Arguing for co-ops I: growth

One lesson of the financial crisis is that hierarchical firms with outside owners are prone to catastrophic failure. This presents an opportunity for the left - to press the case for more  egalitarian co-operative forms of ownership and control. But as Paul says:

Co-ops can only really succeed if there is a consensus on this subject - and as far as I can see, the left hasn't even started talking about it properly yet. This is what the left is for. It is the only thing that the left is for.

So, let’s try and remedy this. In the next few days, I hope to sketch some arguments for co-ops. These are intended to be first words, not last ones.
I’ll start by considering an argument against co-ops which I consider to be quite weak.
A common argument against co-ops is that they have a bias against growth. This is because if a co-op is to expand, it must take on more workers or customers and this dilutes the ownership stake of incumbent workers (or customers if these own the firm). And workers/customers will be reluctant to do this.
Just look at food retailing. The Co-op has lost market share down the years, whilst Waitrose stays up-market rather than pursues discounting-led growth of Lidl or Tesco.
A co-op dominated economy will therefore grow more slowly than a shareholder-dominated economy.
Even if we concede that growth is a good thing, however, this argument, however, is not as strong as it looks.
This is because existing firms, on average, don’t often grow anyway, whatever their ownership. Bart Hobijn and Boyan Jovanovich show (pdf) that the value of firms that were on the stock market in 1972 fell relative to GDP, even though falling discount rates alone should have raised it.
In other words, all of the US’s massive stock market boom between the early 70s and late 90s came because of new firms. Aggregate economic growth occurs not so much because existing firms expand, but because new ones enter.
One big reason for this is that, often, only new firms can fully use new technologies. For example, it was Dell that made a better go of selling PCs than IBM. It’s Amazon, not Waterstones, that dominates online book retailing.
Of course, quoted firms invest millions of pounds worth of management time in looking for growth opportunities. But much of this is wasted. As Alex Coad shows, firm growth is “largely a random process.” Nothing much predicts which firms will expand and which won’t - not profits, size, productivity nor even innovation.
If you doubt this, just think of the number of ways the pursuit of growth can backfire. Growth can be bought merely at the  price of increasing risk; Bradford and Bingley and Northern Rock expanded rapidly after demutualizing. And look what happened. Or growth cannibalizes sales of existing outlets, as DSG and Starbucks have found. Or there are just good old diseconomies of scale. Growth is often a bosses’ ego trip, rather than a viable or efficient strategy.
All this raises the question: why do we think quoted firms are an engine of growth? In part, because of cognitive biases. They talk incessantly about pursuing growth, and we mistake talk for deed. And, of course, there’s the salience effect. We see the tiny minority of successful growth stories whilst the many failures get forgotten; everyone knows Tesco, but few remember Fine Fare.
The bottom line here is simple. The tendency for co-ops not to grow is no argument against them, relative to quoted firms. If you want economic growth, the key thing is to ensure that barriers to entry for new firms are low. Growth comes from market structure, not ownership structure.

Comments

[Frank H Little]

> if a co-op is to expand, it must take on
>more workers or customers and this dilutes
>the ownership stake of incumbent workers (or
>customers if these own the firm)
Traditionally, this wasn't a problem, as the co-operative movement grew organically. Although a basic template became established, as well as a jointly owned wholesale society, co-op societies sprang up independently.

[jameshigham]

Glad you're running this thread - I like co-ops and think it was something in Britain that was good. Hope it returns to this.

[passer by]

"why do we think quoted firms are an engine of growth?" Whos is the We, I dont.

[dearieme]

Most of "the left" wouldn't be remotely interested in the widespread existence of co-ops because dispersal of power and wealth in not what they seek; they want them centralised and under their own control. As you must very well know, Mr D. Ooh, you are a tease.

[Luis Enrique]

Doesn't a distinction need drawing between growth of a firm (what, revenue growth?) and firm behaviour that leads to growth at the aggregate level? For example, a sector that experiences a dramatic productivity increase and sees revenues fall (because prices are cut) and employment fall, can contribute greatly to growth in the wider economy (indeed, how else does growth in that sense occur?). Likewise, it is wrong to think that because growth by firm A cannibalises firm B, that nothing has been achieved ... why does firm A beat B? It may be by cutting prices, introducing a new variety of good or raising the quality (in the sense that consumers prefer firm A's output) of an existing variety - all these things are what drives growth as in wealth creation / poverty reduction.

