The Democratic Economy: a Hope and a Danger

Winston Churchill famously quipped that "democracy is the worst form of government, except all those other forms that have been tried from time to time". An analogous statement can be made regarding capitalism, which, for all its faults, basically works - at least, better than any other system that has yet been tried.

But what really has been tried? With the end of the Cold War and the fall of the Berlin Wall, it was widely proclaimed that the 'End of History' had been reached; capitalism had won a categorical victory against its arch-rival system of communism, which had proven to be unviable. It should not be forgotten, however, that the centrally-planned, authoritarian system of the Soviet Union was a far cry from the communist utopia envisaged by Marx, just as the corporatist, oligopolistic version of capitalism that predominates today is a far cry from the free-market utopia envisaged by neoliberals.

Indeed, just as the Left has struggled to find a concrete alternative on which to ground its identity since that momentous day 1989, the traumatic events of 2008 and their enduring aftermath have led many on the Right to grapple for their own alternative to the present system. In reality – and despite what many a sensationalist airport-book author would have you believe – modern capitalism continues to stagger on virtually unchallenged, with no definitive indication that it will collapse any time soon; but it is nevertheless clear that its problems are mounting, and that the solutions offered so far have been inadequate to avert further catastrophe.

There is, then, a growing a sense that neither corporate capitalism nor state socialism are fit for purpose, and that some alternative system is called for. Neither Left nor Right have managed to substantively imagine (or at least compellingly describe) what this alternative might be, and to the extent that they have, their formulations are in some ways diametrically opposed. There are, nevertheless, some common threads.

I would particularly draw the reader’s attention to the cross-cutting agreement that, in some way, shape, or form, society needs to be more democratic. One of the peculiar traits of neoliberalism – and indeed, one of its most impressive victories – has been its ability to convince the masses that democratic participation need only inhere in the political sphere, with labour-market choice sufficing to ensure equivalent freedoms in the economic sphere. Although many discontented right-wingers (especially of the libertarian ilk) buy into the false premise that ‘free markets’ are inherently democratic, and would thus have market forces permeate even more of our social relations, it is has become increasingly apparent that the economy is constituted by more than just the market. Indeed, most economic activity occurs within organisations like firms, which must therefore be explicitly democratised if the economy is to even remotely approximate the hallowed value of freedom supposedly intrinsic to markets.

Meanwhile on the Left, the rubric of ‘community participation’ has acted as a backstop for hopes of a fairer, more decent, and generally better socio-economy. Although this vision is often vaguely and incoherently articulated through a disparate range of permutations – unlike their libertarian counterparts, socialist dissidents lack a unitary idol like the market around which to centre their ideology – real-world examples have proliferated in recent times, or at least grown in prominence. The late Nobel prize-winner Elinor Ostrom, for example, compellingly demonstrated that communities are, directly contrary to the predictions of mainstream economic theory, often the best stewards of common resources, which may otherwise be depleted through overuse if managed by either private owners or public administrators. Solidarity/social economies, cooperatives of various sorts, transitional towns and more have all added to the repertoire of evidence that some kind of ‘communism’, defined loosely and without the authoritarian connotations, may be possible after all.

Opposite extremes of the political spectrum therefore converge, or at least overlap, in their aspirations for a democratic economy. In this vein, it is interesting to note that cooperatives often transcend traditional ideologies, appealing to thinkers and activists of all stripes and none but also repulsing mainstream party politics. Perhaps the only global ideology that has historically embraced cooperatives without reservations (for example relating to trade unions or 'private property') has been anarchism, which, as a political philosophy that can be formulated from both left- and right-wing perspectives (or from neither perspective), is itself located in the ‘no man’s land’ of political economy.

The allusion to anarchism is not coincidental, for so far the institution of the state has been conspicuously absent from our discussion; and it is here that the promise of a democratic economy becomes a danger. While freedom from government interference is a familiar mantra of reactionaries, it should not be forgotten that the dissolution of the state was an explicit objective of many communists, not least Vladimir Lenin. Of course, Lenin’s famous avowal was not borne out by the actual experience of the Soviet Union – quite the opposite, in fact. However, that same experience demonstrates the perils of mindlessly retrenching the state. The overnight liberalisation recommended by neoliberal economists ('shock therapy') led not the emergence of a free-market utopia propelled by citizen-entrepreneurs, but rather to a coup-d’économie by a select group of oligarchs, leaving the post-Soviet countries in a situation not far removed from the runaway inequality of Western capitalism.

Cooperatives again provide a microcosm of this danger. Despite their progressive potential, cooperatives have been increasingly co-opted by conservative politicians as a means of privatising social services through a more palatable back door – particularly in the UK, where their not-so-hidden agenda of dismantling the welfare state has taken root under the pretext of austerity.

The ambition to create a democratic economy is noble, and, given its cross-cutting allure, may just about be attainable. The road to reform, however, is fraught with peril. 

Money as Socialised Credit

I have been reading quite a lot recently on the nature of money (e.g. Felix Martin's Money: the Unauthorised Biography and various bits by David Graeber). The question of 'what is money?' intrigues me because, as an economist, I was long taught that money isn't really a thing - it is simply an index of value, a way of circumventing the inefficiencies of direct barter. Yet, it quite patently is a thing, for all sorts of reasons - it confers social status, is subject to hoarding, causes financial crises, etc. For me, the main problem with the economists' view of money lies in in its fiat property: unlike commodity or representative money, money in modern economies is literally created out of thin air by central and private banks, which doesn't sit well with the notion that money exists as some kind of 'natural law' of society.

Of course, it could be argued that the inflation brought about by money creation, by increasing prices of all goods by the same proportion, still retains an equivalence of relative value between those goods. Even if that is true, however, money creation and its consequences do have distributive consequences - for example between creditors and debtors in the case of inflation, or between asset-holders and everyone else in the case of quantitative easing. This, I believe, is where the heterodox definition of money excels - according to both Martin and Graeber, money is, by its very nature, a form of credit. In particular, I would say that it is a claim on society (and, for that matter, the natural environment) - its resources, its labour, or whatever.

The definition of money as socialised credit allows us to challenge the economic status-quo, along with its plethora of social disorders, in a way that is not possible with the definition of money as an immutable law of value. Take inequality, for example, perhaps the most prominent economic issue of our time. If we espouse the standard defintion of money, our ability to question the distribution of wealth and income is limited. We can still implement redistributive policies, of course, but there is a sense in which we are defying some kind of 'natural law' (such as c>g, perhaps!) in the process, unless we claim to be rectifying some previous infringement such as monopoly. If we espouse the definition of money as socialised credit, however, we can ask the fundamental question of whether society really 'owes' this person billions of dollars' worth of its resources or labour. What has that person contributed to society that commands such a hefty price tag? Has that person really contributed millions of times more (or, for that matter, anything more) than the average worker, whose wage has been stagnant for decades? Can we really justify a situation in which the 99% is in 'social debt' to the 1%?

