Summary of “For an Economic-civil Theory

of Cooperative Enterprise”Working paper N. 10 by Stefano Zamagni, published by AICCON

March 2005

By Noémi Giszpenc, November 2005If you’re reading this: cited references are in the

“notes” section of the slides.

Contents (Rough)

I. History

II. Note 1: Market vs. Captialist Economies

III. Note 2: Social Utopianism vs. Coops

IV. Contrasting Coops to Capitalist Firms

V. What Distinguishes Coops, and How Can They Benefit from Distinction

VI. Noémi’s Impressions and Musings

History

• Coops appear historically after Kist (capitalist) firms.Is this because…• Coops are a response to market failure…(niche)• Or a more advanced form of organization? (destiny)

“The form of association that, if humanity continues to improve, we should expect will prevail in the end, is not that which can exist between a capitalist as boss and a worker without any voice in management, but an association of these workers on an equal basis who collectively own the capital with which they pursue their activities and who are directed by managers nominated and removed by themselves.” --John Stuart Mill, Principles of Political Economy 1852

Big Conflicts

• 20th C.: Kism vs. Communism (private vs. public property)

• 21st C.: Control by suppliers of K, or by suppliers of labor (or primary materials or demand)?

(property is private in all cases.)– Need theory to explain prevalence of Kist firms and

how to combine their advantages (access to K, diversification of risk) w/ those of coops (stimulation of work effort, mitigation of distributive conflict)

Note 1:Market and Capitalist Economies• Not the same: it’s a mistake to conflate

• Market dates from at least Greco-Roman times: predates capitalism. – E.g., end of 13th C. to mid 16th C., “urban

civility” in Umbria and Tuscany.

3 Pillars of Market Economy

1. Division of Labor– To live is to produce, participating in the creation of

the common good • Charity helps a person survive, but not live, if charity does

not help person to produce.

– Increases specialization and obliges reciprocity

2. Primacy of Development/Progress– A part of surplus must be devoted to productive

investment, enlarging K stock for future: economy is a positive-sum game.

3 Pillars of Market cont.

3. Liberty of enterprise– Entrepreneur (has (a) creativity, (b) adequate

risk preferences, (c) capacity to coordinate others’ work) must be allowed freedom to act.

– Is a good in itself.• Historically entrepreneurial activity led to opening

of markets, cultural exchange, innovations: double-entry bookkeeping, insurance, stock markets, banks, maritime regulations, etc.

Kism: intro of profit motive

• In 1600s, emergence of Kism, which adds to 3 pillars goal of profit maximization for distribution to K suppliers in proportion to K supplied (Sen 1983)

• In contradiction to “civil humanists,” who looked to market to produce the common good, which provided justification for market’s existence– (as opposed to Bentham’s utilitarian total good)

• Kism justified by efficiency• Market justified by liberty/freedom• Coops consistent with market

Note 2:Social Utopianism vs. Coops

• Paternalistic cooperation of the early 19th C. fundamentally pessimistic about people

• Sought total good vs. common good• Rochdale Pioneers (1844) adopted different

principles, including:– Profit distributed according to economic activity (not need)– Market prices– Preference of K supply from members– Need to devote part of profit (5%) to research and training

for members

Direct Benefit (coop) vs. Indirect Benefit (paternalistic)

• In contrast with paternalistic scheme, running an enterprise and sharing the results respects the participants; not humiliating

• Alfred Marshall, Cooperation essay, 1889:– Produces better people– Releases best efforts, makes full use of capacity

• Coop has ethical base that allows transcendence of conflict b/w self-interest and interest of others– This is meaning of communal good

Past half-century:Contrasting Coops to Kist Firms

• Criteria used: efficiency– Of K vs. members in controlling enterprise

• First line of research: Ward 1958– K: maximization of profit vs.

coop: maximization of profit per unit of labor

– Leads to “perversities”: • Coops have negatively sloped supply curve

• Underinvestment due to members’ shorter time horizons relative to investment payoffs, leads to undercapitalization, niche (Furobotn & Pejovich 1970)

Problems with Analysis

• “Perversities” artifact of way model is described– Doesn’t allow possibility of market for membership

rights, such that leaving members can anticipate future production in sale of share to new member, thus transcending short time horizon

– Such a “membership market” would mirror stock market and make phenomena of under-investment (and other perversities) disappear (Schlicht & Weizsacher 1977)

– Such a market consistent w/ coop form• practical issues remain such as access to K, but this is not a

theoretical difficulty

Unfair Comparison

• Constraints assigned to coops and not to Kist firms– E.g., why total profit maximization and not

maximization of profit per unit of K?

