Friday, April 28, 2017

Cooperatives and John Stuart Mill

John Stuart Mill was an important utilitarian classic liberal thinker from the 19th Century.  Taking utilitarianism and personal freedom to its logical conclusions, Mill is one of the early proponents of Economic Democracy.  If you think that working for a wage curtails personal freedom and that cooperatives can be more efficient than capitalist companies, then it follows that a system based on coops should offer a higher utility maximization point for society.

His classic "Principles of Political Economy" (1848), was utilized as the main text for Political Economy studies until the advent of Alfred Marshall's book in 1890. From the title of Book IV: "Influence of the Progress of Society on Production and Distribution", we can infer that the most important aspects of the economy are not "the market" and "the consumer" but the progress in the production of goods and services and a better distribution of those goods and services and the profits derived from them.

In said Book, the Chapter VII is titled "On the Probable Futurity of the Labouring Classes".  Language is important, we are not speaking about a "low" class, but a class of people for which work is their main characteristic, as opposed to the "Leisure Class" (a parasitic class).  Here starts his treatment of a cooperative economy.

Progressive is the word that comes to mind when reading Mill. He asks for the social independence of women, since education and work can stop the problem of possible over-population.   We should remember that the over-population threat was a common theme between English intellectuals since Malthus.  One can hardly expect Mill to imagine the changes in the relationship between genders that would occur in the next century and a half.  He was, effectively, one of the first feminists.

Mill prefers the manual laborers to be "self-dependent", thus rejecting the paternalism of the private well-off charities. He also expects that (1) with the extension of the political franchise to the working class they will shown their own interest,opposed to that of their employers.  He also thinks that (2) workers` education and just laws will bring a better deal in the distribution of the production, and that (3) workers will cease to be content as wage laborers

We know,at least for the situation in the early 21st Century, that he was wrong in these three cases: (1) Workers often vote against their own interests,due to their individual identification with the ruling class; (2) the rise of dysfunctional meritocracy means the reification (become concrete,solid) of social hierarchies where those at the top utilize academic accreditations as entrance barriers, with parts of the population underqualified and others overqualified for the available work, and (3) a longing for the days of stable wage work against the current instability of the project-based industry (especially in high-tech) and the perils of increased automation.  The road from feudalism to Economic Democracy is not straight at all.

Mill`s main objective is not the total independence of the individual (often confusedly called "freedom" in libertarian forums), "but to enable them [people] to work with or for one another in relations not involving dependence" [pg. 768]. Workers would be independent by forming cooperation ties with other workers or,in certain cases, even with capitalists (which we can see in German companies with worker participation in decisionship).

In the following section Mill describes the development of various contemporary examples of the burgeoning cooperative movement and the mechanism by which they would be created and operated.  I recommend reading this section straight from the original since his explanation is detailed and functions as a primitive economic anthropology of sorts.  Some names are widely known, such as the pioneer Rochdale society. Mill`s optimism is contagious, there is not even malice against capitalists, but admiration for those coops that grew from the effort and small capital investments of their own members.

Since Mill thinks that cooperatives are efficient, and as we saw he expects workers to follow their own interests, he supposes that once there is a sufficient number of cooperative companies the system will turn towards a mixed economy: "capitalists (...) will gradually find necessary to make the entire body of labourers participants in profits".  Finally, we would reach a stage where all of society would enjoy the benefits of a full-blown economic democracy.  In his views it is composed by the  rewards for personal extortion and the benefits brought by competition.  The main enemy for Mill is generalized idleness and stagnation.  His ideal seems closer to the modern concept of Market Socialism than the Socialist State of the 20th Century.


It is disheartening to know that most of these movements did not made significant progress since Mill`s writings, and that gigantic capitalist oligopolies, being producers or just financial entities, became the norm in our current world. It seems that the limitations for the development of better organizations are not simply economic but instead political.  The discussion of progressive economic models often feels useless.  Still, we talk, we imagine, we write on blogs, and we plan for the future.  More than one hundred and fifty years have passed, and the dream is still not dead.  Knowledge persists, and that alone is a reason to continue developing it.  Political and economic crisis often the chance of paradigm shifts, and we should be ready to apply a previously developed model when opportunity arises.

