A CIVIL-ECONOMIC THEORY OF THE COOPERATIVE ENTERPRISE Stefano Zamagni University of Bologna, May 2005

A CIVIL-ECONOMIC THEORY OF THE COOPERATIVE ENTERPRISE Stefano Zamagni University of Bologna, May 2005

1.

Introduction and Motivation

Historically, the cooperative enterprise comes into being in the more advanced economic systems, following the birth of the capitalist firm, and begins to expand with different modalities and growth rates from one nation to the next. The cooperative is therefore in some ways an unexpected fruit of industrial civilization, a fruit that reaches full maturity during the “Belle Époque.” There are two possible ways of interpreting this historical fact. The first sees the cooperative as a response to a specific “failure” of the capitalistic firm; in this view the cooperative is a type of remedy or compensation for that which the capitalistic firm is not able to obtain, or better, to guarantee. The second interpretation, on the other hand, sees the cooperative mode as a more advanced way of doing business in socially advanced systems. In this second interpretation the aspirations of those who see labor as an occasion for self-realization—and not a mere factor of production—find their fulfillment in the cooperative mode. It appears to be to this interpretation that J.S. Mill—the great liberal thinker—alludes when, in the third edition of his Principles of Political Economy, published in 1852, he adds the following, truly remarkable passage: “the form of association, however, which if mankind continues to improve, must be expected in the end, to predominate is not that which can exist between a capitalist as chief and work-people without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations and working under managers elected and removable by themselves” (p. 772). From these two interpretations there follow—as is obvious—different practical consequences. The first leads to the relegation of the cooperative to a niche position, useful and effective as long as one likes, but always destined to remain the exception to the rule. The logic behind this interpretation is the same logic that asks the market to deal with the Government failures, and non-profit organizations to deal with market failures. The school of thought that begins with the pioneering work of B. Ward in 1958, and extends to the valuable work of H.

Hansmann of 1996 sees itself, basically, in such an interpretation; of course with all of the variations and nuances that differentiate one author from another. The second interpretation, instead, brings one to see the cooperative as the form of enterprise towards which, in the long-term, in advanced market economies, the capitalistic form of enterprise could tend. This writer sees himself in this second line of discourse. A prospective that I will formulate, concisely, as follows. The twentieth century saw the confrontation-clash between two principle modes of socioeconomic organization: on the one hand capitalism, and on the other, real socialism. As noted, one major difference between the two systems regards the type of property rights of the means of production: private in one case and public (or collective) in the other. The century closed with the victory of the capitalist system. Authors like F. Fukuyama were too quick, in this regard, to speak of the end of history. The fact is that property is not the only aspect that characterizes the various typologies of economic organization. Much more pertinent, today, is the dimension of control. Knowing, that is, who has the ultimate control over the productive process. Well then, my conjecture is that the twenty-first century will see the dialectical confrontation between the two principle modes of exercising control inside the firm: control by those who supply capital and control by those who supply labor. The terms of comparison, therefore, no longer regard the nature of the ownership of the company, which will remain largely private. (Publicly owned companies, if they survive, will occupy truly interstitial spaces.) Rather, the point of contention will be who has the rights to the final say in the management of the enterprise; specifically whether this right will belong to the suppliers of capital—as happens in capitalist firms—or to the suppliers of labor—as occurs in the cooperative. I find interesting what Milgrom and Roberts (1990) write, though with different theoretical intentions, regarding the centrality of the problem of control: “the crucial characteristic of differentiation of the enterprise is not the model of ownership of its equity, but the substitution of centralized authority in the place of the relatively infinite negotiations that characterize market transactions” (p. 72). To advance conjectures as to which type of firm—capitalistic or cooperative—will in time prevail requires a theory that, once the strengths and weaknesses that distinguish the two models is taken into consideration, explains why the capitalist firm is today the prevalent form. As G. Dow (2004) opportunely asks, if many of the problems that afflict our contemporary societies—from increased alienation at work to increased inequality; from the so-called happiness paradox to the

emergence of social poverty traps—could be mitigated by an economic organization in which workers retained control of the businesses to which they supply their labor, how come the most prevalent form of enterprise should remain the capitalist form? A serious (and credible) response to questions of this type must avoid merely ideological positions, like ones that identify the explicit cause of this phenomenon in the domination of “hidden powers” and their capacity to influence the state, or those who retain that, from the scarce diffusion of cooperatives, one must infer their radical incapacity to co-exist with capitalist firms. Instead the challenge is to find persuasive arguments that, on the one hand, identify the forces capable of guiding the process of evolution of the institutional-economic structure towards a final equilibrium characterized by the preponderance of the cooperative form and, on the other hand, that can explain how it is possible to combine the clear advantages of the capitalistic firm

in accessing capital and diversifying risks, with the

advantages of the cooperative in stimulating the effort of the workers (and therefore favoring increases in productivity) and attenuating the conflict over distribution. The objective that I assign the present work is that of preparing the terrain, so to speak, in order to lay the framework for a new economic theory of cooperatives. New not in the sense of a refinement or strengthening of the existing theory, but in the sense of offering a different view of reality. A theory, indeed, is always a particular way of seeing reality. Two important specifications, nonetheless, are required as a preface to the argument that follows. It is to these specifications that the next two sections are dedicated.

2.

The Market Economy and the Capitalistic Economy

An intellectual error, at the origin of grave misunderstandings and therefore useless debates, tends to identify—superimposing the two—the market economy with capitalism. This is an identification that is disproved by history, and without any theoretical foundation. As I have widely discussed elsewhere (Bruni and Zamagni, 2004) beginning with the end of the thirteenth century and lasting until the first half of the sixteenth century, that social order for which Italy is justly famous around the world was created in Umbria and Tuscany, known as “civilta' cittadina” or civic civilization. This model was supported theoretically by the reflections of those thinkers that

Garin (1947) and Pocock (1995) have called “civil humanists.” Here I will mention only a few them. Matteo Palmieri, whose essay Della Vita Civile goes back to the middle of the decade from 1430-1440; Leonardo Bruni, Chancellor of the Florentine Republic; Antonino da Firenze, Dominican bishop of the city; Benedetto Cotrugli, whose treatise Della Mercatura e del Mercante Perfetto is from the middle of the 1400s; Bernardino da Siena, author of the celebrated Prediche Volgari of 1427. A central institution of civic civilization is the market economy itself, just as we intend it today. (The market, as a place of exchange, has its beginnings in the Mediterranean in the Greco-Roman epoch.) As clearly emerges from the systematic reflections of the Franciscan School, the first real school of economic thought, there are three pillars that identify and buttress the market economy. The first is the division of labor, the organizational principle that allows all—even those less able—to work. In the absence of the division of labor, in fact, only the strongest would be able provide for what they need by themselves. As Palmieri writes in Della Vita Civile: “Among all beings, man is the most useful to man. He cannot expect from others those goods that he can only obtain from other men.” To grasp the profound meaning of this first pillar it is useful to remember the Franciscan maxim that said alms help one to survive, but not to live, because to live means to produce—to participate, that is, in the creation of the common good - alms do not help one to produce. At the same time, the division of labor improves productivity through specialization and obligates men de facto to feel reciprocally tied to each other. It is on this basis that the principle of reciprocity, a complement and counterbalance to the principle of the exchange of equivalents (of value), is elaborated; a principle already known at the times of the Scolastica. The second pillar is the important position that the notion of development and, as a consequence, accumulation occupies in economic activity. It is not only to prepare for future emergencies that one needs to accumulate wealth, but also out of responsibility to future generations. A part of the social surplus must be destined to productive investments: those investments that expand the productive base and whose profound role is that of transforming the economy from a zero sum game to a positive sum game. In this way manufacturing-based work organization is born. Systematic training of new workers through apprenticeships is also put into practice as well as the incentive to improve the quality of the products through requests for “masterpieces.” In the same way, standards and measurements are introduced, inventions that

