Making It Mutual: The Case for a Co-operation Policy

22^nd March 2013

Secretary General of Co-operatives UK, Ed Mayo, calls for a national co-operation policy

The UK has a competition regime, but still lacks some of the essential ingredients it needs for the nation to be competitive on the world stage in a tough economic climate.

At the heart of this is the need for a model to allow enterprises and their partners to co-operate in order to compete. My argument is that we have had a competition policy for some time. We now need a co-operation policy as a vital complement for economic renewal.

The conceptual framework for co-operation

The idea of co-operation as central to how society works is not new. For example, Adam Smith, thought to be the grandfather of western economics, argued in his Theory of Moral Sentiments that ‘sympathy’ was a central emotion. And, within evolutionary biology, there is a growing consensus on the role of co-operation over the long time frames of evolutionary processes.

Co-operation and modern economics, however, sit awkwardly together because within free market theory. The interaction of people within a market is extreme simple: agents with resource endowments bump in to each other, and both parties choose whether they want to engage in a transaction or not. The co-operation that sits behind someone coming to market at all is assumed. The co-operation that can make (non zero-sum) exchanges of greater mutual benefit is set aside.

We are lucky that the world doesn’t conform to theory, because then it might indeed be nasty, brutish and short. In reality, forms of social and economic co-operation emerge through a range of emotional, rational, legal, institutional, and organisational means. Sociologists and anthropologists have explored the extent to which our willingness to subordinate our interests to those of the group is part of human culture and nature. Biologists have explored how co-operation is the result of reciprocity designed to maximise the long-term self-interest of the species – in short, that the selfish gene can be best served by hosts that act in non-selfish ways.

In economics, in a paper entitled System Fitness and the Extinction Patterns of Firms under Pure Economic Competition, Paul Ormerod and Helen Johns examined models involving competition and co-operation. [1] The models described were Agent-Based Models, which are based on computer simulations rather than the limited mathematics of neoclassical economics. One model described by the authors was equivalent to perfect competition in free market theory: co-operation was non-existent. A second type of model allowed for a type of co-operation between agents. There were two results from this work that are important to note.

• First, the behaviour of the model that involved co-operation approximated the real world better than the model that involved only competition (technically speaking, the co-operative model followed a power law that was broadly similar to that observed in the real world).
• Second, the model that involved co-operation was far less volatile than the competition-only model, which suggests that co-operation helps in making an economy more resilient.

In Ormerod and Johns’ own words: “…models of pure economic competition do not provide a good description of how many industries actually behave, and … a certain amount of collaboration and co-operation between firms is required for the survival of an industry.” The implication for policy, in their view, is striking. “The enforcement of strict economic competition between firms by regulatory authorities, particularly in industries in which entry is relatively easy, runs the risk of causing large scale extinctions of companies.”

This is not to suggest that firms within industries ought to collude – there are unquestionably ‘bad’ forms of co-operation that reduce market competition and mean that consumers lose out. This is the enduring insight and value of competition economics and competition policy.

But it does emphasise that there is a space for ‘good’ forms of co-operation. Good co-operation can enhance consumer and market outcomes and should be at least understood and at best enabled by government and regulators. In work I am exploring on the economics of co-operation, there are six forms of good co-operation that I would identify.

1. Co-operation in the firm
2. Co-operation between firms
3. Co-operation and innovation
4. Co-operation and culture
5. Co-operation and well-being
6. Co-operation and the future

An example of the dynamics of these is included in the work by ResPublica in relation to northern Italy. The traditional districts and meta-districts in Lombardy contain important mechanisms of inter-corporate co-operation. Lombardy’s regional neighbour, Emilia Romagna, has developed one of the most productive co-operative manufacturing enterprise clusters in the world. Included within this is the extensive use of co-operative models of guarantee societies with small businesses as members – a European demand-side model of small business finance wholly absent in the UK. Their experience suggests that co-operation can and does co-exist with competition – economic co-operation at one level can indeed increase competitive advantage at another.

