Un-Cooperative.

Worker Cooperatives are often seen as the answer to capitalism because they democratize work, limit hierarchical structures and provide meaningful employment to workers.

They are also rare and insignificant, especially in the United States, and are thus not a viable solution to fixing capitalism.

Ouch.

This essay dissects the nature of work and structure of corporations under the capitalist system in America and reveals why it’s nearly impossible for worker cooperatives to succeed at scale. It’s a lot to digest, but we’ll leave some helpful clues along the way.

Chapter One: Doing the Work

What is work? Why do we do it? With all the talk of finding happiness, dreaming of retirement, reducing the number of workdays, increasing the number of sick days, paid time off, disability benefits, unemployment benefits, parental leave, bereavement leave, federal holidays, sabbaticals, remote work and hybrid work, we seem to spend more time talking about ways to not work than ways to work.

That said, we have all sorts of ways to measure the amount of work we do as a society and the value of it, the most notable being “productivity.” Each year the World Data Bank and OECD release information on worker output relative to the wealth of a nation, or GDP per capita. For example, South Koreans work 450 more hours every year than Norwegians, yet Norway ranks number two overall in terms of productivity compared to South Korea at 24.

What’s interesting about the United States is that we’re ranked 10th on this list even though the U.S. has the highest GDP in the world by a wide margin and we work 1,800 hours per year on average, similar to that of South Korea. That means there’s something askew about the per capita equation. Given our GDP and the amount of hours we work, there should be more money floating around.

The fact is, it’s expensive to perform work in this country and other mature economies. Anyone who works in a small business, works for themselves or has ever tried to start up a company finds out pretty quickly that it’s pretty complicated. First, you have to register to do business on the state and federal level. (Thankfully there are free resources to do this, though it’s a bit tricky.) It really helps to have an attorney who can draft formation documents depending upon the type of corporation you would like to be, which is determined by several factors that an accountant can help you sort out. (There are free accounting resources as well, but they also take some understanding.)

Most of the big named companies, and all of the ones listed on public stock exchanges are called C-corporations. Basically C-corps allows for unlimited shareholders and the ability to raise money through the issuance of shares or stock. It also has dual taxation, meaning that the corporation itself will pay taxes on its earnings and its shareholders will pay taxes on distributions of these earnings. That’s one of the reasons that small businesses and partnerships aren’t typically organized as C-corporations.

For smaller companies there are other ways to set up a business. For example, the S-corporation has a single taxation stream on the shareholders or partners. A lot of law firms and doctors are set up this way so there’s no tax at the corporate level, only on the distributions recognized by the partners or shareholders. But S-corps are pretty limited in terms of capital raising because there’s only one class of shareholder, as opposed to the C-corp that can have multiple tiers based upon participation.

A lot of small businesses and startups outside of practices like lawyers or physicians use something called a limited liability company (LLC). You’ve likely heard of these. The benefit of an LLC is that you can choose how to be taxed while enjoying the benefits of a corporation that protects you from debt and personal lawsuits. There are nuances to this but the bottom line is that an LLC is the way most small businesses are organized these days.

On the pure corporate and profit motive side of things, those are the major ones. Although there are some honorary mentions.

There are specific use cases for different types of for-profit entities such as holding companies and joint ventures, but these tend to be legal structures designed to account for shareholder liabilities and responsibilities to some degree. On the investment side things get even murkier. Like Real Estate Investment Trusts (REITs are investment vehicles designed to hold a portfolio of individual income producing real estate properties.

On the non-profit motive side of the spectrum we also have several considerations.

Most of us are familiar with charitable organizations or nonprofit entities. These are established as 501c organizations, which themselves sit along a spectrum of designations. Charities that perform public welfare services and churches are considered 501c3 and can offer tax deductions for people who donate to them. Lobbying groups are considering 501c4s and chambers of commerce are 501c6s, for example. The throughline is that these aren’t designed to turn a profit for personal gain. They can have surpluses, but these aren’t taxable like regular corporations.

