Co-operative principles and the evolution of the ‘dismal science’: The historical interaction between co-operative and mainstream economics

Abstract

The development of co-operatives has been (and is) influenced by ideas and conceptions first developed by mainstream economics, yet there is commonly claimed to be a disinterest (or misunderstanding) among economists relating to the advantages and challenges posed by co-operative organisations. Yet a broader perspective demonstrates that whatever distance between the economic profession and the co-operative movement may exist today, there has certainly been a close association throughout most of their shared history. This paper, therefore, seeks to illuminate the perspectives adopted, and insights into co-operatives developed, by leading economists since 1776.

Keywords:

• co-operative economics
• producer and consumer co-operatives
• worker co-operatives
• self-management
• degeneration of co-operatives
• co-operative efficiency
• co-operatives and neoclassical economics
• Keynes and co-operatives

Notes

  1. Keynes, General Theory, 383.

  2. Cited by Gide, ‘Has Co-operation Introduced a New Principle’, 491–2.

  3. Hamilton, ‘Keynesian Economics’, 108.

  4. Bernardi, ‘The Co-operative Organisation’, 15.

  5. The treatment of two of the largest American introductory economic textbooks, Samuelson, Economics: An Introductory Analysis and Lipsey, An Introduction to Positive Economics, are illustrative in this argument, since the former has no discussion on co-operatives (excepting a small passage on Yugoslavia), while Lipsey used co-operatives as an example of cartels, raising prices to increase profits and reduce consumer surplus; Kalami, ‘The Disappearance of Co-operatives’, 636. With this material being internalised at an early state of academic development, it is perhaps not surprising that later generations of economists were less interested in co-operatives than their forbears.

  6. Kalami, ‘The Disappearance of Co-operatives’.

  7. One obvious omission relates to the Labour Management (LM) approach, which created a model of producer co-operatives using standard neoclassical tools, to compare performance with capitalist firms; Ward, ‘The Firm in Illyria’; Vanek, The General Theory of Labor-managed Economies. Results suggested that LM delivers inferior performance, since output would theoretically respond inversely to changes in the producer's price, thus the supply curve for the co-operative would be backward bending, and thereby increasing the possibility of economic instability. However, this depends almost entirely upon assumptions that firms operated in conditions of perfect competition, had a perfectly flexible supply of labour and that LM firms would seek to maximise income per worker rather than other possible objectives (i.e. profit maximisation, producing at the social optimum output or job security); varying these assumptions produced vastly different results; Domar, ‘The Soviet Collective Farm’; Horvat, ‘On the Theory of the Labor-managed Firm’; Meade, ‘The Adjustment Processes of Labour-co-operatives’. Indeed, Vanek argued that producer co-operatives had the potential to be super Pareto efficient – i.e. maximising both net private and social benefits; Vanek, ‘The Basic Theory of Financing of Participatory Firms’.

  8. Galbraith, ‘The Founding Faith’, 158.

  9. It has been suggested that co-operatives emerged in the UK as early as 1179; Lucas, Co-operation in Scotland, 13; whereas more recent examples included a fire insurance organisation in the early 1700s; Williams, The Co-operative Movement, 10.

 10. This refers to the difficulty in co-ordination in complex organisations, as the owner (principal) has to rely upon an agent to manage affairs, amid information asymmetry, and consequently, without costly monitoring processes, problems of shirking or substitution of objectives other than those of the principal may occur; Jenson and Meckling, ‘Theory of the Firm’; idem, ‘Rights and Production Functions’.

