The Principles and Methods of Cooperatives I The Origin of Cooperation

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The world-embracing system of the social division of labor originated from occasional assistance mutually granted to one another by neighbors. John, more efficient in the processing of iron, manufactured a plough-share for Paul who was less efficient in this art. On the other hand, Paul, more efficient in leather work, fabricated a pair of shoes for John who was less gifted in this kind of production. It was all friendship and neighborly fellow-feeling. Out of these modest beginnings developed the marvelous specialization of industry as it operates today.

It would be nonsense to refer to those remote sources of the division of labor in dealing with present-day industrial conditions. Nobody is so unreasonable as to base any claims and pretensions upon the fact that the exchange of commodities and services was originally a display of pure brotherly sympathies. No modern steel corporation asks for any privileges or subsidies on account of the fact that once, in the ages of primitive mankind, a mythical John offered his services voluntarily to his no less mythical neighbor, Paul.

In the treatment of the affairs of the cooperatives, however, such a procedure is quite common.

We may admit, for the sake of argument, that cooperation originated from friendly relations between neighbors. The villager John went to town to buy five pounds of coffee. His neighbor Paul asked him to buy five pounds for him too. When John cam back and handed the five pounds of coffee over to Paul, Paul reimbursed John for what John had expended for them. Perhaps the two also shared the transportation costs incurred by John. On the other hand, if the purchase of ten pounds of coffee was done at a wholesale price, John passed the difference on to his friend, Paul, and the latter also enjoyed the advantages inherent in wholesale buying.

This all was certainly comradeship and amicable sodality. But it is an impermissible display of naivete to refer to these mythical characters, John and Paul, in matters of the cooperatives as they operate today. These cooperatives are big businesses with millions of members who never meet one another. Their turnover amounts to billions of dollars. They are organized in a complicated hierarchy of simple cooperatives, super-cooperatives, and super-super associations. They have established gigantic vertical organizations. They do business with the government and are active in international trade. They own factories, oil wells, and transportation facilities; they engage in financial operations and enter all divisions of commercial and industrial activities. Their affairs are so complicated that their handling requires the employment of hosts of directors, managers, clerks, accountants, and lawyers. There are special schools for the training of the personnel of the cooperatives. Many universities have established chairs for the teaching of the cooperative methods of business management and accounting and of the laws of cooperatives.

It is ridiculous to conjure up the spectres of mythical John and Paul in dealing with these mammoth enterprises.

In the writings of those fighting for the preservation of cooperative privileges, the cooperatives are described as agents of the memberships. However, no matter how lawyers define the term "agent" from the point of view of the valid laws of the nation, which, after all, are liable to alteration on the part of the legislature, from the economic point of view it is obvious that the cooperatives cannot be considered in any other sense as agents or mandatories of their membership than any other enterprise operating under the division of labor. If the cooperative is called the member's agent because it passes the gasoline it acquires on to the members, the term also fits the activities of any other enterprise. Then the steel corporation is the agent of all those whose well-being depends on the use of steel. If there were no steel works, every individual would have to produce the steel he needs for himself. The operation of steel works relieves the individuals from the necessity of taking care of an important branch of production for themselves. The steel corporations do not turn out products for their own use, but for that of all. Without a radical change in their standard of living and their daily activities, people could do without the services rendered by cooperatives; but they would fall back into the conditions of primitive barbarism and penury if the specialized industries were to go out of business.

When a cooperative buys some commodities, it looks after the interests of its members who ask for these commodities. But the same is no less the case when the businessmen and farmers are intent upon producing all those things which the average man needs for his own consumption.

Decency would require that the champions of the cooperatives cease to boast of their own idealism and disinterestedness. All those whose work contributes to the business of the cooperatives make their living from this job. To establish this truth is not to disparage these men. They are no less honest and useful citizens than any businessman, farmer, or wage earner. But they cannot be called idealists in any other sense than that which would apply to every other man engaged in a gainful occupation. Civil society is not based upon mere idealism and unselfishness. Its driving force is the rightly understood selfishness of every reasonable man. Selfishness, rightly understood, urges everybody to integrate himself into the system of the social division of labor. In rendering useful services to his fellow-men, he furthers his own vital concerns.

