The Lega Cooperatives

Italy has the largest number of workers' cooperatives in the Western world, and the largest fraction of the workforce employed by such firms. Ammirato (1996: 319) reports that in 1989 there were 10,445 workers' cooperatives affiliated with one of four national federations, along with many others not so affiliated. This is likely to be an underestimate because cooperatives in the agricultural, housing, transport, and fishing sectors have been excluded along with so-called “mixed” coops. But data on the Italian coops are notoriously bad (Oakeshott, 1978; Zevi, 1982; Earle, 1986: 63–66), with Earle remarking that nobody really knows “how many co-ops are genuine and operative, and how many are dormant, embryonic, phantasmal or bogus” (1986: 203). For example, entirely conventional firms have sometimes registered as cooperatives in order to gain access to public subsidies. All numerical estimates must therefore be taken with a generous serving of salt.

By contrast with the plywood cooperatives and Mondragon, which developed with little state involvement, the Italian cooperative movement was heavily politicized from the outset, and has enjoyed tax advantages as well as preferential access to public land and contracts, job creation programs, loans and grants, and the financial expertise of public banking and research institutions. The national federations provide member cooperatives with more support than the plywood coops ever derived from their industry association, but have less formal authority than the central agencies of the Mondragon group.

The Symmetry Principle

This chapter has two broad objectives. First, I develop a pair of heuristic tools, the symmetry and replication principles, which are helpful in probing hypotheses about LMFs. The rest of the chapter surveys strategies that could be used to explain the facts about LMFs. These include theoretical frameworks that rely primarily on efficiency concepts (transaction-cost economics, contract theory) and others that assume optimizing behavior but leave more room for inefficiency (adverse selection, repeated games). I also consider two approaches not derived from microeconomic theory, those invoking history and culture. My goal is not to evaluate the empirical merits of any theory, but to present a theoretical menu from which choices can later be made.

A useful source of intellectual discipline in generating explanations for the rarity of workers' control runs as follows. If there were competitive markets for all relevant goods and services, firms would not exist in a meaningful sense because all production activities could be coordinated through market contracting rather than authority. In this environment, each agent would maximize the profit obtained by transactions in input and output markets because each would want to have the maximum possible income available for consumption purposes. There would be no debate about control rights or the objectives of firms.

Economic Systems

People care about the organization of firms. Their concerns include alienation in the workplace and participation in decision-making, wage and job security, the risks associated with employee stock ownership and profit-sharing, and a host of other matters. Alienated workers are unlikely to contribute their best efforts to the success of the firm. Employees may wonder whether the information they reveal now will be used against them later, or whether authority delegated today will be revoked tomorrow. Information technology may make worker knowledge the most important input to the production process, but workers who fear downsizing may be reluctant to invest in skills that would only be valuable at their current job. Globalization expands export markets but simultaneously poses risks to wages and jobs. Employee stock ownership is often claimed to increase productivity, but employees may well hesitate to place their life savings in the hands of their own employer.

Many of these dilemmas would be mitigated or eliminated if workers had ultimate control over the firms to which they supply their labor. Presumably if workers ran their own firms they would feel less alienated; they would willingly disclose information that might improve efficiency; they would be less worried about layoffs, downsizings, or plant closures; and they would closely monitor how their savings were used by the firm. Why not, then, adopt an economic system in which workers rather than investors hold ultimate authority within firms? Why not implement a system of workers' control?

Capital Constraints

Workers who want to create a labor-managed firm will usually find that inputs must be acquired today, while output and hence revenue will not arrive until tomorrow. There are several potential solutions. First, workers might attempt to match revenue flows against expenditure flows by leasing assets. But leasing is not always practical, as was discussed in Sections 8.2–8.4, and it is hard to avoid the need for working capital. Second, workers might use their personal savings and those of family members or friends to finance jointly owned assets or other upfront costs. Poor workers, however, may not have the resources needed for this. Third, they might finance a firm by borrowing from banks, suppliers, or customers, or by selling equity claims to outside investors.

Many writers have argued that limited worker wealth combined with credit rationing is the key barrier to LMF creation. For example, Drèze asserts that “funding difficulties are the main reason why labor-managed firms are not spreading within capitalist economies,” and adds, “labor-managed firms will spread more easily in sectors where capital investment per worker is not high” (1993: 261–62). A number of authors blend an emphasis on capital constraints with arguments about the cost to workers of making undiversified investments in their own firms (Bowles and Gintis, 1990, 1993b, b, 1994, 1996b; Putterman, 1993). I consider portfolio diversification separately in Sections 9.5–9.6, but for the moment it will be simpler to assume that all parties are risk neutral.

