Are cooperatives more virtuous than corporations?

Abstract

There are several sectors of the economy in which cooperatives have flourished, competing successfully against standard business corporations. The best explanation for their success is that they provide superior benefits to their members. The question addressed by this paper is whether cooperatives also provide important benefits to society, such that non-members should prefer a cooperative economy to one dominated by business corporations. It has often been suggested that cooperatives are more virtuous because they are more democratic, less hierarchical, less anti-social and less apt to produce economic inequality. This paper evaluates these claims. The central challenge stems from the observation that cooperatives are not nearly as different from corporations as is commonly assumed.

One of the more useful clarifications to have emerged from the great debates over the merits and demerits of capitalism, which have preoccupied political economists for almost 200 years, has been the recognition that the term “capitalism” refers to at least two importantly distinct institutional arrangements. First, it designates an economic system in which major decisions about the allocation of resources, labor and consumption goods are made based on prices that emerge in a set of decentralized, competitive markets, determined by the buying and selling decisions of private actors. Second, it refers to a system in which ownership of the means of production is predominantly private, with firms being managed in the interests of, and profits accruing to, the contributors of capital. The problems experienced in the former Soviet Union implementing a system of central planning of prices were sufficient to persuade most socialists that there is no feasible alternative to the first set of arrangements, the market determination of prices. As a result, critics of capitalism have increasingly focused their attention on the second set of arrangements, involving the ownership and governance of firms. Under the banner of “market socialism,” many blueprints have been proposed that would reform the ownership structure of firms while keeping the basic structure of the market—in particular, the competitive determination of prices—in place (Roemer, 1998; Stiglitz, 1994). Since the most plausible alternative to the capitalist firm (i.e., the investor-owned business corporation) is the cooperative, this has resulted in a great deal of attention being paid to this organizational form. Unlike public sector ownership, which tends to interfere with the price mechanism, an economy dominated by cooperatives would preserve the decentralized decision-making that is central to the market determination of prices. As a result, cooperatives have, in many cases, been asked to shoulder what remains of the utopian ambitions of the socialist project—they have become, for many, the last, best hope for meaningful structural reform of the capitalist system.

The central question that will be addressed in this paper is whether cooperatives are a suitable vehicle for the realization of these utopian ambitions. Since the emergence of the modern cooperative movement—often associated with the foundation of the Rochdale Society of Equitable Pioneers in 1844—cooperatives have enjoyed a widespread perception of moral superiority over standard business corporations. ¹ The suggestion has been that they are not just better for their members but that they are better for society as a whole. Although many claims and counterclaims have been made over the years, the most common suggestion has been that, in contrast to business corporations, cooperatives are more democratic, less hierarchical, less anti-social and less apt to produce economic inequality. ² It is, of course, easy to find examples of cooperatives that exhibit all of these virtues, but some of this is due to advantageous selection, whereby cooperatives attract a more idealistic class of patrons, who are committed to precisely these values. My goal in this paper will be to focus more narrowly on the formal structure of cooperatives, in comparison to corporations, in order to determine whether the organizational form provides better incentives with respect to any of these social concerns. After all, if the goal is to expand the cooperative sector so that it becomes the dominant organizational form in the private economy, one cannot assume that everyone involved will be motivated by a high level of ideological commitment. We can expect many people to become increasingly responsive to the economic incentives provided by the organizational form (Dow, 2003: 261). As a result, in order to show that cooperatives will exhibit superior virtue, compared to corporations, it is necessary to show that they will provide participants with better incentives. This is, however, somewhat challenging to demonstrate because when examined through the lens of modern corporate law, cooperatives are simply not all that different from ordinary business corporations. Indeed, it has become conventional in some quarters to describe the corporation as a type of cooperative (specifically, a “lender's cooperative”[Hansmann, 1996]). ³ This gives rise to the concern that, just as “a squirrel is a rat with better public relations,” cooperatives may enjoy only the perception of superior virtue, relative to the corporation.

My goal in all of this, I should note, is not to criticize cooperatives; the goal is simply to determine whether they have the emancipatory potential that has sometimes been attributed to them. There are several sectors of the economy in which cooperatives have flourished, competing successfully against standard business corporations (Hansmann, 1996: 1–2). In each case, the most plausible explanation for the prevalence of the institutional form is that it provides superior benefits to its members. These benefits are often non-trivial, and nothing that is said here is intended to downplay them. The question that will be the focus of this paper, however, is whether these cooperatives also provide important benefits to society, or whether they are superior from the moral point of view, such that non-members should prefer a cooperative economy to one dominated by business corporations. ⁴ In order to answer this question, it is necessary first to provide a more detailed account of what cooperatives are and how they differ from corporations. Many discussions of the “capitalist firm” are conducted at the somewhat rudimentary level of sophistication that prevailed during the 19th century, before the development of the modern theory of the firm. Corporate law underwent significant development over the course of the 20th century, which must be taken into consideration. The U.S. Small Business Administration (n.d.), for example, lists five major classes of “business structure” (sole proprietorship, partnership, limited liability company, corporation and cooperative), along with five different subcategories of corporation. These are only general categories; regional legislation generates a further proliferation of forms, as well as offering special-purpose corporate structures (condominiums, real estate holding companies, income trusts, etc.). There are also, in most jurisdictions, several different legal forms of cooperative—financial cooperatives, for example, are often incorporated differently and are subject to different rules than housing cooperatives. Finally, not all cooperatives are incorporated under cooperative statutes (e.g. many de facto cooperatives are partnerships). ⁵ My initial effort, therefore, will be to describe some of the important structural differences between these legal forms, in order to make clear the essential difference between a corporation and a cooperative. I will then show how the market conditions that tend to favor the success of cooperatives, which I refer to as compound market failure, can lend the impression of superior virtue to the cooperative organizational form. Once this is complete, I will go on to assess the four claims, listed above, that have been made about the moral superiority of cooperatives.

Corporations and cooperatives

There is nothing incoherent in the vision of a fully atomistic market society, in which each individual is a private contractor, whose economic relations with others are mediated entirely through market exchange. There are, of course, various disadvantages associated with organizing one's economic affairs in this way. When individuals come together to create a firm, they are taking a set transactions that could have be carried out through market exchange and choosing instead to organize them through a system of directly cooperative production. ⁶ To use a common metaphor, the creation of the firm transforms the competitive market system from an individual to a team sport, albeit a peculiar one, in which the size and composition of the teams is constantly shifting, subject to the choices made by participants in the course of play (Blair and Stout, 1999). The reason that economic actors band together in this way is to achieve certain advantages, often described as a reduction in “transaction costs.” The important point is that they are still engaged in economic transactions among themselves; they are simply choosing to organize them in a different, typically more efficient way. To cite another commonly used metaphor, they are substituting the “visible hand” of management for the “invisible hand” of the market.

