I am having trouble applying the concepts of efficiency, inefficiency, free-rider problem, decision-making, incentives toward a article.

In her article, "Co-op Economics", Nancy Folbre proposes a dramatically different power structure at the level of the individual firm, with workers democratically controlling the enterprises where they work.

• Why does she think that this alternative structure could be desirable for workers and for society by comparing cooperative firms and capitalist firms.
• If it is so desirable, why do you think it is not more common?

Use concepts of efficiency, inefficiency,free-rider problem, decision-making, incentives.

Module 7: Required reading: "CO-OP ECONOMICS "

Please read this article to give you a basic understanding of what Cooperative Economics means.

"CO-OP ECONOMICS" - BY NANCY FOLBRE

I teach economics, a discipline largely inhabited by people skeptical of human potential for cooperation. But I live in a small New England town and work in a university environment that are, for the most part, cooperative. If I eat lunch on campus, I buy it from a student-managed, democratically run business that offers the tastiest, healthiest, cheapest provisions available. If I need to buy bread or milk on the way home, I pull into the Leverett Village Co-op. If my car needs attention, it goes to a worker-owned business, Pelham Auto, where I know both service managers by name. My money sits at the Five College Federal Credit Union, where it earns more interest and gains me better service than I've ever gotten at any other bank.

About four years ago, I began to weave economic theory more closely into my everyday life. The threads began coming together when Adam Trott and Michael Johnson, two members of the local Valley Alliance of Worker Cooperatives, reached out to tell me about their efforts to promote locally owned and democratically managed firms. Although we lived in the same community, they found me as a result of a short post I wrote for the New York Times' "Economix" blog, describing a collaborative agreement between the United Steel Workers and the largest worker-owned business in the world, Mondragon Corporation. It seemed ironic, but also encouraging, that we first connected online, and that it might be possible to go from the global to the

local and then back again

local and then back again.

Even in our cooperative-rich area of Western Massachusetts, Trott and Johnson explained, most potential worker/owners knew virtually nothing about the principles involved (beyond liking the general idea). Why couldn't a public university provide better education and training for students potentially interested in starting up or joining a worker-owned business? Of course it could, and should. We decided to try to make that happen. In a collaborative process that involved interested faculty and graduate students, as well as representatives from the Valley Alliance, we developed a new upper-division economics course and designed a Certificate Program for Applied Economic Research on Cooperative Enterprises centered on a summer research internship with a local cooperative. Here, I want to share some of the ideas and opinions I've formed in the process of developing this program, which we believe could be a good model for other colleges and universities.

History Matters

Most people, including most college students, seem to think that cooperatives are a counter-cultural leftover from the 1960s, a niche phenomenon confined to hip neighborhoods and college towns. The economic history of the United States is typically portrayed as the steady march of corporate capitalism, trampling all other institutional forms .

Many on the right see it as a march of progress; many on the left, as a march of doom. Ironically, the traditional left preoccupation with corporate capitalism may simply feed the beast overstating its hegemonic role, as though it can't be contained until the revolution comes. J.K. Gibson-Graham makes this point persuasively in The End of Capitalism (As We Knew It): What we call "capitalism" involves many different creatures. Families, communities, non- profit organizations, and the state actually account for a larger share of economic activity-broadly defined-than capitalist firms. Though standard economics texts hardly mention them, consumer cooperatives and worker- owned businesses have shaped our history. Their influence, however, has

been uneven greater in some industries and regions than others

been uneven, greater in some industries and regions than others.

