I wonder how well it would work if you started something like this from scratch today in for instance SV.
The primary challenge imo is the mass financialization of the global economy, which makes it a lot more enticing to start a traditional corporation over a cooperative. Cooperative regulations in most jurisdictions make it very difficult to raise equity and even restrict many types of debt. There’s more coordination overhead, at least initially, and once mature, most cooperatives tend to look like public companies governance-wise anyway.
It just doesn’t make sense for the average person to start their own cooperative, especially in any competitive domain. The risk-to-reward ratio is totally skewed towards the wrong direction. It’s like starting a union for a non-existing company.
I say all this as an avid cooperatist who has been working in the space for the last six years and who runs a cooperative startup in Quebec, arguably one of the strongest coop ecosystems in the world. If the stars didn’t align for us (e.g. strong technical team, ample personal funds, prior cooperative experience, market timing, etc.), there’s no way we’d be surviving two years in.
What do you mean by 'competitive domain'? State of the art like Amazon or many competitors like Ben and Jerry's [1]?
If it's competitive like Ben and Jerry's, wouldn't that be the best environment for a cooperative? You can use your network to assemble an initial team and then build something that the market wants because everybody already knows the market. You create one more offer that will find its niche on the market.
Where else does an average person have enough domain knowledge to make a better investment?
[1] https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
While the capital requirements are relatively lower to start a food processing business, they’re not non-existent. The founders will have to pony up most of the initial investment and take on a whole lot of risk early on, with only a very slim possibility of a large payout if the venture does exceedingly well. Most financial institutions (even cooperative ones) won’t lend to them, as it’s difficult to collateralize the initial equity put forth by the founders of a cooperative. Equity can’t be issued to investors, due to governance and legal restrictions. The capital pool is thus dramatically constrained vis-à-vis a traditional corporation.
This is ignoring that cooperatives are harder to start in most jurisdictions due to a lack of legal resources. Our food delivery cooperative took 7 months and several letters and in-person meetings to legally incorporate (even though we started sales one month in) whereas our local competitors who formed corporations were able to incorporate within one day and online. During the early months of the pandemic, we actually had to get a derogation from the government to be the first cooperative in Canada to have our founding general assembly (a legal requirement to start a cooperative in Quebec) online, as the law said we all to physically meet in person to be able to incorporate!
The very legal framework for cooperatives see much less use in most jurisdictions, meaning that when things go wrong, the venues for recourse are unclear due to a lack of precedent. A notable case of this is the hijacking/bankruptcy of Mountain Equipment Co-op in Vancouver, Canada, which was sold off to private equity without the consent of its members, all while following the law to the letter.
Contrast this with starting a corporation, where the financing and governance playbook is known and if you want to bring in more people onto the team, you can just continue subdividing the equity to get something akin to a cooperative. A cooperative is just a corporation after all, just with a more equitable equity split.
I think what you’re suggesting can still work in certain cultural and economic environments. The founders really have to sell the idea of buying into their cooperative, all while limiting their potential upside as they bring in members who have yet to contribute to the cooperative and yet will soon be eligible to take part in the proceeds and governance. If they can manage that and get over the initial legal and financial hurdles, they can totally be competitive. The initial constraints don’t make it attractive however.
This is really insightful and almost fully explains why there aren't more co-ops. Entrepreneurship AND capital aren't being materially rewarded for the huge amount of risk, so both founders and investors have zero interest in trying out the model, unless they're unusually missionary minded about the co-op model. That's two factors of production out the window. I think this is why market socialists often advocate for the government to ban traditional shareholder-owned corporations and force everyone into the co-op model, with capital allocation initially handled by a government bureaucracy. Founders and investors actually can't get there voluntarily due to high risk receiving little reward.
How are terminations of underperforming employees handled?
Is there a particular type of business (e.g. established old-school industry vs. R&D startup) where this model should be better at, and others where it is worse at, due to systematic factors?
Does a worker co-op mean that a union serves no purpose?
Would a worker co-op mean that important strategic decisions are made by large committees, or can they made by individual/executives that are voted into their position by workers? Or are such details up to the discretion of the particular co-op's charter?
How does it differ to a traditional company that simply gives lots of equity to all the employees? Is the main practical difference that the "equity" (i.e. their voting power and profit share) expires when the employee quits their job, and therefore it isn't commoditized?
Would this model be expected to produce less externalities to society? Or should the same bad incentives cause them to pollute, corrupt government, and so on?
