“Economists” “clinging” to “discredited ideas” (Or, Don’t Shoot the Economists)

I recently was pointed toward an article in The American Prospect, “Why Economsts Cling to Discredited Ideas.” The article outlines what (it claims) are discredited ideas about markets, invisible hands, and such, to which (the article claims) economists (it claims) cling to. The article is interesting, making some fairly familiar claims (though more explicitly than most). There is,however, a lot of contention on Madrick’s part, and he doesn’t present much evidence for what he is claiming. He is talking about some very fuzzy things.

    I would say that, as usual, things are a bit more complicated. First, the idea that free market/invisible hand ideas have “failed” i s a highly subjective notion…failed on what basis? Compared to what? (Planned economies?) The ideas certainly don’t apply to all the places the conservatives would like them to…but to call them a failure is kind of stupid. They’ve been right, they’ve succeeded, quite a bit. I’m not saying that the economics profession hasn’t taken the ideas too far in many places…but “failed” is a bit much.

    More to the point, check out journal articles here and here that provide a bit more scholarly approach to what economists think. The articles confirms my suspicions, based on the economists I know: we economists are by-and-large progressive.. Most economists recognize that market failure is pervasive. And these articles are a bit dated; I’d bet that more information about minimum wage, in light of the past 8 or 9 years, has made even more economists drop the notion that the minimum wage is bad. (Heck, up until 4 or 5 years ago, I wasn’t sure myself…but now more careful studies have been done, the data on inequality is overwhelming,  and it’s clear that a higher minimum wage doesn’t lead to more unemployment in the vast majority of cases.)

     I think Madrick comes closest to the mark when he talks about careerism, but even here, the analysis is superficial. There’s a theory of knowledge called actor-network theory that fits economics very well, I believe. Actor-network theory sez that the people who advance in a discipline, and what ideas they advance, is very much tied into who gets published, who knows who from cocktail parties or squash games, who gets tenure and who doesn’t; paradigms shift when the old editors die.
     And there is just built-in inertia. For example, there is a particularly vicious cycle with undergraduate textbooks; several books become well established, lots of professors use them, and the publishers don’t want to change much within them because they don’t want to lose these professors…so the professors, who are loathe to depart from the textbooks, don’t ever teach anything different. Besides being lazy, the profs are loathe to depart from the textbooks because any student who doesn’t get “the standard material” will be at a huge disadvantage at the next higher level of classes. This happened at Oregon while I was there, and we had a passel of bitter students. Of course, I don’t have to worry about this at College of the Atlantic because I’m the entire department, teaching all levels; thus, my courses can and do go in directions that I think best explain economic phenomena.

     Frankly, I don’t think it’s the economists’ fault…it’s the politicians. They’re the ones who cling to outdated ideas like the Washington Consensus. Within development economics, the Washington Consensus is quite dead…but it lives on in conservative think tanks and firebrand politicians. To see this in stark relief, look how few climate scientists *don’t* believe in human-caused climate change…yet most of the Republican party clings to the small, small bit of science that supports denial.  When you look at climate change, you see just how desperately politicians will seize on ideas long after they’ve been demolished within academia.

     I would point out that I’m a card carrying ecological economist, which makes me heterodox (but in case any of the wrong people are reading this, I would also point out that ecological economics doesn’t seek to replace neoclassical economics, but rather, to “include and transcend” it). But neoclassical econ has changed quite a bit in the last 30 years, and there are particular reasons for it not changing more. We shouldn’t let a couple of dinosaurs from Chicago, and the Republican Party, obscure that.

 

 

 

Why a Cooperative Economy for Rural Maine?

I see two big threats to the support of population in rural Maine. The first is more immediate: the changing nature of the U.S. economy and what it means for rural people. We know the story. It hardly takes any people/employment to do the resource extraction and agriculture that is the long-time mainstay of economic activity in rural places; this is the primary reason for the emptying out of rural places. Manufacturing jobs, some of which were located in rural Maine or its medium-sized river towns 30+ years ago, now require additional education beyond high school, and the 30-odd year gap between Maine’s manufacturing decline and the present means that, unlike places like the Carolinas (who had textile manufacturing until relatively recently; they took Maine’s jobs), Maine would have trouble attracting such high-tech manufacturing anyway. This latter trend ties in with increased clustering of manufacturing activity. Maine has a small base of high-tech service businesses, but even if this grows, it is not likely to provide sufficient jobs in the right places to keep rural Maine populated at its current (depressed) levels.