Speaking of which, the issue of debt offers another lucid example of the contrasting definitions of money. From Germany's perspective, Greece must repay its debts, because it would be cheating not to - that's just the way that money works. When we conceive money as socialised credit, however, it becomes clear that such an assumption is moot in the context of the Eurozone, in which the mechanisms by which credit is socialised (such as a coordinated fiscal policy that could redistribute surpluses to deficit regions) are critically deficient and unfairly rigged.

In reality, of course, these examples are tremendously complex, involving numerous interacting elements; but how we understand money is surely one of the most consequential.

Cooperatives in the Organisation Economy

In previous posts discussing the relationship between cooperatives and archetypal economic systems (viz. communism and capitalism), I drew what I believe to be an important distinction between ownership of enterprises and coordination between them. I argued, moreover, that it is primarily the former criterion that defines these archetypal systems – capitalism consists of ownership (of the means of production, property rights, or whatever) by capital, whereas communism entails ownership by the community (broadly conceived). Cooperative ownership, I suggested, can be conceived as a variant of either of these ideal-types, or perhaps as a ‘third way’ between them - workers may be their own/each other’s capitalists, and/or they may circumscribe ‘the community’ to the level of the enterprise. I also proposed that the coordination criterion, while significant (especially given its interaction with the ownership criterion), is less consequential, because, crucially, it would be theoretically possible for common ownership to be coupled with market coordination in a sort of ‘market socialism'.

This point is made all the more clear when we consider that ‘actually existing capitalism’ is a far cry from the free-market utopia eulogised by neoliberal ideologues and the perfect-competition model depicted in economics textbooks. In fact, the market is not the primary means of coordination in modern capitalist economies; rather, most allocative decisions are made within organisations (such as firms, governments, and universities), or between them through non-market means (such as long-term agreements, joint ventures, and implicit collusion). As Herbert Simon once remarked, real-world capitalist economies are more accurately described as ‘organisation economies’ than ‘market economies’.

With this in mind, it is a moot point as to whether or not cooperatives can thrive in a purely market-based economy – the question that commentators on the subject usually pose – because such an economy is a fiction. Indeed, there are compelling reasons to believe that even capitalist firms would not be able to function effectively, or at all, in such an economy. For one thing, as Ronald Coase famously postulated in 1937, firms themselves represent ways to circumvent market transactions, the costs of which (owing to asymmetric information and whatnot) would prohibit economic activity. Coase actually understated his case, because firms intentionally avoid (and manipulate) the market even to coordinate with each other. At any rate, without firms – that is, in a situation characterised by sole entrepreneurs buying inputs and selling outputs – there would be nothing for capital to own; indeed, the distinction between capitalist and labourer would disappear. After all, from a Marxian perspective, it is precisely through the employment and agglomeration of workers that capitalists extract surplus value. From a Schumpeterian perspective, meanwhile, it is precisely the pursuit of monopolistic rents – which, by definition, cannot exist in a state of perfect competition – that propels innovation in a capitalist system.

How, then, would cooperatives fare in an organisation economy? To answer this question, we should first remember that, although both Marx and Schumpeter extolled (organisational) capitalism for its unparalleled ability to create wealth, they also bemoaned its tendency to stimulate individualistic behaviour, induce unemployment, and prevent workers from attaining their intellectual and moral potentials. Cooperatives, by contrast, have been repeatedly shown to generate employment, foster trust, and develop workers’ skills. Rent-seeking is also associated with other undesirable activities – such as extortionate pricing, regulatory corruption, and wasteful advertising – which cooperatives are supposed to eschew thanks to the principle of ‘concern for the community’ enshrined by the International Co-operative Alliance. Indeed, cooperatives have been widely lauded for integrating marginalised social groups, revitalising declining regions, and otherwise contributing to their local communities.

These positive spillovers would be magnified in an organisational economy dominated by cooperative ownership. For starters, the complementary principle of ‘inter-cooperation’ – that is, cooperation between cooperatives – would ensure that relations between firms are productively cooperative rather than wastefully competitive or collusive (although some degree of competition would undoubtedly be required) (Gregory 2013: 62; Bruni and Zamagni 2004; Zamagni and Zamagni 2008). This would essentially be what is often referred to as a 'solidarity economy' - a notion that is not as far-fetched as it would first appear when the organisational nature of economic coordination in existing economies is considered. Crucially, in such an economy, the rents that drive innovation would not vanish, but would rather be pursued in a more socially-beneficial manner. They would, moreover, accrue to cooperative worker-members, which would have far-reaching consequences given the relative immobility of labour: rents will tend to be reinvested within firms rather than siphoned off into private accounts, and will not be concentrated within the small section of society that happens to own capital.

In sum, the fact that modern economies are primarily coordinated through organisations rather than the market strengthens my case that cooperatives offer a means to harness the productive powers of capitalism while avoiding its adverse effects.



References

Gregory, D. (2013) 'Towards a New Economy Based on Co-operation' in Harrison, R. (ed) People Over Capital: the Co-operative Alternative to Capitalism (Oxford: New Internationalist Publications)

Bruni, L. and Zamagni, S. (2004) Economia Civile (Bologna: il Mulino)

Zamagni, S. and Zamagni, V. (2008) La Cooperazione (Blogna: il Mulino)

The Methodological Division of Labour in Economics

My very first post on this blog discussed the mathematical imperialism that has recently infiltrated the discipline of economics. In that post, I distinguished between pluralism in subject matter (e.g. paying more attention to issues like inequality) and pluralism in methodology (e.g. accepting historical approaches as legitimate), and argued that, at present, ‘New Economic Thinking’ relates primarily to the former. I promised, moreover, to explain in a subsequent post why I think that methodological diversity is also crucial to the renaissance of economics. Over ten posts later, that is precisely what I intend to do now, albeit by way of analogy, and in a rather tongue-in-cheek fashion.

Following Adam Smith, who is widely considered to be the ‘father of modern economics’, I accept that some degree of specialisation – in this case, with regard to methodology – is acceptable, and even desirable. Mathematics and econometrics (hereafter ‘MAE’) certainly have their place, and it stands to reason that the field of economics benefits when certain economists choose to specialise in using these tools. Smith (1776, Book I, Chapter 1), after all, argued that specialisation would increase productivity by improving workers’ dexterity and by facilitating innovations at each stage of production [1]. Specialisation in MAE thus produces better mathematicians/econometricians and better maths/econometrics. For a number of reasons, however, Smith’s logic also implies that this specialisation should not proceed indefinitely.

