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)