1. Is it sensible for workers to buy unprofitable companies?
   1. The capital company
   2. The worker cooperative

Is it sensible for workers to buy unprofitable companies?

Worker cooperativism is awakening in Europe... we are seeing a real wave of worker buyouts in Italy, France and even Germany, which are rescuing the places abandoned by industrial capital. These are not isolated cases. Although the French Duralex or Bergère de France or the Italian GKN are famous, in Italy alone 71 companies have already been rescued.

A desperate folly? No. Not at all. There is room and it is important to understand why.

The bottom line is that an industrial company, especially if it arrives loaded with debt and equity, is very unlikely to be profitable in Europe today. However, that does not mean viability and sustainability for the workers is impossible.

The underlying issue is that whatever may be said in masters and universities, the objectives of workers and investors are not the same. Workers do not expect the same from a company they manage as worker-members as investors do. The nature of a worker cooperative is not that of a capital company.

The capital company

The capital company exists for profitability. Its competition in the market for goods and services is only a means to keep on existing in the capital market.

Why do we say this? Because if the company fails to reach the profitability of the market, the most rational thing (from the point of view of Economic Theory) the owners can do is to sell the facilities and place the capital in any other destination offering them a higher profitability. Either by offshoring, opening another line of business or, if there is no other choice, selling the company and taking their capital elsewhere.

Therefore, in a competitive environment, its ultimate goal is none other than to place and bring to use as much capital as possible. The history of a capital company is a succession of share capital increases. Its coming of age: going public. Profitably employing more capital compared to other alternative uses of capital is its way of growth.

The worker cooperative

The worker cooperative is still a workers' entity. It does not respond to the needs of capital, but to those of labor. And this implies a completely different logic.

What do workers ask of their cooperative?

1. Alternative uses of their labor are scarce, if any, and their ceiling is their sector wage. That is to say, the market does not push them to grow or die as it does capital. The objective of labor in the market is simply to ensure that the sale of its product is capable of satisfying the material and cultural needs of the workers. In other words, generate decent and sufficient income for them.

2. It must be viable -that is, throughout the production and marketing cycle, it must generate at least as much income as expenses.

3. It must be sustainable, i.e., it must be able to be maintained over time without undermining its own viability. In other words: that its relationship with the environment, first of all with the community - families, the neighborhood or town -, with the economic - suppliers and customers - and the natural environment - the fields, the water, the atmosphere - is not based on an extractive logic supporting the company at the expense of everything surrounding it and making the above possible.

4. It must be resistant, and ideally, safe, and if nothing else, resilient. Able to face the crises of the system or the sector without laying anyone off and keeping as much as possible the social environment in which they live as intact as possible.

Over the last 15 years we have seen these four criteria, however reasonable they may be, increasingly clash with the profitability criterion. The result today, as Europe is in a new wave of deindustrialization, is that an increasing number of companies that are vital to their environment cannot compete on the capital market because of their low profitability and yet are still viable.

The logic of profitability

Viability and profitability are two different things

We have heard it a thousand times: a company, whatever its nature, must generate sufficient income to maintain itself and its activity and salaries. If the company makes a loss indefinitely, it has no future: sooner or later, it will gobble up its own reserves and close down. This is what is sometimes called viability and sometimes economic sustainability.

The logical consequence is that revenues must exceed expenses. So we could define viability as a situation in which one would expect revenues to exceed expenses.

Profitability, however, is not the result of subtracting expenses from income during the year, but the ratio between the surplus remaining after making the corresponding reserves and the capital invested.

Profitability is the measure of the return on capital or, rather, of what is attributed to capital in the results of a joint-stock company, in which it is assumed that labor has already been fully remunerated by wages, which are counted among the expenses.

The strategies of profitability

The above formula tells us what a manager can do to improve the profitability of their company:

1. Increase revenues.
2. Reduce expenses and in particular the item that is usually the largest: salaries.
3. Reduce reserves.
4. Reduce total invested capital.

Who dares to increase sales?

