Book review on plywood coops

I have not written too much on the rather worthless academic literature on the “Illyrian firm” or “Ward-Domar-Vanek labor-managed-firm”–although there are a few points that warrant attention.

The worthlessness of the academic literature is due to it being based on the silly assumption that if workers in a “labor-managed firm” could kick out some members and thereby raise the net income of the surviving members, then they would do so. The literature churns out anomaly after anomaly (e.g., backward bending supply curve) based on that assumption, seemingly without stopping to consider that the same anomalies could be generated for a conventional corporation if the same silly assumption was applied there. That is, suppose there was some unanticipated and exogenously caused increase in the price of the principal product of a conventional company. That would lead to an increase in the price of the stock. If a majority of the shareholders had a mandatory call on some of the others’ shares at the pre-increase price, then they could use some of the firm’s capital to buyback those shares at the old price and thus capture more of the price increase for their shares. But other things being equal, this expenditure of the company’s capital would mean some reduction in the level of output, and hence a backward bending supply curve. Hence if that were allowed in an ordinary company, then the same anomalies would arise, but that is not allowed between shareholders scattered far and wide with no face-to-face community. But by making the outlandish assumption that workers in a cooperative would do that to each other, the literature on the “labor-managed firm” has with straight-face derived these anomalies and then “reluctantly” dismissed the labor-management idea as anomalous.

Another point is how the system of internal capital accounts solves the Furubotn-Pejovich horizon problem. But Furubotn and particularly Pejovich did not raise this problem in order to prompt a solution but to plant the idea that this was an inherent and fatal flaw in the whole idea of workplace democracy. Hence they are distinctly uninterested in acknowledging any solution.

Another commonly cited “problem” is that the workers’ capital stake in a worker-owned firm is not diversified like a stock portfolio on the stock market, and since workers are generally not in a position to be risk-takers, worker-ownership should be avoided for the workers’ own interests. This argument is also answerable by noting that there is another “dual” strategy for reducing risk which these critics and economists in general seem to be “unaware” of–although evolutionary biology is well-aware of it in the notion of K-selection as opposed to the diversifying strategy of r-selection.

This book on the plywood coops is written by an academic economist who is sympathetic to worker cooperatives, but just repeats the standard criticisms as if he were unaware of the solutions and counterarguments. Hence I wrote the review to once again point out the solutions and counterarguments.

Click here to download review.