In the next post I will talk about a couple of articles by Justin Schwartz about Mill and the failure of the cooperative project.  I am especially interested in debunking some explanations that different writers (between them Schwartz) utilize to justify the lack of cooperative companies on the market and the degeneration into capitalist enterprises of existing coops.  I can`t afford to be a fatalist about this subject: we need to see a workable and widely available workplace democracy in our lifetimes.

Added to Accumulated Bibliography: (press to access)

MILL, John Stuart (1848, revised 1852): Principles of Political Economy: with some of their applications to social philosophy. Book IV,Chapter 7. John W.Parker, London.

Monday, April 22, 2013


Welcome back, this time to a completely speculative and absolutely non-scientist look at the transition from a Capitalist economy to Market Socialism.  In this episode of the Road to Utopia we will dissect David Schweikart´s attempt at a transition and I will point my departure from his vision.  Welcome to the "what if..." of posts, the game of choice for dreamers and future marble statue subjects.

This episode starts in Chapter 6 of Schweickart´s "After Capitalism".  In this chapter our good friend David tries to find a way to go from "here" (our now) to "there" (our imagined market socialism future).  He divides our now into two camps, the first is the branch of the post-war capitalist economies, and the second is the branch of the socialist countries.

(1) The developed capitalist economies chose a Keynesian path, that brought them finally to stagflation (inflation plus unemployment).  I think that many up-and-coming Third World countries are currently entering this stage, as without the competition provided by cooperatives, they are jailed into a cage of massive spending and strong oligopolies that control prices, always correcting upwards, passing wage increases into consumers.   On those countries that abandoned Keynesianism in favor of "capitalism of friends" (my name for neo-conservative policies), things are faring even worse, with rampant unemployment and/or decreases of real wages fueled by bubble bursts (Spain, Greece, the U.S., etcetera).  The problem with all models of post-war capitalism is insufficient demand.  It seems to me that Marx is finally exacting his delayed revenge on the system.

(2) The socialist branch of the tree of economic policy was buried under the weight of inefficient central planning and bureaucracy, and we could see its quick fall into oblivion some years ago, amid the fanfare and triumphalism of Francis "Mission Acomplished" Fukuyama and friends.  We all know by now that victory for American capitalism was declared way too soon.  According to Shweickart, the nascent market socialist techniques aborted in the ex-Yugoslavia gave fruits later on China, our new super-power.  If the Chinese system can be called as market socialist is something that I left to each one of you to peruse. Schweickart suggests that socialist countries can find its way into marksoc better than capitalist countries. Again, Marx influence is obvious in my position: a real marksoc system must be developed in an open and democratic society, hence I want to analyze how the path on those countries "from-here-to-there" would happen.

  • Workplace Democracy
As told before in this blog, I favor a snow-ball  approach to the subject: small changes in the right places bring to the complete overhaul of the system.  These strategic changes can happen from an bottom-up perspective as well as aided or directly promoted by the top-down direction.  As an example, I put the development of the worker cooperatives in Argentina, which took force with the movement of "Recovered Factories" born from the economic meltdown that culminated on 2001.  With the credit crisis initiated on February 4, 1994 (known later as the "Tequila Effect"), the Argentinean economy, hand-cuffed by pegging its currency to the USD dollar, started to slow down and fell on a spiral of capital flight, decreased demand and high unemployment.  Many local capitalists decided then to "vacuum" funds from their business until they crashed.  Without the possibility of finding a new job, or even traveling back home due to unpaid wages, many workers decided to guard the factories were they worked and start production on their own; and surprisingly, many of those factories not only survived but thrived once the external conditions changed for the better.

This movement was clearly a bottom-up phenomena, normal workers dictating change to those on top, which thankfully helped with the required changes in legislation to finally grant full ownership to these stoic producers.  I agree with Schweickart that this approach can be dangerous, as the workers are taking into themselves the task of building up companies that crashed, and this could mean years of subsistence-level income and gargantuan efforts (self-exploitation).  This approach works well in a high-unemployment environment and knit-tight worker communities, but if other job options are available, and workers are not united, the outcome will be the demise of the company.  The same will happen if the economy surrounding the company is in tatters for a long time, no matter how much effort the workers put in,  or if the company is fundamentally unsustainable from reasons other than capitalist abuse or mismanagement.