Lastly, existing somewhere in the middle with a foot in both worlds we have mission-driven, for-profit companies. These are considered public benefit corporations and some even have something called B-Corp status, which has become popularized in recent decades. But these are selected designations that demonstrate a company’s particular mission like Bombas Socks, Ben & Jerry’s, Patagonia or Warby Parker. These corporations do good work as part of their profit mission but for practical purposes, they’re considered regular corporations under the federal and state tax codes.

So here’s the bottom line, at least where the United States is concerned. No matter how big or how small, companies have a lot of work to do just to exist.

Employees need to file tax forms to have local, state and federal deductions withdrawn from their paychecks. If they’re contractors or outside workers, they still have to fill out paperwork to track payments to them and they’re responsible for filing taxes. You need liability insurance, worker’s compensation coverage, articles of incorporation, maybe some sort of health insurance plan and guidelines for employment like number of days off and sick days. To do these things right all costs money. (CLUE #1)

And if you work for one of these companies, you might think the whole system kind of stinks. Red tape and paperwork, being overworked and underpaid, watching dipshits get ahead of you when you either work more than them or just do it better.

An honest wage for an honest day’s work seems like a million miles away from where we are today in this bureaucratic mess. Not to mention, you have your own problems that come along with being a person in the world. You too have to file taxes, pay rent or a mortgage, buy food, find transportation, get insurance on yourself and your stuff. And so you start thinking to yourself, there has to be a better way…

Chapter Two: Mondragon

One of the reasons I think worker cooperatives capture our imaginations is because of Mondragon in Spain. It’s a true marvel because it’s competitive at scale. Typically worker cooperatives are small, local enterprises like food cooperatives, independent breweries and small retail stores. Engagement with local members who are more connected to them and unique product offerings that appeal regionally make them competitive on a small scale but this typically falls apart when you try to compete on a much larger scale due to the competitive price forces of capitalism. (CLUE #2)

We’ll talk more about that in a moment, but let’s first talk about Mondragon and why it’s such a unicorn.

The Mondragon Corporation was actually founded in 1956 in the Basque region of Spain. The timing is important because Spain was deeply recessed at the time and still desperate to recover from World War II. Unemployment was high and Spain’s infrastructure was battered from the war, making it difficult for industries to rebuild and grow. That’s when a young priest named José María Arizmendiarrieta envisioned a different kind of business model—one where workers themselves would own and operate their businesses democratically.

Father José María also understood the value of training, much in the way social democratic models grew up around organized labor movements. So the whole endeavor actually began when he established a technical training school. The first round of graduates from the school went on to found the first cooperative, a small home appliance manufacturing and repair company.

Essentially this paved the way for the formation of multiple cooperatives going forward.

Educate and train.

Establish and build.

Owned by members and still run by managers, but completely democratized among members and workers.

We’ll talk about this hierarchy in a moment, but this blueprint came to define the network of cooperatives under Mondragon that continue to this day.

Mondragon is made up of more than 90 separate cooperatives employing more than 80,000 people. And it’s not just manufacturing anymore. They have businesses in a variety of sectors from finance and retail, to education and food. In fact, that’s one of Mondragon’s greatest strengths. Diversification has made it resilient to economic downturns in any single industry. For example, even when its flagship manufacturing cooperative—the one that made those household appliances—went bankrupt in 2013, the broader Mondragon group was able to absorb the shock by reallocating workers to other cooperatives within the system.

This ability to redistribute labor within the corporation has helped it avoid mass layoffs, a common issue in traditional corporations during times of financial distress.

This can’t be overstated, by the way. It’s highly unusual for most corporations, especially ones that have grown to this size, to be strong and competitive for so long. But there’s more to Mondragon than size and tenure that makes it unique among both cooperatives and more traditional corporations; it has an innovative streak to it as well. Again, hard to pull off in longstanding organizations that tend to get too big and can’t move quickly in the face of new competitors or technology.

That’s because the worker-owners of Mondragon also invest heavily into research and development. As much as it’s unified under a central brand, the individual cooperatives are free to explore their own competitive environments and industries and when one happens upon an innovation that can be adopted across the network of cooperatives, the incentive structure is there to promote sharing rather than secrecy.

So you have this incredibly powerful equation where the individual cooperatives are able to be nimble in the context of their own industries while being able to tap into the financial health and infrastructure of the parent company. So decisions are made both for the individual good of the cooperative and the greater good of the collective. And everyone who works there is incentivized to perform because they’re compensated based upon their contributions at the cooperative level.