In a larger sense, many other economic trends, along with social and cultural trends, are making the U.S. an urban-centric society. (There are of course countering trends drawing some people to rural places, e.g. telecommuting, but these seem to be dominated by the urbanization trends.)

The second trend is more long-term, but I think it is short-sighed to ignore. This is the environmental/ecological impacts of our contemporary economy. There are several known dimensions of this threat, and probably ones we don’t yet know. I am not a climate alarmist, and the sea level going up a foot isn’t going to devastate Maine. But think about it: warm water in the Gulf of Maine is already affecting lobster populations and their health. (Not sure I recall the specifics exactly, but the center of the Maine lobster catch has moved from Casco Bay to Stonington); if the lobster goes in the next 10 – 30 years, it’s possible that coastal tourism could take a major hit. Additionally, the Gulf of Maine is one of the fastest-warming bodies of water in the world…and it is cold waters that give us cool summers relative to the rest of the Gulf Stream-ensnared east coast of the U.S.

Apart from climate, and in a larger and more general sense, the manufacturing trends outlined above means that, if it takes fewer people to operate machinery that is more and more productive (the only way, we are told, that U.S. manufacturing can compete with China), the only way to maintain our current level of manufacturing employment is to produce exponentially more stuff. Put another way, needing smarter and smarter people to operate manufacturing machines implies that those machines are increasingly sophisticated…which means they can replace more people…which means to stay employed, workers will have to be even smarter, which will permit them to work even more efficient machines, which will replace even more people….onward, onward. I can’t believe that the logic of this is lost on smart policy-makers; it just seems that the immediate situation is so desperate for workers that the immediate response is to jump into this maelstrom with more education for workers, thus continuing the process; no one wants to look ahead to the long-term (which probably isn’t more than 20 years off).   It seems we’re not going to run out of hydrocarbons anytime soon, but there may be other limitations to this growth process. I don’t see it continuing uninterrupted for another fifty years….we would be buried under 3D printed plastic crap. When it takes one person to run a huge factory, people are going to have to find something else to do (or work less, which doesn’t seem culturally permissible in the short- or medium-term). I have some sense that younger generations are awakening to the illogic of all of this, educating themselves and others about it, and trying to do something…but change is extremely difficult to make happen, because it requires a wide array of mutually-reinforcing changes to make anything stick; in many ways, significant institutional change is a massive coordination problem.

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The ideas above represent my concerns about the contemporary situation. I really think these are the most interesting of times, for rural places. Rural places in Maine are in a long, drawn out process of economic, social, and cultural collapse. They won’t empty out completely, but they will continue to become shells of their former selves. Ironically, the more that former resource extraction and manufacturing workers leave, the more the door is open for second homes, traditional tourism, ecotourism, (modest) creative economy activities, and similar stuff. And these activities produce service-based jobs that will need filling. Some highly specialized, idiosyncratic manufacturing will remain. Resource extraction will remain, but continue to lose jobs via technological innovation and capital intensification.

I’m not sure how much can be done about this. Augusta, the community development community, and grass-roots groups offer up exciting workshops about entrepreneurial efforts to build local economies…but that seems to be palliative lip-service, or at best a rearguard action whose gains haven’t yet outpaced the countervailing losses. One can outline a set of possible approaches:

-do next to nothing: not popular

-do palliative work that “eases the way down”; actions to make the transitions a little less rapid (humans don’t do well with rapid, so slowing the process down is worthwhile, even if the ultimate end result is the same)

-rearguard: help people get ready to be “the survivors” in hollowed-out rural places.

-adaptive: find breakthrough ways that make the current trends work in positive ways for the current and growing numbers of prosperous rural residents

-reversal: reverse the long-term trends through some kind of economic miracle (e.g. fracking in North Dakota…though that hasn’t actually done that much for rural North Dakota…the farming towns continue to empty out while Bismark and Fargo grow) or some kind of massive government intervention (e.g. the agricultural policies of the EU).

