned economy that is a capitalist firm. The incomplete nature of labor contracts introduces the role of power and authority, something that both Marx and Coase, from different perspectives, emphasized.

The allocation of talent, the internal organizational design and the allocation of effort to different tasks, which happen inside the firm and other organizations, determine not only the opportunities that different individuals have (and hence have distributional implications), but also the efficiency and productivity of the whole economy. 

This is why, if you use the e-book The Economy with your students (as I do), these will be exposed to what happens inside the firm, opening the black box, before they see a supply and demand graph.

Public-private projects and beyond

I gave yesterday a lecture on public-private partnerships at a Master for public servants. I gave them material on the literature about formal and conventional infrastructure public private partnerships from economists and business schools, but we spent most of the time talking about their own experience in the local and regional government with projects that involved both the public and the private sectors. It was easy for the students/public servants to come up with examples of projects with public and private inputs.

It was clear from both the examples and the literature that both the public and private sectors had by their nature strengths, weaknesses and common challenges. We concluded  that we need high capacity governements at all levels and that strong governments are complementary of good public-private projects.

We focused also on problems of cost underestimation of infrastructure projects, renegotiations and corruption (which are interrelated). Some of this is covered in the work of Chilean economists Engel, Galetovic and Fischer, including their 2015 book on PPPs and their more recent article (with Campos) on the Odebrecht case. Bengt Flyvbjerg has a recent very interesting article on the persistent bias of cost-benefit analysis of infrastructure projects to underestimate costs and overestimate benefits. To counter this trend, he proposes to introduce statistical and institutional measures to de-bias estimations, to punish (with jail if necessary) the more scandalous cases of mis-estimation, and to democratize the evalutaion of public projects along the lines of the work of social psychologist Slovic instead of the technocratic cost-benefit analysis promoted by authors such as Sunstein.

We will need more and better public intervention, complementary of civic participation and consent, to face pandemics and the climate emergency. We need to increase the efficiency and productivity of public projects, and mobilize all the resources of society in a transparent and fair way to face these challenges.