You don't need to be a genius to realize that the only strategy that generates greater welfare and sustainability is to increase revenues. Yet this is something that, according to a famous 2022 study by 2024 Nobel Prize-winning economist Daron Acemoglu, MBA-educated managers rarely attempt.

At the end of the day, the market is increasingly saturated and the remaining options are generally easier and more accessible in the short term. Let's see:

Reduce expenses and salaries.

We all know that the talk of cutting wasteful costs usually hides a reduction in quality and direct damage to the quality of life and safety of employees.

The boom of low cost companies was not a reduction of costs, it was a real change of product. A steel appliance is not the same as a plastic one, the experience of an airline from the 80's is not the same as that of Ryanair, being attended by the doctor in 3 minutes than in 30, etc.

And when it comes to working conditions, it is not the same to have breaks and normal work rhythms than to have nerve-racking ones, concentrated vacations than single days, flexibility to take care of children than not to have it at all, etc.

But all this is precisely what the logic of short-term profitability encourages: to lower salaries or, failing that, to increase working rhythms in order to reduce staff or increase production with the same human resources, and to reduce the quality and cost of the products.

The social result is what we have been experiencing in recent decades. A low cost and low wage economy that mercilessly crushes moods and lives.

Reducing reserves

Common reserves in companies are generally ridiculously small, so small that they rarely serve to self-finance strategic projects, much less to face an unexpected market crisis. Just look at the effect of the reduction in turnover during the Covid pandemic los according to Bank of Spain data: a drastic increase in indebtedness, layoffs and lay-offs, and a significant increase in closures and bankruptcies.

How could most Spanish companies arrive at Covid “bare bones”? Because no manager in their right mind would adopt just in case a policy that reduces profitability.

The incentives point to the opposite: to keep reserves at the minimum necessary so as not inordinately dependant on external financing. When you go to a bank to ask for a loan or present yourself in front of shareholders at the annual meeting, they will not look at reserves or the company's resilience in the face of a systemic crisis, but at profitability.

Reducing total invested capital

The type of divestments we have seen over the past few years have been the cause of disruption in the short term and inefficiencies in the long term. The typical example is the sale of the company's headquarters to a third party who then rents it to the same company on a long-term lease.

This is obviously a financial business for the third party, which logically does it because it charges a margin... which is an inefficiency for the company that made the sale, because it generates an extra cost in something that it will use anyway.

And if instead of a financial business we are talking about a training facility, a day-care center for employees or a bus to take workers from their homes to the workplace, this will be coupled with a transfer of costs from the company to the workers or, in other words, a de facto reduction in the remuneration of labor.

In all cases, sustainability is being eroded to increase profitability. But, again, managers are judged by the profitability of the capital invested in the company, not by its sustainability or resilience.

Tell me which kind of productivity you measure...

The concept of productivity can measure different things:

• Physical productivity. How much product is produced in an average hour of work. It is measured in number of services, tons of production, customers served, etc.

• Productivity in terms of value. It measures how much realized value (income) each hour of contracted labor produces. Economists use it because measures of physical productivity vary from industry to industry and firm to firm, while sales revenues are reported to the Treasury and their aggregates are public. Economists use it to approximate the degree and success of capitalization and technological development of an economy, since higher productivity in terms of value depends in the end on having technologies (which implies making investments and capitalizing) and using them productively (which is supposed to be reflected in sales).

• Productivity in terms of profit. It measures how much surplus each hour of work brings in and is the measure of productivity that really matters to a company's manager.

Profitability and productivity

Intuitively, we would think that any increase in productivity should be in the company's interest. At the end of the day, increasing productivity means obtaining more product, revenue or surplus, depending on what productivity we calculate, with the same working time.

But productivity gains do not come for free. They generally involve an investment, whether in machinery, software or consulting to reorganize processes. In other words, it involves a calculation. And this is where things, once again, differ between the capital company and the worker cooperative¹.

To begin with, if profitability is the objective of the productivity increase pursued, profitability with increased capital must be higher than with the initial capital.

