Cooperative Enterprise and Market Economy: Chapter 11

Introduction & Preface | Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Chapter 9 | Chapter 10

Translator’s note:

As we end the second section, Luis Razeto closes out his theoretical analysis of equilibrium in cooperative enterprises with a consideration of equilibrium in the “new model” worker cooperatives he proposes. Not only do workers’ enterprises of this type overcome, in theory, the limitations to growth and even tendencies to decline argued to be inherent to community enterprises and traditional cooperatives, they turn out to be superior to capitalist firms in terms of efficiency and innovation, operating in ways that more closely approach “perfect competition.” This is not an examination of the historical performance of cooperatives and their demonstrated comparative strengths in terms of innovation and efficiency (the subject of many books and articles). Razeto’s focus here is more narrow: to identify the economic concepts, relations, and dynamics specific to cooperative enterprise. This analysis leads him to propose alternative cooperative structures and practices. The chapter ends with a hint of things to come: in Section 3 the analysis of the cooperative firm gives way to that of the cooperative group, network, and sector, and a renewed cooperativism, which leads, in turn, to Section 4: the democratization of the market and the state.

Note: In the interests of making an already challenging text more accessible to those unfamiliar with the mathematical exposition of equilibrium theory, I have chosen to place the formulas and graphs and their explanatory text in an appendix.

- Matt Noyes

Chapter 11

Possibilities of Dynamic Equilibrium in a New Cooperative Model.

1. Beyond “Rochdale”1

The analysis of equilibrium in community enterprises, subsistence collectives, and traditional cooperatives in chapters 9 and 10 exactly confirms the critical observations we made in the first section of this book on the essence and structure of cooperative enterprises. It also confirms our critique of the cooperative experience in its historical unfolding and the cooperative “doctrine” arising from that experience and a particular interpretation of the Rochdale principles.2

Now it’s time for a critical analysis of our proposed alternative understanding of cooperativism and the new model of a workers enterprise or cooperative. We make use again of the theory of equilibrium because any enterprise, of whatever type, which hopes to operate with efficiency in the market must be capable of self-sustained growth, which we can call “dynamic equilibrium.”

As we saw, Jaroslav Vanek argued that cooperatives suffer from inherent tendencies toward under-investment and self-extinction due to their reliance on self-financing and collective property. The conclusion he drew from this critique was that financing in cooperatives should be fully external, with a strict separation between capital, on one side, and labor and management, on the other.

Vanek took as his point of reference the self-managed enterprises of post-war Yugoslavia; he was well aware of the difficulties such enterprises faced in their operations and establishment:

“But of course, to have full external financing (as here defined) and thereby obtain the benefits noted, one can never rely on the conventional private banking system. Conventional banks, whether in Victorian England or the modern United States, would hardly lend much to a producer cooperative, and the cooperatives themselves might shun such funding. It must take an act of political will, or a philanthropic (not profit and power-oriented) group of men to provide the necessary characteristics of the capital market which would support the smooth and efficient operation of a participatory economy or a participatory sector. Such an economy or sector would then be optimal both humanly and in terms of economic efficiency, superior to all existing forms of productive organization.”3

But while financial obstacles facing cooperatives might be overcome through state financing or contributions from cooperative or other organizations interested in supporting the development of self-managed enterprises, Vanek’s proposal turns out to be inadequate for reasons inherent to the operational logic generated by such enterprises. It is important to recognize that if, in fact, their adoption of the criteria of externality of financing and ownership by third parties might address the tendencies to limit or reduce employment and investment he identifies, enterprises of this type would demonstrate other tendencies toward inefficiency.

If capital is obtained through external sources, and not through the investment of savings or reinvestment of surplus by the worker-members themselves, workers will have made no effort at internal capitalization or accumulation. This can lead to inefficient deployment and use of the finance factor. If the cost of capital to the enterprise is null or lower than the usual market rate, the enterprise would logically tend to adopt the most capital intensive technologies possible since a given amount of labor would lead to increased production and earnings per worker. Likewise, we would see a tendency to deplete the capital of the enterprise, there being no incentive to maintain the value of the assets, which can be easily replaced.