render the market more trustworthy and transparent and that contribute to significantly lowering what, today, we call transaction costs. Particularly eloquent in capturing the real meaning of the notion of development is the following affirmation of Coluccio Salutati’s who, in the wake of the reflections of the great Albertano da Brescia, writes: “To consecrate oneself honestly to honest activity can be a sacred thing, more sacred than living in idleness, in solitude. Because the sanctity reached with a rustic life is of use only to itself... but the sanctity of an industrious life raises the existence of many” (cited in Nuccio, 1987). As one can understand, we are far from the medieval principle by which any economic production beyond that strictly necessary was to be condemned. (“Est cupiditas plus habendi quan oportet.”) The third pillar of the market economy is freedom of enterprise. He who is creative, who has an adequate inclination toward risk and the capacity to coordinate the work of others (ars combinatoria) these are the three characteristics that define the entrepreneur—must be left free to act, without having to submit to the authorization of the sovereign (or someone acting on the sovereign’s behalf) because the “vita activa et negociosa” is a value in and of itself, and not simply the means to an end. Regarding the qualities that the entrepreneur must possess, Cotrugli writes: “That they may have patience, the few ignorant that damn the merchant, who is aware. No, they risk greater insolence, desiring that the merchant must be illiterate. And I say that the merchant not only must be a good writer, good with the abacus, and a good book-keeper, but also well read and a good orator” (Cit. in Nuccio and Spinelli, 2000, p. 275). To the merchants went the task of opening new markets, sometimes very distant markets, on which the products of manufacturing were sold and from which important raw materials and other goods came. Entrepreneurs were not only the most active of the culturally open, but also the most active producers of organizational innovation both in the company field (like the commenda—predecessor to the modern corporation —the double entry—definitively systematized by the Franciscan Luca Pacioli in 1494—the bill of exchange); and in the macroeconomic field, as with insurance, the “merchant's forum,” the Monti di Pietà or charitable loan-institutions (born specifically to combat usury and to favor access to credit), in other words the modern bank, the stock market; and at the level of the legal-institutional structure of society: think about the birth of the Lex Mercatoria and the Rights of Navigation, examples that demonstrate eloquently how not all laws are the exclusive prerogative of the state. Without all of these fundamentals, sustainable economic development throughout the territory would never have

been possible. It is only with the beginning of the 1600s that the market economy begins to become a capitalist economy, even if it will require the industrial revolution to usher in the definitive triumph of capitalism as the model of social order. To the three pillars of which we spoke above, capitalism will add “the profit motive” (Sen, 1983) and, therefore, the focusing of all productive activity toward one objective: to maximize profit to be distributed among the suppliers of capital, in proportion to their quotas. It is with the industrial revolution that the principal “fiat productio et pereat homo” is affirmed. This historical period will end with the sanctioning of the radical separation between suppliers of capital and suppliers of labor, constituting the definitive overcoming of the principal “omnium rerum mensura homo,” previously at the foundation of the market economy. In my opinion, there is no better way than by referring the reader to the writings of the civil humanists to stress how the logic of profit, as it is understood today, is not a crucial element of the market economy. The constant that runs through all of their works is that market activity must be oriented toward the common good, from which it gains its legitimacy or better, its justification. (Note that the common good is something very different from the total, or collective, good. It will be Bentham's utilitarianism that established the coincidence of the two concepts; terms in which many today continue to reason, erroneously.) In the 38th sermon Bernardino da Siena writes: “But to better be understood, I want to tell you which six respects [considerations] one must have regarding he who engages in commerce... the first is that one must consider the person who engages in commerce. Second is to consider the soul of he who engages in commerce. Third, one must consider the mode with which one engages in commerce. Fourth, one must think about the place where the commerce is exercised. Fifth, one must consider the time when the commerce is exercised. Sixth, one must look at the consortium [society] with which one practices commerce. The seventh we add, that is of Scoto: for the common good one must exercise commerce” (p. 1101). And later he concludes: “The third thing necessary to a city or a Community, yes, is that there need to be those who practice commerce in another way; as the wool that becomes material: it is legitimate for the wool maker to earn. Each of them can and should earn, but with discretion. Always with this understanding, that in that which you exercise, you don't do anything that isn't correct. You must never use any malice; do not falsify

ever any commerce: you must do it well, and if you don't know how to do it, instead you must leave it be, and let someone exercise who knows how to do it well, and in that case it is legitimate to earn” (p. 1138). It might be interesting to refer to the opinion of an historian like F. Braudel, according to whom the market economy and capitalism do not coincide for the fundamental reason that capitalism needs, in order to function and guarantee in particular the enforceability of contracts, the nation-state; an institution which was beginning to take root in Europe only after the peace of Westphalia and therefore long after the advent of the market economy (See Jossa, 2004, for an in depth look at this point). For Max Weber, on the other hand, capitalism is born on the long-wave of the Protestant Reformation, at the end of the 16th century. Two centuries after the advent of the market economy. What is the relevance of the preceding summary regarding the objectives of the present argument? To reassure those who support the market economy—and I am one of them—that the eventual future convergence of the capitalistic enterprise on the cooperative form in no way means the disappearance or the deligitimization of the market. On the contrary, it would constitute a significant reinforcement because as, among many others, Rajan and Zingales write (2004): “We believe that capitalism—today more precisely described as the free enterprise system—is, in its ideal form, the best system for allocating recourses and incentives. But the form that capitalism assumes in the majority of nations is very distant from that ideal... many of the accusations made against capitalism... refer to existing corrupt and non-competitive systems, more than to the authentic free enterprise system” (p.324). And they continue: “The worst enemies of capitalism are not union agitators with their corrosive critique against the system, but the managers in pinstriped suits that sing the virtues of competitive markets in every speech, while they attempt to suppress it with every action” (p. 325). It is because we continue to confuse—in the etymological sense of the term—markets and capitalism that many academics, and not only politicians, observe with worry the growth and diffusion of cooperative enterprises and, in general, of social and civil enterprises. Certainly capitalism postulates and guarantees the free market, but the reverse is not true, as the great economist L. Walras (1874) was among the first to recognize explicitly, if at the purely theoretical

level, with his model of general economic equilibrium. Adam Smith in The Wealth of Nations (1776) clarified that the (vertical) division of labor does not exclude, per se, the eventual possibility that it could be labor that “hires” capital and in this way exercises control over the enterprise. We can therefore completely agree with the affirmation with which Hansmann (1996) closes his work: “the freedom of enterprise is an essential characteristic of the most advanced market economies. Capitalism, on the contrary, is contingent; it is simply that particular form of property of the patron that more frequently, but not always, has demonstrated to be efficient on the basis of available technologies” (2005, p. 292). This is tantamount to say that the market economy is the genus of which capitalism is only a species. While the latter finds its legitimacy in the principle of efficiency, the market economy finds its legitimacy in the value of freedom.

3.

