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