The following point in Schweickart´s agenda is to grant workers a share in a capitalist company through ESOPs (Employee Stock Ownership Plan), and to change its meaning to share control over an enterprise.  Personally, I think that any measure about capital that does not transfer control to workers is akin to bonuses or the ownership of small portions of stock through the stock market: maybe good for your portfolio, potentially dangerous (ENRON and similar cases) and not in line with a program towards marksoc.  Giving control alongside shares could make workers more susceptible to the idea of taking over their workplace, but it could also reify the position of the capitalist owners and current management.  It is a social pact of the likes we have seen before during the 20th Century in Germany and Northern Europe, and it could be instable, with capitalists taking every part back from the workers once the external conditions are in their favor.

  • Social Control of Investment
Schweickart proposes reforms which could be applied undercurrent circumstances and gradually take control over investment, always prone to crash due to lowered expectations or the opportunity cost of the financial “casino”.  We all are witnesses to the  production and destruction of gigantic bubbles that suck up funds from productive investments and throw them into the bottomless pool of financial games crafted in some nice office in New York or London.  Schweickart proposes to incorporate environmental externalities into production costs, since this would make capitalists to invest into technological solutions.  At the same, a “Tobin Tax” should be implemented to reduce the speed and volume of financial speculative transactions.  The last two reforms he suggest are the “democratization of pension funds” and the implementation of a “capital assets tax”.

If those proposals seems positive, not all of them are the exclusive province of capitalists.  Introducing externalities into the production would hit also cooperatives, and until a marksoc system is put in place a Tobin tax could hurt a profitable source of income for coops that generates surpluses.  Ideally all income should originate in normal production, but I don`t see nothing wrong with taking parts of the pie of the financial casino.  Is it true that this money will come from other workers around the world, since in the end governments bails out the monstrous financial institutions responsible for these bubbles, but where would this money go if not into the coffers of coops? Into the pockets of bankers and other capitalists, of course.  I agree that we need to contaminate less, and that we need to limit financial speculation.  Are we going to do it just when worker cooperatives are starting to sprung all over the place?  Whose organizations would survive these limitations? The all-powerful multinational conglomerates, or the small newly born coops?

  • From Reform to Revolution...
Schweickart presents two ways on which we can do a peaceful transition from capitalism to Economic Democracy.  Both include the ascend into power of a leftist political party.  I guess that the meaning of "leftist" is informed by American politics, that do not correlate with the situation in other countries around the world. The radical quick path that he suggests would be born of a big capitalist crisis that would give this hypothetical party the votes necessary to implement all legal changes towards market socialism,  first abolishing stock dividends, and second, automatically converting big companies into worker cooperatives.  The third measure would be the implementation of his famous flat rate tax over capital assets.  The fourth one, the nationalization of all banks.  The radical softest path that he suggests in the following incise introduces smaller changes to the system as a whole, but still converts big corporations, and also takes care of the middle class stockholders that are left stranded in a smoother transition.

As I wrote above, I believe in a snowball approach.  Maybe others will consider my way to be naive, but I want to win the game by utilizing its rules, not by writing new ones.  Is the game slanted? Sure it is. But with a little push in the right direction, changes can be made to be permanent.  If we write new rules, those can be erased when another administration has its turn.  If we do it organically, nobody can claim foul.  The secret is to study cooperatives and their efficiency and effectiveness.  I think that they can be more efficient than their capitalist counterparts, and that the problems with coops is that there are not enough of them, especially in highly profitable sectors such as Internet-related high-tech.  Make them a palatable choice, and workers will vote with their feet.  Nobody wants consciously to be worse off.

If  I agree, as Schweickart writes, that the "problem with capitalism is lack of effective demand for all the goods it is capable of producing" (Schweickart, same chapter),  I think that economists often forget about the lack of opportunities to affront large scale production, due to problems with financing or logistics, and the conservative nature of a working business.  That is why I put so much importance on the function of the State as the original soccer player.  The ball just needs to be kicked, and then the game can proceed.  Provide funding and some technical support in the right direction, and coops can by their own effort produce a good amount of Maradonian goals for our marksoc team.  If somebody is offended, the same government can offer funding for new small capitalist enterprises.  Why not? If we are right, our cooperatives will blow them off the board.  If not, we will nevertheless introduce new competitors into the market (which is always a good thing).

