The Cooperative Model
in Crisis?
Cooperatives have gotten a pretty
bad press lately. Two recent instances of major cooperative crises, in
particular, have received a significant amount of attention: the collapse of
the Fagor cooperative, part of the world’s largest cooperative group in the
Basque Country, and the series of scandals within the Co-operative Group in the
UK, the world’s largest consumer-owned business.
Although a detailed account of
each episode would be beyond the scope of this blog (and probably impossible,
given that many of the details remain obscure, at least from the perspective of
outside observers), a brief synopsis is in order. Fagor is (was) an industrial
cooperative in the famous Mondragon group of cooperatives in the Basque Country,
the largest such group in the world, which has received plaudits from all
quarters for balancing economic efficiency and technological innovation with
cooperative values. It recently came to light that Fagor had been making losses
for five straight years, incurring debts of around $1.2bn. The group had
experienced similar crises in the past, which it managed by voting to support
ailing cooperatives until they could once again become profitable. This time,
however, the other coops in the group voted not to meet Fagor’s request for
bailout funds (despite the Spanish and Basque governments offering to meet them
part way), and, unable to find willing creditors elsewhere, the cooperative
filed for bankruptcy and was soon dissolved.
The Co-operative Group, a massive
conglomerate of consumer coops in the UK, has recently experienced a succession
of scandals initiated by the finding that the Chairman at the time, Paul
Flowers, had been illegally
using expense claims to fund his drug addiction. Soon thereafter, it came
to light that the group had been incurring astronomical
losses, most of which came from its banking division, leading to its buyout
by US hedge funds. To continue this series of unfortunate events, the newly
appointed chief executive Euan
Sutherland quit after only 10 months in the job, following protests within
the group over his pay level; having been entrusted with the task of reforming
the group, he claimed that the group was “ungovernable”. Labour is now moving
to sever its historical ties
with the Group.
Does this double-punch of
failures in the world’s paragons of producer and consumer cooperatives imply that
there is something inherently wrong with the cooperative model? The Economist seems to think so. Commenting
on Fagor’s collapse, it sneered that “The co-operative model has its
virtues, but there are times when those nasty, money-obsessed capitalists have
their uses too”. Its
analysis of the Co-operative Bank’s predicaments similarly jeered that “its
vaunted model means it cannot speedily raise equity”. I, however, beg to differ,
due to three overlapping sources of bias that plague the evaluation of the cooperative
model: experimental bias; cognitive bias; and institutional bias.
Experimental Bias
It
should firstly be noted that there is really no such as thing as ‘the cooperative model’. There is the Mondragon
model, there is the Co-operative Group model, and there are countless other cooperative
models, all of which differ. Even if recent events represented a malfunction of one of these models, that would not imply that cooperatives
in general are inherently unworkable. Furthermore, the failure of one feature of one of these models does not imply that the model as a whole has failed. For instance, the Co-op’s recent plight
may indeed stem from its complex
governance structure; but that structure is a historical
relic, unique to the federalism of the UK consumer co-op movement.
In any
case, even if there were such thing as a ‘cooperative model’, to what is it
being compared? When a traditional (capitalist) firm fails, people never ask
whether this is the fault of the ‘capitalist model’ of organisation. Rather,
they attribute it to adverse economic conditions, or even say that capitalism
is simply doing its job (“creative destruction” and all that). When a cooperative
fails, however, they automatically treat it is evidence that the ‘cooperative
model’ doesn’t work. For example, the causes of Fagor’s collapse – lack of domestic
demand, low-wage competition from China – have afflicted the entire Spanish
economy, especially the industrial sector, which has been declining in most of
the Western world. Indeed, it is probably because these problems are
structural (and therefore affect all firms in the economy, capitalist or
cooperative) that the other coops voted not to support it.
If anything, Fagor’s collapse
demonstrates the strength of the
Mondragon model. After only four months, the Mondragon group relocated
nearly all of the redundant workers (867 to be precise) in other coops,
with the rest (e.g. those who were anyway close to retirement) receiving ‘early
retirement’ packages. Such practices are exceptionally rare, as the sky-high Spanish
unemployment rate (26% in the last quarter of 2013, and over double that for
young people) attests. In fact, during Spain’s economic recession, when net
mortality rates have been through the roof, cooperatives in the Basque Country have experienced
net business creation.
