Tag Archives: cooperative economics

Methods to promote cooperatives

On this site we have proposed several methods which the government could use to stimulate the creation of a cooperative economy.

First of all, the government should give preferential treatment to worker cooperatives when procuring goods and services from the private sector. This will give cooperatives an advantage and hence create an inducement to start a cooperative and to maintain them.

Also the government could set up a finance company which will help people with funding a cooperative through either finance or operating lease. This way the start-up costs and hence risks for new cooperatives will be reduced. By reducing the costs of setting up a cooperative, their formation will become more attractive.

Further the government should create a level playing field between wage labor and self-employment. This requires, for instance, the abolition of minimum wage laws and its replacement with some kind of basic income guarantee. A basic income will reduce the risk people face when they run their own businesses.

Another idea is when people who have lost their job apply for unemployment benefits, to inform them of the possibility to set up a cooperative with other people who lost their jobs. This should be combined with a retraining program, to ensure people will have the necessary skills to operate a worker cooperative.

Borrowing versus leasing

In our post A Cooperative Economy we briefly discussed the option of leasing as a method of funding worker cooperatives. The essence of a worker cooperative is that workers own, or at least control the means of production, or capital, instead of being employed by the owners of capital.

The fundamental problem is how can workers who are starting a cooperative, can acquire the means of production they need. Suppose that Alice and Bob are setting up a worker cooperative, but need 100,000 worth of equipment. Assuming that both have a monthly basic income of 1,200, it will be clear that they can’t raise the money on their own.

Of course, Alice and Bob can borrow 100,000 from the bank or some other financial institution. But this we leave both Alice and Bob indebted, which they have to pay off even in case their cooperative proves to be a failure. This is a prospect which might and will deter workers from forming worker cooperatives.

The issue at stake here, is the idea that a worker cooperative should own their means of production, which means that the cooperative has to purchase those. A large one time expense. There are, however, alternatives for outright ownership of the means of production.

Instead of buying, Alice and Bob could decide to lease the equipment they need. Suppose they could lease this equipment for, say, 10,000 a year, their cooperative only needs to raise 10,000 in order to start-up. When the cooperative is successful, they will be able to pay for the capital they use without incurring additional debts.

Alternatively Alice and Bob could hire-purchase the capital goods. The difference between lease and hire-purchase, is that in the latter case the goods will become the property of the lessees, while in the former cases these will return to the lessor at the end of the contract (or the lease contract maybe renewed). Both forms of credit have a big advantage from the perspective of the A&B Coop: in case it will default on its payments the lessor can only take back the leased goods, and refuse further use, but Alice and Bob cannot go bankrupt.

Because the lessor can reclaim his goods in case of default by the lessees, he takes less risks than in case of a monetary loan. Hence the costs of funding a business by lease or hire-purchase will be lower than the interests on a monetary loan.

This leaves us with the question who should supply the goods for lease. We propose that local governments to set up publicly owned lease companies which specialize in leasing capital goods to worker cooperatives. These lease companies can be funded either by the revenue raised by the lease of land or by borrowing the required funds. Money can be borrowed either from the Federal Credit Bank or from private investors. In the latter case interest rates can be kept low, since the government will guarantee the payment of debts.

Though in Mordan space settlements, a substantial portion of the means of production will be owned by the community, our system differs from Soviet-style communism. First, unlike in the USSR the private ownership of capital goods will be legal. Second worker cooperatives will operate in a free market rather than in a command economy, i.e. the state does provide capital to the cooperatives, but it does not determine what should be produced.

In the economic system we propose, labour will hire capital rather than be hired by capital. And hence capitalism is essentially reversed without resorting to Soviet communism.

A few words on Consumer Cooperatives

In our post A Cooperative Economy we argued that shops with numerous “anonymous” customers are not well suited to be run as consumer cooperatives. A consumer cooperative is a business owned and democratically by its consumers. It’s clear that the anonymity of customers, is a s problem for running a consumer cooperative.

One way to solve this problem, is to restrict access to these shops to members of the cooperative. But this seems to be an inferior solution. Could we design a more satisfying solution?

Most companies handle markup pricing, which is determining prices by adding a markup to the costs of production. An an example: a shop owner buys apples from a farmer for 5 Stella per kilogram, and he sells it for 6 Stella per kilogram in his shop. In this case the cost of production is 5 Stella, and the markup is equal to 1 Stella.

In reality the cost of production includes not only the purchase price for the company, but also additional costs such as salaries, transportation and storage. The markup is simply the profit the shop owner makes if he sells something.

How does this relates to consumer cooperatives? The main objective of a consumer cooperative is to reduce the prices for its members. Ideally, the prices its members should be should be equal to the cost of production. Or in other words, setting the markup at zero. A company knows its costs of production (it has to pay these costs) and their markup (it has to set this one). This allows a consumer cooperative to apply price discrimination, by charging members only the costs of production and non-members also the markup.

Of course, this requires that members of the consumer cooperative has to identify themselves when they make a purchase. The simplest way to arrange this, is by providing membership cards when people join the cooperative, probably after a paying a (one time) membership fee. Those who can’t show a membership card, will have to pay the markup as well.

An interesting question is what to do with the markups paid by non-members? It can be used for investments, to pay a bonus to the employees or it can be donated to charity.