Okay, so why Spain? Why aren’t there Mondragon’s all over the world?

Mondragon has a few things going for it. First off is longevity as discussed. But rooted in that longevity is an ethos that is tethered to its structure.

Mondragon was born at a time when the region that surrounds it was desperate for economic activity and there was a sense of unity and shared suffering that fostered this type of social and economic solution. That explains the rise of it least. What likely explains the tenure of it is a bit more complicated.

The Basque region of Spain has a long history of mutual aid and solidarity. It’s kind of its own thing among the different cultural attitudes in Spain. From a technical and structural standpoint, however, Mondragon is the beneficiary of Father José María’s original design: a foundation of education. The region is now home to a network of technical schools that act as feeders much in the way union apprenticeships and trade schools helped build the working class after World War II in the United States.

The other thing that likely supports the Mondragon model in Spain is a little more sensitive. Despite its long and storied history as an empire, Spain hasn’t flourished in the modern nation state economic system to the same extent that some of its European counterparts have. For decades Spain has been somewhat adrift in the capitalist system and thus it experiences a high level of unemployment and, for some reasons, it continues to languish behind other European industrial nations such as Germany, France and England.

Now, with all the attention we’re paying to Mondragon because of its size and legacy, it’s important to note that it hasn’t brought the rest of Spain along with it when it comes to the cooperative movement. It turns out that Mondragon is an outlier even in Spain. The world leaders in terms of employment and assets are actually France, Germany, Japan and the United States. The bulk of the asset based comparisons are due to the proliferation of credit unions and which countries have organized their agriculture sector around the cooperative model, something France does particularly well. (CLUE #3)

We’ll talk more about these structures in a moment, but in terms of a diversified corporation, outside of credit unions and agriculture, that competes head-to-head in the capitalist system, Mondragon stands head and shoulders above the rest.

Chapter Three: Cooperatives Models

The type of cooperative that most often comes to mind are small to midsize democratized workplaces where members own and control the business. But there are others that are often included in reporting figures but are extremely different such as massive buying cooperatives, especially in the agricultural sector.

The best estimate I can give you regarding farming and agriculture cooperatives in the United States is that there are anywhere between 1,700 and 2,100 farm cooperatives employing around 2 million farmers, and an additional 250,000 people in support of them. These are consensus figures between the USDA, National Council on Farmer Cooperatives and EOS Data Analytics.

Those seem like big numbers, which is why we need to make a distinction. Agriculture cooperatives are part of a long tradition in Europe and the United States. It’s a structure that allows farmers to pool their resources for both purchasing power and leverage supply outlets.

The two examples cited most frequently because consumers recognize them are Ocean Spray and Land O’Lakes. These are sort of superbrands that coordinate supply from participating farmers and leverage their buying power to market their products. There are examples of this in other industries as well such as healthcare. Large health insurance cooperatives have sprung up since the passage of the ACA to fill gaps in certain parts of the country and leverage the same type of buying power on behalf of their members.

These huge buying groups are organized like many other traditional corporations with boards that make key decisions and strict hierarchies. But in many ways the members do hold the power in that they participate in surplus and dividends in the way a small cooperative membership structure might.

On a regional level, the most visible example of a cooperative model is the credit union. Credit unions are owned by their members and governed by bodies of banking professionals that serve at the pleasure of the board. And these boards are controlled by members and their proxy votes. In many ways, this is the easiest and most impactful way citizens can participate in a true co-op.

On balance, credit unions and agri co-ops make up the lion’s share of cooperatives in the United States and Europe. The governance of these models has one foot in capitalism and the other in social democracy and they’ve been allowed to succeed to a degree by the system. Credit unions because they’re slow moving, low risk financial institutions that don’t pose much of a threat to capitalism. Farm co-ops because they reduce the need for government farm subsidies and help mitigate fluctuations in crucial commodity markets.

Essentially they fill gaps on fundamental products from auto loans and savings accounts to dairy products and don’t pose much of a threat to the most profitable verticals. Credit unions, for example, make up about 9% of total deposits in the country and agricultural co-ops make up about 25% of total farm output. Not insignificant, but because they represent the low margin end of their respective industries, capitalism is willing to let them be.

