Preliminary Considerations on Cooperatives


Before presenting a curriculum on cooperatives, two considerations may help understand why cooperatives emerged in society, and what it is about cooperatives that creates an essential difference from other models of organization. These considerations are offered to be helpful to the teacher new to the subject of cooperatives.

In order to situate cooperatives in society, Douglass North’s work on institutions is used as a framework to explain how organizations emerge and evolve to meet social needs. In order to examine how cooperatives are essentially different from other models of organization, the role of values is explored as a characteristic that not only makes cooperatives unique, but also presents the challenge of how a cooperative can sustain a commitment to its values while facing global competition that is not subject to the same constraint.

These considerations—the role of institutions and organizations in society and the role values play in defining organizations—are also relevant to organizations other than cooperatives. Thus the curriculum presented here could be combined with an examination of other types of organizations, as well, such as nonprofit organizations, philanthropic foundations, limited liability corporations, and newer types of organizations such as the low-profit limited liability company and the emerging B Lab certified B-corporation. Perhaps even more could be learned and appreciated about cooperatives if they were studied in such a comparative context. And students might also appreciate that different organizational models may better serve to meet certain needs than others. For all their advantages, cooperatives may not be the best model in all situations.

Situating Cooperatives in Society


Modeling organizations is analyzing governance structures, skills, and how learning by doing will determine the organization’s success over time. Both what organizations come into existence and how they evolve are fundamentally influenced by the institutional framework. In turn they influence how the institutional framework evolves.
Douglass North, Institutions, Institutional Change and Economic Performance (2005/1990, p. 5)

Cooperatives, as other types of organizational models, emerged to meet specific needs. Thus we feel that a course on cooperatives should provide students with an understanding of how cooperatives emerged within a larger and evolving social and economic context, and how they are different from other organizational models designed to serve other social needs. Here we review a theoretical treatment of how different types of organizations, including cooperatives, emerge within societies. For this purpose, we have chosen the work of Douglass North, whose institution theory provides one such explanation for the emergence and historical evolution of social arrangements, as indicated in the opening quotation. For understanding why organizations take the specific form of investor-owned, cooperative, or nonprofit models, we have consulted the work of Henry Hansmann. What follows is no substitute for reading North or Hansmann, but is rather an overview of some of the key concepts presented to encourage reading the original texts. For a foundational understanding of his institution theory we recommend reading Institutions, Institutional Change and Economic Performance (North, 2005/1990). For a further understanding of how he explains historical change we recommend reading Understanding the Process of Economic Change (North, 2005). In addition to North’s contributions, for those who seek a more thorough examination of the emergence of institutions we also recommend reading Avner Greif’s Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (Greif, 2006). For an empirically-based theoretical treatment of how different forms of enterprise ownership emerge, we recommend reading Henry Hansmann’s The Ownership of Enterprise (Hansmann, 1996).

Thus our introduction to cooperatives begins with a question about how we as a people develop one form of organization and not another in order to meet our needs. How do societies arrange themselves as they do, and not in other ways? And, for that matter, why to different societies evolve in different ways, rather than converge over time?

North's Model of Institutions, Organizations, and Entrepreneurs


To understand how and why societies form organizations, North (2005/1990) provides a straightforward set of ideas that can be used to explain organizations in most any society. He begins by noting that all societies have “institutions”—which “are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (p. 3). Institutions are the ways of serving social needs including government, religion, the law, the market, the family, education, and so on, that in turn are defined by of two types of influences. First, there are codified rules, which are written laws and regulations that define and govern such institutions. Our Constitution is one such codified rule, which, in turn, provides a basis to define other institutions in our society.

Second, there are unwritten, informal rules, which are the social norms, values, beliefs, taboos, and so forth that shape our behavior. These norms and other unwritten rules can be openly discussed and supported, but interestingly, as Timur Kuran (1995) has explord, social norms can dictate our behavior even when we privately disagree with them. In fact, there can be such widespread dissatisfaction with social expectations that massive change, such as a revolution, can occur without any obvious prior warning, as has occurred in Iran and the Soviet Union and may well eventually take place in Cuba and North Korea.