In such a situation, it would be reasonable for capital-providing institutions, whether public or private, to take measures to ensure specific levels of profitability and productivity of the funds contributed. For example, they might seek to limit the quantities of funds loaned to each enterprise, or to maintain or increase employment by restricting layoffs or demanding increased hiring of workers. They would likely scrutinize every investment project. Their intervention would lead to a loss of worker control over the enterprise and its management, and the emergence of two contradictory operational logics, making it harder for enterprises to make coherent decisions.

These problems arise from the treatment of factors to which we referred in our examination of the mode of operation of traditional cooperative enterprises and can not be resolved by simply treating “capital” and financing as purely external.

Our approach differs substantially from that offered by Vanek. Instead of assuming that finance is completely external, we assume a model of workers enterprise in which the “capital” worker-members invest is recoverable, and in which they participate proportionally to their contributions of current and accumulated labor. Such an enterprise, to the degree that it disposes of and is prepared to risk its own “capital,” can, moreover, obtain and contract debt on normal market terms; obviously, such financing would remain external to the enterprise up to the point where the payments have covered the principal and interest, at which point the “capital” would become internal.

Two characteristics define the functioning of such a cooperative enterprise: first, the inseparable union of “capital” and labor (the difference between them in this type of enterprise being solely methodological, since, as we have seen, the essence of “capital” is Labor and labor power could not be external or hired on the market); second, the existence of an internal accumulation process based on distribution to members of part of the surplus generated, in the form of “values” (shares) or property rights.4

For an enterprise with this structure, the economic objective (the foundational criterion for determining equilibrium) would not be the maximization of profits, as in capitalist enterprises, nor the maximization of net earnings per worker, as in traditional cooperatives, but rather the maximum valorization of Labor, including member investments in both “accumulated labor” (material and financial factors which imply monetary costs) and “current labor” (internal human factors). […]

The unification of objectives that remain divided in traditional cooperatives, such that the highest earnings for workers (over time) go hand in hand with the highest profitability and growth, gives these enterprises a unique dynamic, which can be expressed in the definition of economic equilibrium.

In theoretical terms, these enterprises seek the maximum valorization of Labor, which in concrete practice amounts to a search for the highest possible enterprise profits.5 Unlike in traditional cooperatives, here the objectives of the individual worker-members and those of the enterprise as a whole are the same. And, unlike capitalist enterprises, the interests of the owners of capital and those of the workers are also the same.

This being the case, in our new model of worker enterprises, equilibrium is defined by the simultaneous optimization of the two relevant internal productive factors: “capital” and labor. The objective function of the enterprise is the maximal valorization of two distinct productive factors that, as we have seen, have the same constitutive essence. Simultaneous optimization of “capital” and labor is reached when the two factors are utilized in some determinate proportion.

Defining equilibrium in these enterprises as a particular proportion of “capital” and labor, means that the forces of self-extinction and under investment that we saw at work in traditional cooperatives do not come into play. On the contrary, we see active forces of expansion.

The model we are using in this case is not different in its mathematical formulation from the one we used for traditional cooperatives, so we merely have to state the assumptions and define the equations. The foundation and the explanation of the various assumptions made are the same as in the prior chapter and we can continue to use them to simplify the analysis without disturbing the essential functional logic of the enterprises under study.

One important assumption we have modified has to do with the recovery by workers of the “capital” they have contributed: each member of the cooperative maintains ownership of any factor which they are contributing to the operation of the enterprise.

The other modification we have made is derived from the fact that these enterprises can operate with debt obtained on the financial market; this does not impact the logic of the model since its focus is on the proportion of the internal factors combined, while the impact of external debt is felt in the enterprise’s cost structure. In the mathematical model, we will operate as if there were no recourse to external financing. (The theoretical result is the same as if we replaced the “internal” capital with the variable “relevant cost of capital.”)

