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


  1. Well, capitalist firms do receive a good deal of "help" from the State, and arguably always have. I have no problems with cooperatives receiving the same support from political allies.

    Additionally, I think if we want to have full-blown socialism, we will need to legally abolish wage labor just as we did with slavery.

  2. You don´t need to abolish wage labor (in fact it could be useful in some circumstances). If capital is offered and labor laws strict, wage labor will diminish and dither.

  3. Mondragon industrial co-op was begun and flourished even under the hostile authoritarianism of the Franco regime. They're a multibillion euro co-op complex. That Karl Polanyi reference is a kicker. Neoclassical Economics is a bit of a sham, since it is in fact very based on psychological, sociological, and historical factors. David Ellerman has been developing important arguments, beginning with his perception of the criminal liabilities of any wage earning employee. He calls it the Labor Theory of Property. I see that his argument also justifies it as a Human Right.

    1. Thank you Mark for your comment. I have been far away from anything academic for years (I am currently a barely middle-class traveling salesman of little trinkets), I will come back shortly with more. And now I have more to read, Ellerman included.