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Unpublished Paper
WHERE DID MILL GO WRONG?: WHY THE CAPITAL MANAGED FIRM RATHER THAN THE LABOR MANAGED ENTERPRISE IS THE PREDOMINANT ORGANIZATIONAL FORM IN MARKET ECONOMIES
ExpressO (2011)
  • Justin Schwartz
Abstract

In this Article, I propose a novel law and economics explanation of a deeply puzzling aspect of business organization in market economies. Why are virtually all firms are organized as capital managed and owned (capitalist) enterprises rather than as labor managed and owned cooperatives? Over 150 years ago, J.S. Mill predicted that efficiency and other advantages would eventually make worker cooperatives predominant over capitalist firms. Mill was right about the advantages but wrong about the results. The standard explanation is that capitalist enterprise is more efficient. Empirical research, however, overwhelmingly contradicts this. But employees almost never even attempt to organize worker cooperatives. I critique the explanations of the three leading analysts of the subject (N. Scott Arnold, Henry Hansmann, and Gregory Dow), all of whom offer are different transactions cost accounts, as logically defective and empirically inadequate. I then propose an explanation that has been oddly neglected in the literature, that the rarity of cooperatives is explained by the collective action problem identified by writers such as Mancur Olson. Labor management is a public good that generates the ¬n-person prisoner’s dilemma which gives rational actors the incentive to create it in suboptimal (or no) amounts. I support this by reference to the empirical facts about the origin of existing cooperatives and show that this explanation requires no strong version of a questionable rational choice theory. My account points advocates of labor management towards solutions such as institutional changes in incentives, which, however, themselves involve public goods issues.

Keywords
  • business organization,
  • corporations,
  • companies,
  • capitalist firms,
  • cooperatives,
  • markets,
  • efficiency,
  • self-management,
  • transactions costs,
  • collective action,
  • public goods,
  • prisoner's dilemma
Disciplines
Publication Date
July 15, 2011
Citation Information
Justin Schwartz. "WHERE DID MILL GO WRONG?: WHY THE CAPITAL MANAGED FIRM RATHER THAN THE LABOR MANAGED ENTERPRISE IS THE PREDOMINANT ORGANIZATIONAL FORM IN MARKET ECONOMIES" ExpressO (2011)
Available at: http://works.bepress.com/justin_schwartz/4/