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Catalyzing worker co-ops & the solidarity economy

Cooperative Enterprise and Market Economy: Chapter 3

Article type
GEO Original
November 28, 2022
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| Introduction & Preface | Chapter 1 | Chapter 2 |

Chapter 3

The valorization process in capitalist enterprises and worker enterprises. Labor, finance, commodity, and profit in worker enterprises.

1. We will develop our argument starting from the particular case of worker cooperatives, or, more precisely, worker enterprises. In reality, the validity of the analysis extends to all enterprises organized by the Labor factor, whether or not they are engaged in production and whether or not they are seen as forming part of the cooperative phenomenon. The result of this analysis will be a theoretical model of the Labor Enterprise, which will be useful for understanding worker self-managed enterprises. We have already said that, in light of the essential criterion of the organizing category, the expression “cooperative phenomenon” (and consequently also “cooperative enterprise”) shows itself to be relatively indeterminate insofar as it includes various types of economic entities and associations. Nonetheless, the economic argument concerning Labor enterprises can be reconstructed by analogy when analyzing other types of enterprise, especially Community (or communal) enterprises; the theory of the worker enterprise contributes conceptual elements useful for the understanding of the cooperative phenomenon as a whole, and helps clarify the economic theory of the enterprise, in general.

Most of the difficulties encountered in identifying the economic logic of the cooperative enterprise derive from an erroneous consideration of the cooperative enterprise as an economic entity in which the figures of capitalist boss and wage worker are merged. By embracing this conception, one is – implicitly or unconsciously – subordinating the analysis of the cooperative to concepts that define a capitalist enterprise, and thus ignoring the specific nature and theoretical autonomy of cooperation. This conception does not allow us to understand the mechanisms in the workers enterprise by which economic equilibrium is established, the volume of productive activity or the degree of intensity in the use of labor power are determined, a given level of gains is considered satisfactory, etc.

The fiction of uniting the capitalist boss with the wage worker leads, in effect, to insoluble logical contradictions. On this basis, for example, the cooperative member, as an employer, would be motivated by the goal of increasing the difference between gross revenue and factor costs, while as a worker, they would be seek to raise the fixed costs of labor by keeping fatigue and the consumption of energy as low as possible. If this were the case, what level of economic activity would be considered efficient? When the (average) rate of profit on capital was equal to or higher than that considered normal in the market? Or when the remuneration of labor was equal or superior to the market average salaries for similar workers?

It would be easy to respond that the cooperative enterprise seeks the simultaneous accomplishment of both objectives; but it is difficult to understand how it is that, in the presence of two parallel objectives, which translate into numbers of different amounts and imply the deployment of different means, one could orient business decisions in a coherent way.

If the problem is posed in these terms, one can see no other alternative than to consider one of the objectives as an invariable datum or variable, and the other as the effective end of the business activities undertaken and decisions made. If a fixed remuneration of labor is established, equivalent to prevailing wages, then business operations will tend toward obtaining and surpassing the normal rate of profit. If, on the other hand, the average rate of profit on capital is established as the independent variable, economic decisions will be motivated by the objective of obtaining and surpassing the normal wages of labor.

The problem is insoluble because the dilemma is poorly posed. Notions like “profit on capital” and “wages” belong to capitalist businesses and have no meaning in worker enterprises in which the remuneration of labor is not a set wage that is accounted for as a cost but as a variable quantity that forms part of the surplus (the difference between the gross revenues of the enterprise and the total costs paid to third parties and for reinvestment, a difference that cannot in any way be considered profit on capital). On account of this difference the monthly pay that workers receive is not considered a wage or salary. Likewise, business profit, is not applicable.1 But what is profit, in essence? What is different about profit in a workers enterprise and profit in a capitalist business?

To understand the rational economic behavior of a workers enterprise it is necessary to recognize that it is a special form of private enterprise, made up of cooperating members who combine their labor power with other factors or means of production they already possess as a group, or buy on the market, sharing economic decision-making power and control over technical conditions of production.

