JEOD - Vol.2, Issue 2 (2013)
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at t r i b u t i o n 3 . 0
All firms are cooperatives
– and so are governments
Yale Law School,
Oscar M. Ruebhausen Professor of Law, Yale Law School
To both the scholar and the layman, cooperatives often appear to be something of a sideshow in
and democratic governments as well, exhibit the basic form of a cooperative. As a consequence,
the study of cooperatives (in the narrower, conventional sense of that term) illuminates our
understanding of both investor-owned firms and governments and, conversely, much can be
learned about cooperatives by examining other forms of organization. This is already evident when
we examine the power and limitations of contemporary economic theories of the firm. At present,
however, we know much more about the economic factors that govern the viability of cooperative
enterprise than we do about the forms of internal corporate governance and external regulation that
also play a critical role.
enTrePreneurshiP, cooPerATives, nonProfiT orgAnizATions, Public enTerPrises,
PrivATe enTerPrises, governAnce, firm orgAnizATion
Publication date: 07 January 2014 | volume 2, issue 2 (2013) 1-10
classification: D21, l22 l31, l32, l33 | DOI: http://dx.doi.org/10.5947/jeod.2013.007
We live in a world of global capitalism; even the russians and the chinese are now rushing rapidly
down the capitalist road. in such a world, cooperatives might seem to many an economic sideshow – a
form of organization that is helpful, perhaps, in marketing agricultural products and a few similar special
roles but, whatever its appeal as an ideal, largely impractical elsewhere. but this is a mistaken view. broadly
considered, the cooperative is the dominant organizational form in market economies today. virtually all
privately-owned enterprise has adopted the cooperative form, as has most governmental enterprise.
This view of economic organization depends, of course, upon one’s definition of a “cooperative”. The
conventional definition is that a cooperative is a firm that is collectively owned either by its customers
(a consumer cooperative) or by its suppliers (a producer cooperative). if we use the term “patrons” to
encompass all persons who transact with a firm, whether as sellers of inputs or as purchasers of outputs,
then we can say, more generally, that a cooperative is a firm that is owned by (a subset of) its patrons. in
saying here that a cooperative is “owned” by its patrons we mean that the patrons share in the two rights
that, together, conventionally define ownership: the right to share in the organization’s profits and the right
to share in control of the organization. in particular, profits in a cooperative are commonly allocated to the
organization’s patron-owners in proportion to the volume of their patronage (the amount they purchase
from the organization in a consumer cooperative, or sell to the organization in a producer cooperative),
while control (commonly in the form of voting rights for election of the organization’s board of directors)
is commonly allocated either according to patronage or simply as one-member-one-vote. Thus, in a
workers’ cooperative, profits are generally allocated according to the value of the labor each worker-owner
contributes to the organization, and votes are allocated the same way or per capita.
2. Business corporations and governments are also cooperatives
With these matters of definition in hand, a bit of reflection shows that, in fact, nearly all privately-
owned firms are cooperatives. This includes, in particular, the conventional investor-owned firm – the
business corporation, or joint stock company – that we are accustomed to labeling “capitalist”. such firms
are simply a subset of producer cooperatives that we might call “capital cooperatives”. They are owned
collectively by the persons who supply capital to the organization, with an individual owner’s share in both
profits and voting rights determined by the amount of capital they have contributed.
nonprofit firms are the only form of private enterprise that is not, in effect, a species of cooperative.
nonprofit firms are not owned by their patrons; indeed, they are not owned by anyone at all. They are
characterized by a division between those who control the firm and those who receive the net benefits it
confers. There is, moreover, a corresponding difference in the economic role generally played by nonprofit
firms and cooperative firms. nonprofit firms typically serve to protect consumers in situations where the
consumers have great difficulty in judging the quality or quantity of the goods or services that the firm
produces for them. cooperative firms, as we will discuss shortly, instead typically serve to protect one or
another class of a firm’s patrons when the firm has a degree of market power over those patrons, generally
because the firm is in a position of monopoly or because the patrons are otherwise locked into dealing with
the firm (hansmann 1980, 1996).