So, do you think co-ops differ from other forms of ownership with respect to their incentives for / propensity to produce welfare enhancing growth of that sort? If, for example, they are reluctant to make investments that reduce employment, what are the consequences of that?

Also, while it's obviously true in a sense to say much effort attempting to grow is 'wasted', when you are dealing with discovering (costs, demand) and learning, trying and failing is a necessary part of the process, and not a waste at all. I really don't know what conclusion to draw from the observation that firm growth is unpredicatable.

[passer by]

cant we just keep it simple.

1, get rid of dividends
2, get rid of off book accounting
3, stop giving the city a subsidy thru our pensions...you never know coop investment trusts might emerge

[Jason]

Hrm, I've always equated coops with higher prices.

[Bob B]

James Higham: "I like co-ops and think it was something in Britain that was good."

Producer or consumer co-ops or both??

If co-ops - of either kind - are such a good thing then why aren't there more of them.

The John Lewis Partnership is a success story but why, or why, is it so difficult to find other examples of successful co-operative enterprises?

[Charlieman]

The Co-operative Wholesale Society is a federation of local co-ops. Overall growth of CWS benefits local co-ops, because they have greater buying power and they retain independence. Growth of local co-ops benefits members materially, but reduces ownership and the sense of belonging. A solution therefore is to grow and divide.

[Charlieman]

@Bob B

Successful employee owned companies:
http://www.baxipartnership.co.uk/index.html

[Giancarlo Angulo]

I've wanted to write about a coop enabled economy I envision, similar to an startup driven economy I've been reading elsewhere.

It just seems a good idea to me.

Hope to find new ideas in your future posts on coops.

cheers!

PS: You've written about how most growth isn't from companies growing rather come from new firsm getting created. The implications of this just hit me whilst reading your post, thanks!

[Bob B]

If co-operative enterprises are so beneficial, presumably countries with more of them would be economically more successful than countries with few co-operatives.

"Collective farming is an organization of agricultural production in which the holdings of several farmers are run as a joint enterprise. A collective farm is essentially an agricultural production cooperative in which members-owners engage jointly in farming activities. Typical examples of collective farms are the kolkhozy that dominated Soviet agriculture between 1930 and 1992 and the Israeli kibbutzim. Both are collective farms based on common ownership of resources and on pooling of labor and income in accordance with the theoretical principles of cooperative organizations. . . "
http://en.wikipedia.org/wiki/Collective_farming

And was Soviet agriculture hugely successful?

I believe not. By many accounts:

"Although accounting for a small share of cultivated area, private plots produced a substantial share of the country's meat, milk, eggs, and vegetables. Although never more than 4 percent of the arable land in the USSR, private plots consistently produced roughly a quarter to a third of agricultural produce. Private plots were among many attempts made to restructure Soviet farming. However, the weak worker incentives and managerial autonomy, which were the crux of the problem, were not addressed."
http://en.wikipedia.org/wiki/Agriculture_of_the_Soviet_Union

[ejh]

"why, or why, is it so difficult to find other examples of successful co-operative enterprises?"

Well, perhaps because if an enterprise is likely to be successful, it's relatively easy for a capitalist with ready money (or access to it) to organise that enterprise than for a co-operative to be set up. It's more straightforward and it's also the process we're accustomed to.

It doesn't follow, from its rarity, that a co-operative model wouldn't work: I'm sceptical about the idea (and more than sceptical when it comes to agriculture, for reasons set out above) but I don't in principle see that it shouldn't be more common than it is.

Of course one problem is that it tends to be used very much as a last resort, for failed companies that capital won't touch: so it's not really playing on a level playing field.

[dsquared]

[One lesson of the financial crisis is that hierarchical firms with outside owners are prone to catastrophic failure.]

S&Ls! Equitable Life! Even your original point about building societies is very under-researched (see also, the Spanish cajas de ahorros).

[Bruce]

One problem with employee or customer owned enterprises is that there is an ever present risk that the current owners (with current management promoting) will decide to "cash-in" on any success by selling or going PLC - such as with the building societies (with hindsight, not a success) and increasingly professional partnerships.

[ejh]

"see also, the Spanish cajas de ahorros"

Has something gone wrong with them then? (Just in case I need to know.)

I'm not sure that demonstrating that the S&Ls and Equitable Life fell into disaster demonstrated anything other than it's not just "hierarchical firms with outside owners" which "are prone to catastrophic failure".