First, there are clearly limits – or at least diminishing returns – to the productivity gains that can be accrued by further specialisation in a given task or methodology. You can only get so good at casting or filing a pin (clearly, I don’t remember the actual stages of production involved in pin-making described by Smith), or, for that matter, doing MAE. Although innovations in casting or filing can surpass these limits, they are not costless – you might get away with paying a worker the same wage to do more work (or more productive work) in a given amount of time, but machines have to be built, purchased, operated, and serviced. The result is that a whole production process, including its own division of labour, emerges to focus on improving the particular task of casting or filing. A parallel in economics, for example, is that teachers require an increasingly higher level of training in MAE. Meanwhile, textbooks must be continually rewritten to reflect mathematical and econometric ‘advances’, giving rise to a vast industry in its own right, just as peer-reviewed journals must expand, change focus, or multiply to keep apace. At some point, the costs of this sub-division of labour must outweigh any benefits to economics of marginally superior (and increasingly less-superior) MAE.

A more glaring problem with unlimited specialisation in maths and econometrics, however, is that the whole point of specialisation, according to Smithm is to allow for more production to occur for a given amount of manpower. What we see in economics, by contrast, is the exponential proliferation of economists specialising in MAE. This proliferation, moreover, does not simply reflect the proliferation of the discipline itself, which would not necessarily defy Smith’s logic; rather, it is occurring to detriment of other methodologies. This relates to a third problem, which is that specialisation in a given task is only beneficial within a broader division of labour. After all, if specialisation in MAE is beneficial, then specialisation in other methodologies must be also [2].

In my initial post, I alluded to the proverb of the man with a hammer (i.e. skills in MAE) who thinks that everything is a nail. What we observe in economics is a vast population of workers, each equipped with a state-of-the-art hammer with which she has been trained to the level of expert. All of these workers are huddled around a single worktable, each trying desperately to push their way to the front so that they can impress the boss by hitting something (and don’t come at me with the benefits of competition, which Smith also emphasised – the whole point of a firm, at least according to mainstream economics, is to internalise transactions that would normally occur through the market). Meanwhile, all (at least most) of the other work stations are undermanned, laden with untapped potential for improvements in productivity. Thus, in a sort of reverse Lewis-model scenario, workers are flooding into the surplus-labour ‘MAE sector’, adding little in the way of productivity, despite other sectors remaining underpopulated. Furthermore, those work stations that are enjoying a much-needed increase in manpower, such as behavioural economics, remain disconnected from the other stages of production, with the lamentable result that the mainstream continues to rely on demonstrably false assumptions in order to facilitate hammering (i.e. modelling). The gross inefficiencies of this factory of economics are reflected in the quality of its final product, with which its consumers – that is, students, employers, and the like – are increasingly dissatisfied.

Finally, it should be noted that, despite singing the praises of specialisation within a division of labour, Smith also warned against its adverse effects on individual workers. Indeed, he (1776, Book V, Chapter 1, para. 178) went so far as to state that repetitively performing a narrowly-defined task would render a worker not only “stupid and ignorant”, but also “incapable of…conceiving any generous, noble, or tender sentiment”, even to the point of adversely affecting her “private life”. At the risk of (severe) generalisation, this is indeed what we observe in economics – flocks of idiot-savants who succeed in degrading the subject to a mere branch of mathematics, so devoid of any real-world foundation or application that academics and students alike have called for a ‘post-autistic economics’. Even specialists in MAE must have some knowledge of actual economies, as well as economic history, economic thought, and other methodologies. Indeed, Smith (ibid.) was so concerned about the adverse effects of specialisation on workers’ mental health that he believed government intervention would be required to curb it. Perhaps something similar is required in economics!

Notes:

[1] Another channel by which specialisation would increase productivity, according to Smith, was by eliminating the time wasted by transitioning between stages of production. This channel does not apply to the current discussion except insofar as time is required to learn new methodologies, which could be spent using the methodologies in which each economist is already proficient.

[2] Obviously, I am assuming here that other methodologies are useful, which is precisely what I am trying to argue. As stated at the outset, this is (admittedly circular) argument by analogy, not deduction. Incidentally, the exclusive use of deductive logic to the neglect of inductive approaches has been identified to be one of the major pitfalls of contemporary economics.


Reference:

Smith, A. (1904 [1776]). An Inquiry into the Nature and Causes of the Wealth of Nations (5th ed.). London: Methuen & Co. Retrieved from http://www.econlib.org/library/Smith/smWNCover.html

The Failure of the Anglo-Saxon Model of Business and the Worker-Cooperative Solution

Introduction

Discontent with the prevailing business model of the Western, capitalist economy, while arguably mounting for the past half-century, has reached a climax with the financial crisis of 2007-8 and its enduring aftermath. There is now a pervasive sentiment among intellectuals, policy-makers, and the public at large that the shareholder-oriented corporation is not fit for purpose, and that a fundamental change is needed in the way that businesses are run. The sources of this dissatisfaction are manifold, relating to the failure of the status quo both to maintain a robust economy and to deliver on social criteria like fairness and wellbeing. While there have been calls from many quarters for companies to include a wider variety of stakeholders in their systems of participation and decision-making, the worker-cooperative model, whereby workers own and control the firms in which they work on a democratic basis, is a largely overlooked alternative to conventional enterprise that offers some unique advantages in addressing some of the most urgent socio-economic ills of our era.

Inequality

Amongst those ills, it is probably the issue of inequality that has received the most attention in recent times. The work of renowned economists like Thomas Piketty and Joseph Stiglitz has exposed both the magnitude and the costs of a scandalously lop-sided distribution of wealth and income, which has provoked popular agitation against a system in which a small class of super-rich – the infamous ‘one-percent’ – grows increasingly richer while the rest of the citizenry endures hardship and stagnation. Although issues such as deregulation, union decline, and deindustrialisation are all contributing factors, the shareholder model of corporate governance has undoubtedly been complicit in causing and perpetuating this woeful state of affairs.

The capitalist corporation configures the firm to be a mere investment vehicle through which the wealthy can multiply their wealth without taking an active part in the production process; ownership of (limitedly liable) residual claims has become just another financial asset for an investor to add to her portfolio. Furthermore, due to the separation of ownership and control, especially when coupled with dispersed shareholdings, managers have become a class of their own, enjoying astronomically inflated levels of pay that are entirely inconsistent with their levels of productivity. The real wage of the average worker, meanwhile, has been stagnant for nearly half a century; the common citizen is no better off than were her parents, or even her grandparents. In short, while corporate profits boom and executive pay soars, workers are sharing less and less in the proceeds of growth. With the rise of ‘precarious employment’, they are also enjoying less in the way of promotional opportunities, critical welfare services, and job security.

By conferring both residual claims and ultimate authority to workers, cooperatives have the potential to generate a more equitable distribution of wealth and income: in a cooperative, worker-members enjoy both a stake in the firm’s profits and the power to determine their own wages. They also have the power to determine the salaries of managers, and thus to reduce the deadweight burden on society caused by inordinate executive pay. Furthermore, in addition to creating well-paying jobs, cooperatives have been lauded for preserving those jobs during economic recessions, a propensity that derives in part from the fact that worker-members can collectively choose to temporarily reduce their share earnings.