If we are going to do something, one attribute of an ideal course of action is that it could be palliative if there is little chance of truly transforming rural economies toward a more vibrant outcome, or actually part of that positive outcome if that is possible. Actions need not be considered mutually exclusive in this regard.

From another perspective, we can consider the ways that economic change can be directed. A table I am developing:

Reform (from within) Revolution (from without)
Political Social democratic reforms to make capitalism less harsh (hard to do because the capitalists largely control the political process; economic crisis helps, but it will have to be much more severe than what we’ve seen lately, or require more education [see cell below]). Massive political change, usually involving actual revolution (e.g. Russian Revolution)
Direct Economic -Cooperatives and collectives, especially worker ownership;-Enlightened capitalism: traditional business forms, but run with worker’s councils, profit-sharing, commitment to place; etc. Currently not very prevalent, will require lots of education of select people who by their nature are resistant to such ideas-Withdrawal from the system (done by a very small segment of the population, but apparently not realistic for most people) Not possible; requires the political changes from the cell above
Cultural Continual education, including examples Not possible; Cultural Revolution didn’t work, people can’t do fast change

As noted in several places, but also in less obvious ways, these cells interact with each other.

Fostering worker owned businesses will be a long, uphill battle…but I think it’s worthwhile. It meets a lot of positive criteria: it’s feasible (according to the chart above). Referring to the list further above, it can be seen as palliative, reardguard, and potentially adaptive and reversal. The chances of positive change are sufficiently large to make this option better than doing nothing. It probably needs a large dose of continuing education, but also feeds into that. Focusing on expanding enlightened capitalism is too slow and has too much chance of being unsuccessful; encouraging withdrawal will be ineffective. Focusing only on continuing education is too slow and too isolated.

So, fostering worker owned businesses is the best option.

Thoughts on a climate-related debate

A friend who works for Greenpeace recently sent me a link to a video in which author and environmental activist Annie Leonard explains why she and many others feel that “cap and trade” carbon markets are a bad way of reducing carbon in response to global climate change. The debate regarding carbon trading is particularly lively because economists are almost universally in favor of carbon trading as the most effective, least-cost means of reducing carbon emissions. The video is a great summary of what I take to be the key issues, and you can find the video here.

A brief critique of the video: it starts off by poisoning the well…Goldman Sachs is involved in carbon markets, so they must be evil! Then Leonard points out particular problems of existing trading schemes (permits given away, volatile trading, bogus offsets) and concludes that therefore carbon markets don’t work. My commentary: markets are working to a significant degree in California…auctioned permits, steady trading above the price floor, pretty thorough inspections to make sure offsets aren’t bogus, etc. ); it’s definitely trickier and more expensive to implement than command, especially correctly, but the savings between trading and command might make it worthwhile. It would come down to the numbers, and nobody is talking about then. But so far, California seems to be showing that it can work.

Then the video gets into the third problem, that cap and trade is a distraction, that we should go for the “big solutions.” I more or less concur that big solutions would be better…change society, get rid of carbon subsidies, decarbonize, get off of the growth merry-go-round.  etc. I’d like to see all that happen. But I don’t think it will.

So it comes down, it seems, to a choice of political strategy: the messy, ugly work of building an imperfect, quite partial, but apparently politically feasible system, or the noble work of taking a stand against the whole sordid system, without coming up with much in the way of politically feasible alternatives. (One could argue that we need to change the politically feasibility, and although there are some examples in some realms of that happening, it’s still just another kind of long-shot. It’s certainly something we weren’t willing to consider after Deepwater Horizon or the financial crisis.)

It may sound like I would come down on the side of the cap and trade, but the video really makes a very good point. I remain highly critical of people who install CFLs in their homes and feel they’ve done their part (or a college that puts in a bit of solar panels and says “we care.”) But then one is left with the conclusion that “well, cap and trade is a distracting and ineffective exercise, BUT real change is never going to happen…so we’re basically screwed.” Which is pretty much my conclusion, at the level of the big picture.