sometimes the term “cooperative” is applied to firms that are in fact nonprofits – that is to say, to
firms whose nominal patron-owners have no meaningful degree of control over the firm’s senior managers,
different role than firms that are truly owned – and hence controlled – by their patrons, we can best avoid
confusion by confining the term “cooperative” to firms of the latter type.
by these definitions, governmental enterprise, and indeed governments themselves, are – in contrast to
nonprofit firms – in effect another species of cooperative. We will return to this issue below.
it follows that nearly all enterprise is organized in the cooperative form, which is to say that nearly all
firms, private and public, are owned by one or another group of their customers or suppliers. Why is this
the case – that is, why is productive enterprise typically patron-owned?
The reason, evidently, is that ownership by one or another class of the firm’s patrons serves to protect
those patrons from exploitation by the firm. The exploitation involved is commonly simple monopolistic
exploitation deriving from market power on the part of the firm vis-à-vis the patrons. That market power
may come from actual monopoly, in the sense that economies of scale lead to domination of the market
by a single firm. Alternatively, the market power may derive from ex-post lock-in, in the sense that the
patrons in question must make transaction-specific investments in their exchanges with the firm that
render them vulnerable to opportunistic exploitation in future negotiations with the firm over the terms
of their transactions.
As a simple illustration, consider an example from the past. in the united states decades ago, small rural
towns commonly had only enough demand to support a single “general store” that sold food and other
household necessities. That store was therefore in a position of natural monopoly. To avoid the possibility
that the store would use its market power opportunistically to keep prices well above cost, these general
stores were commonly organized as consumer cooperatives, collectively owned by the members of the local
community who were their customers.
but consumer cooperatives such as this, with individuals as members, are extremely uncommon in
the united states today, and in much of the rest of the world too. owing to better transportation and
greater urbanization, markets for food and other household items are today generally quite competitive
everywhere. consequently, consumers of such goods are no longer subject to monopolistic exploitation
(hansmann 1996, ch. 8). grocery stores, like most other retailers, are today almost uniformly organized
as capital cooperatives (i.e., investor-owned firms) rather than consumer cooperatives, since today the
providers of capital, rather than customers, are the firm’s most vulnerable patrons.
Why are suppliers of capital vulnerable? The answer begins with the observation that, if a firm is
owned by someone other than its suppliers of capital, the firm must borrow the capital that it needs. This
borrowed capital, moreover, must be obtained as long-term debt; if borrowing were short-term, the need
to constantly renegotiate the debt would expose the firm to holdup by its creditors. but when the firm
borrows long-term, the shoe is on the other foot: the lenders are exposed to opportunism on the part of
the firm. for example, once a firm is highly leveraged, its owners have an incentive to engage in more
speculative projects, shifting increased risk onto its creditors. Potential creditors of the firm, in turn, will
often anticipate opportunistic conduct, and raise the interest rate they charge. in the end, the firm will
face an inefficiently high cost of capital, but will still only earn a market rate of return on its investments.
ownership of the firm by contributors of capital, in contrast, largely removes this problem by putting the
contributors of capital on both sides of the transaction, in the form of equity investors (i.e., shareholders)
who are both lenders to, and owners of, the firm.
This is not to say that consumer cooperatives have disappeared from the American economy, or from
other developed economies. rather, most consumer cooperatives today are owned, not by individuals, but
instead by other businesses to which they provide inputs. A prototypical example is offered by the visa credit
card network. visa was originally created and owned by bank of America. other, smaller banks purchased
franchisee bank would then be responsible for selling the credit cards and for providing the credit extended
to individuals who purchased the cards. eventually, however, bank of America encountered resistance
from current and potential franchisees, which were concerned that bank of America might eventually take
advantage of the franchisee banks by imposing upon them ever harsher terms. The result is that, in 1970,
bank of America sold the visa trademark and payments network to a cooperative collectively owned by its
numerous franchisee banks – a form of organization it retained until 2007, when visa, presumably facing
stronger competition, reverted to investor ownership through a massive public offering of stock.