Clearly, something is holding back worker co-ops from competing effectively in the market, given that examples like Mondragon are relatively rare. What are all the reasons for this?
In short:
1. Underperforming workers can still be fired. Their ownership stake is bought out by the firm. Because firings are costly, hiring is a more intentional process, typically involving a "trial period" at the beginning of employment that more closely resembles traditional employment (no ownership stake, no voting rights, easy severance).
2. Successful cooperatives exist in all sectors, but there are many variables at play. A tech worker co-op today is unlikely to be able to pay its worker-owners salaries comparable to what VC can provide, due to factors ranging from tax rates (capital is taxed at negligible rates compared to labor) to investment bubbles and concentration of wealth. Long-lasting cooperatives have lasted longest in agriculture and finance because they can operate more efficiently than firms which need to retain a chunk of their margin to pay investors.
3. There is no real role for a union in a worker co-op. Surprisingly, this doesn't mean they don't exist. Mondragón actually went to war against unionizing efforts at their firm in the 80s, which led to them increasing education on what rights and privileges worker-owners already have. Generally, though, worker co-ops align the incentives of workers with the firm such that unions are unnecessary.
4. The management structure of each cooperative is up to them. Most successful ones (including Mondragón) delegate decision-making to a core group of elected executives, just like in successful modern democracies. Major structural decisions are made by general assembly -- analogous to a stockholder meeting at joint stock firms.
5. Worker co-ops differ from ESOPs (firms that grant lots of equity to workers) in that they confer decision-making, as well as equity, to workers. ESOPs usually grant workers non-voting shares. I've actually seen the ugly side of ESOPs when my startup employer diluted my stake to nearly nothing just prior to a buyout. That would be a much more difficult prospect in a worker co-op.
6. I'm unaware of any systematic studies done on the relative propensity for different types of firms to externalize costs. I'd only say that there's certainly less incentive for worker co-ops to act irresponsibly, as they are directly answerable to their community, who both work at and own the firm, and usually live nearby.
And there's no obvious way in which they seem more incentivised to bad behavior than other types of firms.
For example, Mondragón were "caught" underpaying some workers in their overseas factories, in line with how other firms abuse their outsourced workforce. However, they were caught by their own worker-owners, and unlike other companies, Mondragón's worker-owners objected to this treatment and voted to provide their outsourced employees with a path to full ownership.
7. I've responded elsewhere with what's holding worker co-ops back and won't elaborate too much here. Suffice it to say that they would be much more common if there was a standard corporate form, consistent and non-discriminatory tax treatment, and and easier access to alternative means of raising capital.
Where some or all of these structures are in place, cooperatives are surprisingly common. I'd advise looking into the Emilia-Romagna region of Italy, in addition to Basque Spain for more examples.
That makes sense. Externalities will be less. I would love to hear how anarcho-syndicalists think that any remaining externalities can be managed without a state. Like, if I'm in a co-op with 10 people, I can still see us all deciding to screw over society just a little bit for our own gain, and telling ourselves a nice story that that's not what's happening.
> 7. I've responded elsewhere with what's holding worker co-ops back and won't elaborate too much here. Suffice it to say that they would be much more common if there was a standard corporate form, consistent and non-discriminatory tax treatment, and and easier access to alternative means of raising capital.
Don't both capital and entrepreneurship require asymmetric compensation for the unusual amount of risk of starting some ventures? Even if the playing field was levelled, why would a founder or investor willingly opt-in to a corporate form that will massively reduce their upside in the 10% chance that they end up succeeding? I could see why they would do it for a traditional business -- say, they're a group of 5 plumbers that start a co-op together, where some level of success is guaranteed and they don't project needing to hire 1000 additional employees that will dilute their upside as the business matures. But what about the far more risky (both capital intensiveness and probability of success) ventures, e.g. starting a nuclear fusion company? For these sectors I can only see two viable solutions: (1) accept that co-ops can't service these particular high risk sectors properly due to a fundamentally inadequate incentives, or (2) government becomes a VC firm and the traditional corporate form is banned.
States are here to stay and are, in fact, necessary for the enforcement and arbitration of business law. They're a necessary ingredient to any regulatory regime.
I look askance at any solution that pretends to completely "solve" the issue of externalities. Humans are optimizing, externalizing creatures, and our organizations will reflect that fact.
Given all that, though, an ecosystem of cooperatives actually does do a better job of policing and creatively regulating externalities in a manner more beneficial to society than many forms of government regulation.