From Social Utopianism to Modern Cooperativism

Now I'll move on to the second specification that I hinted at in the introduction. The idea of a business managed by its workers was not born in 1844, the year in which the Equitable Pioneers of Rochdale gave birth to the first fully successful cooperative experiment. As is well-known, the Rochdale cooperative was a consumer cooperative which those thirty weavers decided to open, guided by Chalres Howart, with the goal of “improving the economic and social situation of the members.” In fact, already at the beginning of the century, under the decisive influence of Utopian thinkers like Charles Fourier and most importantly Robert Owen, a vibrant cooperative movement took root in England. Many were the cooperatives created: New Harmony, in the USA; Orbiston in Scotland; Queenswood in England, to cite only the most famous. William King, medical doctor and social reformer, founded the journal The Cooperator in 1828 and in 1830 the “Brighton Cooperative Trading Association,” grouping more than thirty consumer cooperatives. But in a few short years these initiatives failed miserably. It is important, for the purposes of the argument that will be developed in the following pages, to understand the reasons for their failure. At the center of the theoretical structure of the father—so to speak—of the cooperative movement there is a pessimistic vision of man. Owen was a strange “socialist” that did not recognize in man any natural inclination towards freedom. He thought, however, that his character could be molded by modifying his life conditions. Charged by the House of Commons with

coordinating the work of an investigative committee on the state of the application of the Poor Laws, Owen seized on the occasion to write a report, Villages of Cooperation, in which he espoused his radical ideas about social transformation. As one can imagine, the report was punctually rejected by the House of Commons. Essentially, Owen proposed a model of social organization with strongly educational goals, a model that he sought to create in a factory that he owned. The factory represented for him, as it did for all followers of organic socialism, the nucleus around which society was to be rebuilt. The factory was to be managed cooperatively; the commodities were to be exchanged on the basis of the labor contained in them—as dictated by Ricardian orthodoxy—; the company was to provide not only for the planning of production, but also for the spiritual education of the workers. Government was to be the prerogative of the elderly and the entire power hierarchy, at the base of social relations, was to be founded on age difference. It is not difficult, at this point, to understand why, guided by such a line of thought, the experiences described above could have only failed. Not only was the cooperative conceived of as being opposed to private property (in the means of production), but to the market as well! In fact, Owen systematically refused to provide aid to the newly-born consumer cooperatives—and to the future Rochdale cooperative—with the following argument: “Joint stock retailing is not the Social System which we contemplate... and will not form any part of the arrangements in the New Moral World” (in Birchell, 1994, p. 22). This is a clear example of the errors that can be caused by ideology when, in the name of the total good, the common good is contradicted. Luckily, the Equitable Pioneers were not dazzled by ideological furor nor influenced by bad theory; this is how they arrived at the famous Rochdale Principles. Of these 12 principles it's important to first highlight that of the necessity of creating a bond between members and the cooperative through the mechanism of patronage dividends, whereby profits are divided among members on the basis of the purchases effected. Three other principles will prove to be of central importance for the successive developments of the cooperative movement: exchange of goods and services must be done at market prices; capital should be raised from among members for the needs of capitalization; and a part of the profits (5%) must be destined for research and educational activities for members. The principle idea, starting with Rochdale, at the base of the entire cooperativistic framework is that, on the one hand, members’ needs must be satisfied directly, through the socalled “mutualistic advantage,” and not indirectly as when dividends or a part of the profits are

redistributed; and on the other hand, that needs must be satisfied through normal business operations. This way the members become entrepreneurs and not the mere receivers of benevolent acts by philanthropists or benefactors of humanity. In other words welfare must be done well, in a way that is not humiliating and does not damage the self esteem of the needy. Alfred Marshall is a key figure for understanding the passage from the paternalistic model of the social economy to the cooperativistic model. In the essay Cooperation from 1889, the great Cambridge economist effectively brought to light the two great virtues of the cooperative enterprise: on the one hand, that of favoring the “production of excellent human beings,” and on the other hand, that of contributing to the full utilization of the labor capacity of individuals. On this last point he writes: in the cooperative “the worker does not produce for others, but for himself and that liberates enormous capacity of scrupulous labor and of the highest level, that capitalism holds back. In the history of the world there is a squandered product, much more important than all the others, that has the right to be called the Wasted Product: the best working capacities of the majority of the working classes” (cit. in Jossa, 2001, p. 130). It is interesting to remember that in France the person who, mutatis mutandis, played an analogous role to that of Owen in England was F. Le Play, founder in 1854 of the Soceite' d'Economie Sociale. To him, in particular, we owe a vast program of research and studies conducted to favor “the harmony among people cooperating in the same work” (cit .in Latouche, 2003, p.61) and to render popular the idea of business philanthropy. One thinks about the realizations of Schneider at Creusot, of Michelin in Clermond-Ferrand, of Ernest Solvay in Belgium and then in Tuscany, of Alessandro Rossi in the Vicentino, and of other businessmen in Lombardo-Veneto: workers were accompanied from cradle to grave. Maternity, nursery schools, schools, music societies, pensions, houses of worship: everything is regulated in an ordered way through a rigorous hierarchy. It was this paternalistic model, diffused in all of Europe and then around the end of the 19th century in the USA, that was labeled “social economy” and which cast a long shadow on the nascent cooperative movement, generating diffidence and grave misunderstandings about the movement. J.S. Mill was among the first to severely criticize philanthropy, considered as a legitimate child of the “theory of dependency and protection.” With great foresight he wrote: “in the working classes of Western Europe one can at least affirm for sure that the patriarchal and

paternalistic system of government is only one of many to whom the workers do not want to be subjected” (cit. in Latouche, 2003, p. 63). What is the meaning of these brief historical annotations? On the one hand, they allow us to understand just how important theory is for such a field of economic activity. The cooperative movement could have avoided many errors of strategy and failures if it had had a robust body of theoretical-economic knowledge. And on the other hand, the historical annotations allow us to grasp the ethical anchoring of the cooperative way of acting. This is the ethic of virtues, as Adam Smith, in the tracks laid by the civil humanists, elaborated in his fundamental opus The Theory of Moral Sentiments of 1759. The institutional structure of society—says Smith—must be such as to favor the diffusion of civil virtues among citizens. If the economic agents don't already welcome in their structure of preferences those values that must be respected, there isn't much to be done. For the ethic of virtues, in fact, the enforceability of the norms depends, in the first place, on the moral constitution of individuals; that is of their internal motivational structure. Systems of exogenous enforcement are secondary. It is because there are subjects that, like the worker-members, have ethical preferences—that attribute value to the fact that the company practices equity and works for the respect and the dignity of people, independently of the material advantage that can derive from this—that instruments like declarations of values or codes of ethics can be respected even in the absence of mechanisms like reputation. Of course, this is not so in the capitalistic firm where instruments like codes of ethics are seen merely as a constraint. (Zamagni, 2005). The point worth highlighting in particular is that the key to the ethic of virtues is in its capacity to resolve the opposition between self interest and interest for others, between egoism and altruism, by moving beyond this distinction. It is the distinction, child of the individualistic tradition of thought, that prevents us from grasping that which constitutes our own wellbeing. The virtuous life is the best not only for others—like the various economic theories of altruism would have it—but also for ourselves. This is the real significance of the notion of common good, as it can never be reduced to an aggregate of individual wellbeings. Instead, the common good, which is interpreted by the cooperative enterprise, is the good of being in common. That is the good of being inserted into a structure of common action, gifted with certain peculiarities, of which I will speak in part 6.

4.

