Why aren't co-ops everywhere?
Why co-ops face structural disadvantages in equity markets
People like co-ops. They like working for them, and they like supporting them—across political lines.1 With all that interest, why aren't co-ops everywhere?
There’s a common misconception that co-ops can’t compete with traditional firms because they're inefficient—if everyone needs to decide on every issue, how can you compete with top-down, hierarchical management? This misconception confuses firms’ management structure with their political structure. There are plenty of co-ops with the kind of ‘flat’ management structure this stereotype imagines. But co-operatives aren’t defined by their management structure. Cooperative ownership is about a firm's political structure—how people with power are held to account. In traditional firms, management answer to the shareholders, and workers to management. In cooperative firms, management answers to the workers. (Cooperatives can take on any management style—hell, Spain has a worker-owned management consultancy). What matters in co-ops isn’t whether there’s a boss. It's who can fire the boss.
And co-ops, as a political structure, can compete with the best. Co-ops are “(somewhat) more productive than conventional firms [and] afford their workers greater job satisfaction” (Harcourt, 2024; p 51). Cooperative firms are “economically sustainable and that they return more economic value to workers, reduce turnover, and motivate work effort” (Schor & Edddy, 2022; p 22).
So, why aren't co-ops everywhere? The most satisfying explanation I'm aware of is from Gintis (1989). It has to do with raising money.
Imagine you’re starting a co-op. Say it’s a bagel factory. You need to raise money for the warehouse, the machinery, distribution, etc. So you go to meet investors. And investor after investor tells you the same thing:
“Your venture isn't risky enough. Look at it from our perspective: we have a portfolio to manage. We have to earn at least 6% year over year—ideally more. You’re going to need to take on more risk—increase your upside—if you want us to invest.”
So they push you to buy equipment on debt, lever up and buy an existing factory, run a big ad campaign instead of saving for payroll, whatever.
Here’s the issue: risk and reward are linked. You can't take on more reward without more risk. And here’s where we hit our problem: investors want more risk than workers are willing to take on. Workers don’t want equity in a high-risk firm. They want a steady paycheck. Workers’ risk preference, in other words, is systematically lower than that of investors.
There is a solution here. Investors could pay workers off—give them a “golden parachute,” a payout that triggers if the business goes under. Golden parachutes are a common tool in traditional firms for aligning CEOs’ and investors’ preferences. Even CEOs want to keep their jobs, after all, but everyone has a price: if investors pay management enough, they'll agree to take on more risk. (This is why CEOs will occasionally receive massive golden parachutes even when their businesses fail.). All sufficiently (from the investors’ perspective) risky firms carry some risk of failure. An executive who takes on that risk may be out of a job themselves, and they know it. So, investors are forced to guarantee them a not-so-bad outcome if that comes to pass.2
If golden parachutes work for management, why not pay off all the workers in a co-op? Give them enough cash to make it worth their while to take on the level of risk investors prefer? Because, from the investors’ perspective, traditional firms are a better ‘buy:’ you only have to pay off management! Fewer heads in a top-down firm means a lower cost of investment: fewer people to pay off. So, even if the co-operative political structure is more innovative, stable, customers prefer it, etc., the traditional firm will still be ‘cheaper’ in equity markets—it will cost investors less to encourage that firm to take on the risk those investors want it to.
And that's why there aren’t more co-ops. It’s harder for co-ops to raise money than it is for traditional firms. In financial jargon: co-ops are structurally disadvantaged in equity markets.
What can we do about it? What can we do to help co-ops compete in equity markets? Gintis (1989) suggests regulatory approaches: tax-advantaging co-ops or co-op investments, offering government cash to supplement co-op equity, and so on.
These approaches are plausible. But I don't love them. Any time there’s a tax advantage, there's a long line of thirsty “entrepreneurs” waiting to capture it. Loopholes are almost guaranteed. I can just imagine the headline: “Goldman Sachs Becomes Worker-Owned Co-Op.” (Look, Nestle is a certified B-Corp. Anything is possible.).