So boys and girls, prepare your investigative goggles, and start your research.  We need the best factual  information about coops, the best theoretical developments, the best resulting laws and regulations you can create.  We have only a bright future to gain, and some old chains to lose from all of this.  Are you ready?

SCHWEICKART, David (2002):  "After Capitalism", chapter 6, Lanham: Rowman & Littlefield.

For the accumulated Bibliography and the Glossary please click here

Post-script: Why aren´t enough coops? Read my previous entry into this blog, and the subsequent ones, which will be probably centered on the work of Gregory K. Dow and his book "Governing the Firm".

Tuesday, October 23, 2012

Panu Kalmi and the Seed of Cooperative Knowledge

After many months, welcome back.  It is easy to be intimidated when trying to get into the theory of cooperatives and alternative economic systems.  One feels terrified when being confronted by professional economists, humbled when reading papers of people that undoubtedly put thousands of hours into the subject, weird when trying to explain the simplest of the concepts of market socialism to an uninitiated crowd ("do you mean that people can control a factory? And who is the owner? They are? That´s crazy") and also a little bit unintellectual and a dreamy Utopian.  Bear with me, this episode of the blog seems hard, but if you are already here I suppose that you are interested in the subject.  If nothing else, skip to the end of this post where I shortly digress about the expansion of the marksoc initiative into a full-fledged economy.

For the reasons exposed above, is why Panu Kalmi is such a welcomed medicine for the troubles of the amateur marksoc scientist.  The academic articles authored by Kalmi converts the rough seas cooperatives` theories into an ordered channel of  easily followed schools and methods.  The guy creates what I like to call “seeds”.  A seed is an article that works as a starting point for intellectual endeavors, an index of complex matters that stimulates intellectual growth.  As I like this blog to become a seed for market socialism, is it worthy to include on it seed-articles that redirect the attention of the fellow researchers.

The article in question is called “The Study of Co-operatives in Modern Economics: AMethodological Essay”, and it analyzes the two big theoretic traditions of research over worker cooperatives: the neoclassical approach exemplified by Jaroslav Vanek, and the New Institutional approach represented by Henry Hansmann (“The Ownership of Enterprise”, 1966).  Kalmi also includes later developments he thinks hold potential: the contract-theoretic approach and the work of Gregory Dow.  He also indicates that he is excluding certain schools from the article: the old institutionalist, the Marxist, and the Austrian approaches.

The approaches included will try to explain the inner mechanism of the worker-owned company and its place on a free-market economy, each utilizing a different methodology and point of view. Lets try to resume the main characteristics of each school.

The Neoclassical School

The classic article on worker coops from the point of view of the neoclassical economists is “The Firm in Illyria: Market Syndicalism”, by Benjamin Ward (1958).  In this article Ward utilizes equations and the typical two-axis graphics to compare a woc firm with a capitalist company.  Here you have an example of his work:

Hey, remember those Math classes at school? You don´t? Shame on you
Please don´t fret and run , I think that Ward really meant to scare people away.  The important thing to keep in mind is that this school will compare between "labour-managed-firms" (LMFs) and "capital-owned-firms" (KOFs) with the same tools utilized regularly in the neoclassical analysis of the capitalist market (meaning lots of curves).  The main supposition is that while KOFs try to maximize profits, LMFs will try to maximize income per employee.  Ward reached the conclusion that individual LMFs "employs less labour and produces less output" (Kalmi, op. cit.) than KOFs in the same situation.

From this work emerged the oeuvre of one of the big names in marksoc theory, that you probably heard before: Jaroslav Vanek.  The Czech writer argued that despite Ward´s conclusion for any individual firm, the structure of a economy based on LMFs would allow for more competition between cooperatives, thus restoring full employment.  I let you as a homework to elucidate the significance of "the Ward effect", also called "perverse supply reaction" for individual LMFs and its counter-arguments (I suspect that I will be going back to that point in the future)  The main critique of Kalmi regarding Vanek is that despite the later´s claim that he proves the superiority of LMFs with the same techniques utilized by neoclassic economists (microeconomics) in the end he utilizes arguments that come from other currents (LMFs are more efficient because are more humane, thus positively affecting the work ethic.  In the same article Kalmi will put in doubt this crucial difference between LMFs and KOFs: what if a capitalist company gives enough incentives to its workers?). In his latter work Vanek would abandon his neoclassical approach altogether, favoring a normative view (The Participatory Economy, 1971). 