It has become common in contemporary corporate law to use the term “firm” as the most generic designator for such a cooperative organization. Corporations, cooperatives, partnerships, non-profits, and so forth are then categorized as specific types of firms. Thus, the “theory of the firm” provides an account of these organizations at the most abstract level, while a variety of more specific theories provide a fine-grained account of why the firm comes to assume the specific form that it does, including the structure of ownership that it adopts. With respect to the former, it has become common to describe the firm as a “nexus of contracts” among economic actors, who are conventionally assigned to four different categories, depending upon the specific contribution they make to the success of the organization. There are suppliers, who sell inputs to the firm, and customers, who purchase the firm's outputs. In between, the firm engages in some process of value creation, involving workers, who provide labor, and lenders, who provide capital goods that increase the productivity of labor. I shall refer to these groups as the four major “constituencies” of the firm.

There are, it should be noted, more or less controversial versions of the “nexus of contracts” view. The central observation, which is generally accepted, is that granting the corporation “legal personhood” dramatically reduces the transaction costs that would otherwise be associated with this economic process, by making it so that members of these constituency groups need not enter into complex multilateral contracts with one another but can each contract directly with the firm. The firm is therefore the “nexus,” in the literal sense of the term, of a set of contractual relations. For example, the contributions of the firm's customers generate a revenue stream, which members of the other three constituency groups each have some claim upon. And yet instead of contracting with one another to determine how it should be divided up, corporate personhood allows members of each constituency to contract with the firm to establish their entitlements. ⁷

Contracts, from this perspective, represent the central mechanism through which the benefits and burdens of the cooperative system of the firm are allocated among its participants. For members of each constituency, the contract specifies what that person is committed to doing for the firm and what the firm is committed to doing for the person. Because of this, contracts serve as the primary means through which individuals are able to ensure that the firm respects their interests (Boatright, 2006: 107). (This is a slight oversimplification, in that the contracts need not always be with individuals but could also be with other firms.) Of course, as every law student quickly learns, contracts are always to some degree incomplete, since it is impossible to specify in advance every obligation under every eventuality. Thus, contracts are more or less open-ended and open-textured, requiring that the parties act with some degree of good faith toward one another or, failing that, allowing them appeal to the courts for the imposition of such terms. To pick a common example, most firms obtain some access to capital by securing a loan from a lending institution, such as a bank. The terms of the loan involve a clear contractual specification of the interest rate charged, the repayment schedule, the prepayment options, and so forth. While there will be certain discretionary elements—pertaining especially to how the creditor may respond to default—the contract as a whole will be quite rigid, imposing a relatively strict set of payment obligations upon the firm.

There is, however, a rather striking exception to this general principle. In a standard business corporation, one group of investors has a relationship to the firm that is, from a contractual point of view, almost entirely unspecified. Unlike those who purchase corporate bonds, which are governed by fixed interest payments and clear repayment terms, those who purchase shares of the corporation's stock receive no guarantee with respect to either periodic payments or repayment. Instead, what the share confers is an ownership stake in the firm, where ownership is understood in relatively narrow terms, as involving formal control of the firm (i.e. through the power to elect members of the board of directors) and a residual claim on the earnings of the firm (i.e. an entitlement to disbursement of the firm's profits, typically in the form of dividend payments) (Hansmann, 1996: 11–12). Being a residual claimant with respect to the firm's earnings, rather than having a contractual claim on some fraction of them, has both advantages and disadvantages. While it gives the shareholders the right to appropriate everything that is left over, after all of the firm's contractual obligations have been met, it means that they are also last in the order of repayment. This means that owners are the first to absorb any losses suffered by the firm. Their position therefore involves the greatest risk exposure because while it typically has the most significant upside, it also has the most immediate downside and therefore offers the least security against loss.

This is why, despite the fact that control of the board of directors need not necessarily be associated with ownership of the residual claim, the two almost always go together (Hansmann, 1996: 12). Because the residual claim involves no guarantee of any sort of payment, it is difficult to see why anyone would agree to be in this position, with respect to the firm, unless they were also given the right to appoint those who govern the firm. ⁸ In this respect, control of the board of directors somewhat understates the nature of the relationship between shareholders and the firm. Control involves not just the power to elect directors but also the more general sense that these directors, as well as the managers whom they subsequently appoint, will act as agents of the shareholders by seeking to maximize the value of the residual claim. This is often expressed as a commitment on the part of managers to a norm of shareholder primacy, whereby they must exhibit partiality to the interests of shareholders in any discretionary decisions they make, ranking shareholder interests above those of other constituencies. The firm must, of course, still meet all of its contractual obligations; the discretion in question arises only after those obligations are discharged.

I have been specifying these points in some detail in order to discourage a common misunderstanding, which involves a conflation of ownership of the firm with the provision of capital to the firm. ⁹ In reality, one can own a firm without providing capital to it, and one can provide capital to the firm without acquiring ownership of it. The latter is most clearly illustrated in the case of bank lenders and bondholders, who have a contractual relation with the firm rather than an ownership relation. With respect to the former, the most striking example is the cooperative, in which ownership is exercised by a constituency group other than the firm's lenders. The most common form of cooperative is a consumer cooperative, which is a firm that is owned by its customers. In an insurance cooperative (i.e. a “mutual”), for example, policy-holders become “members,” a status that entitles them to vote for representatives on the board of directors, thereby exercising control over the firm. Less obviously, they are residual claimants on the earnings of the firm because they are issued a periodic “refund” on the insurance premiums they have paid, which represents a disbursement of the revenues that are left over after the firm has met all of its contractual obligations (in particular, after it has paid out on all claims against the policies it has underwritten). And finally, the management of these firms exhibits partiality to its members, assigning priority to their interests over those of other constituencies.

Less common, but nevertheless significant, are supply cooperatives, which are owned by those who provide inputs to the firm. A familiar example is the dairy cooperative, which is typically owned by the farmers who supply milk to the firm (which then engages in some value-added processing, such as producing butter, cheese or yogurt). There is also the somewhat difficult case of credit unions, which are technically supply cooperatives because they are owned by the depositors who supply credit to the firm (which is then packaged and resold to those who receive loans from the firm, who are technically its customers). In modern retail banking, however, in which depositors pay fees in return for a variety of services and often receive no interest on their deposits, it is often reasonable to classify them as customers (and therefore, the credit union is a customer cooperative). And finally, there are worker cooperatives, which are owned by those who supply labor to the firm. In principle, there could also be multi-constituency cooperatives, although in practice, these are very uncommon, and in many jurisdictions, cooperative incorporation statutes restrict their formation.