By comparing countries, especially those with contrasting cultural histories, it becomes almost immediately apparent that variations in their laws and customs can help explain the differences in their institutions and the concept of path dependence can help explain how and why different societies diverge rather than converge over the historical period. Path dependence describes how in historical terms societies make choices that are influenced by prior choices or circumstances. Thus, for example, Putnam explains how the flourishing cooperative community in northern Italy is the outcome of the social norms of mutual aid that emerged in the region a millennium ago, while southern Italy is characterized by hierarchies mistrust and mafia control explained by a history of autocratic rule and authoritarian order that undermined the development of trust and mutual aid (Putnam, 1993). Corcoran and Wilson describe the context and success factors in three countries—Italy, Spain, and France—that reflect traditions and policies conducive to the flourishing of regions of cooperatives (Corcoran & Wilson, 2010). Understanding social institutions and both the codified and unwritten rules that define them is the first building block on which to understand how different types of organizations arise.

As North describes, if institutions are the rules of the game, organizations are the players:

Organizations include political bodies (political parties, the Senate, a city council, a regulatory agency), economic bodies (firms, trade unions, family farms, cooperatives), social bodies (churches, clubs, athletic associations), and educational bodies (schools, universities, vocational training centers). They are groups of individuals bound by some common purpose to achieve objectives. Modeling organizations is analyzing governance structures, skills, and how learning by doing will determine the organization’s success over time. (p. 5)

As “groups of individuals bound by some common purpose to achieve objectives,” we would expect organizations to evolve to meet otherwise unmet needs, and in an open society, we might also expect to see a variety of types of organizations, each modeled to serve different needs. And, in reference to North’s quotation opening this section, modeling the cooperative as an organization is the task of this Curriculum. In specific reference to cooperatives, Hansmann, drawing on empirical evidence, theorizes that only cooperatives that can sustain a homogeneity of interests amongst members survive. Thus, employee ownership is rare in organizations characterized by large numbers of workers with different skills doing different tasks (Hansmann, 1996, p. 94). In cases of cooperatives that survive significant growth, such as Mondragón, Hansmann argues that they have created special governing structures that eliminate or attenuate the costly effects of owner disagreement.

Finally, in North’s model, “The agent of change is the individual entrepreneur responding to the incentives embodied in the institutional framework” ((North, 2005/1990, p. 83). Individual entrepreneurs control and influence their organizations and, over time, can also seek to modify the formal and informal rules that shape our institutions. As Schumpeter (2008/1934, pp. 128-156) has written, creating new forms of organization is as entrepreneurial as inventing new products or innovating new processes. And the evolution of such organizations is far from over, as social needs continue to change.
These three elements—institutions, organizations, and entrepreneurs—provide the building blocks for the social arrangements through which societies endeavor to meet social needs. How these elements and the interactions between them evolve is a matter of the codified laws and social norms that prevail in society, and how entrepreneurs seek to change them in order to meet social needs.

As North (2005/1990) notes, “All theorizing in the social sciences builds, implicitly or explicitly, upon conceptions of human behavior” (p. 17). He discusses the role of rational choice theory to help explain behavior and further considers evolutionary psychology in some depth (North, 2005). Further reading in evolutionary psychology is recommended. For example, in evolutionary terms, we as people (Homo sapiens) seem to have survived by employing a combination of competitive and cooperative behaviors, which in turn may have evolved with different emphasis between males and females (Campbell, 2002). The competitive instincts of males, according to theory, were favored as a means by which to secure mates for reproductive purposes, while the cooperative nature of females evolved as a protective mechanism designed to ensure their survival and the security of their children. The high-risk/high-gain (or high-loss) merits of competition can also be seen in organizational behavior, as can the lower-risk survivalist merits of cooperation. While we have not so far found a definitive explanation linking organizational models to evolutionary psychology, the readings noted here are provocative and insightful in helping us advance our understanding of how behavior appears extended through the organizations we create to serve our needs.
North’s work has also influenced scholars who have defined a difference between the mental models and ideologies of those trained to be “Business School Managers” and those prepared to be “Social Economy Managers,” including managers of cooperatives (Chaves & Sajardo-Moreno, 2004). Consistent with path dependency, the values and ideologies of these managers can determine the path taken by the organizations under their management.

