Cooperative Enterprise and Market Economy: Chapter 9

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

Translator’s note:

Luis Razeto Migliaro began his practical and theoretical work in the area of solidarity economy in the Economics of Work Program sponsored by the Archbishop of Santiago, researching the economic viability of the multifarious forms of business and provisioning generated by the poor, forms that he and others came to refer to broadly as “popular economic organization.”

Razeto tells of a visit by Cardinal Silva Henríquez, who asked [the young researchers]: given the combination of high unemployment in the working class districts – 60-70% – and the cuts to social services due to neo-liberal policies, how was it possible that the people were not starving? The ensuing research lead to the publication of a book on “popular economic organizations” (Las Organizaciones Económicas Populares, 1983)… and a second book [the first version of this present one] on workers enterprises and the market economy, (Empresa de Trabajadores y Economía de Mercado, 1982)1

Recognizing that it would be unscientific to analyze these organizations as if they were standard capitalist businesses, with the same social relations, modes, and purposes, Razeto explored their specific reality and economic logic, distinguishing them also from “traditional cooperatives.” In this chapter, he offers an analysis of equilibrium specific to two types of popular economic organization: community enterprises and subsistence collectives.

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 9

The Problem of Equilibrium in Cooperative Enterprises. The Case of Community Enterprises and Subsistence Collectives.

1. If we wish to formulate a scientific theory of economic equilibrium in worker enterprises, we must first recognize that the cooperative economy is a distinct phenomenon which can only be understood and analyzed with concepts specific to cooperativism. We must also consider the differences between the various organizational forms that fall under the umbrella term “cooperative,” examining the distinct economic objectives of each and the different ways in which they make use of the economic factors.2

In the course of our exposition we have underlined the operational problems that arise in worker cooperatives organized in a manner consistent with a traditional interpretation of cooperative doctrine. In response, we have laid out the foundations of a model of worker cooperative based on an alternative model of property, financing, and objectives. The organizing category and leading factor in this model is a combination of Community (formed on the basis of the “C factor”) and Labor.

Because the theoretical problem of equilibrium is posed and resolved differently for each type of cooperative enterprise, we will distinguish between three forms: community enterprises (and subsistence collectives, which share the same operational logic), traditional workers cooperatives, and the new type of worker cooperative that we have presented in the first part of this book.3

Before getting into the analysis, we should recall that equilibrium is an analytical model of social-economic relations that implies decision-making criteria. The relations may or may not be apparent to the members of the enterprise in question, and the decision-making criteria may or may not be taken into account by those in leadership. This is where theory comes in: identifying the often disguised logic of the real processes and structures. It does this, however, at a level of abstraction that implies assuming conditions that are not always seen in concrete cases. Thus, the outcome is never the comprehension of reality itself but the creation of an instrument necessary to that comprehension.

Let us begin by considering the case of community enterprises.

Community enterprises are businesses organized by the community, in which the different members of the group contribute the various necessary factors of production without placing a monetary value on their contributions or expecting an individual profit. Organized as a unit of production, community members collaborate, bringing to bear the resources available to them, becoming in the process a communal subject that is at once an integrated work unit and an organizing and decision-making body. It is an economic unit that seeks the development of the community and/or the satisfaction of individual and social needs of the group, in other words, community well being (or quality of life).

In order to understand the logic of these enterprises it is important to recognize that they generally do not operate with external factors, those bought or rented on the market for defined periods of time. They do not hire wage labor, they do not finance investments with credit obtained on capital markets, nor do they employ outside management. The factors they use are typically limited to the contributions made by different members of the community or collective that creates them. This includes acquisitions made with money contributed by members or earned by the enterprise itself, which obviously should be considered to be internal financing. Factors purchased with donated funds, a common source of finance, should also be counted among the internal factors available to the enterprise.

It is because they are “community” organizations that these enterprises tend to be self-sufficient or autonomous when it comes to factors of production. In essence, community refers to the interrelation of subjects who form a human group that is more or less differentiated with regard to the provisioning of factors. Members do not assign a value to the factors they contribute and then bargain over the terms of their individual contribution and how they might be compensated. To do so would be to constitute themselves as a market. Rather, they form a community, in which every member contributes what they can. In other terms, perhaps more abstract but still illuminating, it is through community integration and not through mercantile organization that they overcome the social (factorial) division of labor.

