What's Socialism Got to do With It?:

Cooperatives as an Alternative in Economic Development

by Steven Saus, 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 tool.

Read the full paper here as a PDF.

This paper was presented at the 2007 Bowling Green State University Undergraduate Economics Paper Contest and Conference. My accompanying notes for the presentation are below.

All text of this work is original, and is copyrighted under a Attribution-NonCommercial-NoDerivs Creative Commons license

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 investment.

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 expenditure.

Your questions?

All text of this work is original, and is copyrighted under a Attribution-NonCommercial-NoDerivs Creative Commons license

by Steven Saus