How is capital investment supposed to happen in an economy of workers co-ops?

Question

Socialists have proposed that capitalist companies (organisations owned and controlled by shareholders) should be replaced by co-operatives (organisations owned and controlled by their workers).

Where cooperatives exist within a broadly capitalist society they can borrow money from capitalist organisations such as banks or wealthy individuals. But how would that work if cooperatives replaced capitalist companies? Has anybody worked out how such an economy would make capital investments?

Government loans are an obvious answer, but history suggests that governments are bad at making this kind of commercial decision. Anything better?

(I considered posting this over on Economics, but I suspect I'll get better answers here)

Answer 1

There is nothing to prevent cooperative firms retaining income for investment purposes (either into their own operation, or for lending externally).

Indeed even amongst non-cooperative firms in the recent past, workers were often invited or compelled to allocate a portion of their earnings to company investment, with the promise of a pension paid later.

This was rationalised not as a profit-seeking activity for the pensioner, but as a mixed function of "deferred earnings" and income insurance for old age - in that the total mass of pensioners would only receive back their original contributions on average, preserved against inflation, and any increased profitability of the firm resulting from investment, would be distributed either as higher immediate earnings or as lower consumer prices.

There is nothing to prevent the cooperative movement running a bank, either. I think generally it is considered that finance is a central function in a cooperative ecosystem, and therefore all cooperative participants are considered to have a piece of it - not just the bank staff.

The cooperative model doesn't seem to differ radically from the logic of ordinary capitalism or imply seriously different constraints, save that the shareholders or partners of a firm, must work in it (with the special status of the bank noted).

Hence, the pure capitalist rentier who collects unearned income from the possession of capital alone is excluded from the system, but investment capital is still raised in essentially the same ways as a private owner might raise their personal wealth in the first place.

That is, the accumulation and allocation of capital, does not require either private ownership or external ownership. The state raises its capital typically either from normal production and trading activity (if it chooses to engage in those), or from taxation.

Taxation simply collects capital from amongst the available pool in society, not wholly dissimilar to how the rentier withholds profits from the wage-bill of the workers or demands the rent from the worker on his doorstep, except that the state isn't entitled to do so for personal reasons or for the enrichment of its bureaucrats, but must justify both the raising and disposition of the capital as being for the common good.

The hallmark of taxation is that there is no accounted-for obligation to the taxpayer or right of monetary return. There are tactic and general political obligations, but not specific financial ones. This is why capitalists love state borrowing, and hate state taxation, because taxation tends to be redistributive (taxation may even be shaped for that purpose), whereas borrowing is strictly non-redistributive.

What largely prevents cooperative organisations surviving, is that external owners with dictatorial powers are much better at attacking the workers of a firm, so if a cooperative (a) tries to uphold a certain standard of fair wages or decent treatment, and (b) there isn't state or a powerful trade union capable of neutralising any undercutting in the sector, and (c) if there isn't full employment or generous social security where workers can reasonably act as individuals to boycott the undercutter, then the cooperative firms simply fall behind and fold as they are undercut by more malevolent competitors.

Answer 2

It depends.

Co-ops have many attractions, but they typically operate within a narrow range of concerns and capital requirements.

(Note that this answer is more concerned with producer-led coops than consumer ones)

First, let's compare them with an individual entrepreneurship:

• they can access the same financing mechanisms like bank loans and their financial asset pooling has benefits. Bonds could be arranged.

• they need several people to initiate (duh!). This means that someone with an innovative idea can't start a coop without convincing others.

• in both, people have their skin in the game. if it fails...

• they don't depend on individual leadership and avoid succession risks.

Let's also look at some of the biggest players, from one of their own viewpoints:

Most enterprises in the Top 300 by turnover are producer co-ops, mainly representing agricultural and retailers’ co-ops (126, to which is added one producer/consumer), followed by mutuals (84) and consumer/user co-ops (71). Eleven of the top 300 are non-co-ops controlled by co-ops, while only five are worker co-operatives and two are multi-stakeholder.

The results are similar in the Top 300 based on turnover over GDP per capita, but there are more consumer/user co-ops than mutuals, respectively 84 and 67 organisations. The countries with the most enterprises in the top are USA (71), France (42), Germany (31) and Japan (22).

What seems to come out is that they are suited for cases where:

• business growth can be slow and organic
• aggregated smaller business assets: shops, farms, banks, insurance, housing (though seed capital is often provided to kick start coops in housing).
• these are going businesses.
• owner skill requirements are either uniform or not very high (note: I am sure this is a factor, but I don't think I am expressing it well, suggestions welcome).
• the product is known and will have cash flow from early on.

On the other hand, Filthy Lucre: Economics for People Who Hate Capitalism - Wikipedia tended to largely dismiss them as the solution, stating that, while they work great in some fields they can't replace more traditional approaches in many others.

So let's look at why the model might be unsuitable for some cases:

• Immediate large scale capital requirements for a new, uncertain venture. How are you going to start up Tesla, with the massive investments needed for a new factory, and how will worker-owners pay their bills until they have something to sell?