The Causal Tapestry

The time has now come to gather up the threads from the last few chapters and weave an answer to the question, “Why is workers' control so rare?” As explained in Section 6.1, the challenge is to identify a physical or institutional asymmetry between labor and capital that accounts for actual asymmetries in the control rights held by the suppliers of these inputs. I will argue that the symmetry between capital and labor is broken by the fact that capital is alienable, while labor is not.

Ownership rights over productive non-human assets, ranging from agricultural land and office space to machines and computer software, are easily transferred from one person or group to another. The same is true for financial wealth including cash, bonds, or claims on the net incomes of firms. The bundle of ownership rights in this context is the standard one: the right to decide how an asset will be used, the right to derive income from its use, and, crucially, the right to transfer the first two rights to other people. Nothing rules out the collective ownership of non-human assets provided that there is a well-defined collective choice procedure through which the owners exercise the rights just described.

The capacity of a person to supply labor services, together with that person's skills, talents, experiences, and other aspects of human capital, cannot be transferred to another person because these attributes are integral to personhood itself.

Most large enterprises in the developed world are controlled by shareholders, who choose the board of directors and can therefore replace the firm's top management. But in a few firms, control rests with the employees, who have an analogous right to choose the board of directors and hire or fire top managers. Why is the first pattern so common and the second so rare? Economists have had surprising difficulty in framing a satisfactory answer to this seemingly straightforward question.

Because economists have no generally accepted explanation for the prevalence of capitalist firms, they lack a good explanation for the persistence of capitalism itself. They have also been obliged to remain largely silent on various contemporary policy debates. Should employees be represented on a firm's board of directors? Does it make sense to subsidize stock purchases by employees? Should governments encourage worker buyouts of closing plants or failing firms? Most economists could undoubtedly formulate opinions on these matters, but they would have trouble locating a systematic body of theoretical or empirical research with which to inform their opinions. With or without participation from economists, however, policy issues of this sort have become increasingly prominent across Europe and North America.

This book seeks to explain why investor-controlled firms are common and worker-controlled firms are rare. The answer is not as simple as the question, but one can develop a theoretical story that is logically coherent and accounts for a good deal of the empirical evidence.

Practical Considerations

A classic tale from the state of Maine goes something like this. The residents of a small Maine community notice a tourist from New York. He comes to an intersection at the east end of the town, gazes at a complicated set of road signs, and then drives back toward the west end of town. Baffled by an equally complicated set of road signs, he turns around and drives east again. This continues for a while. Finally he pulls up to the general store and asks, “How do you get to Nesowadnehunk?” After pondering this for a moment, one of the locals replies, “You can't get there from here.”

The conclusions of Chapter 11 may have left the reader somewhat discouraged. The inalienability of labor is a fundamental physical fact, and few of us would want to live in a society that pretended otherwise. Workers' control may thus appear infeasible, at least beyond the narrow niches where it is currently found, despite the normative arguments in its favor. But all is not gloomy, because some of the consequences of inalienability can be remedied through policy measures. Capital market imperfections can be corrected to some degree. Collective-choice problems can be mitigated through sensible institutional design. The appropriation and free-rider problems hindering employee buyouts of capitalist firms can also be overcome to some extent.

Explaining the Rarity of Workers' Control

The time has come to survey some hypotheses concerning the rarity of LMFs and their observed distribution across industries. This chapter and the next address hypotheses offered by microeconomic theorists and writers in the new institutional economics, drawing on earlier work by Dow and Putterman (1999, 2000). Here I focus on asset ownership and work incentives. Chapter 9 continues this survey and critique by addressing capital constraints, portfolio diversification, and collective choice. Using the case studies from Chapters 3–4 and other empirical evidence, I will identify strengths and weaknesses in each approach, along with puzzles deserving further attention. While no hypothesis escapes unscathed, theory and evidence together suggest that some are more promising than others. Chapter 11 will weave the more successful ideas, and those of Chapter 10 on organizational demography, into a broad theoretical synthesis.

It may be that all of the hypotheses in the next few chapters contain some kernel of truth. The constraints on workers' control that prove binding could vary by industry, society, or historical epoch. Moreover, important interactions are likely to be overlooked when hypotheses are artificially grouped into a few simple categories. But one must start somewhere, and even if the reader rejects the synthesis proposed in Chapter 11, the effort made here to separate wheat from chaff should help clarify the issues at stake.