But as long as I’m ranting, let me share some additional latest thinking. This whole situation is usually framed in the context that “we” need to take  significant steps “to avert climate disaster” [often with reference at this point to children or grandchildren]. I think this framing  contains two, interrelated untruths: that there is a “we” and that there is a “then,” something in the future to be averted. Neither contention is true. Climate change is happening NOW, affecting people NOW, killing people NOW. The dying are largely invisible because they’re mostly poor people in poor countries, and it’s hard to say who exactly was killed by climate change, versus pollution or government idiocy or deprivation due to lack of political power, or what…but I think we can easily say that it is happening now, inter alia. And we can just as easily say that *some* people will NEVER be affected by climate change…they will build higher sea walls, better buildings, get better air conditioning, buy better medicine against climate change induced diseases, afford food despite diminished supplies, etc. Some people are hurting now, and some people will never be hurt by climate change. There is no “we” and there is no  “then.” Just like always, there are people dying now because they don’t have the power and resources that others have; it’s really not that different from the age-old patterns of power and resource distribution that lead some people to lead relatively short, brutish lives while others live in comfort for a relatively long time, for whatever particular circumstance. We can ask why climate change resonates more than other local or global injustices; amongst other things, it probably has something to do with the scale and boundary-less nature of the problem. But regardless, the problem is with us now, but some people are grossly affected, while others are not, and won’t be.

I believe that the “we and then” construction gives us solace in the face of our contradictory existence. The unity implied by “we” both feels good in the sense of global brother/sisterhood and hides the fact that the good people flying to a climate conference (or driving to work at their cool little college) are killing Bangladeshi farmers. And the “then” of course means we can keep doing what we’re doing, living the way we’re living, because there’s just a little bit more time before “disaster” is upon “us.” We can wait until “we” get our act together, “then” we can save the planet.

I really don’t know where this assessment of “we and then” leaves us regarding cap and trade versus big political and economic changes as means to lessen carbon emissions and climate change. Neither one acknowledges the contradictions of our existence, which consists largely of recognizing that doing “the right thing” in regard to our suffering fellow humans would require we in the North uprooting our entire individual lives and collective culture in ways that really can’t be asked of us, that would destroy us emotionally and socially, if not physically. But I think I’m a little bit more suspicious of the false nobility of the comfortably impossible cause. When I think of the falseness of  “we and then” in the context of my own life, the fact that people are dying right now suggests that every little bit counts, everything I can throw into the battle to make the world a better place right now is going to help, will save lives…even as I recognize that I can’t change the world, or myself, as much as I’d like.

Basic Income Versus Job Sharing

As is so often the case, one of my students has sent a very interesting link, that sparks a dialogue about economic choices our society faces. In this case, the link is to a video describing a (European) proposal for providing all (EU) citizens with a guaranteed basic income. You can see the video here.

The proposal is interesting. The first concern that arises is what will happen to productivity. Will people still want to work, when their work isn’t tied to their incomes? Will a country that adopts this approach become an impoverished (at least as far as income) land of poets? And will the highly productive people who want to work, to earn more income above the basic income, be willing to share those gains with those who aren’t working or are working in low productivity jobs? It does seem that we have a tremendous amount of wealth, our societies are rich enough to provide everyone a basic income…but we GOT that rich by having  lots of incentives to create wealth: those who created it got to keep it. (To varying degrees some did that on the backs of others… but a lot of it was legitimate wealth creation nonetheless).
   Another angle, consistent with a lot of the ideas of degrowth, is simply that we are working too many hours..The video makes the point that our productivity has gone so far up that people rightly fear losing their jobs…millions already have, over the years. But I’d say the solution to that is to work fewer hours…that might cut in to productivity a little bit, but it might not. If we had two COA economists, each of us working 30 hours a week (because I often work 60 hours a week), there would be some increased administrative overhead costs…but the two economists working for 30 hours each would be fresh all the time and collectively have much more expertise and ideas than I alone could possible have. So, instead of guaranteeing a basic income, you greatly increase the job availability (two economists get hired at COA instead of one; each economist gets paid less than the 60-hour-a-week single economist, but enough on which to live)…and people have enough time off to become poets, great parents, and/or contributing members of their communities, etc. The market still sends signals indicating which kinds of work are needed, and people can still get rich, tho it might be a bit harder. I think this would be a better solution than “pay me and I’ll go be a [bad] poet.”

