Friday, June 7, 2013

A system that governs a community can either dissolve or exist for many years. Different systems attempt to allocate scarce resources in different ways i.e. land, labor, capital and entrepreneurship. These resources that are used to manufacture goods and services are called the factors of production.  A system that allocates these resources in the most effective manner can maximize profits. There have been many economic structures that have failed miserably in allocating resources and accomplishing its core goals. However, there are few that have used an alternative system of production which are successful. One of the few is the Mondragon Cooperative System. Co-operative Economics is an idea of people co-operating with each other to achieve a common goal using organization, governance, equity financing, operations and economics that are unique to cooperatives. The most recent financial crisis has threatened the reliability of Cooperative System nonetheless this system has sustained enough to be discussed among economists. The problem today is that we have gotten into a very vicious cycle in thinking about the relationship between business and society, the purpose of capitalism, and benefits of capitalistic system to society. Increasingly companies are being perceived as creating profit at the expense of the community, not creating profit that benefits the community. When questions like such come up, it is wise to re-think the system.
In 1956, Jose Maria Arimendiarrieta and a few graduates started a firm called Ulgor. At first they made paraffin heaters and cookers, all sold well. Their brand name became established but they realized that further developments required a company structure. Jose Maria, in his studies had read of a 19th century attempts to set up workers cooperatives. He was inspired by the work of Robert Owen but less so with the ideologies of Adam Smith or Karl Marx. Owen was a social and education reformer. In his cotton mill at New Lanark, he promoted industrial efficiency and the welfare of his workers. He was successful in reducing waste and raising productivity. He set up a school for child workers believing that through education people would eventually be able to govern themselves in prosperous cooperative community. He believed education was the key to a happier society, and universal harmony. Having profited enormously from the early Industrial Revolution, he did not care much about the profits, rather focused in the well-being of the workforce. The basic principle for organizing cooperatives are open membership, democratic control (one man, one vote), distribution of surplus in proportion to trade, payment of limited interest on capital, political and religious neutrality, cash trading, and promotion of education. These principles were known to Jose Maria. In 1959, Jose Maria recommended that Ulgor should adopt a cooperative structure and this was the beginning of Mondragon Cooperative Corporation.
            In Mondragon, the primary focus is in the labor which is highly related with capital. Workers earn a good salary and each worker owns a share of firm’s capital as the means of production. Salaries depend on the tasks they perform. The highest paid never gets more than three times the lowest. In addition, annual interest is paid on each capital holdings at a fixed rate of 6%. If at the end of the year the co-op makes a profit, this is divided in fixed proportions. 10% must be given back to the community for schools and activities, 20% goes to the co-ops reserve or reinvestment funds and 70% can be divided amongst the worker members. Each member share is proportional to his salary. The profits are added to his capital holdings where he earns cumulative interest. If a cooperative makes a loss, 30% of that loss is absorbed from the reserves. But the balance has to be taken away from the capital holding accounts of the individual members. When a member leaves, he must take his capital holdings out. In this way the cooperatives protect themselves from external controls.
Mondragon Cooperatives are stable and powerful. Their highly motivated workers result in higher productivity. There is no need to employ managers to supervise the workers. In fact they supervise the amount of quality of each other’s work. In doing so they get away with costly supervises which is an important gain in efficiency. 90% of all the profits are retained in the firm as either collective or individual capital. During a recession, workers are sent back to school. Once the production picks up, they go back to work. This makes them better qualified to cope with the changing shape of industry. However there have been some disputes caused by lack of communication. Consequently, it was decided that no cooperative would be allowed to exceed 500 people.
            Jose Maria was horrified by the human cost of the Spanish Civil War. There were endless disputes between management and labor. Even services like hospitals and schools were no longer exempt from strike. Jose Maria saw labor blaming the management and management blaming the labor. There were no incentives for anyone to work. He wanted to put a system together by which he would be able to create a happier society and greater productivity. When a new system comes along, it tries to solve the problems of the society. In Jose Maria’s case, he had seen companies taking advantage of workers to maximize their own wallets. Companies were creating profit at the expense of the community and not creating profit that ultimately benefits the community. Owen had faced similar issues. He had seen child labor during the industrial revolution which he was strongly against. He did not see workers getting what they deserve. He believed if every worker in the community makes a reasonable salary, the community can create its own self-regulating economy. He ran an experiment of his ideas in Harmony, Indiana. The experiment was established in 1825 and dissolved in 1829 due to constant quarrels. From 1828 Owen lost his partnership in the New Lanark mills due to increasing friction with some of the wealthy philanthropists who were co-owners. His dreams of making a happier society never came true.   
             America is facing tough times right now. With thirteen million Americans unemployed, 42 out of 50 states facing budget deficits, the gap between the rich and the poor getting wider and wider, American companies need to really reconsider reinvesting back in the country and create jobs. Robert Owen and Jose Maria did not believe that you can build a sustainable enterprise with the singular goal just on profit. The best part of business right now is trying to create the balance between profitability and social consensus. We are living at a time where citizens, business leaders, and corporations must do more to serve the communities that they live in and work in. Recently we have seen weaknesses in the capitalistic system. We must re-think capitalism to solve the problems that we are facing now.