No business system is perfect, but there are some problems in many firms that
may be easily solved by moving to a cooperative system. Cooperative businesses
are those that try to exchange some of the tight control of a traditional
organization for the trust of the workers, which can be more valuable in the
long-run. This does not mean that this is a cure-all or that this is an easy
solution, since there are many barriers to slow down such a radical change in
thinking. Just like any business decision, this is a tradeoff, here it is
between which goals the firm wants to achieve and how much power the "owner"
wants to give up to reach those goals. This paper presents cooperative
business techniques as alternatives to traditional hierarchical organizations
to help the business person optimize this tradeoff.
"Hierarchical patterns are so prevalent in our society and so deeply ingrained
in our mind the we are almost incapable of looking objectively at the available
evidence and admit that democracy in business and in other types of
organization is indeed an economically -- and certainly humanely -- superior
structure" (Seibel and Damachi 1982, p. 129)
This paper will provide evidence that alternatives to a traditional
hierarchical organization can not only benefit the workers, but can make the
business succeed as well. Then the paper will discuss some of the ways
cooperatives can fit into various economic models.
If a business person is to be encouraged to move towards a cooperative system,
then they would want reasons that doing so would be advantageous. This paper
hopes to show that a number of goals that many business people have been
striving to achieve are simple consequences of a cooperative system. However,
cooperative firms are just as unique as traditional firms, but most of them do
have following distinguishing characteristics that make them quite attractive.
There are two competing theories on the effects of cooperative management on
the health and safety of workers. First, there is the theory that the workers
would be more willing to take greater risks with the potential for greater
profits. On the other hand, the workers in a cooperative are better informed
about issues of health and safety, so that makes them more careful. In fact,
what often happens is that the firm approaches a social optimum between these
two extremes. That way, the balance can be reached by making sure workers are
informed of workplace hazards, and then can make an informed decision to take a
risk with the chance of greater profit. (Rooney, Employee Ownership and
Worker Participation: Effects on Health and Safety, p. 324) However, when
the cooperative firm is put under economic stress this situation actually has a
negative effect. In this situation, the workers will take too many risks in
order to save their jobs or current wages.
Organizational behaviorists and some managers have come to realize that
different working environments affect the productivity of workers, while most
economists stick to the more traditional model of treating workers just as a
quantity unaffected by other factors. There have been studies to show that
cooperative work environments affect worker productivity positively, as in the
case of some Yugoslavian firms. However, most economic literature has a
difficult time assessing work environment because it is so qualitative in
nature. (Klinedinst, p. 364)
The increase in productivity due to a positive working atmosphere is
particularly noticeable when the cooperative firms are compared with state-run
firms. Cooperative firms are definitely more competitive than state-run firms,
and one can try to argue that cooperative firms are as competitive as, if not
more than, any capitalist firm. The failure of cooperative companies in
capitalist systems may be more due to ideological conflicts, rather than any
lack of competitiveness. (Doucouliagos, p. 44)
As Kropotkin suggested, worker alienation forces the worker into a mindless
state of unimaginative drudgery. While if you engage the worker's mind, then
it will naturally be put to use trying to innovate the way their work is done.
This is particularly advantageous when innovation is the real product sold to
In some cases, and especially in the case of the computer industry, innovation
is the only advantage that one business has over another competing business.
The competing businesses constantly try to innovate: their product, its method
of production, the labor costs, and their customer service. Unfortunately,
"hierarchical organizations inhibit innovation and ignore the talents of the
majority of employees." (Wilson, p. 39) Therefore, if one's goal is to
increase innovation at any cost it would be best to avoid a hierarchical
organization, and probably in one's best interest to consider cooperative
Quite often, one of the institutional goals of a company is to get a long term
commitment of the employees to the firm, since high turnover can break any
sense of continuity and add greatly to training costs. Cooperative techniques
can be seen a route to achieving this goal, as shown in the case of U.S.
