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:
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:
 |
| Hey, remember those Math classes at school? You don´t? Shame on you |
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".
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
For the accumulated Bibliography and the Glossary please click here