Marxist scholars have often associated cooperatives with the so-called "utopian socialists"-whom they have traditionally considered well-meaning but misguided. Efforts to establish alternative businesses have often been labeled a form of co-optation less politically virtuous than trade-union organizing or socialist political parties . Yet cooperative efforts have typically been closely linked to and complementary with larger anti-corporate organizing efforts. In a fascinating article entitled "Toward an Organizationally Diverse American Capitalism? Cooperative, Mutual, and Local, State-Owned Enterprise," sociologist Mark Schnaiberg traces the history of cooperative marketing efforts in the grain and dairy industries , originally dominated by large monopsonies that used their market power to pay farmers as little as possible. (A monopsony is a single buyer that dominates a market, just as a monopoly is a single seller.) When farmers successfully started up cooperatives, ocher members of the community also became more likely to organize on their own behalf.

Even when cooperative enterprises represent only a small proportion of market transactions in a local community, they often exercise a disproportionate influence, disciplining capitalist enterprises or pioneering innovations that are later adopted by them. Local food cooperatives were the first to begin marketing organic and local produce, and large supermarket chains gradually followed suit. Local credit unions have made it harder for large banking institutions to charge excessive fees. Worker owned businesses have pulled the small-business community in a more progressive direction, serving as a counterweight to large, footloose firms. By demonstrating the viability of businesses aimed to serve larger social goals, cooperatives have altered our economic ecology.

Culture Matters

As an economist, I was trained to emphasize the difference between for-profit and non-profit firms. But that difference may be less significant than the moral and cultural values central to the definition of cooperative enterprises.

Consumer cooperatives seek to provide high-quality products at minimal cost. Worker-owned businesses need to generate profits both to pay themselves and to finance investment. Both, however, are committed to seven "cooperative principles" (see below) that include democracy and concern for community.

In this respect, cooperative enterprises can be seen as a subset of efforts to develop a solidarity economy, which also includes non-profit businesses and community organizations. They are also closely aligned with "buy local" efforts chat urge consumers to shop in locally owned scores and build a local supply chain (for instance, by patronizing restaurants utilizing locally grown produces). Not that it's always clear how "concern for community" should be defined. Almost by their very nature as small, decentralized businesses, co-ops prioritize those with whom they are most likely to come into contact. But local solidarity is not automatically consistent with broader forms of solidarity.

In fact, it risks a kind of parochialism chat could lead to happy little enclaves embedded in a larger economy built on hierarchy and exploitation. On the other hand, co-op culture can promote values that may lead people toward other forms of positive engagement , with the goal of steadily expanding the cooperative reach and linking many kinds of progressive efforts together. Co- op ventures also offer people the opportunity to build something new, rather than merely crying to tear down something old.

The Seven Cooperative Principles

Cooperatives around the world generally operate according to the same core principles and values, adopted by the International Co-operative Alliance (www .ica.coop) in 1995 . Cooperatives trace the roots of these principles to the first modern cooperative, founded in Rochdale, England, in 1844.

1. Voluntary and Open Membership:Cooperatives are voluntary organizations, open to all people able to use its services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination .

2. Democratic Member Control:Cooperatives are democratic organizations controlled by their members-those who buy the goods or use the services of the cooperative-who actively participate in setting policies and making decisions.

3. Members' Economic Participation:Members contribute equally to, and democratically control, the capital of the cooperative. This benefits members in proportion to the business they conduct with the cooperative rather than on the capital invested.

4. Autonomy and Independence:Cooperatives are autonomous, self-help organizations controlled by their members. If the co-op enters into agreements with other organizations or raises capital from external sources, it is done so based on terms that ensure democratic control by the members and maintains the cooperative's autonomy.

5. Education, Training and Information:Cooperatives provide education and training for members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperative. Members also inform the general public about the nature and benefits of cooperatives.

6. Cooperation among Cooperatives:Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures .

7. Concern for Community:While focusing on member needs, cooperatives work for the sustainable development of communities through policies and programs accepted by the members.

From the National Cooperative Business Association, International Year of Cooperatives (usa2012 .coop).

