What's Socialism Got to do With It?:
Cooperatives as an Alternative in Economic Development
by [Steven Saus](https://stevensaus.com), Wright State University
Perceptions matter. The public perception of cooperatives is one of
funky food stores frequented by neo-hippies and other fringe members of
society. Inner cities are seen as being in irreversible decline - as
places where poverty, crime, and unemployment congregate, more Grand
Theft Auto than Sesame Street. Regional economic planners believe they
are faced with a trade-off between helping current residents of their
cities or attracting high-skill, high-wage jobs. All of these
perceptions may be false.
Cooperatives can be dynamic agencies for change, allowing economic
developers to invest in current residents while achieving economic
goals. This paper covers the methods that cooperatives can address
market failures and produce positive social externalities. It will
outline the shape of local government involvement and mechanisms for
adapting current methods of development funding towards encouraging
cooperatives. Finally, it will briefly examine the potential pitfalls -
both real and rhetorical - of cooperatives as an economic development
Read the full paper [here](SAUS_Cooperatives_Web.pdf) as a PDF.
This paper was presented at the [2007 Bowling Green State University
Undergraduate Economics Paper Contest and Conference](http://www.cba.bgsu.edu/econ/conference.html). My accompanying
notes for the presentation are below.
All text of this work is original, and is copyrighted under a
1: Good morning. When I was a child, my parents took me to the Mountain
People's Co-op. My perception was simple: guys with long hair and
beards, women with tie-dyed dresses, and straws where you could get raw
honey. Our popular perception of co-ops hasn’t changed. As I've grown
up, popular culture has informed me that Sesame Street isn't what urban
areas are like anymore. Instead, there is a perception of them as
places where crime, poverty, and unemployment thrive. As I've studied
economics, I've learned that economic developers often face a tradeoff
between creating and attracting skilled jobs or helping the existing
inhabitants of a city - a "people vs. place" dichotomy. All of these
perceptions are mistaken.
2: Co-ops can have a significant role in urban development.
They can help local populations while allowing cities to achieve
economic goals. In the next few minutes, I'll provide a brief overview
of the role co-ops can take in urban economic development. We'll look
at how co-ops can address market failures in an urban setting. We'll
examine the role of government in correcting those market failures.
We'll briefly examine methods of funding this type of initiative, and
we'll examine the potential pitfalls - both real and imagined.
3: "Co-operative" is a very broad term - nearly as broad as
saying "business". In general, though, they all work from a presumption
of co-operation towards a common goal. That cooperation is intended to
achieve greater efficiency - whether in production, consumption,
distribution, or all of the above. Like a "normal" business, they work
for the behalf of stakeholders - but the stakeholders in a co-op --
especially a production co-op or employee-owned co-op -- are the
workers instead of shareholders or absentee investors.. They directly
benefit from the profits of the venture. Coops also usually draw their
members from the local community. As we'll shortly see, these key
aspects are especially useful for local economic development.
4: There is a major market failure in the flow of capital to
inner cities. Capital investors, for a variety of reasons, mistakenly
inflate the risk of investing in inner cities. This
implies that businesses may not develop -- or have failed -- due to
absentee owners or investors. Utilizing local residents at all levels,
as co-ops do, corrects this failure. They know the true risk of capital
investment, and can exert social control to ensure returns on
5: This is exactly what has begun to happen with microloans.
The perceived risk was too high, so charities, ,the world bank, and
other NGOs stepped in to finance these instruments. . Now that they
have a phenomenally high repayment rate, private capital desires to get
into the business. This foreign experience can be modified for domestic
use; it also implies that not only will efforts correct the market
failure for the co-op itself, but it can coordinate market expectations
and help the entire region. In turn, this can help lure the informal
economy into the mainstream and create a place where it can develop.
6: The role of government need not be more extensive than it is
now. With the co-op emphasis on local initiatives, a train-the-trainer
approach, already familiar with the business and military community, is
ideal. This training - whether in basic literacy, or how to run a
business, or anything in between - can be effectively used to fight
structural unemployment. This training is different from
less-successful job training programs due to the local emphasis, the
self-selected pool, and a concrete goal of a co-op job.