In other words, the profits distributed (dividends) must be more than proportionally greater than the capital increase to be made. Otherwise, why would shareholders be diluted and receive less than they did before the capital increase?

In addition, if part or all of the financing is obtained through a loan, financial expenses must be added to the operating expenses.

In other words, the more expenditures we consider in the process of financing and adopting the improvement, the higher the expected income (Revenue₂) that the expanded capital needs to produce in order for the first term of inequality to remain higher than the second.

What does this mean in the context of the last 15 years? That unlike what had been the historical constant of capitalism (progress), technological innovations today do not precede wage increases and new job offers in companies, but new cuts in expenditures and reserves.

Productivity increases today, when guided by the logic of profitability, tend to undermine the living conditions of workers and the environment (those expenses) and the very viability and resilience of the company in the long term (reserves).

The management logic of associated labor

Why do worker cooperatives not compete on profitability?

The scarcity of social capital would point to higher profitability.

The social capital of worker cooperatives is made up of worker contributions. These contributions are completely different from shares in a company. They cannot be sold, and since they cannot be put on sale in a market, they are only revalued from time to time and always for the amount that the assembly of the cooperative itself decides using technical criteria defined by law. That is to say, in worker cooperatives the famous strategies that sought to generate value for the shareholder by complementing the dividend with the increase in value of the share, do not take place. Worker cooperatives are not a useful object for financial speculation.

These social contributions of the workers, in most cases, are not even remunerated at a pre-agreed interest rate. And it is logical: what interest can the workers have in remunerating a generally small or negligible monetary contribution in terms of capital at the expense of the remuneration of the work they perform collectively and of the reserves that give them security in the future?

That said, it would seem that worker cooperatives should be very profitable. After all, if we remember the formula of profitability, obtaining the same surpluses with less capital increases the profitability of capital.

This expectation is consistent with the fact that nowadays most worker cooperatives that are created from scratch are advanced service companies in which a good part of the founding capital is reduced on the basis of universal common goods (free software, open knowledge, etc.) and what some confusingly call human capital (knowledge and previous training of the founders and worker-members).

But in practice, low relative capitalization does not mean more profitability. The cause lies in the other elements of the profitability formula.

Decent income and Covid-proof reserves

There was a time in Spain when workers associated in cooperatives were generally paid less than a similarly skilled worker in a capital firm. But through the successive waves of deindustrialization and precarization since the 1980s, the real wages of workers as a whole have been lowering their share of the wealth produced.

But over the last twenty years, with household income stagnating, incomes and wages have been redistributed. It is not only that capital income has increased its share of the national production pie. Wages have been concentrated around the minimum wage, with the good salaries of workers disappearing and the salaries of managers and middle managers rising. The result is that there is increasing working poverty and, on average, real wages paid for the same work are falling.

The logic of worker cooperatives aims to provide a decent income for their members. Generally above the sectoral wages, but not by much and in some cases according to the particular needs of each one. In any case, their personnel costs tend to be slightly higher, which reduces profitability.

Moreover, as the life of a company progresses, its social capital goes from being practically all the capital employed to being only a part, and this part will become smaller and smaller as the accumulated reserves increase.

In other words, although worker co-ops use on average less capital - in accounting terms - than capital firms of similar performance, their propensity to save is much greater. When workers run the enterprise they tend to accumulate reserves. If a cooperative makes relatively few reserves for its surpluses, it is almost certainly among the managerialized or on the way to being managerialized.

Is it bad to be less profitable?

Let's reflect for a minute. Worker cooperatives tend to be less profitable because they produce slightly higher worker incomes and larger reserves, which over time accumulates more capital than is usual in equivalent capital enterprises.

This importance of reserves has to do with their nature and explains why cooperatives in general and worker cooperatives in particular demonstrated greater resilience in the face of crises both after the 2009 financial crisis and in 2020 (Covid).

