Unit 6 The firm and its employees

6.14 Application: Another kind of business organization

Why do firms work the way they do? Why, in the majority of firms, do the owners of capital hire the workers, rather than workers owning the firm and renting the machinery they use? Randall Kroszner and Louis Putterman summarize this field of economics in their book, The Economic Nature of the Firm.1

cooperative firm, worker-owned cooperative
A cooperative is a business organization whose members together own the assets of the organization; they share the income resulting from their activities and jointly determine how the organization will be run. A worker-owned cooperative is a firm that is mostly or entirely owned by its workers, who hire and fire the managers.

Even in capitalist economies, some business organizations have an entirely different structure from the ones we have been analysing: their workers are the owners of the capital goods and other assets of the company, and they select managers who run the company on a day-to-day basis. This form of business organization is called a worker-owned cooperative or cooperative firm.2 3

One well-known example is the large British retailer John Lewis Partnership, founded in 1864 and held in trust for its employees since 1950. Every employee is a partner, and employee councils elect three out of seven members of the company board. The benefits for employees (pension, paid holidays, long-service sabbaticals, social activities) are generous, and the business’s profits are shared out as a bonus, calculated as a percentage of each person’s salary every year. The bonus normally ranges between 10% and 20% of pay, even after a significant chunk of the profits are retained for future investment. John Lewis has been one of the country’s most profitable and consistently successful retail businesses, although profits were severely hit by the COVID-19 pandemic.

Worker-owned cooperatives are hierarchically organized, like conventional firms, but the directives issued from the top of the hierarchy come from people who owe their jobs to the worker-owners. The other main difference is that the cooperatives need fewer supervisors and management personnel to ensure that the worker-owners work hard and well. Case studies show that in companies owned primarily by the workers themselves, work is done more intensely, with less supervision. Fellow worker-owners will not tolerate a shirking worker because the shirker reduces the profit share of the other workers. Less need for supervision is among the reasons that worker-owned cooperatives produce at least as much per hour, if not more, than their conventional counterparts.

Inequalities in wages and salaries within the company, for example between managers and production workers, are typically less than in conventional firms. And worker-owned cooperatives tend not to lay off workers when the economy goes into recession, offering their worker-owners a kind of insurance (often they cut back on the hours of all workers rather than terminating the employment of some).

The economist John Stuart Mill predicted that the conventional employer–worker relationship would eventually be replaced by partnership types of business organization. There have been many attempts to establish unusual types of business organization throughout recent history, but borrowing the funds to start and sustain worker-owned companies can be difficult because, as explained in Unit 9, banks are often reluctant to lend funds (except at high interest rates) to people who are not wealthy.

Exercise 6.12 A worker-owned cooperative

In Figure 6.1 we showed the actors and decision-making structure of a typical firm.

  1. How do the actors and decision-making structure of John Lewis Partnership differ from that of a typical firm?
  2. Illustrate your answer to Question 1 in a diagram as shown in Figure 6.1.

Great economists John Stuart Mill

Portrait of John Stuart Mill

John Stuart Mill (1806–1873) was one of the most important philosophers and economists of the nineteenth century. His book On Liberty (1859) provides a powerful argument in favour of individual freedom and privacy.

Mill thought that the structure of the typical firm was an affront to freedom and individual autonomy. In The Principles of Political Economy (1848), Mill described the relationship between firm owners and workers as an unnatural one: ‘To work at the bidding and for the profit of another, without any interest in the work … is not, even when wages are high, a satisfactory state to human beings of educated intelligence,’ he wrote.4 5

Attributing the conventional employer–employee relationship to the poor education of the working class, he predicted that the spread of education, and the political empowerment of working people, would change this situation:

The relation of masters and work-people will be gradually superseded by partnership … perhaps finally in all, association of labourers among themselves. (The Principles of Political Economy, 1848)

Exercise 6.13 Was Mill wrong? The role of cooperatives in the economy

Worker cooperatives are part of many economies, but have generally not yet become the dominant form of organizing labour. Use these articles to answer the following questions:

  1. According to the evidence, how do worker cooperatives tend to perform relative to firms with traditional structures?
  2. What views about worker cooperatives do these articles challenge or provide an alternative perspective on?
  3. Despite the potential benefits of worker cooperatives, what are some reasons why they have generally not ‘superseded’ traditional firms as Mill predicted?
  1. Randall S. Kroszner and Louis Putterman (eds.). 2009. The Economic Nature of the Firm: A Reader. Cambridge: Cambridge University Press. 

  2. During the twentieth century, worker-owned plywood producers successfully competed with traditional capitalist firms in the US. John Pencavel. 2002. Worker Participation: Lessons from the Worker Co-ops of the Pacific Northwest. New York: Russell Sage Foundation Publications. 

  3. The knowledge-based economy is creating new forms of firms, neither capitalist nor worker-owned. Tim O’Reilly and Eric S. Raymond. 2001. The Cathedral & the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary. Sebastopol, CA: O’Reilly. 

  4. John Stuart Mill. 2002. On Liberty. Mineola, NY: Dover Publications. 

  5. John Stuart Mill. 1994. Principles of Political Economy. New York: Oxford University Press.