If we eliminate the large agri buying cooperatives and credit unions, we’re left with a subset of worker owned and run cooperatives that we typically think of when we think of worker co-ops. Again, taking a consensus figure between the Small Business Association (SBA), U.S. Federation of Worker Cooperatives and the Democracy At Work Institute (DAWI), there are around a thousand active worker cooperatives in the United States.

Just to offer a bit of perspective, there are about 33 million small businesses in the U.S.

That’s a painfully small number but it doesn’t tell the whole story. For example, a study on cooperatives shows that:

“Worker co-ops have a higher than average success rate. Those that are 6-10 years old have a 25.6% success rate while those over 26 years old have a 14.7% success rate. By comparison, US small businesses that are 6-10 years old have an 18.7% success rate while those older than 26 years have an 11.9% success rate.”

The Federation of Workers Cooperatives and DAWI identify the top states and territories in the U.S. where cooperatives operate: New York with 110, California has 99, Puerto Rico has 57 and Massachusetts has 53. It drops pretty steadily from there. One of the reasons for this, as we’ve mentioned, is that it’s hard to start a business in this country. In Europe, the rules governing cooperatives and the resources made available to them tend to be slightly more favorable than the United States.

But another reason there are so few cooperatives in the U.S. is the structure itself, which isn’t really talked about all that much. Cooperatives are organized in much the same way as an LLC or even an S-corp; the difference is in the capital structure and tax code.

In a worker co-op there are members and workers. Members put up the money and dedicate their time and workers put in their time. Seems straightforward, but it’s actually pretty complicated when it comes to tracking value, inputs and time.

Cooperatives typically file under what is called a subchapter T designation, which accounts for the capital put into a business and the allocation of time that members and workers dedicate to the enterprise. (It gets a bit complicated here but here’s a terrific guide to cooperative tax structures if you’re interested in learning more.) Basically, a cooperative can avoid the double taxation issue if it distributes 20% or more of its surplus. In this way it’s taxed like a dividend. Determining how much money stays within the cooperative to pay for infrastructure, rainy days, etc. is designed by the organizing documents so there’s flexibility as not every co-op is the same.

Then there is an allocation for time or products given to the co-op. Determining the amount of input or influence one has in a cooperative is actually pretty intense. Thus the founders have to have access to capital, a deep understanding of the organizational structure, the ability to attach value to member contributions and create an organizational structure that allows for input from members and workers in a democratized process. Of course, there’s also the normal business practices from inventory and payroll to marketing and distribution.

As the numbers show, when it works, it works better than traditional small businesses. The hard part is clearing the hurdles to get the co-op operational. There are also very few sources of capital willing to invest in a business that doesn’t have a mechanism for investors who aren’t contributors to the business to profit on their investment. So it comes down to founders who already have access to capital. (CLUE #4)

And even if all of the hurdles are cleared, the money is raised, the documents are signed, allocations are agreed upon and the idea behind the business is sound, you still have to compete against businesses that are better suited to the capitalist system.

Bottom line…this shit is hard. And because co-ops are such an insignificant part of the overall economy, there’s very little legislative support to institute meaningful change in the way we treat them.

For example, this year Ro Khanna and Jamaal Bowman introduced HR 7221 in the House which would direct several agencies to remove barriers to establishing cooperatives and create a $60 million lending pilot program over ten years to tackle the capitalization issue.

The bill was referred to three separate committees in March and it died in each one.

Chapter Four: The Food Dude Retires

The Park Slope Food Co-Op in Brooklyn, New York is one of the most iconic cooperatives in the United States. It’s quirky, confusing, dysfunctional and awesome. For 50 years it has served its members well and thrived through recessions, uprisings, and ultimately gentrification. Next year it faces a different challenge; its co-founder Joe Holtz is retiring.

Holtz was employee number one and according to the New York Times has been as much of a visionary as a micromanager. The result is a very human and byzantine operating model that has endured the test of time and competition. According to the Times:

“As many as 10,000 new food co-ops were born between 1969 and 1979, according to one history of the movement. Today, their numbers are in the hundreds, and many of those stay afloat by operating more like normal grocery stores. The Park Slope Food Co-op is one of the few that held to its original cooperative model.”

