Cooperative Enterprise and Market Economy: Chapter 14

Introduction & Preface | Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Chapter 9 | Chapter 10 | Chapter 11 | Chapter 12 | Chapter 13 |

Translator’s note:

In this chapter we move to the question of cooperative integration in economic operations, with the author proposing the creation of four intercooperative bodies: an exchange for cooperative shares, a labor exchange, a financial entity, and a research and development arm.

Readers familiar with the Mondragón cooperative experience will immediately recognize these patterns. The famed Basque cooperative group is known for its regional and industrial cooperative councils; its cooperative bank (Laboral Kutxa), which, in its early years as Caja Laboral Popular played a crucial role in funding the growth and diversification of cooperatives; its health, job security, and training system (Lagun Aro); its research and development centers (Ikerlan, Lanki); its controversial issuance of subordinated debt (aportaciones financieras subordinadas) in Fagor Electrodomésticos and Eroski; and the Mondragón Corporation, itself, which coordinates and supports member businesses.1 More than its size or presence in leading industries, it is this remarkable development of cooperative integration that truly makes Mondragón stand out. At the same time, one can also see at work there the influence of capitalist practices and forms of organization, and the erosion of cooperative norms, against which Razeto warns us.

Of course, Mondragón is not the only example of cooperative economic integration. To mention just two others: since the 1990s, Brazilian cooperativists, including Euclides André Mance, have worked to create the intercooperative commercial, financial, and technological infrastructure they call Solidarity Economy Circuits, embodied in a software platform Solidarius.net that is used across Latin America and in Europe.

And, based in Kanagawa, Japan the Fukushi Club cooperative network, started by a local buying club, now integrates agricultural production, processing, manufacture, transportation, marketing and more with health care and training, while supporting the creation and coordination of worker collectives around the country. It is also an important force in social and political movements.

These and other living, thriving examples show that the forms of intercooperation that Razeto describes here have an importance that is not only theoretical but eminently practical.

Intermediation is an important concept here, the function of linking organizations, agents, and processes, and facilitating flows among them. The overall objective, though, is not just economic and operational efficiency at the level of the individual enterprise, but the consolidation of a cooperative sector as part of the larger project of social, economic, cultural, and political transformation that is the subject of the next Section.

- Matt Noyes

Chapter 14

Economic Integration of a Cooperative Sector

1. - The problem of cooperative integration for economic and operational purposes requires a particular treatment in which the criteria of efficiency and functionality are duly considered. From a strictly economic point of view, the problem derives from and is a necessary complement to the problem of economic equilibrium in a cooperative enterprise. Economies of scale, mobility of factors, and the general optimal functioning of the cooperative in view of maximization of results must all be considered.

Posing the issue in terms of strict economic rationality might seem too narrow to those who are used to seeing cooperative integration as a predominantly social process, within which the economic, political, and cultural aspects of cooperativism find their principal moment of articulation. We have emphasized the separation between integration of representation functions and integration of economic operations, so it makes sense to consider the latter. Economic and operational intercooperation can not be understood only in terms of the benefits and advantages that an integrated cooperative movement offers to each participating enterprise. We must examine the ways in which the economic goals of those enterprises can be more efficiently pursued through their association and joint and coordinated activity. Given that the objectives of that integration are economic and operational, the criteria that define it can not be other than economic and technical.

The construction of an economically integrated cooperative sector is a complex problem that we can analyze on two principal levels.

The first level involves the integration of individual cooperative enterprises for purposes of jointly carrying out specific economic operations in which they might obtain economies of scale. In that case, the participating cooperatives choose to combine some of their capacities and resources with the objective of operating on a larger scale, thus obtaining better market conditions and a higher rate of return on their resources. The individual cooperatives retain their economic and managerial independence, but, by coordinating and combining some of their functions and activities they are able to reduce costs, eliminate external intermediaries, realize operations that are out of the reach of the individual enterprises, avoid useless duplication and parallelism of efforts, etc.

The principal ways in which this type of integration can be realized are the following:

1. Joint purchases of inputs and concentration of demand, augmenting the buying power and bargaining strength of the cooperatives vis-à-vis producers and suppliers;
2. Joint marketing of products and concentration of supply, augmenting the market influence of cooperatives and enabling them to raise prices and increase sales;
3. Joint purchase of professional and technical services that would represent an excessive cost for individual cooperatives, but would be viable for a group of cooperatives sharing the services and their costs;
4. Joint use of means of transportation and storage, maximizing utilization of fixed capacity;
5. Joint operations in investment, foreign trade, financing and credit, technological innovation, and other activities which must be done at a volume that is beyond the reach of individual cooperatives.