A theory of the workers enterprise should first of all identify its proper economic objective and demonstrate the coherence of the behavior necessary to achieve that objective; to do that it should create special notions and concepts on the basis of its experience and its particular way of being, overcoming every form of theoretical subordination with respect to conceptualizations created on the basis of other types of enterprise.

All enterprises, in their economic activity, operate with the fundamental goal of obtaining the maximum valorization possible of the economic category at the center of the organization itself: the valorization of capital in a capitalist enterprise, the valorization of Labor in a workers enterprise, of Community in a community enterprise, of Technology in a technology enterprise, etc.

Workers enterprises or cooperatives in which the organizing economic category is Labor have as their general objective (which operates as a criterion when making decisions), the maximum valorization of Labor, such that the result or economic benefit is defined not as profit on capital but as Labor profit. This profit does not have a fixed or predetermined volume but takes the form of a variable amount that depends on the volume of activity, the quality of management, the value of the other factors, raw materials and supplies used, changing market conditions, etc. This is true even when, for practical reasons, workers in the enterprise receive a fixed monthly remuneration, which is, in essence, merely an anticipated distribution of expected surplus to be generated by business operations. What is critical is the fact that, after paying for the other factors of production at market rates, Labor obtains, in the form of profit, the remainder of the revenue collected through the sale of goods and services produced. If the balance of gains and losses is negative, Labor will not receive any profit (and a portion of the anticipated surplus advanced to the worker members will be charged against the equity of the enterprise). The remuneration of Labor and the profit earned by Labor operate, then, in a manner analogous to the remuneration and profit of capital, with this difference: while, in capitalist businesses, capital pays for the labor power it contracts at a market rate (the lowest possible, in order to maximize its profit), in Labor enterprises, Labor that pays for the financing it needs at market rates (also paying as little as possible in order to maximize its own benefits).2

We can express these two logics schematically, staring from the “circulation formula” for a capitalist business: K1 – C – K2 .3 Here, money (m) is converted into capital (K1) through a process that generates economic value, that is through investment in the enterprise, followed by a process of production of commodities (C), and their sale on the market, resulting in a net increase of money that amounts to an increase in capital (K2). Graphically:4

 

The valorization process in a cooperative can be expressed analogously, in the formula T1 – C – T2. Here, upon being invested in the enterprise, labor power (t) is converted into Labor (T1), which is a category, and, through a production process resulting in a commodity (C) which is sold on the market, that is, through a process that generates economic value, the result is a net increase in money that makes possible the expanded reproduction of Labor (T2). Graphically:

 

In these general formulas we can see the differences that exist in regards to the factor that initiates the process – in a capitalist firm it is finance, in a workers enterprise, labor – the organizing category (capital and Labor, respectively), and the result of the process, which in the first case presents itself as profit on capital and in the second as Labor profit.5 On the other hand, the terms that define the intermediary and transitory moments of the process appear to be the same, that is, the commodity and the net monetary gain. Nonetheless, there is an essential theoretical difference with respect to those things that are called in both cases “commodity” and “net gain.” Let us examine the composition of these concepts.

2. In capitalist production, capital comes into existence as an investment of money, and, more broadly, as financing, and can take the form of as many elements as are incorporated into the enterprise through its investment. In other words, capital is the product of the transmutation of the finance factor into the ensemble of factors in which it has been invested, including the remnant of money not used to produce other factors which remains in the form of finance. Capital is identified, here, with the ensemble of the factors belonging to the enterprise.6

Empirically speaking, in cooperative production Labor is made up of the same elements as in capitalist production, that is, by those factors that have been incorporated into the enterprise through the “investment” of labor power, that is, in the process of transformation of the factor labor power into the category Labor. It is Labor that is identified with the ensemble of factors belonging to the enterprise.

It is not difficult to understand how the finance factor converts itself into capital, because we see it every day and it responds to the predominant rationality of our economies: the possessor of money comes to the market and meets others who possess means of production, technologies, labor power, administrative capacity, etc., all presented in the form of commodities for sale at specific prices. By converting portions of this money into ownership or use of these factors, the owner is subsuming them under the form of capital. In this process, money (the finance factor) is transformed into the category of capital, which presides over the business.

