by Jim Rose in Austrian economics, industrial organisation, labour economics, managerial economics, organisational economics, theory of the firm Tags: adverse selection, cooperative ownership, Jon Elster, kibbutzim, moral hazard, Ran Abramitzky, Robert Nozick, worker ownership

If workers’ cooperatives are so efficient, why are there so few cooperatives? Workers’ cooperatives should be able to slowly undercut other firms on price because they do not have to pay a profit to the capitalists.

Building societies, credit unions and some life insurance companies were mutually owned by their customers for a long time, but recently fell out of favour because of a growing lack of competitiveness and under-capitalisation.

Cooperatives are not economically viable because of intrinsic difficulties of entrepreneurship and management. And most workers prefer to work in firms for a wage rather than wait for the co-op to start up and hopefully break even before they get their first pay cheque. That could be a slow train coming.

The kibbutzim are Israeli agricultural communities initially organized on socialist lines, mostly between the 1910s and 1950s. The kibbutz is an example of voluntary socialism. The founders of kibbutzim were socialist idealists wanting to create a new human being.

Robert Nozick pointed out that few people actually join a kibbutz. Six per cent is the maximum proportion of any population who would voluntarily choose to live in these socialist communities. More recently, 2.6% of the Israeli population live on a kibbutz.

Originally, most kibbutzim followed strict socialist policies forbidding private property; they also required near-total equality of income regardless of differences in productivity, and in some cases, even abandoned the specialisation of labour. Kibbutzim are communities whose aim is equal sharing.

Kibbutzim were expected to fail because of moral hazard and adverse selection. Other organisations subject to adverse selection and moral hazard are professional partnerships, co-operatives, and labour-managed firms because they are all based on revenue sharing.

Kibbutzim have persisted for most of the twentieth century and are one of the largest communal movements in history. About 40% are still run on communist principles. Why is this so?

The kibbutz movement was founded by individuals who can be regarded as ex-ante homogeneous in their ability and potential income, and who came to a new land full of uncertainties. They were young unattached individuals who share a comparatively long period of social, ideological, and vocational training.

An even more durable example of voluntary collectivist living is Catholic monasteries and convents, but notice that these too were founded on a realization that close family ties are inimical to communal order.

Kibbutz founders wanted insurance, but their founders realised that members who would turn out to have high abilities might leave the Kibbutz.

The founders of the kibbutzim decided to abolish all private property and to own all wealth commonly, which served as a lock-in device.

Like monasteries and convents, kibbutzim deter members from fleeing through this communal ownership of property. You leave with the shirt on your back!

Kibbutzim also put prospective members through lengthy trial periods to make sure they are made of the right stuff. Those raised on a kibbutz tend to have learned kibbutz-specific skills, such as agronomy, which also makes exit to the outside world even more difficult.

Kibbutzim are similar to law firms, medical and business partnerships that pool income for risk sharing purposes.

Mutual monitoring and peer pressure replace direct monetary incentives in mitigating moral hazard in a kibbutz (and in monasteries and convents) in the same way as in professional partnerships, cooperatives, and labour-managed firms with pooled assets and the option of exit.

The trade-off between insurance and adverse selection determines the level of equality within a kibbutz and its size, as with any other professional partnership:

Kibbutz vary in size from less than a hundred to over a thousand, but most have between 400 and 600 members, with an average of 441 members.

Kibbutz size is limited by the savings on income insurance no longer offsetting the costs of moral hazard and other transaction costs as the Coasian firm grows in size.

Ran Abramitzky writes with great insight on the economics of the kibbutzim. He is writing a book The Mystery of the Kibbutz: How Socialism Succeeded. He found that high-ability individuals are more likely to leave a kibbutz. The brain drain would be worse if kibbutzim didn’t make it so costly to exit. Is this a familiar theme of socialism?

Many hybrid organisations exist in the market, ranging from joint ventures and agricultural seller and supermarket buyer co-ops to labour-owned firms such as in most of the professions.

But rarely do we find real life existing cooperatives with all workers and only workers having equal ownership rights. As Jon Elster noted, there are often non-working owners, non-owning workers and unequal distribution of shares in real life workers’ co-ops. All other types of co-ops and professional partnership share this feature.