[Kevin Carson]

Bob B.: I'd almost think better of you if I thought you were being deliberately disingenuous.

Do you *really* think Soviet collective farms, whatever their de jure status may have been, were a genuine example of cooperative ownership? Good God! They were required to market a fixed percentage of their produce to the state, on terms set by the state, and their autonomy was severely restricted by state interference with their internal governance.

Next thing, you'll be using the soviets under Stalin as evidence for the unworkability of direct democracy.

[Bob B]

"Do you *really* think Soviet collective farms, whatever their de jure status may have been, were a genuine example of cooperative ownership? Good God!"

Ahem. Nice try but your comment doesn't - and cannot - account for why the small private plots of land, cultivated by the long-suffering Soviet peasantry, were so productive and provided such a disproportionately large share of food supplies on the Soviet market. Stalin tried to abolish the private holdings for a short period, as they were deemed ideologically unsound - which they indeed were in terms of the prevailing ideology - but the private plots had to be restored because of the impact their abolition had on Soviet food supplies.

Besides that, the other outstanding example of collectivist agricultural co-operatives were the kibbutzim in Israel:
http://en.wikipedia.org/wiki/Kibbutz

And the numbers of kibbutzim and their share of Israeli agricultural output are in decline.

It's challenging to extract from the factual evidence a case for co-operative enterprises. The standard economics case against co-operatives is similar to the regular case made against the commons - the tragedy of the commons:
http://www.dieoff.org/page95.htm

[Bob B]

Some reflections:

Rather than go charging around claiming that co-ops are truly wonderful - when the evidence shows that they manifestly aren't - it seems to me that the intelligent approach is to analyse why the John Lewis Partnership (JLP) has been so successful, making it one of the few notable examples of a commercially successful producer co-operative. Another example is the Tower Colliery in Wales, now closed down for geological reasons:
http://www1c.btwebworld.com/tower-coal/histintro.html

Waitrose is part of JLP so it's not really a separate example of a successful co-operative. Now the interesting thing about Waitrose is that it makes no attempt to go for the popular end of the groceries market.

It is unashamedly elitist and prices accordingly. No rational shopper goes to Waitrose looking for price discounts. As The Economist once described its loyal customers, they regard themselves as mostly too refined to shop at Sainsbury's. And since I count a few among personal friends and acquaintances, I can attest to that insight. As for me, I mostly shop at Tesco's, easily the most successful British supermarket chain of them all but then I'm an economist and not hung up on ideological preconceptions.

[Charlieman]

@Bob B

Waitrose is expensive, so it would be unwise to shop there for your entire family basket if you are on a modest income. But that does not necessarily make it elitist or overpriced. Waitrose is just part of the market, and what it does best is selling good food. I've not observed a dress code at the entrance and know many people who use it to buy specialities, topping up what they buy on the market or at discount supermarkets.

Consumer perceptions of supermarkets are a good example of cognitive bias. Most consumers believe that they get the cheapest basket for their requirements from their preferred store; naturally, they haven't performed a trial, buying the same basket from a different supermarket eight times on the same day. Their perception of "cheapness" is based on ad hoc purchasing, and the cheap deal on two or three items in the basket on a first visit can easily skew perception for a long time.

If you are like me, you'll get a flier every week from a local supermarket offering the best deals. I must have been away when they sent me the flier about the worst deals, but the bad deals must exist in order for supermarkets to maintain their margins (even given supplier exploitation).

The "average basket" surveys by consumer organisations don't convince me either; they are "too average" and fail to account for taste or cultural differences. Supermarkets play on our biases and lack of time; in an open market, I can quickly spot who has the cheapest aubergines and the best oranges; without driving.

[Bob B]

There's the challenging issue as to how come Tesco's is so successful among the supermarket chains in Britain and number 3 in the world in terms of its global sales, after Wal Mart and Carrefour.

After all, at the start of the 1990s, Tesco's wasn't even the biggest British supermarket chain as measured by sales - Sainsbury's was. Why does Tesco have the edge?

[refurbished computers]

it could be bad sectors on the HD or mobo issues. Since you have a Dell, hardware issues are always likely.

[plantronics telephone headset]

Company growth is our main concern being a small business operation. Needing to find the faculty is one thing but then having to pay their salaries.

[plantronics wireless headset]

We are confident that we will be able to pay them to keep them happy. We need to start outsourcing telecommunications to stay in business.