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
