Building an economy for people, not profit – Co-operative capital in a global economy

This clever trading arrangement only worked because of another less well-known feature: the funding of the business by members. Co-operative retailing could not start until impoverished individuals had saved sufficient capital to commence trading. Once they had done so, through trading co-operatively they could accumulate further capital through dividends (a post-facto readjustment of purchase prices), interest on capital, and further deposits. Brilliant.

In 1850, before the first Industrial and Provident Societies Act formally introduced the possibility of co-operative trading, the House of Commons had established a Select Committee on Investments for the Savings of the Middle and Working Classes. One of those who gave evidence to this Committee was John Stuart Mill. When asked about laws thought by some to be unjust and unequal in preventing working class people having fair play in the use of their “small capitals” compared with what is afforded to persons possessing greater wealth, he answered:

The advantages which the possession of large capital gives, which are very great, and which are growing greater and greater … are at present … to a great degree a monopoly in the hands of the rich, and it is natural that the poor should desire to obtain those same advantages by association, the only way in which they can do so. … I think there is no way in which the working classes can make so beneficial a use of their savings both to themselves and to society, as by the formation of associations to carry on the business with which they are acquainted, and in which they are themselves engaged as workpeople …

The legislation of 1852 did exactly that. Coming out of the friendly society roots, it enabled individual trades-people and artisans to form associations (productive societies) to carry on their business co-operatively. This worker-based model immediately provided a vehicle for the burgeoning customer-based (distributive) societies which were being established following the example of the Rochdale Pioneers.

This enabled the “small capitals” which concerned the Select Committee to be put to use as members capital. In 1844, the Rochdale Pioneers started trading with £28. Within five years it had grown to £1,194, and by 1880 it was approaching £300,000. According to the Co-operative Union’s statistics, by 1900 capital in societies across the UK exceeded £23 million. The Co-operative News regularly carried adverts by societies looking to do something with their capital.

In his book The Mystery of Capital written 150 years later, the Peruvian economist Hernando de Soto set out to answer the question of what prevents capitalism from delivering to other countries the same wealth it has delivered to the West. Arguing that no one had properly documented the capacity of the world’s poor for accumulating assets, he and a hundred colleagues from six different countries “closed our books and opened our eyes – and [went] out into the streets and country-sides of four continents to count how much the poorest sectors of society have saved. The quantity is enormous. But most of it is dead capital.”

Capital is dead without the mechanisms to bring it to life. The small amounts of cash owned by lots of impoverished people in England were brought to life by co-operative trading from 1844 onwards.  At that time, there were no high street banks or financial services for ordinary citizens.  Cash was at risk, whether left at home or kept in the pocket. Safe-keeping of cash was a benefit.  A small rate of interest was a positive bonus.  Co-operative trading breathed life into capital, and in so doing enabled those with the greatest need to gain access to wholesome food.

The capital which businesses use for trading – both in Victorian and modern times – is money which we do not need today but will need later.  Our pension savings and insurance premiums today comprise a substantial amount of the capital used by UK businesses. But what we expect from our savings for tomorrow shapes how businesses behave today. If we simply want our savings to secure the highest rate of return, then we can’t complain if the businesses which use those savings are driven solely by the need to maximise return on capital.

The challenge for today is to help people to understand that if they don’t like a world dominated by businesses solely pursuing economic objectives, then people need to change how they behave. The patterns of our individual economic behaviour – as customers, as workers, as savers – shape the world we live in. If we want the world to be different, we had better make different choices.

There are many who say that to meet the challenges of today, co-operatives need to be able to attract capital; from investors, from the market, and from institutional providers of capital. This is to fundamentally misunderstand not only the nature of a co-operative but the nature of the problem we face today. We have the capital; it’s just that we are using it in the wrong way.

If co-operatives simply try to compete for capital with for-profit businesses, they will either fail or they will cease to be co-operatives. If we truly believe in the importance of the values and principles of co-operation, we should make sure that those values and principles are being followed by the societies we do business with, and then we should be happy to entrust our savings to them.

There is just one problem. Most of them don’t want our money – at least, they do not want us to provide it to them as the bespoke form of capital designed for a pre-consumer age, namely withdrawable share capital. That was exactly what was needed in 1850, and it worked. It doesn’t work so well today, as is evidenced by the fact that most large registered societies (including both co-operative and community benefit societies) do not use share capital to fund their business.

There is no prospect of co-operatives becoming anything other than marginal players in a global economy without a new financial instrument which meets the needs of savers and businesses. It needs to provide an exit for savers, with stability for the business. This requires a new deal between the society and those entrusting it with funds; not a deal involving forecast levels of earning, but a deal about how the business will and will not behave, to its customers, workers and communities.

And that deal needs to be enforced, by members holding to account those entrusted with the power to manage their society according to the values and principles they hold dear.

Pie in the sky?  I don’t think so; it’s the future.

For more information

Please contact  Cliff Mills

This article is the fourth in a series of four articles written by Anthony Collins Solicitors.  To read the others please click on the links below:

• Building an economy for people, not profit – Social Business
• Building an economy for people, not profit – Communities and Co-operation
• Building an economy for people, not profit – A Co-operative Vision for Public Services

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