Capital Constraints

Workers who want to create a labor-managed firm will usually find that inputs must be acquired today, while output and hence revenue will not arrive until tomorrow. There are several potential solutions. First, workers might attempt to match revenue flows against expenditure flows by leasing assets. But leasing is not always practical, as was discussed in Sections 8.2–8.4, and it is hard to avoid the need for working capital. Second, workers might use their personal savings and those of family members or friends to finance jointly owned assets or other upfront costs. Poor workers, however, may not have the resources needed for this. Third, they might finance a firm by borrowing from banks, suppliers, or customers, or by selling equity claims to outside investors.

Many writers have argued that limited worker wealth combined with credit rationing is the key barrier to LMF creation. For example, Drèze asserts that “funding difficulties are the main reason why labor-managed firms are not spreading within capitalist economies,” and adds, “labor-managed firms will spread more easily in sectors where capital investment per worker is not high” (1993: 261–62). A number of authors blend an emphasis on capital constraints with arguments about the cost to workers of making undiversified investments in their own firms (Bowles and Gintis, 1990, 1993b, b, 1994, 1996b; Putterman, 1993). I consider portfolio diversification separately in Sections 9.5–9.6, but for the moment it will be simpler to assume that all parties are risk neutral.