Tuesday, 7 April 2009

The Economics of Co-operation - Part 3

I intend to look here at some of the Economic Theory in relation to Co-operatives. As much of the existing writing deals with Co-operatives in terms of orthodox micro-economic theory i.e. marginal analysis, I intend to begin by making some fairly general points using that method, but to illustrate the argument further in accordance with Classical Marxist Value theory.

Marginal theory starts by taking a fixed amount of some factor/s of production, and then seeing how each increment of some other factor affects output (Marginal Physical Product), and consequently Revenue (Marginal Revenue Product). The optimum employment of that factor is taken to be where the Marginal Revenue produced is equal to the price of the factor. If less of that factor is employed then more profit can be made by employing more, if more than that level is employed a higher level of profit can be achieved by employing less.

There is no reason to assume that Capital employed by a Co-op is more or less revenue producing than in a Capitalist enterprise, it remains the same machine. If output rises it is due to the way the machine is used i.e. the Labour applied to it, not to the machine itself. So we can draw the same Marginal Revenue Curve for Capital in the Capitalist firms as in the Co-operative firm.

At interest Rate I (the price of Capital), Q Capital is optimum. At the amount of Capital employed the Marginal Revenue is equal to the price of Capital I. At any point to the right of Q the revenue produced is less than the cost of employing it, so it reduces profit. At any point to the left of Q the revenue produced is greater than the cost, so employing more will increase profits. The Green area IOQ, is the total cost of employing this Capital, and as POQ is the total Revenue produced, the Blue area IPO represents the profit created by this Capital.

For Labour, however, the situation is not the same. For reasons previously set out, and which will be referred to again later the assumption is that Labour in a Co-operative enterprise will be more productive than that in a Capitalist enterprise. To demonstrate the consequence it is necessary to draw two Marginal Revenue curves, one for the Capitalist firm, and one for the Co-operative firm reflecting this assumption.

The red curve is the MR in the Capitalist firm whereas the yellow curve is the curve for the Co-op. This shows that for a fixed amount of Capital additional units of Labour result in higher levels of output and revenue for the Co-op compared with the Capitalist firm. Labour is not homogenous between them unlike Capital. We have empirical evidence to support this assumption. Marx in his analysis of the Lancashire Co-ops sets out that their higher rate of profit was due to their more efficient use of Fixed capital. Connolly makes a similar point about the use of machinery at Ralahine. Surveys in the 1990’s also showed that Owner Housing Co-ops are also the most efficient form of housing provision, and this appears to be due to a more efficient use of their Fixed Capital, i.e. the housing stock.

It is clear then that the higher MR curve for the Co-op has significant consequences. Firstly, profit for the Capitalist firm resulting from the optimum amount of Labour Q is shown by the green area, W,P,O, at wage W. For the Co-op, however, it is the much larger area shown by the combined green and mauve areas i.e. W,P1,O1. In addition, at the given wage rate W, the Co-op can sustain a much larger workforce at Q1, as opposed to Q.

If we assume the Capitalist firm operates on the basis of simple reproduction, that is all of the profit is consumed by the entrepreneur, then we can see that the Co-op has all the additional profit in the area P,P1,O1,O for use as expanded reproduction through investment. Alternatively, I have given the example of what COULD happen with a single Co-operative enterprise. Suppose the enterprise employs the same quantity of Labour as the Capitalist firm i.e. Q. But, at this level of employment MR is O2, and now equal to a wage rate of W1. Although, this leaves a surplus equal to W1,P1,O2 the amount available for investment is markedly reduced. This is the danger with standalone Co-ops as some theorists have set out. Workers may adopt a short term view looking only to maximise their own short-term welfare rather than considering the long-term interests of the firm and future workers. That could be particularly true if the firm is made up of predominantly older workers.

However, there does not seem overwhelming empirical evidence to support such an assumption. Most workers will consider their own future for at least several years ahead, and recognise that their interests are served in that respect by ensuring the viability and success of their firm. The greater efficiency of the Co-op can mean that both a higher wage and a greater surplus for reinvestment is possible, represented by Wage rate W2, giving an employment level of Q2, and a surplus equal to W2,P1, O3. Alternatively, if, as has been suggested, the Co-op is merely one component of a Co-operative conglomerate, then the wage may remain at W, the Labour employed at Q1, but the profit represented by the area W,W2,O3,O1 could be shared amongst those workers, whilst the remaining profit, represented by W2,P1,O3 is transferred to the holding company, there to be accumulated for the purpose of a) creating a Pension/unemployment sickness Fund, b) an accumulation Fund, and c) an overall profit fund from which all workers in the conglomerate are paid a dividend.