North describes the crucial importance of “transaction cost” in creating economic and social efficiency. By this term he refers to the degree of trust that is more or less present in a society and determines the basis on which societies require investment in third-party means by which to ensure the trust necessary for orderly transactions, and to compensate for a lack of implicit trust. The cost of such investment is the transaction cost. As Fukuyama (2001) points out, social capital leading to cooperation in groups serves to create trust that lowers transaction costs, at least within those groups.
North (2005) further notes that it has been empirically shown that societies that allow multiple forms of organizations to meet social needs are societies better equipped to survive. He calls this “adaptive efficiency” (p. 154). Thus, he argues, the demise of the Soviet Union may be seen in part as the failure of its singular, orthodox form of economic organization—state communism—to meet social needs, while the continued survival of capitalist countries may be due, in part, to their ongoing entrepreneurial proclivity to create new forms of organizations that meet changing social needs. Is China, another communist state, employing adaptive efficiency to avoid the consequences faced by the Soviet Union? There may be implications here that should make us mindful of how rigidly any organizational (or ideological) model should be defined, as flexibility appears to enhance survival.

Political Economy and Organizations


Political economy refers to the arrangements of power and money in a society. According to Clark, “Politics and economics are simply two facets of the process by which society is organized to achieve both individual and community goals” (Clark, 1998, p. 18):

Analysis of the market and government as political and economic institutions suggests that neither is solely capable of organizing society to secure prosperity and justice. Both institutions are sufficiently flawed to require a balancing of political and economic processes to sustain a healthy society. In a positive sense, each institution serves to complement weaknesses of the other. However, the market and government also generate powerful forces reverberating against each other with potentially damaging consequences.

Since the market and government interact with each other, efforts to analyze them separately will yield only partial, and therefore distorted understanding of the social system. (p. 18)

In our own political economy, that of democratic capitalism, there is ample room for innovating new and different types of market and governmental organizations to meet social needs. Over time we have seen agrarianism, guilds, mercantile shops, companies and corporations of ever increasing size and complexity, modern philanthropic foundations bloom from the Gilded Age concentrations of fabulous wealth, and nonprofit organizations specifically designated by the Internal Revenue Code to be exempt from tax based on their charitable purpose, not to mention a myriad of types and varieties of governmental offices, agencies, programs, and services that come and go with virtually each new presidential administration.

Corporate organizational types have evolved to include the C corporation, the S corporation, and the T corporation (a cooperative). Since 1972, the LLC (limited liability corporation) has emerged, and in 2010 Maryland became the first state to create a new type of company, a “benefit corporation” that combines social benefit and shareholder value.

Thus the principal types of organizations that serve the market in our political economy today are the:
· Sole proprietorship
· Partnership
· Corporation
· LLC (limited liability corporation)
· Nonprofit organization
· Cooperative

Of particular interest in this curriculum is the cooperative, for unlike the typical objective of seeking a financial return in most other organizations, or serving a charitable purpose in most nonprofit organizations, the role of the members in a cooperative is to meet their own economic, social, and cultural needs.

Although the cooperative model in the United States has been traced back to Benjamin Franklin’s Philadelphia Contributorship for the Insurance of Homes from Loss of Fire, formed in the early 1750s (Shaffer, 1999), and U.S. Senator from California Leland Stanford, the railroad tycoon, attempted in 1886 to introduce bills to the Senate that would establish a national law promoting cooperatives (Altenberg, 1990), cooperatives today remain outside of agricultural regions a relatively little known model of organization that creates both economic and social value. We hope this curriculum significantly raises both awareness and stature of cooperatives in societies throughout the world as a form of organization uniquely suited to meet certain social needs.