The reference to idealism, unselfishness, and similar high-sounding notions is especially inappropriate with regard to farmers' cooperatives. The farmers are businessmen and entrepreneurs of the type which the cooperative literature denounces as hard-boiled callous egoists. They do not till the soil for a heavenly reward, but for their own gain. They do not fill the markets with cereals to perform an act of charity for the consumers, but to make money and to buy the products of the processing trades. They use their political power and form pressure groups in order to attain special privileges enhancing their incomes. They are anxious to pay less taxes than the rest of the people, to receive subsidies out of the public funds, to be protected by import duties, and to enjoy a thousand other privileges and prerogatives. There is certainly no idealism involved in the anti-margarine laws.

The endeavors of the farmers' cooperatives to save the farmers some money are perfectly sound and legitimate insofar as they do not ask for special privileges at the expense of all the people. Farmers are manufacturers and it is all right for them to be concerned with keeping down costs of production. But it is quite another thing if they want to attain this aim by evading taxes and other burdensome obligations which must be borne by all other producing citizens.

Producers and Consumers

The characteristic feature of the free society of competitive capitalism is the unlimited sovereignty of the consumers. The capitalists, the owners of land and the entrepreneurs are by the inescapable law of the market forced to employ their ingenuity and the material factors of production at their disposal in such a way as to fill the most urgent of the not yet satisfied wants of the consumers in the best possible and cheapest way. Businessmen are not irresponsible production tsars. They are unconditionally subject to the supremacy of the consumers. If they fail to obey the orders of the consuming public, they suffer losses. If they do not alter their conduct of affairs very soon in such a way as to adjust it to the demands of the public, they are forced to go out of business and forfeit their eminent position. The consumers, by their buying and abstention from buying, make poor people rich and rich people poor. They determine who should own the capital and the land and who should run the enterprises. They determine what should be produced, of what quality and in what quantity. The market economy is a democracy of the consumers.

It is true that sinister elements are intent upon sapping the unhampered market economy and substituting a producers' supremacy for the consumers' supremacy. A general tendency prevails among present-day governments and political parties to shelter the less efficient producer against the competition of the more efficient producer. The very essence of government interference with business is to paralyze the operation of the unhampered market which invariably tends towards the attainment of that end which is today, not very appropriately, called "freedom from want." While flamboyantly advertising their alleged concern about the masses' material well-being, those in political office are firmly committed to restrictive practices which curtail the quantity of commodities available for consumption. They call their pernicious acts "social policy, "Sozialpolitik," "New Deal," "progressivism" and smear all opponents as "reactionaries" and "economic Bourbons."

The most enthusiastic supporters of restrictions are the organized pressure groups of the farmers and of the wage earners. Deluded by fallacious pseudo-economic doctrines, these pressure groups believe that they can improve their own material well-bring by all kinds of restriction and feather bedding, by subsidies and other privileges.

Now, it is true that a privilege granted to a special group of producers improves in the short run the material conditions of those favored by this privilege at the expense of the rest of the population. Within a society based on the social division of labor, each specialized group is only a minority. If a privilege is granted to such a minority group, the result is certainly an improvement of its members' conditions. But it is quite hopeless for such a minority to remain lastingly in the exclusive possession of a privileged position. However gullible the rest of the people may be, they will finally discover that they are suckers who must foot the bill for the privileges granted to a comparatively small group. They will not tolerate the preservation of such a state of affairs. They will either abolish the privileges granted to other people or they will secure for themselves similar privileges.

Unfortunately, what prevails in our day is the second alternative. Faced with the problem of privilege, those not privileged do not ask for the abolition of all privileges. They ask for privileges for themselves too. They are too dull to comprehend that this system, when carried to its ultimate logical consequences, is the acme of the nonsense. What a man may gain qua producer by a privilege granted to his branch of production, he loses qua consumer in buying the products of the other equally privileged branches. What remains is merely a deterioration in the material well-being of all people on account of the general drop in the productivity of labor.

It seems to be a very good thing for the milk farmers to outlaw margarine and for the musicians to outlaw recorded music. But if in every other branch of production, progress is likewise stopped, nobody gains and all people are hurt. The milk farmers' and the musicians' incomes are raised, but the prices of all the goods they want to buy are raised concomitantly. What remains is that all people miss all those advantages they could derive from technological progress.

This nonsensical and self-defeating policy of privilege parades today under the misleading label of "producers' policy." The worst sin of capitalism, contend the champions of the producers' privileges, is that it assigns the primacy of the "idle" consumer and not to the "industrious" producer. They fail to realize that producers and consumers are the same people. It is only the thinking of economic analysis that distinguishes between man as a producer and man as a consumer. In life and reality these two aspects of each individual are inextricably linked together. You cannot favor man in his producer quality without hurting him in his consumer quality. The primacy of consumption as manifested in the unhampered operation of the capitalistic market economy is the consummation of the fact that consumption is the sole end and purpose of production.

