Why don't workers own and control the companies they work for?

The statist left, the left as most understand it, believe that government can make things better. That organisation by the state can outperform the chaos of the market. However, Chris Dillow is right to argue that this is not necessarily the logical conclusion of the Marxist call for workers to seize ownership from capitalists. He argues that for workers to own the firms they work for - within the market system - would be more just and for them to run those firms - from the bottom up - would be more efficient.

My father worked for a mutual and it seemed to work quite well. Largely as a result of that experience I'm quite open to forms of corporate ownership other than the public limited company. However, that is still the way most sizeable firms are organised (small companies often are owned by their workers - the corner shop is a classic example). Firms like John Lewis are very much the exception.

Why do we not have a John Lewis economy?

First, I will put a couple of reasons why workers rarely own the companies they work in. From there I will build the case as to why a hierarchy is necessary within most firms. Why do workers not own the firms they work in?

1. It is not in the workers' interest

According to Chris the managers are successfully rent-seeking at the moment so it seems unlikely that they would benefit from his new system. However, I also doubt the workers would stand to benefit from it either.

First, bear in mind that workers do own huge swathes of the corporate world. Pension funds are largely composed of their savings and have huge financial muscle. The question isn't "should workers own companies" but "should workers own the company they work for".

The next thing you must remember is that most people have the bulk of their wealth in the form of future income from labour. Their financial wealth generally has a much smaller present value, at least until they near retirement. Their expected future earnings are often tied up with the fortunes of their employer and their industry. It makes sense to use their financial wealth to diversify away so that if their employer or industry should suffer their fortunes will not be entirely ruined. To own the company they work for exposes them to greater risk and is not in their interests. That is why employees usually need to be bribed to take stock options.

What do they get in return? They get control of their workplace. Not much control though. In any firm of more than 100 employees they will, personally, have less than 1 per cent of the votes. Only if they think of themselves as part of the monolith 'workers' would 'they' really be in control. I'm not sure they do. I think the lack of class feeling among the workers has long been the downfall of Marxist analyses and undermines the idea of workers controlling their workplace as well.

Workers increase their financial risk and gain little but a symbolic power over their workplace.

2. It would stifle the economy's ability to respond to changing conditions

It is important that most large firms are owned by investors concerned, more than anything, with maximising their return. That interest means that they direct their capital where it is most valued. By contrast, workers cannot move freely between employers and industries. If workers owned the firms they work in they would not reallocate their capital if an opportunity for greater profit arose. New industries could be neglected as they are unable to build a critical mass of workers invested in them. In this way firms owned by workers would create the same sclerosis that many historians argue affected British corporate performance when it was dominated by family firms.

Only firms that exist will have workers attached to them. To quote Milton Friedman: "the interest-group whose self-interest is most aligned with the free market, isn't big business or small business, it's the businesses that don't yet exist". An economy dominated by worker co-operatives would make it hard for new industries, even if they were far more profitable, to attract capital and expand with new businesses and investment.

Making the economy less adaptable and hurting the financial security of the workers themselves seems, to me, to deal a serious blow to any case for workers owning their places of work.

Why firms usually operate as hierarchies

Chris argues that Hayekians, who are sceptical of government planning, should also be sceptical of planning by management within a firm. I don't think that really constitutes a case for worker control, bottom-up management. There is still planning whether that planning is done by one or a thousand people. Hayek saw the best system of organisation not as a democracy but a market. While more people making a decision might allow for more dispersed information to be used in decision-making the amount gathered in a corporate democracy would still be vanishingly small compared to the volume of information marshalled by the price system.

For firms - a space in which planning takes the place of the price system - to exist at all is a sacrifice of Hayekian principle. How they are organised is a trivial detail by comparison. However, Coase did a fine job of explaining why firms exist so that sacrifice in purist anti-planning principle should not be too galling.

Having external shareholders drives the need for a hierarchy. Shareholders need to be able to appoint someone who will manage their company for them. They then need to be able to hold that person accountable for delivering results. That really needs to be one person, to whom other employees are - in turn - responsible. Without the clear lines of accountability provided by a hierarchy there is too much opportunity for people to either avoid being held to account or be held to account for things outside their control. The skill of the manager is in ensuring those he manages know what they are responsible for, are only responsible for what they can control and are held properly accountable when they fail.

Therefore, Chris is right that corporate hierarchies are about power. However, that power is the legitimate power of a company's owners over all those who work for it.

P.S. I've only linked to the oldest incarnation I could find of Chris making this argument but have drawn on several arguments that he has made since. This has been such a theme at his blog that it would be more of an effort than I can manage right now to link to all his relevant posts on this subject.