In all of these cases it is a question of coordination or integration among cooperatives in order to accomplish one or more specific functions, activities, or economic operations in which cooperatives are related to the external market. Operating jointly, each enterprise maximizes the efficiency of those functions while conserving its autonomy as an enterprise. The same thing would not happen if two or more enterprises decided to integrate their operations completely. In that case it would be a matter of merger, absorption of one enterprise by the other or the creation of a new one.

Now, merger of cooperatives is economically reasonable if it allows them to reach an optimal size that enables them to benefit from economies of scale. As we have seen when examining the problem of equilibrium in enterprises, that process encounters a limit when, upon reaching a certain size, enterprises begin to see their marginal coasts rise, generating a decline in their economies of scale. Higher administrative costs, loss of flexibility in the market, increasing risk aversion, are factors that place a technical limit on the growth in size of enterprises (which operate in a market of limited size), such that the merger of cooperatives is not always appropriate.

In the same way, there is a “technical limit” to joint performance of specific partial functions, which can be objectively measured by considering the curves of average and marginal costs of the services carried out in common.

Thus, economic integration of particular enterprises is always limited, as cooperatives have to respond to criteria of profitability and efficiency when determining the level and scope of operations, and not to a generic affirmation of the benefits of intercooperation.

The form in which to implement integration at this level also poses an interesting problem. We know that economic operations comprise a series of complementary and coordinated functions that imply a division of labor within a given management unit. As a result, each enterprise has its own functional organization, which coordinates and unites the functions of financing, marketing, procurement, planning, finishing, development and technical control, administration, transport, storage, job security, public relations, etc.2 Operational integration of distinct enterprises for the joint realization of one or several functions means, then, that these enterprises are functionally linked such that the scope of the individual unit of business management is reduced in proportion to the functions that are shared among enterprises. Done jointly, the functions cease to belong to the distinct units of business management, constituting de facto a new unit of management of specific economic activities, which is to say, economically speaking, an enterprise, that is, an economic unit: a supplier, a marketing enterprise, a technical development enterprise, an investment firm, a transport business, a storage business, etc., according to the case. Said differently, the specific functions and activities that various enterprises realize jointly are de facto distinct enterprises owned by the participating cooperatives.

Whether or not this fact is formally recognized, through creation of a special juridical entity (which depends above all on the scale of the shared activities), from an economic point of view this fact must be assumed, as it signifies that, to some degree, the distinct integrated enterprises have shared business interests: in some of their functions they share a portion of their factors and their labor, administered in common, resulting in gains that should be distributed proportionally.

Theoretical recognition of the de facto enterprise that carries out these integrated activities and functions allows us to resolve questions of ownership or “capital” and determine the destination of the surplus obtained, inasmuch as we can apply the same criteria that we have proposed for cooperative enterprises in general. Each cooperative will participate in the ownership and surplus in proportion to the contributions that it makes to the common enterprise: the capital that each contributes can be expressed in cooperative shares (units of recoverable value), and the gains can be distributed in each period, “pro rata” to the contributions made, be it in a direct form, as an allocation of surplus, or by addition to the capital of the enterprise.

We should note that this first level of cooperative integration offers a special flexibility in market operations that private capitalist firms can not have. The latter can integrate some of their functions only with difficulty, given that they are in competition and there is no principal of solidarity and economic cooperation at work. Each enterprise feels obliged to take on fully and on its own the costs of all the necessary functions. True, individual capitalists can place one part of their capital in new separate entities that carry out specific functions in a way that benefits the individual enterprise: creating subsidiaries for procurement, marketing, shipping, etc. However, this would not constitute true integration among enterprises but a process of diversification of operations and concentration of capital, benefiting not the enterprises as such but the shareholders who participate in their ownership. Experience shows, moreover, that this is viable only in the case of large enterprises and big capital.

2.- A second level of economic integration has to do with the possibility of a group of enterprises creating a web of real economic relations that functions in some way as an articulated whole: a cooperative sector.