On the Mode of Comparing Capitalist and Cooperative Enterprises

Most of the literature that, in the last 40 years, has carried out the comparison of which we are speaking, has chosen efficiency as the test bed on which to measure the relative performances of the firm types. There is obviously a specific reason behind such a choice. Since in a market economy only efficient businesses survive the mechanism of selection, determining which firm type is the most efficient is the same as providing reasons that predict the long term success of one or another type. How does such a methodological orientation get translated in practice? One must first start with the consideration that the firm is a coalition of subjects that provide inputs necessary for carrying out a particular production process, whose output is, then, sold on the market. Because the relationships between these subjects and the firm are regulated by inherently incomplete contracts, for well known reasons, it follows that one of the subjects must be assigned the role of controlling the productive activity. Let’s assume that the only candidates to exercise control are either the suppliers of capital or the suppliers of labor. (As was specified in the preceding note 1 it is only for reasons of simplicity that other subjects are not taken into consideration, like suppliers of raw materials or of the demand of products of the enterprise, that is the consumers). In addition, whoever the subject entrusted with the control of the firm is, it is recognized that the attribution of authority always contains the risk of abuse: the subject that has the right to control can impose costs and benefits on other components of the coalition, without there being much they can do to alleviate the consequences. The reason for this, basically, is that inside the firm—and unlike that which happens in the market—negotiations in the short run between controller and controlled are not possible and therefore, as Dow observes (2004), the theorem of Coase does not find an application inside the firm. Only in extreme cases or in the presence of serious abuses of authority is the exit option exercised by the members of the coalition. Finally, starting from this frame of reference, one goes looking then for causal factors that explain the different abilities of the suppliers of capital and labor to exercise the right of ultimate control. The type of business that demonstrates to be the most efficient in the exercise of control will win and will therefore prevail in the market. In section 5 I will carry out a critique of the conceptual basis on which such a comparison is founded. First, though, it is opportune to consider, if only briefly, the principle results that the literature has produced in the past decades.

4.1

A first line of research goes back to the celebrated contribution of Ward in 1958

who places in the difference of the objective functions of the two types of enterprise the reason for their different behavior. Two are the fundamental assumptions of the model: on the one hand, market conditions and technological conditions (expressed by a neoclassical production function) are the same for both companies; on the other hand, the capitalist firm pursues the objective of the maximization of total profit and the cooperative pursues the objective of maximizing net income per unit of labor (or per member whenever all workers are also members of the cooperative). The results that the American economist draws from this model are the noted “perversities” onto which rivers of ink have been spilled. First, the short run supply function of the cooperative is negatively inclined and therefore an increase in the product’s selling price reduces the quantity produced and with it the labor employed. Second, as the market parameters vary—prices of inputs and the form of the production function—the response of the cooperative contradicts the familiar laws of microeconomic theory. Enough can never be said regarding the negative impact of such, seemingly innocuous, results on the economic credibility of the cooperative movement, which has had to employ not a few intellectual resources to defend itself from the attacks against the cooperative as an inferior form of enterprise. A third perverse result is associated to the model of Furobotn and Pejovich (1970) and regards the so-called phenomenon of underinvestment (and therefore under capitalization) of the cooperative. The authors demonstrate that whenever the median member’s time horizon (the time that the member still has to spend in the cooperative) is inferior to the economic horizon of the investment (the time during which the investment generates positive returns), democratic governance based on the principle “one person one vote” will lead the cooperative to choose suboptimal investment strategies and, definitively, condemn it to small dimensions and niche marginalization. Again notable is the damage done by such a result to the image of the cooperative movement, which was not capable of reacting, for some time, to the critique that it was unable provide sufficient theoretical reasons for the growth in size of its own enterprises. (It goes without saying that there have been convincing responses at a practical level, but these—as we have known since the times of David Ricardo—are never enough to invalidate a “demonstrated” theory). What do we find behind these perverse results? Essentially a true error of epistemological nature: the functioning of the capitalist firm is analyzed inside a market of supposed perfect

competition in which every type of market failure is absent; the cooperative firm, instead, is analyzed in a context characterized by the non-existence of a market for membership rights. (With a market of this nature, the member that intends to leave the cooperative could appropriate the current value of future earnings generated by the company's activity by selling his very position as member to another worker who takes his place, or to the cooperative itself). Schlicht and Weizsacher (1977) were the first to demonstrate the complete equivalence, regarding the functions carried out, between the stock market for the capitalist firm and a membership market for the cooperative: the phenomenon of underinvestment would disappear if one were to assume the existence of the membership market. Not only, but the perverse effects found by Ward would also disappear, because a membership market would do, for the cooperative, what the labor market does for the capitalist firm. It is worth clearing the field right away of a double objection. Is the membership market— one will say—compatible with the nature of the cooperative firm? The response is decidedly positive: as long as the firm is controlled by those who supply labor, the identity of the cooperative is safeguarded, not threatened. The other possible objection regards the practicality of such a market. We well know what the obstacles preventing the implementation of such a project are. Both Dreze (1993) and Bowles and Gintis (1993) showed how limited access to capital (due to scarce personal wealth and submission to various forms of credit rationing) - a condition to which the worker-members are subjected - is the principle reason for the practical difficulty in creating a market of membership rights. But that is another question, because the perversities indicated previously follow from theoretical models, not factual analyses or empirical investigations. And at the theoretical level nothing hinders the assumption that the cooperative firm can count on the existence of a membership market. The truth is that the confrontation between the two types of firm is not carried out “with equal arms,” because the same degree of freedom given to the capitalist firm is not given to the cooperative. For example, why is the capitalist firm’s objective assumed to be the maximization of total profit and not—as it should be for reasons of symmetry—the maximization of profit per unit of capital? As Samuelson (1957) already clearly sensed, in a perfectly competitive context and given (real) parity of conditions, “it does not matter who hires whom,” given that an economy in which the workers rent machinery with contracts, let's say by leasing, and one in which capitalists

“rent” workers by means of a labor contract both generate exactly the same results in terms of efficiency. This conclusion was formally demonstrated, many years later, by Dreze (1989), but is hardly ever brought into the current debate.

4.2

A second line of thought is represented by Hart and Moore (1996), Kremer (1997),

Bacchiega and De Fraja (1999). These authors find the cause of inefficiency in the heterogeneity of the preferences of the worker-members of the cooperative with respect to a twin capitalist firm. Let's see what this is all about. In their interesting contribution, Hart and Moore (1996) demonstrate that, when the democratic procedure adopted by the cooperative favors the option (let's say, an investment project) preferred by the median member, while the cost for the realization of the option is “borne” by all the members equally, the more the mean of the distribution of members' preferences diverges from the median, the more elevated is the risk of inefficiency of the cooperative with respect to the twin capitalist firm. In other words, each time the membership assembly is “split” because the preferences of its components are very heterogeneous, it is clear that, unlike what happens in the capitalist firm where one votes with the criteria “one share one vote,” the cooperative goes inevitably toward the risk of decisional paralysis or towards the de facto transfer of the rights of control to the managers. In the first case one gets inefficiency; in the second case, the distortion of the nature of the cooperative identity. In certain respects Kremer (1997) obtained a parallel result which considers a model in which the members pay a fixed sum that constitutes the capital of the cooperative. Once the workers have become members of the cooperative, they decide in the assembly a wage policy that depends on the levels of output obtained. If the ability (or effort) of the median member is lower than the average ability (or effort) of the members, the wage policy will redistribute income from more productive members to less productive members. On the other hand, the more productive members cannot leave the cooperative without loosing the sum initially paid. That would explain the relative income compression that one observes in the cooperative firm with respect to the capitalist firm and, at the same time, would bring to light an impediment to the growth of the cooperative owing to the inefficient remuneration policy. Where is the aporia in this line of reasoning? In the tacit assumption, in no way justified, that the motivational structure of an individual that decides to become a member of a cooperative is exactly the same as that of someone

