Where Did Mill Go Wrong? Why the Capital-Managed Rather than the Labor-Managed Enterprise is the Predominant

Ohio State Law Journal 73:220-85 (2012)
Justin Schwartz
University of Michigan, Ann Arbor (PhD)
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 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. This explanation is supplemented by the mere exposure or familiarity effect derived from social and cognitive psychology, which turns on the fact that labor managed firms are rare, in part because of the public goods problem, thus unfamiliar, which makes them less attractive and thus more likely to be rare. My account points advocates of labor management towards solutions such as institutional changes in incentives, which, however, themselves involve public goods issues.
Keywords Cooperatives  Capitalist firms  Game Theory  Public Goods Problen  Mancur Olson  John Stuart Mill  Prisoner's Dilemma  Familiarity or Mere Exposure Effect  Social Psychology  Organizational Forms
Categories (categorize this paper)
Edit this record
Mark as duplicate
Export citation
Find it on Scholar
Request removal from index
Revision history

Download options

Our Archive
External links

Setup an account with your affiliations in order to access resources via your University's proxy server
Configure custom proxy (use this if your affiliation does not provide a proxy)
Through your library

References found in this work BETA

No references found.

Add more references

Citations of this work BETA

No citations found.

Add more citations

Similar books and articles

Voice Without Say: Why Capital-Managed Firms Aren't (Genuinely) Participatory.Schwartz Justin - 2013 - Fordham Journal of Corporate and Financial Law 18:963-1020.
Mill, Political Economy, and Women's Work.Nancy J. Hirschmann - 2008 - American Political Science Review 102 (2):199-203.
Of Making Comparison of Sraffa's Theory of Price to Marx's Theory of Value.Jun-Shan Zhang - 1997 - Nankai University (Philosophy and Social Sciences) 1:7-15.
Mill's `Socialism'.Dale E. Miller - 2003 - Politics, Philosophy and Economics 2 (2):213-238.
John Stuart Mill on Health Care Reform.Sean Donaghue Johnston - 2011 - Social Philosophy Today 27:63-74.


Added to PP index

Total views
60 ( #113,296 of 2,312,424 )

Recent downloads (6 months)
9 ( #68,222 of 2,312,424 )

How can I increase my downloads?

Monthly downloads

My notes

Sign in to use this feature