Why Are There So Few Employee Owned Business Firms?

• From: B
Sent: Mon 5/22/2017 3:45 AM
• To: wblock@loyno.edu
• Subject: The case of the small painting company
• Dear Professor Block
• Why are most small companies owned by either sole proprietorships or small partnership and so rarely employee owned? If my Marxist friends are correct, wouldn’t it be the other way around? After all, the most people would get the most out of it, they would be extra happy and far more productive that way, right? If a company can afford to pay all their workers as well as one or more mooches/owners, then obviously a(n) employee owned business could easily out-compete them. It’s a no brainer, right?
• Now one might argue that it’s somehow cost prohibitive. Although I can’t see why. It’s easier for a group of people to pool their money to start a business than for a single person to do it. Many small businesses such as painting companies have tiny start up costs. No need for family wealth in this case or in many small businesses.
• I can even show the various tax advantages to having the business owned by more partners and not less. Write offs for everyone’s vehicles, deductions spread out so the profit is taxed in a lower bracket, no unemployment insurance to pay, no mandatory withholding etc. There is quite a bit of extra paperwork that goes with an employee that wouldn’t have to be done as well.
• Yours truly, Confused
• PS, Did you know that some of my Marxist friends believe that in a perfect society I wouldn’t be able to own a business and you wouldn’t be allowed to work for me if you wanted to? I guess that would be one way of increasing the number of employee owned small businesses. Although this brings up another question; These friends also claim to be anarchists. How does that work? Who’s going to enforce the ban on me not hiring you? I guess they could hire a private security company but then wouldn’t that make the private cops employees? I guess they could just shoot me themselves but that seems harshly totalitarian for such caring people.

Dear B: I think that the answer to your question has several parts. First, there is that matter of time preference. Employees usually prefer , at a great rate, money at present to money in the future. Employee owned firms would have to put up the investment money right away, and most workers, even if they have these funds, which they are less likely to have, are unwilling to do so. Then, there is risk preference and risk avoidance. Employers veer to the former, employees to the latter. In other words, the entrepreneur is more willing to take the risk of business failure. Not everyone wants to risk being the residual income claimant, paid off only if all goes well. Third, is specialization and division of labor. Some people want to be plumbers, others carpenters. It is a matter of taste. Ditto for starting up and running a company, vis a vis working for one.

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5:24 pm on December 17, 2018