Many of these cooperatives are incorporated under special cooperative statutes, but they can also be created as partnerships or even as standard business corporations, simply by issuing shares to individuals who stand in a specific relation to the firm and then setting conditions on share transfer. In the case of U.S. plywood cooperatives, for example, the firm issues an extremely restricted number of shares, each of which is owned by a single worker, who then enjoys the benefits of membership (the right to employment at the firm, a vote in board elections, a share of the profits, etc.). Similarly, in traditional New York housing cooperatives, residents own a certain number of shares (depending on the size of their apartment) in the corporation that owns and manages the building, which entitles them to vote in board elections and to hold a “proprietary lease” on their apartment. On the basis of these examples, it is not difficult to see that the distinction between a cooperative and a standard business corporation is less clearcut than often assumed. In a business corporation, shares are allocated to individuals who make an initial investment in the firm, as a result of which the firm is owned by the providers of capital. Some have argued, on this basis, that the corporation should be seen as a lender's cooperative, in a way that closely parallels other forms of cooperative (Hansmann, 1996).

There is a great deal to be said for this analogy. It is a characteristic feature of successful cooperatives that they obtain the primary input supplied by the ownership group on easy terms, which in turn gives them an important measure of flexibility in responding to market fluctuations. The owners are normally willing to forego the market price—which is to say, the price that could be obtained in a contractual relation—because they expect to recapture any initial loss through their residual claim on the firm's earnings. Thus policy-holders in a mutual insurance scheme normally pay upfront premiums that are higher than the market rate for such policies, with the expectation that they will receive a substantial refund at the end of the policy term. Similarly, farmers who are members of a dairy cooperative will sell milk to the firm at a price substantially lower than the market rate, with the expectation that the difference will be made up by the profit share they receive at the end of the year. Shareholders in a standard business corporation are doing something quite similar. Unlike bondholders, who demand a positive interest rate and fixed repayment terms, those who purchase shares from the corporation are essentially making a zero-interest loan to the firm with no fixed repayment date. ¹⁰ They are, in other words, extending credit to the firm on easy terms, with the expectation that they will make up the loss through the residual claim. Of course, they may also be hoping to benefit by reselling those shares in secondary markets, but this is no different from the way that many cooperative members behave, in cases where secondary markets for cooperative membership exist (e.g. are not prohibited by the transfer rules of the cooperative). Although there are differences of detail, the basic structure exhibits a striking similarity, which is what justifies thinking of the corporation as a type of cooperative owned by the providers of capital.

The benefits of cooperatives

A common misconception, encouraged by the use of expressions such as “the capitalist firm,” is that the capitalist mode of production somehow imposes a particular structure on firms, along with a specific constellation of obligations and entitlements on their participants. In reality, corporate law is almost entirely enabling, not prescriptive. ¹¹ It provides economic actors with a menu of options, containing relatively few restrictions on the modifications that can be made to the standard templates. To the extent that there is homogeneity in the firm types that one encounters in a capitalist economy, this is because economic actors themselves strongly favor a particular organizational type—the investor-owned business corporation. And yet, not only is there no legal impediment to the formation of a cooperative in any market, there is nothing to prevent a firm from changing ownership constituencies once it is up and running. Workers may buy out a business corporation, turning it into a cooperative, just as a cooperative may be transformed into a corporation.

This observation raises a puzzle, which has generated a large and sophisticated literature in economics: why are corporations more common than cooperatives? Or more specifically, why is it so often investors who assume ownership of the firm? The discussion takes as its point of departure Paul Samuelson's observation, in 1957, that at a sufficiently high level of abstraction and in a perfectly competitive market, it does not matter whether capital hires labor or labor hires capital (Samuelson, 1957: 894; also Dow, 2003: 2–4). Capitalists could own the corporation and rent labor from workers, or workers could own the corporation and rent machines from the capitalists. The fact that an asymmetry can be observed in real-world markets therefore cries out for an explanation. What is the difference between capital and labor that accounts for the relative scarcity of worker-owned firms? Others have generalized the question, asking why cooperatives of all types are less common than corporations (Hansmann, 1999: 389). And among cooperatives, there is a question as to why consumer cooperatives make up over 90% of the sector, while worker cooperatives account for less than 1% (Deller et al., 2009: 11).

The simplest answer would be that the firm is most likely to be owned by the group that stands to benefit the most from exercising ownership. ¹² However, any effort to give this a more detailed specification quickly becomes quite complicated. There are three general categories of effect that any particular ownership structure will have on the firm, each of which will produce both costs and benefits for any group that assumes ownership. First, there are the benefits and costs of ownership that fall directly on members of the ownership group. Most obviously, there is the value of the residual claim, as well as the direct costs of exercising governance over the firm. Second, there are the benefits and costs generated by having every other constituency group stand in a contractual relation to the firm. For example, choosing a cooperative form involves foregoing the benefits of equity capital, which usually means having to secure financing in the form of bank loans. ¹³ And finally, there are the benefits and costs to the firm as a whole generated by the governance system instituted by the ownership group. For example, one constituency might be able to exercise more effective supervision of management than some other, reducing managerial opportunism and benefiting the firm as a whole.

This framework can be used to provide a persuasive analysis of why investors often have more to gain than any other constituency group from exercising ownership over the firm:

1. Ownership costs. The value of the residual claim to each potential ownership group depends heavily on the risk tolerance of its members because the residual claimant is the first to absorb any losses incurred by the firm. Investors often have a relatively high tolerance for risk because they are able to diversify their holdings and hedge certain risks quite easily (most obviously by investing in other firms), and so their direct costs of ownership are often lower than those of other constituencies, who find it more difficult to diversify their risk exposure. Workers, in particular, have enormous difficulty diversifying because their primary input (labor) is non-alienable and largely indivisible (Ben-ner, 1988: 290; Dow, 2019: 120).

2. Contracting costs. The equity capital provided by investors can be used not only to finance the operations of the firm but also as collateral to secure bank loans, which gives investor-owned firms both easy access to additional capital and the benefits of financial leverage. Cooperatives by contrast have difficulty securing bank loans because they often lack collateral, and so eliminating shareholders means not only foregoing equity capital but also having to pay a higher interest rate on debt (which is to say, the contracting costs with lenders go up). This is a particularly acute problem for worker cooperatives (International Cooperative Alliance, 2015).

3. General benefits. The constituency that is able to govern the firm most effectively will be able to maximize the overall cooperative benefit provided by the organization. Investors are often thought to enjoy certain advantages in this regard because their interests tend to be closely aligned and their contribution to the firm is easily measured and compared. ¹⁴ This reduces the potential for multi-task and multi-principal agency problems in their relations with management (Heath and Norman, 2004). To the extent that investors care only about the “bottom line,” they are the ownership group that is least likely to start bickering with one another. By reducing agency costs within the firm, this generates benefits that are, in principle, available to all members.

