Owners of corporations are stockholders, and their power derives from the amount of stock they own (their proportion of the investment). Co-op members are the owners, determined by the enterprise’s bylaws and the fact that they have invested at all in the co-op (no matter how much or how little). Co-op members all have equal voting power (“one person, one vote”), and their influence on the cooperative depends on their participation in and use of the cooperative. Surplus distribution is decided jointly and shared relatively equally. These differences in structure and procedure provide cooperatives with different mechanisms and unique functioning for conducting business—and they often give cooperatives an advantage over other types of businesses.
Cooperatives are not just economic enterprises; they are also relatively homogeneous associations of people who have come together to address a common need or want, which “reduces to a minimum potential frictions and suspicions within the aggregate” (Emelianoff 1995, 250). Traditional neoclassical economics lacks a theory of democratic or social enterprise, because “the firm is seen as a technologically specified black-box or, from the institutional viewpoint, as a piece of property, a capital asset—not a community of work qualifying for democracy” (Ellerman 1990, 207; see also Fairbairn 2003). Emelianoff (1995) tried to apply pure neoclassical economic theory to the theory of cooperation, and while he could describe what cooperatives are, he had trouble categorizing them as economic enterprises because of their social aspects and their function for use rather than for profit. Emelianoff seemed more comfortable categorizing cooperatives as some kind of not-for-profit organization without an economic basis, i.e., not a business. Fairbairn (2003, 3) notes that business leaders, policymakers, and mainstream economists view cooperatives as burdened and marginal and as more likely to fail because they are expected to do more (i.e., they are hindered by the expectations of and obligations to their members), but they cannot raise capital from markets in the same way as other business corporations. Spear (2000, 510) turns this notion on its head and expresses the concern that for-profit businesses, in their quest for excessive profits, exploit situations to provide inferior products and services. Spear observes that asymmetrical information and lack of opportunity to monitor quality create a failure in the ordinary contractual processes so that exploitation can occur. This gives not-for-profit enterprises an advantage as companies that can build and depend on trust, reciprocity, and transparency.
Emelianoff (1995) had no theory of the social enterprise when he wrote about the economic theory of cooperation in 1948. Later in the twentieth century, as scholars developed theories of not-for-profit enterprises, social entrepreneurship, the social economy, and the solidarity economy, there was a better understanding of cooperatives as economic enterprises with unique strengths. Today we have a much better understanding of not-for-profits and of organizations that operate economically and within some kind of market using monetary exchange, but where making a profit is not the primary purpose. Spear, for example, explains that demand-side theories of contract failure and excessive market power help to explain how state and market failures lead consumers and workers to search for alternatives that base economic exchanges more on trust and transparency (2000, 510). In addition, supply-side theories that focus on agency and the dynamics of institutional choice (508–9) contribute an understanding of social entrepreneurship and historical legacies to the understanding of cooperative effectiveness and efficiencies.
The Cooperative “Advantage”
Spear sums up the current understanding of the economic and social advantages of cooperatives: the associative nature of cooperatives and their tight connections with community “provide a uniquely favourable basis for the utilization of social capital, its reproduction and accumulation.” This attracts nontraditional resources, reduces costs of ownership, provides “a network of [reciprocal and] trust relationships which reduce asymmetric information and opportunistic behavior,” and allows “more efficient economic exchanges and activities” (2000, 519). Cooperatives address market failure, asymmetric information, distrust of opportunism, excessive market power, and barriers to entry.
As early as the 1920s there was clearly a growing concept of cooperatives as economic entities that solve economic problems in different ways than conventional for-profit businesses. For example, the director of the Division of Foods and Markets of the New York Department of Farms and Markets argued that “there is scarcely a duty connected with the marketing work that we cannot accomplish more effectively by the path of organization of cooperative enterprises than we can through any means of governmental control or governmental direction that did not involve cooperative effort” (Jones 1920, 51). He also argued that cooperative organization was the best way “to accomplish standardization, uniform packing and more economical methods of shipping” in the private sector, and to change distribution conditions: “if you have a consumers’ organization that is distributing foodstuffs solely for use, you can change the physical facilities and change the methods of doing business and approach your whole problem from the standpoint of rendering the most efficient and economical service to the people” (53). The chair of the Committee on Cooperative Organizations of the Division of Foods and Markets also noted that cooperatives allow “uniformity of shipments.” In addition, the committee emphasized the role of cooperatives in facilitating “needed market reforms,” writing that the cooperative organization “often increases the price to the producer and lowers it to the consumer by eliminating abnormal profits, wastes and losses between the two”; “enables the grower to understand commodities and discuss them in the same terms with the purchaser”; “makes possible better business methods in dealing with the buyer, transportation companies, etc.”; and disseminates “valuable information to help prevent losses in business” (White 1920, 29–30).
Others have studied the social purpose of cooperatives. Also writing in 1920, Ruby Green Smith noted the “loyalty to collective action that shall result in the greatest good to the greatest number” (1920, 16). Bristow Adams observed that “successful cooperation means the ability to work so that the other fellow can work with you” (1920, 48). The president of the Cooperative League of the USA, James P. Warbasse, noted that “the fundamental principle of cooperation is the principle of democracy” (Warbasse 1920, 26). These early twentieth-century views of cooperative enterprises anticipate Vanek’s (1971) notion of active participation, Ellerman’s (1990) concept of universal membership, and Fairbairn’s theory of interlocking and multidimensional relationships between members and the co-op: “a co-operative has powerful advantages because of its integrated, flexible and dynamic relationship with its members” (2003, 26).
How are these notions of business and democracy connected? Can there be an effective and efficient business that is also a social enterprise operating on the principles of democracy and equality? Cooperative economic theory gives us an understanding of communities of work (Ellerman 1990) and associations of people engaged in common economic activity that “aggregate the market power of people” (Birchall and Ketilson 2009, 10). Cooperatives are understood more and more for their unique contribution to economic development, particularly community-based economic development. Cooperative economic development is experiencing success in urban as well as rural areas around the world, developing—and surviving—as a response to market failure and economic marginalization