What are the conclusions from this? The Marginal Revenue curve for Capital in the Co-op and Capitalist firms are the same, whereas the MR curve for labour is pushed out in the Co-op at any given wage. It is clear that the Co-op should have a lower Capital:Labour ratio than the Capitalist firm, or what in Marxist terminology is a lower organic composition of Capital. But, how is this to be understood? In some ways this seems counter-intuitive to previous arguments. If the Co-op uses Fixed Capital more efficiently would this not suggest that LESS Labour would be required due to its higher productivity? Isn’t the lesson of Ralahine that such Co-ops tend to introduce such equipment more readily than the capitalist enterprise, both because they see it as labour-saving, and because they can use it more profitably? Yes, that is absolutely correct if the above is seen in the way that orthodox neo-classical economics often phrases things as simply Labour and Capital being nothing more than factors of production that are fully interchangeable in any production, more of one, less of another being used depending upon the relative prices of each. But, that assumption is not really valid. We do not see firms deciding to employ ten labourers digging with their hands, rather than five digging with spades, just because Labour is cheap! Capital is introduced because it raises the productivity of Labour, which is the value creating substance, and competition between firms ensures that whenever some new machine or production technique is introduced, rapidly all firms are forced to introduce it.

The argument above is not for Co-ops to work with a lower technical level than other firms in their industry, but that Co-ops should be established in those industries whose existing Organic composition of Capital is already low. It is in those areas that the higher labour productivity of Labour in the Co-op will be most effective, precisely because it is in those industries where Labour constitutes a larger proportion of costs! It is likely that within these industries the Co-op itself will have a higher level of investment in Capital than the average Capitalist firm for reasons I will come to shortly.

It is perhaps for this reason that Co-ops have frequently been successful in agriculture, which has traditionally had a lower organic composition of Capital than industry, but also Light as opposed to heavy industry also seems most optimal for the Co-op for the same reason. Again, that could explain part of the success of Mondragon, which has focussed on Light Industrial Production. This is good for a number of reasons. Firstly, given the problems of Capitalisation, it is good that the optimal type of production is that which requires least fixed Capital! Secondly, because these areas maximise Co-op profits. Thirdly, because the Light industry and agriculture in producing consumer rather than producer goods facilitates the linking of the producer co-operatives with the Retail Co-operatives in the way suggested by Lenin, and with the worker as consumer, thereby providing the basis for undermining the alienation of labour in production. Fourthly, because the Co-operative is more labour-intensive it withdraws proportionately more Labour from the circuit of Capital, and by reducing the supply of Labour, enables workers in the Capitalist sector to more easily negotiate higher wages. There is one final argument here. I have previously argued, basing myself on Marx’s Grundrisse, that Surplus Value is only produced in Department II – Consumer Goods. Capitalists in Department I and III (Capital Goods and Luxury Goods) obtain profits by the mechanism of the average Rate of Profit. To the extent that a Co-op sector can secure for itself a monopoly position it can remove its profits from that averaging process, keeping all the Surplus Value it creates. A similar thing can be seen in the way Oligopolists like TESCO achieve that in relation to their suppliers from Dept II.

See: Capital Consumes Itself

To come back to the Production Function of the Co-op and capitalist firm, there is one more consideration. I have previously argued that if all Co-ops were part of a single conglomerate then a Central Co-op Bank could provide finance for investment for firms within the sector, and could do so at a long-term fixed rate, lower than the market rate. This could be funded out of the accumulated profits of the sector. In effect, what we would have would be single fund for investment that merged the self-financing investment of the Capitalist firm with its investment from borrowing. Whilst its true that there could be periods when this fixed rate is higher than the market rate – though as I’ve said the Bank could replenish its reserves during such periods by borrowing in the market itself – the assumption of this lower rate can still be maintained for the Co-op sector, by considering the difference as a Risk premium. In other words, the Capitalist enterprises in making their investment decisions have to take into account a certain risk premium based on the possibility of rates rising. The Co-op on the basis of a Long-term fixed rate from its own Bank can discount that. Consequently, not only can the Co-op make better use of Labour, but can also justify a larger employment of Capital compared to the capitalist firm. Its production function as a whole is shifted outwards.

If this is considered in terms of Marx’s Value Theory I think it can be seen more clearly.

C £1,000 V £1,000 S £1,000 = E = £3,000.

Suppose this is a capitalist firm. All of C is used up in production with the fixed and circulating components having the same Rate of Turnover. Let us assume that 1,000 units rea produced with a value of £3 each. The Rate of profit = S/C+V = 1,000/1,000+1,000 = 50%.

Let us now assume that there is a Co-op producing the same commodity, but the productivity of Labour in the Co-op is twice that of the Capitalist firm. In that case if we assume the same amount of labour employed, this labour will consume twice the quantity of C. But, V will remain constant. We will have twice the output, and as the Co-op takes the market price the value of its output will be 2,000 units x £3 = £6,000. So we can calculate,

C £2,000 V 1000 S £3000 = E £6,000.