You cannot separate either the basic income proposal or my job sharing proposal from norms (New Institutional Economics, of course)….our social norms would need to change considerably. I think the norms necessary for for a shorter work week would be easier to move toward (because we already have shortened the work week a tad…just not nearly enough, given productivity gains) relative to the norms necessary to make a basic income a human right (give me something for doing “nothing”…”nothing” in quotation marks because it’s really wrong to say that poetry and parenting is “nothing”…but those norms persist). For either proposal, however, we need to keep pushing the ideas, to have them “on the shelf,” becoming normalized and ready to go when we’re ready for some change.

Why cooperation?

I do a lot in the realm of cooperation and cooperatives…in my courses, in conversations with people, and in real life. I was recently asked by someone about how and why I got into cooperatives and cooperation…and this was via e-mail, so I had to write it down, succinctly. Here is what I said:

“I teach economics, as I mentioned. At COA, off course there are plenty of students interested in sustainability, and also quite a few who are suspicious of standard economics. Ecological economics answers both situations: it’s the economics of sustainability, and is in marked contrast to standard economics in lots of ways. Once I got into teaching ecological economics, I got into sustainable food systems, which led me to farming. It turns out, additionally however, that a lot of ecological economists see cooperatives and a cooperative economy as a necessary part of some kind of “sustainable” future. So much of sustainability is somewhat hopeless/depressing (once you start looking at it systematically and intensely as ecological economics does), but cooperatives are a major bright spot, one of the few places where change can be real, effective, and possible (possible, as opposed to, for example, us stopping using carbon-based fuels anytime soon; getting rid of carbon would be *highly desirable,* but I think it will be a cold day in hell before we actually restrain ourselves in this realm, and many other, realms). Plus, my students love the idea of a cooperative economy, it really gets them excited and inspired. So I work it into a lot of my classes, have a new dedicated class (The Economics of Cooperation, Networks, and Trust), and do cooperation in real life whenever I can. I’ve been involved in co-op startup efforts in Bar Harbor and Seal Harbor (both ultimately unsuccessful), co-managed a buying club for about 4 years, and am working with another farm toward some kind of producer co-op for local foods in Knox County. Throw in 1) the desperate state of the rural Maine economy and resulting out-migration of young people, and  2) the financial constraints to doing small scale sustainable agriculture as a sole proprietor, and all off a sudden co-ops and cooperation make for a pretty important topic.

    Part of all this work is the result that I’m not starry-eyed about co-ops…they are amazing at providing lots of different things, but there is also cold hard economic logic that explains why they make up so little of our economy (but the variables behind that logic can change…people need to re-evaluate what’s important to them, or not be told by corporate American what is important to them). So I tend to spell things out, not ignore the tough economics of cooperatives and cooperation, but am constantly hopeful that we can do better. I do think the U.S. (and Maine in particular) could and should develop a cooperative economy.”
    That about explains it.

 

Contemporary lessons from an early economy

I’m reading The Merchant of Prato, by Iris Origo. Written in 1957, there are no doubt more up-to-date treatments of the the Medieval European economy. But as it was written by a non-economist, it portrays the every-day life of Francesco di Marco Datini, 1335 – 1410, as well as the economic scene of the time; its economics, politics, religion, and personal life all rolled into one. As such, it’s a much better read than most economic histories, but still has plenty to tell.

First, there was plenty of trade going on the 14th Century, all over Europe and the Mediterranean. All manner of inputs and finished goods are traded, from the the Baltic and Scotland to the Levant and Balkans, North Africa, the Black Sea, and of course spices and other such goods coming from farther afield. A vast network of trading houses and merchant companies, with firms having representation in many major cities, exists to support the acquisition of inputs and sale of finished products. (More money is made and trade conducted in luxury goods, but one does find commodities such as wheat moving around.)