computer industry. (Bradley and Smith, p. 580) A cooperative environment is
generally more friendly and makes the worker feel like part of the whole, and
inspires employee loyalty. Luckily this effect is not limited to "full"
cooperatives alone, and the evidence available "suggests conditions under which
some firms are facilitating inter-worker collusion and receiving employee
loyalty in exchange." (Drago, p. 59) One of the best examples of limited use
of cooperative techniques are unions, which can be quite effective since
"unions create a worker voice, reduced turnover, and enhanced commitment to the
firm" in a study of 21 Australian firms. (Drago, p. 60)
"There is reason to believe that the damage to persons caused by the experience
of productive labor in settings characterized by powerlessness and the absence
of autonomy is manifested in a wide range of problematic behavior, attitudinal
and psychological developments." (Greenberg, p. 550) So, the first step to
improving the mental health of workers is to eliminate these feelings of
powerlessness and absence of autonomy.
From previous research, there are two sides of this problem to attack: first,
the work is technically alienating because of the minute division of labor
exemplified by the assembly line; and second, the organizational hierarchy that
manages the workers treats them like a social assembly line. Again, the
obvious solution is an imaginative reorganization of the work atmosphere by
giving the workers a sense of power and autonomy, thereby eliminating these
feelings of helplessness.
One of the greatest problems in firms today is still worker alienation, and was
one of the primary justifications for communism. The cooperative may have a
solution to this problem without the totalitarian measures of the Bolsheviks.
By giving the workers a sense of power and purpose many cooperatives have
instilled a sense of satisfaction in their members and reduced feelings of
alienation. This goes with the previous point of having less mental health
problems, but one hopes that happy workers are good thing in their own right
aside from the mental health benefits.
In the cooperative firm the job boundaries aren't as rigid as they are in a
traditional firm, so much so that spontaneous cooperation pops up everyday in
the cooperative company. A prime example of spontaneous cooperation is when
there is an informal rotation and sharing of jobs outside the usual assigned
schedule. Job assignments become informal and alternative arrangements can
easily be reached based on the workload and the abilities of each of the
workers. When there is a conflict, the workers stick together and try to work
the conflict out, rather then appealing to a higher authority. (Greenberg, p.
To further illustrate spontaneous cooperation, many of the workers who had
experience in traditional businesses often complained that they felt helpless
to assist coworkers with tasks because it was against union regulations. They
felt much better with the cooperative notion that encourages workers to help
each other out when they run into difficulties. If spontaneous cooperation
isn't enough of a benefit in itself, the phenomena also affected firm
efficiency and worker effort in a positive manner. (Klinedinst, p. 370)
A common complaint of modern businesses is that they are often top heavy. This
is a problem that is quickly solved by a cooperative organization, as
demonstrated by the survey of the plywood cooperatives. The plywood
cooperatives required one-third the management of an equivalent firm run
traditionally. Why is this? How can they continue to run with significantly
First, the workers in the cooperative firms felt that they weren't being
treating like children anymore. They were treated like rational human beings
by the managers and the managers weren't disappointed in return. This is
somewhat counterintuitive to the traditional notion that if you give the
workers an inch, they will take a mile. Instead, this inspires the managers to
trust the workers, and the workers learn to be trustworthy.
Of the workers sampled that had previous experience with a hierarchical firm,
they noted that whenever their supervisor was looking over their shoulder they
felt unsure of their abilities and that they could do nothing right. In the
cooperative environment the workers felt that they were trusted to do a good
job, and made sure that their coworkers were doing a good job. This made
everyone more confident and proud of the job that they were doing.
Supervisors in a traditional firm are often occupied with the direct
supervision of each stage of the process. They are often so busy that they
don't see the forest for the trees. Since the supervisors in the cooperative
firms trusted the workers, they could worry about more plant-wide issues and
deal with much larger problems more effectively. So, the managers are freed
from the job of micro-management and supervision, then in turn they can spend
most of their time on problem solving tasks that better utilize their skills.