But reserves are more than just a deposit or mere insurance against disasters. They are accumulated surpluses:

• They serve to make self-financing available and finance growth. Saving to invest is an uncommon phenomenon in capital companies, but relatively normal in worker cooperatives.
• They also materialize in investments that are not necessarily productive from the point of view of profits but are very valuable for the sustainability of the way of life: day-care centers, training programs, social actions and projects in the community where they are developed, etc.
• They serve as a kind of general insurance for cooperative members.
• In some cases, they are a fund of last resort for the direct environment of the members and the community in which they live, providing interest-free loans, scholarships, etc.

For all these reasons they form a true commons, a compass of cooperative life for many worker cooperatives² because they ensure the viability and long-term sustainability of the organization and, many times, of its community environment.

Productivity in Worker Cooperatives

In general terms, the productivity that a worker cooperative is interested in improving is physical productivity: how much it is capable of producing per hour of work.

It is the only one that can measure the development of the capacity of one's own work when part of what is produced is not produced for the market - free software, free services to the community, etc. - or when one is simply willing to absorb the negative externalities of one's own activity out of pure moral commitment.

In the face of market activity physical productivity matters also because its progress gives the extent to which hours of work and/or resources of customers can be brought to hours devoted to the community, family and environment.

The rationality of work and the social interest

An example of the extent to which the physical productivity-linked approach to cooperative sustainability and the capital-return focused approach typical of capital firms (and managerialized co-ops) differ in their consequences is the green industrial transition.

The shift to green technologies and energy, even if it increases physical productivity and improves the economic sustainability of the company, is simply not profitable from a capital point of view. From the logic of profitability, if the capital investment does not translate into significant increases in margins and profits in the short to medium term, investment makes no sense, it is not rational. But from the point of view of the sustainability of the organization, the environment, the planet and the partners' way of life, it may not only be rational, but necessary.

Why is cooperativizing a viable option?

In Germany we are seeing how football clubs, needing to raise capital just to pay debts, are looking at the Community Cooperative model and after Sant Pauli and Schelke, by cooperativizing their football fields.

What's the story? With many of the Bundesliga clubs in the black but with little to show for it, the management wants to raise capital just to get rid of the accumulated debts. But capitalizing debts means drastically reducing profitability: the capital employed increases, but with all the investment devoted to paying off what is owed, there are no resources left to finance anything that will increase revenues. So investors and funds ask for the lion's share and demand a level of control that the clubs cannot give without stripping themselves of their nature.

This is the same thing that happened at Duralex, GKN and so many industrial companies. The business is viable, but it is loaded with debt, sometimes since before Covid. They are zombie companies, and investing capital in a zombie company -like the more than 50,000 there are in Spain alone- offers almost no profitability. No matter how viable the business is, it is not going to obtain capital when it needs it.

The best solution for everyone: it should go into liquidation and the workers should buy the facilities and, in some cases, the brand and the commercial fund.

Beyond cooperativism, the future

In the end, we are faced with the double contradiction that defines our era.

• Worker cooperatives are made up of associated workers. The interests they seek to defend are not particular. They seek through their work in the co-op to satisfy needs that are general to all human beings: to work, to generate sufficient income to have their physical and cultural needs covered, to have a long-term perspective and to create a minimum vital security for their members, their community and their environment. This is not rhetoric: the prosperity and sustainability of a working coop depends on the prosperity and sustainability of its social environment. That is why the cooperative perspective of sustainability is aligned with the general social interest as we saw in the case of the ecological transition. And that is why, without the need for a doctrine, all the above is a material trend, actually existing and contrasted by all kinds of studies on the behavior of worker cooperatives in different countries and continents.
• The logic of profitability, however, only serves the needs of the capital invested and, under today's conditions, slows down, or even clashes head-on, time and again, with all the opportunities created by technological development to promote human development. Either by ignoring physical productivity or turning it into a reason for exclusion from access to work; either by adopting the artificial creation of scarcity as a general business model through intellectual property or other artificial monopolies, or by renouncing to produce without destroying the environment and the future of all.

Worker cooperativism is not only viable, sustainable, resilient and resistant. It is necessary. Now.