7: This kind of involvement also helps reduce the uncertainty
associated with urban development. There is an open and direct
assessment of development efforts. Local govt. involvement can help
ensure that job creation stays focused on current residents, and by
encouraging import-substation, it can help decrease the marginal
propensity to import.
8: There's several positive externalities from using a
cooperative style, and they flow from a direct benefit. By having the
workers be the decision makers and stakeholders, there's a real sense
of ownership. This has led to increased efficiency and output in the
private sector before now as well as in other co-ops. That ownership -
and the local nature of co-ops -- increases a sense of community and
the social bonds that go with it. That in turn, decreases deviance
among the population, and provides an engaged citizenry to support
difficult - but worthwhile - efforts in the community.
9: Economic development already has a history of finding
flexible sources of funding. Whether through redirecting current
incentives luring a box or chain store, adapting funding models from
enterprise zones, utilizing tax incremental financing, or even creating
new funding instruments, there does not need to be a significant change
from current methods of funding. In fact, because of the greater
ability to assess outcomes, there is a possibility for economic
development professionals to gain a more accurate sense of the payoff
on their investments.
10: As with all strategies for economic development, there are
real obstacles. Co-ops are not a magic bullet - they require some
initial sense of shared values, community, or degree of social control.
For example, centered around a church, or the laid-off workers of a
plant, or a close-knit neighborhood. They could become too successful:
as market expectations are re-aligned, the temptation to sell out will
be greater. Yet if they sell out, the gains from this method of
development will be short lived. Likewise, in-migrants may be attracted
to these areas, displacing those who are already there. Yet these
obstacles are not insurmountable.
11.There are also several "straw man" arguments - ones that
sound good, but don't hold up to inspection. These arguments are
roughly akin to someone protesting against all corporations because of
the actions of Enron.
12: When I described production co-ops in a global economy
class, a fellow classmate said "That sounds like socialism to me!"
While co-ops (and the values behind them) have often been tried in
socialist settings, they are not inherently so. There's also the
implication that co-ops cannot compete in a capitalistic society. This
doesn't seem to be the case, whether in Italy or Spain, in corporations
that embody some of the key aspects of co-ops like Semco, or with
co-ops in America.
13: There are some accusations of fraud (especially with the
government efforts of co-ops in Venezuela); these would be a moot point
in the model we've described due to local oversight and American
regulations. While diseconomies of scale and worries about transmitting
information to members may have been historical worries, both can be
dealt with now through technological improvements and in the ways that
the co-op is structured.
14: There's one straw man, though, that requires a bit more
explanation to dispel. At the end of the 19th century, many co-ops were
created due to ideological reasons. Most of these co-ops failed. That
failure was largely attributed to a Hobbesian analysis - that everyone
was simply out for themselves, and that human nature, red in tooth and
claw, didn't mesh with the utopian nature of these ideological co-ops.
Yet this doesn't explain the long-run success of both co-ops and
corporations that embody some of the aspects of co-ops. yet there's
another time that humans tend to not act selfishly - during a disaster.
During those times, instead of panic and greed, we see an outpouring of
"kindness and good sense. There's a common explanation for both this
and the success of cooperatives (and corporations that have co-op like
aspects): In disasters and when the workers are the stakeholders, the
individual's self-interest is identical to the community interest. This
brings people together.
15: One of my drill sgts in BASIC put it this way:
It's this kind of thing that really embodies the idea of an "ownership" society.
16: To sum up: We've addressed how co-ops address a market failure, how
governments would be involved in that, and some of the social benefits
that could also arise from it. We briefly discussed funding of co-ops
as a mechanism for economic development, addressed the real obstacles
that they face, and some of the rhetorical arguments and why they
aren't real obstacles after all.
I believe that adding co-ops to our economic development "toolbox" can
create greater levels of economic and social benefits for existing
residents for a similar level of government involvement and
All text of this work is original, and is copyrighted under a Attribution-NonCommercial-NoDerivs Creative Commons license
by [Steven Saus](https://stevensaus.com)