Lastly, but certainly not the least of the advantages in the supervision of
cooperative firms is that workers noticed that their supervisors were much more
polite. The supervisors would often make sure to say "please" and "thank you"
when making requests of the workers. This helps contribute to an attitude of
mutual respect. (Greenberg, pp. 557-8)
Another major advantage of a cooperative firm was that the workers were often
better informed than their counterparts in a traditional firm. Not only
informed about labor related issues, but also production, finance, and other
enterprise-level issues. This way we aren't letting the monkeys run the zoo,
because each worker knows the state of the company and can decide where it
In the cooperative firm, it is necessary that all information regarding the
state of the enterprise be available to all members of the cooperative. All
too often, very few members take advantage of all the necessary information to
make an informed assessment of the state of the enterprise. However, even this
dissemination of information seemed to be enough to make sure that no small
group of people tried to take control of the whole firm.
A surprising result of this process is that company-wide issues become the
small-talk heard on the shop floor. So if two random people meet in the
company rather than talking about sports or the weather they would often have
an informed discussion of where the company was and where it should be going in
the future. If the general masses of the company are expected to run it, then
they have to work through hot issues. It's rather remarkable that this happens
spontaneously on the shop floor during otherwise idle time.
Since the workers are the ultimate authority in the cooperative firm, they had
better attend the shareholders' meetings to make the decisions. The
shareholders' meetings often show a remarkably high attendance of almost 92% in
the case of the plywood cooperatives. This is encouraging because it is the
most concrete evidence that the workers do participate regularly in the
management on their firm, and do believe that it is worthwhile; otherwise, the
workers would not attend if they thought that the meetings were just a joke.
The meetings are full of informed, intelligent conversation regarding the state
of the firm, and where it should be going; this is a direct result of them
being better informed.
The only rule for the organization of a cooperative firm is that there is no
strict rule. They range widely from a profit sharing retirement plan all the
way to employee owned/labor managed firms and producer cooperatives. The
organization of a cooperative varies according to what goals the company in
aiming for by using cooperative techniques. Sometimes a company's only
objective is to achieve a different tax status, while other times it is a small
step in a long evolutionary process. Often, employee motivation, innovation,
long term commitment of employees to the firm, diversification, and avoidance
of hostile takeovers are motivations for using cooperative tactics. Following
are some of the more prominent features of many cooperative firms. (Bradley,
In a truly cooperative venture the ultimate authority in the firm has to be the
mass of workers. Usually this is accomplished via general membership meetings,
which can greatly vary in frequency but annually or semiannually seem to be the
rule. The meetings generally concentrate on high level topics and try not to
get bogged down in the details since they are often so large, while most of the
detail is left to working groups or committees to work out.
Just because the workers hold the ultimate authority doesn't mean they don't
enlist the help of experts to help plan and manage day-to-day affairs, since
meetings of the entire worker's body occur rather infrequently. However, in
the anarchist tradition the authority delegated to the expert is done so freely
and can be taken back at any time. The expert is still responsible to the
workers and must report to them. Most of all, the expert can be relieved at
any time. These "experts" sometimes hold the position of managers in the
company. However, some view the manager/worker relationship as destructive and
that authority is better delegated in other ways. (Wilson, p. 48)
Along with the last point, hierarchies can still exist in a cooperative venture
too. However the power in the hierarchy flows from the bottom-up in these
hierarchies, rather than top-down in the traditional way. So, if there is any
committee system or management system, the power comes from the masses of the
workers and can be taken away by the masses of workers. Even if the smaller
governing body is made up of shareholders, the smaller body is accountable to
the larger one. This is a radical departure from the traditional capitalist
Profit sharing is one of the easiest ways that a business person can gain some
of the benefits of a cooperative venture, because required effort and change to
the power structure is minimal. With this small change one can begin to reap
the many benefits that cooperative firms enjoy. However, to fully enjoy the
fruits of a cooperative system one must be willing to take more substantial
There is a great deal of diversity among those profit sharing firms which
institute no other cooperative measures. The profit sharing schemes can range
from a simple retirement plan that is based on profits, to more direct or
performance related incentives, to employee stock ownership programs. The
method by which the dividends are calculated range widely also: some firms
advertise beforehand what scheme they will use, while others aren't so clear
how they arrive at the figure to be shared. One of the most common techniques
was to set a minimum goal that must be met by the workers before the profit
sharing would kick into effect. (Bradley, p. 573) In summary, the above are
the most popular methods of profit sharing, but most of them are pretty
uninteresting and too "traditional" when compared with more innovative
There are many possible incentives to raise worker morale, one of those being
community property which all the shareholders can enjoy, for example: vacation
houses, lunches, training sessions, day care, culture (music and actors for
celebrations), sports, holiday pay, etc. (Klinedinst, p. 374) Here you can
get the economies of scale, while keeping things decentralized.
