What Cooperatives Do: Market Access, Countervailing Power and Yardstick Roles Enhance Economic Efficiency

Article excerpt

The year 2012 has been declared by the United [Nations General (Assembly as the International Year of Cooperatives in order to highlight the contribution of cooperatives to socioeconomic development worldwide. That same year also will be the 90th anniversary of the publication of "Economic Philosophy of Co-operation," the first academic paper on the theory of cooperation, published in the American Economic Review (Nourse, 1922; Hess). The piece was written by Edwin G. Nourse, who later became the first chairman of the Council of Economic Advisers, Executive Office of the President, 1946-49.

This may be an opportune time to review Nourse's ideas on cooperation and see if they have relevance to the reality of the market performance of cooperatives today and, therefore, if they deserve to be relearned.

Nourse's primary focus, along with the oft-quoted "brief remarks" he made years later (Nourse, 1945), was on the role agricultural cooperatives played in the marketplace. This arose from his observation that the attempt to apply the cooperative form of organization to economic needs and problems in agriculture was critically important.

Purposes of cooperation

The following examples are taken from Nourse's paper to illustrate how farmers organize cooperatives to perform various market functions jointly and efficiently in various market situations--functions that cannot be satisfactorily carried out alone by individual farmers:

1) Cooperation for market access--An example is a small fruit-producing area far from any large market. The product is perishable, hence both risk and marketing expense are high. Volume is not large enough to attract a private distributor. Facing this situation, producers have the option of organizing a cooperative association to market their products. These cooperatives have frequently demonstrated the ability to achieve successful results where private outside entrepreneurship fails to perform.

2) Local to regional coordination--A local cooperative creamery may initially be effective in meeting the competition of other small, private creamery operations. However, when competing creameries have grown to be entities of great size, the competition must be met by a distributing organization of equal scope. This will often be achieved through federation of the cooperative creameries across a region which may embrace an entire state, several states or parts of a state.

3) Region-wide associations--In many instances, growers in horticultural regions have organized and integrated highly efficient businesses that serve producers across an entire production region by assembling, processing and distributing their products. These agencies have eliminated wasteful competition both at the local shipping point and at the central markets. Further-more, they are the instruments of the producer and owner of the goods, and hence are likely to be more aggressive in the effort to reduce expense and wastage in the handling process and to improve quality and enlarge outlets.

(Author's note: Cooperative organizations covering entire production regions have been most prevalent in California because of the characteristics of the state's economic geography. This type of cooperative organization was called "the California plan" and was promoted on a national scale in the 1920s by Aaron Sapiro, with varying degree of successes and failures (Sapiro; Larsen, et al).)

Countervailing power

The above examples show how cooperatives are organized and grow to enable farmers to exercise "countervailing power" in the market-place, although the term was not coined until the 1950s when economist John Kenneth Galbraith cited the type of cooperatives made famous by Sapiro as an example for his explanation.

Nourse certainly recognized the importance of countervailing power if cooperatives are to have a strong market position. As he stated: "Possibly the keynote of the philosophy lies in the idea that a means must be found for giving agriculture a type of organization whose productive and bargaining units respectively will expand in step with the growing needs of the agricultural techniques (and its accompanying capital demands) and of the size requisite to an effective bargaining position in contact with the units of commercial organization with which they must deal. …