It is important to emphasize that these observations are not intended as an argument for investor ownership or for the claim that firms should be owned by lenders. They offer merely a summary of the empirical literature that seeks to explain the fact that, given a choice, so many economic actors adopt the legal form of a business corporation as a way to organize their affairs. In this respect, the analysis serves as an alternative to the popular explanation, which assumes that investors own the firm because they are rich and cooperatives are rare because other constituencies are too poor to buy it from them. This explanation is question-begging since any viable firm eo ipso generates a revenue stream adequate to cover its expenses, and so any group capable of extracting greater benefit than investors should be able to borrow the money to acquire it from them. Transforming a business corporation into a cooperative necessarily requires replacing one's shareholders with creditors. The fact that the cost of capital goes up, in the transition from corporation to cooperative, is counterbalanced by the fact that the cost of some other input will go down (depending upon which constituency acquires ownership). If the latter gains do not make up for the former losses, then this fact is what explains the persistence of investor ownership, not the background differences in wealth between the parties.

A noteworthy feature of the advantages enjoyed by investors, when it comes to exercising ownership of the firm, is that they are perfectly general, since they arise from intrinsic features of money and credit. As a result, these advantages will be present in every sector of the economy, creating something of a general presumption in favor of investor ownership. This explains why the growth trajectory, from sole proprietorship or partnership (which often involve members of non-investor constituencies) to standard, investor-owned business corporation, represents something of the default in mature market economies. In sectors where cooperatives do succeed, competing effectively against standard business corporations, there is usually a particular explanation for this success. Most often, there is something unusual or defective about the market that explains why investor ownership is not the favored mode of economic organization in this particular domain. There is, in a sense, a compound market failure in these sectors—not only does the market fail in a way that favors the development of a firm, but the standard ownership structure of the corporation fails in a way that makes the cooperative organizational form unusually beneficial to its owners.

These circumstances of compound market failure can usefully be analyzed using the three categories introduced above:

1. Ownership benefits. Constituencies that are severely disadvantaged in their relations with the firm (e.g. through having made “asset-specific investments”[Blair, 1995]) often have a strong incentive to assume ownership in order to reduce the chances of opportunistic behavior by the firm's management. This is most obvious in cases where the firm exercises significant market power over one constituency. The classic agricultural consumer cooperative, for example, flourished at a time when transportation was relatively underdeveloped and farms were geographically isolated, which favored the formation of regional monopolies in the retail sector. Similarly, residents of rental apartments are subject to a measure of market power from their landlords, due to the costs of moving, which makes condominiums more attractive by comparison. The costs of ownership, in these cases, including the heightened risk exposure, are simply outweighed by the benefits of having management that is responsive to one's interests.

2. Contracting costs. Business corporations are doubly advantaged when it comes to accessing capital: not only do they receive it directly from shareholders, but the equity capital can be used as collateral to secure additional loans. Cooperatives necessarily forego access to equity, leaving the central question the terms under which they are able to access credit. In some cases, this will not be overly difficult because the credit is intended to purchase physical assets that can, in turn, serve as collateral for the loans. In other cases, the members may be able to use their own contribution to the firm as a form of collateral. For example, the development of secondary markets for long-term energy supply contracts facilitated the formation of consumer cooperatives in the renewable energy sector, by allowing these firms to sign long-term contracts with their members, which can in turn serve as collateral on loans. More generally, though, cooperatives are likely to be more successful in the least capital-intensive sectors, where their high cost of capital constitutes a less significant competitive disadvantage.

3. General benefits. As condominium owners quickly discover, the costs of exercising governance over the firm and imposing accountability on management are non-trivial. Conflict among members is easily exacerbated by the presence of divergent interests. These conflicts will be lower when the members are all similarly situated in their relations with the firm and when their contributions are more easily quantified and compared. A notable feature of cooperatives is that they are more successful in sectors where members of the ownership group are identically situated in their relations with the firm. For example, agricultural supply cooperatives often deal with “pooled” commodities, like milk or grain, where there are no quality differences in the contributions of different members. Absent this homogeneity, cooperatives may be more successful when members have some external source of solidarity that minimizes conflict. For example, a sense of ethnic solidarity is often thought to be an important factor in the success of the Mondragon cooperative (given that the model has proven impossible to reproduce in other social contexts). It is also worth noting that when a particular constituency is a source of significant moral hazard costs to the firm (e.g. policy-holders in an insurance scheme or difficult-to-supervise workers at a conventional firm), having that constituency assume ownership may enhance productivity, through mutual monitoring or simply enhanced cooperativeness.

As this analysis makes clear, cooperatives produce benefits for their members; these benefits are precisely what makes that constituency willing to assume ownership. Cooperatives often arise in markets in which business corporations are doing a particularly bad job serving the parties that they contract with. For example, the most common impetus for the formation of a consumer cooperative is when a market is partially or wholly monopolized, which gives customers an incentive to form a cooperative as an alternative to contracting with a hegemonic capitalist firm. It is easy to see how this could give rise to the perception that the cooperative organizational form exhibits superior virtue. Individuals who are being taken advantage of by a greedy corporation band together to create a cooperative alternative! These are roughly the circumstances that gave rise to the Rochdale Cooperative movement, which Beatrice Potter (1893: 59–64) famously lauded. In the early stages of industrialization, retail was an undeveloped sector, and so workers often found themselves forced to transact with a “company store” owned by their employer, which in turn took advantage of them in various ways. The development of a consumer cooperative in this context was emancipatory, as it freed workers from this dependency. And yet it is a truism that cooperatives are better for their members—if they weren’t, then their members wouldn’t be their members. In this respect, they are the same as corporations. In order to establish the superior virtue of cooperatives, it is necessary to show that they are also somehow better for non-members or for society more generally.

Claims about the superior virtue of cooperatives

Many philosophers and political theorists, despite being critical of the capitalist firm, nevertheless choose to publish their anti-capitalist books with one of the small number of multinational corporations that dominate academic publishing. I have published with some of these firms as well, but for my most recent book, Ethics for Capitalists (2023), I opted instead to publish with Friesen Press, a local worker cooperative. This gave me an opportunity to experience the difference between publishing with a corporation and a cooperative. It is important to observe, in this context, that as an author, I am not a member of the ownership group in either case. Authors are suppliers, whose relations with a publishing house are contractual. My experience conformed pretty closely to the predictions of theory, which is that in both cases, it was necessary to read one's contract carefully and be vigilant in defense of one's interests. Dealing with a firm that favors the interests of its workers, rather than the interests of shareholders, is not all that different from the standpoint of the author. In neither case is one dealing with an eleemosynary organization. ¹⁵

The question, therefore, is why one might think that cooperatives are better for any group other than their members. Another way of putting the question would be to ask whether there should be a social preference over which specific constituency owns the firm. If there are general benefits to society from having non-investor constituencies assume ownership, it follows that the state might want to positively incentivize the formation of cooperatives. But if there are not, it suggests that the state should focus on ensuring that the law is neutral between these organizational forms, so that members of each constituency are treated equally and the parties are not arbitrarily restricted from maximizing the internal benefits of their economic enterprise. Many discussions of cooperatives unfortunately obscure the distinction between member benefits and social benefits, and so it is necessary to examine more carefully the arguments that have been made in favor of the superior virtue of cooperatives.