It is more difficult to understand the transformation of the factor labor power into the category Labor. The possessors of labor power can convert their factor into Labor only if they manage to transform it into the other factors needed by the enterprise. In market economies, such a transformation is rarely experienced directly but rather through the mediation of money. Thus, to convert their labor power into the organizing category of an enterprise, workers first have to find sufficient money in the market to buy the means of production, technology, and other indispensable factors. We will see later on that this is not the only way to bring the various necessary factors together under Labor, but it is this aspect – the definitive problem of incorporation and subordination of the finance factor in worker enterprises – which offers the greatest difficulties for understanding and which we will consequently address first.

Is it possible for labor power to find the money it needs in the market? In other words, how can a workers enterprise be financed such that it is truly Labor and not capital that is the organizing factor? Habituated as we are to the opposite scenario – capital acquiring labor power – it may appear impossible and paradoxical. But it is not, and to understand this we only need to observe the way in which capital and Labor meet in the market.

Just like labor power and the other factors that are offered for sale in the market for a specific price, which the buyer can then use to generate a greater quantity of money through productive consumption, so too money appears on the market as a commodity. The person who seeks money on the market is there because they do not possess the money they need. But they promise to pay for the money by returning it after a specific period of time, plus an additional amount. So, on the market, money takes the form of credit, that is, money that is paid for over time and in a larger amount, implying that the money is used productively during the period of time it is borrowed. In this sense, the conditions under which money is contracted do not differ from those under which labor power is contracted, in that it too is used productively for a period of time, then paid for. What is important here, from our point of view, is the fact that being a commodity makes money available on the market and enables it to be converted into means of production, by another economic category – Labor – which aspires to organize a productive unit starting with itself (labor power) but without all the needed funds. Initially obtained as an external factor, money is later repaid as the result of the sale of the commodities produced. In this way it is converted into and internal factor, that is, a factor belonging to the enterprise.

At this point in the argument we should ask if financing in the form of credit implies some contradiction, since we have indicated that the finance factor (like the other factors) is subsumed under Labor in this process. It would appear that finance, one of the factors belonging to the workers enterprise, is functioning as an investment of money and not of Labor, and in that way does not differ essentially from the capital that defines a capitalist enterprise. If we consider the question more methodically, we discover that in reality this is not how it works. When the organizers of a worker enterprise borrow money on the market what they are doing is investing labor or making an advance of labor.7 The cooperative enterprise uses the factors in its possession, including labor power, to produce a commodity and is able to pay back the money borrowed in the specified period out of the revenues generated through its sale. The interest the worker enterprise pays on the money that it borrowed comes from the operating surplus that it produces, the Labor character of which we will examine later on. It is Labor alone that is converted into factors belonging to the enterprise, which are purchased by advancing of a portion of its value in the form of money-credit. The latter remains as external factor with regard to the enterprise until the moment it is paid back; only at that moment does it form part of Labor (as an organizing category).

In reality, not all money used by a cooperative entity is borrowed on the market, nor are all the factors used purchased with money. Moreover, normally, credit financing cannot be obtained on the sole basis of having available labor power. The workers enterprise has to have some financing of its own or at least an adequate supply of means of production, technology, management and administrative capacity, etc., to serve as collateral for the credit received. All of these factors together constitute an investment of Labor, insofar as they represent previous labor of the members, labor accumulated in the form of savings, knowledge, means of production, etc., all put to common use by workers when they come together to launch their cooperative activities.

Synthesizing, this means that the finance factor in worker enterprises comprises, a) the sums of money pooled by the members when launching their enterprise, in the form of dues or money contributions using the money that they acquired through their previous labor and now invest together; b) the portion of the monetary surplus not distributed to the workers, reserved by the enterprise to augment its “collective account,” which is the product of the current labor of the enterprise; and c) finance obtained in the form of credit, which consists of advanced or future labor and is incorporated into the enterprise when the debt is paid back out of its revenues. Thus constituted, the finance factor is truly Labor as are the other factors bought with this finance factor and incorporated into the enterprise.