If the cooperative movement were to attack the errors of this alleged "pro-producer" policy, it would render a very valuable service to the promotion of welfare. However, in spite of the lip service they pay to what they call the primacy of the consumer, the consumers' cooperatives are far from raising any objections to the restrictive practices of our day. They are, on the contrary, among the most zealous supporters of these disastrous methods. Many of their members are precisely those people who most obtrusively ask for such producers' policies: farmers and labor union members.

All this bombastic talk about the alleged blessings of cooperation is vain, as the cooperatives acquiesce in the existence of vast producers' privileges. The farmer may save pennies as a member of a cooperative, but he loses dollars on account of feather bedding and hostility to technological improvement as displayed by labor unions. The wage earner may at best save pennies when buying in a cooperative store, but the pro-farmer privileges cost him dollars.

There is only one really efficient way to further the interests of the consuming masses, namely the way of free private enterprise. Not to hinder the more efficient producer to outdo the less efficient rival, is a much better method to have the farmer and the urban consumer supplied more amply and at lower costs than anything else. In diverting the public's attention from the main economic evil, viz., the policy of restriction and producers' privileges, and in concentrating upon the trifling issue of saving pennies where dollars are at stake, the cooperative movement does more harm than good.

The cooperators have certainly no claim to glorify themselves as the champions of the consumers. Their achievements are meager indeed when compared with those of the businessmen who succeed in turning out more, better, and cheaper products.

The Place of the Cooperatives within the Frame of the Competitive System

Economic liberalism, today disparaged as Manchesterism, maintains that the government should not place any obstacles in the way of people who want to serve their fellow citizens. As the liberals interpret the principle of consumes' sovereignty, the consumers alone should decide whether a business unit is good or bad. This is what the much abused slogan "laissez faire" means: let the consumers choose for themselves and not a Fa ahrer for them.

The market economy gives everybody a chance. What a man needs to become a captain of industry is merely good ideas and the ability to make these ideas work. No inherited wealth and no capital is required in order to succeed. The capitalists, driven by their own selfish interests and eager to find the most profitable investment for their funds, are always in search of ingenious men to whom they can entrust their funds.

The harbingers of totalitarian government omnipotence would have us believe that under present conditions, in the era of what they call "mature" capitalism, this is no longer true. Today, they say, conditions are rigid. There is no longer any opportunity for a penniless newcomer to challenge the vested interests of the old firms and big corporations. The poor are doomed to remain poor forever, and the rich are getting richer from day to day.

This fable distorts the actual state of affairs no less than all the other Marxian and Keynesian fables. It is, of course, correct that today all branches of government cooperate in the effort to prevent technological progress and the emergence of new enterprises and new millionaires. But in spite of all these handicaps there is still room left for the success of self-made men. The greater part of the present-day leaders of business are not sons and still fewer grandsons of the millionaires of days gone by. As far as a family succeeds in preserving its place on the top of the social ladder for several generations, it owes its eminence to the ability and zeal of its younger generations. There is nothing in the operation of the unhampered market economy that could, in the long run, afford to vested interests a safe protection against the competition of improved methods of production, new products, better quality and cheaper prices. It is precisely because such protection is absent in the unhampered market that those, who by indulgence in routine, lack of inventiveness, incompetence, laziness, and negligence endanger their own prosperity, are asking for protection on the part of the government.

The principle of not interfering with market conditions and giving a chance to everybody applies no less to new methods of business organization. The corporative form of business enterprise owes its present role not to any assistance offered on the part of the laws and the administrative officers. On the contrary. From its early beginnings it had to meet the hostility of those in power. This hostility developed in the last decades into undisguised persecution. The authorities discriminate in many respects, first of all in the field of taxation, against the corporations. The corporations are singled out for much more burdensome taxation than non-corporate business. But the enormous efficiency of the corporate form of business has victoriously withstood the onslaughts of the power to destroy.