• Samuelson (1957) had intuition that in a perfectly competitive market it doesn’t matter who hires who (K hires L or L rents K)– Formally shown by Dreze (1989)

2nd theme: Heterogeneity of mbrs

• Heterogeneous preferences can lead to fracturing of decision making, thence to paralysis or transfer of control to manager (Hart and Moore 1996)

• Heterogeneous abilities (Kremer 1997) plus democ. leads to unfair(ly low) salaries

• Temptation of free-riding makes decisions inefficient (Bacchiega & De Fraja 1999).

• None of these take into account possibility of different utility function for members of coops– That includes belonging, identity, loyalty, trust, equity

Neoinstitutional approach (Williamson & Hansmann)

• Coops unlikely to be found in sectors that require a lot of K investment, or where members are poor, or where credit is difficult to obtain

• Kist firms at a disadvantage to coops where workers need to make big investments in specialized ability and/or where tacit (as opposed to codified) knowledge is important to firm

• This approach leaves out externalities, important for coops (e.g. in networks) and uses efficiency as critierion (not necessarily appropriate).

Inalienability of Labor

• A big asymmetry between K and labor (Dow 2004)– K can be obtained as stock or as flow (leasing). Labor

only as flow (slavery not admitted as a possibility)– K has no natural limits, unlike L– K owner need not be close to K; can send K to many

places at once. Labor indivisible.– (finance) K is homogenous. Labor is heterogenous.– This is a robust anaylsis, and these differences may

explain difference in efficiency b/w Kist and coop firms.

Efficiency Insufficient Criterion

1. Efficiency is not a neutral concept (normative, not positive)

– Postulates Bentham’s utilitarianism as ethical basis

2. Nonprofit and coop firms draw strength from ideological, social and ethical (intrinsic) motivations, so rational choice models do not model agents well.

– Ignoring this highlights coops’ costs but not their potential benefits

Coops Generate (+) Externalities

3. Efficiency is insufficient criterion b/c the way coops operate increases the democratic functioning of society (a positive externality)

• This points to a grave pragmatic contradiction in capitalism: the market values liberty and equality, but Kist firms do not

– In contrast to service contracts and social contracts, labor contracts demand obedience

– Kist firms can be defined as hierarchical organizations w/ goal of profit production; a nexus of labor contracts • Screpanti, 2004

Autonomy as a value

• Coops are the preferred form for those who put autonomy and personal liberty near the top of their hierarchy of values

• This could explain the relative scarcity of coops: liberty is not yet a priority for most

• Walter Benjamin: “the pain that accompanies submission is preferable to the pain that always accompanies liberty.”

What Distinguishes Coops?

• Economic action is always a communal action (b/c of division of labor). Three requirements (Viola 2004):

1. Everyone involved is conscious of what they are doing

2. Everyone keeps title to and responsibility for actions• As opposed to in a collective action where individual

contributions are blended into the whole

3. Unification of efforts toward a common objective

• In a firm, commonality can be around means or ends

Coordination vs. Cooperation

• If commonality is around means, the firm is Kist and its form of intersubjectivity is the contract– Everyone pursues diverse ends, often conflictual

• If instead is ends, firm is cooperative– Analogous to communal good: the advantage that each

derives is inseparable from good derived by others; benefit together

– Private good: each benefits at cost of others

– Public good: each benefits regardless of others

Coordination vs. Cooperation (2)

• In Kist firm where commonality is around means and actors joined by contract, problem to resolve is coordination. – Needs management science (e.g. Taylor, Simon)

• Where commonality is ends, problem to resolve is cooperation. – Note: not to be confused by the circumstantial

cooperation inspired by strategic interdependence in a game; here interrelations are valued per se

Coordination vs. Cooperation (3)

• A firm is not a market. Behavior of employees not (only) regulated by “prices” (wages). Relationships, norms, expectations, etc. matter.

