Reimagining cooperatives for post-pandemic inclusive growth | Dan Mikhaylov
For communities in the North of England, the government’s questionable predilection for imposing lockdowns with little regard for public opinion and equally little success at curtailing the spread of COVID-19 must seem truly exasperating. Imbibing duplicity and enjoining economically earth-scorching restrictions, Westminster has come to betray One Nation Conservatism during the pandemic. At a time when London had been getting away with high numbers of coronavirus patients and deaths right until the week preceding Christmas, the relatively poorer Northern and Midlands counties have spent months under the draconian Tier-3 arrangements. In fact, as many as 75% of them have continued to live under this regime since the second lockdown was lifted, notwithstanding its parlous ramifications on the local economy.
The intertwined phenomena of pauperisation and unemployment are becoming all the more profuse across those communities, whose pandemic-era burden has in many respects been insurmountable and disproportionate. The first lockdown alone resulted in 43% more unemployment benefit claimants in the North East of England, which already had the highest redundancy rate in the United Kingdom. The situation does not end there. In some north-western areas, the authorities have registered an alarming ratio of 30 workless individuals per vacant job, which leaves limited room for optimism about the country’s future, particularly if the national furlough scheme runs out of steam or is deemed no longer sustainable in the light of excessive state expenditure.
As we cannot anticipate a complete financial recovery until 2023, Westminster would most likely struggle to lift those regions out of the uncertainty and despair, to which they succumbed during the virus outbreak, by following the existing developmental model. Stimulating considerable, yet simultaneously inclusive economic growth by promulgating neoliberal economic policies is nothing short of a pipe dream in counties, where unemployment stood at more than 4% even before the pandemic and where purchasing power was correspondingly lagging behind the British average. Nor should the government entrust the local small- and medium-scale entrepreneurs to provide an alternative solution: depressed areas with meagre demand do not tend to abound with entrepreneurial activity, in general, due to limited access to funding and limited incentive to risk starting a business amidst high risks and dubious potential returns.
Enhancing the state’s redistributive role, we maintain, will not necessarily deliver. This might backfire by stymieing the ruling party’s electoral positions, already weakened by its retreat on education reform and the anxiety surrounding the nation’s future outside the European Union, as doubling down on progressive taxation to replenish the tax base resonates with members of the contemporary Conservative rank and file. Even if the government were to entertain this scenario, funnelling additional funding into the very system that made Britons feel neglected in their own country would prove no panacea for the expanding disparity between the English North and South.
Instead of this reactionary approach to inclusive growth, Britain should address the problem proactively and pioneer incentive-compatible cooperatives to reconcile growth with inclusivity and place the nation on track to genuine One Nation Conservatism. By championing societal responsibility in addition to ensuring economic development, this model should help cultivate greater solidarity among the UK’s diverse demographic groups, thereby encouraging people to contribute to the common good through such initiatives as charity and care for the local community at a cost to extremism and other malevolent ideas that emerge from alienation from, and disaffection with, society.
Herein, we argue that such establishments have the capacity for in-built inclusion and define them as firms, owned and directly managed by those working within the firm. Moreover, incentive-compatible cooperatives presuppose democratic administration and non-tradability of company assets, which naturally precludes the existence of private shareholders. Under these conditions, workers are the sole residual claimants with exclusive control over the organisation’s net cash flows.
It is also incumbent that we clarify that cooperatives need not connote profoundly ideological, doctrinaire left-wing institutions. Quite the contrary; this concept predated Marxism and came to the fore not in a socialist, but in a capitalist system. In Britain, the formation of cooperatives is rooted in the economic inequality of the eighteenth and nineteenth centuries and is customarily associated with the Rochdale Society of Equitable Pioneers, founded in 1844. This is the oldest operational cooperative in the nation, and its creation inspired many comparable projects in different parts of the UK, with 200 cooperatives, run in accordance with the Rochdale model, registered in the English North West by 1860. Nowadays, Britain is home to 7,000 such organisations employing 17 million Britons, annually contributing £34 billion to the national economy, and spanning multiple sectors, such as retail and food, dominated by none other than the Co-op supermarket that many Britons frequent for groceries.
Therefore, advocating for incentive-compatible cooperatives is a fundamentally conservative prerogative. Our proposal neither implies breaking away with Britain’s fine worker cooperative tradition, let alone with the communal solidarity observed across working-class communities in the North and in the Midlands, nor necessitates rejecting capitalism. Conversely, although some cooperatives have failed in the long run, they could succeed under our economic arrangement and better resonate with counties, where private enterprise has traditionally been less formidable. Ensuring inclusive growth in the aforementioned areas requires accounting for their idiosyncratic worker solidarity, cultivated through the centuries of coalmining and shipbuilding, alongside their salient monetary pressures. Incentive-compatible cooperatives achieve this, but also represent an improvement from past institutions that is sufficiently resilient and efficient to survive in our interconnected world.
There are several reasons why cooperatives present an attractive solution. Firstly, they are conducive to smaller wage disparities than those observed in large transnational companies, which could likewise fill in the void relinquished by the now bankrupted small and medium British business owners. In worker-managed companies, employees select their managers and approve their pay, which, as the London School of Economics’ Francesco Caselli suggests, produces a flatter pay gradient. Thus, for instance, the Spanish-based Mondragon Corporation, the world’s largest cooperative with circa £12 billion revenue, had a 1:9 earnings ratio between the lowest and the highest earners in 2018. Meanwhile, this ratio grows to the average of 109:1 among the FTSE 100 companies, as CEOs often exploit both the subordinates and the shareholders to carve out disproportionately high salaries. In the post-pandemic frugality, the former approach appears more suited for the task of bringing out widespread improvements in declining living standards than the latter.
