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Market Neutrality and the Failure of Co-operatives

Published online by Cambridge University Press:  27 January 2009

David Miller
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Extract

Among the arguments that have featured in the recent revival of libertarian thinking is one purporting to show that a free market economy, protected by a minimal state – or even no state at all – is neutral as between capitalism and a certain form of socialism. The argument runs as follows. The market places no limits on the manner in which people may associate for purposes of economic activity. They may choose capitalist forms of organization, in which case those who become owners of capital assume a greater degree of risk and responsibility and stand to gain correspondingly higher rewards, or they may choose co-operative forms, where groups of producers supply their own capital and share the profits between them. If capitalist forms are overwhelmingly favoured, as the historical evidence shows, this reveals something about the preference structure of the population as a whole. Either the bulk of the population actively wish to avoid the risks and anxieties of capital ownership, and so willingly transfer these responsibilities to the few willing to bear them; or the efficiency of the capitalist firm is such that it can pay wages high enough to compensate the work force for their loss of autonomy in comparison with the co-operative alternative.

Type
Articles
Information
British Journal of Political Science , Volume 11 , Issue 3 , July 1981 , pp. 309 - 329
Copyright
Copyright © Cambridge University Press 1981

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References

1 Nozick, Robert, Anarchy, State and Utopia (Oxford: Basil Blackwell, 1974).Google Scholar

2 Friedman, David, The Machinery of Freedom (New York: Harper and Row, 1973).Google Scholar

3 Nozick, , Anarchy, State and Utopia, pp. 250–3.Google Scholar

4 I therefore exclude the institution which bulks large in ‘histories of co-operation’, the Co-operative Wholesale Society, since this was an association of consumers employing workers rather than a co-operative in my sense.

5 See Jones, Benjamin, Co-operative Production (Oxford: Clarendon Press, 1894), Vol. I, Chap. 14.Google Scholar

6 The classic examples were the communities at Orbiston, Ralahine and Queenswood. See Jones, , Co-operative Production, Vol. I. Chap. 6Google Scholar; Garnett, R. G., Co-operation and the Owenite Socialist Communities in Britain, 1825–1845 (Manchester: Manchester University Press, 1972).Google Scholar

7 Jones, , Co-operative Production, Vol. 1, p. 70.Google Scholar

8 Jones, , Co-operative Production, Vol. 1, p. 262.Google Scholar

9 See Oakeshott, Robert, The Case for Workers' Co-ops (London: Routledge and Kegan Paul, 1978), Chap. 5Google Scholar; Jones, Derek, ‘British Producer Co-operatives’ in Coates, Ken, ed., The New Worker Co-operatives (Nottingham: Spokesman Books, 1976).Google Scholar Jones stresses the longevity of these enterprises and attacks the pessimistic views of the Webbs, but his figures reveal that the surviving firms are really participatory joint-stock companies rather than genuine co-operatives, with the employees very rarely being majority shareholders (although more often having a majority on the management committee).

10 Jones, , Co-operative Production, Vol. I. Chap. 19.Google Scholar

11 Webb, Beatrice, The Co-operative Movement in Great Britain (London: Swann Sonnenschein, 1891), p. 144.Google Scholar For her general case against producers' co-operatives, see Chap. 5, passim.

12 The Prisoner's Dilemma may also be avoided if the parties are assumed to have a sufficient degree of altruism. For discussion of such escape routes, see Taylor, Michael, Anarchy and Co-operation (London: Wiley, 1976)Google Scholar; Sen, A. K., ‘Choice, Orderings and Morality’ in Korner, S., ed., Practical Reason (Oxford: Blackwell, 1974)Google Scholar; Collard, David, Altruism and Economy (Oxford: Martin Robertson, 1978), Chap. 4.Google Scholar

13 The analysis is presented informally and draws upon the rapidly growing body of literature on the economics of co-operatives. Readers wishing for a more formal treatment should begin by consulting the following: Vanek, J., The General Theory of Labour-Managed Market Economies (Ithaca: Cornell University Press, 1970)Google Scholar; Meade, J. E., ‘The Theory of Labour-Managed Firms and Profit Sharing’, Economic Journal, LXXXII (1972), 402–28CrossRefGoogle Scholar; Steinherr, A., ‘The Labour-Managed Economy: A Survey of the Economics Literature’, Annals of Public and Co-operative Economy, IL (1978), 129–48CrossRefGoogle Scholar; Clayre, A., ed., The Political Economy of Co-operation and Participation (Oxford: Oxford University Press, 1980).Google Scholar