The commitment to democratic decision-making distinguishes worker-owned businesses from other institutional forms that aim to enlarge economic goals (such as the new social benefit corporate charters) or to help incentivize workers (such as profit-sharing or employee-stock-ownership plans). This commitment reflects a cultural value-as well as a political principle. Other shared values encouraging respect and concern for others may help lubricate the democratic process by making collective decision-making less contentious. Democratic values and skills may grow stronger in communities where they are consistently exercised, explaining why some regions of the world seem to foster more cooperative enterprises than others.

The famous Mondragon cooperatives grew up in the Basque area of northern Spain, among people who felt embattled and impoverished by their minority status and strengthened by their progressive Catholic traditions. Many small cooperatives have prospered in northern Italy, an area with a long history of labor radicalism and a strong Communist Party. In Canada, the province of Quebec has successfully encouraged the cooperative provision of social services under the banner of the "social economy."

In the United States, cooperatives have often helped improve living standards in African-American communities, from a cooperative shipyard in 1860s Baltimore, to a co-op buying club in Depression-era Gary, Ind., to the Common Ground Collective in post-Katrina New Orleans. As Jessica Gordon-Nembhard and Ajowa Nzinga point our in their 2006Dollars & Sensearticle, a common history of economic exclusion and hardship can foster cooperation. Public policies have also played a role in developing these epicenters of cooperative development. But culture is surely one of the factors shaping the political alignments that generate such policies.

Efficiency Matters

Economists often overstate the value of efficiency, or define it in excessively narrow terms. But that doesn't mean it's not important. Efficiency is an important arbiter of success in competition and, in the world we live in, co- operators need to compete. Since competition between firms is, to some extent a "team sport," successful cooperation among team members can prove

advantageous. Democratically managed firms may be more efficient than others, even from the relatively narrow perspective of costs and benefits.

The British economist John Stuart Mill made this argument in the mid-19th century, pointing out that workers who were also owners would be likely to work harder and smarter than those merely paid an hourly wage. This issue never received much attention from early-20'h-century Marxists convinced of the virtues of central planning. However, it came to the fore with Yugoslavian experiments in worker self-management in the mid-20'h century and has since had a big impact on progressive economic chinking-in part because it helps frame a critique of both the traditional family firm and the modern corporation.

A long-standing favorite of neoclassical economists is an argument, developed by economists Armen Alchian and Harold Demsetz, that workers will have a tendency to shirk on the job unless they are overseen by an owner who can capture any profits (or "residual") left over after the workers are paid. This gives the "residual claimant" an incentive to crack the whip and make them work as hard as possible.

Ownership in most modern corporations is highly fragmented, but owners presumably hire managers-from the chief executive officer or CEO down to supervisors and foremen-to fulfill this disciplinary role. Radical economist Samuel Bowles effectively rebuts this argument, pointing out that it is difficult and costly to monitor effort. Workers seeking to resist capitalist exploitation may be especially likely co shirk unless managers can find a way to either secure their loyalty or threaten them with costly job loss.

Unfortunately, worker ownership alone doesn't necessarily solve this incentive problem. Workers either have to be really good at monitoring one another's efforts (so that no one can free ride without being sanctioned), or they have to feel such strong solidarity toward one another that no one even tries to free ride. (The latter is preferable, since it's often hard for a collective to fire someone who is slacking off.)

Other tensions among owner-workers can arise. For instance, young owner-

workers have a stronger incentive to reinvest firm profits to increase their future earnings than older owner-workers, who would prefer to retain more earnings and/or fund their pensions. The success of a worker-owned enterprise depends on the ability of worker-owners to anticipate and creatively respond to such conflicts of interest. But the process of doing so-negotiating and resolving differences of opinion-can itself be quite costly, in two ways. First, democratic decision-making can be quite time-consuming, especially if based on rules of consensus. Worker-owned firms generally treat time in meetings as part of their paid work, and the time they devote to it can cut down on directly productive activities.

