In an ideal world, David Erdal would not have had to write this book advocating much wider ownership of businesses by their employees, because employee owners would not be such rare creatures. Modern economies, and especially the Anglo-Saxon ones, have a dangerous business monoculture. Nowhere have the weaknesses of big businesses run according to the mantra of "shareholder value" been more dramatically revealed than in the US and UK banking industries. According to Jim O'Neill, the emerging economies guru, the Chinese refer to "the North Atlantic financial crisis".
Given the flawed economy we have, Erdal has written a polemic urging the spread of employee ownership of businesses. He writes from experience, having delivered his own family-owned firm into the safe keeping of its employees, in the teeth of advice that it would prove a disaster. He also describes a number of other employee-owned businesses, from well-known examples such as the John Lewis Partnership and the Mondragon Co-operative in Spain to some less prominent examples.
The author debunks – quite successfully, I think – some of the myths about employee ownership. Three are particularly tenacious: that these companies will be slow and cautious, that they will not reinvest because employee-owners want to take out the cash, and that they will not be able to raise enough capital to grow.
The examples demonstrate that none of these is inevitable. John Lewis has prospered, invested, innovated and grown far more than many high-street rivals. Anyway, conventional corporations are hardly celebrated for their long-term perspective. Employee owners are bound to be more committed to the success of the business than remote pension fund shareholders.
It's also undeniable that working for a conventional big business is a soul-destroying way of earning a living. Whether you're a shelf-stacker or an upwardly thrusting executive, corporate life sucks. The governance of big companies is weak in the extreme. In very few cases do the structures of management allow individuals to take pride in and responsibility for their effort. It seems plausible that businesses owned by employees would have a greater sense of pride in serving customers well. The book gives vivid illustrations.
Erdal makes a good case for employee ownership. However, the book would be stronger if he had addressed some obvious caveats. There are two main ones. The first concerns the well-being of the employees. They are earning their living from the company that pays their wages. If shares in the company also form their main asset, they are extremely vulnerable to its fortunes. Employees of Enron, which had a wide employee share ownership scheme, found this out to their cost.
The second is that, if employee ownership is such a good idea, why is it so rare? The examples in this book crop up every time anyone writes about the subject. The legal framework enables others to exist – but they don't. Why not? I would also have liked some wider context, perhaps some figures on how many such businesses exist. My hunch is that this is a fringe phenomenon.
I also have a specific complaint, which is Erdal's bizarre and irritating view that economics is to blame for the structure of the corporate world. He seems to think we economists assume that "human nature is driven by a psychotic focus on marginal self-interest". In my 30-plus years of doing economics, never have I come across a theory that starts: "First, assume N psychotic individuals..." Erdal seems unaware of the rich body of work by economists on different types of institution, including co-operatives and mutuals.
The real target should not be economists but the rich and powerful who bowdlerise a version of the subject to cloak their self-interest. The obstacle to wider employee ownership – as to other forms of organisation that would permit a healthier economy – is the resistance of people who benefit from the system we have now. Perhaps this is starting to change. The Governor of the Bank of England, no dangerous radical, has pointed out that the banking industry serves bankers, rather than its customers. His intervention might be the first step on a road to what David Erdal would describe as a more human economy.
Diane Coyle's new book is 'The Economics of Enough' (Princeton)
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