Economic Stagnation

The classic justification for inequality is that it is ‘good for growth’, which expands the total size of the economic ‘pie’. In recent years, however, we have instead witnessed economic stagnation, punctuated by financial bubbles that eventually burst and thus reduce the total wealth of society. The most convincing explanation for this deep-seated malaise, which has come to be known as ‘secular stagnation’, is the rising tendency for economic agents and institutions to forego value creation in favour of value extraction – that is, to leech on society’s resources – a practice that is intrinsically related to the rise in inequality.

Although the most obvious driving force of value extraction is the unrestrained ascendancy of the financial sector, which has directed its resources to ‘innovations’ that are not only unhelpful but in fact detrimental to the real economy, even non-financial companies are at fault. As economist William Lazonick has explained, large, investor-owned corporations, long the protagonists of Western economic history, are failing to invest in research and development, worker skills, and other productive assets that generate a social benefit. Instead, they are siphoning an ever larger share of their net revenue towards dividend payment and share buybacks, the latter of which are usually performed purely to boost the already-excessive pay packages of top executives.

Even amongst the investments that corporations do undertake, shareholder primacy (coupled with the excessive mobility of capital and the threat of hostile takeovers) leads to a bias against long-term and uncertain investments – precisely the ones that lead to the most significant innovations, and thus social rewards – in favour of ‘low-hanging fruit’ that temporarily boost share values and look good on quarterly reports. Indeed, non-financial corporations have developed an unhealthy taste for financial assets, further contributing to the ‘financialisation’ of the economy. The result of this neglect for productive investment is that, despite giving workers an increasingly unfair deal, Western corporations are increasingly unable to compete globally or deliver the level of social value that would be commensurate with the amount of economic resources they command. On the contrary, they are using those very resources to push for tax cuts, deregulations, and even subsidies – not to mention exploiting fiscal and regulatory loopholes that further reduce their contribution to society – or else abandoning the communities that have come to depend on them.

Worker cooperatives offer an expedient alternative to the myopic imperative of share-value maximisation. Because members of a cooperative are not only investors but also workers, they cannot withdraw their wealth without incurring either unemployment or a loss in the value of their firm-specific skills, and in some cooperatives the withdrawal of investment may anyway be limited or even prohibited. The livelihood of a worker-owner therefore depends to a greater extent than an investor-owner on the long-term prospects of her enterprise. This gives her reason to not only reinvest within the enterprise, but also to engage in those investments that secure the future of the enterprise, not least her own skills. It also contributes to the inherently ‘place-based’ nature of cooperatives – workers are members of a community, and are unlikely to pick up sticks in order to take their investment elsewhere.

Alienation and Antagonism

Concomitant with the recent surge in inequality is a sense of workplace alienation, which, given its documentation by Marx, Durkheim, and others, has been present at least since the Industrial Revolution. The activity of work, which occupies the majority of an adult’s waking hours, is increasingly seen a necessary evil that must be endured purely for the sake of earning an income, and ultimately for consuming goods and services produced by other people. This loss of personal and social meaning is not only deplorable in itself; it also leads to a decline in productivity, and thus contributes further to economic stagnation. As work conforms to its economic depiction as mere ‘disutility’, workers conform to the economic prediction that they will dodge their responsibilities, fail to take initiative, or at least work without enthusiasm, doing just enough to receive their wage and avoid the sack. A knock-on effect of this behavioural shift is that workers come to view managers as enemies, enforcers of an organisational objective that does not affect them, at least in a positive way. A vicious circle of distrust and disloyalty is therefore initiated, further impairing organisational performance.

Worker ownership not only provides material incentives for workers to perform above and beyond the bare minimum, but also, when coupled with worker-control, affords a moral motivation to pursue the ‘common good’ of the company, be it by working harder or by exerting social pressure on peers to do so. Worker-members can also democratically choose less alienating terms and conditions of work, and, because managers are ultimately accountable to workers, they are less likely to be seen as adversaries.  

Conclusion

Shareholder capitalism was famously justified by Milton Friedman on the grounds that maximising profits was the best way for a company to serve the common good. Although the investor-owned corporation remains predominant in the Anglo-Saxon world, Friedman’s argument has been called into question by a rise in inequality, economic stagnation, and workplace dissatisfaction. Social and economic prosperity clearly requires an alternative business model, for which I have argued worker cooperatives represent a promising candidate. Indeed, countries across the globe are already experiencing a trend towards employee participation in various forms. More public awareness and more public action will be needed, however, if worker cooperatives are to be given a legitimate opportunity to challenge the hegemony of the investor-owned corporation, and so help to remedy its adverse socio-economic effects.

Who Hires Whom in Cooperatives?

It is usually assumed in the literature that whereas in a capitalist firm capital hires labour, in a cooperative firm labour hires capital. This may be an accurate description of a capitalist firm, in which the owners of the firm’s capital enjoy residual claims and control rights, paying workers a rental fee (that is, a wage) in return for their labour. In cooperatives, however, even if ‘labour hires capital’ in some theoretical sense, worker-owners do not necessarily hire capital from somebody else (although they may). Rather, many cooperatives in the Western world are self-financing, meaning that members contribute both labour and capital, receiving both wages and dividends; the roles of worker and capitalist are merged into one person. In fact, it is almost as if workers have become “their own capitalists”, as Marx bemoaned, by hiring their own labour (and each other’s). This can be clearly seen when one considers that many cooperatives hire non-member workers, who receive only a wage and have no control rights. The only thing that distinguishes these non-member-workers from worker-members is that they have not contributed any capital in the form of a membership fee.

What about the fact that voting rights in cooperatives are usually allocated on a 'one-member-one-vote' basis? Doesn't this imply that control rights have in fact been allocated to labour rather than capital? That could well be the case - control rights could have been separated from residual claims, the former vested in labour and the latter vested with capital (but both ultimately remaining with the same persons). However, the equal-voting principle can also be explained by the fact that members usually contribute an equal amount of capital, at least with regard to their membership; in some cooperatives the membership contribution is set at a token $1, for example. Indeed, in some cooperatives that allow for variable amounts of internal investment by members, voting rights are allocated in proportion to capital contributions. And, of course, the principle could simply represent a historical or philosophical remnant of the cooperative movement rather than a necessary result of the way that cooperatives function.

