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JEOD - Vol.1, Issue 1 (2012)
Acknowledgements
An earlier version of this paper was presented at the international conference: “Promoting the understanding of co-operatives for a
better world”, Venice, March 15-16, 2012. The paper has benefitted from comments from participants at that conference, notably
Alberto Zevi and Sonja Novkovic, and also from comments by Chris Gunn, Betsy Jensen, Mark Klinedinst, John Pencavel, Jeff
Pliskin and Jaroslav Vanek as well as research assistance by Matt Poterba.
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at t r i b u t i o n 3 . 0
Economies of Scale
Versus Participation:
a Co-operative
Dilemma?
Derek C. Jones
Department of Economics
Hamilton College, Clinton, NY 13323, USA
djones@hamilton.edu
Panu kalmi
Unit of Economics, Faculty of Business Studies,
University of Vaasa, PO Box 700, 65101 Vaasa, Finland
panu.kalmi@uwasa.fi
authors
JEL
Classification: P0; P13; L25; G340 | DOI: 10.5947/jeod.2012.003
We examine the proposition that, in co-operatives, the need for democracy must clash with efficiency
demands. To shed light on diverse issues surrounding this claim we distinguish different forms of
co-operatives and identify different meanings of democratic governance and forms of economies
of scale. One focus is on democratic decision-making within individual coops, including tensions
between members and managers and/or boards, and how processes often labeled as “degeneration”
can be averted. Another focus is on co-ordination problems among and between groups of co-
ops in a network, or second tier co-ops, and how innovative forms of monitoring and forms of
corporate governance may be expected to emerge in response to these potential difficulties. We
also integrate evidence drawn from the available econometrics literature with this discussion. Our
main source of empirical information is the provision of institutional evidence for the cases of
Mondragon and co-operative banks in Finland. We conclude that the evidence for an alleged
inexorable trade-off between democracy and efficiency is not compelling, but also note the need for
additional theoretical and empirical work.
CO-OPErATiVES, DEMOCrACy, EFFiCiENCy, COrPOrATE GOVErNANCE, MONDrAGON,
FiNLAND.
aBstraCt
KEY-WorDs
Publication date: 21 December 2012 | Volume 1, issue 1 (2012) 37-64
Economies of Scale Versus Participation: a Co-operative Dilemma?
Jones, D.C.; Kalmi, P.
38
JEOD - Vol.1, Issue 1 (2012)
1. Introduction
A commonly voiced proposition is that the need for democracy in co-operatives must clash with
efficiency demands. in a fast changing and globalized world, it is argued that market pressures, including
the need for economies of scale, require individual co-operatives to be continuously increasing their scale.
At the same time, this need for relentless growth is said to require changes in governance that tend to
undermine the democratic nature of co-operatives and thus the very essence of what makes co-operatives
different (e.g. Nilsson et al., 2009.) While some might object that technological changes during the last
twenty years or so, in particular the growth of the internet, have at least undermined the economic forces
that require steady increase in average plant/establishment size, there are several reasons for giving close
attention to this claim. One reason is that there is a body of work mainly on the Mondragon co-operatives
(e.g. Cheney (1999) and Kasmir (1996)) that has had considerable influence and which apparently tends
to support certain issues concerning the claim. A second reason this contention demands attention is that
often the concern is advanced by those with a deep knowledge of co-operatives themselves (e.g. Fulton
and Hueth, 2009; Parnell, 2010) rather than by others, including mainstream theoretical economists, who
may have limited first-hand knowledge of actual co-operatives.
1
Thirdly, the claim has long legs. A glance
at earlier literature on co-ops will find that this matter has long been actively discussed within the co-op
literature (See, e.g. Lambert, 1970; yamagishi et al., 1996.)
Since we are unaware of any recent work that systematically examines the theoretical and empirical
underpinnings for issues surrounding this claim, in this paper we make a preliminary step in that direction.
We seek to shed light on diverse issues surrounding this alleged inexorable trade-off between democracy
and efficiency and whether or not, as a result, all co-operatives must be considered organizations that are
necessarily unsustainable.
We begin by distinguishing different forms of co-operatives. in the third and fourth sections we
identify different meanings of democratic governance and forms of economies of scale. We endeavor to
show that, in principle, the nature and potential trade-off between democracy and scale economies is not
a straightforward matter. rather it can be expected to vary depending on factors including the particular
meaning of “democracy”. We also discuss how tensions between scale economies and democracy might
be predicted to appear and to vary by co-operative type as well as ways in which, in principle, different co-
operatives may be expected to respond, to varying degrees, to these problems.
One focus is on democratic decision-making within individual coops, including tensions between
members and managers and/or boards, and how processes often labeled as “degeneration” can be averted.
Another focus is on co-ordination problems among and between groups of co-ops in a network, or second
tier co-ops, and how innovative forms of monitoring and forms of corporate governance may be expected
to emerge in response to these potential difficulties. We also integrate evidence drawn from the available
econometrics literature with this discussion. But our main source of empirical information is of a qualitative
nature. We focus on primarily institutional evidence for two cases for which we have most knowledge
-- Mondragon and co-operative banks in Finland. in particular, we discuss ways in which these two
dissimilar co-operative cases have continued to thrive in recent years and yet have responded, albeit with
1
in the mainstream economics literature on co-operatives perhaps the most commonly accepted proposition concerning the
behavior of one important type of co-operative,
the worker cooperative, is that firms will respond perversely to product
price increases. Despite the existence of massive theoretical and empirical evidence to the contrary, the conventional wisdom
continues to accept the existence of a “backward-bending supply curve.”