Secondly, non-tradability of assets and the concomitant elimination of capital income prevent the usurpation of such companies in the hands of few shareholders, whose monopolistic manipulations would have otherwise caused wages to stagnate at a cost to the wellbeing of the impoverished households in Britain’s most economically depressed areas. This principle, together with democratic self-management and egalitarian pay, are enshrined in the so-called Rochdale Principles, on which all cooperatives nationwide and worldwide operate, and which explain their continual appeal to working-class-dominated regions, sceptical of neoliberal deregulation and tax cuts. Similarly, academic research reveals a positive correlation between work in a cooperative setting and job satisfaction, arguably because the workers have a greater sense of responsibility for the commercial well-being and success of their firm.
Replacing these existing structures with incentive-compatible cooperatives to make them more financially viable vis-à-vis the corporate world would expand on these advantages by mitigating the microeconomic problems faced by these businesses. This involves reimagining how cooperatives are governed. Although the Rochdale Principles do not mandate direct democracy, we must take a stronger stance against it in favour of representative democracies. This is because many failed cooperatives as well as some poorly performing ones today preferred to make decisions via all-worker assemblies. These were not only inefficient, with some establishments spending most of the working week in permanent assemblies, but also counterproductive, given how difficult it is to reach consensus in a passel of people and preserve it subsequently. In a representative democracy, participants would cull deputies and empower them to make decisions on their behalf, much like we elect our MPs and trust them to decide on our behalf in parliamentary votes. This will expedite important strategic and operational deliberations, while also prompting greater discipline in a hierarchical system that resembles its private enterprise counterparts.
Furthermore, incentive-compatible cooperative could solve the investment dilemma, responsible for the stagnation and demise of many cooperative organisations. Whereas capitalists expand their businesses, knowing they will extract benefits in the future thanks to their ownership of the invested capital, cooperative members would ordinarily have fewer incentives to invest. After all, investments would chip at their earnings, with cash flow divested from employees’ salaries towards other expenditure. For this reason, cooperatives risk succumbing to the so-called present bias, whereby workers refuse to invest in tomorrow without guaranteed future benefits and opt for receiving the money today.
However, this problem can be remedied by giving erstwhile workers, whether retired or employed by a different organisation, to partake in the distribution of the cash flow alongside those who work for it, but acknowledging the time spent with the firm and weighing it by investment in those years. This should not be seen as radical, considering that the Rochdale Principles themselves acknowledge the possibility of cooperatives distributing dividends received from auspicious investments.
Besides changing their microeconomic composition, the government should make cooperatives align with our macroeconomic processes. Building on the Rochdale commitment to open and voluntary cooperative membership, the new generation of these organisations permit workers to search for, and move between, different cooperatives, while reserving the authority to fire and hire workers based on their productivity and output. Likewise, the UK Competition Law merits an update, which would create an equivalent to Ofcom or Ofwat to monitor how cooperatives behave in the market and prevent them from violating antitrust regulations and disdainfully exploiting the consumer.
Certainly, this economic paradigm is not without reservations. The very requirement that provides for their inclusivity threatens to conflict with our liberal financial markets, founded on releasing and trading stocks. If shares in cooperatives remain immune from trading or exchange, cooperatives might have a difficult time attracting investors. However, cooperatives can evolve and overcome this challenge. Inter alia, they could look into selling subordinated debt securities to invite such institutional investors as pension funds, insurance companies, and building societies to consider investing in cooperatives, or supporting cooperative financial institutions and associations, which could supply additional funding at critical moments.
Should incentive-compatible struggle to adjust by such means, they could always endeavour to mirror the Mondragon Corporation. With more than 81,000 and 257 subsidiaries, ranging from the retail giant Eroski, which has almost 2,000 outlets in Europe, to the banking sector, this organisation could hardly be accused of failure. After reorganising a defunct factory in 1956 and making initial strides in trade, Mondragon’s founders chose to broaden their metier by acquiring private companies and creating further hierarchy within the corporate structure.
Mindful of the common good, conservatives must recognise the need for inclusive post-pandemic growth. Since unemployment is as much an economic phenomenon that undermines economic growth and local development as a social malaise, capable of fuelling extremism and other malevolent behaviours stemming from disaffection with the public, ensuring that Britain’s poorer counties are not left behind by the government’s blueprint for financial rejuvenation must be a priority. Since the conservative ideology cherishes social cohesion and national unity, exacerbating the existing socioeconomic divisions in the UK is not only pernicious for the country’s territorial integrity, but also in contravention of the tenets, to which we expect the Tory government to subscribe.
Since neoliberal policies cannot a priori reconcile innovation with inclusivity and profit-making with maintaining communal solidarity, other options should be considered. Incentive-compatible cooperatives is precisely one such conservative solution. This model sees worth in our existing arrangement, but nonetheless eschews disregarding our nation’s profuse history of cooperatives. Most importantly from the societal perspective, it protects the working-class culture forged in many villages and towns across Northern England, the Midlands, Wales, and Scotland, and helps people gain an additional sense of belonging that they might not always find in a large transnational firm, uninterested in the British county particularities.
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