To be sure, cooperatives may issue debt to outside investors, paying interest on the debt, which would indeed be a case of ‘labour hiring capital’. Furthermore, in post-Communist Yugoslavia, workers in self-managed enterprises did not own the capital of those enterprises, but rather rented it from (that is, paid interest on it to) the state. The workers received only wages as remuneration, but these wages were really a form of dividend as they were set by workers themselves according to the firm’s anticipated net earnings (akin to profits). This was also a case of labour hiring capital, with the capital owned by the government rather than by capitalists. However, a complication arises when cooperatives issue non-voting equity to investors – although the investors do not enjoy control rights, they do enjoy residual claims; so, although they do not hire labour, they nevertheless part-own the firm. And, of course, if those investors do enjoy voting rights, then the firm is no longer a cooperative in a strict sense but has rather ‘degenerated’ into some sort of hybrid between a cooperative and a capitalist firm, such as Spain’s sociedades laborales, which are at least 51% owned/controlled by their workers. In that case, it is impossible to say who is hiring whom! In fact, both capital-owners and worker-owners are hiring labour, the latter from themselves.

The question posed in the title presents even more surprising answers. A consumer cooperative, for example, can in fact be considered a variation of a capitalist firm, because the member-owners, who pay a membership fee and receive dividends (for example in the form of coupons), hire labour from employees. Conversely, you could say that a ‘classical firm’, in which the capitalist-owner also manages, is a variation of cooperative enterprise – as in a cooperative, a set of worker-capitalists are hiring their own labour, this time in the form of management (a particular kind of labour). One apparent difference between a cooperative and a classical firm is that the labour of non-owners is hired along with that of the owner; but as I mentioned earlier, this also occurs in many (hybrid) cooperatives! A partnership, moreover, would appear to be even less distinct from a cooperative. So really these archetypal firms are best conceived on a spectrum.

Another interesting case is that of the Mondragón group of cooperatives and those that have mimicked it. In Mondragón, workers receive wages that are connected to net earnings and so are similar to dividends. At the same time, they own ‘internal capital accounts’, which are essentially savings accounts within the firm that accrue interest over time. This system represents the inverse of a conventional cooperative: whereas in the latter, it is as if worker-capitalists own/control the firm and hire labour from themselves, in the former it is as if workers own and control the firm in their capacity as labourers, and instead hire capital from themselves!

Activities versus Things: Cooperative 'Membership' Redefined

Most of the literature on cooperatives frames the discussion in terms of cooperative versus capitalist firms. In reality, however,there are two distinct forms of enterprise that are often bracketed together in the term 'cooperative': there are worker cooperatives, owned and controlled by their workers, and there are consumer (and other user) cooperatives, owned and controlled by their consumers (and other users) [1]. So what do these forms of enterprise have in common that differentiates them from capitalist firms?

It is usually said that cooperatives are 'membership organisations', meaning that they are owned and controlled by their members. By this explanation, the difference between the diverse forms of cooperative lies in which category of stakeholder is accorded the status of 'members'. However, as Hansmann (2013) has provocatively argued, according to this minimal definition there is no reason why capitalist firms should be excluded from the 'cooperative' classification, because capitalists can be considered members just like workers or consumers; capitalist firms, in other words, are essentially "capital cooperatives". In the conventional application of the 'cooperative' term, it would thus appear that the only thing the various types of cooperative have in common with each other is that they are not owned and controlled by capitalists. To retain consistency in light of Hansmann's argument, we could alter the definition of 'cooperative', either by restricting it to one particular type of cooperative or by extending it to include all firms. Either of these options, of course, would render the term redundant - the first by applying it in an equally arbitrary fashion as its current usage, the second by failing to offer any distinction between firms - which is precisely the purpose of Hansmann's reductio ad absurdum.

There is, however, a way to defend the current usage of the cooperative label, namely by providing an explanation as to why capitalists cannot in fact be considered 'members' of the firm. In a sort of Marxian way, I think that one potential explanation is that capital - be it physical capital like a machine or financial capital like a sum of money - is a tradable commodity; it is an actual 'thing' (even if it is an intangible thing, such as an entitlement to a certain portion of national wealth, as in the case of money) that can be bought and sold over the market. By contrast, neither labour nor consumption can be detached from their human actors; they are not 'things' but rather activities performed by human beings. Indeed, the 'fictitious' nature of the labour commodity is why, although there exists a labour market, employers can only rent/hire labour rather than purchase it in its entirety. Even in the case of slavery, wherein labour is bought and sold, a master cannot buy a person's labour without also acquiring its human embodiment. (This is both expedient and bothersome to the master, who is also entitled to any of the slave's offspring, but must deal with the physical and psychological needs of a human being if he is to extract the slave's labour power - a point that Marx raised in Capital when discussion the obligation of capitalists to ensure that their workers are capable of "social reproduction"). Consumption, meanwhile, cannot be bought or hired, because it is by definition the final stage of a product cycle - you cannot acquire somebody else's consumption, but only the thing that they consume; you can consume instead of somebody, but you cannot consume vicariously on somebody else's behalf.

What all of this implies is that in a capitalist firm, it is possible to arrive at a bizzare situation in which nobody (that is, no human being) involved in the firm's activities (recall the difference between things and activities), be it work or consumption, actually owns or controls the firm. Those who do own and control the firm - that is, those who have provided the firm's capital, and who receive a share in the firm's profits - may be completely absent and anonymous, which is indeed the case in many large corporations. The owners may even be performing activities of work and consumption elsewhere - many employees own shares in other companies, for example, while ultra-rich owners may be busy consuming yachts and fine wine. Of course, absentee owners employ managers to supervise production, but management is a form of labour rather than capital - it is an activity rather than a thing.

Now, it is true that investment is also an activity. However, capitalists do not own and control a firm because they have performed the activity of investment, but rather because of the capital they have provided. To see this, consider that a rich person can hire a stockbroker to invest the rich person's capital. In that situation, the owner of the capital, and not the stockbroker, becomes an owner of the firm in which the stockbroker invested. As I implied earlier, this dynamic cannot occur in the case of labour or consumption, because these activities can only be performed by the human beings in which they are embodied. In a sense, then, the capitalist firm is actually 'owned' by a thing - that is, capital - with that thing in turn being owned by capitalists. Indeed, this is normally how the firm is portrayed in neoclassical economics, with a certain factor of production (viz. capital) hiring another factor (labour), rather than the owners of those factors playing any primary role.

Based on the discussion so far, we can now establish a new criterion for membership: to be a member of the firm, somebody (that is, some human being) must be involved in the firm by virtue of her activities. Because a capitalist is involved in the firm only through her capital, which is not an activity, she cannot be a member of the firm, even if she owns and controls it. With this addendum, the reductio of Hansmann's argument - that a 'cooperative' consists of any firm that is not owned and controlled by capitalists - is not as absurd as it first appears!


