Who bears risk?

Chris Dillow writes Who bears risk?.

By contrast, many of City Link's drivers had to supply capital to the firm in the form of paying for uniforms and van livery, and are unsecured creditors who might not get back what they are owed. Many thus face a bigger loss as a share of their wealth than Mr Moulton. In this sense, it is workers rather than capitalists who are risk-takers.

This point is not, of course, specific to City Link. Most decent-sized businesses represent only a small fraction of a diversified portfolio for their capitalist owners, whereas suppliers of human capital usually have to put all their eggs into the basket of one firm; only a small minority of us have "portfolio careers" . All that stuff they teach you about the benefits of diversification applies in the real world to capital, not labour.

There are two implications of all this.

First, it means that the idea that capitalists are brave entrepreneurs who deserve big rewards for taking risk is just rubbish. As Olivier Fournout has shown, the idea of managers as heroes is an ideological construct which serves to legitimate power and rent-seeking.

Secondly, it suggests that ownership might in some cases lie in the wrong hands. Common sense tells us that those who have most skin in the game should have the biggest say simply because they have the biggest incentive to ensure that the firm succeeds. As Oliver Hart - who's hardly a raving lefty - says: "a party with an important investment or important human capital should have ownership rights." This is yet another case for worker ownership.

This in turn reminds us of a cost of inequality; sometimes, ownership is in the wrong hands simply because the most efficient owners can't afford to buy the firm.

Emphasis Mine

But Dillow is still arguing for the private ownership of the means of production. It is this that is the problem, no matter who owns the firm, because the focus is on profit, not on satisfying human need.

However, it is interesting for a Capitalist economist, like Dillow, to see the benefits of worker ownership, even under Capitalism. These benefits are greater productivity (and therefore greater profits), and more successful firms.

Under Communism, there is no need for the workers to purchase firms as these will be owned by the public. How this will be achieved is something that society needs to work out.

THe important difference is that the firm is held in trust from society, and is to be used for the benefit for the whole of society, instead of for the narrow interests of the private owners.