The plywood cooperatives of the Pacific Northwest are a good example of
successful cooperatives here in the United States. By keeping close to home,
the laws and practices governing businesses will hopefully be more familiar to
the reader, so that this paper can concentrate on the innovative solutions the
plywood cooperatives have for doing business here in the U.S. Hopefully a
specific example will show how these pieces can fit together into a coherent
scheme for running a cooperative.
To remain consistent with the principle that ultimate decision making authority
and responsibility should lie with the general membership, the plywood
cooperatives have annual or semiannual meetings of all the shareholders to make
all the important decisions for the next year. These meetings generally focus
on the performance of the general manager, the financial situation of the firm,
the establishment of hourly wage rates, and division of the profits into
further investment and dividends to the shareholders.
One may find it odd that a general manager is mentioned in the topics of the
shareholders' meetings. Isn't it inconsistent with the principles of a
cooperative to hire a general manager? Not at all say the plywood
cooperatives, because the general manager and his subordinate supervisors are
hired experts whose authority comes directly from the workers. The workers are
not afraid to give the managers great leeway in running the company's
day-to-day affairs since the managers are hired hands, and if they screw up the
workers will fire them (and often do).
Cooperatives, in general, have also been criticized because they aren't as
quick to act as a traditional firm, since all the major decisions ultimately go
through the general shareholder's meeting. However, the workers of the plywood
cooperatives already have this problem solved by electing a board of directors.
This smaller board of directors allows the firm to react quickly to outside
influences, but this must be balanced with the dangers of giving a small group
of people great deal of power.
The plywood cooperatives have addressed this difficulty in a number of ways:
first, the board is elected by the shareholders; second, they make sure there
is regular turnover on the board, and third, they actively try to prevent a
tight-knit minority of shareholders from taking over the board. Some
encouraging statistics which indicate that this system is successful are: 31.5%
of the workers have run for a board position, and 17.5% of the workers had
indeed run for and served on the board of directors. This atmosphere has
prevented the board from getting too distant from the workers, since it is made
up of workers and when their term is up they will go back to being workers. In
fact, the shareholders almost universally felt that board members were very
approachable and almost always available to talk about company issues.
Producer cooperatives have also been criticized as "letting the monkeys run the
zoo," in effect implying that the average worker doesn't have enough
intelligence or knowledge to effectively run the whole firm. However, from
studies of the plywood cooperatives it is apparent that the average worker
doesn't hold the fate of the entire firm in their hands. The average worker's
actual decision making power is limited to the infrequent general membership
meetings, so the firm is remarkably immune to the petty whims of a small group
of workers. On the actual production front, the day-to-day management is
pretty much the same too, with the workers being supervised by managers. All
in all, things look very much the same in the day-to-day operation, and if one
worker is a "monkey" it is impossible for that worker to change the fate of the
One of the most interesting phenomena is how groups of workers act as
collective supervisors to handle people that might be "slacking off." If an
individual worker is not "carrying their own weight," and tries to reap the
benefits of others work and cannot be convinced by the hired management to
"shape up," then it is up to this person's fellow workers to get him/her back
in line. So there is tremendous pressure for a worker to listen to the
management and to do their job well, as long there is confidence that the
management is performing their job well.