Note:
[1] To be sure, cooperatives are usually differentiated into a larger number of categories, including, most prominently, agricultural cooperatives. In fact, however, the term ‘agricultural cooperative’ is ambiguous, and agricultural cooperatives can be either worker cooperatives, in which the farmers are the worker-members, or user cooperatives, in which farm units collaborate to bulk buy inputs, share marketing costs, and so on. This same distinction can be drawn between other forms of cooperative enterprise that are commonly enumerated, such as healthcare or educational coops, which can be owned and controlled either by the workers (healthcare practitioners or teachers) or by their users (students/parents or patients). Financial cooperatives, meanwhile, are clearly a form of user cooperative. In my estimation, therefore, the worker/user distinction is exhaustive.

Reference:
Hansmann, H. (2013) 'All Firms are Cooperatives - and so are Governments' Journal of Entrepreneurial and Organizational Diversity 2 (2): 1-10

A Note on 'Private Property' in Cooperatives

There is a widespread presumption that worker ownership and control of the firm represents a deviation away from 'private property', a principle which is supposedly more closely maintained in conventional, capitalist firms that are owned and controlled by investors. This conception is reflected both in general opinion, which often associates cooperative organisation with socialism/communism, and in on a lot of the academic literature, especially within the so-called 'property rights school' initiated by Furubotn, Pejovich, and Vanek in the 1970s. In my estimation, however, this conception is in fact a misconception; indeed, I think that the opposite is actually the case.

The underlying rationale for my argument relates to the peculiarity of labour as a factor production. Whereas capital (especially financial capital - physical capital can be problematic) can be bought and sold over the market, with ownership transferring from one party to another, this is not the case with labour. As David Ellerman (1992) has explained, labour is de facto inalienable from the labourer, and is therefore a 'fictitious commodity'. To transfer ownership of labour from one human being to another, as is routinely done with capital, would require the buying and selling of human beings themselves - that is, slavery, which is prohibited (if not completely eradicated) in most of the civilised world. Thus, when an employer employs an employee, labour is only being rented, not purchased; hiring a worker is, in an important way - but not in all ways - equivalent to hiring a car. That is why workers in modern economies are paid wages according to some temporally limited contract, rather than a lump-sum being paid either to the worker or to her previous owner to cover an indefinite period of time.

The peculiarity of labour vis-a-vis capital applies to the present topic in the following way. In a conventional capitalist firm supposedly owned and controlled by its investors, property rights are limited by the fact that labour cannot be owned by anyone other than the labourers, and in this sense, investors do not actually own 'the firm' in its entirety. Instead, their property rights merely give them a claim to the firm's 'residual profits' - that is, the surplus left over from the combination of labour and capital, after the costs of those inputs, including wages along with the 'opportunity cost' of investing capital elsewhere, have been covered. The incomplete nature of ownership in a capitalist firm is perhaps why, even abstracting from the autonomy of managers vis-a-vis investor-owners, residual claimants do not absolutely control the firm even in legal terms. In a worker cooperative, by contrast, workers can potentially own both labour (by virtue of being labourers) and capital (by acting "as their own capitalists", as Marx bemoaned), and in this sense, the cooperative firm represents a more complete form of ownership than the capitalist firm.

Now, it should be noted that, just as investor-ownership is a simplification, so too is worker-ownership. In fact, the assets of a 'worker-owned' firms are not entirely owned by their workers, except for in certain American cooperatives. Rather, virtually all cooperatives maintain some sort of 'collective capital' that cannot be paid out as shares to individual workers or sold to outside parties, but must rather remain within the firm. One purpose of collective ownership (although it is not really 'ownership' at all) is to prevent workers from neglecting internal reinvestment or selling out to investors - problems that the American 'capitalist cooperatives' (and indeed, capitalist corporations) have experienced in force. An extreme form of collective ownership was found in the self-managed enterprises of the former Yugoslavia, which adhered to a 'usufruct arrangement' whereby all surplus earnings were collectively owned. However, while the collective-ownership model prevented workers from buying out, it did not succeed in promoting reinvestment, because workers simply increased their wages and bonuses, thus reducing the collective surplus. This led to further problems, such as the disincentive to hire new workers. In practice, therefore, most cooperatives use some mixture of individual and collective ownership; the 'individual capital accounts' of the Mondragon cooperatives are the most famous example.

However, even if a Yugoslav-style system of ownership is not as complete a form of property as individual ownership (in either a cooperative or a capitalist firm), both individually- and collectively-owned cooperatives arguably represent a more 'private' form of property than capitalist firms. At this point, Ellerman's discussion of the 'labour theory of value', which emphasises that production is ultimately carried out by workers, comes into play. Because labour cannot be removed from the labourer, in a capitalist firm there will always be another category of stakeholder other than investor-owners - namely workers - vying for control of the firm (again, even in a legal sense). By contrast, a cooperative can in principle abolish the investor category of stakeholder, or at least combine it with the worker category into a single category of 'members', because worker-members need not 'hire' capitalists in the same way that investor-owners must hire workers (although they may, for example, rent machinery). It is no surprise, then, that cooperatives have often been compared to secret societies - surely as 'private' as it gets!

In corporations - also known as public limited companies - the non-private nature of capitalist ownership is magnified by the fact that shares can be traded over a public stock market. Cooperatives featuring common property cannot be likewise traded; and although worker-owners in individually-owned cooperatives can sell their shares to investors, there is no market (or even the possibility for private exchange, as in the case of a private capitalist company) for the unified category of membership. If capitalists purchased all the shares of a cooperative, they would have to hire workers, thus transforming the firm into a capitalist firm, or else become workers themselves.

So, in sum, cooperatives need not represent a deviation from the notion of private property; on the contrary, they may represent a more complete, and indeed more private, form of property.


Reference: Ellerman, D. (1992) Property and Contract in Economics: the Case for Economic Democracy (Cambridge: Basil Blackwell)

The Firm as a Commons: an Application to Cooperatives

In a recent reading group, I had the privilege of discussing an unusually insightful article by Cambridge law professor Simon Deakin (2012) that submits the notion that the firm (and particularly the corporation) can be most accurately conceptualised as a “commons” – a resource used and controlled by a plethora of different types of parties, such as workers, consumers, and the local community, in addition to shareholders. In this post, I would like to apply Deakin’s idea to cooperatives, showing that the ‘firm as a commons’ framework offers both support and opposition to the case for cooperatives.

In times gone by, the prevailing view on the commons was based on Hardin’s (1968) famous model of the ‘tragedy of the commons’, whereby a lack of private property rights leads to a ‘collective action problem’ as individual users (in his example, herdsmen grazing their cattle) fail to fully internalise the consequences of their actions, ultimately resulting on the depletion of the resource (a common piece of land in Hardin’s example). Until recently, suggesting that the firm is a commons would be therefore be tantamount to advocating the paradigm of ‘shareholder primacy’, dominant at least since Milton Friedman. Incidentally, the original argument against cooperatives, which was initiated by Benjamin Ward’s (1958) neoclassical model of the “Illyrian” (Yugoslav) self-managed enterprise a decade before Hardin’s article, was that common ownership on behalf of workers would lead to “perverse” (read, non-profit-maximising) behaviour with respect to investment, production, and employment, and ultimately the dissolution of the firm or its degeneration into a capitalist enterprise, as each worker maximised the average share value as opposed to the marginal share value – precisely the mechanism by which Hardin envisaged that his ‘tragedy’ would occur.

