Outcompeting Capitalism
A business model has been quietly outcompeting privately owned companies for nearly a century, sticking to the shadows like mammals in the age of the dinosaurs. It’s a business model so successful that it’s often used to rescue privately owned companies on the brink. But it’s also so transformative that it’s helped change the paradigm of politics and economics in Scandinavia, France, New Zealand, and other countries. It’s been written about by Forbes, Reuters, The Atlantic, Huffington Post, The Nation, The Guardian, and PBS.
If you work in one of these businesses, you can have a say in who your boss is. You can have a say in how your company is run. You have stock. You vote to decide representatives and board members. As a democracy, you and your fellow workers decide whether to distribute profits among yourselves, or reinvest in research and expand the business. You would have, statistically, higher compensation and better health coverage.
They are, of course, employee-owned cooperatives — companies owned entirely, or in considerable majority, by employees. Many are small, but a few are huge, including the Spanish giant, Mondragon. They often have lower levels of inequality between employees at different strata, and offer incentives like dividends, job security and a say in the workplace, while merging the concepts of the company and the union.
So, let me pose you a hypothetical question: if we instituted a federal investment scheme for employee-owned startups to make them a major part of the economy, would the resulting reduction in the supply of skilled labor available to private firms cause all salaries to rise accordingly? Maybe it’s time to introduce a new gold standard, but for salaries, in which productivity and compensation are inherently linked.
This might seem like a stretch, but consider that nations which have lots of employee cooperative workers also rank highly on the Social Progress Index (SPI), according to the U.N. The SPI is a measure for, “accessibility of basic needs, opportunity, and access to knowledge.” In more human terms, that translates into these nations also topping the list of happiest countries, according to CNN and the BBC.
These countries, which include New Zealand, France, Norway, Sweden, Denmark, Finland, and others, also tend to rate for some of the lowest inequality rates in the developed world, when compared to a list on Business Insider.
So, why are these countries consistently happy, healthy and economically equal, when compared to the United States? There are many ways to reduce inequality, like raising taxes on the rich and having generous social programs, which many of these countries have. But these measures have proven politically not feasible and inadequate in the U.S., with inequality at its highest point since 1905, according to a 2017 article by The Guardian.
Low taxes on the rich, as well as cuts to social programs, are often symptoms of predatory capitalism and concentrations of wealth, which employee cooperatives could disperse.
These companies would provide a baseline standard of pay in all markets and levels of income, relative to how much each worker was actually producing in the economy. They would set up, essentially, a direct relationship between productivity and compensation rates within markets, eventually cutting out private corporations and middlemen who apply downward pressure on worker salaries for their own gain.
It’s widely agreed upon in the articles above that employee cooperatives are more stable and offer more dependable employment, even during recessions. Moreover, they have shown this in tests like the Spanish real estate bubble of 2008, where unemployment reached 24 percent nationally. In Basque Country, however, that number was just 13.5 percent.
In part, this is due to the employee-cooperative and corporate giant Mondragon, along with its 102 employee-owned subsidiaries. Beginning in the crisis, Spanish companies laid off 3.5 million people, reports The Guardian. At Mondragon, salaries for all employees fell just five percent, while employees who had no work were shifted to other divisions and cooperatives. Today, Mondragon has 73,000 employees, 11,000 of whom work outside of Spain.
We know employee cooperatives are also more successful when introduced with the help of government organizations, according to a study by Iowa State University. And there are some who suspect they would be more resistant to automation and globalization, simply because employees are less likely to phase out their own positions. You can get a good idea of what I’m talking about from this video of Richard Wolff, Professor of Economics Emeritus at UMass Amherst.
For every American, it would present an opportunity to access stock options and dividends, to have a say over who their bosses are, to have more dependable employment, and better health coverage. Control over the destiny of the organization you work for. More money to pay off debt, or invest back into the stock market and private enterprise.
Employee cooperatives are run by elected employee representatives, depending on size, and would introduce boots-on-the-ground experience into boardrooms, reducing internal friction over position, power, and pay. But that’s not the only benefit that could come with employee-owned companies and cooperatives, as having control over your work is an important factor in reducing anxiety and depression as well, according to The Guardian. And needless to say, cooperatives may also get more people involved in the act of democracy, since their livelihoods will depend on it.
But here’s the kicker — even if you didn’t end up having a job in an employee cooperative, these cooperatives would still benefit you through richer customer bases and increased competition for skilled employees, decent benefits and good pay.
It is also true that these companies could increase job security for at-risk workers, as they have higher employee retention even in markets like home health services, where compensation is meager by nature of the market. Federal investment in employee startups entering markets like these may even draw skilled workers away from privately owned companies, eventually forcing private businesses to increase salaries and offer better benefits to compete.
Because these businesses are owned by employees, those same employees decide whether to pay dividends to shareholders (themselves) or whether to invest in new market frontiers and research new technologies. And because they answer to themselves, and not a bank holding a majority share, Wolff points out, they are more able to plan and strategize for long term goals.
To summarize the benefits, Wolff turns to the Mondragon Corporation. In the economic depression following the Spanish Civil War, the priest José María
Arizmendiarrieta founded a technical college, and later Mondragon to bring jobs to the area.
Since then, Mondragon has become one of the ten largest companies in Spain, outcompeting privately owned companies. Yet their highest paid employees can receive no more than eight times their lowest paid workers, and employees hire and fire their own bosses.
But cooperatives come in all shapes and sizes, some owned by customers, some by retailers, some by farmers, and some by employees. And you might be surprised by which brands you recognize. They include: Ace Hardware, The Associated Press (AP), R.E.I., Bob’s Red Mill, Cabot Creamery, Dairy Farmers of America, Ocean Spray, Sunkist, True Value, and Welch’s, among others.