In summary, there are infinitely many possible ways to organize a cooperative
firm. Above are some organizational techniques that have succeeded in a number
of situations. However, each business is an individual and may require new and
innovative solutions which remain true to the principle of giving control back
to the workers.
There are two great political and economic systems that are in place today:
socialism and capitalism. It is possible for cooperative ventures to benefit
both of these systems greatly, and luckily the philosophy behind cooperatives
actually seems to lie somewhere between the two systems. Cooperatives aren't
strictly forbidden in either of the two economies, but there are barriers to
instituting cooperative reforms in both. This section of the paper will
discuss how cooperatives may benefit socialism and capitalism, and the barriers
that stand in the way.
The principles of a cooperative aren't too distant from socialist doctrines
that exist (or existed until recently) in many countries. According to the
Pravda, Karl Marx himself "saw cooperatives as a form of new production method
is comparison with capitalism." Many socialists don't see cooperatives as a
retreat to capitalism, but rather as "a new, higher form of economic endeavor,
totally compatible with socialism." (Schillinger, p. 23) With the recent fall
of the U.S.S.R. and some disillusionment with the benefits a free-market
promised, it might be wise for the leaders of the new republics to go to a
system that is a little more familiar, the same system some capitalists are
willing to adopt too.
On the other hand, there are some aspects of the cooperative firm that are
ideologically at odds with the socialist system. The whole idea of competition
between the cooperatives and between the cooperatives and the state-run firms
is completely against Marxist-Leninist communal ideals. (Schillinger, p. 24)
However, cooperatives aren't totally unfamiliar to socialist governments.
Cooperatives were quite popular during the New Economic Program period in the
U.S.S.R., and were responsible for a great deal of economic growth during this
time. So what helped the Soviet Union many years ago, may help the struggling
former Soviet Republics today. (Schillinger, p. 23)
It is often argued that cooperatively managed firms are less efficient than
traditional capitalist firms on the basis that if they were as efficient we
would see more of them around everyday. The proponents of labor managed
companies counter this argument by saying that the capitalist system is
ideologically hostile to cooperative firms. Moreover, the capitalist system
uses its power (implicitly and explicitly) to stifle the growth of labor
managed firms and to continue the current path. Cooperative firms in a
capitalist system have been compared with foreign tissue being rejected in an
organ transplant. (Doucouliagos, p. 48) Often this rejection isn't overt, it
is very subtle; for example, a bank may discriminate against a cooperative
firm on a loan application because on the surface the venture looks
particularly risky, and the bank doesn't understand the strengths of a
cooperative firm and how to measure the heath of a cooperative firm. For labor
managed firms to succeed they have to develop democratic organizations
everywhere they go, just as capitalist firms create hierarchical organizations
everywhere they go. That way democratic banks will loan to democratic
enterprises, hopefully attracting democratic customers.
A second weakness of cooperative firms, in the eyes of the capitalist, is that
many times when a cooperative becomes successful it loses its cooperative
character and begins to look more and more like a traditional capitalist firm.
From the previous argument it could be shown that these firms might feel the
pressure to conform as they need more and more support from great capitalist
institutions like banks. However, there is more to the death of many
cooperative firms than just the ideological bias against them in a capitalist
The creation of many labor-managed firms is often counter-cyclical, which means
when capitalism is in crisis cooperatives thrive, since people are willing to
try innovative management techniques. The labor-managed firm is able to pool
it's resources and weather the hard times, but they succeed as long as the
capitalist firms are doing poorly. When economic conditions improve, the
cooperative's members want to increase their per capita profits, and the
easiest way to do this is to use more hired labor (who are not shareholders).
If this trend is continued to it's extreme, they there is only one shareholder
and you are back with a capitalist system. So this is the first way
labor-managed firms collapse back into capitalist firms.