 11. Smith, Wealth of Nations, 65–6; Henderson, ‘Agency or Alienation?’, 113–14, 127, 129.

 12. Galbraith, ‘The Founding Faith’, 161.

 13. Hughes and Neale, Foundations, 90; Hamilton, ‘Keynesian Economics’, 108–9.

 14. Smith, Wealth of Nations, 22; Zamagni and Zamagni, Co-operative Enterprise, 83.

 15. Hughes and Neale, Foundations, 90.

 16. Zamagni and Zamagni, Co-operative Enterprise, 1.

 17. Williams, The Co-operative Movement, 10.

 18. Fourier, La Theorie des Quartres Mouvements.

 19. Webb, The Co-operative Movement, 122–4; Norman, The Victorian Christian Socialists, 17.

 20. Owen, An Explanation of the Cause.

 21. See Smith, Wealth of Nations, 36–7; Webb, The Co-operative Movement, 50.

 22. Cited in Webb, The Co-operative Movement, 48.

 23. Ibid., 49.

 24. Marx, ‘The Civil War’, 152.

 25. Marx and Engles, Selected Works, 81; Lenin, ‘The State and Revolution’, 162.

 26. Burkitt, Radical Political Economy, 68–70.

 27. Marx, ‘The Civil War’, 155.

 28. Selucky, ‘Marxism and Self-management’, 57–8.

 29. Prychitko, Marxism and Workers’ Self-management, 2.

 30. Helm, The Economics of Co-operative Enterprise, 4–5; Smith, ‘Economists, Economic Theory’, 97.

 31. Marx, Capital, 106; Marx and Engels, Selected Works, 81–2.

 32. This held that the wages of labour were fixed, in aggregate, and so the more workers were employed, the smaller the amounts each received. It was, in essence, the basis for Marx's contention of the immiseration of the proletariat, as wages were squeezed down to subsistence levels. The theory was overturned by J.S. Mill, who thereby gave theoretical justification to trade unions being able to improve wages; Tabb, Reconstructing Political Economy, 71. See also Smith, ‘Economists, Economic Theory’, 97.

 33. Riley, ‘Introduction’, xi–xii, xv.

 34. Static equilibrium exists where variables do not change over time, vis-a-vis dynamic equilibrium.

 35. Mill, Principles, 142–4.

 36. Mill, Chapters, 418–19; Robson, The Improvement of Mankind, 266.

 37. Mill, Principles, 140; Bradley, ‘Mill on Proprietorship’, 423, 432.

 38. Mill, Principles, 148.

 39. Cited in Sarvasy, ‘A Reconsideration of the Development’, 325.

 40. Mill, Principles, 147.

 41. Ibid., 153.

 42. Ibid., 141; Henderson, ‘Agency or Alienation?’, 116.

 43. Mill, Principles, 149; Robson, The Improvement of Mankind, 267. Recent evidence would tend to support this conclusion; Doucouliagos, ‘The Economics of Capital Hiring Labour’, 237–9; Bonin, Jones and Putterman, ‘Theoretical and Empirical Studies’, 1303.

 44. Mill, Chapters, 421.

 45. Jones, ‘British Economic Thought’, 11; Mill, Principles, 153; Robson, The Improvement of Mankind, 265.

 46. Mill, Chapters, 421; Zamagni and Zamagni, Co-operative Enterprise, 94.

 47. Mill, Principles, 142.

 48. Sarvasy, ‘J.S. Mill's Theory’, 574; idem, ‘A Reconsideration’, 314.

 49. Mill, Principles, 155–6.

 50. Ibid., 154.

 51. Robson, The Improvement of Mankind, 264.

 52. Mill, Principles, 157.

 53. Robson, The Improvement of Mankind, 249; Riley, ‘Introduction’, xxxv–vii.

 54. Schwartz, The New Political Economy, 226.

 55. Jones, ‘British Economic Thought’, 7–8.

 56. Cited in Claeys, ‘Justice, Independence and Industrial Democracy’, 140.

 57. Schumpeter, History of Economic Analysis, 827.

 58. Walras, Elements of Economics.

 59. Cited in Tabb, Reconstructing Political Economy, 95.

 60. Walker, William Jaffe's Essays, 113.

 61. Walras, Les Associations, 229.

 62. Zamagni and Zamagni, Co-operative Enterprise, 29.

 63. This is a problem perpetuated by a number of contributions in the Labour Management (LM) debates a century later.

 64. Gide, ‘Has Co-operation Introduced a New Principle’, 495–9.

 65. Rather than the utility (or satisfaction) derived from a good or service being objective (or having an intrinsic value which may differ from price), neoclassical economists treated it as subjective (value being determined in the minds of producers and consumers), while diminishing marginal utility for consumers (hence a downward sloping demand curve) implies that an equilibrium position in a market can be found where the value of consuming the last unit of an item is equal to the cost of its production. It superseded the Labour Theory of Value held by Classical economists.