A Note on Values


A close look at how an organization manifests its basic values or tries to achieve democracy leads us to pay attention to how value-related terms are expressed, debated, suppressed, or altered over time. After all, what is described as social solidarity today may be different from that of yesterday, and may be differently understood by various organizational members. In addition, an organization’s official stance on values—as expressed in its mission statement, for instance—may be quite distant from how most members see the matter for their work lives. Answering the question of who represents the “real” organization and its values is crucial to understanding and improving it.
George Cheney, Values at Work (1999, pp. xiii-xiv)

Values are crucial in explaining both normative and descriptive behavior, yet values may be insufficiently examined and discussed in the context of explaining economic behavior. Lest behavior be seen as random, we must reflect on the role of choice, reflective or otherwise, in acting one way or another. The theoretical domain of this exploration is called Rational Choice. Where choice is involved, there is a guiding preference or constraint on preference that influences how we choose. Attitudes have been invoked as one phenomenon that guide such choice (Ajzen, 1991), and at one level of analysis the focus on attitudes may be both appropriate and effective in explaining behavior. However, attitudes can be subject to situational or temporal change, and are not thus entirely satisfactory when seeking a more stable and reliable factor by which to understand behavior over time. By contrast, values are seen as both more essential than attitudes and representing a more stable set of psychological conditions less subject to change and more resistant to external influence.

Values have long been of interest to Western students of behavior, from the early Greeks through philosopher Kant and sociologist Weber. Among the earliest systematic social studies of values in the modern era was the anthropological work of Clyde Kluckhohn (C. Kluckhohn, 1951) and his wife and colleague Florence Kluckhohn, who with Fred Strodbeck wrote Variations in Value Orientations (F. R. Kluckhohn & Strodtbeck, 1961). Milton Rokeach contributed significantly to advancing an understanding of the nature of human values (Rokeach, 1973), and more recently Shalom Schwartz has built on that work to explore the universality of particular values (Schwartz, 1992). Alan Fiske’s research has revealed four categories of preferences for social arrangements that imply collective values (Fiske, 1992). And while economists have for the most part examined the role of values as revealed preferences in making financial choices, psychologists have emphasized the normative role of values in guiding deliberations concerning competing choices (Hastie & Dawes, 2001).

What are values? And what do they have to do with cooperatives? Values, in short, are deeply held beliefs that guide behavior. Values feature in normative behavior, that is, what should be done and how to do it, as well as descriptive behavior, behavior that has actually taken place. Values and sets of values, called value systems, constitute an important part of any educational enterprise because they determine what is important and provide the basis for making judgments, or, in other words, evaluations (Bloom, et al., 1956; Bloom, et al., 1964). Values are explicitly addressed in the design of this curriculum on cooperatives.

In this work we differentiate between three types of values: Personal Values, Organizational Values, and Social Values (Whitman, 2006). Rokeach defines a value as “an enduring belief that a specific mode of conduct or end-state of existence is personally or socially preferable to an opposite or converse model of conduct or end-state of existence” (Rokeach, 1973, p. 5). Whitman provides a nuanced modification of Rokeach in defining a social value as “an enduring, normative belief that describes a preferred mode of social conduct or end-state in society and justifies action to attain or sustain a preferred social order” (Whitman, 2006, p. 137). For our purposes, we shall define an organizational value as formal or informal preference that reveals or determines how individuals who represent the organization act either internally amongst themselves, externally in relationship to those outside the organization, or both.

In short, personal values are those that guide or describe individual behavior; organizational values are those that similarly affect organizational behavior; and social values guide or describe why and how an individual or organization puts effort into social change for the purpose of achieving preferred social arrangements. At some level, all three types of values play a role in cooperatives, and indeed in any type of organization, for organizations do not act without human agents, nor do they act without some relationship to the society in which they are situated. For our purposes, however, we shall focus principally on those organizational values that are helpful in defining the cooperative as a model organization different from other types of corporations.
Which organizational values uniquely define cooperatives? The values central to cooperatives are promulgated by organizations that promote cooperatives, in particular the International Cooperative Alliance, founded in 1895. In their web site (http://www.ica.coop/coop/principles.html, cited 16 June 2010) they state:

Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.