That said, it would be a mistake to overemphasize the self-sufficiency of these economic units. In effect, nothing stops them from occasionally recurring to external factors when those they possess are insufficient. They may hire labor for limited periods, contract technical or administrative services, or rent space, equipment, and machinery.

But, when they do so they are not acting in accordance with their own rationality but simply addressing a limitation they face with regards to the provisioning of factors. More important, when contracting external factors their goal is not to extract profit: in the peculiar logic of community enterprises, factors obtained externally are remunerated for at least the amount that they contribute. Far from exploitation of others, the intention is to benefit the people with whom they related or those in the environment in which the community enterprise operates. This may include incorporating those subjects into the organization, to the degree economically possible.

The fact that community enterprises tend to prioritize production for the satisfaction of needs and improvement of the quality of life for their members and the community itself does not, however, prevent them from establishing commercial relations on the market to buy raw materials and inputs, or to sell finished products. Profits obtained through such operations enable the members of the economic unit to obtain and make use of indispensable goods and services that they do not produce for themselves.

Our theoretical analysis of community enterprises should be useful to single owner micro-enterprises (self-employed workers) and families, as well as what we call subsistence collectives.

Subsistence collectives resemble small family businesses in certain ways. We call them “subsistence” collectives because they are primarily oriented to meeting the needs of the members and their families and not the growth of the collective business per se. They are specific forms of community enterprise, economic units that have been organized collectively by members who contribute means of production, some amount of money, management skills, information and technical capacity, a spirit of solidarity, and above all their own labor power to tackle together the problem of subsistence. The necessary factors here are usually obtained through donations made in a spirit of solidarity.

Understanding the operational logic of community enterprises helps us understand the logic of subsistence collectives because in each case the collective element determines the form of the economic unit and its operational logic. The goal of self-sufficiency of the members of the collective resembles, and to some extent coincides with, the rational objective of community enterprises which is the well being of community members. To some degree, both enterprises are organized by the category Community. As for why they tend to operate with their own factors, it is well known that small subsistence enterprises have difficulty accessing capital markets or factor markets where they might obtain financing or labor power; as a result, they often seek donations in order to obtain the factors they lack.

The applicability of this analytical model to the case of single-owner micro-enterprises derives from the fact that the organizing subject is a person who embodies a combination of a set of factors which are not split apart by a social division of labor. This gives such enterprises a mode of operation similar to that of community enterprises, which are characterized precisely by the social re-integration of labor.

Moreover, in the analysis of all these types of economic units we can apply the same assumptions we made for community enterprises with no loss of realism or theoretical rigor. Naturally, when applying the “theoretical model” that we are formulating to these different types of economic units, their peculiarities and unique traits must be taken into account.

2. Community enterprises (and subsistence collectives) do not calculate profits in the sense that capitalist enterprises do, as a ratio of surplus value generated in the labor process to the value invested in [labor power and] the means of production.4 The reason is obvious: the enterprise operates with internal factors that are not bought on the market or assigned a value there. Nonetheless, like any economic enterprise, community enterprises seek to maximize gains.5 The gains they seek can be measured and evaluated, as can the use of factors. Even if factors are internal and not purchased on the market at defined prices, they undoubtedly imply costs and sacrifices for the people who contribute them and for the enterprise as such. We see, then, that the search for maximum gains figures here too, as does the evaluation of the degree to which gains are maximized.

Obviously, the maximization of gains corresponds to the optimal fulfillment of the rational economic objective of the type of enterprise in question. In this case, realization of the objective, in economic terms, requires us to consider two fundamental aspects or variables.

On the one hand, there is the net product which the associated workers obtain as a result of their labor; the product on the basis of which they manage to satisfy their needs and improve their well being. It is not important if this product is a good or service or consists of monetary income obtained through sale of the product, or a combination of both.

On the other hand, there is the element that the workers and the community invest in the economic unit, which is, essentially, their own effort, the exercise of all the capacities and skills they make use of in the activity of the business; the forces and capacities that they employ at a determined level of intensity.