If you’re really interested in the idea of cooperatives this is a great piece to dig into. It brings to life the sheer chaos of it all and the pure organic nature. And I’m not saying that in a pejorative way. I don’t care what kind of small business you want to run, there’s an element of chaos to each and every one because of the human element. What’s fascinating about cooperatives is that the human element is everywhere.

The elimination of hierarchical structures means that a founder’s input is just as valuable as a member and, in theory, just as valuable as a worker depending upon the way the co-op structures governance. What’s striking about the story of Joe Holtz is that the Park Slope Cooperative has an iconic air to it. It’s more than a business. It’s part of the fabric of the community and an extension of the personalities that run it.

It’s beautiful. And chaotic. And only works because it works.

And so do the members.

If you belong to the Park Slope Co-op, the items come at a serious discount. It’s a great consumer benefit. But you’re also required to work a certain number of days throughout the year and are encouraged to serve on committees. This is as feudal as it gets and the store does more than $50 million in annual sales, which is astounding for a place of this size. That’s why so many people who are fascinated by cooperative structures study this place.

It’s also in a part of New York that is built for this kind of participation. There’s a good deal of wealth now and liberally minded people who want to do good in the world. Of course, Park Slope wasn’t always this way but it’s certainly part of the longevity and success of the store.

It’s also densely populated. So you have a tight knit community with a cultural tie to the store, a densely populated area and committed members like Joe Holtz who have organically grown and changed with the times. There are some parts you can replicate by studying it, but it’s not as though you can drop a Park Slope Cooperative in anytown, USA and expect it to perform to the same degree. (CLUE #5)

With all the changes they’ve weathered, another test awaits when its co-founder exits stage right and takes with him the institutional knowledge and roadmap that lives in his head.

Chapter Five: Barriers and Clues

Let’s review the clues we left along the way to explain the barriers that exist in our system.

CLUE #1: Productivity

The capitalist system is designed to extract labor and suppress wages to produce a profit for the owners of capital, which means no matter how hard you work in a cooperative you’re still competing against workers in other businesses who are working just as hard for a lot less. That might seem unfair, but it’s reality. So not only do you have to work more, you have to have a better model, access to capital and the ability to remain competitive when the forces of capital are working against you.

CLUE #2: Structure

Our second clue was about structure. Our system is designed to support specific types of businesses from a legal, accounting and tax perspective. Cooperatives have to follow the same type of rules and regulations with the additional burden of establishing a complicated governance structure that allows for democratized management, capital investments and tax consequences related to measures that are difficult to track.

CLUE #3: Scale

Mondragon developed at a time when the Spanish economy was decimated. Hence, the cooperative model was born out of necessity and with an eye toward charity. It combined economic need with educational foundations and an egalitarian model designed by a priest. In other words, the circumstances were ripe for this type of model to thrive due to the absence of choice and the necessity for reinvention. Today the United States is the most mature and robust economy in the history of the world. Everything we have was designed to promote capitalism and the companies that thrive within it have achieved unprecedented scale. Trying to hop on board this moving train with a new model that has everything going against it is the tallest task of them all.

CLUE #4: Good Graces

The cooperative structures that thrive, first in Europe and then in the United States, are the ones that capitalism allowed to exist because the margins associated with them were too small to care. Hence the proliferation of agricultural cooperatives and credit unions.

CLUE #5: Capital Access

Small businesses typically start with friends and family money. If your credit is good enough and you have a car or a house, you might qualify for a small business loan. You can use this credit to purchase the first truck in your fleet, another barber chair, computers and servers…whatever tools of the trade are required for you to succeed will come from personal credit. Absent that, you’ll need an investor who will at some point expect a return.

Cooperatives exist just outside of these basic structures, though there is some overlap. But the system is designed to provide funding for the spate of corporate structures we reviewed in the beginning. Having the fortitude to start and maintain a successful cooperative likely means that you have already accumulated enough capital to make it through the most difficult startup years.