A similar point can be made with
regard to the Co-op, albeit with lesser force. The massive losses incurred by the
group originate primarily from its banking division (£2.1bn of the £2.5bn
losses for 2013), which, as a result of its flopped takeover of Britannia, was
bought out by US hedge funds last year. During the financial crisis, however,
the Co-op Bank was seen as a resilient outlier, persevering when the rest of
the financial sector was going pear-shaped. At the time of writing, the government is still trying to
sell off its massive stake in the Lloyds Banking Group.
Cognitive Bias
This
last point leads on to the second reason why cooperative organisation has not been
undermined by recent events: recent events, although ‘fresher’ in the mind, are
not necessarily representative of historical trends. According to Wikipedia (I
hope you appreciate the high standard of scholarly research), “the availability
heuristic is a mental shortcut that relies on immediate examples that come to
mind. The availability heuristic operates on the notion that if something can
be recalled, it must be important. Subsequently, people tend to heavily weigh
their judgments toward more recent information, making new opinions biased
toward that latest news.” In the case of the two examples discussed in this
blog, this cognitive bias is exacerbated by the fact that both of the
failed/failing coops have symbolic appeal. Fagor was the offspring of the first
cooperative in the Mondragon group, founded with the assistance of the
charismatic priest who is still venerated as the group’s architect (at the time
of its collapse, however, it represented a small fraction of the group’s total
turnover). The Co-operative Group in the UK, meanwhile, traces its ancestry to
the birth of the consumer coop movement in Manchester, where the legendary ‘Rochdale
Pioneers’ established the first coop store during the Industrial Revolution.
Institutional Bias
Some may retort that
cooperative failure is, in fact, a historical trend. For instance, they could
cite Beatrice Webb’s survey of the UK cooperative movement in the 1800s, which
concluded that producer coops were doomed to failure in a capitalist economy.
However, that very example demonstrates the third point, namely that efficiency is not absolute – it is
only meaningful in relation to the current institutional environment. A host of
authors have noted that cooperatives suffer from ‘institutional bias’, as
prevailing systems of finance, education, and law, are catered towards
prevailing modes of organisation. In an economy with a higher frequency of
cooperatives, cooperatives would likely be more efficient, because these
systems would be more conducive to cooperative organisation. A case in point
might be the Co-op Bank: as a mutual, it was supposed to stick to ‘simple’
activities like mortgages, pensions, and deposits, rather than dabbling in the
financial alchemy, investment banking, and other risky activities. Although
this made the Bank more stable (and arguably closer to what banking should
resemble), it also made it less competitive vis-à-vis mainstream banks, which
were (at one point, anyway) making astronomical profits.
Conclusion
There is an assumption, widespread
amongst both academics and laypeople, that capitalist organisation is the ‘natural
order’ of things, and that cooperative organisation represents a deviation from
that natural order. As Karl Polanyi demonstrates in his 1944 book The Great Transformation, however, the
latter is actually the more ‘primal’ of the two, with the former only recently coming
to predominate. Indeed, whereas Jensen and Meckling (1979) point out that
cooperative organisation usually emerges and persists due to social movements
and ‘artificial regulation’ rather than ‘natural market forces’, and submit
that is as evidence that cooperatives are generally inefficient, Polanyi shows
that the capitalist order was itself a fabrication of the landed elite, devised
to protect their private interests. This misconception could well be the source
– it is certainly a source – of all
three biases discussed in this blog: experimental (it skews comparisons of
capitalist and cooperative organisation), cognitive (it gives priority to
recent events), and institutional (it ignores that the current institutional
environment militates against cooperatives).
Barring the recent popularity of ‘randomised
control trials’ (and even then), social science is not experimental in the
manner of the natural sciences. For lack of a counterfactual (or a sufficient
number of counterfactuals), it may therefore be impossible to fully remove
these biases. However, for that very reason, it is worthwhile to remember that isolated
instances of cooperative failures cannot be taken as evidence, let alone proof,
that cooperative organisation is inherently flawed.