The second way cooperative companies degenerate is by capitalist takeover. If
a labor-managed firm is remarkably successful, which is the hope of the
founding members, then the shares appreciate significantly. If the shares
increase in value to the point that a new member couldn't possibly afford the
cost of a share, then a retiring member of the cooperative has no choice but to
sell their share to a capitalist firm. Soon enough the capitalist firm owns a
controlling share of the company, and it degenerates into a capitalist venture
Internal conflicts and information disclosures are both sited as causes of why
labor managed firms fail. In the case of internal conflicts, there is so much
internal strife over some issue that it affects the ability of the company to
operate on a day-to-day basis, and they have no choice but to give up at some
point. As for information disclosure, one of the principles of a cooperative
firm is that all the workers are kept well informed as to the state of the
entire company. However, in a capitalist system it is often to one's advantage
to keep corporate secrets, but this is almost impossible in the labor-managed
firm. If this becomes a significant competitive disadvantage, it may
eventually cause the company to go bankrupt.
Finally, the very nature of the technology of production seems to be against
the methods of the cooperative. The machines and tools that a labor-managed
firm buys are geared to an assembly-line mentality, and are often very hard to
adapt to a completely different working environment. So, if the only
technology to build a car is an assembly line, then a cooperative car company
is still going to have arrange production around an assembly line. This is
completely counter to the principles of the labor-managed firm, but they have
to live with it until other tools become available.
It seems that the two great institutions of socialism and capitalism have
developed cracks over these many years and may require some patching up if they
are to continue to exist. Both have exhibited problems that essentially stem
from worker alienation, and cooperatives can be a solution the deals directly
with this problem. This paper has presented benefits to be gained by moving to
a cooperative system and ways of achieving those goals. The end result could
represent a great increase in the quality of life for a majority of humanity,
but there is a small minority of capitalists who must be convinced to give up
their "power" in favor of helping their neighbors. This is the real challenge.
- Bradley, Michael D., and Smith, Stephen C. "The Comparative Institutions
of Profit Sharing." Journal of Economic Issues. v 26, no. 2 (1992).
- Coates, Kevin, ed. Can the Workers Run Industry? (Nottingham: The
Bertrand Russell Peace Foundation, 1968).
- Doucouliagos, Chris. "Why Capitalist Firms Outnumber Labor-Managed Firms."
Review of Radical Political Economics. v 22, no. 4 (1990). pp. 44-67.
- Drago, Robert. "Share Schemes, Participatory Management and Work Norms."
Review of Radical Political Economics. v 23 (1991). pp. 55-62.
- Greenberg, Edward S. "Participation in Industrial Decision Making and Work
Satisfaction: The Case of Producer Cooperatives." Social Science
Quarterly. v 60, no. 4 (1980). pp. 551-569.
- Klinedinst, Mark. "Inside the Black Box: Compensation Structures of
Efficient Yugoslavian Firms." Economic Analysis and Workers'
Management. v 25 (1991). pp. 363-383.
- Rock, Charles P., and Klinedinst, Mark A. "Worker-Managed Firms,
Democratic Principles, and the Evolution of Financial Relations." Journal
of Economic Issues. c 26, no. 2 (1992). pp. 605-613.
- Rooney, Patrick Michael. "Employee Ownership and Worker Participation:
Effects on Health and Safety." Economics Letters. v 39 (1992). pp.
- Rooney, Patrick Michael. "ESOPs, Producer Co-ops, and Traditional Firms:
Are They Different?" Journal of Economic Issues. v 26, no. 2 (1992).
- Schillinger, Elisabeth, and Jenswold, Joel. "Cooperative Business Ventures
in the Soviet Union: The Impact of Social Forces on Private Enterprise."
Sociology and Social Research. c 73, no. 1 (1988). pp. 22-30.
- Wilson, H. B. Democracy and the Work Place. (Montréal: Black
Rose Books, 1974).