Why Care About Workers' Control?

One reason why an economist should care about workers' control is that capitalist firms dominate large sectors of every modern economy and are major features of everyday life. Given the apparent feasibility of firms controlled by workers, this empirical regularity requires an explanation. Most of this book addresses the theoretical question of why LMFs are rare. This intellectual project should be of interest to anyone who wants to understand the way the world works. At the same time, workers' control taps into deeply held moral and philosophical beliefs about the purposes and design of an economic system. Views expressed in the literature run from sweeping denunciations of capitalism to equally sweeping pronouncements that the market has revealed the futility of workers' control.

This chapter surveys a series of moral justifications for workers' control, including those based on egalitarianism, democratic theory, property rights, and ideas of dignity and community. Most of the chapter will describe and critique arguments developed by other writers. Because each writer makes a distinctive case against the capitalist firm, there is no consistent version of workers' control that all would embrace as an ideal. Some writers advocate a radical transformation of the entire economic system, while others endorse only minor tinkering with the status quo or the use of workers' control in particular contexts.

The conventional approach

In concluding the previous chapter we explained how institutional, organisational and financial set-ups of megaprojects might significantly influence risks and costs in such projects. We therefore concluded that institutional issues and issues of risk need to be analysed together in project development. In what follows, a number of such issues are identified. In this chapter we focus on what we call the conventional approach to project development and appraisal. In the next chapter, the focus will be on approaches with a more recent history, including the so-called BOT, build-operate-transfer, approach.

Projects developed according to the conventional approach are typically financed by public money, or are backed by public (sovereign) guarantees. The majority of projects reviewed in the previous chapters were developed according to this approach, the Channel tunnel being a notable exception. The conventional approach was used for the Øresund and Great Belt projects. Table VIII.i presents an outline of the steps that make up the approach, as used in these projects.

The characteristics and problems of the conventional approach to project development and appraisal are the following:

1. (1) The project cycle does not include a pre-feasibility phase before the decision to carry out a full-scale investigation is taken. The result may be an over-commitment of resources and political prestige at an early stage;

2. (2) Project development and appraisal are seen as technical exercises with a focus on technical solutions at an early stage.

For the past century and a half, the rules governing the banking and financial professions have been shaped by the rivalry between two types of banks – banks that are relatively more exposed to market competition and banks that are somewhat sheltered from it. Exposed banks cannot afford to own risky or non-marketable assets, lest their financial costs rise, their profitability drops, and their share value suffers. Sheltered banks, in contrast, can afford to hold riskier or less marketable assets either because they benefit from a government guarantee or because they need not worry about maximizing profitability. What has varied over time is the membership of each group. Before World War I, the exposed group was made up of center banks, the sheltered group of local banks and postal savings. During the contraction of the middle century, state intervention added to the sheltered group a new category of bank – the special (state-run) credit bank. Today, the deregulation of finance has reduced the sheltered group to local banks again.

During the period under consideration in this study, the relative size of the exposed and sheltered sectors was a reflection of the relative power of their respective clients – large and high-growth firms on the exposed side; agrarians, small firms, and traditional industries on the sheltered side. The anti-competitive coalition was comparatively stronger in decentralized states, where they could rely on local governments to monopolize access to investment information and extract protection for local banks.

Following forty years of stagnation, financial centers started to grow again in the wake of a long and hesitant process of deregulation. The movement began in earnest in the 1960s, was set back by the currency and monetary turmoil of the 1970s, and resumed its course in the 1980s. Deregulation opened up an era of thorough reorganization in all financial systems, marked by sectoral concentration, the acquisition of foreign banks and opening of branches abroad, the development of deep international money markets with the Euromarkets, and the displacement of bank loans by bonds, stocks, and market instruments of varying time lengths. Many banks took advantage of the new freedom to try their hand at new products, especially market-related ones. This initial shakeup was followed by the present period of consolidation, in which banks are now seeking to improve profitability by focusing on what they do best.

The present part reviews the deepening of core–periphery patterns in OECD countries by taking up in the following order the four issues of spatial concentration, internationalization, securitization, and specialization. Like the preceding one, the present part emphasizes the reluctance of decentralized countries to submit to global changes. In it, I argue that concentration has increased across countries, but that it has taken place only within banking sectors, not across sectors. Deregulation has merely restored the degree of competition that existed in the pre-Depression days (chapter 7).