Today, most cooperative enterprises operate in the market in a relatively independent way, using the instances of economic intermediation presented by the market – banks, insurance companies, etc. – or creating their own intermediaries only partially and in specific cases. This poses two serious problems for cooperatives: on the one hand, it leads to certain rigidities in the treatment of “capital”, labor, and other factors, and on the other hand, cooperativism tends to remain subordinated to capitalist institutions that do not favor or may even discriminate against it. Alternatively, cooperatives that turn to the State and public powers to resolve financing problems or enable adequate access to resources, end up in a position of significant dependency. Is it possible to resolve these problems autonomously, through the constitution of cooperative mechanisms of intermediation and an intercooperative market of productive factors?

Starting from the model of cooperatives “in the market” that we have proposed, and supposing the existence of a significant number of such enterprises, sufficiently consolidated, it seems possible to develop a factor market built by and for cooperative enterprises. In concrete terms this might look like:

1. A cooperative share exchange;
2. A cooperative labor exchange;
3. A market for cooperative finance;
4. A service for the cultivation, strategic planning, and technological development of the cooperative sector.

In the chapter on cooperative ownership we proposed the issuance of labor shares representing proportional shares of accumulated value belonging to the members of the cooperative. These labor shares represent the member’s initial “capital” contribution or dues plus that share of the surplus that is not distributed in monetary form but instead reinvested in the cooperative or held in reserve. Labor shares, we said, have a unit value equal to the average value of a day of labor in the enterprise, measured as the quotient of the sum of surplus generated in the last period and the quantity of labor performed in that period. These shares have, then, a variable value – year by year – that can be greater or lesser depending on the profitability of the enterprise and the productivity of labor; but they do not generate rents nor do they give rise to dividends as is the case with capitalist shares.

We also saw how, in order to secure the external capital necessary for developing the enterprise in favorable economic contexts and conjunctures, a cooperative can issue debt securities or bonds with a fixed return that they promise to pay progressively or in a predetermined period of time, discounting that value from the surplus and the reserve fund, just as enterprises normally do when issuing debt.

We also noted that the amount of money that each member has the right to recover at the time they withdraw from the enterprise is determined by their right to the shares of “capital” they have accumulated over time.

To avoid the situation in which withdrawal of their shares of equity poses serious financial and cash flow problems for the enterprise we noted steps that could be taken to regulate the payment of the required amounts to the member, one of them being the immediate transformation of the accumulated “capital” into external financing, in the form of bonds or debt securities in a fixed amount issued by the cooperative. We observed that the withdrawal by the worker of their accumulated “capital” is necessary in order to forestall the tendential severance of “capital” from labor, which implies that the cancellation of the value of the shares or their transformation into external financing is indispensable in order to maintain transparency in cooperative relations.

There can not be, then, a member who is not a worker, or a worker who is not a member. Now, it may happen that a worker-member needs money at some point, to handle an illness or other urgent situation. They have their own accumulated “capital” in the enterprise but can not draw on it without withdrawing from the enterprise. This fact certainly constitutes a rigidity that can weigh negatively in the decisions of the enterprise (for example, by inducing workers to reduce the amount of surplus their contribute to the capitalization of the enterprise) and may also dissuade workers from joining the cooperative, since they may be able to find in the market alternative forms of capitalization that are more flexible and do not imply freezing their savings in the medium or long term. Can this problem be solved without a severance of “capital” from labor?

The purchase and sale of cooperative shares in the market would inevitably split “capital” from labor, resulting in the eventual conversion of the cooperative into a capitalist enterprise.

What if labor shares could only be sold to worker-members in the same enterprise? In that case, the result would likely be the concentration of equity in the hands of a smaller and smaller group of members, who would assume growing power in the governance of the enterprise up to their conversion into true capitalist bosses.

One solution is possible, though: under certain circumstances the cooperative, the collective of workers, could be empowered to authorize the transformation of part of the labor shares of the worker-member in need into bonds or other securities issued by the cooperative that can be sold on the market. In that case, the member would see a reduction in their share of accumulated “capital” and the enterprise would transform part of its own “capital” into external financing represented by the corresponding obligations to pay. But the enterprise would not be affected in its productive operations nor in its short term finances, allowing it to preserve the unity of “capital” and labor.3

Now, if we consider a cooperative enterprise in isolation, the issuance of debt securities and bonds is feasible only for an enterprise which has a high level of prestige and economic solvency, things which are only built over a long time and on a large scale. In principle, such securities could be sold in the capital market and on the stock exchange. In reality, the majority of cooperative enterprises are not in a position to do this. Here is where we see a possible role for an intercooperative body that could fulfill the functions of support and guaranty for the bonds and debt securities issued by enterprises in the sector and functioning as an intermediary to handle their sale in the market. It would be a kind of cooperative stock exchange, providing at the same time control and oversight over the labor shares issued by the enterprises, which would reinforce the confidence of members in the system.