who decides to invest their capital in a capitalist firm, becoming a shareholder. That things are not like this in reality is widely confirmed by the empirical evidence and is well know by all, except those who construct models in order to demonstrate that which is already implicitly present in the premise. For example, it would be enough to add to the arguments of the utility function of the agents a parameter that reflected the preference for equity—as is done in the models that deal with the ultimatum game—and the results reached by Hare and Moore and Kremer are rendered null or at least re-dimensioned. (Borzaga, 2001). Of particular interest for the aim of our discussion is the essay by Bacchiega and De Fraja (1999). In a comparative context in which attention is placed on the constitutional design, typified by the procedural rule with which one arrives at the decisions in assembly in the two types of firm, these authors assume that the technological possibilities, prices and even the utility function of the subjects is equal. The latter, in particular, is of the type: Ui= U(ci, E, wi) where ci denotes the consumer good of agent i; E is a local public good; wi, the usual stochastic variable. In a world of complete contracts the choice of the institutional structure of the firm would be completely irrelevant: one would obtain any way the first best solution, i.e. that one that maximizes the sum of the individual utilities. Instead, with incomplete contracts the authors demonstrate that cooperatively organizing common activity in order to achieve the production objective leads to underinvestment and therefore an inefficient outcome. The reason, basically, is that the worker-member is rationally driven to offer a smaller financial contribution than the capitalist shareholder toward the realization of the common activity. Intuitively, the explanation is that in every common activity some production of a local public good is always implicated and with the public goods the problem of free-riding presents itself punctually. Now, in the cooperative the members that were to derive ex-post a low benefit from the production of the public good would certainly not be moved to contribute ex-ante to the creation of the same. Not like this, instead, in the capitalistic firm where a minority of shareholders, in possession however of the majority of the quotas of capital, can make decisions against the numerical majority of the shareholders. This means that the capitalist shareholders have a motive for bringing resources to their firm with the goal of “buying the power to make decisions.” It is this incentive that prevents the problem of free-riding that per se exists also in the capitalist firm. (Mind

you that this implies that it is asymmetry in the distribution of quotas of capital among shareholders in the capitalist firm that differentiates this firm with respect to the cooperative. It's of course true that if the capitalist shareholders all had the same number of quotas or shares, they would behave as if they were in a cooperative.) What doesn't fit with such a framing of the problem of the comparison among the two types of firms? The non-parity of treatment regarding the mode in which the behavior of the agents in the two types is formalized. Why should the utility function of the worker-member ever be the same as that of the capitalist shareholder? Is it not perhaps true that—as we will argue in the next section— the choice of joining a cooperative instead of a capitalist firm postulates a Schumpeterian preanalytical judgment, one that refers to a precise value judgment, that of personal autonomy? Is it possible that one cannot perceive that it’s one thing to be a worker in a firm in which you are controlled, and another to carry out the same job but as controller? Therefore, while it is perfectly legitimate that the utility function of the capitalist shareholder is of the above indicated form, that of the worker-member can't not include, as an ulterior argument, at least the consumption of relational goods that always accompany cooperative activity (Bruni, Zamagni, 2004): Ui=U(Ci, E, Ri, wi), where Ri=0 if the subject decides to enter as a shareholder in the capitalist firm, and Ri>0 if i decides to enter as a member in a cooperative. If one were to do this, one would find that the consumption of Ri, much more than the goal of “purchasing the power to make decisions,” would be capable of counterbalancing free-riding. In fact, as one concludes from the vast theoretical literature on organization, the relationship between an individual and a firm does not end with the economic exchange between the two parts. This relationship also includes one of belonging, which expresses people's fundamental need for identity, giving way to a psychological exchange having as its object immaterial, but real, elements such as honesty, reciprocal trust, the sense of equity (Rousseau, 1995). Now, there is no one that does not see how, regarding the decision to join the cooperative, relational incentives cannot be forgotten. If the only category of incentives to be taken into consideration when two types of firms are compared are the material incentives, it is evident that the verdict of the cooperative as inefficient is written from the start.

4.3.

It's worth speaking of a third approach here, the neoinstitutionalist approach

associated with the names, above all others, of Williamson and Hansmann. To the question: why do different types of firms exist, the authors, who place themselves in the transactional paradigm, respond that it depends on the different capacities of the various classes of stakeholders to minimize the total sum of the transaction costs (those owed to ex-ante market power, to ex-post market power, and to asymmetric information) and of the costs of the exercise of property rights (i.e. costs for the control of the managers; costs for the process of collective decision making; costs of risk assumption). It is therefore, yet again, the capacity of the single classes of stakeholders to be efficient that determines if it is “good” that the firm be structured in the capitalist or cooperative form. A couple of examples are worthwhile. As long as the quotas paid by the members or the capital set aside from the non-distributed profits are sufficient to ensure the expansion of the firm, cooperative governance does not pose serious problems. But when the moment comes to mobilize risk capital from outside of the firm, potential outside investors, afraid of the abuse of authority by the worker-members (who are those ultimately in control), will not invest as much as is necessary for the growth of the company. Here is why we will rarely find cooperatives in the capital intensive industries or in the cases in which the members are “too poor” to give their firm the necessary capital, or when it is difficult to obtain on loan the necessary capital goods. The difficulties of the capitalist firm are analogous even if symmetrical: how to motivate those that operate inside the firm to provide information and to make the optimal effort? The wage laborer will hardly reveal his true abilities when carrying out the tasks to which he is assigned for fear that he who exercises the functions of control can take away a unilateral advantage. In addition the capitalist firm, while requiring its employees to make a specific investment in human capital, does not offer guarantees regarding the duration of the relationship: this incentivizes the worker not to focus on excessive specialization so as to avoid lock-in phenomena. Now we can understand why the cooperative form will be successful in all of those cases in which, for technological reasons, workers must make significant, specific investments in skills, or in cases in which the strategic factor for firm development is tacit, rather than codified, knowledge. As one will note here, unlike that which happens in the contributions examined in points 4.1 and 4.2, above the result of the comparison between capitalist firm and cooperative are not a given, that is it is not already contained in the premise of the analysis. This is, therefore, an

appreciable progress. What is the limit of the transactional approach? The first limit—after all, minor—is that the criterion of efficiency is applied to the single firm taken in isolation from the rest. This means excluding from the calculation of efficiency both the externalities (positive and negative) connected to the functioning of the firm, and the strategic complementarities between firms. Now, if for the capitalist firm such forgetfulness does not create big problems, the same is not true for the cooperative. It is well known, in fact, that cooperative firms act as a system—it is the so-called intercooperativism—and that the system takes advantage of relational agreements whose practical significance is the reduction of transaction costs. Cutting out of the calculation of the algorithm proposed by Hansmann such an element means influencing, at least in part, the order of efficiency. The second limit, certainly the more serious one, has to do with the significance and appropriateness of efficiency as the criteria for comparison. I will address this in the next paragraph. First it's worth considering the argument of Dow (2004) who, among all those available in the literature, seems to me to be the most convincing and robust. For Dow, the most relevant asymmetry between the inputs of capital and labor is, that, while ownership of capital goods can be transferred from one subject to another, the capacity to provide labor, in as much as it is inalienable, cannot be transferred. It follows that a firm can obtain the capital it needs from a stock of goods of its property or from a flow of services obtained from leased goods; on the other hand, a firm can only obtain labor services in the form of a flow, because a stock of laborers doesn't exist (slavery is not admissible). In addition, while an individual’s labor cannot exceed certain natural limits, there is no limit to the wealth that an investor may possess. Those who provide labor cannot enter into close relationships with the other suppliers of the input labor, and no one can find himself in more than one workplace at the same time. The supplier of capital, however, can stay far from the productive process to which he confers his “machinery” and can also place it in different places simultaneously. Not only, but labor services are inherently heterogeneous because they are linked to the characteristics of the people from whom they come; finance capital, instead, is homogeneous. When the rights of control are attributed to the suppliers of labor, it is impossible to transfer control from A to B without substituting the labor services of A for those of B. On the contrary, in the capitalist firm, the voting rights associated with the quotas of capital possessed can be passed from A to B without requiring any variation in the capital goods at the firm's disposition. Definitively, it is the non-alienability of

the factor labor and the alienability of the factor capital that marks the profound difference between the capitalist firm and the cooperative. It is, therefore, this that determines the different relative efficiencies.

5.

