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.

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.