Precisely stated, that which the workers and the community invest and make use of, and thus sacrifice, is a collection of values belonging to them, principally their own human factors (labor power, administrative capacity, technological knowledge, “C factor”), but also objectified factors (finances or materials) that have been produced through communal or social accumulation of prior labor.

In enterprises of this type, the material factors, or objectified factors in general, are strictly limited according to their availability. In our analytic model they can be treated as a given (as in “given” factors), because their increase does not depend very much on business decisions. (Later, we will lift this assumption and examine how modifications in the availability and use of objective factors impacts the logic of these enterprises.)

So, members of these economic units control two principal variables, which we will call, simply, product and effort. By “product” we mean all the benefits obtained by members of the enterprise, whether goods that can be directly consumer or monetary values that remain at their disposition. By “effort” we mean all the contributions of human factors belonging to the workers, including direct labor, participation in management, the creativity mobilized, the “C factor” incorporated into their activity, information provided by members, etc.

In theoretical terms, it is important to emphasize that it is the members of the community enterprise themselves who set the level of production and decide how much effort to contribute. Clearly, this decision is not arbitrary. The levels of contribution are limited by the quantity and quality of factors in their possession and the conditions given by the market.

Now, these essential variables are related, such that the greater the effort, the greater the product and, thus, the satisfaction of needs. But the incentive to generate the greatest quantity of product possible (in order to satisfy as many needs as possible) is limited by the fact that the greater the duration and intensity of effort applied, the greater the fatigue and sacrifice experienced by the members of the economic unit, which results in a decline in their well-being.

Thus, community enterprises, too, seek equilibrium in their relevant variables. More precisely, the economic agents involved seek the right balance among the variables in their control, such that their total gains can be maximized. To the extent that they function with the two principal variables of product and effort, equilibrium in community enterprises and subsistence collectives will be determined by the volume of operations at which they expect to obtain the maximum well-being or happiness possible, balancing the satisfaction of needs through consumption of the product generated and the sacrifice implied by the use and exhaustion of the personal factors they contribute (especially labor and management).

Both elements of the relation can be measured and quantified; with some simplifications we can reduce them to net product and labor time. But the determination of the acceptable quantities or volumes of both elements is based on an eminently subjective criterion. What the workers or the community consider to be a sufficient or appropriate level of satisfaction of their needs is culturally determined, usually (although not necessarily) taking into account the workers’ aspirations, the number of family members, etc., as well as the situation of workers doing the same work in other enterprises. That which they consider an adequate duration and intensity of effort is also subjective, taking into account the normal labor time of a worker, the worker’s age, health, and capacity for work, the conception of work they have, etc.6

Equilibrium in community enterprises, those formed by self-employed workers (which can be considered individual businesses), and in subsistence collectives, is, then, a balance between two variables that the workers themselves regulate and combine, which is possible because they control both the means of production and the labor process. As they are not in a position to influence the market conditions in which they have to operate, they typically act under tight constraints and are limited in a double sense. On the one hand, they are forced to inhibit their needs and aspirations for production and consumption, on the other, they are pressured into greater self-exploitation of their own labor power.

Taking these conditions into account, the equilibrium point will be empirically given by the point at which the workers decide to leave work because a greater intensity of labor only allows them to satisfy needs that they define as unessential, or because longer labor time is not subjectively compensated.7

Naturally, it can occur that the economic unit operates at levels more or less approaching equilibrium, At the same time, it is possible that the market conditions and the enterprise’s levels of productivity do not permit it to reach the level of income considered the minimum necessary with a degree of intensity of labor considered to be the maximum possible (the maximum that the workers are willing to perform). In this case the two variables do not meet, or intersect, meaning the enterprise is not viable.

We will try to formalize these elements in a simplified model on the basis of which a systematic analysis can be done of the most meaningful variables that intervene in the function of these types of economic units.8

[...]

Some conclusions

We can draw some conclusions from the preceding analysis, considered as a whole, about the viability and potential growth of community enterprises and subsistence collectives operating in a “market economy.”