To the degree that finance is converted into a factor owned by the enterprise, it loses its initial capitalist essence and is transformed into Labor. Now, it makes no sense to postulate a limited remuneration or interest on Labor. The objective of the enterprise is, to the contrary, its maximum valorization. But to the degree it remains external financing, that is, credit-money belonging to the financial business which offered it as a commodity on the market, it is an external factor and the cooperative enterprise will naturally tend to pay as little as possible for its use, according to market conditions. It will tend to pay just enough to attract the amount of funding it needs. Thus there is no economic motive on the part of the enterprise to predetermine a fixed and limited interest rate to pay; instead it will seek to obtain external financing on the best terms possible, that is, with the lowest interest and the most generous length of time, since only that is consistent with the goal of increasing the gains of Labor.

We thus arrive at the conclusion that the economically logical rationale of worker enterprises by itself guarantees the anti-capitalist objective for the purpose of which the “limited interest on capital” was established, and without creating unnecessary obstacles and rigidities in the securing of financing.8 Equally, given this normal mode of satisfying the financial needs of the enterprise by means of contracting credit on the market, which remains external to the enterprise (only becoming internal to the enterprise when it is paid off and thus transformed into Labor), a fear that those who contribute money-credit would control the management of the enterprise is unjustified (beyond the normal guarantees that any financial institution would require of people to whom they lend money).

Now, the equity of the enterprise – Labor – is not only the finance factor and that which has been acquired through it. It also comprises the other factors invested by the workers when forming the enterprise: the means of production they have decided to share or bring into the enterprise in some form, the technological knowledge and information they possess and utilize in the different processes, the capacity for administration and coordination they apply to self-management, and the “C factor” which also collaborates in production and the other economic activities of the enterprise. All of these, when incorporated into the enterprise organized by the workers, are subsumed under the category Labor, which valorizes them and gives them functions in order to meet the general objectives of the enterprise: the valorization of Labor.

3. Having thus analyzed the transformation of the factor labor power into the corresponding category – Labor – and the economic content of the latter, we now examine the content of the product, the commodity, and of the net additional surplus.

Having completed the production process, a good or service appears and is exchanged on the market for money. This commodity’s value is greater than the sum of the factors consumed in its production, which means that the enterprise has generated a surplus value through its production, circulation and consumption activities. This is as true of the Labor enterprise as it is of the capitalist enterprise. Nonetheless, considering each type of enterprise from a theoretical point of view that uncovers their respective rationalities and essences, that is, considering them from the point of view of their organizing categories, the commodity and surplus value created by the worker enterprise shows itself to have a different composition from that generated by the capitalist enterprise.9 We shall see how and why this is so.

The product, which enters the circulation process as a commodity, is the result of the transformation of specific portions of the factors assembled in the enterprise, plus something additional added through their organization. The product is a new reality reflecting a degree of organization superior to that existing in its separate components. In other words, one part of the value of the factors used in production is transferred to the product, which is nonetheless more “valuable” than the sum of values transferred. (We can say this additional value is present in the enterprise itself insofar as the factors find themselves organized for a business purpose there.) We shall try, then, to break down the economic elements that make up the product (and, thus, the commodity).

In the first place we consider the factors, small portions of which are transformed into the product. Such factors exist in the enterprise in two forms: internal factors (IF) already in possession of the workers and external factors (EF) bought at market prices.

The product generated in the enterprise has incorporated part of the internal factors as well as the external factors, corresponding to the part of each used and consumed in the production process.10 In other words the product includes IF + EF. This is true of capitalist firms as well as worker enterprises. But are these IF and EF the same in each type of enterprise? Certainly not, since although the sum of both elements is the same, the concrete factors which are considered internal and external in each type of enterprise are different. Indeed, in the capitalist enterprise labor power is always and almost exclusively an external factor while in the workers enterprise it is the most important internal factor.