The assumptions we now make are:

1. Production depends on the amount of two factors used: “capital” (internal factors which have involved monetary costs) and labor (internal human factors).

2. Constant returns to scale.

3. Homogeneous supply of internal human factors and factors that imply monetary costs.

4. A unitary and constant product price for elements which involve monetary costs.

5. No use of external financing.

6. Constant rate of time preference.

7. No appreciation or depreciation of factors.

8. Cooperative members retain individual ownership of the “capital” contributions they make.

9. The cooperative’s operations are defined only in terms of the interests of the members. […]

The big difference here with respect to traditional cooperatives has to do with the cost of capital contributed. In effect, given the assumption of recoverability, the cost of each unit of “capital” is given by the sacrifice made by the person contributing it, who forgoes the use of that money for other purposes (for household consumption or investment in other areas) for a given period of time […]

Recalling what we discussed in the previous chapter, we can affirm that in a traditional cooperative the level of “capital” per worker, in a state of equilibrium, will always be lower than in the new type of workers’ enterprise (assuming identical production functions and rates of time preference), due to the irrecoverability of member contributions, leaving unmade contributions whose earnings would exceed the corresponding opportunity cost. In the new type of workers’ enterprise, on the contrary, there is a total equivalence between the economic gains on capital and the gains made by each worker.

In conclusion, in our workers’ enterprise, equilibrium is reached with a greater amount of “capital,” higher production, and superior well-being of the members than in a traditional cooperative […]

Moreover, given their different “capital”-labor ratios at equilibrium, we can deduce that in the new type of workers’ enterprise the productivity of “capital” is lower and the productivity of labor higher than in the traditional cooperative model, given the law of diminishing returns by factor. […]

2. Potential for growth

Having identified the equilibrium state of the new type of workers’ enterprises we now turn to certain aspects tied to their growth and stability.

In the first place, we can affirm that under the model assumed in this chapter the so-called “forces of self-extinction” do not arise. In effect, as discussed in the previous chapter, these forces derive from the tendency to eliminate members so as to raise the “capital”/labor ratio and the total income of the members with no cost to them, thus increasing their average net earnings. In the new model, this is not seen because if a member leaves the cooperative, they take with them their share of the contributed capital, resulting – given the assumption of homogeneous condition of the members – in an unchanged “capital”/labor ratio. As this first tendency toward self-extinction does not arise, nor is there any reason why we should see the second (see chapter 10).

A second point refers to the potential of the new type of workers’ enterprise with respect to its capacity for technological growth, in comparison to traditional cooperative and capitalist enterprises.

We know that in a workers’ enterprise members do not have an incentive to allocate all of the revenue generated to worker remuneration, so we can reasonably expect that some portion of this revenue will be directed to productive investment. (The proportion of surplus allocated to remuneration and re-investment, respectively, is decided by the workers collective; it can nonetheless be defined as a criterion of perfect competition – call it “optimal utilization” – consisting of remunerating current labor and accumulated labor (“capital”) in proportion to their respective productivity […]).

Whatever the portion of surplus allocated to re-investment, the fact that it is productively invested implies a change in the combination of factors, which it is important to elucidate.

In an enterprise whose production function is characterized by constant returns to scale, investing in a way that preserves the (equilibrium) ratio of “capital” to labor would signify acquiring new machinery and equipment of the same quality as the existing ones. But in that case production per worker would remain stable as would the current earnings of the workers considered as a whole; and yet, older members (those who made the investment) would benefit in terms of net growth of their “accumulated capital,” represented by a greater quantity of ownership shares, which would amount to greater future income due solely to their higher relative participation in ownership of the enterprise’s “capital.”

A more economically rational accumulation process in this type of enterprise would be to invest in innovation and technological improvement, as defined in chapter 10. That would put the enterprise on a new level of equilibrium, characterized by a higher “capital”/labor ratio, simultaneously increasing the productivity of both factors.