More democratic

Many discussions of workplace democracy are dominated by a view that simply equates the firm with its employees and so declares the standard business corporation to be “undemocratic” because these employees lack democratic control over the conditions of their employment (Dahl, 1986; Frega et al., 2019). ¹⁶ Proponents of this view sometimes fail to note a further implication of their analysis, which is that it classifies both consumer and supply cooperatives as equally undemocratic because employees have no control over the management in these firms either. From this perspective, the only “democratic” firm is the worker cooperative (and perhaps certain hybrid forms, such as the German codetermined firm) (Ferreras et al., 2024; Saitō, 2024: 164). Another way of looking at it, however, would be to say that all of these firms are democratic, it is just that in each case, they are democratically controlled by their owners. Workers who want democratic control over their conditions of employment can obtain it by acquiring ownership of the firm and creating a worker cooperative, just as customers who want democratic control over the supplier of some goods can obtain it by acquiring ownership and creating a customer cooperative. Workers do not get board representation or control over management in a customer cooperative for the same reason that customers do not get board representation or control over management in a worker cooperative (and for the same reason that neither group gets either in a lender's cooperative).

Furthermore, even when a particular constituency assumes ownership of the firm, it is seldom the case that every single individual who stands in that relation to the firm becomes a member of the ownership class. In a standard business corporation, some lenders become owners through their purchase of shares, but the firm still engages in contractual relations with other lenders (selling bonds, securing bank loans, etc.), and the latter group does not get any democratic say over the direction of the firm. Cooperatives are sometimes even more restrictive in who they allow as members (motivated in part by their desire to maintain homogeneity within the ownership class). A dairy supply cooperative, for example, will typically include only one class of suppliers as members (the farmers who sell milk to the firm), it will not bring in all other suppliers as members (e.g. those who sell packaging or equipment to the firm) but will instead just contract with them. Similarly, almost every worker cooperative has both member and non-member employees. ¹⁷ In particular, these firms almost always hire managers on contract, in order to avoid introducing hierarchical relations within the ownership group. The latter class of employees are, however, non-voting. The justification for this “undemocratic” arrangement is presumably that their interests are protected by contract. But this is exactly the same justification for the non-voting status of employees in a standard business corporation.

Because of this, the claim that cooperatives are more democratic than corporations is largely an illusion. ¹⁸ All of these firms restrict voting to members of the ownership group, which means that they are either all democratic or all undemocratic, depending on how narrowly or broadly one chooses to define those terms. They are democratic in relation to their owners, undemocratic in relation to all parties with whom they have merely contractual relations. If one wants to argue that there is something problematic about the latter set of relations, this tends to push in the direction of stakeholderism (in which all constituencies would receive some form of representation on the board) rather than favoring cooperatives. Otherwise put, from the standpoint of democratic theory, cooperatives seem to have the same defect as corporations, which is that they are controlled by their owners (patrons, members, etc.). When a corporation becomes a cooperative, there is no net increase in the amount of “democracy” in either the firm or society; democratic control of the firm simply shifts from one of the firm's constituency groups to another.

Finally, it is sometimes suggested that cooperatives are more democratic than corporations because they operate on the principle of “one member, one vote” rather than “one share, one vote.” ¹⁹ Standard business corporations are sometimes caricatured, on this basis, as equivalent to pay-to-play schemes, in which wealthy individuals are essentially able to buy greater influence. Giving each member a single vote, and thus equal say in firm governance, certainly bears a closer resemblance to the way that voting is exercised in a democratic polity, in which each citizen has one vote. And yet without even evaluating the analogy, it is sufficient to observe that many cooperatives are organized in the same manner as business corporations, assigning greater influence (and a greater share of the residual claim) to individuals who have a greater “patronage level” (i.e. contribute more, purchase more, etc.). The assignment of one vote per member is more common in worker cooperatives, where membership is limited to full-time employees who are all doing essentially the same job. Customer coops also sometimes adopt this principle with respect to voting, even though they pro-rate the “refund” given to members based on the dollar value of their transactions with the firm. And yet many other cooperatives have a graduated system of voting rights, which gives greater influence to those who provide more of the input associated with the ownership group. In many cases, these firms simply issue shares, with voting conducted in the same manner as in a business corporation. Thus, the allocation of voting rights within the cooperative scheme does not turn out to be an important point of contrast between cooperatives and corporations.

Less hierarchical

With the recent popularity of “relational egalitarianism” in philosophical circles, many theorists have become persuaded that the existence of hierarchical relations within the management structure of firms is an important affront to the freedom and autonomy of workers (Malleson, 2013; Néron, 2024). Again, there are certain confusions surrounding this claim that are important to avoid. It is sometimes assumed that the power to direct workers follows directly from ownership of the firm, or of its productive assets. ²⁰ In reality, the extent to which workers are subject to authority in the workplace is determined by the contracts they have with the firm. Some workers have relatively complete contracts, which then give managers very little power to specify how their terms must be fulfilled. These workers are known as subcontractors, freelancers, or “gig” workers. The distinguishing feature of an employment contract, by contrast, is that many of the worker's obligations are left unspecified, with the understanding that firm managers will have the authority to “fill in the blanks” on an ongoing basis.

Thus, the relational egalitarian critique of firm hierarchy is not really an objection to the corporation, but rather to the employment contract as it is standardly constituted. ²¹ As such, the critique applies with equal force to the vast majority of cooperatives, since consumer and supply cooperatives have management relations with their employees that are practically identical to those of business corporations. There is, of course, a great deal of variation in the degree of non-consultative decision-making that goes on in different firms, because cooperative law resembles corporate law in placing almost no constraints on the specific management model adopted by these organizations. ²² Workers may also have the opportunity to become members in these firms, not qua worker, but rather by acquiring an ownership stake (e.g. through an employee stock ownership plan (ESOP) in a business corporation), although this seldom results in control of the board, and so typically yields only influence over the everyday conditions of employment. As a result, the only important deviation from the hierarchical nature of the firm in its relation to workers occurs in a worker cooperative. The question, therefore, becomes whether the management practices instituted in these cooperatives represent an important form of human emancipation, beyond the more prosaic benefits that they generate for workers.

