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.

A Note on 'Executive Pay' in Cooperatives

A common practice in cooperatives (especially large, complex ones like Mondragon) is to establish maximum pay differentials between the lowest-paid worker and the highest-paid manager. In Mondragon, for example, it was agreed from early on that top-level managers would not receive more than three times the remuneration of shop-floor workers. In some of the Mondragon coops, this ratio has been relaxed (it is as high as 1:9 in a few 'high-tech' coops, and in some cases even higher if you count contracted professional services), but it is still worlds apart from the gaping inequalities observed in conventional firms, wherein managers are paid up to 400 times as much as the average (not even the lowest-paid) worker (see 'Thing 14' of Ha-Joon Chang's 23 Things They Don't Tell You About Capitalism).

There is a sense in which imposing these maximum wage ratios is a defiance of market forces. Liberals may oppose this for ideological reasons, extolling the freedom of choice afforded by free markets, as well as for economic reasons, as the practice would, in the long-run, lead to a scarcity of skilled managers (a shortfall of supply relative to demand) if adopted on a wide scale.

Now, even if it were true that the practice was indeed defying the market, it would still be defensible. After all, markets are never 'free' in the sense envisaged by hardcore liberals in the Milton Friedman school (see Chang's 'Thing #1' for more on this). We all (well, most of us) agree that child labour should be banned, for instance, which is a far more radical policy than limiting executive pay. There is no reason, in short, why we should acquiescently accept the outcome of the market.

More importantly, however, cooperatives are not defying market forces by refusing to pay executives the exorbitant salaries they would receive in capitalist corporations, because those salaries are not determined by market forces. As Chang rhetorically asks, is it really conceivable that a manager is 400 times more productive than the average worker? Is it really conceivable that managers have become 10 times more productive than in the 1960s, as would be the case if their salaries were purely a reflection of the value they bring to the company? Is it really conceivable that managers in the US and the UK are more productive than their counterparts in other parts of the world, despite losing out to those countries competitively?

The resounding answer is 'no'. As Chang explans, managerial salaries (not to mention the vast benefits they receive in the form of stock options, severance packages, etc.) are not determined by market forces; rather, just as neoclassical economists have long bemoaned the power of trade unions to inflate workers' wages, managerial salaries are a reflection of 'institutional factors' deriving from the messy relationships betwen managers and shareholders inherent in corporate business - relationships which are avoided in cooperatives. So, a 1:3 ratio may not be a perfectly accurate reflection of the supply and demand for managerial talent, but is is probably more accurate than a 1:300 ratio (not uncommon in capitalist corporations)!

Of course, maintaining managerial pay ceilings on the level of a single enterprise is a challenge. Skilled managers, who could earn 100 times more in a conventional firm, are likely to be repelled from working in a cooperative. To put this into perspective, managers who could earn $10 million a year in a corporation may have to put up with a salary of $100,000 in a cooperative - hardly meagre, but nevertheless a substantial opportunity cost. To a large extent, cooperatives like Mondragon must therefore rely on ideological motivations of potential candidates. In fact, this is one of the primary reasons that Mondragon engages in internal management training - in order to train managers who are not only skilled, but also motivated by cooperative principles.

Most cooperatives, however, will probably not be able to afford such training programmes, and will have to rely on hiring managers externally - yet another reason why isolated cooperatives may appear inefficient given the status-quo, even though an economy dominated by cooperatives may be more efficient than our current set-up.

Culture, Economic Development, and 'First World Problems'

I recently read this article in the Guardian, which I found to be suprisingly perspicacious, if excessively verbose. My own PhD research touches on the same question - what is the relationship between culture and economic development? In Chapter 9 of his book Bad Samaritans (entitled "Lazy Japanese and Thieving Germans"), my supervisor, Ha-Joon Chang, persuasively debunks the 'culturalist' answer to this question, viz. that the prevalence of certain culturalist traits is responsible for either poverty or affluence. I wholeheartedly agree with Chang's observation that cultural change tends to follow, rather than lead, economic development, and in my research I apply this insight to patterns of organisation - in particular, the feasibility of cooperative firms in different cultures.

The article prompted me to think of the relationship between culture and economic development in broader terms. It occurs to me that when a country overcomes the real obstacles to economic development, and subsequently adopts certain cultural traits that it previously lacked (e.g. thrift, hard work, and strict time-keeping), it concomitantly adopts a host of new problems inherent in its new culture - 'First World problems', as they have come to be known on the Internet. Although there is clearly a 'virtuous circle' between these traits and continued economic development, this mutually reinforcing relationship can also be a 'vicious circle', when we take into account the diminishing returns of wealth.

