OP-ED: Will cooperatives work in Bangladesh?

Prime Minister Sheikh Hasina has declared that cooperatives will be a part of the abolition of poverty in Bangladesh. She is, of course, correct. The important thing to know though is that many things are correct in economics. What's necessary is to work out when they're correct and when it is that some other idea, practice, or method works better.

Cooperatives, by their nature, don't work well when there's a substantial need for financial capital. So, cooperatives will work well when this requirement is absent -- as is going to be true with the rural enterprises the PM is talking about. This would be less true if we were to talk of a steel works or a gas pipeline, where large amounts of financial capital are a basic requirement.

The underlying distinction here is access to capital. Even, what it is that we mean when we talk about capitalism. The real definition here is that the people who provide the capital aren't the people who work in the organization. Sure, there's all sorts of Marxist talk about this and that to do with “capitalism” but put that all to one side. The true point is that those doing the actual work aren't the people who own the production unit. Or, as is equally true by definition, the capital of the company is owned and provided by those outside it. 

Under this definition a large state-owned company is capitalist -- and it is indeed often referred to as state capitalism. The money to buy the machinery, land, etc, comes from outside those who work directly in the company. 

Given this we can then go on to say that organizations where the capital is provided by those who do work within the organization are socialist. The ownership of, the provision of, and the capital is social. A cooperative is thus a socialist organization. And so too is a firm of lawyers, where the partners own the firm. 

In fact, so are most knowledge-based organizations because the capital required is the people with the knowledge. This makes an investment boutique -- where it is the people who work within it who own it -- socialist, not capitalist. An oddity but given the definition being used here, a true one.

This then brings us to the grand puzzle -- when does capitalism work better than socialism? For we can see the value of the people working there owning it all -- their interests are aligned with that of the firm as a whole and thus we would expect it to do well. In a capitalist system, there's an obvious tension between those who own and get the profits and those who work and get the wages.

Further, all economies are shot through with socialism. In my native Britain, the John Lewis stores -- which include the supermarket chain Waitrose -- are owned by the workers. There are similar chains in the US. The Mondragon companies in Spain -- mostly light engineering -- are all worker owned, are cooperatives.

So, what we need is some manner of determining which is the best method for any specific time, place, or task. One answer is that we can just not bother. The interaction and testing of the different methods in specific tasks that are inherent to a market economy mean that those that work will work, those that don't simply won't. Those that don't work will fail, those that do will prosper, and so our identification of which structure is better is something we observe -- it is emergent, rather than something we predict.

While this is true, that's not sufficient because we can still go on to extract some basic rules from our observations. The most basic of which is that capitalism works better when lots of financial capital is required and social or socialist forms of organization when it isn't.

Take, for example, the steel plant mentioned above. These cost some $1 billion to build these days. Actually, that would be quite a small one. And a modern steel plant might have 5,000 workers in it. So, if we are to have a worker cooperative here then the 5,000 workers have to invest $200,000 each to build the plant. 

And we really don't think that would-be steel workers will each have that sum nor would it be wise of them to put it all into the one investment if they did. Instead, far better that we go to 100,000 people (just imagine) and ask them for $10,000 each to go build the plant. We've gained our capital from outside the organization -- this is a capitalist firm. 

But what about the small rural company? Say something to market the onions, or peppers, of the farms in an area? The large capital requirement is in the land and the financing of the growing season. This is already owned and done by the farmers of course. The extra capital required to become the cooperative is a small sum -- something that can and will be provided by the members of the organization. 

Sheikh Hasina is entirely correct. Cooperatives are indeed a piece of the puzzle in abolishing rural poverty. But we must not forget that the usual answer to any question in economics is “it depends.” Here, the interesting part being well, when isn't socialism the answer -- the answer is when lots of financial capital is required. 

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.