Why Efficiency is Insufficient as a Criterion of Evaluation

What reasons advise against the adoption of efficiency as the only test bed on which to confront the relative performance of the capitalist and the cooperative firm? I will indicate three. The first is that, contrary to what many think, efficiency is not a neutral notion with respect to value judgments; it is not a positive, but rather a normative category of discourse. In fact, it postulates the acceptance of Bentham's utilitarianism as an ethical presupposition. If you adopt either the Paretian version of efficiency, based on ordinalism, or the notion of efficiency as a measure of the distance between a particular result and the first best solution (the cardinalist version), it is always the utilitarian philosophy to which you must refer. How can one affirm, then, that the comparison between the two types of firm, based on the calculation of efficiency, is of a technical nature, and therefore objective? The second reason is that, as Sacconi (2001) notes: “the base factor of efficiency in the non profit organization is the possibility of making use of ideological principles and ethical codes of self-regulation. These firms operate in the double sense of drawing from such factors an additional element of motivation and incentive for the members of the organization; at the same time those factors act as a cognitive instrument for use with donors and the beneficiaries of social services” (p.1). (Sacconi’s argument, though referred to non profit organizations, is valid and a fortiori for cooperatives). Now, exactly because the additional resource that the cooperative can utilize to its advantage is the intrinsic motivation of the actors that operate in it, the comparative analysis in terms of efficiency cannot be based on the model of rational choice because, as is well known, rational choice is a teleological model that, as such, is not capable of taking into account agents’ motivations. Simply put, rationality is not able to find an adequate place for the category of social and ethical motivations. In fact, as is evident from the relevant literature, motivations are “reduced” to special arguments of the utility functions of the agents or to particular forms of the same utility functions: which is exactly what motivations don't tolerate. John Dewey—the founder

of philosophical pragmatism—was aware that human behavior can't be explained either in terms of only intentions and beliefs—as if intrinsic motivation and the surrounding environment didn't count for anything—nor only in terms of motivations and the environment—as if intentions and beliefs did not have any weight. Consequently, when Stigler and Becker (1997), in their famous article, affirm that the change of observed behaviors can be explained as a rational subject’s response to changes only in incentives, these authors demonstrate to be affected by naïve realism. Incentives can never be defined independently of the subject to whom those incentives are directed. What is the consequence of what I've just said? That if all of those elements that motivate a subject to become a member of a cooperative (the valorization of subjectivity; the psychological advantage of not suffering alienation; the sharing of the results of a common activity; the sense of equity) are excluded from the calculation of efficiency, it is clear that you'll curve the analysis in favor of the capitalist firm. While the costs that the cooperative encounters are emphasized—above all else those regarding raising capital—the benefits that the cooperative is capable of generating are not considered. This is for the simple reason that such benefits don't regard the capitalist firm. The final reason for the inadequacy of efficiency as the sole measure of performance regards the social externalities that the firm, because of how it operates, always generates. The fact is that in the calculation of efficiency social externalities are never taken into consideration. The most relevant of these has to do with the democratization of society. If it is true—as it seems to me —that workplace democracy facilitates and renders more stable the democratization of political institutions, and if you accept that the democratic structure of society is also a function of economic development, then a comparative analysis that does not take into consideration such an aspect would be guilty of unjustified partiality. “If democracy—writes Dahl (1985)—is justified in the governance of the state, then it is also justified in the governance of the firm” (p. 57). The 18th century philosopher of law Cesare Beccaria can help us to better understand this point. In Dei delitti e delle pene (An Essay on Crimes and Punishment) Beccaria writes: “if we want a republic made of families, we will have then a republic made of family heads and therefore a democratic republic of the heads of families, but each family will have a hierarchical structure and one of slavery. Instead, if we want to have true republics, we must focus on the person.” Beccaria well understood the issue: if the head of the family represents the entire family, that which happens

inside the family is completely irrelevant and therefore can be left out of consideration. Well, if we substitute the term “family” with “firm,” and in the place of “republic” we put “market economy,” we can understand how there can be freedom of enterprise without an authentic freedom at the level of citizenship. Those who work in firms governed hierarchically are not able to experience freedom in the workplace. Indeed, one cannot negate that an economic system in which those who work in a company are also the owners and (ultimate) controllers of the same firm is “superior,” in the order of positive freedom, to an economic system in which those who work are subjected to hierarchical rules and, therefore, the restriction of personal autonomy. This observation brings us back to a question of wider importance. If you reflect for a moment, you will discover that the capitalist economy suffers a grave pragmatic contradiction: while in the arena of the market the two founding principles of modernity find their space—the freedom of the individual and the formal equality of all individuals—inside the capitalist firm vertical relationships based on hierarchy prevail. (Eloquent, in this regard, is the text of article 2086 of the Italian Civil Code: “The entrepreneur is the head of the firm and it is on him that his collaborators depend hierarchically.” “Why—Bruni asks (2004)—despite the fact that the modern economy was born profoundly linked to the principles of equality and liberty, is the firm, its principle institution, constructed on the principle of hierarchy?” (p. 378). This is a question that, from another perspective, Zingales (1998) formulates in the following way: “Governance is synonymous with exercise of authority, direction and control. These words sound strange, however, when used in the context of a free market economy. Why should we need some form of authority? Is not perhaps the market capable of allocating resources efficiently without the intervention of an authority?” (p. 497). Marx clearly understood that “the relationship of capital” is the prime cause of the absence of freedom and equality in the capitalist firm. Unlike the young Marx who, in the wake of Hegelian philosophy and the political thought of Feuerbach, identified capitalism with private property in the means of production, the mature Marx comes to perceive the labor contract as the fundamental institution of capitalism from which its various effects derive. To a great degree, it is the confusion —explains Screpanti (2004)—between the partnership deed (the contract linking partners in a private firm) and a work contract on the one hand, and the labor contract on the other, that generates many of the misunderstandings regarding the real differences between the capitalist firm

and the cooperative. In the partnership deed, two or more partners come together to carry out a common activity with the goal of dividing the residuals (or net product) and in the work contract, a subject commits to supplying a particular product to another subject, without any subordination. On the contrary, in the labor contract, one party (the wage laborer) agrees to renounce his decisional autonomy for a certain period of time, in favor of the employer, in exchange for a fixed remuneration ex ante and independent of the result obtained (the wage). In addition, in the partnership deed, decision-making power is reserved for all partners, and the object of the transaction is the amount of labor services that the members provide, in addition to the capital eventually conferred by them. In the work contract, remuneration and the nature of the services supplied are defined ex ante, but the mode in which these are supplied is decided freely by the worker himself. Instead, with the labor contract a well defined good or service is not exchanged, but rather a commitment of obedience is assumed, so much so that the wage is configured as a price for renouncing that immaterial good that is personal autonomy. “The obligation to obey assumed by the worker with the labor contract establishes the capitalist firm, which can be defined as an organization based on a hierarchy of power with the aim of the production of profits. The capitalist firm is the nexus of labor contracts, that is, exactly the opposite of that which the theorists of the 'nexus of contracts' think” (Screpanti, 2004, p. 12). These theorists confuse the labor contract with other types of contractual figures, as if the nature of all of these were the same. In light of what we've said, we can now understand the key to the cooperative enterprise: placing the worker-members in the condition to control their own productive activity, this type of firm makes real, inside the firm, those principles of equality and freedom that distinguish the market economy. In such a way, the cooperative resolves, at least in principle, that pragmatic contradiction of which we spoke previously. If one admits—as I believe—that autonomy is a value per se, independently of the fact that it may lead to better or worse economic results, we can appreciate Cicero's opinion that: “ignoble and vile are the earnings of the wage earner, for whom one pays the labor and not the art: because the salary is the price of their slavery... sordid is the occupation in which the workers find themselves, because nothing truly free can be found in a factory” (De Officiis; cit. in Screpanti, 2004, p. 18). Definitively, the cooperative is the enterprise form preferred by those that place personal freedoms at the top of their hierarchy of values. This suggests an explanation—that I maintain is

extremely plausible—of the scarce diffusion of this type of firm in the world: that the passion for (positive) freedom does not yet occupy first place in the lexicographical arrangement of preferences of the great majority of people. Significant, in this respect, is the affirmation of Benjamin Constant: “the pain that accompanies submission is preferable to the pain that always accompanies freedom.”