As described by George Cheney, values like “democracy,” however, can be ambiguous and lead to a false sense of consensus and even manipulation (Cheney, 1999):

Value-related terms such as “participation” and “solidarity” refer in part to the ways people communicate with one another in certain situations: for example, in making collective decisions. However, like all terms for values, these are necessarily ambiguous and subject to change over time. One person’s vision of dynamic and self-sacrificing teamwork, for example, is someone else’s mask for the domination by a coach or a few star players. Terms such as “democracy,” then, become key points of reference and key sources of inspiration for people. Words such as “efficiency,” “productivity,” and “competitiveness” are important loci where different interpretations and meanings come together or come into conflict. Some of our most frequently used terms are also some of our least examined, and that lack of reflection leads to both illusions of consensus and bandwagon effects—not to mention manipulation. (p. xiii)

In some situations, there may be advantages to purposely employ strategic ambiguity in order to create support for what otherwise might be questionable policies (Moore, 1995). In opposing such ambiguity, some argue that we as a society must strive for clarity and transparency in our language in order to communicate more efficiently and honestly (Habermas, 1981a, 1981b). One skill to be imparted in this curriculum is to critically examine how organizations employ value terms, and how their behavior may or may not align with espoused values (Argyris & Schön, 1974).

Moreover, within the framework of the above distinction between individual, organizational, and social values, cooperatives appear to conflate these values without differentiation. For example, the International Cooperative Alliance states, “Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honest礀, openness, social responsibility and caring for others.” (http://www.ica.coop/coop/principles.html, cited 16 June 2010).

Cooperatives also convey values as principles, rather than or in addition to values. Principles may be seen as normative declarations to guide action based on underlying values. The seven principles espoused by the International Cooperative Alliance are: Voluntary and Open Membership, which explicitly excludes discrimination; Democratic Member Control, which requires one member, one vote; Member Economic Participation, in which members contribute equitably to and democratically control the cooperative’s capital; Autonomy and Independence, which emphasizes the self-help mode of operation; Education, Training and Information, which requires both education of members in order to participate meaningfully in the decision-making process of cooperative management and informing the public, particularly youth and opinion leaders, about cooperation; Cooperation among Cooperatives, which strengthens the movement by working together; and Concern for Community, which calls for sustainable community development.
Mondragón espouses ten principles (without further definition), some of which may overlap with the ICA principles: Education; Sovereignty of Labor; Instrumental and Subordinated Nature of Capital; Democratic Organization; Open Admission; Participation in Management; Wage Solidarity; and, representing the cooperative’s external relations, Inter-Cooperation; Social Transformation; and Universal Nature. In the case of ICA, there is little definition, and in the case of Mondragón, there is no explication of these principles beyond their labels. Consistent with Cheney’s observation above, this leaves ample room for ambiguity, which can cut two ways.

Values count, and the values that define a cooperative make it different from other types of organizations. While different groups espouse a different set of defining values, common to all are the values of democracy, operationalized by one member, one vote. Yet operating democratically, which can be less efficient than hierarchical, authoritarian decision-making, can make it difficult for the cooperative, especially a large cooperative, to serve satisfactorily the interests of all its members and especially to compete in the market against more efficiency-driven contestants. It is important not to mythologize cooperatives, but to understand the conflicts than can and do emerge as a result of heterogeneous preferences. For example, Kasmir provides a critique of what she considers a false idealization of Mondragón (Kasmir, 1996). One contribution of Cheney’s critique of Mondragón, Values at Work//, is that it describes how difficult it can be to sustain the social values commitments of the cooperative when faced with exceedingly challenging market pressures. Stresses may very likely emerge in every cooperative sooner or later. How to anticipate and manage the challenge posed by conflicting preferences among cooperative members is addressed by Cook and Burress in their study of the cooperative life cycle (Cook & Burress, 2009), and how training and value orientations of individual managers can affect the paths taken by cooperatives is explored by Chaves and Sajardo-Moreno (Chaves & Sajardo-Moreno, 2004).

In summary, the creation of cooperatives as a distinct organizational model can be explained by how they uniquely address specific social needs. Cooperatives are different from other types of organizations because they are essentially democratically-run organizations that abide by explicitly stated, if ambiguous, values. This values orientation has its benefits, but it can also create tensions. While well-suited to meet the needs of democratically-run arrangements, cooperatives are not the most appropriate organizational model for all social and economic arrangements. These considerations may be helpful in setting the conceptual stage for teaching about cooperatives.