Proceeding in this way, the enterprise would operate at an increasing level of equilibrium corresponding to growing scale of the enterprise; we would be dealing with a dynamic equilibrium.

The situation we have described does not imply that the number of workers will remain constant, since that depends on the technical characteristics of the technological innovations introduced, which might require an increase in the number of workers. But in no case will this increase in labor exceed the increase in “capital.” The essential development here is the increase in the “capital”/labor ratio, that is, a more rapid growth in “capital” than in labor.

Growth of the enterprise will be primarily in technology and secondarily in work force, a typical process of development of modern highly productive enterprises, which employ a relatively small number of workers. (This apparently contradicts the assumption of constant returns to scale, insofar as throughout its expansion the enterprise produces growing earnings. The contradiction is, nonetheless, only formal, since what is seen over time are different technological combinations of factors, each with constant returns, if with differing levels of productivity).

The comparison between this result and that of traditional cooperatives is obvious if we recall the discussion in the previous chapter: members of the latter have little incentive to make contributions that raise the technological level, and in general, tend to allocate the majority of surplus to their own personal consumption.

In comparing workers’ enterprises with capitalist enterprises we should assume that in both enterprises the cost of capital is the same and that in new type workers’ enterprises labor is remunerated exactly for its productivity.

[…]

Based on our assumption, the workers’ enterprise will remunerate labor in such a way that the needs of the workers are met first, with the remaining earnings being available for productive investment. […] Let’s see what happens in a capitalist enterprise.

A first possibility is that in a capitalist enterprise the factors of production will be remunerated according to their respective productivity (this would correspond to conditions of perfect competition in the factor market). […] Capital would not obtain profits as such but the remuneration corresponding to its exact market value.

In this case, the amount available for productive investment would be inferior to that available to worker-members for investment in their enterprises, since part of the revenue generated by capital would have to be allocated to the owners of capital, for consumption. As a result, if the enterprise proceeded along the path of growth and technological innovation in order to raise future returns on capital, its process of accumulation would tend to be slower than that of homologous workers’ enterprises which could allocate to productive investment the entirety of the revenue generated by their accumulated “capital.”

The second possibility – certainly more realistic – is that in a capitalist enterprise capital receives more than the share of profits generated by its productivity. What makes these extraordinary profits on capital possible? Imperfect competition in the factor markets; more concretely, labor being remunerated at a level below its productivity, which is seen when the economy is not in a state of full employment (a state of perfect competition in the labor market). The extraordinary profits on capital would be, then, that part of the value generated by labor only to be appropriated by the owners of capital.

So, if capital obtains extraordinary profits we can suppose that they would be sufficient to satisfy the consumption needs of the capitalists, such that the total remuneration allocated to capital corresponding to its productivity would be available for productive investment. This capitalist enterprise could, then, capitalize its earnings, just like our workers’ enterprise. Nonetheless, here too we see a substantial difference between the two models, in relation to the type of investment which is economically most profitable for capital.

Since the owner or owners of capital obtain extraordinary profits by lowering the relative cost of labor power (in other words, by appropriating part of the remuneration due to workers for their productivity), the investment realized will tend to a growth of the enterprise keeping the established proportions of capital and labor constant. The enterprise will tend to privilege the growth in the number of workers employed over the introduction of innovation and technological development. More precisely, the enterprise will tend to grow in a manner that does not diminish the global difference between the productivity of labor and its remuneration, which presumes investment that takes advantage of the lower comparative cost of the factor labor power.

Undoubtedly, technological innovation also occurs in capitalist enterprises, but its principal motivation lies in a different class of considerations: the fact that the introduction of new technology also enables the enterprise to obtain extraordinary profits in the short term (until competing enterprises adopt the new technology); the exigencies of competition for market share; and the fact that operating with a technology with a higher capital/labor ratio tends to raise the extraordinary profits the enterprise can make based on the difference between the productivity of labor and its level of remuneration.