governments – or at least democratic governments – are another well-established form of consumer
cooperative. in effect, a government is a territorial cooperative. local governments, for example, typically
provide services that are local monopolies, such as roads, police, firefighting, and schools. The local residents
and businesses that consume these services become locked in by purchasing real estate in the territory
served by the local government: if the price charged for government services increases, or the quality of
those services decreases, the consequence is a decrease in value of that real estate, leaving the residents
worse off whether they remain in the jurisdiction or leave it for another. (lock-in to a government – as
to employers in general – also results, of course, from difficult-to-change employment, established social
relationships, etc.). it is therefore sensible to have the supplier of such services owned by the consumers,
who can use their control to assure that the prices charged for the services are kept close to their cost.
it follows that the question of economic organization faced by society is not “should we have more
cooperatives?” rather, the question is “What kind of cooperatives should we have?” That is, which set of a
firm’s patrons should own the firm? if we put the question this way, we can see a bit more easily what is at
stake in matters of ownership.
in determining which set of an organization’s patrons should own the firm, there are two basic
considerations. The first is: which group of patrons is most subject to exploitation by the firm? The second
is: which group of patrons can govern the firm most effectively?
so far, we have been focusing on the first
were all that is involved, the most vulnerable group of patrons would be the natural owners of the firm. but
some patrons are in a better position to control the firm than are others – for example, because they have
better access to information about the firm, or because they are easier to form into an effective governing
body. And the patrons most vulnerable to opportunism on the part of the firm may not be the patrons
best able to govern the firm. so there can be a strong tradeoff in choosing which group of patrons should
own the firm.
To see what is involved, it helps to begin by focusing on a classic two-person partnership in which
one partner provides the necessary capital while the other partner manages the business. it is common in
such firms for the two partners to share ownership equally, so that both must agree upon any significant
decision regarding the firm. The result is a reductive form of producer cooperative – a mixed capital/worker
When a firm has a larger number of owners, however, it is rare for those owners to include diverse types
The calculus of ownership described here follows that in hansmann (1988, 1996).
both simultaneously. ownership is almost universally confined to a single class of a firm’s patrons – such as
workers, customers, suppliers of a particular input, or lenders of capital. moreover, the class of patrons that
owns the firm is typically highly homogeneous with respect to its members’ interest in the firm. successful
worker-owned firms, for example, are generally not owned by the entirety of their employees, but rather
by a highly homogeneous subset of the employees.
The evident reason for this is that, absent substantial
in terms of the effort that must be put into decision-making and in terms of the quality of the decisions
made. And this cost of governance frequently overwhelms other considerations in the choice of owners.
This is evidently an important reason for the ubiquity of capital cooperatives: it is easy to structure the
terms of investment so that all investor-owners have highly homogeneous interests (namely, to maximize
the firm’s profits per unit of invested capital), while it is much harder to induce such homogeneity among
the interests of customers, employees, or suppliers of other inputs.
Discipline is another problem. even for firms with relatively homogeneous owners, it is often difficult
to take action to impose discipline upon individual owners, or to expel owners when downsizing the
firm is called for. An important reason for this seems to be that a strong norm of equality of treatment
among members of the class of owners is necessary to constrain the costs of collective decision-making,
but the same norm makes it difficult to single out individual owners for discipline or downsizing. This
seems to explain why collective ownership of a franchisor by its franchisees can be successful where the
quality of an individual franchisee’s performance has little effect upon the success of the franchise system
as a whole – as in credit cards (visa), hardware stores, and trucking firms, all of which at some point have
been characterized by successful franchisee cooperative ownership – but not where bad performance by
an individual franchisee can have a negative effect upon the success of other franchisees, as in fast food
retailing (e.g., mcDonald’s). capital cooperatives are much less subject to these problems, presumably
because of greater homogeneity among the owners (and hence less likelihood that one owner needs to be
disciplined for the benefit of the others) and because the divisibility of capital contributions (as opposed
to, say, retail stores or workers, which are lumpy) allows the costs and benefits of downsizing to be shared
equally among all owners of the firm.
consequently, though many firms have substantial market power toward their customers (or employees
or suppliers), they are nonetheless formed as investor-owned firms (capital cooperatives) rather than as
consumer (or worker or supplier) cooperatives, for the simple reason that the customers (or workers or
suppliers) cannot exercise effective control over the firm. Were it otherwise, microsoft might be more
efficiently organized as a consumer cooperative.