• Transformative businesses. Let's say its the 1950s and you have an idea to make electronics from integrated circuits. Your current company doesn't believe in it, it requires a lot of money and, while you can find fellow engineers to work in it as a startup, they don't have the cash for large scale capital investments. Unlike the Tesla example, no one has ever made this product so a bank won't talk to you. How about Moderna and its RNA-based vaccines? Many highly paid researchers, heavy capital investments, years of navigating health regulations and medical tests. Without any revenues.

• Even in fields like agriculture, not all is suited for coops. Embrapa in Brazil is very good at doing cutting edge research for farmers. But it is state owned, not a coop. How would say a centralized coop for all farmers allocate between research for soy vs for beef? How much can a farmer contribute, personally, to DNA sequencing to identify drought-resistant crops, across multiple crops?

• Skin in the game. Unlike share-based corporations or venture capital, owner-workers do not spread their risks. They invest their savings and their wages. This is the opposite of financial diversification. Again, quite possible in well-known fields of businesses with workers that know it and can provide equity via sweat. But less attractive on a new venture - there is it is much better to find people who have money and can afford to lose many little bits of it and recoup their losses on success. Far as I know, that is how capitalism got started, financing spice runs to the East Indies in the UK and Holland: individual owner-operators could not afford to have limited ships lost, but shareholders that spread their risks over many ships could.

• Last, their decision making is by its very nature, distributed. They can't "pivot" to new business ventures as easily as an individual-owned or public company. Nokia used to be mostly a wood and paper product company, before going into printers, monitors then into smartphones. Hard to see a coop version of it doing that (no, no need to remind me of what happened to Nokia, but it doesn't detract from their innovation at their highpoint).

I am not saying coops can't work.

Nor that their use shouldn't be explored more aggressively over sole reliance on more traditional financing models.

Take WeWork, a business which managed to sell to gullible investors the notion that they had "digitalized" what's inherently a bricks-and-mortar, old-fashioned business: office space rentals. In as far as they innovated anything - which is doubtful - grouping together with existing small office leasing companies might have provided for a much more disciplined, realistic, business model than burning through investors' cash by a mercurial and undisciplined CEO.

One might also envision a coop-initiated Uber. The base capital investments aren't that high: a few smartphone apps, a server, individual car owners - it could spread from city to city, slowly. However, it might still struggle with investor-driven competitors, once it has established that there is a valid business model.

Coops sidestep the succession issues inherent to family firms. And they avoid the often inefficient allocation of resources from government-led investments where bureaucrats and politicians pick winners in fields they don't know well. They could also work well in financing multi-family housing, avoiding the pitfalls of government-owned subsidized housing that residents have little incentive to take care of, while also avoiding the speculation inherent in the sector.

They may also be attractive to developing countries with less mature local stockmarkets. And they could also dovetail neatly with Muslim constraints on interest payments.

Too gloomy? Read between the lines in the citations below.

Making this work is a challenge, even in fields that are coop-appropriate.

The cooperative capital constraint revisited

Our findings are mixed. While cooperatives in our sample have significantly lower debtto-asset ratios than comparable IOFs, we do not find evidence that they face financial constraints, at least in the short run. However, for financing long term assets, our data suggest that cooperatives tend to rely more on equity capital, which may reflect a constraint on borrowing

Can co-ops compete ... in capital? | Guardian sustainable business | The Guardian

There are in fact two problems around capital which co-operatives have to wrestle with. The first is that co-operatives cannot access equity capital (money put in by shareholders) – or at least, not normally. Equity is valuable for businesses because it does not show up on balance sheets as a liability, the argument being that shareholders would ultimately forfeit their whole investment if things go wrong.

The search for equity has led some foreign co-operatives to voluntarily choose the route now followed perforce by Britain's Co-operative Bank, typically by creating Public Limited Company (PLC) structures which co-ops partly own but which also have external investors.

Approaches like this immediately come up against the second big difficulty. How can you ensure that external investors do not eradicate the very thing that makes co-ops distinct, the fact that they are run by and for their members? As the ICA puts it, how can co-operatives find capital in ways which don't at the same time compromise the principle of member control and democracy?

When Co-ops and Venture Capital Meet | Media Economies Design Lab | University of Colorado Boulder

It is a common assumption that cooperative business and venture capital financing don't mix. And there is good reason for this. Venture capital uses investor ownership to drive companies toward a quick, value-maximizing exit. Co-ops, in contrast, are designed to be owned by their participants rather than outside investors, prioritizing social value over the long term. But that assumption may be worth reconsidering. In April, Savvy Cooperative announced that it had struck an investment deal with Indie.vc, a pioneering venture firm. Both Savvy and Indie.vc pushed the boundaries of their respective structures to make this happen, while keeping those structures intact.

I don't think coops are incompatible with a free market economy and they do not equate to socialism. In fact, when there is a need for government intervention to correct market failures, coops are likely one of the better actor types to provide subsidies to, as they can be more closely aligned to their members' and customer's needs:

US electric co-ops plan to build rural broadband infrastructure

Around 200 of the 900 co-ops affiliated to the National Rural Electric Cooperative Association (NRECA) are already providing or building out broadband. Another 200 more are assessing the feasibility of providing service to over six million households in co-op service areas that don’t have access to high-speed Internet service. The Fiber Broadband Association (FBA) estimates that rural electric co-op providers currently deliver fibre broadband to around 675,000 homes.