Similarly, the economist Robin Murray points, for example, to the key role of co-operation in the remarkable success story of the UK broadcast and film digital imaging industry. This was an industry that President Clinton said was more crucial to the US now than the auto industry, and where Britain became a world leader. “The reason was,” Murray explains, “that the industry and broadcasters, notably the BBC, worked together to develop a set of common standards (a 600 page manual constantly updated – which was adopted by continental Europe and the US) and a shared testing facility to ensure that inter-operability of products before they went into full production. Large firms co-operated with the small, the public BBC with the private. The state itself followed this shared pool of technical expertise.” [2]

Inter-firm co-operation can also change the market dynamics faced by businesses of different scale. The Italian, German and Danish examples of co-operative consortia relate to small and medium enterprises. They have a collective interest in accessing services with high economies of scale, which the large firms commonly provide internally. Here the contrast is not between competition and co-operation, but between co-operation and hierarchical management.
Co-operation also shapes economic competitiveness through the influence of culture. Mario Grondona has explored the role of culture in supporting or hindering economic development. He found that there were three groups of characteristics that explained success: norms relating to individual behaviour (strong work ethic, individual accountability, agency); norms relating to co-operative behaviour (value generosity and fairness, and sanction those who free-ride and cheat); and norms around innovation.

On these, the UK does not necessarily score highly. We have, for example, a very high proportion of workers (23%) that report, according to international surveys, that they do not feel engaged in their workplace. Staff engagement, remember, is often conceptualized as a two-way process – that employment is seen as a co-operative process, shaped not just by a formal contract but also a psychological contract. Low levels of economic co-operation in the workplace therefore come at a cost. Drawing on a methodology developed for the USA, I have estimated the annual economic cost of low co-operation in the UK workplace to be around £36bn. Boosting UK productivity comes down, for this part, to boosting UK workplace co-operation.

Towards a co-operation policy

There is a long history of interest in economic co-operation. John Stuart Mill argued in the nineteenth century that “we may through the co-operative principle, see our way to a change in society which would combine the freedom and independence of the individual, with the moral, intellectual and economic advantages of aggregate production.” [3]

How the UK harnesses the potential of economic co-operation is not straightforward, because yesterday’s policies for co-operation may not be the same as tomorrow’s. What can one nation state do, anyway, in the context of the free flow of capital, goods and business? Well, it helps to ask the question, rather than assume there is no answer. Even on issues such distributive justice, the fairness that underpins effective co-operation, there is more scope than often assumed. Samuel Bowles, who together with Herbert Gintis is one of the leading theorists of co-operation in economic life, argues for example in his book ‘The New Economics of Inequality and Redistribution’ that there are still national policies that are positive in terms of both equality and productivity. Widening ownership, in the co-operative and mutual model, is one policy that is recognised by both Bowles and Wilkinson and Pickett.

In reality co-operation is rife in all economic systems because it has value. And the circle of interest in co-operation has come round again. There is a growing interest in its role in economic success. In the pioneering book on economics by Eric Beinhocker, The Origin of Wealth, there were five times as many references to co-operation than there were to competition. In the context of new thinking in economics, Beinhocker noted that “co-operation is as vital an ingredient in economic development as ‘survival of the fittest’ individualism.” [4]

This does not mean that co-operation and competition are simple opposites. Nor that competition policy is any less important. Competition policy has developed and changed over time and will continue to do so. Its early days focused on supply-side interventions around antitrust, mergers and price fixing, while in more recent decades, this has broadened to encompass wider market competition, state aids controls, consumer choice and consumer behaviour. It is not inconceivable that there could be a grand unifying theory of market and economic policy that embraces both competition and co-operation, with the aim of finding the blends and contexts for effective wealth creation.

Co-operation and competition operate to a degree in balance and there are good and bad forms of competition, just as there are for co-operation. Good co-operation, though, as the nineteenth century Rochdale Pioneers saw it, is open to new people coming in, and open in the way it works. Bad co-operation includes closed cartels, and forums that are captured by those with economic power, such as multi-national companies that invest significant sums to pressure and lobby national governments. Co-operation mechanisms must therefore be designed with care, and they must be sensitive to changing requirements as the economy evolves. This paper has been a sketch, no more, towards such an approach.

By emphasising competition, the economic literature and our actual economic systems undervalue the gains to be made from good co-operation. It is time to consider the case for a national co-operation policy.

This article was originally published in ResPublica’s Making it Mutual: The ownership revolution that Britain needs, a collection of essays covering all areas of policy – energy, financial services, education, infrastructure, welfare, public services, competition – proposing entrepreneurial and innovative policy proposals for structural reform.