4. The theory of the firm
viewing organizations in the terms we have been using offers a useful perspective on the strengths and
limitations of current economic theories of the firm. The most prominent of those theories is the “property
rights” theory of the firm with roots in the work of grossman and hart (1986, 1995). in essence, that
theory focuses on what the firm owns, and does not directly address the question of who owns the firm.
The spanish industrial worker cooperatives, including particularly those at mondragon, have long been a conspicuous and
consider again the visa credit card operation. The corporation holding the visa trademark and
central transaction clearing operations had, as we have noted, substantial market power over the many
independently owned banks that sold credit cards under the visa trademark, and provided the credit for
the cards they sold, as franchisees. An obvious way to avoid inefficient use of this market power would be
vertical integration, with the franchisor – the corporation owning the trademark – purchasing and owning
the franchisee banks, and combining them all into one huge bank. but that approach threatens to dampen
incentives for the efficient operation of the local banks, whose managers would then be controlled by other
managers higher in the consolidated firm’s line of control rather than by local controlling owners with
good information about the local bank and a direct stake in its profitability.
in effect, as grossman and
(owner–) managers or by the franchisor. strong incentives for efficient management of the local bank favor
its independent ownership, while elimination of inefficient exercise of monopoly power favor its ownership
by the holder of the visa trademark. under the property rights theory of the firm, efficient organization
stops here with the choice of the least costly option: a patron of a firm (or rather, the patron’s assets) is
either owned by the firm or independently owned and connected to the firm only by contract.
When we view firms as cooperatives, however, we see that it is often possible to choose a third ownership
structure that solves both the incentive problem and the monopoly problem. in the credit card example,
that solution is to keep the local banks separately owned to maintain incentives for their managers, while
removing the incentive for exploitation of monopoly power by the franchisor by having it, in turn,
collectively owned by its franchisee banks.
in fact, this analysis of credit card franchise relationships applies, in general terms, to nearly all firms
with shared ownership. There is in each case a set of patrons who are subject to opportunism on the part
of the firm, and also some reason why that problem cannot be solved by having the firm assume ownership
of (the assets managed by) those patrons. reasons for leaving the patrons independently owned include,
beyond giving high-powered incentives to local managers (as discussed in the bank example), the illegality
and inefficiency of slavery (which would result if a firm owned its workers) and the fact that a patron of one
firm is likely to be a patron of many other firms as well. Yet the patron cannot be owned simultaneously
by all its various patrons. rather, it must relate to most of its contractual counterparties via contract rather
in sum, the property rights theory of the firm offers insight into what assets are owned by a single firm,
but requires some extension to address the closely related problem of who, in turn, owns the firm.
over the long term, there seems to be a tendency for capital cooperatives to replace other kinds of
cooperatives in any given industry. or, put in ordinary parlance, there is a tendency for ordinary investor-
owned “capitalist” business firms to replace the non-investor-owned firms that are conventionally termed
cooperatives. one reason for this is that governmental regulation often develops to mitigate the market
in talking loosely about incentives here, i take some liberties with grossman and hart’s original model for the sake of intuitive
by banks and insurance companies, first introduced in the united states in the middle of the nineteenth
century, permitted the replacement of cooperative and mutual savings banks and insurance companies
with investor-owned firms. similarly, the development of the antitrust laws has reduced the incentive to
form agricultural cooperatives, and the development of rate regulation has reduced the need for utility
Another reason for the tendency toward investor ownership is that, even without government
intervention, experience leads to more efficient markets for firm inputs and outputs over time, reducing
the need to protect the patrons who supply those inputs or buy those outputs by making them owners
of the firm. one example of this is the evolution of hospital insurance in the united states, which was
first developed in the 1920s as a cooperative venture among a group of hospitals, presumably because
the cost of providing such insurance was originally unclear, making it an exceedingly risky business for
an investor-owned firm, and also because the provider of such insurance in its early days would have
substantial market power owing to the economies of scale involved. similarly, the development of futures
markets for agricultural products reduced the monopolistic power of the purchasers of farm products, and
thereby reduced the benefits of forming agricultural marketing cooperatives among farmers. And, turning
to worker-owned enterprise, American law firms, long owned by the lawyers who practice in them, are
arguably now ripe for conversion to investor ownership, in important part because it has become much
easier for outsiders to a law firm to evaluate the talents of individual lawyers within the firm, and thus
create an active employment market for established lawyers, thereby reducing the extent to which lawyers
are locked into the particular firm with which they began their career.