The first two motivations for innovation are present also in workers’ enterprises, as is the third, if in a different form (seeking an increase in net earnings per worker), but with the same motivating effect as in capitalist enterprises, such that we can conclude that the rhythm of technological innovation in capitalist enterprises will be slower than in the new type of workers’ enterprises when their operations are aligned with their economic rationality.

3. Conclusions

1. The workers’ enterprises discussed in this chapter can be created and operate efficiently in a market economy. What’s more, their specific economic logic is one of competition and markets: not only do they adapt to the exigencies of competition and markets, they tend to operate, in a certain way, as if the prevailing market situation were one of perfect competition. In other words, within each enterprise there tends to be an optimal allocation of productive factors without reference to the external cost of factors and price of their products.

2. In theory, these workers’ enterprises do not face the same challenges as traditional cooperatives with respect to their process of capitalization, investment, and growth, nor do they run into the structural limits that affect subsistence collectives.

3. These workers’ enterprises are also more efficient in the market than capitalist enterprises which have a similar utilization of inputs and a similar production function. They constitute, as such, an alternative model of enterprise, more socially attractive not only due to their superior values and the harmony of interests they generate as enterprises founded on labor and cooperation, but also for their efficiency in terms of the quantity of goods or services produced for a given amount of “capital” and labor.

4. The situation of the worker-members in these new type cooperatives is indubitably superior to that of workers in other types of enterprises. Workers benefit from a series of conditions: they work in an enterprise that they own, they participate in its management, they organize their own labor, they control not just their working conditions but also the economic result of their activity. All of these are characteristics of non-alienated labor that permits workers to fully develop their creative capacity in an environment of solidarity.

From the standpoint of economic revenue, not only would worker incomes be higher than in similar capitalist enterprises, given that the totality of gains are distributed among the workers themselves, but also more rationally structured than in traditional cooperatives, insofar as part of the revenue is allocated to necessary current consumption and another part is accumulated as productive investment from which the workers benefit in forms and conditions that are economically rational. This makes workers’ enterprises attractive to workers, which enables them to recruit the labor force that best corresponds to their needs and integrate them into the labor collective. Worker-members with the organizing capacity, access to savings or credit, and the necessary managerial aptitudes, will also tend to form new enterprises of this type.

5. The outstanding characteristic of these workers’ enterprises would be the tendency to privilege qualitative growth over quantitative growth: they are driven not to establish gigantic enterprises but rather comparatively small enterprises, with fewer workers, but high productivity due to a more rapid process of innovation and technological improvement. This supports the development of communitarian human relations and the real participation of members of the labor collective in the management and control of the productive and economic processes in general. At the same time, it can lead to the formation of a network of cooperative worker enterprises, constituting a dynamic sector of the economy capable of inspiring the confidence of providers of credit and financing, with a resulting acceleration in their process of expansion.6

• 1

  Heading added by translator. - MN

• 2

  The Rochdale Principles, first formulated in 1844 by members of the Rochdale Pioneers Equitable Society, are the source of the widely accepted Cooperative Principles of the International Cooperative Assocation. See https://rochdalepioneersmuseum.coop/about-us/the-rochdale-principles - MN

• 3

  The Labor-Managed Economy: Essays by Jaroslav Vanek. Vanek, J. 1977. Cornell University Press. P197 - MN

• 4

  The author often capitalizes “Labor” when using it as the proper name of the economic factor. He places “capital” in quotation marks when distinguishing capital in cooperative enterprises from capital in capitalist firms (where capital includes relations of exploitation). - MN

• 5

  It may be helpful to recall that profit, in a cooperative enterprise, is derived not from labor exploitation but is collectively generated, owned, and controlled. - MN

• 6

  This process of “inter-cooperation” can also lead to a virtuous circle of innovation and qualitative growth. See Herve Charmettant, The strengths of worker cooperatives in innovation processes. A way to find the “truth” of the firm. Routledge, 2025. - MN