It is well-established that increases in GDP (a country's income) do not correlate well with increases in perceived well-being. I would rather not delve into all of the reasons why this is the case; I urge you to read Chapter 5 of Jonathan Aldred's The Skeptical Economist for a user-friendly discussion. In fact, Aldred discusses the idea, submitted by Hirsch and others, that in well-developed economies, increases in wealth can lead to net decreases in welfare. Once a country reaches a certain 'satiation' point, whereby its material needs have been met and absolute poverty has been generally eliminated, relative poverty (inequality) still matters a great deal for wellbeing, in part because people estimate their own wellbeing based on that of others in their society. At this point, increases in wealth amongst the few (perhaps the infamous "one-percent") do not yield any significant improvements in wellbeing (does one more yacht, vacation home, supercar that you will never use really improve your quality of life?). On the contrary, they can lead to a net decrease in wellbeing in society as a whole, because they are detrimental to the wellbeing of others. In other words, economic development becomes zero-sum, and possibly even negative-sum. This is especially true with so-called "positional goods" that are only valued due to their scarcity, and so lose any welfare-enhancing qualities once they become widely adopted, leading to an interminable hamster-wheel of 'keeping up with the Joneses'.

Why do we keep striving towards an unreachable goal - the elusive gold at the bottom of the rainbow - when doing so is clearly making us worse, rather than better off? After all, Keynes famously postulated in his Economic Possibilities for Our Grandchildren that, once societies reached a certain point of economic development (perhaps the 'satiation point' aforementioned), they could 'step off the gas' and simply enjoy and maintain the level of wealth that they had accumulated. Working hours, for instance, could be dramatically reduced. There are many possible explanations for why this has not occurred, such as the Marxian argument that capital must continually accumulate in order to survive. Another piece to the puzzle is inherent in the aforementioned idea of positional goods and relative poverty. Essentially, it may be rational for each individual to continue striving for increases in income, even if it is collectively irrational from the perspective of society as a whole.

I think, however, that culture also plays a role: once societies reach their 'satiation point', they still possess the cultural traits geared towards continued economic development. The current standard of living enjoyed in Western economies is largely a product of the Industrial Revolution; but for the average worker, it was not an enjoyable time in which to live, to say the least. We continue to toil away in the mind-sets and traditions established by the requirements of factory labour, including our fixation on time-keeping and productivity (even our 'three meals a day' derives from this time), without yielding any further benefits in wellbeing. Moreoever, not only does all of the hard work, thrift, and so on yield little in the way of additional happiness, but also incurs costs of stress, alienation, and so on. Combined with the relentless obsession with material consumption that accompanies it, this relentless obsession with work represents, in my opinion, a real 'poverty of culture', even if it is (or at least was, at one time) the antithesis of a 'culture of poverty'. This cultural explanation for irrational levels of work behaviour finds support in the fact that people work excessively, sacrificing their health, family time, and overall quality of life, even when doing so doesn't yield any further benefits in wealth, let alone happiness - a conundrum that cannot be easily explained by the Marxian or relative poverty explanations alone.

What kind of economic change needs to occur for this culture to change, and would it be feasible given the current configuration of ideologies and interests? Both questions are open to debate, and hopefully, experimentation.

Would a Cooperative Economy Be Communism?

When I discuss cooperatives with people (and by “people” I mean both species of human – academics and everyone else), a common issue that crops up is how cooperative firms could be ‘upscaled’ to the whole economy. In other words, what would an economy dominated by cooperative firms look like? That sounds like the title of a PhD dissertation, not a blog post, so I won’t attempt a complete answer here. Instead, I will address one permutation of the question that I have heard on more than one occasion – “how would a cooperative economy be different from communism?”

I think that two distinct dimensions are involved in answering this question: who owns and controls what (particularly ‘the means of production’, or firms), and how the economy is coordinated (by the market or by central planning). It seems to me that the question about communism not only betrays a misunderstanding of how cooperatives relate to each of these dimensions, but also confounds the two dimensions. In particular, depending on our definition of communism, the question (at least in its rhetorical form) seems to assume that a cooperative economy would be a) state-owned (or owned by ‘the people’) and b) centrally-planned. It is my contention that a cooperative economy need not be either of these things. Consider each dimension in turn.

