Where Did Mill Go Wrong?: Why the Capital Managed Firm Rather than the Labor Managed Enterprise is the Predominant Organizational Form in Market Economies

71 Pages Posted: 15 Jul 2011

Date Written: July 14, 2011

Abstract

Why do market economies consist almost entirely of capitalist firms rather labor managed worker owned cooperatives? Over 150 years ago John Stuart Mill predicted that cooperatives would become the predominant form of enterprise organization. His reasons were right but his conclusion was wrong. The standard explanation of the prevalence of capital management and ownership is that capitalist firms are more efficient ion some way, but empirical research shows the opposite to be true. That deepens the mystery. I review three standard transactions costs explanations of the sort by the leading scholars of the field, N. Scott Arnold, Henry Hansmann, and Gregory Dow, and show that their accounts are inadequate. I then set forth my own theory, a novel one that has been overlooked in the literature: the formation of a labor managed cooperative is a public good that creates collective action problems of the sort expounded by Mancur Olson and Russell Hardin. I illustrate this with empirical examples and suggest that these indicate the path to be taken for those who wish to promote the development and growth of a labor managed economy consisting largely of cooperative labor managed firms.

Keywords: cooperative, enterprise, firm, business, organization, labor-managment, worker ownership, transactions-cost, collective action, public good, rational choice

Suggested Citation

Schwartz, Justin, Where Did Mill Go Wrong?: Why the Capital Managed Firm Rather than the Labor Managed Enterprise is the Predominant Organizational Form in Market Economies (July 14, 2011). Available at SSRN: https://ssrn.com/abstract=1886024 or http://dx.doi.org/10.2139/ssrn.1886024

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