Co-operative ownership – the liberal way

I have written before that co-ops and similar ventures are part of the rich tapestry of a market economy. After all, before the days of statutory regulation, the Stock Exchange was a mutual – you can’t get closer to the market economy than that. Co-ops and mutuals certainly have their limitations – access to capital and corporate governance being the two main ones. People complain about profit-making banks being owned by shareholders but mutuals can be captured by management and pay poor interest rates to savers and co-ops can be captured by a senior management clique without any possibility of facilitating change. There is a big literature on all this and I hope that Osborne’s team has read it. Neverthelessm, mutuals and co-ops definitely have their place. Three cheers for George Osborne’s attempts to create co-ops in the public sector then? Not yet.

As ever with Conservative proposals the small print is not easy to understand. What is proposed seems to be worker-managed institutions which have to accept public sector wages, conditions and pensions. Furthermore, though they can keep some of “surplus” the organisation makes (for some reason it cannot be called profit) they have to provide the type and quality of service that the state would like them to provide. Who actually owns the capital of the hospitals and schools that are “co-operatised” is unclear. This model seems to be much closer to the collectivised farms and so-called co-operatives in some communist countries than something to which free-market liberals should aspire. A union leader suggested that David Cameron was using the language of socialism. That would seem to be true – for good reason as the proposals seem to be socialist. But a few tweaks could set that right.

What would free-market policy in this area look like?

1. Co-operatives would be free to determine their own terms and conditions of employment.

2. Co-operatives would own the capital of the institution that was co-operatised.

3. Co-operatives would exist in an environment of competition for health and education in which the user of the services and not the state decided what was provided and how and the user of the services was the only arbiter of standards.

4. Other organisations must be allowed to compete (including profit-making schools) – yes let school and hospital co-ops have some first-mover advantage if that helps sell proposals politically but, unless there is competition, then co-operatives will be simply a different way of managing the provision of state-controlled services. If competition is not the arbiter of quality, the state will always step in.

In some situations (village schools, for example) co-operatives may get a substantial foothold in the provision of services, in others profit-making corporations may do better. It should be the user of the service that decides upon the nature of the provider, not the government.

What happens if co-operatives make losses? Would they be shared out among its members? I always regard the possible of going bust — and hence going out of business — as one of the glories of the market system. In contrast, state monoparechies (single suppliers) seem to last for ever, no matter how inefficient and unable to satisfy consumers of their services.Perhaps that is one reason for opposing taxpayer (compulsory) financial support for political parties. If the Labour Party, for example, were unable to attract enough money from its supporters, it could simply disappear.

I think that Conservative party might have disappeared had it not been for taxpayer support in the last 12 years! And perhaps the Liberal Democrats too. That would have created an interesting situation. Members would have stood in individual constituencies, unsupported by a central national organisation and then, no doubt, formed themselves into alliances or parties when they got to Westminster recreating the situation that existed in the nineteenth century. It worked rather well.

Another factor that has to be considered is the membership of the co-op. It’s not always the workers that should be the members. For example, in a housing co-op, the tenants should be the members. Co-operative stores were originally formed by communities that didn’t have access to safe, affordable food. In that case, the shoppers formed the membership. For schools, perhaps the parents should be the members. For further and higher education, perhaps the students. Or maybe a mixed membership? The PTA would be an obvious choice for a school, for example. D.R. Myddelton: co-ops are usually limited companies. The members are shareholders, and so have protection against creditors.

“If competition is not the arbiter of quality, the state will always step in.”It would be clearer to say that service users should be the arbiters of quality, and only a competitive system can put them in the driving seat. ‘Competition’ doesn’t make the decisions, as it is an abstract concept.

thanks, it was a typo

One problem with co-operatives is that they become an end in themselves: their purpose is to co-operate rather than to provide a service. Likewise, the Conservatives focussing on this issue risks confusing means with ends.

All attempts at reforming the public sector under New Labour have floundered on the rock of trade union intransigence and the “we know best” of the professional educators, social workers etc. Giving these groups extra power is a big leap of faith. The John Lewis model is not a good analogue. JL have to compete against all the other retailers. How much competition do the Cameroons think that the unions – disproportionately strong in key parts of the public sector -will permit?

And I should say sorry for having glided over the fact that you’d put it correctly in point three! I’m perhaps just very alive to the dangers of putting things in short-hand: if we ‘get’ the idea of free choice then we understand what the short-hand stands for, but people who don’t agree can find talk of ‘competition’ and ‘the market’ all a bit impersonal.

I most certainly agree that the “co-op” ideas put forward by the Tory Party are not very advantageous, in particular where they envisage them – they replace a State-run monopoly with a co-operative operating a State-mandated monopoly. They will fall victim to the “third party payer” problem that most of the NHS and Educational apparatus suffers. As for your points 1. Agreed2. A Co-op handed a prime site might asset-strip unless re-investment was enforced somehow – a lease? If the co-op keeps profits, the original owner of the asset (taxpayer) cannot be left out. Can get messy, but must not be overlooked.3. Agreed, if and only if private entities are also competing, as you say in 4.

There are ways of preventing asset-stripping. For example, constitutions can require that assets remain within the co-operative movement. Charities and community interest companies have similar requirements. Other similar models could be devised.Land value taxation would be a sensible way to recompense the taxpayer.

@Ian Eiloart,Yes, constitutions can prevent, but can be amended. I am not sure I like the sound of “within the co-operative movement” either! That could cover “social housing” and all manner of things. Redevelopment churn is lucrative. Covenants on a lease are trickier to bypass.As for Land Value Taxation, I have heard many attempts to explain LVT, but in each case the term “sensible” is non-sequitur. LVT does not know how far back to go while refusing to look ahead.

[...] Co-operative Ownership – the Liberal Way: I have written before that co-ops and similar ventures are part of the rich tapestry of a market economy. After all, before the days of statutory regulation, the Stock Exchange was a mutual – you can’t get closer to the market economy than that. Co-ops and mutuals certainly have their limitations – access to capital and corporate governance being the two main ones. People complain about profit-making banks being owned by shareholders but mutuals can be captured by management and pay poor interest rates to savers and co-ops can be captured by a senior management clique without any possibility of facilitating change. There is a big literature on all this and I hope that Osborne’s team has read it. Neverthelessm, mutuals and co-ops definitely have their place. Three cheers for George Osborne’s attempts to create co-ops in the public sector then? Not yet. [...]

@Tim CarpenterWell, a constitution can be amended, but only with the permission of relevant regulators. Covenants can also be rewritten, with agreement. And the laws that govern all of this can be changed. My point is that safeguards can be put in place, and they can be whatever is appropriate. For a care home, a housing co-op might well be appropriate. I’m not sure I understand what you mean about LVT not looking forward or back. It’s a tax on current and largely unearned wealth. After all, and acre of land has no inherent value in isolation – look at land prices on “Inaccessible Island”, for exampe

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