6.

The “Fundamentum Divisionis” Between Capitalist and Cooperative Firms

Having reached this point in the argument, the question that can no longer be put off is: where to place the ultimate discriminant between the two types of firm? To respond, we should start from the consideration that economic activity, whatever it may be, is always a common action, “an action, that is, that to be performed requires the intentional contribution of two or more subjects” (Viola, 2004, p. 14). If we think well enough about it, it is the division of labor that confers to economic activity the status of common actions. In this sense, a market economy that— as we explained in section 2—is founded on the division of labor is a world that is densely populated with common actions. Following Viola (2004), three are the elements that distinguish a common action. The first is that it cannot be concluded without all those who take part being conscious of what they are doing. The mere coming together or meeting of many individuals is not enough. The second element is that each participant in the common action must retain title, and therefore responsibility, for that which he does. It is exactly this element that differentiates common action from collective action. In the latter, in fact, the individual's identity disappears and with him disappears also personal responsibility for that which he does. The third element is the unification of the efforts on the part of the participants in the common action for the achievement of the same objective. The interaction among many subjects in a given context is not yet common activity if they follow diverse or conflicting objectives. Therefore, the firm, in as much as it possesses all three of these elements, is common action. Diverse are the types of common action in relation to the object of communalism. The communalism, in fact, can realize itself around the means or around the ends of the action itself. In the first case, the firm will be of the capitalist type and the form that the inter subjectivity assumes is, typically, that of the contract. As is well known, in a contract the parties must come together for its execution, but each party pursues different ends, often contrasting. This is the case in the sales

contract between seller and buyer, or the labor contract. Instead, when the communalism is organized around the ends, you have the cooperative enterprise. Note well that there is a difference between the situation in which it is agreed that each person follows his own end (as happens in the capitalist firm), and the situation in which there is a common, shared goal. This is the same difference between a common good and a (local) public good. In the first case, the advantage that each person draws from the use of the good can't be separated from the advantage that others also draw from it. That is, the interests of each person are realized together with that of others, and not against as happens with a private good, nor apart, as happens with a public good. Essentially, while public is opposed to private, common is opposed to one's own. That which is not only one's own, nor of all indistinctly, is common. What is the economically relevant consequence that follows from such a distinction? That when the “common” of the action is limited only to the means, the problem that must be resolved, basically, is that of the coordination of the activities of many subjects. The science of management provided, and provides, for this, beginning at least with the pioneering contribution of F. Taylor of 1911 (Principles of Scientific Management) and, after the end of the second World War, by that of Herbert Simon. On the other hand, when the “common” of the action is extended to the ends, the problem that must be resolved is how to put into being cooperation. To avoid any misunderstandings, it is important to make clear that the notion of cooperation, in the sense understood here, should not be confused with the cooperation of which game theory speaks. As noted, a game is cooperative when some mechanism of enforcement exists so that the players respect the commitments made. Each player, however, pursues an end that differs from the ends of the others. To put it in formal terms, a problem of coordination arises from the strategic interdependency of more than one subject; a problem of cooperation, instead, arises from their axiological interdependency. That is, in the cooperation that we are speaking of here, intersubjectivity is a value; in game theory it is a circumstance. Contrary to what agency theorists argue, the coordination of decisions inside the firm uses non-market instruments. Prices, in fact, are almost never used inside the firm to coordinate the division of labor. This is in contrast to what Alchian and Demsetz (1972) write: “telling an employee to type a letter instead of cataloging a document is like telling the grocer to sell this brand of tuna and not this brand of bread” (p. 677). This line of reasoning is unacceptable, for the simple

reason that it is beyond reality to think of the firm as a sort of sui generis market, since the people that operate in the firm are guided, other than by commands, by informal norms of behavior, those that define the specific firm culture. It doesn't take much to understand how the effects of such norms on human behavior are much different from the effects generated by the system of prices that govern market relations. The reaction of a consumer to price variations of a good that he intends to purchase are certainly different from the reaction of a worker to the positional competition pursued by the firm in which he works. While variations in price impact on my decision to buy, but don't change my model of behavior, the informal rules of the firm in which I work determine behavior patterns and this induces, in me, a precise expectation of rights and obligations. Now, as Schlicht (2003) lucidly demonstrates, the basic problem that a business organization must resolve is that of the “psychological coherency” between social norms and working styles, on the one hand and commands and formal rules, on the other. If the manager gives orders that are perceived as incompatible with the informal norms the result is organizational chaos. Indeed, while the command given to a machine does not influence the “response” that that machine will give to other commands, this is not so with people. With people each command creates a precedent, and therefore the expectation that similar situations will come up again, in the future, in a similar way. And if this is not so, the worker will react by shirking or refusing to make his personal tacit knowledge available to the firm. Well, one can demonstrate that coordination does not eliminate the risk of psychological incoherency, and therefore the risk of organizational inefficiency. (See, for example, Dassein and Santos, 2003). Cooperation, instead, does offer such a guarantee because it concedes to the workers the decisional discretion necessary for adapting to local circumstances. Adaptation, in fact, always requires the use of local information associated with a particular task, the information that pertains exclusively to the worker assigned to that task. It is, by now, well known that, given the characteristics of the current technological trajectory, one of the central problems of the modern firm is that of adapting organizational design and productive structure, reciprocally, and effectively taking advantage of the potential complementarities among resources (Trento and Warglien, 2001). And with respect to such a problem, cooperation has shown itself to be decidedly superior to coordination.

The question then arises: how is one to positively resolve a problem of cooperation? Bratman (1999) gives a convincing response, in my opinion, when he outlines the following three conditions. In the first place, each participant in the common action assumes that the intentions of others are relevant, and therefore worthy of respect, and knows that this is reciprocal. This is the condition of mutual responsiveness. It is not enough that the members intend to do the same activity; they must want to do it together. In the second place, each person commits to a joint activity—even if for different reasons—and knows that the others also intend to do the same. This means commitment to the joint activity, in which it is de facto impossible to quantify the specific contribution of each person to the joint product. Finally, each person commits to helping others in their efforts so that the final result will be the best possible (commitment to mutual support). Reciprocal aid must manifest itself while the joint activity is being carried out, not a latere, nor at the end of the activity. Such a commitment should not be confused with self-interest, nor with disinterested altruism. There being a connection of interests, by providing help to others one pursues one’s own interests. In other words, the worker-member, because he is worried about his own well being, is interested in the well being of the other members (Dworkin, 1992). It is this specific interpretation of the principle of reciprocity that the cooperative puts into practice. As a reminder, the principle of reciprocity goes like this: I give (or do) something for you so that you, in turn, might give (or do) something for others or, if it is the case, for me. On the contrary, the principle of the exchange of equivalents, which is at the basis of capitalist activity sounds as follows: I give (or do) something for you so that you can give to me in exchange something of equivalent value. In turn, the principle of philanthropy or altruism recites: I give to you as long as you don't give me anything; better yet, I don't even want to know your identity. What must a cooperative do to satisfy these conditions? On the one hand, it must render accessible the line of communication among worker-members; on the other hand, it must commit to the practice of equity, avoiding subjection and exploitation (Viola, 2004). Let's try to clarify. Communication is different than information. While complete information is all that is needed to solve the problem of coordination of decisions, cooperation presupposes that a particular form of participatory democracy is put into place: the exercise among the members of the firm of the option of voice. It is to Hirschman that we owe the important distinction between exit and voice, and the affirmation that, while the former would find its ideal-type place of application in the economic