The answer depends upon the specific employment and supervisory practices of the cooperative in question. In some cases, cooperatives are completely non-hierarchical, but only because they are formed among workers whose contributions are so independent that it is difficult even to know how the firm should be categorized. A traditional taxi cooperative involves independent owner-operators pooling their resources to provide a centralized dispatch service. A traditional hardware cooperative (such as Home Hardware in the U.S.) involves independent owner-operators pooling their resources to provide conventional franchise services. The former is often classified as a worker cooperative while the latter is not. In both cases, the cooperative members are typically free from supervision, but this is primarily due to the nature of their work and not the cooperative form. By contrast, in worker cooperatives that involve conventional team production, even though in principle workers could just collaborate with one another, collective action problems usually lead them to hire a supervisor to direct production. As a result, workers are subject to authority relations on the “shop floor” that are quite similar to those that prevail in corporations (Pérotin, 2012). The primary difference is that employees exercise indirect control over management, either through their control of the board, or through a work council with the power to hire and fire managers. As a result, there is greater accountability in the way that authority is exercised over workers. This is the feature that has most often been pointed to as a significant gain in autonomy.

And yet while there is something to be said for this analysis, it is important not to overstate the amount of freedom that control of the firm gives to workers. Democratic control, in practice, usually means majority rule, which means that some workers will inevitably find themselves outvoted on certain issues. Because worker cooperatives are generally only successful in firms where there is considerable homogeneity of interest, the problem of permanent minorities—a structural problem in democratic systems—has historically been somewhat attenuated. As a result, the major axis of conflict in existing worker cooperatives tends to be between older and younger workers. But in firms with a more complex internal division of labor and different classes of employees, caution must be exercised in order to prevent the domination of one class of employees by another through the democratic decision-making apparatus. This is in fact why corporate law contains such elaborate protections for minority shareholders—to prevent their exploitation at the hands of other members of the ownership group (O’Neal, 1987). There is no structural reason to think that a minority class of employees would not be equally vulnerable to being outvoted on issues that are central to their interests in a worker cooperative. As a result, democratic control does not guarantee non-domination in the workplace. ²³

More importantly though, worker cooperatives have a well-known and much-lamented tendency to give rise to their own, distinctive form of hierarchy (Ben-ner, 1984). Because the members have an interest in maximizing the average value of the residual claim, they have an incentive to stop expanding the membership class long before the point at which the marginal revenue from an additional employee is equal to the marginal cost (Miller, 1989: 85; Ward, 1958: 576). This means that worker cooperatives find themselves often in a position where they could increase their profits by hiring additional workers at the prevailing market wage, so long as they do not make them members (Ben-ner, 1984: 299). This gives these cooperatives a powerful incentive to create a secondary class of non-member employees. Because they are not members, these workers have no democratic say over the management of the firm, and so are subject to all of the conventional forms of hierarchical authority in the workplace. But they also stand in inegalitarian relations with other workers, some of whom may be doing the exact same job, but happen to have been lucky enough to get in on the “ground floor” of the cooperative.

The resulting structure is familiar from the case of law firms, where the partners all share in the profits and so have no incentive to admit anyone as a new partner unless that person can be expected to raise the average payment to all the other partners. Because of this, the typical law firm will bring in new employees as “associates,” who have a standard employment contract devoid of the benefits of partnership. In many firms, the staff of associates grows to the point where the associates drastically outnumber the partners. In formal worker cooperatives, this expansion in the number of non-member employees is often referred to as “degeneration,” and it can be widely observed, even in the celebrated Mondragon cooperative (which over the past decade has had more non-member employees than members) (Malleson, 2013: 142). This is why, in her celebrated treatise on cooperatives, Potter (1893: 144) had practically nothing good to say about what she refers to as “producer cooperatives,” describing them as either impossibly fractious or else creating two tiers of workers (and thus becoming “the brotherhood of workers sweating their fellow-men”). Furthermore, it is important to observe that while some cooperatives may resist degeneration on ideological grounds, the underlying incentives are a structural feature of the cooperative form, which is why the same tendencies that were derided by 19th-century socialists can still be observed in worker cooperatives today. Furthermore, there is no obvious solution to the problem. If one were to stop worker cooperatives from hiring wage labor, it would either constitute a significant interference with the ability of labor markets to clear or else put worker cooperatives at a competitive disadvantage against the other forms of cooperative.

It is important to emphasize that bad management is an endemic problem in human social organizations and abuse of authority is a recurrent feature of bad management. My objective in this discussion has not been to downplay or minimize the indignities that employees may be subject to in the workplace. My goal has simply been to question whether a change in organizational form will make these problems less likely to arise. My suspicion is that in most cases, it will not, and so the only real solution to bad management is better management. There is, unfortunately, no simple formula for achieving this, and no guarantee that reassigning ownership away from investors will lead to improvement.

Less anti-social

There is no shortage of literature condemning corporations for what Joel Bakan, in a memorable phrase, described as their “pathological pursuit of profit and power” (Bakan, 2004). Indeed, an astonishing amount of crime is committed by corporations, imposing costs on society that easily eclipse the damages due to street crime (Simpson, 2009). Even within the domain of legally permissible conduct, corporations often act in ways that impose very significant, uncompensated costs on society, whether it be through pollution, chicanery, rent-seeking or other forms of unscrupulous behavior. This is often blamed on the overzealous pursuit of profit, or to put it somewhat more technically, on the fact that corporations exhibit partiality toward the interests of shareholders, rather than being motivated by impartial concern for the general interest (Heath, 2022). Because managers are only accountable to insiders, they are rewarded not only for creating benefits for these insiders, but also for actions that merely displace costs from insiders to outsiders. The problem is further exacerbated by the competitiveness of market interaction, which penalizes firms that fail to take advantage of exploits that are being employed by their rivals (Heath, 2018). These factors risk transforming the corporation into what some have described as the perfect “externalizing machine” (Greenfield, 2007; Mitchell, 2001: 53).

It has sometimes been suggested that cooperatives are less likely to exhibit such behavior (Pérotin, 2016; Saitō, 2024: 212–13). This seems overly optimistic, given that cooperatives have essentially the same organizational objectives and accountability relations as business corporations. Most obviously, cooperatives are profit-seeking enterprises, even if, as noted above, their disbursements to members of the ownership group are not always labeled as such. Well-ordered business corporations seek to maximize the value of the residual claim held by their investors, just as cooperatives seek to maximize the value of the residual claim held by their members. In some cases, such as the “refund” offered to policy-holders in a mutual insurance scheme or the “bonus” paid to members of a worker cooperative, the disbursement takes the form of a monetary payment. In other cases, payment occurs in-kind, as when a customer cooperative provides a higher quality of goods to its members than could otherwise be obtained at the price charged. The fact that cooperatives are able to reduce their accounting profit to zero through such payments does not mean that they are not profit-oriented enterprises. ²⁴ Furthermore, they exhibit the same partiality toward their ownership group and so have the same basic incentive to produce negative externalities. Ultimately, it is the decentralization of decision-making in market economies that rewards the production of externalities, so changes in corporate ownership and governance are structurally incapable of resolving the root problem.