The analysis of the product and the commodity does not end here. We said, in effect, that in addition to that portion of the (internal or external) factors productively consumed and incorporated into the product, there is an additional element consisting of a higher degree of organization than that which existed before the product was created. The product is, in effect, something more than the sum of those portions of the factors which have been incorporated into it. Where does this “something more” come from? From the enterprise, obviously, which is also “something more” than the sum of its factors: specifically, the sum of its factors as “organized for business” (organizados empresarialmente).

This “something more” comes from the form of organization, which, as we know, has a different origin or source depending on the organizing category of the enterprise, whether it is capital, Labor, Community, Technology, etc. The organizing category is what determines the content of this “something more,” as well as its value composition, which differs in a capitalist business and a workers enterprise.

Once placed on the market, the product acquires a price. In essence, the product is assigned a value by the ensemble of subjects participating in the market, giving rise to a “system of relative prices.” (This is different from valorization.11 ) The price or value of the product is that established in the circulation process, that is, in the market, and is thus relatively independent of production. However, the product will continue to come to market only if the price obtained covers the costs of production (that is, the value of the internal and external factors used in its production) and generates some benefit for the producer, compensating them for their efforts as organizer of the enterprise. The producer applies all their powers of negotiation to that end, seeking the greatest profit (utilidad) possible, not on each individual product, but on the production and activity of the enterprise as a whole.

So we see that the value of the commodity can be divided into three parts: one part that goes to pay for the external factors employed in its production, purchased at given prices; one part that goes to cover the use of internal factors and makes it possible to pay for the replenishment (simple reproduction) of the enterprise; and one part that constitutes the profit of the enterprise, which compensates or rewards the organizing effort and the risk undertaken by the organizing category of the enterprise. This profit can be reinvested in the enterprise (in part or in whole), increasing the quantity of internal factors in a process of expanded reproduction.

We have established, then, that the economic, social and human content of profit is essentially different depending on the type of enterprise, whether organized by capital or Labor (or by any other category). We understand this to mean that cooperative profit, or worker profit, is the same as profit on capital only in terms of its form, the substantial content being radically different. (It is crucial to understand this point if we wish to penetrate the ethical difference between one and the other form of profit; a much deeper and truer difference than the largely indeterminate distinction that some authors have made between “legitimate” and “illegitimate” gain.)

Paying attention to the economic content of the product and the commodity, as well as the qualitative and essential difference that we have underscored, we also find a significant quantitative difference, in the following sense. Suppose that we take two products that are technically and materially identical, the commodity will acquire the same price or value, regardless of whether it was produced by a capitalist firm or a workers cooperative, and both enterprises will find the same prices for the external factors they require.12 Notwithstanding this equivalence, the amount spent on each of the three component parts of the value of the commodity will always be different. In effect, there is no reason why the part of the value that corresponds to the purchase of external factors should be the same, nor the part that covers the cost of internal factors, because the internal and external factors, and their relative amounts, are different in each type of enterprise. In part, this is because the “valuing” of the internal factors is partly subjective, determined by the people who contribute them to the enterprise. As a result, that part of the value that constitutes the profit of the enterprise and which is, in quantitative terms, the difference between the price of the product and the payment for the factors employed in its production, will also differ, even if the revenues from the sales of the products are the same.

Assuming that an enterprise cannot influence the price of the commodities they put on the market, on the one hand, but can exert an influence on the prices of the factors they buy, on the other, it is possible for the enterprise – whether capitalist or worker cooperative – to obtain excess profits as a result of paying less for the factors than the latter contribute to the enterprise. In that case, the excess profits correspond to what we can consider an exploitation effect. In the capitalist enterprise, the exploitation may be of labor, which is for such firms one of the principal external factors, whereas in a workers enterprise, the factor exploited might be finance or one of the others.13

 

Translated by Matt Noyes
Header image by Jeff Warren and Caroline Woolard. CC BY-SA 3.0

 

 