Ownership

                The first question is whether a cooperative economy would be state- (or ‘communally-‘) owned. It is certainly the case that a cooperative economy could not be a capitalist economy, given that an inherent feature of capitalism is that capital owns the means of production, and therefore hires labour, leading to class distinctions. In a cooperative economy, by contrast, not only would capital be subservient to labour, but labour would probably own rather than hire capital (currently, capital must hire rather than own labour, due to the prohibition of slavery). Class distinctions would therefore be eliminated (or at least drawn on different lines), because workers would own both labour and capital. Workers would not exploit capitalists; rather, there would be no capitalists.

                That sounds like communism, right? Not so fast. Just because a cooperative economy would not be a capitalist economy does not entail that it would be a communist economy. Cooperative firms are still ‘private property’, in that they are not owned by the state, or ‘the people’ in general, but only by members that work within them. You can think of it as workers also assuming the role of capitalists. Now, cooperatives may be communally owned between their members (i.e. there may not be private property rights within the firm), but the firm itself is still private rather than public or ‘common’ property, in the sense that it is owned and controlled by a well-defined group of members (even if entry were to be unregulated). In this sense, cooperatives can be conceived as "hybrid form" of organisation between socialism and capitalism, to use Rosa Luxemburg's term.

               

Coordination

The second question is whether a cooperative economy would be centrally-planned or market-coordinated. Here is where the two dimensions are conflated – there seems to be a presumption that if we change one of the dimensions of the present system (which is assumed to be capitalist-owned and market-coordinated), namely the ownership dimension, we must also change the coordination dimension; that is, a non-capitalist economy must be a non-market economy. Hindmoor (1999) has even gone so far as to say that cooperatives are essentially “free-riding off capitalism”, because a cooperatively owned economy would somehow squander the benefits of the market.

However, although it is certainly true that capitalism is characterised by markets, that does not entail that markets cannot feature in other systems, such as cooperatively-owned ones. Indeed, I see no good reason why an economy dominated by cooperative firms could not be market-coordinated, and would have to be centrally planned. Of course, many socialists have envisaged a centrally planned economy, with semi-autonomous cooperatives producing according to government-directed prices or quantities, either as a stepping stone towards communism or as a final utopia. Indeed, Marx’s vision of ‘advanced communism’ may have featured cooperatives owned by well-defined communities. But I see nothing intrinsic about cooperatives that entails central planning; it would be possible for all firms to be cooperatively owned and controlled, but still compete with each other over the market. It seems to me that Hindmoor had in mind a market economy, rather than a capitalist economy, when he suggested that cooperatives are “free-riding off capitalism”. But in that case, capitalism is also free-riding off a market economy!

Perhaps there is a misconception that cooperatives are themselves more ‘centrally-planned’ than capitalist firms, which are somehow more ‘market-based’. It may be the case that the relationships prevailing within capitalist firms are more ‘market-like’; but actually, all firms (in a decentralised, market economy) are “islands of planned coordination in a sea of market relations” (Richardson 1972: 883). To go one step further, as Richardson acknowledged, it is not actually true the current system is characterised by a “sea of market relations”; rather, as Schumpeter’s analysis of capitalism demonstrates, and as Herbert Simon once pointed out, most coordination in the present system occurs within institutions like firms and the state, rather than across the market. So capitalism itself is not really ‘market-based’ – it is characterised by “islands of planned coordination” within a ‘sea of planned coordination’ (or perhaps a panacea of planned coordination with some rivers and lakes of market relations)!

Of course, a cooperative market economy would be very different from a capitalist market economy, not least because some very key markets, like the stock market and the labour market, would either be vastly different or would not exist. But other markets may emerge that do not exist today, such as some hybrid between labour and stock markets that allows worker-owners to move between firms. Weitzman (1984) suggested something along these lines, and argued that it would entail less unemployment and less inflation than the current arrangement. And cooperatives would still compete with each other, so there would still be a drive towards efficiency and innovation. Indeed, Vanek (1970) argued that a ‘labour-managed economy’ could more competitive than a capital-managed economy (for various reasons that are beyond the scope of this blog).

Conclusion

In summary, there are two dimensions to the question of what a cooperative economy would look like, which are often confounded. The first is who owns and controls what (‘the mean of production’ in Marxist parlance). If workers own and control the means of production, we have a cooperative economy, whereas if capitalists do so, we have a capitalist economy. The second dimension is how the economy is coordinated. If prices and/or quantities are centrally dictated, we have a planned economy; if they are negotiated in a decentralised fashion, we have a market economy. These two dimensions form a matrix of four potential economies (although I am not sure about a capitalist-planned economy – perhaps it would resemble some feudal arrangement, or some perhaps an extreme version of state capture. Wait, isn’t that what we have now?).  