The New Institutional School

If the neoclassical school favored theoretic models, the institutional approach started its way from empirical studies of existing cooperatives.  Their main precursors are Eirik Furubotn, Svetozar Pejovich, Michael Jensen and William Meckling.  They emphasized "methodological individualism" thus centering into problems of governance (management, decision-making) and problems of re-investment.  Jensen and Meckling also developed a functionalist approach, trying to explain the reasons for the scarcity of LMFs in real life. The main problem I find with any kind of functionalism is that it is based on the existing institutions.  And our main task is to develop new ones or change the existing ones to make the establishment of LMFs a viable prospect.  Ours is not "the best of all possible worlds".

The natural conclusion of this path is the book by Henry Hansmann, "The Ownership of Enterprise" (1996).   Hansmann builds upon Jensen and Meckling but adds its own version to explain how real-world companies "choose" their mode of ownership: it depends on transaction costs.  I am not versed enough on this kind of literature, and I will kindly accept any offer to explain to me the reason why these authors use the sentence "firms choose" as if those firms are a black box.  Is not as if workers could suddenly decide that their company is not going to be owned by a capitalist anymore, and he/she would silently acquiesce.  Hansmann maintains that the costs of ownership in coops is high, but for every "cost of democratic worker assemblies" card I would raise a "cost of systematic control over workers in any capitalist company" one.  This is not natural selection, since the markets are human creations.  As I said before, if LMFs are not efficient in the current system (which I still doubt), our main problem resides with the system, not the companies.

Giving another turn to the screw, a neoclassical current called Contract Theory will, according to Kalmi, come to dominate the study of cooperatives in mainstream economics, since it combines the questions presented by the New Institutional School with a mathematical presentation.

Here you have an example from Oliver Hart and John Moore in an article from 1996: 

Please, remain seated.  This question will not be in the test.

Gregory Dow and finally a Conclusion
The work of Gregory Dow is the last one analyzed in Kalmi`s article.  Dow also is preoccupied by the rarity of cooperatives, but he does not think that it is based on the supposed inefficiency of these companies.  Instead, the cause  of the scarceness is what he calls “the inalienability of labor”.   We have here another concept to investigate, and refute or confirm its utility.  A positive trait that Kalmi finds about Dow is that he declares his support for the cooperative form.  In general, economists try to maintain “objectivity” in respect of the phenomena that they are studying, but we know that political preferences already show when the object and methodology of study are chosen.  To make social science means to have a political stance. If something, the difference between economists and Dow is that the later is being honest.
And here we reach the end.  Along this short history of marksoc theory we can see a constant battle between a normative view of the problem ("we need more coops") and an "objective" one ("we asses through the current methods of the economic science that there are not more coops in what we seem to think is the natural state of markets because ").  I find this dichotomy to be false, and to make good on my claims I will be spending the following weeks trying to get my points from the great market debunker, Karl Polanyi.

My small digression about a full marksoc economy came to me many years ago, but I found a literary expression in the concept of Ice-Nine, from Kurt Vonnegut.  Simply put, it means that a little molecule can change the state of an entire body of water, giving that certain conditions are present.  It is a snow-
ball effect, and it is unstoppable by common means.  I see marksoc developing as a slow bloodless revolution, a change that can be made in a capitalist democracy through laws and regulations, from which springs a complete overhaul of capitalism.  If they key changes are small, they could very well go unnoticed, hence unopposed by the ever present establishment of powerful players.  Small changes in legislation, here and there, can fertilize the soil for the unimpeded multiplication of worker cooperatives in all areas.  Coops are private companies, so the establishment cannot claim that government is trying to take private property away.  Coops would win in the market following market rules, innovation and profit, so the establishment cannot cry foul.  Our task is to find the right measures, the way of making a good seed.  I am one key stroke away of misquoting a Kevin Costner movie , so get prepared: "If you build it they will come".

KALMI, Panu: “The Study of Co-operatives in Modern Economics: A Methodological Essay

For the accumulated Bibliography and the Glossary please click here