The cooperatives entered the scene of business with passionate diatribes against the merchants and especially against the retailers. It would have been comprehensible if the retailers had asked the authorities to suppress these new competitors who seemed to expect less from serving their members than from smearing the established firms. A demand of retail business for outlawing the cooperatives and suppressing their activities altogether would not have been more perverse than are the endeavors of the farmers to outlaw margarine and to cut down the importation of meat and cereals. But apart from the angry utterances of a few hotspurs, no such demands were ever raised. The fairness of the much calumniated merchants and their full endorsement of the principle of free competition manifested themselves in the attitude these men showed in dealing with the cooperatives. They did not ask the police to silence these insidious slanderers and defamers. All they asked was that they not be coddled with privileges and prerogatives. Fully committed to the fundamental maxim of free enterprise and free competition, all that private businessmen are aiming at is equality in the treatment of all forms of business enterprise. They ask for neither privileges for themselves nor hostile discrimination against any group of rivals. All they ask is that the government stay neutral. Neither privileges nor discrimination. The freedom of the public to choose between the multiplicity of competing sellers and to prefer the shop that best serves them should not be curtailed by virtual subsidies granted to less efficient enterprises. For the sake of consumers' sovereignty and for the benefit of the whole people, there should be equality in the treatment of all kinds and varieties of business enterprise.

The Character of the Cooperatives' Profits

There are three different elements included in the conception of profit as popularly employed in mundane language and in statistics: interest on invested capital, compensation for the entrepreneur's own labor expended in the conduct of the business and finally, profit proper. In the case of corporations and cooperatives, the second of these elements is absent as the owners of the enterprise are legally distinguished from those performing any labor in the conduct of business even if these latter own stock in the corporation or are members of the cooperative.

Profit proper is the surplus an enterprise earns from selling at prices exceeding the total amount of costs expended. There is no need to enter into an examination of the conditions required for the emergence of profits proper, their economic significance and the role they play in the operation of all economic affairs. Such an analysis is the task of treatises dealing with economic theory.

The cooperatives contend that the objective of their conduct of business is not profit making and that the surplus they are passing on to their customers in proportion to the purchases each of them made is not a dividend, but a "patronage refund"; that it is not profit, but savings resulting from the conduct of the business. Upon this doctrine the cooperatives base their vast claims to a privileged position and especially to tax exemption.

It is possible to imagine a method of conducting a cooperative's business in such a way that no such surplus emerges at all. The cooperative could sell every article at a price which merely includes the costs the cooperative itself incurred in acquiring it plus full compensation for the costs incurred in the manipulation of this article. Actually no cooperative has adopted this procedure. The cooperatives sell above costs. At the end of a definite period, there remains, provided the conduct of operations was successful, a net profit, i.e., a surplus of sales proceeds over costs.

Mrs. Beatrice Potter Webb (Lady Passfield), that adamant apologist of the worst excesses of Bolshevism, tried to explain why the cooperatives do not realize "the Owenite ideal of eliminating profit in the transaction of business," why they do not sell "their commodities at cost price plus the expenses of management." As Mrs. Webb saw it, the blame must be put upon the imperfection of monetary institutions. The sale of small quantities at cost price, she contended, "involves the use of fractions not represented in current coin." [12] Yet the fact that the divisibility of coins is not unlimited has never prevented business from nicely adjusting prices to each height required by the structure of the market. In the retailing of fruit and other necessities of daily life, such prices as "five pieces for seven cents" and "three pieces for eleven cents" are quite common. There is no reason why the cooperatives should not adopt the same procedure. Actually they do adopt it, as it is indispensable. But when they adopt it, their aim is not the elimination of profit, but rather the necessity of competing with their rivals.

Mr. Jacob Baker explains these procedures of the cooperatives in a different way. In his opinion, it would take too much bookkeeping to calculate the wholesale cost and proportional share of operating expenses on each dozen of eggs and each pound of butter. [13] However, a businessman who would not figure out neatly what his own costs are and would grope about in the dark, is a clumsy bungler and headed for bankruptcy. Competition enjoins upon every seller-whether profitseeking merchant or allegedly altruistic cooperative store or oil station-the necessity of not asking more than the market price. But every seller must know whether each of his transactions involves a profit or a loss. If he were to ignore this and to sell below his own costs, he would very soon forfeit his position in the framework of the social division of labor. If economic calculation shows a businessman that he cannot carry a definite article without losing money, he must as a rule discontinue this branch of activity. In exceptional cases, he may go on deliberately carrying this article for special considerations such as not making his customers stop patronizing his shop or similar matters. But even then, he must be fully aware of the import of his conduct. In the operation of commerce, there is no room left for ignorance and carelessness. Computing costs as correctly as possible is the backbone of trade.