So, when the questioner asked “wouldn’t a cooperative economy just be communism”: no, not really, for two reasons. First, a cooperatively-owned economy would not be communally-owned; cooperative firms have strictly defined members, and are not the property of ‘the people’ in general. Second, a cooperatively-owned economy would not necessarily be centrally planned; it would be fully compatible with a market economy. The reason for making this point is that a cooperative, market economy could still enjoy all of the benefits associated with the market (competition, innovation, etc.); and perhaps it could do so without incurring the devastating effects of control by capital.

Seeing the Woods for the Trees: Recent Cooperative Crises in Perspective

The Cooperative Model in Crisis?

Cooperatives have gotten a pretty bad press lately. Two recent instances of major cooperative crises, in particular, have received a significant amount of attention: the collapse of the Fagor cooperative, part of the world’s largest cooperative group in the Basque Country, and the series of scandals within the Co-operative Group in the UK, the world’s largest consumer-owned business.

Although a detailed account of each episode would be beyond the scope of this blog (and probably impossible, given that many of the details remain obscure, at least from the perspective of outside observers), a brief synopsis is in order. Fagor is (was) an industrial cooperative in the famous Mondragon group of cooperatives in the Basque Country, the largest such group in the world, which has received plaudits from all quarters for balancing economic efficiency and technological innovation with cooperative values. It recently came to light that Fagor had been making losses for five straight years, incurring debts of around $1.2bn. The group had experienced similar crises in the past, which it managed by voting to support ailing cooperatives until they could once again become profitable. This time, however, the other coops in the group voted not to meet Fagor’s request for bailout funds (despite the Spanish and Basque governments offering to meet them part way), and, unable to find willing creditors elsewhere, the cooperative filed for bankruptcy and was soon dissolved.

The Co-operative Group, a massive conglomerate of consumer coops in the UK, has recently experienced a succession of scandals initiated by the finding that the Chairman at the time, Paul Flowers, had been illegally using expense claims to fund his drug addiction. Soon thereafter, it came to light that the group had been incurring astronomical losses, most of which came from its banking division, leading to its buyout by US hedge funds. To continue this series of unfortunate events, the newly appointed chief executive Euan Sutherland quit after only 10 months in the job, following protests within the group over his pay level; having been entrusted with the task of reforming the group, he claimed that the group was “ungovernable”. Labour is now moving to sever its historical ties with the Group.

Does this double-punch of failures in the world’s paragons of producer and consumer cooperatives imply that there is something inherently wrong with the cooperative model? The Economist seems to think so. Commenting on Fagor’s collapse, it sneered that “The co-operative model has its virtues, but there are times when those nasty, money-obsessed capitalists have their uses too”. Its analysis of the Co-operative Bank’s predicaments similarly jeered that “its vaunted model means it cannot speedily raise equity”. I, however, beg to differ, due to three overlapping sources of bias that plague the evaluation of the cooperative model: experimental bias; cognitive bias; and institutional bias.

               

Experimental Bias

                It should firstly be noted that there is really no such as thing as ‘the cooperative model’. There is the Mondragon model, there is the Co-operative Group model, and there are countless other cooperative models, all of which differ. Even if recent events represented a malfunction of one of these models, that would not imply that cooperatives in general are inherently unworkable. Furthermore, the failure of one feature of one of these models does not imply that the model as a whole has failed. For instance, the Co-op’s recent plight may indeed stem from its complex governance structure; but that structure is a historical relic, unique to the federalism of the UK consumer co-op movement.

                In any case, even if there were such thing as a ‘cooperative model’, to what is it being compared? When a traditional (capitalist) firm fails, people never ask whether this is the fault of the ‘capitalist model’ of organisation. Rather, they attribute it to adverse economic conditions, or even say that capitalism is simply doing its job (“creative destruction” and all that). When a cooperative fails, however, they automatically treat it is evidence that the ‘cooperative model’ doesn’t work. For example, the causes of Fagor’s collapse – lack of domestic demand, low-wage competition from China – have afflicted the entire Spanish economy, especially the industrial sector, which has been declining in most of the Western world. Indeed, it is probably because these problems are structural (and therefore affect all firms in the economy, capitalist or cooperative) that the other coops voted not to support it.