At the highest level of generality, there is no reason to think that cooperatives will be more prosocial in their relations with external constituencies. It is nevertheless the case that cooperatives may be less likely to produce certain specific negative externalities than corporations are. Obviously, the definition of what constitutes an externality changes when the ownership group changes. In addition, because of the anonymity and interchangeability of capital, many shareholders are absentee, in the sense that they have little or no connection to the communities in which the firm operates. Other constituencies, especially workers, but often customers as well, have much closer geographical ties to the firm and so are more likely to be negatively affected by externalities that are local in effect. This, in turn, may reduce the incentive that the firm has to produce them (Malleson, 2014: 207; Schweickart, 1996: 145). For example, business corporations are sometimes quite capricious in making decisions that will have secondary economic effects on the communities in which they are located. Moving the company headquarters to a larger city to satisfy the lifestyle preference of executives is a typical example (Burrough and Helyar, 1990). This is less likely to happen with a cooperative in which members live in the community and would be negatively affected by the decision. Similarly, cooperatives often find it easier to obtain “social license” to operate in sectors such as renewable energy, based on the judgment that they are less likely to produce local negative externalities. The cooperative form is, however, not a panacea, since it does not abolish free-rider incentives, and with externalities that have less local effect, such as greenhouse gas emissions, a cooperative has no greater incentive to restrain itself than a corporation does.

Finally, it is worth noting that the tendency of corporations to externalize costs, particularly in the form of pollution, is sometimes blamed on the fact that they enjoy limited liability in tort (Pistor, 2020). This means that while the corporation can be sued for damages, the injured party has no claim on the personal assets of the firm's owners. A consequence is that once profits have been “paid out” to shareholders, they cannot be repossessed. Injured parties can seize the assets of the firm, forcing it into bankruptcy, but beyond that, they have no ability to collect further damages. In a general partnership, by contrast, each partner is responsible for the full liabilities of the firm, which means that their personal assets can be seized in the event that the firm is unable to pay its debts. There is a complex literature in corporate law focused on these policies, and there is debate over whether the benefits of limited liability outweigh the social costs (Easterbrook and Fischel, 1985: 89–117; Hansmann and Kraakman, 1991). All of this is irrelevant, however, to the present discussion since cooperatives enjoy limited liability in practically every jurisdiction, just as corporations do, and so there is simply no contrast to be drawn between them. (How many people would be willing to shop at a cooperative grocery store if by doing so they became personally liable for all the debts of the firm?) Even with respect to partnerships, many jurisdictions now offer the option of forming a limited liability partnership. As a result, the debate over the wisdom of according limited liability to firms has become orthogonal to the debate about the most desirable structure of firm ownership.

More economically egalitarian

It has sometimes been suggested that the extremes of economic inequality produced under capitalism would be at least partially attenuated if cooperative firm governance were to become more widespread (Pickett and Wilkinson, 2009: 245–252). As with the previous arguments, there are more and less sophisticated versions of this claim. It is sometimes assumed that the relation of shareholders to the firm is entirely parasitical, and so once they are removed from ownership, the profits that had been flowing to them would be freed up and become eligible for redistribution to the other constituencies. In reality, shareholders provide capital to the firm, and if it is not being supplied by the ownership group, then it will have to be obtained on contractual terms. Just as a commercial dairy processor cannot expect to purchase milk on the favorable terms obtained by dairy cooperatives, a cooperative cannot expect to obtain capital on the favorable terms obtained by standard business corporations (i.e. a zero rate of interest, no fixed repayment date). As a result, and all else being equal, the “profit” that becomes eligible for appropriation by other constituencies with a transition to the cooperative form is only the amount that exceeds the interest rate that must be paid to replace equity with debt.

The more plausible version of the egalitarian claim relies therefore on the observation that cooperatives exhibit greater internal “wage compression” than corporations (Dow, 2003: 277). Wage compression is said to exist when the difference in wages between individuals doing different types of work is lower when they are both employees at the same firm than when they are employees at different firms that specialize in those different types of work. The implication is that someone at the firm must be earning more or someone earning less than the market wage for the type of work being done (including the possibility that both are). It should be noted that wage compression is not unique to cooperatives; it arises in corporations as well, but it is more pronounced in cooperatives, especially between workers and managers. Many worker cooperatives maintain explicit ratios limiting the range of permissible wage differentials. The Mondragon cooperative, for example, does not allow the ratio of managerial salaries to worker salaries to exceed a 6:1 ratio.

Two cautionary observations are in order here. First, there is a long-standing debate over whether the more extravagant compensation packages enjoyed by senior managers at certain corporations represent the will of shareholders or are more reflective of managerial opportunism. It is noteworthy that in jurisdictions where corporations rely more heavily on bank lending for finance, such as Germany and Japan, management-to-worker salary ratios are much lower than in the U.S. (Pan and Zhou, 2018). The suggestion is that in publicly traded firms, managers are taking advantage of the diffusion of ownership to gain excessive influence over the board of directors, as well as board compensation committees (Fried and Bebchuk, 2004; Pepper, 2019). Firms with more concentrated ownership, or reliant on bank financing, are subject to more careful supervision, which in turn constrains managerial opportunism. If this is correct, then it suggests that the wage compression found in cooperatives, especially worker cooperatives, stems from their superior ability to limit managerial opportunism. This seems intuitively plausible, to the extent that the members of a cooperative are seldom “absentee owners” in the way that shareholders in large, publicly traded corporations are. Furthermore, cooperatives are not in a position to offer equity-based compensation, which makes up a large fraction of executive compensation in U.S. corporations (some suspect because it does not show up as an ordinary budgetary expenditure). ²⁵ At the same time, cooperatives would appear to be vulnerable to managerial opportunism in other ways, many arising from heterogeneity of interest within the ownership class (Heath and Norman, 2004). Thus, it is something of an open question whether these salary ratios could be sustained if the cooperative sector were to expand dramatically.