 66. Keynes, ‘Alfred Marshal’, 40–4; Robinson and Eatwell, Introduction to Modern Economics, 34.

 67. Marshall, Principles, 6–9.

 68. Ibid., 10, 134.

 69. Ibid.

 70. Ibid., 227–8, 240; Jones, ‘British Economic Thought’, 12, 21; Devadhar, ‘Alfred Marshall on Co-operation’, 290.

 71. Devadhar, ‘Alfred Marshall on Co-operation’, 292–3.

 72. Marshall, Principles, 236–7.

 73. Marshall, Principles, 253, cited in Jones, ‘British Economic Thought’, 11. Simon, ‘Organisations and Markets’ and Stiglitz, ‘Post Walrasian and Post Marxian Economics’ concur with this conclusion, stating that the best way to overcome agency problems may be by increasing the identification of workers with their firm.

 74. Marshall, Principles, 232, 254.

 75. The importance of trust in competitive advantage, and the lower incentives for co-operatives to engage in short term opportunism, has been noted in the literature; Jones and Kalmi, ‘Trust, Inequality’. Hence, competitive advantage can be derived from the persistence of informational asymmetries in the market place, and consumers seeking to overcome their disadvantage by dealing with organisations they believe they can trust; Bernardi, ‘The Co-operative Organisation’, 15.

 76. Marshall, Principles, 233–4, 236.

 77. Ibid., 232–3, 236; Devadhar, ‘Alfred Marshall on Co-operation’, 295.

 78. Marshall, Principles, 243–4.

 79. Cited in Devadhar, ‘Alfred Marshall on Co-operation’, 297–9.

 80. Marshall, Principles, 244–6. One recent theory suggests that co-operatives suffer from a ‘horizon problem’, as investment in collective assets, which are irrecoverable by individual members, will only be supported if the resultant income stream will produce greater benefit during their remaining period within the co-operative than the immediate loss of revenue; Miller, ‘Market Neutrality’; Fulton, ‘The Future of Co-operatives’. This will shorten the time horizon of the investment and necessitate a greater annual return, therein leading to lower levels of investment. This is compounded by the greater risk faced by worker-investors, since their assets are tied up in one firm and risk is not diversified; Miller, ‘Market Neutrality’, 316–17. However, an inter-cooperative capital market would be one solution.

 81. Marshall, ‘Co-operation', 1889, 246.

 82. Pigou, An Economist's View. This organisation was initially founded in 1884 as the Labour Association for Promoting Co-operative Production based on the Co-partnership of Workers, and has subsequently become the Involvement and Participation Association (IPA). The initial motive was to promote workers co-operatives, but this remit has subsequently been broadened to the promotion of employee participation within the workplace.

 83. Pigou, The Economics of Welfare, 205–6.

 84. Pigou, An Economist's View.

 85. Webb and Webb, A Constitution, 3, 18–19.

 86. Ibid., 27–8, 103, 160; Webb and Webb, The Consumers’ Co-operative Movement, 466.

 87. Webb, The Co-operative Movement, 150; Webb and Webb, A Constitution, 157; idem, The Consumers’ Co-operative Movement, 466–7.

 88. Jeavons, ‘Account of Weaver's Strike’; Webb, The Co-operative Movement, 127–8, 152–3; Webb and Webb, The Consumers’ Co-operative Movement, 468.

 89. Webb, The Co-operative Movement, 45, 150; Webb and Webb, A Constitution, 28–9, 155; idem, The Consumers’ Co-operative Movement, 182, 463–4. Subsequent research does not, however, support the generality of this assertion; Bonin, Jones and Putterman, ‘Theoretical and Empirical Studies’, 1293; Jones, ‘Producer Co-operatives’, 155.