If anything, Fagor’s collapse demonstrates the strength of the Mondragon model. After only four months, the Mondragon group relocated nearly all of the redundant workers (867 to be precise) in other coops, with the rest (e.g. those who were anyway close to retirement) receiving ‘early retirement’ packages. Such practices are exceptionally rare, as the sky-high Spanish unemployment rate (26% in the last quarter of 2013, and over double that for young people) attests. In fact, during Spain’s economic recession, when net mortality rates have been through the roof, cooperatives in the Basque Country have experienced net business creation.

A similar point can be made with regard to the Co-op, albeit with lesser force. The massive losses incurred by the group originate primarily from its banking division (£2.1bn of the £2.5bn losses for 2013), which, as a result of its flopped takeover of Britannia, was bought out by US hedge funds last year. During the financial crisis, however, the Co-op Bank was seen as a resilient outlier, persevering when the rest of the financial sector was going pear-shaped. At the time of writing, the government is still trying to sell off its massive stake in the Lloyds Banking Group.

Cognitive Bias

              

                This last point leads on to the second reason why cooperative organisation has not been undermined by recent events: recent events, although ‘fresher’ in the mind, are not necessarily representative of historical trends. According to Wikipedia (I hope you appreciate the high standard of scholarly research), “the availability heuristic is a mental shortcut that relies on immediate examples that come to mind. The availability heuristic operates on the notion that if something can be recalled, it must be important. Subsequently, people tend to heavily weigh their judgments toward more recent information, making new opinions biased toward that latest news.” In the case of the two examples discussed in this blog, this cognitive bias is exacerbated by the fact that both of the failed/failing coops have symbolic appeal. Fagor was the offspring of the first cooperative in the Mondragon group, founded with the assistance of the charismatic priest who is still venerated as the group’s architect (at the time of its collapse, however, it represented a small fraction of the group’s total turnover). The Co-operative Group in the UK, meanwhile, traces its ancestry to the birth of the consumer coop movement in Manchester, where the legendary ‘Rochdale Pioneers’ established the first coop store during the Industrial Revolution. 

Institutional Bias

                Some may retort that cooperative failure is, in fact, a historical trend. For instance, they could cite Beatrice Webb’s survey of the UK cooperative movement in the 1800s, which concluded that producer coops were doomed to failure in a capitalist economy. However, that very example demonstrates the third point, namely that efficiency is not absolute – it is only meaningful in relation to the current institutional environment. A host of authors have noted that cooperatives suffer from ‘institutional bias’, as prevailing systems of finance, education, and law, are catered towards prevailing modes of organisation. In an economy with a higher frequency of cooperatives, cooperatives would likely be more efficient, because these systems would be more conducive to cooperative organisation. A case in point might be the Co-op Bank: as a mutual, it was supposed to stick to ‘simple’ activities like mortgages, pensions, and deposits, rather than dabbling in the financial alchemy, investment banking, and other risky activities. Although this made the Bank more stable (and arguably closer to what banking should resemble), it also made it less competitive vis-à-vis mainstream banks, which were (at one point, anyway) making astronomical profits.

Conclusion        

There is an assumption, widespread amongst both academics and laypeople, that capitalist organisation is the ‘natural order’ of things, and that cooperative organisation represents a deviation from that natural order. As Karl Polanyi demonstrates in his 1944 book The Great Transformation, however, the latter is actually the more ‘primal’ of the two, with the former only recently coming to predominate. Indeed, whereas Jensen and Meckling (1979) point out that cooperative organisation usually emerges and persists due to social movements and ‘artificial regulation’ rather than ‘natural market forces’, and submit that is as evidence that cooperatives are generally inefficient, Polanyi shows that the capitalist order was itself a fabrication of the landed elite, devised to protect their private interests. This misconception could well be the source – it is certainly a source – of all three biases discussed in this blog: experimental (it skews comparisons of capitalist and cooperative organisation), cognitive (it gives priority to recent events), and institutional (it ignores that the current institutional environment militates against cooperatives).

Barring the recent popularity of ‘randomised control trials’ (and even then), social science is not experimental in the manner of the natural sciences. For lack of a counterfactual (or a sufficient number of counterfactuals), it may therefore be impossible to fully remove these biases. However, for that very reason, it is worthwhile to remember that isolated instances of cooperative failures cannot be taken as evidence, let alone proof, that cooperative organisation is inherently flawed.

New Economic Thinking?