  • 1See the previous chapter for definitions of surplus, gains, and profit in a workers enterprise.
  • 2This is often referred to as Labor “hiring” capital. - MN
  • 3See Marx, Capital Volume 3, Chapter 4: The General Formula for Capital. Marx’s simple formula is: M – C – M’, or money – commodities – money plus an additional increment of money. The expanded formula is: M – {cc + vc}...P...C’ – M’, or Money – {constant capital and variable capital} … Production … new Commodity – Money plus an added increment of money. Razeto’s expanded formula, in which the purchase of means of production and other factors is implicit, as is the production process, is: m – K1...C – K2. - MN
  • 4I have inserted the letter π, often used for profit in economic texts, and K1’ to signify the original amount of capital now to be applied to another round of production and circulation, assuming, as Razeto does here, simple reproduction. - MN
  • 5I have used “Labor profit” instead of profit on Labor, to avoid confusion with the capitalist phenomenon of profit through exploitation of labor power. – MN
  • 6Economic theory uses the concept of capital differently, based on a dichotomy between capital and labor in which the six factors we have distinguished have not been analytically separated and the difference between economic factors and economic categories has not been established. Practically all microeconomic models have been constructed on the basis of this distinction between capital and labor. It is on this basis of this traditional conception of factors that Marx distinguished two elements of capital: a sum of money, c, invested in means of production, and another sum, v, invested in labor power. c represents that part of value converted into constant capital; v is that part converted into variable capital. At the outset of the process, K is equal to c + v. At the end of the production process a commodity has been produced whose value is (c+v) + s, s being surplus value. The initial capital, K, has become K’. All of these notions cease to be valid and useful in our theoretical framework, although we retain many of the terms. It is important for the reader to be aware of this.
  • 7Compare this to Marx’s argument that workers “allow credit to the capitalist” by “advanc[ing] the use-value of their labor power to the capitalist” who consumes it first and only pays later, or in the case of wage theft, not at all. Volume 1, Chapter 6, p278. The difference here being that since workers own and control the production process, they advance their labor in order to acquire means of production they need in order to create value for themselves. - MN
  • 8See the 1967 Report of the I.C.A. Commission on Cooperative Principles, Principle #3 Interest on Capital.
  • 9This is a good example of how Razeto retains terms while changing their meanings (see the previous footnote). For Marx, who first analyzed the concept, surplus value only occurs as a result of exploitation of labor, which depends on the purchase/sale of the commodity labor power. If the workers do not sell their labor power and own all the value produced, there can be no surplus value. Here, though, surplus value simply describes the difference between the money invested in production and the money realized in the sale of the commodity. (See Marx (1977), Capital, Vol. 1, p297) - MN
  • 10The incorporation of factors in the product should be understood in economic, not physical, terms. This means that they form part of the product in an economic sense. We are concerned with not just those portions of each factor that are materially present in the product itself (means of production, technological design, etc.) but also other factors that, while they do not appear materially in the product, are nonetheless in it economically, as they have been invested in its production.
  • 11We reserve the term “valorization” for describing the objective sought by the organizers of the enterprise, who seek precisely an increase in value, that is to increase the value of the category they invest in the enterprise. The products, on the other hand, are valued by the subjects operating in the market as buyers and sellers, determining the values or prices of products.
  • 12This assumption is not always upheld in reality, where identical products and factors find different prices depending on the force or power their producers and sellers can exercise over the market. The owners of capitalist firms and worker cooperatives are very different; it is quite likely that the prices they obtain when selling their products and buying factors will reflect that difference.
  • 13This argument enables us to grasp how it is possible to have “exploitation of labor” in workers enterprises; directly, when the enterprise employs labor power which is paid at a rate lower than its productivity, and indirectly, when one of the other factors which is indispensable for operations (be it finance, management, or technology) demands a fixed remuneration that is superior to the actual contributions the factor makes to the product.
Citations

Luis Razeto Migliaro, Matt Noyes (2022).  Cooperative Enterprise and Market Economy: Chapter 3.  Grassroots Economic Organizing (GEO).  https://geo.coop/articles/cooperative-enterprise-and-market-economy-chapter-3

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