Another intermediary body in the cooperative sector that it is possible and appropriate to create has to do with the factor labor power. In the chapter where we analyzed the cooperative treatment of labor and the problems posed by the recruitment and withdrawal of members, we established the inappropriateness of hiring labor externally. All the workers in a worker cooperative should be members of the cooperative with full rights, as that is the only way to ensure that the social relations created be transparent, avoiding serious dysfunctionalities that will translate into economic inefficiency. But we also noted that proceeding in this way, while it resolves important structural problems, can generate certain rigidities that make it harder for a cooperative to adaptation to, and take advantage of, conjunctural market situations that require prompt action.

To seize the opportunities offered by such conjunctures, we said, the enterprise might need to temporarily enlarge its labor force, without being able to guarantee continuing employment. But bringing on these temporary workers as new members of the cooperative could imply future disequilibrium. The problem can be partially resolved at the level of the individual enterprise, we noted, but a large group of enterprises operating in different productive sectors and types of economic activity might be able to handle the situation more efficiently by operating jointly. In effect, situations like the one described arise at various times, some enterprises needing to temporarily hire a larger labor force just when others feel the need to reduce their own.

A labor exchange in which all the cooperative enterprises participate could constitute an effective instance of intermediation for this productive factor. The exchange should be able to count on a labor force permanently prepared to work for fixed terms in the cooperative enterprises that need workers. The workers who participate would be considered members of the cooperative sector with full rights, participating in the life and management of the enterprise in which they are working, in the same conditions as the regular worker-members. They would receive the same direct and indirect (in cooperative shares) remuneration as the rest, which would permit them to accumulate the “capital” needed to join a cooperative as a permanent member, eliminating dues, and investing the share “capital” demanded in each case.

In addition to fulfilling this intermediary function, the cooperative labor exchange could be an effective recruitment instrument for enterprises seeking to bring on regular workers; it could also provide training for workers, financed proportionally by the cooperatives that participate in this service. Unemployed workers could make use of this service, with their time out of work usefully applied to the benefit of the cooperative sector as a whole.

A third intercooperative body that could benefit of all the participating economic units would be a financial entity that organized a true market of cooperative “capital.”

To the degree that their operations generate surplus, cooperative enterprises normally amass a certain quantity of financial resources. Members, too, considered individually, have a certain amount of savings which corresponds to the difference between their income and their consumption. All of these resources constitute a potential source of financing for cooperative investment, and it is logical for cooperatives to put them to use before turning to external sources of financing.

Now, operating in isolation, the investments each cooperative could make would be limited to the monetary surplus they generate from quarter to quarter, in addition to the savings that their members might be disposed to loan the enterprise. This limited financing capacity would prevent them from making larger investments with greater return. Even when financing is available, enterprises do not always have the right conditions in place to make efficient use of their surplus, and the terms (short, medium, long) of the investments may not correspond to the terms during which the savings and surplus are available. In both cases, resources will not be used in the best way.

One simple way to address the problem is to use the general capital market, that is, to place the surplus and savings in external banks and financial institutions, later turning to those institutions when seeking credit or financing. But in that case, a portion of the resources generated by the cooperative sector will inevitably be used outside of the sector, for four reasons: 1) banks will invest the money in the general market, 2) they will require payment for the intermediation service provided or discount the same sum from the total amount deposited, 3) they are less likely to loan money to cooperatives in general, and 4) the interest cooperatives pay if they get access to credit goes to the bank or institution.

The creation of an intercooperative financial market organized by financial entities belonging to the sector (with different characteristics than capitalist entities) would permit all of the resources generated by the sector to be utilized efficiently within it. Concentration of the savings and financial resources from the different enterprises and their members would allow for their more efficient utilization, since we know that with a larger volume of capital available they can take advantage of the benefits of diversification and larger scale operations.