Last term in Cambridge I had the privilege of briefly working with the Cambridge Society for Economic Pluralism (CSEP), a group which, along with equivalent groups around the country, has received a significant amount of press attention. A topic which arose during a discussion with one of its member (who is also a good friend) concerned the meaning of the adjective 'new' when applied to 'economic thinking' (as in the name of the well-funded Institute for New Economic Thinking). The phrase, I think, can be interpreted in (at least) two ways.

First, it can refer to the application of existing (or orthodox) methodologies to 'new' (or unorthodox) topics. So, for instance, we can construct a mathematical model, based on utility maximisation, marginal analysis, and general equilrium, to help explain inequality, or we can run an econometric regression to try to assess the impact of structural change on economic growth. The topics (inequality, structural change, etc.) are 'new' in that they have traditionally been ommitted, or at least sidelined, by mainstream economics; but the economics itself (viz., mathematics and econometrics) is the same old stuff.

The second interpretation, of course, is an authentically pluralistic one that explores, or at least embraces, alternative methodologies*. Just as the 'new' topics in the first interpretation are only new to economics, as other disciplines have been studying them for ages, these 'new' methodologies are likely to borrow from other disciplines such as sociology, history, and psychology. Particularly relevant examples include historical methods and 'political economy', which remind us that mainstream economics is in fact relatively 'new', having replaced the original version of the subject. In this sense, (part of) what we aspire to in our search for New Economic Thinking, at least in this second interpretation, is actually a return to the old.

In my experience, the first interpretation is the one that has predominated. There are countless possible explanations for why that is the case, the most obvious one being that it requires qualitatively less 'newness' than the second approach. With the first approach, we can use the same old proverbial hammer (maths and econometrics, which have in turn been 'hammered' into students of economics) to hit different things (inequality, climate change, and so on), regardless of whether the hammer is actually the best tool for the occassion. The second approach, by contrast, requires us to learn how to use new tools, and how to select which tools to use for different issues (to take the analogy perhaps too far, are we dealing with screws or nails, and accordingly, do we require a screwdriver or will the old hammer suffice?). As Chang (forthcoming) expresses it, authentic pluralism would entail the methodological flexibility of a 'Swiss army knife'.

This difference is particularly pronounced because the dominant economics canon - neoclassical economics - is defined by its methodology, rather than the issues to which that methodology is applied. Indeed, its main strength is that it is relatively easy to subsume 'new' issues under its umbrella - witness the omnivorous utility function. This is precisely why economists (such as the authors of Freakonomics) have attempted to explain 'life, the universe, and everything' through economics, by which they mean the particular methodologies of neoclassical economics (see Chang, forthcoming). By the analogy, you can hit anything with the hammer - what need, then, for other tools? Indeed, alternative approaches to economics are not even considered to be 'economics' proper by the ivory tower - they are usually disparagingly dismissed as forms of sociology, history, or some other 'less scientific' subject. Although there is no a priori reason why other economic approaches cannot coexist with neoclassical economics, this dogmatic attitude entails a paradox of tolerance: how can we have a methodologically pluralist economics, if the (currently) dominant approach does not even acknowledge the existence of other approaches within economics?

I therefore worry that the current demand for a revolution in economic thinking will be met with appeasment and co-option rather than a genuine 'paradigm shift'. This scenario would resemble the unfortunately common process, perceptively illustrated in George Orwell's 'Animal Farm', of new leaders promising change but ultimately reinforcing the underlying system. As the rise of 'institutional economics' demonstrates, this is by no means unprecedented in economics. If it happens, we can expect the attitude to be that of 'all approaches are equal, but some are more equal than others'.

What does it take to elicit an authentic paradigm shift? I suppose you'd have to ask Thomas Kuhn. Apparently, the recent financial crisis, which should have been associated with a crisis of economics, has not (yet) been a sufficient trigger of reform within the discipline. This is arguably because mainstream economics is so divorced from reality that what happens in 'the real world' has no bearing on its faith in abstract models. However, even if economists stubbornly insist on 'doing the same thing over and over again and expecting different results', perhaps policy-makers, who have to reckon with the real world, will be less insane. Similarly, initiatives like CSEP can help to channel students' disillusionment into coherent demands for curriculum reform. Thus, even if the 'supply' of economics remains 'inelastic', perhaps we can hope for a 'demand-led' transformation.

*I have not, in this blog, provided a full explanation as to why I think the second approach is 'better', or least more genuinely 'pluralist'. That would make the blog far too long. It may be the topic for another post.