14 For analysis of this conflict, see Furubotn, E. G. and Pejovich, S., eds., The Economics of Property Rights (Cambridge, Mass.: Ballinger, 1974), especially Chaps. 15, 22.Google Scholar

15 One can see the possibility of developing a ‘convergence thesis’ here, if managers in both capitalist enterprises and co-operatives are able to wrest control from the nominal owners. Moreover, if, instead of having a single owner, the capitalist firm is a joint-stock company, the problem of control is compounded, since the shareholders have to co-ordinate their efforts in order to constrain the manager, which may prove a costly undertaking. For an analysis, see Pejovich, S., ‘The Capitalist Corporation and the Socialist Firm; a Study of Comparative Efficiency’ in Brunner, K., ed., Economics and Social institutions (Boston: Martinus Nijhoff, 1979)Google Scholar, who points out, however, that the threat of shareholders selling up and depressing the value of the firm's stock may act as an automatic constraint.

16 This is now a fairly standard assumption. See Ward, Benjamin, ‘The Firm in Illyria: Market Syndicalism’, American Economic Review, XLVIII (1958), 566–89Google Scholar; Vanek, , The General Theory of Labour-Managed Market EconomiesGoogle Scholar; Meade, , ‘The Theory of Labour-Managed Firms and Profit Sharing’Google Scholar; Wiles, P., Economic Institutions Compared (Oxford: Blackwell, 1977), Chap. 4.Google Scholar It has, however, been challenged by Furubotn who argues that a long-run analysis needs to take account of the possible effects of an income-maximizing policy on the size and composition of the cooperative's membership. See Furubotn, E. G.. ‘The Long Run Analysis of the Labour Managed Firm’, American Economic Review, LXVI (1976), 104–23.Google Scholar

17 Calculated by Furubotn and Pejovich in Furubotn, and Pejovich, , The Economics of Properly Rights, p. 240.Google Scholar

18 Might banks be willing to lend to co-operative members, using their investment accounts as security? Only if bankers could be convinced that co-operatives were financially sound, on which see below.

19 Meade, . ‘The Theory of Labour-Managed Firms and Profit Sharing’, p. 426.Google Scholar

20 Cole observed that ‘workers who invested money in cotton mills preferred not to invest it in the mills in which they were employed; for if they did this they ran a big risk of losing both their wages and their dividends if their particular mill fell on bad times, whereas there was more chance of avoiding the double loss by placing their savings elsewhere’. Cole, G. D. H., A Century of Co-operation (Manchester: Co-operative Union, 1945).Google Scholar

21 Nowadays professional partnerships such as those formed by solicitors may loan incoming members the purchase price of a share, to be repaid out of income over a set period. But these are low capital-high income enterprises, and it is difficult to envisage such an arrangement being adopted throughout industry generally.

22 For evidence of the latter effect, see Jones, D. C., ‘The Economic and Industrial Relations of American Producer Co-operatives, 1791–1939’, Economic Analysis and Workers' Management, XI (1977), 295–317.Google Scholar

23 E.g. Oakeshott, , The Case for Workers' Co-ops, pp. 32–4, 82–4, 190–4Google Scholar; ‘Piecemeal’ in Clayre, , ed., The Political Economy of Co-operation and Participation.Google Scholar

24 See Vanek, Jaroslav, ‘The Basic Theory of Financing of Participatory Firms’ in Vanek, Jaroslav, ed., Self-management: Economic Liberation of Man (Harmondsworth, Middx.: Penguin, 1975).Google Scholar

25 Empirical support for this proposition comes from labour-managed enterprises in Yugoslavia, which when not required by the government to re-invest a fixed percentage of their earnings have chosen to finance themselves almost entirely by bank credit. See Furubotn, E. G. and Pejovich, S., ‘Property Rights, Economic Decentralization and the Evolution of the Yugoslav Firm, 1965–72’, Journal of Law and Economics, XVI (1973), 275–302CrossRefGoogle Scholar; and Pejovich, S., ‘The Banking System and the Investment Behaviour of the Yugoslav Firm’, in Bornstein, M., ed., Plan and Market (New Haven: Yale University Press. 1973).Google Scholar