Even if we could guarantee that these policy solutions would be tight in their implementation (i.e., no fake/nominal co-ops), they have another problem: they borrow from public balance sheets. They all incur lost tax revenue. I don't think public wealth should, or needs to, come at the expense of economic justice. (So, we convert the whole economy to co-ops. Then what? Are we out the tax revenue from all the growth and innovation? Misalignment between public and private interests is more than half the problem we're trying to solve here.).
Mutualist solutions, like a sovereign wealth fund that takes equity in exchange for capital, could be better. Capital comes off public balance sheets at investment time, but at least those balance sheets stand to capture upside from firms’ success. If they want to give co-ops a leg up, they could offer a systematic valuation discount on cooperative ownership structures. And, if cooperative firms are more productive and sustainable than traditional firms, the SWF could make up that discount, especially over the long time horizon states care operate on!
Another option: treat workers more like investors. Give them equity and have them work for the upside. As long as they can pay their day-to-day expenses, this structure will align their risk preferences with capital.3 This solution may be more plausible when paired with a UBI and/or a negative income tax and/or robust means-tested welfare. If any worker has enough to pay day-to-day expenses, why wouldn’t everyone work for the upside? (And why not fund the scheme with a sovereign wealth fund that captures some of that upside in equity ownership?). Yet another reason why guaranteed income schemes could benefit innovation in the right policy environment.
I also wonder about solutions that don't involve the state. How can private arrangements counteract the structural disadvantages co-ops face in equity markets? An easy option: get investment from wealthy patrons who don't care about the ROI. This is the explanation Schor & Eddy (2022) arrived at when they tried to explain the success of Stocksy, a photographer-owned stock photo co-operative. (Stocksy was founded by two wealthy photographers who were motivated in part by philanthropic aims). But that solution requires people with capital to meaningfully divest both their wealth and the political power it buys them—unlikely to happen en masse.
The best non-state solution builds on what we already have: mutual aid networks that provide financial, legal, and otherwise support to co-op members. Groups like the Sustainable Economies Law Center, NOBAWC, and others exist (in part) to help co-ops take on risk. More formal equity-sharing agreements could help those networks capture financial upside from successful co-ops; that upside would, in turn, juice those networks’ ability to provide material financial support to co-ops—a sort of private, mutually owned version of the sovereign wealth fund, at least at its extreme. Relaxing accredited investor rules and creating carve-outs in securities for such activity could help mutual aid networks grow their coffers and subsidize risk-taking for members. These networks don’t need to invest in co-ops themselves. (Arguably, they shouldn’t; doing so could distort their incentives.) They only need to provide a UBI to co-op members while they seek capital in traditional equity markets!
None of these ideas are mutually exclusive—neither the public nor private remedies nor with each other. I remain optimistic about co-ops. If they face a structural disadvantage in equity markets, then I'd argue equity markets face a structural disadvantage in delivering economic justice. That bill will come due eventually. It's only a question of how and when we pay it.
Further reading
Herbert Gintis - Financial markets and the political structure of the enterprise (1989)
Bernard E. Harcourt - Cooperation (2024)
Juliet Schor & Samantha Eddy - The Just and Democratic Platform? Possibilities of platform cooperativism (2022)
Co-ops enjoy broad bipartisan support. Look at the RURAL act. As Fraser (2019) argues, a progressive populism—the institutional form of the co-op a likely anchor—could create a new counterhegemonic bloc in American politics.
Investors also need to compensate management to do, at times, dastardly things, and take the fall for it.
This is already somewhat common in tech, a sector in which risk is always high. But the labor market is tight enough that workers have less to fear from layoffs, as they can almost always find a new job on the other side of a particular firm’s failure to survive.
Fantastic read, thanks for making the ominous market slightly less opaque. Am curious how often co-ops get big enough to be competing for investor money that would otherwise be going to trad firms?
Thought-provoking and clear, as always.