Production is carried out by extreme specialization, requiring inputs and intermediate products to change hands many times. In the production of cloth, wool is carded, fulled, sheared and cut multiple times, spun, woven, measured, dyed, and many, many other steps, all by different people. Some production is shared out to peasant households, such as weaving.

Most of this production is organized by guilds…the guilds are the center of economic life. Merchants organize production as individual agents, but the steps they must take, the rules they must follow, the who-does-what, is all determined by guild rules. The guilds  provide two main functions: establish some monopoly power, by all their rules and requirements, and create trust and reciprocity (because any bad dealings mean getting kicked out of the guild, which means going out of business); like all institutions, they seek to reduce uncertainty in what, by many measures, is a very, very uncertain time.  The guilds establish voluminous sets of rules for how things are to be done, where and how things can be sold, limited points of entry and exit, and lots of penalties if the rules are broken.

The economic system can thus be characterized as some kind of market feudalism.  Markets are very present, but entry to them is highly restricted, and price is determined at least as much by custom (in the form of guild restrictions and numerous taxes levied by sovereigns or municipal or guild authorities) as by supply and demand.  Access to economic resources such as mills is highly restricted and taxed.The feudal state controls the ultimate means of production (land and labor combining in agriculture), but merchants are acquiring massive wealth without the control of these factors of production. The economic fate of people is tied not only to weather (the biggest variable in agricultural production), but the fortunes of war, piracy, and pestilence , all as a result of the increased opportunities and perils of trade.

Risk is everywhere: all travel has to happen with heavy arms and escorts (A surprising amount of transportation of goods happens overland, via mules.). Plagues can shut down a city and its trade, meaning orders for inputs do not get filled, and finished goods do not get sold, with disastrous results for merchants. Monarchs borrow money to fight wars, then default, leading to chains of bankruptcies. Wars between cities states, religious feuds, and travelling bands of mercenaries all can shut down trade. It can take upwards of 3 ½ years to go from ordering wool at the point of shearing to the sale of fine dyed cloth.

Most of the finished products are destined for the rich…who pay very dear prices to cloth themselves in the finest cloth, decorate their houses with drapery, art, carved and inlaid furniture, etc. They must pay for all of this, which means value is being appropriated  from somewhere: the peasants of course. Great wealth is still available from the usual feudal sources, but add to this the growing wealth of the merchant class, who also want fine clothes and goods.

Basically, the merchants provide a new means for the nobility to display wealth…prior to all this trade, being nobility meant having the best local stuff, but now it means having the best stuff from the far corners of the world…a process which enriches the merchants (though plenty of merchants lose their shirts, too). So we have two wealthy classes, with all this wealth ultimately being produced by the peasantry and an army of craftspeople in between. Some of this new wealth is due to subtle improvements in the technology in production, but a lot of it probably just comes from comparative advantage…furs that are a dime a dozen in the Baltic fetch high prices in Italy. The greatest technological development is probably in the mechanisms of commerce, e.g. letters of credit, double entry accounting, etc.

Already the merchant class takes no interest in the affairs of state other than as they relate to trade….everything is about trade, with religious salvation (and hence, good works, charity, etc) taking a back seat, with civic duty and virtue a very, very distant last place.

Already the fate of the peasantry is tied to this global economy. Riots and insurrections occur when business conditions are poor, for example when merchants aren’t ordering enough wool to be shorn, processed, and woven. (e.g. a peasant revolt in Florence with demands that a minimum amount of cloth be ordered, to keep the peasants employed in cloth production and not starving). When Richard of England defaults on his loans, huge merchant/banking houses go bankrupt, leading to cascading chains of defaults of smaller houses, leading to starvation in the countryside.

In the end, everyone gains, to some degree or another, by this trade system; those who stand to gain the most also stand to lose the most, at least in raw financial terms. Even the peasant gains, as s/he realizes that a paltry, mean existence of scratching out existance by agriculture under the thumb of the ruling feudal system can be improved upon by taking in a little wool for weaving. This can stay at a small scale and provide a small amount of additional income, but it could also perhaps eventually lead for this peasant to the formation of a new guild, and thus moving from peasant farmer to craftsperson, with a bit more comfort in life. (It’s not clear what percentage of peasants are engaged in non-agricultural side activities.) But the specialization that is involved means those involved become more dependent on others, and on events in distant lands. To gain, we must become slaves.

