*Professor of Economics, Drexel University, Philadelphia, PA, 19104. This paper was written to be presented at the sessions of the Allied Social Science Associations conference organized by the Association for Social Economics, Washington, D. C. Jan 1995. The author reserves all rights to the use of this paper for profit, but freely grants the right to use the paper for nonprofit purposes, with proper attribution. However, the author reserves all moral rights; that is, the author reserves the right to disapprove any replication or use of the paper with modifications, except for uses in the public domain under fair use. In other words: don't replicate the paper with changes that I might feel change the sense of the paper as I intended it. If you aren't sure, ask.

1. We might call this the Mill hypothesis, since it was clearly stated by John Stuart Mill. He wrote "... cooperation tends ... to increase the productiveness of labor ... by placing the labourers, in a mass, in a relation to their work which would make it their principle and their interest -- at present it is neither -- to do their utmost, instead of the least possible, in exchange for their remuneration." (Mill, 1987 (1909), p. 789) There is now a large literature of evidence on this score, evidence that seems to be unknown to many students of privatization. See Katrina V. Berman, (1967) Paul Bernstein (1976) and M. Conte on the American experience, Derek Jones and D. Backus, (1977) on Britain, Saul Estrin and W. J. Bartlett, (1982) , Janez Prasnikar and Jan Svejnar, (1988) , M. Nishizumu and J. Page, (1982) on Yugoslavia, Derek Jones, (1985) on Poland, J. Cable and F. Fitzroy (1980) on Germany, Niels Mygind (1987) on Denmark, Bodil Thordarson (1987) on Sweden, J. S. Defourny, S. Estrin, and D. Jones (1985) and Jacques Defourny (1992) on France, and Derek Jones (1980) for a Western European survey. Unfortunately, this literature seems to be unknown to some of the students of the transition process in eastern Europe (e.g. Boycko, Shliefer and Vishny)

2. This proposal was first made in McCain 1977. The term used there is "Revenue Participation Bonds," but a change of name seems appropriate. No change in the substance of the proposal is intended here, however. Note also Gui and Smith and Ye for discussions of similar issues.

3. As a matter of convenience, fractional shares might be sold. The key point is that the dividends be proportional to average "employee compensation," and that the factor of proportionality be a matter of law. To make the factor of proportionality one is simple and clear.

4. These first three conclusions extend findings of Ward's famous paper and the work of Vanek, 1970.

5. I have discussed this familiar issue at length in McCain 1992. It is perhaps worth mentioning that that work predicted the continuing failure of privatization in Russia, and their hyperinflation, on cognitive grounds, in a section first presented in January, 1991 (Second World Conference of the Conference of Political Economists, Boston).

6. As can the political process by which a proposal for reform might command a majority in a democratic country. In the United States, at least, it is primarily at election time that we think about reforms -- however shallowly we think about them at any time. By the time a reform of enterprise could command a majority, people would have had plenty of opportunity to acquire new frames for the choice among investment instruments (or among employment opportunities, for that matter). But post-Communist or other countries without democratic traditions present a different and more urgent problem.

7. I am not a professional in the field of accounting. No doubt this proposal would require careful work by professional accountants before it could be useful to a real-world auditor. In any case, a new kind of enterprise is likely to need new kinds of accounting rules. In other words: accountants are not going to find much in this discussion that sounds familiar, but perhaps it will do as a starting point.

8. This discussion assumes that there are no nonmember employees, and certainly the existence of nonmember employees is a deviation from the cooperative ideal. In special cases -- for example, if Bob from the Temporaries Agency comes for a week to replace a member on vacation, it might be inconvenient to make Bob a member of the cooperative. (Perhaps Bob is already a member of the cooperative Temporaries Agency anyway). In that sort of case the payment would be made from the working capital fund.

9. Or, if they were liquid assets, transfer them to the creditors. However, in the absence of fraud, bankruptcy usually seems to presuppose inadequate liquid assets.

10. The reduction in wages would, again, carry a reduction in the proportionate dividends to shareholders: in exceptional cases where shareholders clearly would be unjustly harmed, the court might also decree special exemption from the three-fund accounting rules so that shareholders could be compensated.

11. An exception, not unique as such, is McCain 1991.

12. It is not implausible that an enlightened ownership might do this, since gains in labor productivity through improved motivation of workers could generate profits as a result of the conversion, profits that could be recovered by the owners as proportionate shareholder dividends. The difficulty will be to find an enlightened ownership; but I suspect that this will happen eventually if the proposal comes to be widely known.

13 A footnote should suffice to establish this. The total disbursement of dividends, to shareholders and employee-members, is just the AVA:


where D is the dividend. In turn,



where k is equal by definition. Solving,

which is


14. Proprietorships may be converted to corporate form as a means of solving the successional problem, in order to raise equity capital by a new stock offering, or for similar reasons of convenience. In general these issues would seem likely to arise only for larger proprietorships.