Uploaded July 2014 | Updated September 2026, 2 weeks ago
Week two of the University of Edinburgh's "Astrobiology and the Search for Extraterrestrial Life" (ASTROBIO) open online course.
Prof Charles Cockell
School of Physics and Astronomy
University of Edinburgh
Licence: CC-BY-NC
creativecommons.org/licenses/by-nc-sa/3.0
Week two of the University of Edinburgh's "Astrobiology and the Search for Extraterrestrial Life" (ASTROBIO) open online course.
Prof Charles Cockell
School of Physics and Astronomy
University of Edinburgh
Licence: CC-BY-NC
creativecommons.org/licenses/by-nc-sa/3.0



![Economic Democracy: External finance for conventional and labour-managed firms
External finance for conventional and labour-managed firms
The evidence from the US plywood cooperatives, Israeli Kibbutzim and the Mondragon cooperatives, bears out the key theoretical predictions of Block 3, namely that cooperatives need external finance to be viable in the long-term.
We also know, from Block 3, that this presents a problem for cooperatives, and provides an explanation of the Pangloss Theorem.
Conventional firms can issue a mixture of:
debt (bonds) with a fixed rate of return, carrying no control rights, all risk borne by firm insiders, and
equity (shares) with a dividend chosen by the firm, shareholders have control rights, risk is borne by shareholders with diversified portfolios.
Conventional firms can choose the optimal degree of external finance, and allocate risk efficiently. This process gives control rights to outside owners (shareholders) as a quid pro quo for bearing risk. Cooperatives cannot use equity finance because it would dilute insiders (i.e. workers) right to manage.
Vanek (1975) and McCain (1977) showed in theory that these financing problems would disappear if the financial environment included a new type of financial asset called performance bonds. These are titles to a dividend, the amount of which varies with the firms performance (e.g. value-added or income per worker). They carry no voting rights or other power to influence the firms management.
McCain (1977) speculates on a possible extension of his argument:
Suppose that the [performance] bonds are bought by some social agency such as a state or regional bank. The optimality of external finance with [performance] bonds means that the firm will willingly choose [an efficient financial structure]... (Remarks in square brackets added.)
We next consider how McCains social agency might work in practice.
References
These articles discuss the external finance and performance bond arguments in some detail. They are quite technical and are not required reading for the course, but will be of interest to students with some background in economics.
R McCain: (1977) On the optimal financial environment for worker cooperatives, Zeitschrift fur Nationalokonomie, vol. 37, 1977
Jaroslav Vanek (1975) The Basic Theory of Financing of Participatory Firms, in Self-Management: Economic Liberation of Man, (J Vanek, ed.), Penguin, 1975 Economic Democracy: External finance for conventional and labour-managed firms](https://i.ytimg.com/vi/V6jhj-9y4QI/mqdefault.jpg)