 90. Webb, The Co-operative Movement, 36; Webb and Webb, A Constitution, 6; idem, The Consumers’ Co-operative Movement, 391, 395.

 91. Webb and Webb, The Consumers’ Co-operative Movement, 392.

 92. Webb and Webb, A Constitution, 22; idem, The Consumers’ Co-operative Movement, 182.

 93. Webb, The Co-operative Movement, 194–6.

 94. Jones, ‘British Economic Thought’, 13.

 95. Tarshis, ‘Keynes’ Co-operative Economy’.

 96. Weitzman, The Share Economy.

 97. Keynes, The End of Laissez-faire; idem, General Theory, 160.

 98. Ibid., 376.

 99. Ibid., 378.

100. Crotty, ‘Was Keynes a Corporatist?’

101. Keynes was a member of the Executive Committee of the Inquiry, and Chair of the Committee on Industrial and Financial Organisation, and drafted one book alongside collaborating on three others, yet it is important to note that there is no direct evidence to suggest that Keynes was the author of the material directly relating to co-operatives, only that there is substantial evidence to indicate that he regarded the completed report in favourable terms; Skidelsky, John Maynard Keynes.

102. Liberal Party, Britain's Industrial Future.

103. Ibid., 205–28.

104. Keynes, The End of Laissez-faire, 101.

105. Robertson, The Control of Industry, 101–12.

106. Research indicates that loyalty can influence the profitability of organisations and is a substitute to monitoring; Solow, The Labour Market, 77; Simon, ‘Organisations and Markets’.

107. Robertson, The Control of Industry, 105–12, 134–47.

108. Ibid., 133.

109. Ibid., 148–65.

110. Meade, Alternative Systems; idem, Agathotopia.

111. Meade, Agathotopia, 3–4.

112. Ibid., 7–8, 13.

113. Ibid.

114. Galbraith, The New Industrial State.

115. Galbraith, ‘Professor Galbraith's Reply’.

116. Hamilton, ‘Keynesian Economics and the Co-operative System’, 112.

117. Cited in Kalmi, ‘The Disappearance of Co-operatives’, 634.

118. Whyman, ‘Post-Keynesianism’.

119. Hamilton, ‘Keynesian Economics’, 112.

120. Ward, ‘The Firm in Illyria’.

121. Fulton, ‘The Future of Co-operatives’.

122. Miller, ‘Market Neutrality’, 315.

123. Furubotn and Pejovich, ‘Property Rights’; Vanek, The Labor-managed Economy.

124. Bonin, Jones and Putterman, ‘Theoretical and Empirical Studies’; Kalmi, ‘The Disappearance of Co-operatives’.

125. Horvat, ‘On the Theory of the Labor-managed Firm’.

126. Domar, ‘The Soviet Collective Farm’.

127. Meade, ‘The Adjustment Processes of Labour-co-operatives’; Estrin, ‘Workers’ Co-operatives’, 176–7, 186.

128. Vanek, ‘The Basic Theory of Financing of Participatory Firms’.

129. Vanek, The General Theory of Labor-managed Economies; Jefferies and Mason, ‘The Financing of Worker Co-operatives’, 240–1.

130. Miller, ‘Market Neutrality’; Jefferies and Mason, ‘The Financing of Worker Co-operatives’, 235.

131. Bellas, Industrial Democracy.

132. Jefferies and Mason, ‘The Financing of Worker Co-operatives’, 236; Nilsson, ‘Organisational Principles’, 331.

133. Wachtel, Workers Management.

134. Bonin, Jones and Putterman, ‘Theoretical and Empirical Studies’, 1312; Williams, The Co-operative Movement, 54.

135. Conte, ‘Participation and Performance’.

136. Doucouliagos, ‘The Economics of Capital hiring Labour’, 237.

137. Simon, ‘Organisations and Markets’; Stiglitz, ‘Post Walrasian and Post Marxian Economics’.