1. These enterprises are viable, efficiently achieving their rational economic objective of satisfying the fundamental needs of their members and maximizing their economic well-being. They achieve this objective not only in terms of operational results but also in regards to the factor contributions made by their members.

2. Replacing the means of production and other objective factors as they depreciate may cause enterprises to experience limited growth up to the point at which they achieve an adequate ratio of workers to the objective factors available, given constant production technology. From that moment on they can operate in a stable form, without growth, as long as the subjective judgment of the members about the intensity of labor and their own consumption needs remains unchanged. Under these same conditions, it is only possible to reduce the number of additional members if the workers are ready to reduce their incomes or increase their efforts, which supposes the presence of other motivations (solidarity, etc.).

3. An enterprise which limits itself to replacing its equipment as it wears out, without improving or increasing the technology or using more of it, and without making an effort to develop the human factors belonging to its members, is unlikely to survive. It is natural (including for biological reasons) that as time passes workers will experience a growing sense of fatigue from the same effort necessary to obtain a given level of income; likewise, their assessment of their consumption needs will grow in response to cultural influences from the external market. For this reason, it will always be difficult for an associative enterprise to operate in conditions of equilibrium.

4. If community enterprises and subsistence collectives adopt a policy of technological improvement, along with a policy of increasing the means of production (internal objectified factors), and these are funded through internal saving and reinvestment, a certain growth is possible. Such internally generated growth implies, nonetheless, notable sacrifices on the part of the members, either in the form of intensification of labor or restriction of consumption. Donations constitute an alternative means of factor provisioning, to which such enterprises seem naturally predisposed.

5. The most important source of growth available to this type of enterprise is the improvement and development of the human factors (those belonging to individual workers). This has a positive direct effect as much on the level of results one can expect (productivity) as on worker satisfaction in the labor process itself (reduction of fatigue). The operational rationality of these enterprises leads them to develop along this path.

6. For all of these reasons, community enterprises and subsistence collectives, created to satisfy the needs and well-being of their constituent members, constitute a form of organization of labor without a special tendency toward quantitative growth. Thus, they can expect to reach and maintain equilibrium on a smaller scale than that typical of efficient capitalist enterprises. Measured in quantitative terms from the standpoint of their participation in the market, community enterprises tend to remain subordinated in a “market economy” and less able to participate for structural reasons. Nonetheless, in qualitative terms they can come to have an important transformational effect in the economy to the degree that they demonstrate their capacity to improve the lives of those who opt to work according to their peculiar mode of business. And, when operating with adequate efficiency, they also tend to have very high levels of autonomy with respect to the tendencies and conjunctures of the market.

• 1

  Translator’s Introduction, Solidarity Economy Roads, https://geo.coop/story/solidarity-economy-roads-chapter-1 [MN]

• 2

  For Razeto: labor power, technology, management, material means of production, finance, and C Factor (solidarity). [MN]

• 3

  Subsistence collectives (talleres asociativos de autosubsistencia) are collectively organized but largely informal enterprises whose main purpose is to meet the basic needs of their participants, whether a family or a neighborhood group. In Solidarity Economy Roads, Razeto uses a broader term – popular economic organizations – to cover both community enterprises and subsistence collectives, which share a common imperative: “the need of the poor and the marginalized to find in themselves the necessary forces for subsistence.” (https://geo.coop/story/solidarity-economy-roads-chapter-2) Thanks to Joel E. Franqui for suggesting this translation. [MN]

• 4

  In marxist political economy, where surplus value is a key concept, the rate of profit is the ratio of surplus value to the sum of constant and variable capital. (MN)

• 5

  “Gains” is used here to clarify the distinction between profit as an accounting category and the broader concept of gain or surplus. (MN)

• 6

  In the Mondragon cooperative experience, the principle of “wage solidarity” has been interpreted to include consideration of the needs of workers in the community as a whole, not just the given cooperative firm. https://www.tulankide.com/es/revista/mayo-1987 - MN

• 7

  This concept of equilibrium was originally proposed by A.V. Chayanov in The Theory of Peasant Economy (https://archive.org/details/theoryofpeasante0000chai/page/n15/mode/2up), as an explanation of the functional logic of the peasant family economy in Tsarist Russia.

• 8

  See Appendix, Chapter 9.