June 12, 2018; openDemocracy

Socialism is often thought of as a national economic system, but the Labour Party in the UK is taking a radical step of piloting Municipal Socialism in the town of Preston. Based in part on the successes of worker co-ops in Cleveland, Preston is implementing programs that urge local anchor institutions—companies that are unlikely to leave the area—to procure services from local cooperatives, rather than source from other areas. The program was brought about after Preston’s economy lagged.

The localized contracts have increased the amount of money being spent in the town, from £38 million in 2013 to £111 million in 2017. To be clear, these gains can be part of an overall economic turnaround, not just incentives to spend locally. Nevertheless, that is a substantial (nearly 300 percent unadjusted for inflation) increase in local spending in the local economy. The municipal government of Preston is quite happy with the early returns to this program.

The initiative comes from a community wealth-building model where municipalities encourage large institutions in their jurisdiction to source products locally. In targeting areas facing economic stagnation and decline, advocates hope that the increased spending in the area will build wealth where many people feel it is being extracted. Advocates see the profit motive for corporations as being necessarily exploitative and in opposition to the benefit of the employees. In removing the profit part of the decision-making process, firms will be more likely to invest in the employee and the local community, it is said.

With employees getting a better deal, they are expected to earn more. More money in the pockets of the residents, so the argument goes, will work as a multiplier for growth. While there may be more money being spent by residents in the local economy, the size of the multiplier should not be overstated, as the economy is not closed, and residents are free to spend any or all of their money elsewhere.

Often dubbed “new economics” by proponents, the model of socialism at the local level is rather old. There have been instances in the UK where municipal socialism was introduced, only to fall out of favor for less centralized governing and regulatory systems. Still, there are some instances today of municipality owned enterprises. These are usually utilities like gas, water, and electricity, but things like transportation systems are also municipally owned in some cases.

The Labour Party is holding up the Cleveland-based Evergreen Cooperative as its ideal. In the wake of decades-long decline, Evergreen worked out an agreement to service the laundry needs of hospitals—Case Western Reserve, Cleveland Clinic, and University Hospitals—in the once thriving industrial city. The cooperative tied itself to these anchor institutions and thus began a worker-owned firm that invests in the community. Evergreen has been successful enough that they are opening another location to better serve the Cleveland Clinic, a facility that will require around 100 more workers. All in all, this has been a good thing for the city of Cleveland. Indeed, the Preston Model is more aptly named the Cleveland Model.

Before getting too excited, though, a great deal of caution is warranted, especially when bringing in municipal legislation. First and foremost, the Evergreen Cooperative is not a government organization, nor are Cleveland area hospitals required to deal with them exclusively. Rather, it is a public-private effort that had buy-in from nonprofits and the municipal government. A workers’ revolution this is not. Instead, it is a deliberate measure taken by nonprofits to fulfill a mission—namely, to find a way to invest in a sustainable business model in an impoverished area.

Second, while an effective means of production, worker-owned cooperatives may not always be effective. They tend to be stagnant when it comes to innovation. Furthermore, when they are effective, and indeed they can be more effective than for-profit firms, evidence suggests that when the organization becomes less and less homogeneous—that is, as a greater diversity of workers get involved—the less effective the cooperative becomes.

Some caution is also warranted when considering “anchor institutions.” While it is difficult for hospitals to pack up and leave town, they can still go bankrupt. Not to mention, there are a lot of unknowns when it comes to the direction any industry is heading. At one time, it looked as though the American auto industry was an anchor institution. With the benefit of hindsight, we know that just wasn’t the case.

The municipal corporations that are often seen in the United States are often utilities. These tend to be special instances of natural monopoly, which do not easily transfer to competitive areas of the economy. When a firm needs to be dynamic and adapt to change quickly, it may be hindered by the municipal ownership model.

Finally, one last bit of caution when it comes to government involvement. As recent elections in our country have shown, voter preferences can change on a whim. Politicians can play favorites choosing which firms should get government benefits or which people should lead the municipal firms. We don’t need to look far back in our history to see cronyism warping government policy. The more involvement of the government in an industry, the greater the risk of overreach and abuse of power. It is wonderful to think of how well these things can go when the right people are in control, but terrifying to think of how badly they will go if the wrong people are at the helm.

Ultimately, if this is an issue where profits are causing for-profits to overlook blighted areas with potential or highly qualified people that don’t look great on paper, then this is where nonprofits should thrive. Because they are not burdened with the need to turn a profit, they can reach far into the future when funding promising projects that aim to revitalize municipalities. Nonprofits can also make it possible for low-income people to take risks that they otherwise might not be able to afford. For example, a would-be entrepreneur that would start a business but cannot afford the costs of failure. A nonprofit can grant seed money to that entrepreneur, allowing her to start a business, investing in her community.

There is certainly a problem with community investment in impoverished areas. A number of factors can explain why this is the case, some of them nefariousness on the part of greedy corporations, but other, more common reasons like demographic shifts, competition, and changes in national demands. Giving access to capital markets and investment opportunities to impoverished people is a great way to help these areas, and this is an area where nonprofits can thrive. Who will step in and fill the void?—Sean Watterson