The theory of the commons experienced a paradigm shift, however, with the pioneering work of Elinor Ostrom (e.g. 1990), who won the Nobel Prize for showing that common ownership does not necessarily lead to a tragedy, because communities regularly devise institutions to effectively regulate the use of commonly owned resources. It is no coincidence, I think, that this is precisely what we observe in cooperatives – a range of governance structures and remuneration systems that act to prevent the sort of ‘tragedies’ that Ward predicted, which consequently fail to be consistently observed in practice (Dow and Putterman 1996). For example, in the famous Mondragón cooperatives (and in fact, in many cooperatives around the world), net earnings are siphoned according to predetermined percentages into various ‘reserve funds’, which are indivisible from the firm. Each member receives her share of the remaining ‘profits’ through deposits (or ‘credits’) into her ‘internal capital account’, which is more akin to a savings account than a traditional shareholding in that it is non-tradable and only redeemable upon retirement. Members can even vote to reduce their accounts in order to further reinvest in their cooperatives in order to preserve their jobs during periods of slack demand. This system of remuneration eliminates the incentive for members to restrict the firm's expansion in order to protect the value of their shares; prevents members from ‘selling out’ to investors or ‘cashing out’ their wealth to move elsewhere, thus extending their time horizons; and furnishes the central cooperative bank in which the reserve funds and capital accounts are held with substantial liquidity to undertake large-scale investments, including the creation of new cooperatives.

We should, however, recall the main thesis of Deakin’s article, which is that firms – even capitalist corporations – involve a complex nexus of legal rights and obligations between all categories of stakeholders, including consumers, workers, managers, investors, and so on. Shareholders, who are entitled to a ‘residual claim’ on a share of the company’s profits, are only one of many such categories, and do not own or control the firm itself in any meaningful (or at least absolute) sense. The upshot is that ‘shareholder primacy’ – the notion, predominant at least since Milton Friedman, that companies should be run purely in the interest of their shareholders – is not only injudicious, but actually delusional, because the very idea of ‘ownership’ in the context of an inherently communal entity is moot; the commoditisation of the firm is “fictitious”, to use the term coined by Karl Polanyi (1958) in his seminal book The Great Transformation. In fact, the literature inspired by Ostrom has shown that imposing private property rights onto an inherently common resource may lead to what has been called a ‘tragedy of the anticommons’ whereby users of the resource are unable to effectively negotiate with each other. Analogous ‘private action problems’ afflict modern capitalist countries dominated by short-termist, profit-driven corporate investors, including not only alienation and inequality but also economic stagnation and financial crisis.

This poses a problem for cooperativism. At least in a minimal definition, cooperatives are owned and controlled (in the fictitious sense, I mean) by only one category of stakeholder (workers or users, depending on the type of cooperative), who are its 'members'; and in this sense, as Yale law scholar Henry Hansmann (2013) provocatively averred, cooperatives are not radically different from capitalist corporations – the only essential difference lies on which category of stakeholder is acting as shareholder. It would therefore seem that, at least according to the firm-as-commons perspective, simply transferring (fictitious) ownership away from one category of stakeholder (investors) to another (workers) would merely move the underlying problem with corporate capitalism around rather than actually address it; we would still be left with ‘shareholder primacy’, only in a different form – ‘membership primacy’, perhaps. This implies that a format inclusive of more categories of stakeholders may be more appropriate for reaping the full abundance that the commons has to offer – perhaps something along the lines of the German/Scandinavian codetermination system, whereby managers and workers are both represented on governing boards, or even a more informal means of inclusion, such as the participatory systems of decision-making and remuneration characteristic of Japanese firms. Various forms of social enterprise that encompass users, communities, and other stakeholders are also candidates. Indeed, it would seem that a diversity of enterprises, each incorporating their diverse stakeholders in a diversity of ways, is what the (diverse) world needs. One could even go so far as to say that what we need may not be too dissimilar from the standard capitalist corporation, given that, as Deakin points out, the latter in fact operates as a commons even in legal terms.

By the same token, however, the multistakeholder perspective to which Deakin’s article lends support may somewhat legitimise the controversial ways that cooperatives compete and raise capital in the modern economy, such as hiring non-member workers and even accepting non-worker members, as in the case of worker coops; not only is the very idea of ‘membership’ dubious, but including a wider variety of stakeholders be just what the doctor ordered. Ideally, of course, we would prefer to see different stakeholders (e.g. community rather than investors) being empowered, and in different ways (e.g. with all workers treated equally). In this regard, the ‘social cooperatives’ that emerged in Italy in the 1970s may represent a step in the right direction: with their origins in the non-profit sector, the social coops incorporate both providers and beneficiaries of a community service into a single membership category.

References

Deakin, S. (2012) ‘The Corporation as Commons: Rethinking Property Rights, Governance and Sustainability in the Business Enterprise’ Queens College Law Journal 37 (1): 339-381. Available at http://queensu.ca/lawjournal/issues/pastissues/Volume37/1-Deakin.pdf

Dow, G. and Putterman, L. (1996) ‘Why Capital (Usually) Hires Labor: an Assessment of Proposed Explanations’ Discussion Paper, Department of Economics, Simon Fraser University. Available from: http://ideas.repec.org/p/sfu/sfudps/dp97-03.html

Hansmann, H. (2013) ‘All Firms are Cooperatives – and so are Governments’ Journal of Entrepreneurial and Organizational Diversity 2 (2): 1-10

Hardin, G. (1968) ‘The Tragedy of the Commons’ Science 162 (3859): 1243-1248

Ostrom, E. (1990) Governing the Commons: the Evolution of Institutions for Collective Action (Cambridge: Cambridge University Press)

Polanyi, K. (1958) The Great Transformation: the Political and Economic Origins of Our Time (Boston: Beacon)

Ward, B. (1958) ‘The Firm in Illyria: Market Syndicalism’ American Economic Review 48 (4): 566-589

Would a Cooperative Economy Be Capitalism?

People like to see things in black and white. It allows one to abstract from complexities and nuances, and thus sort real-world phenomena into neatly demarcated categories that make those phenomena more comprehensible or more consonant with preconceptions. Nowhere is this tendency more apparent than the Cold-War dichotomy between capitalism and communism. While the dichotomy is obviously useful, it clearly doesn’t tell the whole story – there are elements of central planning and socialism even in capitalist economies, just as there are elements of private enterprise and market competition even in communist economies. In other words, economic systems do not conform to pure ideal-types in reality.