 

The economics of worker-owned businesses

I just finished two books that run through, in gory detail, the economics of cooperatives. My purpose here is to review their key findings, especially in regard to worker ownership of businesses, and offer some thoughts of my own.

The first book, Henry Hansmann’s The Ownership of Enterprise, examines the costs and benefits of being an owner of a business (whether a standard investor-owned corporation, which is basically still a cooperative of capital providers, or a worker-, producer-, or consumer-owned cooperative), as opposed to having a contractual relationship (as a worker or consumer or provider of capital) with the same firm. The second book, Gregory K. Dow’s Workers’ Control in Theory and Practice, uses a similar logic, but seeks to answer the more focused question of why there are so few worker-owned businesses in the United States. (The number I hear most often is that there are around 300 worker-owned businesses in the United States.)

Both authors acknowledge that there are economic explanations for why worker-owned businesses are not common in the United States (and, relatively speaking, in other parts of the world). Hansmann lays the most significant blame squarely on the costs that workers face when trying to organize and run a business (“governance of the firm”). In particular, if the workers have widely divergent preferences for what the firm should be doing, what it should be paying for labor, etc., and no governance structures for essentially muting that heterogeneity, governance becomes extremely-time consuming and hence costly. Having spent considerable time trying to organize a consumer cooperative, I can attest to the deadly costs of highly divergent preferences in that realm, so I find Hansmann’s rationale compelling. Investors (providers of capital) who seek to organize and run a firm (through the usual channels of a board of directors and management) are likely to have much narrower interests (earning a profit) and hence face lower costs (“transaction costs”) of running the firm.

Both authors run through a long list of potential lowered costs that worker ownership can provide. For example, having workers be owners can lower the costs of monitoring management and determining worker remuneration preferences. However, Hansmann in particular concludes that these foregone costs are insufficient to outweigh the costs of governance that worker ownership entails. While Hansmann goes to the well of purely economic logic a bit too often (“we don’t see a lot of these firms, so the costs must outweigh the benefits”), the evidence is nevertheless compelling.

Dow attributes the dearth of worker ownership to a wider range of forces. He and Hansmann both consider the possibility that workers will have a more difficult time obtaining capital for business operations or expansion, but while Hansmann largely discounts this as a negative force due to highly functional capital markets in the United States, Dow does consider it to be a significant factor working against worker ownership. Investor-owned firms come with their own capital, so obtaining it is not nearly as much of a challenge for them, while obtaining workers on the market via contract is relatively easy. In particular, if the assets being purchased by borrowed capital are less fungible, lenders will be less willing to provide capital on a contractual basis, thus disadvantaging worker-owned firms.

Besides governance of the firm and obtaining capital, Dow assigns blame for the relative lack of worker ownership to a third set of factors, which he calls “commodification asymmetries.”  The idea is that labor and capital are fundamentally different; in particular, it’s easy to sell shares of investor-owned (publicly traded) firm, but a worker-owner must often quit his or her job in order to appropriate the value s/he has accumulated in the role of owner. In a similar vein, an investor who contributes 90% of the capital to start and run a firm can easily lay claim to 90% of the profits or residual value of an investor-owned firm, while a worker who contributes such disproportionate effort (or has invented something extremely valuable to the firm, or done any other number of good things for the firm) is unlikely to be able to appropriate that value; he or she must essentially be willing to share all that with fellow worker-owners. Here too, I see echoes of this phenomena in consumer co-op formation, where it is said that for a food  co-op to get off the ground, there must be one or two or three “heroes,” people willing to work extraordinarily long and hard to get the co-op going.