• Employees are not machines. Need psychological coherence between formal rules and informal norms. Otherwise they may shirk.

• In approaching this situation, cooperation is superior to coordination--more easily transcends prices and provides coherence.

What Does it Take to Cooperate?Bratman (1999)

1. Mutual responsiveness - each participant takes on and considers relevant and worthy of respect the aims of the others, and knows that this is reciprocated; wants to work together.

2. Commitment to the joint activity - each participant is engaged in the joint activity and knows that the others aim to do the same; it is impossible to quantify the specific contribution of each to the joint product.

What Does it Take to Cooperate? 3. Commitment to mutual support - each participant is

engaged in helping others in their efforts such that the final result is pursued as best as possible; done for own wellbeing (reciprocal).

– Reciprocity: I do or give you something so that you can in your turn do or give something to others, or perhaps to me

– (Kist) Exchange:I do or give you something so that you would give me in exchange something of equivalent value

– Philanthropy/altruism: I give to you on condition that you not give me anything; on the contrary, I don’t even want to know your identity.

How to Achieve Conditions?

1. Ease means of communication among members– Hirschman distinguished exit and voice

• Former applies in economic sphere, latter politics

– Cooperation extends voice to economic relations: deliberation• Means each must admit possibility of changing own

preferences in light of others’ reasons– Incompatible with hierarchical use of power

• This is why cooperative action presupposes communication

How to Achieve Conditions? (2)

2. Practice equity, avoiding subjugation and exploitation (Viola 2004)

– Cooperation requires more than coordination (Rawls)• Based on rules & procedures accepted and made by all participants

– Command needed in any enterprise, but power comes from hierarchy in Kist enterprise and from authority in coop

– “Mission” made of bundle of attributes of a project such that participant values its success beyond its monetary return (Besley & Ghatak 2004)

• Coops as mission-oriented orgs reduces need for incentive schemes but heightens importance of non-$ aspects

Intrinsic & Extrinsic motivations

• Assume a generic utility function for ith subject:

– where wi is monetary remuneration, mi is intrinsic motivation, and 0 < a < 1.

• Coop managers must succeed in mixing w and m (material and relational incentives) (given diverse preferences - different people have different a’s) – Or fall victim to paralyzing conflicts– Or “dry up” intrinsic motivation by excessive use of extrinsic

incentives (Frey 1997, Gibbons 1998)• These backfire by signaling lack of trust (Falk & Kosfeld 2004,

Pelligra 2003)

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Noémi’s Impressions & Musings• This paper emphasizes why coop mbrs need to

have utility functions that value autonomy, reciprocity, belonging, equity, etc., and why communication and stuff to reinforce all those (i.e. what OA does) is important

• I like the definition of a market economy as distinct from a capitalist economy– 2nd pillar, “enlarging K stock”, makes me hark back to

Daly’s Beyond Growth emphasis on Hicks definition of income as what we can consume today and still be able to consume in the future

Noémi’s Impressions & Musings (2)

• I don’t really know if either profit-maximization or obedience-type labor contracts is THE distinguishing feature of a capitalist firm (both are proposed as such in the paper at different points)– But both features are certainly important and annoying

• “communal good” still sounds a little mystical to me; I’m not sure if I really get it. – Current take: think of a relationship: I’m not happy

unless you’re happy, and you’re not happy unless I’m happy (for myself)

Noémi’s Impressions & Musings (3)

• I like the freedom/pain quote :)• Elsewhere, Zamagni (and others) have helped

coops overcome K constraints in cool and innovative ways, mainly involving use of non-voting stock or splitting firms into separate entities that contract with each other.– For example, it is possible to be a non-voting

shareholder of Equal Exchange. You get a higher and more guaranteed return, which is why it is called “preferred stock”, but don’t vote.