So, although we have only doubled the productivity of Labour, the Rate of Exploitation – S/V - has trebled from 100% to 300%, and the rate of profit has risen from 50% to 3,000/2,000+1,000 = 100%. This higher Rate of Exploitation and of profit arises not because the workers are physically exploiting themselves more, but simply because their work process is more efficient, they use fixed Capital more efficiently.

Suppose, now a firm with a higher organic composition of Capital. So:
C £5000 V £1,000 S £1,000 = E £7,000.

Now the Rate of Profit is 1,000/5,000+1,000 = 16.67%.

If again we assume 1,000 items we have a price of £7 each.

The Co-op on the same basis as above will have,

C £10,000 V £1,000 S £3,000 = E £14,000 = 2,000 units x £7.

Now the Rate of Profit is 3,000/10,000+1,000 = 27.27%.

So the Rate of Exploitation still rises from 100% to 300%, but where previously the Rate of profit doubled from 50% to 100%, now because a proportionately smaller quantity of Labour is used, and it is Labour, which produces new value, R rises only from 16.67% to 27.27%, a rise of only 63.5%.

This confirms the view that the Co-op has a Comparative Advantage in producing in those areas with a low organic composition of Capital. This does not necessarily mean that Co-ops should restrict themselves to the more technically backward areas of production. As I have argued elsewhere, in fact, new industries are marked by such a Production Function too, because typically, they involve little fixed Capital, but a relatively high level of complex Labour. This then is the other area in which Co-op production could have a marked comparative advantage, and it may also benefit from first mover advantage in being able to create a sheltered market. Thing such as Computer programming and IT development, Bio-Technology, Media production and Creative Production are such areas where relatively little fixed capital is required, but a comparatively large amount of highly skilled, high value, complex Labour is required to produce high value added output.

The role of Co-operative Colleges and universities to further train and develop such workers as with Mondragon can be seen as important in this regard.

Further considerations, need to be taken into account. For goods in a more mature phase of the product cycle it may well be that the surfeit of cheap labour in developing economies means that Capital can locate production of light industry there at wages that could still undercut even the more efficient Co-operative production in a developed economy. It may well be, then that Co-operative production of such commodities is best done there and not in the developed economies. However, the production Function of commodities in this mature phase of the product Cycle is marked by a higher organic composition of Capital, anyway. By that stage, production techniques have developed, and demand has risen to an extent where mass production techniques are profitable, and so skilled labour has been replaced by machines, and unskilled machine minders. The problem for the workers in the developing economies is precisely that they do not have access to Capital to engage in such production in the first place! In fact, this is another reason for the development of a Co-operative conglomerate that can function on an international scale. Such a conglomerate COULD provide such Capital to those workers, just as it provides Capital to Co-operatives in the developed world. There are tremendous advantages in this given the argument I have previously outlined.

Although, the workers in such a Co-op would receive the average wage for such workers in their own economy – which is going to be low – like all other workers in the Co-op conglomerate they would receive income from other sources as members of the Co-op. First, they would receive a share of their own Co-ops profits as an incentive to develop it, to make it more efficient and so on. Secondly, they would receive an equal share with all other workers within the Co-op conglomerate of the Profit Fund. As a percentage of their total income this would clearly be a much bigger sum than for workers in the developed economies with their higher wages. It would be a powerful incentive for such workers to join the conglomerate, and to merge their profits into it. Furthermore, the conglomerate in addition to the profits Fund, would have its unemployment and sickness and Retirement Fund. Access to such funds would place these workers in a privileged position, because it is unlikely that they would otherwise have access to such funds working for a private Capitalist firm in the developing economies. Such factors, would play an important sociological and ideological role, helping to incorporate them into a global Labour Movement.

The other advantage such workers could gain would be in relation to Lenin’s comments about the need to tie the Producer Co-ops with the retail Co-ops thereby providing a guaranteed market. If such a Co-op conglomerate, say in Europe were established that tied in the Euro Co-op, then through its retail operations it could determine the demand for, and specifications of say, an electric kettle. Production of this could then be organised within the developing economy with the benefit of knowing that a guaranteed market existed, because the Euro Co-op would agree to buy and sell a given quantity of those kettles giving them priority over any other make. Through close involvement of workers as consumers the Co-op could enable a constant improvement in quality and design.

In contrast this would also suggest that in developed economies production of a different kind is most advantageous. That is production where competition from low-wage developing economies is not a factor, areas where Capital is not already well-established. In other words, it suggests that attention should be focussed on the kind of high-value, complex labour intensive areas referred to above. Other such areas would be for example, Alternative Energy production.

