The Organization of Labor: The Producer Cooperative Dilemma

This book is mainly preoccupied with assessing capitalist modes of organiza- tion. Although the underlying approach to the study of organization applies to noncapitalist modes as well, few such application*are attempted. The following brief discussion of producer cooperatives ismo remedy. It merely poses issues for which further study is needed. The hlsic dilemma is this: If pro- ducér cooperatives mitigate the disabilities thin many social scientists and social commentators associate with the Authority Relation, why is the record of producer cooperatives so weak?

A definitive answer to that query is not attempted here. Indeed, inasmuch as the producer cooperative mode is still undergoing refinements— witness the Mondragon experiment, which has been in progress in the Basque province of Spain for almost thirty years (Bradley and Gelb, 1980, 1982)—a final determination is unwarranted. The earlier history of producer cooperatives has nevertheless been disappointing. The high hopes with which they were launched have gone unrealized (Kanter, 1972; Manuel and Manuel, 1979). What have been the contributing factors?

Bowles and Gintis (1976, p. 62) observe that worker cooperatives offered a viable alternative to the Authority Relation and “were a widespread and influential part of the labor movement as early as the 1840s The cooperative movement reached a peak shortly after the Civil War but failed because sufficient capital could not be raised.” They go on to quote Grob as follows:

Even when funds were available the desire for profits often became so over-whelming that many cooperatives were turned into joint stock companies. Stock- holders then became intent on paying low wages. Not unimportant were the discriminations practiced by competitors who feared the success of cooperative enterprises. [Bowles and Giritis, 1976, p. 62]

Ellerman describes the “degenerative tendencies” of employee-owned cor- porations in a similar way (1982, p. 39).

Horvat poses the dilemma directly: “If labor-managed firms are really more efficient than their capitalist . . . counterparts . . . why do they not outcompete the latter firms in the market?” (1982, p. 455). His answer is that “a labor-managed firm cannot easily survive in a capitalist environment regardless of its potential efficiency” (p. 455; emphasis in original). The reasons are three (p. 456): (1) Bank and trade credit are difficult for producer cooperatives to obtain, (2) cooperatives are unable to retain superior managers, who are induced to leave by offers of better pay in capitalist firms, and (3) successful cooperatives experience the above-described degeneration, since founders are unwilling to share the fruits of their success with newcomers.

Horvat offers a biological analogy in support of the first point—“capitalist economy behaves like an organism that has undergone an organ transplant: it spontaneously rejects the alien tissue” (1982, p. 456). 1 submit, however, that short-term bank and trade credit are more accurately described by a physical analogy. They are more nearly akin to iron filings in a magnetic field. The prospect of high (risk-adjusted) returns presents a well-nigh irresistible attraction to liquid reserves. To be sure, local exhortations to discriminate can be temporarily effective. But venture capitalists are unprincipled in their search for profit. Capital displays an inexorable tendency to equalize returns at the margin.

A more serious financial concern, which Horvat does not mention but Putterman (1982, p. 158) does, is access to long-term bank financing and equity capital. The issue is not that cooperatives are denied parity access to such funds, but the special hazards that the cooperative form poses. Track record and expropriation hazards must be distinguished. Only the latter are troublesome in the long run.

Considering the difficulties of evaluating the merits of any new enterprise ex ante, investors are always wary at the outset. But that is characteristic of all new firms. Starting small and growing through retained earnings is thus a common scenario. Since workers who are attracted to cooperatives will presumably work for a lower wage,95 the oppressiveness of the Authority Relation having been removed, the greater profitability that thereby results is a decided advantage.96 Once displayed, the above-described magnetic attraction of funds should materialize.

That assumes, however, that the cooperative firm and the capitalist firm do not pose distinguishably different expropriation hazards to long-term debt and, especially, to equity financing. Those issues are best developed in con- junction with the discussion of corporate governance in Chapter 12. Suffice it to observe here that whereas the capitalist form of organization can tolerate outside intervention, to include even the change of management through the concentration of equity ownership to effect a takeover, this is antithetical to the cooperative conception of the enterprise. Ceteris paribus, equity ownership is subject to greater hazard in the cooperative firm.97 The cooperative form of organization experiences a serious (comparative) limitation on that account.

Horvat, however, offers two other reasons, both of which turn on the behavior of managers and are closely linked: the inability of cooperatives to retain good managers, and the unwillingness of founders to share. Putter- man’s recent treatment of management problems in worker-run enterprise is instructive. He observes that

. . . while the market system will permit the existence of worker-run enterprises side by side with capitalist firms, worker-run firms may not be fully viable, and are likely to be unable to attain their full possibilities, under such coexistence, so long as entrepreneurial talent has its in the competing form. It may be necesssary for democratic control to become a fundamental social principle, implemented through legislation insofar as it is not established by the sheer weight of adoption as a social norm, before managerial talent is captured within the worker-run system, turned toward the wider benefit of the workforce as a whole, and brought to cooperate in the multiplication of skills and the education of the workforce which might make management itself less of a scarce resource, and thus promote the success of highly participatory organizational forms. In other words, worker-run enterprise could be better for most workers in the long- run, yet be unattainable as long as that minority of workers for whom this is not so arc attracted to the service of capital. [Putterman, 1982, pp. 157-58]

The argument, evidently, is that skilled managers generate high exter- nalities. Since few if any managers are prepared to make the personal -sacrifices needed for the worker-run enterprise to be viable, legislative intervention is needed if social optimality is to be realized. The defects of human nature as we know it have to be corrected.

As with all proposals for reform, however, the issue is not whether there are defects but rather whether the defects are remediable. What is the prospect that the reform will yield net gains? Since feasible modes of socialist organization are already in place in Yugoslavia and elsewhere, a greater effort to evaluate their benefits and costs presumably ought to be made.

Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.

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