Second, democratic decision-making can prove emotionally costly, as when good friends disagree about important matters and find it difficult to accommodate one another. On the other hand, conflict avoidance-such as a desire not to discipline a fellow worker who is also a friend-can also lower efficiency. This problem can be described as a "second order" free-rider problem-that is, a reluctance to openly point to or discourage free riding. Representative democracy and delegation to a manager can help minimize these problems, but also at some cost. Majority rule can alienate the minority, and unstable factions can lead to lack of continuity in decision-making. Worker- owned firms will be more likely to prosper if they cultivate an awareness of decision-making problems and develop the institutional structures and skills necessary to over-come them.

Here comes the catch-22. Neither our educational system nor most employers do much to help people develop democratic management skills, so there's a big start-up problem. If we could just create more opportunities for people to develop and practice such skills, worker-owned businesses could enjoy more success. Efficiency gains can also come at the macro level. Worker-owned businesses that get off the ground tend to be more stable than other small businesses, in part because workers have an incentive to hang in over the long haul, even if revenue slumps. This can buffer the effects of recession on the economy as a whole. Most importantly, worker-owned businesses depend

more on positive incentives than on the threat of job loss. Unlike employer- owned businesses, they don't rely on the labor discipline imposed by a high unemployment rate. And consistently high unemployment rates are among the most inefficient features of our current economic system.

Collaboration Matters

For all the reasons given above, the cooperative movement may need co reach a certain critical mass before it can really take off. More collaboration among cooperatives-and between cooperatives and other institutions such as public universities-could make a big difference. Relatively few worker-owned businesses are started up in a given year, leading some co speculate that they are inherently less expansionary than capitalist firms (for the simple reason chat worker-owners care about more than the race of return on their capital investment). They also care about the quality of their work life and their place in the community. Some of the decision-making problems described above, moreover, may be more easily solved in small firms where everyone knows everyone else. Expansion can lead to complications.

However, collaboration and expansion could help worker-owned businesses in several ways. First , it could help them gain access to more and better financing. By definition, worker-owned firms can't sell equity shares in their business (because all owners muse be workers). They can develop other forms of self-financing, including bonds that can be especially attractive to socially responsible investors. But they can also develop ways of pooling resources and helping co finance one another. Each firm belonging to the Valley Alliance of Worker Co-ops sets aside a percentage of its profits to promote local cooperative development. One can even imagine a kind of franchise model in which one firm could spin off smaller firms, which could become financially independent, but remain closely allied.

Second, vertical networking along the supply chain could increase efficiency and the ability co compete with large conglomerate capitalist enterprises. International networking among cooperatives holds particular promise,

because it advances a larger fair-trade agenda, and also helps escape parochialism. Many examples of this kind of networking exist, such as the People's Market at UMass-Amherst buying only cooperatively produced coffee and actively seeking other cooperatively produced goods and services. Third, more networking could help develop the distinctive managerial and decision- making skills described above. Indeed, the more worker-owners gain experience in different types of firms, the richer the skills they bring to the task of democratic management. And the more visible worker-owners become, the more young people are likely to become attracted to new prospects for more socially meaningful and economically rewarding work.

Finally, the more worker-owned businesses and other cooperative enterprises expand, the easier it becomes to build political coalitions and implement policies that promote their efforts. These synergies help explain how regional economies in the Basque area of Spain, northern Italy, and the Canadian province of Quebec have evolved.

A worker-owned business is what economists call a "microeconomic structure." But its ultimate success may depend on its ability to change the macroeconomic structure, which can, in turn, improve its microeconomic efficiency. Even a small cooperative firm can help a community enhance its standard of living and quality of life. More importantly, however, it can provide a catalyst for social and political changes that not only bring more and more worker-owned businesses into being, bur also enable them to compete more effectively with capital-owned firms. That's why worker-owned businesses fit the description of what the 20th -century Italian theorist and revolutionary Antonio Gramsci called a "non-reformist reform" and what sociologist Erik Olin Wright terms a "real utopia." Take another look at those seven cooperative principles. They offer a pretty good guide to running not just a business, but a whole society.