See on this for example A Reply to Dr. Paul Cockshott and

The Tendency of the Rate of Profit to Rise

As stated above, if such Co-ops were able to obtain first-mover advantage they might be able to utilise that, and their greater efficiency to create a sheltered market. In addition to using those aspects of bourgeois property law such as patents and copyrights, the Co-op might also distribute some of its Surplus Value to workers as consumers through lower market prices presenting a further barrier to entry by Capitalist rivals. Similarly, distributing a portion of Surplus Value to their own workers in the form of higher wages could provide a further barrier to entry, by setting the market wage that such employers would have to match. By such means it may restrict the ability of Capital to enter the sector effectively, and thereby to push down prices and profits. Indeed, the very nature of the Co-op, and its ability to more rapidly accumulate should provide it with the normal advantages of economies of scale over rivals as a further barrier to their entry. Finally, it may well be that a Co-op producer in a given area over a period of years may well have built up a level of customer loyalty through its methods of relating to customers, especially where appropriate through Retail Co-ops, that this in itself provides a barrier to entry of Capitalist firms.

Economic theory has a concept known as Externalities. What this means is that there are some activities which are not priced, but which have economic consequences. The classic example is that of the beekeeper, and the market gardener. The beekeeper’s bees pollinate the market gardeners fruit and vegetables thereby providing him with a service. The gardener does not pay for this service even though he benefits from it. Similarly, the market gardeners flowers etc. provide nectar for the bees from which they make honey, which the beekeeper then sells. Again the market gardener does not charge for the service provided even though the beekeeper profits from it. In addition to such benefits can also be costs. For example the cost to the household of cleaning is not borne by the motorist whose car’s pollution makes that cleaning necessary! In similar fashion there are benefits that some employers obtain as a result of expenditure undertaken by other employers. An employer who only takes on skilled workers does not pay for the cost of their training, and thereby benefits from the fact that other employers have trained those workers. This is, of course, one reason why employers, particularly small employers, do not like to provide such training. It is one reason that Capital overcome that problem by introducing State Education, and the same argument applies to State minimum healthcare.

From this perspective of a Co-op conglomerate can be seen the advantage of developing a Co-operative University similar to that established at Mondragon in every country. But, we need more than that. WE need Co-operative Colleges to provide training for workers not just in the skills that bourgeois education wants to limit them to, but in management, so that the reliance on elites to perform those functions can be overcome, and at the very least in the short-term the workers can learn the necessary skills to oversee, and inspect the work of those elites. And this education, then becomes connected to the workers daily lives, because day in day out they will be carrying out that Workers Inspection, will be making Management decisions alongside their comrades, at various levels of responsibility. Such education would also make up for the inadequacy of the State Education provided to workers by the State capitalist education system. Obviously, such Universities and Colleges should operate on the basis of giving priority to workers from the Co-operative sector, but they could provide education and training on a much wider scale than that in the way that the Workers Education Association used to do. Indeed, what is left of the WEA, together with the various Trade Union Studies Departments, and the Co-operative Studies Departments at various institutions could form the initial nucleus of such a Co-operative education system.

Such provision has external benefits for all Co-ops, both social benefits and benefits in respect of private net product to each firm. In addition, at some point when workers consciousness is higher, militancy higher, demand might arise for Workers Control in Capitalist Industry etc. and such education and training, together with shared experiences with workers in the Co-op sector provides the basis for workers implanting a regime of Workers Control and Inspection straight away without reliance on elites or bureaucracies.

Back to Part 2


TrumptonRiots said...

This is really well argued.

Some of your figures do need updating. There is no longer £500b in the pension fund for co-operatives but £380b. It would be interesting to see a breakdown of this money by occupation.

Boffy said...

Thanks. I know the Pension figures are out as I've said before. However, the fall is offset by the fall in share prices of the Companies that could be bought - in fact its largely the same thing.

As I've said elsewhere in adition to that sum, it could also be possible to argue for the money that goes to the State to also go to such a Workers Pension Fund, so the sums would be many times larger than now. IN addiiton from such a position I think its possible to argue for larger cobntribuitons into such a Workers pension Fund by companies, and workers through national/international Trade Union bodies should set such figures and take collective action to make all employers conform.

Boffy said...

Just on the contribuitons by Occupation. I'd argue for a single Fund rather than being concerned with different groups of workers. It would be possible to accommodate the idea that the Pension payment should be based on income or contribution without conceding the idea that those who pay more get a bigger say.

The idea being that some well-paid workers but who form a Minority wouldn't be able to influecne the use of Funds unduly, but would accede to the views of the majority provided the Fund continued to pay them a decent pension.

Also from the argument I've given above it may well be these kinds of well-paid workers who would form the kind of high-value added Co-ops referred to, and so the two sides of the equation are tied in.