An interesting way to see this is to ask where cooperatives fit in the schema – are they a form of capitalism or communism, or do they instead represent some sort of ‘third way’ such as market socialism? All three of the possible responses can be found. Because capitalism is today the dominant economic system, however, the question is usually formulated as: do cooperatives represent an alternative to capitalism (be it communism or a ‘third way’) or merely a certain type of capitalism? I have found that the first option is the most commonly held – most people instinctively associate cooperatives with a non-capitalist, even communist, mode of production. This makes sense if one defines capitalism as an economic system in which capital hires labour (or owns it, if slavery is not abolished), given that in a cooperative labour owns capital (or hires it, as in a usufruct arrangement). After all, how can there be capitalism without capitalists?

This very logic is evident in the political economy of Karl Marx, who stated that cooperatives “have shown that production on a large scale, and in accord with the behests of modern science, may be carried on without the existence of a class of masters employing a class of hands…and that, like slave labor, like serf labor, hired labor is but a transitory and inferior form, destined to disappear before associated labour…” (Marx 1864, para. 13). Engels (1989 [1880]: 43) likewise opined that cooperatives have “given practical proof that the merchant and the manufacturer are socially quite unnecessary”. In other words, cooperatives “represent within the old form the first sprouts of the new” (Marx 1959 [1894], Chapter 27, para. 17). Indeed, in his ‘New Economy Policy’, Lenin envisaged cooperatives as a bridge to communism.

In the same breath as praising cooperatives, however, Marx (1867, Section 5, para. 3; 1970 [1875]) – along with his adherents and other radicals – not only belittled, but also severely scorned them. The concern is that cooperatives, far from representing a “transforming force” (Marx 1867, Section 5, para. 2), may amount to a sort of ‘false dawn’ that actually ends up impeding the revolution. By replacing class identity with organisational loyalty and even eliminating class distinction within the enterprise altogether, cooperatives may perpetuate “false consciousness” and obviate the role of trade unions, even while their members voluntarily endure alienating work conditions and exploitative management systems (see Paranque and Willmott 2014). In short, the criticism is that cooperatives represent a palliative sugar-coating to capitalism rather than a radical alternative; and in response to the question of ‘how can there be capitalism without capitalists?’, radical critics of cooperatives contend that worker-members essentially act as “their own capitalists” (Jossa 2005: 14).

Alas, I am not a (out-and-out) Marxist. In my view, the objective should not be to eradicate capitalism, but rather to harness its organisational power, competitive drive, and technological dynamism while avoiding its tendency towards financialisation and crisis, exacerbation of inequality, preservation of unemployment, stimulation of anomie/alienation, environmental degradation, and so on [1]. That is to say, we need to reap the productive benefits of capitalism, which Marx himself extolled, while moderating its adverse socio-economic effects, which Marx predicted would cause it to self-destruct. In this sense, I see cooperatives as conservative, or at least reformative, and even anti-revolutionary.

There is an important question, however, as to whether capitalism’s benefits can be enjoyed, and its adverse effects avoided, in a situation where capital does not hire labour – can cooperatives have their cake and eat it too? According to many radicals, islands of cooperative labour in a sea of capitalist relations - "small units of socialised production within capitalist exchange", as Rosa Luxemburg (1986 [1900]), para. 3) put it - will tend to do just the opposite; by struggling to survive and eventually ‘degenerating’ into capitalist firms (see Egan 1990), while in the meantime “reproduc[ing]…all the shortcomings of the prevailing system” (Marx 1959 [1894], Chapter 27, para. 17), they will instead combine 'the worst of both worlds'.

What would happen, though, if cooperatives were scaled up to the entire (or a significant proportion of) the economy? The answer to this question brings us full circle to the question of whether a cooperative economy would/could be capitalism. As I implied earlier, this is largely a matter of semantics: if by ‘capitalism’ you mean ‘a system in which capital hires labour’, then the answer is no – qualified, of course, by the ‘self-exploitation’ critique. Marx (1864, para. 14) believed that “co-operative labor…fostered by national means” and “developed to national dimensions” could bring about true and lasting “emancipation of labor”. In an earlier blog, however, I argued that a cooperative economy would not necessarily be communism. In fact, as per Lenin’s New Economic Policy, Marx seems to have had in mind some sort of transitional mode of production that would eventually herald full-blown communism. Conversely, cooperatives have often proliferated in countries ‘opening up’ to the internal and external markets, such as today’s Cuba under Raul Castro. So it seems that a cooperative economy would indeed be some sort of 'third way', defying the crude dichotomy between capitalism and communism.  For me, the really interesting question is therefore whether such an alternative economy is an inherently transitory one, or whether it can represent a more permanent socio-economic system.

Notes

[1] It might be (validly) argued that economic growth is no longer necessary, desirable, or even feasible in advanced economies, and that we are currently suffering from all of capitalism’s ills while its benefits either fail to materialise or fail to improve actual living standards. Be that as it may, economic growth is certainly still required in most countries, and even in advanced economies, innovations and increases in efficiency will still be required in order to maintain current standards of living, for instance due to the eventual depletion of natural resources.

References

• Egan, D. (1990). Toward a Marxist Theory of Labor-Managed Firms: Breaking the Degeneration Thesis. Review of Radical Political Economics, 22(4), 67–86.
• Engels, F. (1989 [1880]) Socialism: Utopian and Scientific. In Marx-Engels Collected Works (Vol. 24, pp. 281–325). New York: International.
• Jossa, B. (2005). Marx, Marxism and the Cooperative Movement. Cambridge Journal of Economics, 29(1), 3–18.
• Luxemburg, R. (1986 [1900]). Reform or Revolution (London: Militant Publishers), Chapter 7, accessed at https://www.marxists.org/archive/luxemburg/1900/reform-revolution/index.htm
• Marx, K. (1864). Inaugural Address and Provisional Rules of the International Working Men’s Association, along with the “General Rules.” London: International Working Men’s Association. Retrieved from https://www.marxists.org/archive/marx/works/1864/10/27.htm
• Marx, K. (1867). Instructions for the Delegates of the Provisional General Council. The International Courier, 6/7. Retrieved from https://www.marxists.org/archive/marx/works/1866/08/instructions.htm#05
• Marx, K. (1959 [1894]). Capital, Volume III. (Marx, K. & Engels, F., Eds.). New York: International. Retrieved from http://www.marxists.org/archive/marx/works/1894-c3/
• Marx, K. (1970 [1875]). Critique of the Gotha Programme. Moscow, Russia: Progress. Retrieved from https://www.marxists.org/archive/marx/works/1875/gotha/index.htm
• Paranque, B., & Willmott, H. C. (2014). Cooperatives - Saviors or Gravediggers of Capitalism? Critical Performativity and the John Lewis Partnership. Organization, 21(5), 604–625.