The second point worth noting is that wage compression within a firm represents a type of transaction cost for that organizational form, in the sense that it generates an incentive to outsource certain types of labor. For example, if a worker cooperative among professionals is committed to paying all its members roughly the same salary, it is unlikely to bring in custodial staff as members if this means paying them a wage several times the market rate. Thus, the cooperative will have an even stronger incentive than a corporation does to outsource these tasks to a company specializing in custodial services. Worker cooperatives with heterogeneous labor needs, involving a combination of menial and non-menial labor, sometimes try to avoid this problem by creating “balanced job complexes,” which essentially compel everyone to take turns performing the menial tasks. But again, this just amplifies the incentive to outsource the work in question, as doing so will not only improve the job quality of members but will benefit the organization as a whole by allowing members to focus on higher value-added tasks.

The fundamental point underlying these observations is that under the standard blueprints for market socialism, cooperatives will still be operating in the context of a competitive market economy, which can be expected to discharge the primary function of setting wages. The major empirical question therefore becomes how much of the economic inequality that can be observed in capitalist economies is due to the operations of the labor market and how much is due to decisions taken within firms. The fact that most large corporations already exhibit wage compression suggests that the market is actually the primary force driving inequality. If cooperatives possess an internal dynamic that further compresses wages, this may produce greater economic equality, or it may just limit the growth of cooperative firm size. Indeed, these pressures may explain some portion of the fact that cooperatives (such as Mondragon or Federated Co-operatives Limited in Western Canada) tend to grow through federation with other cooperatives, rather than by becoming large, multidivisional firms.

The bad cooperative

There is an ineliminable element of judgment involved in assessing these issues, precisely because economic actors are always motivated by a complex combination of factors, and so it is difficult to anticipate precisely how a change in organizational structure will affect their behavior. Thankfully, we do not live in the economist's dystopia, in which everyone acts purely on the basis of economic incentives all of the time. Morality and social norms are significant constraints, and so individuals usually act from a combination of instrumental and principled motives. Nevertheless, it is important to recognize that economic incentives exercise an extremely important influence on behavior. So while one cannot assess cooperatives solely by looking at the economic incentives that they provide, neither can one assume that an ideological commitment to socialist equality among their members will serve as a guarantee of prosocial behavior.

My central objective in this discussion has been to show that the economic incentives generated by the cooperative organizational form are not all that different from the economic incentives generated by the corporate organizational form, and so there is no reason to expect better behavior from cooperatives on those grounds alone. Furthermore, it is not difficult to find examples of cooperatives behaving just like corporations, but also misbehaving in ways that are quite reminiscent of corporate misconduct. For example, many people will be familiar with the “spotted owl” controversy that erupted in the late 1980s and early 1990s, when the U.S. Environmental Protection Agency (EPA) chose to restrict cutting of old-growth forests in the Pacific Northwest on the grounds that the trees served as habitat for an endangered species. What is perhaps less well known is that many of the firms in the “timber industry” opposing the EPA on this issue were the famous Pacific Northwest plywood cooperatives. Faced with stiff competition from plywood producers in the U.S. south, the worker cooperatives were trying to shift away from production of low-cost plywood into high-end product with a finished surface. In order to do so, they needed access to the higher-quality veneer that could be obtained only from the old-growth forests, which made them particularly enthusiastic proponents of regional logging. The fact that the workers lived in the same general region as the forests in question does not seem to have diminished their enthusiasm for cutting them down. Furthermore, because of the enormous difficulty that worker cooperatives have managing layoffs, they will often take rather extreme measures to avoid having to do so.

Consider, for example, the case of Astoria Plywood, one of these worker cooperatives, which went out of business in 1991. After the eruption of the Mt. Saint Helen's volcano in 1980, the firm took advantage of a low-cost federal loan intended to compensate for damage to the local timber supply. “Rather than use the loan for plant renewal, it largely served to subsidize income levels for owner-members. At the time that the mill was closed $2.5 million of the $3 million loan was still outstanding” (Gunn, 1992: 530). The firm was also convicted of collusion in its bidding for federal timber rights, resulting in a $1.25 million fine. Finally, at the time of closure, the firm's plant was in violation of environmental regulations, problems that would have cost several hundred thousand dollars to resolve. The last two items—price fixing and pollution—are simply examples of a cooperative acting in the same way as a corporation. The first item is slightly more interesting in that it is the mirror image of a common form of bad corporate behavior. In this case, the cooperative chose to take advantage of a lender, failing to replenish the capital stock in order to protect wages. Corporations often do the exact opposite, sacrificing workers in order to protect investment returns. Both represent instances of the ownership group taking advantage of its position in the governance hierarchy of the firm to advance its interests at the expense of some other constituency. ²⁶ So even though organizations do not always act in ways that strictly align with their economic incentives, there are obviously circumstances in which they do. This means that understanding the incentives generated by the cooperative form is important for predicting the behavior of at least an important fraction of these organizations.

Conclusion

It is not difficult to see how the perception of superior virtue of cooperatives could have arisen. Although corporations serve as the default organizational form in a market economy, there are many circumstances in which the interests of other firm constituencies can only be protected imperfectly through contract, exposing them to opportunistic and exploitative behavior by the firms with which they contract. This is why capitalist economies feature what often seems like a rogue's gallery of bad employers, neglectful landlords, sketchy retailers and so forth. In some cases, the behavior is so intolerable that the exploited constituency finds it worthwhile shouldering the costs of firm ownership in order to avoid having to transact with an investor-owned firm. In such cases, the benefits accruing to the new ownership group through the formation of the cooperative are extremely salient and alleviate an obvious injustice. These benefits, however, risk producing a halo effect that causes observers to overestimate the importance to society of the cooperative organizational form.

There are, I should note, often strong grounds for promoting cooperative formation (above and beyond the objective of ensuring that corporate, cooperative and income tax laws are neutral with respect to different organizational forms), based solely on these benefits to the owners. As I have shown elsewhere, even in cases in which no other constituency has an incentive to acquire ownership of the firm, investor ownership may not be the most efficient arrangement, and so public policy aimed at reducing the costs of cooperative formation can promote superior governance arrangements (Heath, 2011). There is, as many commentators have noted, some prime facie absurdity in the governance structure of a typical corporation, in which workers are the ones who are called upon to cooperate with one another, but management of the firm is beholden to a constituency that has no day-to-day involvement in these everyday operations. The mistake lies in thinking that this unintuitive structure must be the product of a conspiracy of powerful interests or that ownership is an unqualified advantage, hoarded by the wealthy, as opposed to a potentially costly challenge. The lesson that should be learned is quite different. The fact that this unintuitive structure is able to routinely outcompete other arrangements shows just how difficult it is to exercise effective governance over a complex system of team production. Anything that can be done to reduce that challenge for other firm constituencies is likely to promote the emergence of more efficient governance structures, which deserve to be endorsed for that reason. My goal in this paper has simply been to discourage theorists from overstating these benefits or imagining that a range of other social ills, from global warming to economic inequality, would be meaningfully impacted by these changes in firm governance.