So, to summarize, according to these researchers (both of whom are accomplished economists who presented a very impressive array of research and knowledge to support their claims), the lack of worker ownership is attributable to:

  • difficulties in workers governing a firm (Hansmann, Dow)
  • difficulties in workers obtaining capital (Dow)
  • difficulties in workers appropriating the full value of their efforts (Dow)

If this were all there were to the issue, then the prospects of expanding worker ownership in the United States would seem dim. While obtaining capital can be creatively approached (see Michael Shuman’s latest, Local Dollars, Local Sense), depending on “heroes” essentially to be good souls and donate a huge amount of effort to starting and running a worker-owned business is not sustainable, and overcoming governance issues might be even more problematic. But perhaps there’s a role for brainstorming here, in the context of organizational design and/or policy.

However, both authors leave some stones unturned. (Charitably, we could say that at the time that Hansmann and Dow were writing, these stones hadn’t achieved their current prominence in economic research.) What comes to my mind are two important potential benefits of worker ownership: signalling, and networks.

Signalling refers to communicating information to other parties in economic exchanges. The need to communicate information in economic exchanges is pervasive: “this is a good product,” “we will be good partners in a joint venture,” and “we can pay the money back” are messages that businesses want to communicate at various times…but the businesses also have an incentive to misrepresent, and the intended target has to decide if the firm sending the message is to be trusted; this situation is known as “asymmetric information.” There are various ways to overcome asymmetric information; firms can offer a money-back guarantee to consumers, or offer up collateral for a loan. These indirect ways of communicating are known as “signalling.” Economic actors have developed numerous ways of signalling, but these steps are usually costly, and often there is no really efficient way to communicate trust effectively. I would suggest, however, that being a worker-owned business signals a certain amount of trustworthiness, which is an economic benefit right up there with obtaining capital and effective firm governance. Worker-owned businesses need not be saintly, but merely by having undergone the relatively arduous task of organizing as worker-owned, a business is saying that it has values and priorities other than only making financial profits; this in turn can make it easier for the firm to overcome informational asymmetries and thus conduct business in a less costly way.

The other stone left unturned is that of networks. Worker-owned businesses are cooperatives (in the sense that distinguishes them from investor-owned firms), which connects them in a very strong way to all other cooperatives. Almost all cooperatives ascribe to what are usually referred to as the Rochdale Principles, and one of those principles is that cooperatives help and support other cooperatives.(Check out the Principles here.) In my experience, this principle is not hollow rhetoric; I’ve never come across a consumer co-op or worker-owned business that didn’t take the principle seriously. Being a fellow cooperative meant automatic preference and assistance for a firm. Thus, worker-owned businesses are automatically immersed in an extremely useful, economic network. These days, it is cliche to say that economic networks are extremely valuable, a great source of economic benefit, and worker-owned businesses have a tremendous advantage over investor-owned business in this regard. And it’s easy to see how networks and signalling complement each other: the label “worker-owned business” carries the informational signal that immediately fosters networking; the two build in each other recursively.

So, signalling and networks are two economic benefits of worker-ownership that have largely been under-appreciated in the economic literature. Of course, we are still left with the result that there aren’t that many worker-owned businesses, so one might ask what is the point of identifying additional benefits? Well, the key bit about these two benefits, signalling and networks, is that by being under-appreciated by (the all-powerful) economists, they have probably been under-explored as means of fostering worker-owned businesses. There’s a funny thing about economic policy: things that have not been explored theoretically rarely find their way into policy or “how to” literature. The knowledge is out there, but it’s tacit, meaning known but not written down or otherwise easily communicable, and hence hard to share with others. Because of this, while we might, if we rack our brains and get really imaginative, be able to find some undiscovered opportunities to counter or obviate the three major explicit obstacles of worker ownership (obtaining capital, firm governance, and appropriation of value), it’s fairly likely that there are ways we can harness in new ways the signalling and network advantages that worker-owned businesses have.

To borrow from Monty Python, I’m not dead yet. Worker ownership may make up a very small sliver of the economic activity in the United States, and there may be significant economic disadvantages to them. But our contemporary economy is never static; new forces emerge that constantly create new opportunities. Signalling and networks aren’t just recently emergent ideas in economic theory, they’re also growing exponentially in importance in the real economy.  I’ll report back when I’ve collected (no doubt in concert with some of the very cool people and organizations working on this issue) good ideas about harnessing signalling and networks (and other unturned stones) for fostering worker-owned businesses.