26 To avoid this difficulty it has been suggested that the co-operative should finance itself by issuing equity, paying dividends that reflected profits in any year rather than a fixed interest charge. See Jay, Peter, ‘The Workers' Co-operative Economy’Google Scholar reprinted in Clayre, , ed., The Political Economy of Co-operation and Participation.Google Scholar But since on this scheme shareholders would have no voting rights in the co-operative, it is difficult to believe that it would seem an attractive channel for investment if other channels were available. No dividend would be guaranteed, and indeed the only incentive for the co-operative to pay one at all would be a wish to maintain the market value of its equity. Meade has proposed that enterprises might instead take the form of ‘Capital–Labour Partnerships’ in which both suppliers of capital and workers have voting shares. See Meade, J. E., ‘Labour Co-operatives, Participation, and Value-Added Sharing’Google Scholar in Clayre, , ed., The Political Economy of Co-operation and Participation.Google Scholar This proposal clearly makes investment in the enterprise more attractive, but equally clearly does so at the cost of losing the co-operative form and moving half-way towards a joint-stock arrangement.

27 In a co-operative of several hundred people, the link between any one individual's efforts and the share of profits he receives is of course fairly slight. But at the same time each has an interest in seeing that others work hard and produce efficiently, so each will contribute to formal and informal methods of penalizing slackers and eliminating waste.

28 Jones, D. C. and Backus, D. K., ‘British Producer Co-operatives in the Footwear Industry: An Empirical Evaluation of the Theory of Financing’, Economic Journal, LXXXVII (1977), 488–510.CrossRefGoogle Scholar Similar evidence of under-capitalization has been found in the case of French co-operatives (mainly in the building industry). See Batstone, Eric, ‘Some Aspects of the Economic Performance of French Producer Co-operatives’, unpublished paper delivered to the Walton Symposium, Glasgow, 1979.Google Scholar

29 Oakeshott, , The Case for Workers' Co-ops, p. 67.Google Scholar

30 As argued, for instance, by J. S. Mill in the second chapter of Considerations on Representative Government in Mill, J. S., Utilitarianism; On Liberty; Considerations on Representative Government (London: Dent, 1910).Google Scholar For the extension of this argument to industrial participation, see Pateman, Carole, Participation and Democratic Theory (Cambridge: Cambridge University Press, 1970).CrossRefGoogle Scholar

31 There are in fact two ways in which this goal might be interpreted: as survival per se, and as survival during the lifetimes of the members. The appropriate interpretation will depend on whether the co-operators' non-monetary desires are altruistic or egoistic in nature.

32 It is difficult to conceive how such a constitution might be formulated. A rigid set of rules would hamper any co-operative operating in an uncertain and fluctuating market. If, for instance, it were a requirement that the co-operators should reinvest a certain percentage of their profits each year, this would disadvantage the co-operative in relation to a capitalist who was free to adjust his rate of investment to his estimate of market trends.

33 Oakeshott, , The Case for Workers' Co-ops, Chap. 10.Google Scholar

34 For a recent general discussion, see Laver, M., ‘Political Solutions to the Collective Action Problem’, Political Studies, XXVII (1980), 195–209.CrossRefGoogle Scholar

35 See, for example, Friedman, , The Machinery of Freedom, especially Chaps. 26, 34, 39.Google Scholar

36 Nozick, , Anarchy, State and Utopia, pp. 232–46.Google Scholar

37 Nozick, , Anarchy, State and Utopia, Chap, 10 passim.Google Scholar

38 For some evidence in the particular case of the desire for participation at work, see Ramsay, H., ‘Participation: The Shop Floor View’, British Journal of industrial Relations, XIV (1976), 128–41.CrossRefGoogle Scholar

39 I have examined these two other pillars of libertarianism in ‘Justice and Property’, Ratio, XXII (1980–1981), 1–14Google Scholar, and ‘Constraints on Freedom’, Ethics (forthcoming).