Not only that, American cooperatives have entirely transformed markets, just like Mondragon. Take Vermont, where The Burlington Free Press reported in 2015 that the number of farms fell below 2,000 during the mid 1980s Farm Crisis. Nationally, the picture was no different. By 1990, farms in the U.S. numbered just 2.1 million, down from 6.8 million in 1935, according to the series “Farm Crisis” by Iowa Public Television.
Founded in 1919 and dairy farmer owned, The Cabot Creamery Cooperative began their first cheese production just after the Great Depression, branded American Cheddar. By the 1960s, Cabot had a membership of 600 Vermont farms, according to the 2015 article.
Cabot membership fell during the farm crisis, but the company introduced the Cabot brand name in the mid 1980s, and by 1990 had merged with the New England agricultural cooperative, Agrimark.
“Today, the Cabot Creamery is a brand owned by 1,200 farm families who each share 100 percent of the profits based on the amount of milk they ship annually,” according to the 2015 Burlington Free Press article. “The democracy of a cooperative is alive and well — and still assures one vote for every farm, who in turn elect about more than 90 voting representatives based on geography and farm count, who in turn elect a board of directors, made up of one farmer for each of the 14 membership regions.”
More than that, employee cooperatives could use government investing to lift groups of unemployed or undercompensated into the middle class simultaneously, while also creating employee-owned companies and the economic resources to keep them there.
As Thomas Piketty, an economist well known in both the London and Paris schools of economics points out in his best-selling book, “Capital in the Twenty-First Century,” if return on capital is greater than aggregate growth of GDP, then wealth will continue to become more concentrated.
However, it would also stand to reason that if the distribution of return on capital was aimed at lower income levels, the inverse would also be true — that if the rate of return on capital were to abnormally benefit lower classes, then wealth among classes will become more equal. And federal investing in employee-owned companies and cooperatives is one way we might achieve that.
“There are no natural forces pushing against the steady concentration of wealth,” The Economist explains of Piketty’s views. “Only a burst of rapid growth (from technological progress or rising population) or government intervention can be counted on to keep economies from returning to the “patrimonial capitalism” that worried Karl Marx.”
With increasing investment in employee-owned cooperatives and companies, we can create an entirely new section of the economy. This section would be made up of companies like Mondragon, owned entirely by their employees and sharing ownership of the goods they produce, instead of being governed from the top down by a checkbook.
Employee-owned startups can also spread the benefits of federal investing to a larger group of people through democratized ownership of stock and capital, instead of concentrating that wealth with owners and executives. Not to mention, they could stoke business in the U.S. economy as well, by providing private businesses with customers of increasing wealth.
Moreover, as Richard Wolff points out, employees in cooperatives tend not to outsource their own jobs — whether overseas or to technology and AI. While the recession has caused Mondragon to outsource some jobs to Asia, by and large employment at the company has remained steady, and they continue to try and bring contractors into the Mondragon umbrella.
“Like other European companies, Mondragon is exposed to fierce competition from developing world competitors with lower labour costs. Its response has been to set up factories — or buy companies — in other parts of the world. There are now 94 subsidiaries producing goods from Vietnam to Chile, Morocco and Russia.
[Mikel Zabala, a human resources boss at Mondragon’s headquarters] insists that even non-member workers are treated better than in most companies — though temporary workers, who are the first to go at times of crisis, may disagree. “We do not really know how to behave like simple exploitative capitalists,” he said. “Even where we cannot fully behave as a co-operative, we at least try to implant the model of co-operative administration.”
While this view is partially contradicted by this article on Medium by Jill Bamburg, Co-Founder of the Bainbridge Graduate Institute, federal investing requirements could also present the opportunity to have built-in environmental and employee protections— an environmental and employee bill of rights, if you will — which would guarantee adherence to environmental, labor, and community service guidelines.
This means that, also like Mondragon and Cabot, employee cooperatives could be more tightly knit into a community at large, building enclaves of particular skills, and local economies. They are also present in farming regions as agricultural cooperatives, according to Business Insider, which should make them palatable to both liberals and conservatives.
With mandated wage equality and the opportunity for the ownership of capital, these cooperatively owned companies would tend to draw the market’s most skilled employees. This would, in turn, force private employers to pay higher wages in order to compete, and create a natural force to combat concentrations of wealth, just as Piketty describes.
They would also be less expensive for the government, as minimum wage employees often need government assistance, according to this article by Politifact. The benefits of government loans and investment that support these businesses would also tend to be more equitably shared among communities as well, instead of benefiting only a small group of owners.
It’s much like human evolution, and the evolution of other social animals. Humans and other species learned millions of years ago that banding together instead of competing for resources was more efficient, and allowed more of us to live comfortably. It’s social evolution played out in economic terms.
As the tech and AI revolutions continue to evolve and generate greater return on capital for business owners, employee cooperatives would mean that wealth gets spread more evenly through communities. Even outsourcing some jobs, at that point, becomes an exercise in community enrichment, both here in the U.S. and wherever those goods are produced.
We’ve seen countless jobs automated in the past 30 years and work earnings lower than they were in the 1970s, according to The New York Times. But these same forces can also work, over time, to make a U.S. economy built on smaller businesses that is more flexible, stable, and economically viable.
As technology and AI help worker productivity increase manyfold, small businesses will be able to produce larger amounts of goods with a smaller number of employees. And the battle we face in the coming century is: where does that extra return on capital go?
If it goes to the rich, we can expect mass unemployment and low wages. If we democratize that capital through increasingly serious government investment in employee cooperatives, we can use technology and globalization to leverage the massive U.S. market towards greater equality and global competitiveness.