CLUE #6: Organic Unicorns

The Park Slope Food Co-Op is a gem. One of a kind. Sure, there are other amazing food co-ops dotted throughout the country, but there are a few requirements needed for success. There’s a cultural component that has to be organic. Density of population helps immensely to keep a steady stream of members/customers who can perform the work and shop consistently. Our culture is such now that big box stores fill the convenience void in segregated communities. Because cooperatives are both businesses and an extension of the personalities of those who run them, each one is different. That means there are guidelines but no playbook. That’s the chaotic beauty we spoke of that makes it so worthwhile but so very difficult to replicate.

Bring it home, Max.

This piece is not intended to water down anyone’s dreams of starting a worker co-op. But it is a harsh take on the power of the capitalist system to suppress these types of models.

Recall from our socialism series that there have been seminal moments throughout U.S. history when we had the opportunity to redefine work and build structures of power within the working class. The most obvious example was the period when Eugene Debs tried to leverage his authority among trade unions to pull workers toward a more socialist vision. While the capitalist class did everything in its power to stomp out this movement, it was the union leaders who delivered the death blow to his efforts by siding with capital over workers.

After World War II, union membership was at its peak in numbers and strength and the government could have built upon this and even created European-style pathways to support cooperatives. Instead, we reverted to the mean and invested in private enterprise, which in turn set out on a long journey to destroy organized labor.

By the 1970s, the labor movement was in decline having bet on the wrong horse, lo those many years ago. The capitalist class was never going to let workers get ahead and from the neoliberal period forward, wealthy industrialists and their government agents built scaffolding around private enterprise to give it every advantage possible. That’s why there are only 1,000 worker cooperatives in the United States and the agricultural cooperatives are quasi-capitalist enterprises that spend more time tearing down protections for workers and consumers than they do supporting them.

Of all the cooperatives that exist at scale in the United States, the credit union stands out as a beacon of hope and purity because the capitalist class can’t be bothered chasing low margin financial activities.

We don’t talk about credit unions enough, frankly, because they’re boring. But one of the highlights of the Occupy movement was Bank Transfer Day. It was an online movement that chose the 5th of November during Occupy, in honor of Guy Fawkes, to encourage people to move their money from big banks to credit unions and community banks. When the dust settled, it was more than an online petition. More than 600,000 people moved their money to protest bank fees, one of the largest consumer transfers in history. Not only did it mark the biggest depository shift in favor of community banking institutions, it led to the elimination of debit card fees.

There are other incredible examples of corporations doing extraordinary things on behalf of their workers outside of converting to worker cooperatives. Take flour company Bob’s Red Mill for example. When Bob and Charlee Moore, the founders of the company, were looking to retire they wanted a way to honor the employees who worked alongside them for decades so they converted the shares of the company to something called an employee stock ownership plan (ESOP). Today, Bob’s Red Mill is 100% owned by employees. Same story for New Belgium Brewing, the maker of Fat Tire Amber Ale. The founders of the company converted shares over time to a worker cooperative before migrating to an ESOP. So when the company eventually sold in 2019, the employees were the beneficiaries of the gains.

These stories are few and far between but they exist. And they exist to enough of an extent that we can carry some hope that more companies will continue on this journey despite the innumerable challenges of the capitalist system. Speaking of hope. As an individual, there is something you can do by the way.

Remember, remember, the 5th of November,

Gunpowder, treason and plot.

I see no reason

Why gunpowder treason

Should ever be forgot.

Guy Fawkes, Guy Fawkes, ‘twas his intent

To blow up the King and the Parliament

Three score barrels of powder below

Poor old England to overthrow

By God’s providence he was catch’d

With a dark lantern and burning match

Holler boys, holler boys, let the bells ring

Holler boys, holler boys

God save the King!

-John Milton

No, I’m not advocating violence on election day. But it does fall on the 5th this year.

This 5th of November you have two choices. One is on the ballot. A choice between the status quo that works for the very few and dystopia that works for ever fewer. But you also have a choice to vote with your wallet and participate in a very civil bit of disobedience.

Remember, remember the 5th of November and move to a credit union.

Just one small way you can make a difference and support the one cooperative model that actually works deep inside the capitalist system.

Here endeth the lesson.