Why Shareholder Firms Tend to Persist Over Worker-Owned Models

Over at AIER, my Mere Economics co-author reveals one weird trick for the working class to bloodlessly seize the means of production. I won’t steal Art’s thunder, but suffice it to say that this “revolution” would be voluntary every step of the way.

Art’s clever essay demonstrates that capitalism allows for many experiments in production and living. The same can’t be said for (say) socialism.

So, why don’t workers systematically convert capitalist, shareholder firms into labor-owned producer paradises?

To answer this question, the scholarship of Henry Hansmann is both underrated and indispensable. His 1996 The Ownership of Enterprise provides a compelling framework for why some firms are owned by shareholders, others by workers, still others by consumers, and why some are non-profits. Critically, and contrary to popular socialist talking points, workers bear heavy costs associated with ownership. That’s it. That’s the explanation.

As Hansmann describes, these costs arise because there is usually significant heterogeneity among worker goals, attributes, and job descriptions. Thus, coordinating decisions isn’t easy and consumes resources. Those costs eat into output, causing the total product to fall relative to the traditional capitalist firm. In a nutshell, that’s why most people in most places don’t elect for worker ownership despite the fact that they could if they wanted. “Nothing” is stopping them—okay, only the cost is.

Hansmann probably dismisses it a bit too readily, but the Austrian explanation going back to Bohm-Bawerk also emphasizes that some people are better uncertainty-bearers than others. Ownership means bearing uncertainty in a way that being a wage-earner does not. To my way of thinking, this point complements Hansmann’s emphasis on the coordination costs of ownership.

If Hansmann is right, worker cooperatives are more viable in areas where homogeneity characterizes worker tasks and attributes. This point is well corroborated in the literature. Worker-owned firms are most frequently found in service industries, and within these, law firms provide a striking piece of evidence supporting Hansmann’s framework. Law partners have similar skills and they perform similar tasks. There’s a multi-year waiting period before someone becomes a partner. This allows existing partners to select co-owners of similar ability and temperament. For the whole argument, see Hansmann’s book. 

The bottom line is that it’s not “The Man,” government, or capitalism holding back the revolution. It’s just that in most contexts, we—that is, workers—can’t do better than the traditional shareholder firm.

This article was adapted from Marginalia. You can read the original here.