Economics for lefties

Co-ops sound great if you hate big corporations. Not so great if you care about how they work in real life

By Joseph Heath, Citizen Special
May 27, 2009

As the worst recession in 60 years grinds on, Naomi Klein and Avi Lewis are starting to get excited. From "bossnappings" in France to factory occupations in Canada and Britain, workers are starting to flex their muscles. The time may have come, they say, to fire the boss and seize control of the means of production. "Co-ops are once again emerging as a practical alternative to more lay-offs," they write.

Klein and Lewis, I must admit, make me a bit crazy. Not for the usual reasons, though. Unlike their right-wing critics, I don't disagree with the basic complaints they have about the capitalist system. I think they identify real problems. But they proceed to blame these problems on totally fictitious causes, then recommend solutions that are guaranteed not to work. Like co-ops.

[Article continues below]

---

See also the following responses:
Comments from Hazel Corcoran, Executive Director of the Canadian Worker Co-operative Federation (CWCF), Dr. Sonja Novkovic, economics professor at St. Mary's University in Halifax and others.
Article by Ottawa social policy researcher John Baglow
Letter to the editor from Carol Hunter, Executive Director of the Canadian Co-operative Association (CCA)
Letter to the editor from Jason Foster, Director of Policy Analysis for the Alberta Federation of Labour

---

Why do they do this? Because they don't understand basic economics. In this respect, they're in good company. Most of the left-wing establishment in this country doesn't understand economics. I barely do. But at least I'm trying.

Consider co-ops. There is in fact a large literature on the subject, much of it written by economists, none of it particularly optimistic about their potential. Why? Because they don't work very well. If they did, there would be more of them. Furthermore, they have the potential to muck up the entire economy (more on that later).

Here's a question. If workers are so great at running companies, why do they have to wait until their employer is going bankrupt before taking over the firm? Renters have been banding together for decades to "fire the landlord" and form co-operatives. That's what condominiums are. Lawyers have been forming worker co-ops for decades as well (that's why law firms are run by the "partners"). Some of the largest insurance companies in the world are co-ops ("mutuals").

Furthermore, co-ops get a massive tax break from the government, primarily because the surplus revenue they distribute to their members is considered an expense and isn't taxed as profit, the way it would be in a standard business firm.

So if co-ops are such a great alternative to old-fashioned profit-oriented firms, why aren't there more of them already? Why aren't capitalists willing to pay workers to take over their firms, then split the tax savings? Dairy farmers didn't have to wait for a financial crisis in order to create a number of highly successful supply co-ops. So why are there almost no worker co-ops in the manufacturing sector?

The easiest way to answer this question is to look at co-ops that do succeed and consider what they have in common. In the case of worker co-ops, the answer is fairly straightforward. Worker co-ops succeed in sectors where there is a single class of workers and no expensive equipment. Travel agencies, for instance, are often worker co-ops.

Once you start getting a lot of equipment or a variety of different types of workers, certain characteristic problems begin to show up. Most importantly, conflicts of interest begin to develop among the workers. Imagine having a big meeting where it's to be decided collectively how much everyone is going to earn. That decision is a whole lot easier when everyone is doing the same job.

One of the reasons that standard business corporations succeed as well as they do is that they are essentially "money lenders' co-ops." Because money is an extremely homogenous input, shareholders suffer from very few internal conflicts. Thus they are able to provide fairly coherent instructions to managers. Co-ops, by contrast, often break down due to infighting.

Setting aside these internal difficulties, there is a fundamental flaw with the idea of an entire economy constituted by worker co-ops. The problem is that co-ops create unemployment. Let me repeat that, just for emphasis. Co-ops are not a "cure for layoffs." They cause unemployment.

Why? Because they have an incentive structure that leads them to stop hiring long before a capitalist firm would. Even if the potential increase in revenue from a new employee would be more than enough to cover that person's salary, co-ops may be tempted not to hire. That's because each new employee gets an equal share of net revenue. As the firm expands production, hiring eventually reaches a point at which it generates a decrease in wages for existing workers at the firm, even though it is still increasing net revenue. (It increases the total net, but decreases the per capita net.)

Everyone knows how much workers enjoy having their wages cut. As a result, workers in a co-op typically confront an uncomfortable choice. They either leave productive capacity sitting idle, or they hire new workers and accept lower wages. Typically, they choose to do neither. Instead, they bring in new workers, not as full members, but as good old-fashioned wage-slaves (such as the "associates" in a law firm).

As a result, worker co-ops have a tendency, over time, to convert into something that very much resembles capitalist firms, with the founding members as the owners and everyone else working on salary. This is why 19th-century socialists like Beatrice Webb were so strongly opposed to the co-operative movement.

Of course, in the 19th century there was a sophisticated debate among socialists about this very subject, among activists who took economics seriously as a discipline. The same cannot be said today. This is unfortunate. There are, in my experience, quite a few people with a lot of big opinions about capitalism. There are, unfortunately, far fewer who actually understand how capitalism works.

So perhaps one can see why, when I see Klein and Lewis presenting worker co-ops as a "cure for layoffs," it drives me a bit crazy. My first reaction is to ask, "How do they intend to solve the perverse supply response problem?" But then, of course, I realize the answer. They don't intend to solve the perverse supply response problem, because they don't know there is one.

There you have the problem of economic illiteracy on the left, in a nutshell. How can you purport to fix a problem, when you haven't even taken the time to understand the solution you're proposing?

Joseph Heath teaches in the Department of Philosophy at the University of Toronto, and is the author, most recently, of Filthy Lucre: Economics for People Who Hate Capitalism.

© Copyright (c) The Ottawa Citizen