And, as old types of cooperatives disappear, new types proliferate. Patent pools and standard-setting
organizations might be seen as important examples.
6. Some implications for research and policy
The importance of the costs of collective decision-making in cooperatives raises a question for policy
– namely, can those costs be reduced somehow? There has, of course, been an enormous focus upon
this question – under the name of “corporate governance” – regarding business corporations (capital
cooperatives) in recent years. unfortunately, there has been comparatively little systematic research – at
least among legal scholars – on governance in non-capital cooperatives, with the exception of territorial
cooperatives (which is to say, governments). Through closer study of governance in other types of
cooperatives, it should be possible not only to make those alternative types of cooperatives more effective,
but also to gain perspective that will permit improvements in the governance of conventional business
corporations, and in the structure and management of government at all levels – i.e., in the governance of
The transitional character of non-capital cooperatives suggests that it is important to keep organizational
law sufficiently flexible to permit cooperatives of all types to be organized and operated in any industries
where they may prove useful, and likewise to permit firms organized as non-capital cooperatives to convert
to investor ownership – i.e., to become capital cooperatives – when altered market conditions make that
change efficient. Thus it is important to facilitate the formation of cooperative research ventures among
firms in high-tech industries that wish to avoid the obstacles created by patent monopolies, just as it
is important to facilitate the conversion of consumer retail cooperatives to investor-owned firms when
sufficiently flexible concerning internal affairs to permit firms to adapt to a variety of environments, as for
example by allowing diverse voting schemes (one-member-one-vote as well as votes allocated according to
volume of patronage) and a variety of approaches to redemption of capital for exiting members (from a
right to immediate redemption to any of various forms of staged and conditional redemption).
cooperatives are firms that are owned by one or another class of their suppliers or customers. once one
realizes that nearly all private firms – and democratic governments too – essentially have that structure,
it becomes apparent that the principal question regarding enterprise ownership is not whether the firms
in any given industry will be owned by their patrons or not, but simply which class(es) of patrons will
be made the owners. We have made some progress in understanding the economic factors that bear on
the answer to this question. but there is every reason to believe that the answer also depends heavily on
the governance structures that firms can and do adopt, which in turn depends on the surrounding legal
and institutional environment, including organizational (corporation) law, capital market (securities and
banking) development and regulation, and labor law. recent decades have seen an obsessive focus on these
issues, by both economists and legal scholars, regarding capital cooperatives – which is to say, ordinary
business corporations. There has been much less attention to these issues as regards the viability of those
firms that we more conventionally term cooperatives – that is, non-capitalist and nongovernmental firms.
governance and financing becomes both broader and deeper.
bijman, J., van der Dangen, g., hanish, m. (2013). exploring innovations in internal governance in european
agricultural cooperatives. Tilburg law school legal studies research Paper series no. 018.
grossman, s., hart, o. (1986). The costs and benefits of ownership: A theory of vertical and lateral
integration. Journal of Political economy 94, pp. 691-719. http://dx.doi.org/10.1086/261404
hansmann, h. (1980). The role of nonprofit enterprise. Yale law Journal 89, pp. 835-901.
hansmann, h. (1988). ownership of the firm. Journal of law, economics, and organization 4, pp. 267-
hansmann, h. (1996). The ownership of enterprise. harvard: harvard university Press.
for a concise review of the current state of theory, law, and practice, see bijman et al. (2013).
Williamson, o. (1984). corporate governance. Yale law Journal 93, pp. 1197-1230.