This is because governments are susceptible to regulatory capture by private capital, and the concentration of wealth into relatively fewer hands only exacerbates this problem. Cooperatives actively fight against the unfair concentration of wealth, and an ecosystem of cooperatives forms a network of reinforcing relationships that find opportunity in waste that private capital firms might otherwise externalize to the public to deal with.
A good example might be the worker-owned retirement homes in northern Italy. Staff earn higher wages -- and care is consistently rated as far better -- than at either for-profit or public facilities.
> Don't both capital and entrepreneurship require asymmetric compensation for the unusual amount of risk of starting some ventures?
Sure, but that's not incompatible with cooperative ownership. There are forms of worker co-ops which give greater ownership stakes to workers who contribute more, take on early risk, or have seniority. It's not binary.
There are cooperatives that look indistinguishable from SV startups. The only major exception is that they grant voting stock to new hires instead of non-voting share options.
> Even if the playing field was levelled, why would a founder or investor willingly opt-in to a corporate form that will massively reduce their upside in the 10% chance that they end up succeeding?
Because the odds of a cooperative succeeding are higher than with LLCs and joint stock companies (see upthread and numerous studies). In other words, many people would be more willing to accept a 50% smaller slice of the pie if the odds of success triple.
Another minor point here: Cooperative structures also have an advantage in sustainable longevity. VC-funded companies are exit-oriented and tend to struggle to settle into enriching, viable companies post-exit. Cooperatives offer a competitive advantage to the entrepreneur who is not looking to pump-and-dump their life's work, but instead build a sustainable business in the long term. All things being equal, workers will overwhelmingly prefer to work at a mature firm for ownership than simply for wages.
> But what about the far more risky (both capital intensiveness and probability of success) ventures, e.g. starting a nuclear fusion company?
Interestingly, that's not too dissimilar from what Mondragón was at its inception -- a capital-intensive, high risk business. And there are actually lots of cooperatives that succeed at these margins around the world. They're just not easy to start in the US due to a blend of factors including culture, concentration of wealth, and hostile regulations.
But I'd like to point out that, even if the answer is "accept that co-ops can't service these particular high risk sectors properly due to a fundamentally inadequate incentives," nobody in the cooperative space is advocating the eradication of joint stock companies or other corporate forms. Cooperatives are not a one-size-fits-all solution. There will always be cases when LLCs, LLPs, JSCs, etc are a more appropriate form. We just want more choice.
I would strongly support a federal law defining a standard cooperative corporate form and giving worker cooperatives preferential treatment under the tax code. I think society could only benefit from such a change.
At worst, we'd see a bunch of new cooperatives pop up on the fringes, where they had previously been too onerous to start or operate. At best, we'd see a much more democratic economy across the board, with workers more invested in the success of their firms and firms more accountable to their workers.
Several family members worked at zadruge and that's where I get most of my information from, so take this all with a grain of salt...
One of the key issues with zadruge was that, while nominally cooperatives, they were actually owned and managed by the state. Directors were appointed by the communist party and not elected by the workers. As a result, a culture of kleptocracy crept in, since party rank and connections were more beneficial than seniority or hard work, and resentment grew between labor and management.
This has tainted the idea of cooperatives in the former Yugoslavia, so few people are interested in reviving cooperatives today, even though the core issues that plagued zadruge have improved dramatically since 1991.
They were, however, an experiment in democracy in the workplace, albeit limited. And that was radical for its time. Most people I've spoken with say that, for all their failings, zadruge were enriching and empowering places to work and much preferred alternatives to today's jobs.
https://www.totemmt.com/about-us/
"We are a Cooperative Work company from Basque Country. Our mission is to supply the climbers community with quality protection gear.
The production is entirely made in Hernani (Gipuzkoa). We focus our efforts to improve the production processes and management systems to achieve what is demanded by the customer: good products, competitive price and on time delivery."
The tricky thing is building a product-focused business like this. The risk-reward ratio is very different. Most fail and few succeed massively. Succeeding massively often requires extreme hard work and ingenuity from top employees.
Personally I would never work at, nor invest any money, in a co-op. Same reason I will never invest in a public benefit corporation. I don’t see the economy as charity and I prefer to donate money to overtly non-profit entities rather than donating to “I am willing to make you less money” for-profit entities.
Somewhat counterintuitively, "I am willing to make less money" can be unusually effective, if the difference in how much money you're making is small enough. The intuition is that in non-fully-competitive settings, the creation of quasi-rents has quadratic costs on the economy as a whole, much like any other tax. So giving up a tiny bit of quasi-rent in an elastic market has outsized positive effects.