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Democratic Enterprises:
Enterprise Creation in the Social Economy
David Ellerman
University of California at Riverside
and WWW.Ellerman.org
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Biological Analogy:
Increasing Economic Bio-Mass
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Two modes of increasing economic “bio-mass” (jobs
& enterprises)
1. Existing “organisms” getting bigger;
2. Spawning of new “organisms.”
Biological principle of plenitude is second mode—
spawning of new life through fission and
reproduction.
Biologically, expanding old life is very limited by
structure and by death.
Secret of development is spawning new life rather
than “fattening” old life—See Jane Jacobs.
What form of enterprise best fosters spawning new
life?
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Old Companies as Schools for New Companies
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Every company has two products:
* Its products, and
* Organization of people trained in technologies and business capabilities.
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Cambridge economist A.C. Pigou emphasized that the second
product can have positive externalities:
“One very important indirect service is rendered by the general
economic organisation of a country in so far as, in addition to
fulfilling its function as an instrument of production, it also acts, in
greater or lesser degree, as a training ground of business
capacities.” [Pigou 1960, Economics of Welfare. 204]
How to promote this potential positive externality?
Best source of new life is replicating existing business DNA
perhaps with mutations in offspring.
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Spin-offs of Routine Operations
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Many parts of big firms are routine and could sell
products or services elsewhere too:
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Trucking,
Printing and graphics design,
Food services, and
Cleaning services.
Organize them as separate spin-offs perhaps with
worker ownership.
Long-term contract with mother firm so that it is not
out-sourcing.
Spin-offs can then do trucking, printing, etc. for any
number of other firms and thus create more jobs.
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New Product Spin-Offs with Existing Technology
Once a technology is learned in a company, there
may be many other products using it but of no
interest to company (different markets, different
suppliers, etc.)
 Business Dev. Agency could sponsor team
learning technology in existing firm to set up
spin-off producing the other products.
 Happens spontaneously in Silicon-Valley-type
environments so idea is to foster the process.
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‘Light-touch’ Franchising
Most entrepreneurs learn a business in an
existing business.
 A development agency could subsidize training
a potential entrepreneur by working beside a
manager in an existing business.
 New near-clone start-up obligated to be in a
non-competing region to the original firm.
 Like franchising without top-heavy machinery
to replicate systems & enforce trademarks.
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When a Company Fails
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The same spawning-new-life principle should be applied
when a company is failing and going bankrupt.
Turn existing buildings into an “industrial park” where
former managers and workers can start up small
enterprises (capitalizing on their habits of working
together and business know-how).
Like turning a sinking ship into a number of small seaworthy lifeboats.
This approach used successfully in the ARIA Project in
Moldova: See Ellerman & Kreacic paper at:
www.ellerman.org or http://econ.worldbank.org
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4 Enterprise Creation Schemes
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Overall Idea: Best incubator for new firms is existing
firms. Best source of new economic life is replicating
existing business/technological DNA.
Focus on development efforts is to create incentives for
existing firms to foster new firms through:
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Spin-offs of routine products and services,
New products from existing technologies,
‘Light touch’ franchising, and
Recycling facilities and know-how of existing firms that are
failing or have failed.
But what is best form of company for this?
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The Problem with Conventional Companies:
Not Best for Spawning New Life
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Conundrum: ordinary “ownership” in conventional
companies supports existing “organisms” getting bigger,
not the principle of plenitude—the spawning of new life.
Biological parents know offspring have to be spun off;
no possibility of permanent ownership.
But ordinary companies want to own any potentially
profitable “new life” and thus it is not “new life” but is:
* New division of old company,
* New subsidiary of old company;
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So company gets bigger.
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Lack of incentive for spawning spin-offs
Shareholders want every profit potential to
accrue to their company so at best packaged as
new divisions or new subsidiaries—so company
gets fatter.
 Managers are usually rewarded by size of
operation under them so genuine spin-off reduces
their “empire” and is thus resisted.
 Indeed, managers often promote “reverse spinoffs”, i.e., acquisition of previously independent
companies, to increase size of their empire.
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Democratic firms are different
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No “ownership” that owns every new enterprise opportunity.
Analogy to biological parents who cannot own new life. New life
naturally is separate with relationship to parents.
Democratic firms are natural to sponsor:
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Spin-offs of routine operations;
Spin-offs with new applications of existing technologies;
Light-touch franchising to create new business partners;
Bust-ups before bankruptcy.
Genuine spin-offs not limited by diminishing managerial attention
and incentives as company just gets fatter;
Genuine spin-offs are separate firms that can carry out more
experiments, go in new directions, and fill more niches with full
incentives—which fatter old companies can only try to imitate.
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Examples of Development by Spin-Offs
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Thermo Group did partial “spin-out” with every new
product so 70+ companies now in group. See
www.thermo.com, “About Us”, “Former Brands”.
* But it was due to founder stipulating this pattern and has not
been reproduced elsewhere.
* Thermo Group was exception that proves the rule.
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Over a 100 companies generated in Mondragon group
of democratic firms: www.mcc.es
Similar expansion of LEGA cooperatives in Italy.
Imagine if MicroSoft did spin-off for each new
product.
Related but separate companies have more vitality and
create more jobs.
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Democratic Enterprise and Entrepreneurship
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Since conventional firms do not promote new enterprise
creation by spin-offs, entrepreneurs are seen as “dropping
from the sky.”
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Such entrepreneurs who come out of nowhere would want
to start conventional firms where they own everything.
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But democratic firms can use existing firms as schools for
new firms, and thus naturally create new democratic firms.
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In this sense, social economy of democratic firms can be
more entrepreneurial than conventional economy.
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Thought Experiment
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Imagine a company with a maximum of, say, 10 years
working in company.
Within 10 years, each person had to devise, along with
some colleagues, a spin-off which they would join.
Spin-offs would follow the same rule.
Rather than one large company dedicated to furthering the
interests of top managers building their empire, there is
Within a matter of years, a group of related small-medium
sized companies continuing to divide and multiply making
new products and filling new niches.
This tends to happen automatically with democratic firms
particularly with financial & consulting support orgs. and
support from local universities.