sphere, the latter would find space, instead, in the political sphere. Well, the unique significance of the cooperative way of doing business is that it extends the exercise of voice to the sphere of economic relations. As is known, the deliberative process postulates the possibility of selfcorrection, that each subject allows for, ab imis, the possibility of changing his or her preferences in light of the reasons adopted by the others. The deliberative method, it is implied, is not compatible with those who, in the name of power hierarchy, declare themselves impermeable to the arguments of others (Zamagni, 2004). It is for this reason that deliberation presupposes, necessarily, communication. According to Cohen (1989), cooperation is based on “deliberation focused on the common good” in which the participants declare themselves disposed to putting into play their own initial preferences, because “the relevant preferences and convictions are those that emerge from, or are confirmed by, means of deliberation” (p. 69). A cooperative that does not comprehend this unique aspect and that, in the name of efficiency, apes the modus operandi of the capitalist firm—in which by definition no deliberative process can find its place—is condemned to euthanasia. Also the cooperative firm is much better equipped than its twin capitalist firm to take advantage of the potential of the network as an endogenous form of organization which allows users to benefit from dynamic externalities, strategic complementarities and cumulative phenomena. It is true that to build a network structure coordination is all that is required. But it is equally true that the network structures provide the maximum advantage when the three conditions of which Bratman (1999) speaks are satisfied. The other requisite is the commitment to internal equity. The freedom of members to join a cooperative is justified first by the goal of barring any subjugation or exploitation. The idea of cooperation distinguishes itself from that of coordination because, while the latter postulates hierarchy, the former presupposes equal dignity among the subjects and the environments in which they operate. Cooperation—observes John Rawls—demands much more than coordination, in as much as it is based on rules and procedures that are accepted and made by all of the participants. It is of course true that in every common action, and therefore in each firm, someone who exercises the function of command so that individual wishes might converge is required. But while in the capitalistic firm command comes down through the power hierarchy, and can be applied in a more or less authoritarian way depending on personal characteristics, in the cooperative firm command is associated with authority in such a way that no one can impose on others their own way of

interpreting the common action. It follows that the cooperative that founded its governance structure on the hierarchical model, instead on that of authority, would miss the most precious occasion for valorizing its identity-specificity. I will try and explain myself. As Besley and Ghatak (2004) suggest, a “mission” consists of a unity of attributes of a project in which those who take part evaluate its success beyond the monetary income that they receive. In this sense, the cooperative can be seen as a mission-oriented organization that draws power from the motivations of its agents. Motivated is the agent that pursues a particular end because he knows that there is an intrinsic benefit in doing a certain thing or in behaving a certain way. Clearly, the existence of a mission, while reducing the need to negotiate pecuniary incentive schemes, also increases the importance—for the goal of optimizing the effort of the agents—of the non-pecuniary aspects of the firm's organizational structure. In symbolic terms, this means assuming, for the generic subject i, a utility function of the type: Ui= a wi + (1-a) mi, where wi denotes pecuniary remuneration, mi intrinsic motivation and a (0 < a < 1) the weight given to the first component and (1-a) the weight attributed to the second. Now, because intrinsic motivations differ, in general, from person to person, one of the two scenarios will result: either the mission oriented firm, as is the cooperative, is able to organize this diversity and therefore will be able to make consistent productivity improvements, or is not able to do this and will fall victim of paralyzing conflicts. This is why the manager of the cooperative must know how “to do well” as much as his capitalist counterpart and, in addition, do more; that is he must know how to find the optimal mix of w and m, material incentives and relational incentives. If the cooperative manager, overcome by a craving for imitation due to a sort of inferiority complex, insists only on the variable w, he will end up provoking the crowding out effect of which Frey (1997) speaks: the intrinsic motivations are anesthetized by the extrinsic motivations. Gibbons (1998), in a different context, does not exclude this eventuality at all when he writes: “A troubling possibility is that management practices based on [traditional] economic models can reduce or even destroy non-economic realities like intrinsic motivation and social relations (p. 130).” It would be truly paradoxical if, in an historical period like the current one in which the most celebrated studies of the capitalistic mode of organization are discovering that economic sustainability cannot be assured through controls and material incentives alone, the

leaders of the cooperative movement were to miss the occasion to utilize the specificities of the cooperative form of enterprise to reach objectives that, through coordination only, are not possible. As Falk and Kosfeld (2004) have recently demonstrated

experimentally, the use of material

incentives, in so far as this is a sign of distrust of the agent on the part of the principal, significantly reduces the willingness of the former to act in the interests of the latter. The use of incentives backfires, so to speak, against the principal, and the agent's performance is inferior with respect to that which would have otherwise been obtained. This is because giving trust increases the selfesteem (the self-esteem of which A. Smith spoke) of he who receives it. This, while improving productivity, reduces the risk that is always associated with the attribution of trust (Pelligra, 2003). As is well-known, the labor relationship between firm and worker can assume the form of the socalled “social exchange” or “market exchange.” In the first case, immaterial elements like fairness, honesty, and reciprocity enter into play which are not negotiable because they are not verifiable. In the second case, instead, the exchange is based on those elements that fall under incentive systems of one type or another. We well know that different types of work relationships lead to great differences in firm performance. But it is evident that the worker will accept entering into a “social exchange” instead of a “market exchange” only if the firm will appear to him as a moral subject that declares to accept putting into practice the cooperative principle which consents workers to choose freely those projects that maximize their benefits (Aghion, Tirole, 1997).

7.

Instead of a Conclusion

What is the meaning of the discussion that we have been carrying out? That sustainability over time of the cooperative firm depends basically, both on the “relative price” that workers attribute to freedom with respect to security—I want to repeat here the chilling affirmation of Benjamin Constant: “the pain that accompanies submission is preferable to the pain that always accompanies freedom”—and on the capacity of the cooperative movement to put into practice that organizational differentiation that alone can allow the uniqueness of common action to emerge when communality is extended to the end of the action itself. I certainly don't want to ignore, nor undervalue, the importance of the difficulties highlighted above, first of all that of raising capital at market conditions. But I don't think that these are the decisive difficulties, those that can lead the

cooperative firm to accept processes of organizational isomorphism that would bring it, in a short number of years, to no longer differentiate itself significantly from the capitalistic firm, with the exception maybe of having a few more limitations. It would be truly paradoxical, to say the least, if, in an historic phase like the current one, characterized by the end of Taylorism, in which the capitalistic firm is pushed to adopt schemes and organizational principles similar to those of the cooperative firm, the latter were to continue to follow the style of governance of the former, demonstrating that it does not fully understand that which it is and does. This is why we need a new, that is a different, economic theory of cooperatives, a theory capable of suggesting a type of societal governance based on the symbolic medium of the commitment to value, on the interiorization of the objectives by all the members, to which the media of capital and power are subordinated. As Italo Calvino recalls in The Baron in the Trees, there are human needs that cannot be translated into civil or political rights. “He understood this—writes Calvino -: that associations make man stronger and puts into relief the best gifts of individuals and give joy that one rarely has remaining isolated, of seeing how many honest and good and capable people there are for which it is worth loving things—while living in isolation, the opposite happens more frequently, of seeing the other face of the people, that face for which one needs to always keep his hand on the handle of the sword” (2002, p. 129). When we come to understand that which the Baron in the Trees well understood, we will finally be able to grasp why our societies, today more than ever, need more cooperative culture and praxis.

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