Contrast that with giving the - greedy and dishonest - US telecoms corporations more money. Or expecting municipal governments to provide expert ISP services.

To conclude:

Coops work well, under many conditions. However, as per this question, much as some anti-capitalist activists would like to claim they could largely/entirely replace corporations - while avoiding the likes of discredited 5 year plans - coops seem to work better under some conditions than others. And have, in practice, seen relatively limited uptake - again mostly limited to specific domains, despite their supposed advantages.

p.s. I agree you would get better answers on SE.Economics. However, picking one economic model over the other is a matter for voters to decide. So would a drive to change regulations to facilitate the uptake of coops where appropriate.

Answer 3

I just want to give a 2023 example. This is an existing cooperative. (From Spain)

https://en.wikipedia.org/wiki/Mondragon_Corporation

They could then lend money from a bank like this. (From USA)

https://en.wikipedia.org/wiki/Bank_of_North_Dakota

I would think that libsocs would rather have a bank that also is a cooperative, the only one I know here only have a danish wikipedia entry.

https://da.wikipedia.org/wiki/Coop_Bank

Point being that there already are working examples of what you are looking for.

Answer 4

As you're actually asking how that would work on it's own and not how that would work in a niche within capitalism (that seems to be what the other answers are focusing on). Well...

Democratically.

Like capitalism makes us so used to the idea that capital is money sitting in some bank account of a rich person ready to be spend and that it actually takes that money to kick start an operation.

Couldn't be further from the truth. That just happens to be the mode of production under capitalism. However what it actually takes to kickstart an operation is resources, expertise and workforce.

The thing is capital is not equivalent to money, capital is functionally "The social and political power/ability to make people work towards your goal".

So capital is a form of coercive power. And capitalism is the goal of using that power to gain even more power. Using an investment to make other people work for your benefit so that you can make people work for you in larger quantities, qualities and intesities to gather even more capital, rinse and repeat.

Under our current economic system that takes the form of leveraging economic inequality against people to make them work. That is you have societal participation vouchers, called currency, which are unequally distributed and those with more of them can make those with less of them, give up their economic and personal freedom for the largest part of their waking day in exchange for some form of participation and relief.

So those that can make others work for their own benefit are capitalists, while those unable to do so and who thus have to engage in exploitative relationships with capitalists are called workers. Exploitative for the reason that it's not an exchange of 8 hours of my work for 8 hours of your work, but the employer is able to build capital while the worker usually has to drop most of it's payment on rent and sustaining themselves making the capital distribution even more skewed.

And because the working class in rich countries can still use their capital to exploit the working class in poorer countries they think of themselves as "the middle class" and often fight with their dear lives to protect this kind of exploitation, against redistribution, despite the fact that the majority of them would probably gain from that rather than lose.

Now enough of capitalism how would that work without it?

Well with the lack of an ability to coerce people to work for you, you'd need to do it yourself and if it exceeds the limitations of yourself, convince others that it is a cool project worth sinking time and resources into it. They would directly (working at that enterprise) or indirectly (providing the resources for the enterprise and/or the workers) contribute to the enterprise and would have ownership equal to their participation.

So the only person you'd have capital over would be yourself and so in order to gain the necessary capital to start a project you'd need to find enough people willing to contribute to that, who would thus share the workload, the ownership and the rewards equally (or according to their contribution).

And if you finnally drop the bogus idea that companies are independent entities not realying on society to provide for most of their existence, you'd probably end up with larger self-sustaining communities with democratic ownership of the means of production.

Where again the allocation of people and resources would be a democratic endavour where risk and reward would be shared by the participants. So whether that means more or less investment depends on the preferences of the participants.

Now as to whether that is a concept able to compete with capitalism within capitalism. It's at least an uphill battle to say the least. Because unless they are particularly social indiviudals a capitalist has little reason to share onwership, power and reward unless they have to. While a collective of workers would, depending on the nature of the project, need to be sufficiently large to cover the requirements and if the workers want to have a life of their own where they don't need to invest a lot of money back into the business but extract some for themselves they'd face capitalist competitors which don't even have to ask their workers about that and can extract money for investments anyway AND retain the increased capital coming from that. So the workers in capitalist companies invest without seeing an increase in capital because that capital is snatched by the capitalist.

So unless there's a shortage of labor where cooperatives are the better deal for the workers or where capitalists actually have to give their workers capital and not just compensation, it's a pretty hard battle of cooperatives that have to take care of their workers and captalists who can just treat them as tools and abuse and cycle through them. Now despite the "inefficiency" in terms of the decision making, democracies have won in the political domain, so not all hope is lost that the economic sphere will see improvements of worker rights up to the point where either capitalist companies have to be cooperative or where they are replaced by them, but yeah it's probably an uphill battle.