These intercooperative financial entities would intermediate between enterprises with excess resources and those needing more, that is, between the supply and demand of capital. At the same time, they would perform the indispensable function of regulating the terms (short, medium, and long) applied to these operations, aligning the preferences of those provide the financing with the preferences of those who seek it, something that rarely occurs at the individual level.

A fourth mode of integration of operations in the cooperative sector has to do technology, an increasingly important factor of production in modern society. We have seen that cooperative enterprises organized in the form we proposed in previous chapters have a tendency to develop and grow through accentuated technological innovation; thus this aspect of the problem of intercooperative integration has a particular relevance.

The technological factor is really a complex series of elements including technologies of production; labor organization and administration; information and communication; professional development and technical training of the labor force; marketing; finishing; quality control; design; decision-making, planning and programming activities; in short, every aspect of the functioning of the enterprise that can be improved and dynamized through the systematic application of science and accumulated experience.

It is well known that the development of technology is a general social process that has numerous centers of development and diffusion, and that enterprises draw on this universal and multifaceted process to different degrees. Only the largest and most dynamic enterprises are in a position to have their own centers of systematic creation and development of technology, which put them in the vanguard of the development of productive forces, in addition to permitting them to obtain above average profits in the market.

Cooperative enterprises have to make use of the scientific and technological patrimony accumulated by humanity, adapting it to their own needs and characteristics. However, most modern and contemporary techniques and technologies have been created in and for forms of production and types of enterprise in which capital, not labor, is the dominant organizing factor. This has consequences for the characteristics, forms, and contents of the technologies themselves. Technologies developed to serve capital usually assume and support forms of labor that are inhuman, imposing rhythms, paces, and movements that turn the human into a simple appendage of the machine and its systems. Such technologies do not permit the creative deployment of the consciousness, imagination, and will of the workers, but rather prevent them from controlling the production process and seeing their activity and its meaning as a whole. This technological subordination of labor with respect the other factors, does not align with, but rather contradicts the organizing character that labor assumes in cooperative enterprises, and concretely interferes with the participation of workers in decision-making process.

These considerations make utterly clear the importance of specifically technological activity in the development of worker enterprises and a dynamic cooperative sector. Worker enterprises require appropriate technology, that is, technology that corresponds to their particular mode of being; that plays an integrating role, organically, in an alternative type of development; that is designed to serve the needs of human labor and the satisfaction of the needs of the popular sectors; that facilitates the participation of workers in technical development and the production process in general; and that values the knowledge and experience accumulated over time by the labor collective. It is only possible to imagine cooperativism rising to its full height of autonomy, dynamism, and social-economic transformation, if it manages to respond to this challenge and does not limit itself to depending on externally generated technological development.

The workers gathered in each enterprise can no doubt make permanent contributions in this sense; but obviously the prevailing conditions of the modern economy and the real development of science and technology today mean that a great concentration of productive forces and systematic labor is required, an effort that individual cooperatives would be hard pressed to take on and lead.

We see again, then, the need for cooperative integration in the form of a service that can provide organizing, program development, and technological development for the sector as a whole, while being at the disposition of the enterprises themselves. Technology, in the broad sense in which we use the term, would be its field of specific activity.

The four intermediary bodies that we have proposed comprise, in our view, a system of intercooperative economic and operational integration that permits the more efficient allocation of the productive resources of the sector, without placing restrictions on the autonomous management of each enterprise, producing a particularly accentuated dynamism and a capacity for transformation of the market. In their absence, the real autonomy of cooperativism would be permanently menaced in a market economy ruled by capital and its interests, criteria, and values.

• 1For a short description of the Fagor bankruptcy, the near bankruptcy of Eroski, and the problems caused by the sale of subordinated debt see Noyes, 2015, Learning from the Bankruptcy of Fagor Electrodomésticos. https://www.researchgate.net/publication/320143919_Learning_from_the_Bankruptcy_of_Fagor_Electrodomesticos_Reflections_at_the_2015_CIRIEC_Conference_in_Lisbon_Portugal_in_English
• 2

  Acabado usually refers to finishing, as in the final polishing, detailing, etc. of a manufactured good. Here, it suggests completion more broadly, in the sense of a finished product (producto acabado). - MN

• 3

  Of course, the purchase of these securities would not confer any membership or governance rights. - MN