Actually, the immense majority of well-run cooperatives have fully adopted the well-tried accounting methods as developed by many generations of businessmen. They even boast of their achievements in the field of bookkeeping and financial statements. [14]

The method of selling above costs must certainly not be excused by referring to the alleged fact that cooperatives do not know what their own costs are.

The true reasons for these methods are very different from those advanced by these apologetic doctrines.

A surplus of sales proceeds over costs appears only if the transaction was successful. Even the most ingenious businessman cannot always avoid losses. He may sometimes misjudge the trend of prices and expend more in the acquisition of an article than later actual developments would have justified. Business is always speculative as it is based upon the anticipation of the future from which business profits and losses stem. In a world without change in which the tomorrow does not differ from the today, there would be neither profit nor loss. Our actual world is fortunately not stagnate. There is continuous change in conditions and-at least still in this country-a continuous trend toward improvement. Under such a state of affairs, prices are in ceaseless fluctuation. He who buys in order to sell can only reap a profit if he has bought at a price which is lower than the price at which he sells minus total sales costs.

Cooperative enterprise is no exception. It too is subject to the law of the market. If a cooperative buys 10,000 pounds of an article at $2,000 and its operating sales costs are five cents per pound if there is to be no loss. But if in the time lag between the purchase and the sale, the retail price drops to 18 cents, it is forced to sell at a loss of seven cents per pound and total loss of $700. Of course, a cooperative that would engage exclusively in such unwise deals would very soon go to the dogs. With a prosperous cooperative, over a definite period of time, the total amount of profits must at least equal the total amount of losses. But in every business enterprise, whether cooperative or other, the various individual deals contribute in different ways to the final result of business transacted over a definite period of time. Some of these individual deals are more profitable, others either less profitable or producing losses of various amounts.

It is these hard facts that make it peremptory for the cooperatives not to sell each article precisely at the proportional shares of their own total costs (wholesale price expended plus operating or sales costs). If they were to try this, they could not sell at all that part of their stock which was bought at prices which appear unreasonable when seen from the angle of the present structure of retail prices.

Cognizance of the state of affairs explodes entirely the cooperative doctrine concerning patronage refunds or patronage dividends. These refunds have nothing at all to do with the purchases of the individual members. They are not adjusted to the margin above costs at which the concrete purchases were billed to the individual members. They are distribution of the total profit earned by the cooperative over a definite period of time. They have no relation whatever to the individual's purchases. A member who bought only articles in the sale of which the cooperative suffered losses is no less entitled to a refund in proportion to the total amount of his purchases than any other member.

If the cooperative were merely an agent of the members, the members would have the obligation of absorbing their share of the cooperative's purchases and to make good all the costs incurred by the cooperative no matter whether or not this is advantageous for them. They would have the obligation of buying even if this would mean for them buying above the price they would have to expend in buying elsewhere. This is the inference to be drawn from the much talked about fable of John and Paul. If John asks Paul to buy a necktie for him in New York, he must take the necktie and reimburse Paul for what he has expended in the purchase. It is immaterial whether or not John discovers that he could have bought an equivalent necktie in his own place of residence at a much lower price. He has given to Paul the discretionary power to act as his agent in the purchase of a necktie and must bear the consequences.

It is therefore obvious that the doctrine of the cooperators according to which a private store sells articles to its customers while a cooperative store buys them for its members, [15] is moonshine. The cooperative sells no less than a private store and it must induce its own members to patronize the cooperative store by the same methods to which private retailers resort, namely by asking lower prices than its competition. The cooperative's purchases are not more closely tied up with its sales than are the purchases and sales of every private retailing business. Membership in a cooperative does not enjoin upon any member the obligation to buy any commodities in the cooperative store or oil station, still less the obligation to reimburse the cooperative, in the purchase of any commodity he may buy, for all it has expended in acquiring this concrete article plus operating expenses. The individual cooperator has the right to buy in the cooperative store in the same way in which every man-cooperator and non-cooperator alike-has the right to buy in every private shop. The phrase "the cooperative buys for its members" is not a more correct description of the actual state of affairs than the phrase, "the private retailer buys for his customers."

The essential fact is that the surplus of total sales proceeds over total costs which the cooperative distributes among its customers does not stem from the various concrete purchases of the individual members, but from the successful conduct of the cooperative's aggregate business over a definite period of time. Such a surplus appears only if the managers of the cooperative were skillful enough to buy at such low prices that the later sale can be made in a remunerative way.

The economic character of a cooperative does not differ from that of a private store. Success or failure result with a cooperative from the same sources from which they result with a private retail shop. Success nets profits, failure losses.

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