Are Co-ops Naturally Ethical or Moral? No, They’re Not.

Paul Thompson

What makes an organization ethical?

If you’re reading this, chances are you’re a supporter of the co-operative movement. It’s also likely that you would agree with a broad statement like “co-operatives are an ethical way of doing business” or “co-operatives are more like to act ethically than investor-owned firms.”

But how do we know that’s true? Is there something inherent to the co-op model that makes co-operative enterprises more morally sound than their competitors? If you believe the argument put forward by Dr. Morris Altman from the Newcastle Business School in NSW, Australia, the answer to these questions is a firm “no.”

Dr. Altman recently presented his research to faculty and staff at the Centre. Coming at the question of co-operative morality from the perspective of behavioural and institutional economics, he argued that because co-operatives are designed to meet the needs of their membership, there is nothing in their constitution that makes them more ethical than any other type of enterprise.

Central to Dr. Altman’s argument is the economic concept of “externalities.”. The idea is that a moral firm is one that internalizes all of its externalities. Externalities are economic-speak for costs that are not contained within a particular system or market. In this case, externalities would be costs that are generated, but not paid by a co-op. So a co-op that does not internalize its externalities would be passing on costs to people who are not part of the co-op, i.e. non-members. When we think of costs we usually think of dollars and cents, but costs can take many forms. Here are some examples of externalities (costs) that co-ops might fail to internalize (would pass on to non-members).

  • Degrading the environment through pollution or carbon emissions
  • Treating staff poorly (in a consumer co-op) or treating customers poorly (in a worker co-op)
  • Disproportionate consumption of public goods such as fresh water, fish stocks, or publically funded infrastructure

There are many other examples of these kinds of externalities, and it is not hard to think of examples of co-operatives that impose significant externalities on their communities. However, because co-operatives exist to generate value for their members, co-ops may not fully take into account the impact of their decisions on non-members. Moreover, co-operatives may not sacrifice their long-term sustainability by doing so. A co-operative enterprise can live a long and successful life by passing costs on to non-members.

Morris Altman

Dr. Morris Altman is Dean of the Newcastle Business School and Professor of Behavioural and Institutional Economics.

In response to his presentation, the audience focused on two major points:

First, there are actually two kinds of externalities: positive and negative. Dr. Morris’ presentation focused on negative externalities (imposing costs to non-members) but didn’t touch in depth on positive externalities (generating benefits for non-members). One can think of several ways that co-ops could create benefits for others. They could drive up wages in a labour market, advocate for better public policy, or – most importantly – build a more equitable economy.

To my mind, the most overlooked benefit of co-operatives is how they distribute benefits. Because benefits are granted based on patronage rather than investment, it is much more difficult for those with a disproportionate amount of capital to generate disproportionate gains as they would in a typical investor-owned firm. We are starting to learn about the dire cost of wealth inequality (see here, here, or here for example), and co-ops could be a powerful tool for reducing this disparity.

Second, while it may be true that co-ops have no operational or structural imperative to operate morally, the fact is that they often do, even more so than investor-owned firms. This is because they are values-based organizations. Not all co-ops are successful at upholding the co-operative values and principles, but when you have an organization that is built on these principles, it will naturally attract people who believe in them. However, belief is not enough. This is, for me, the biggest takeaway from Dr. Morris’ presentation: co-ops don’t make a difference just because they are co-ops. They make a difference because the people who own them constantly strive to be principled. Of course, this always starts with good governance.

In short, co-ops don’t work on autopilot. There is such a thing as the co-op difference which allows us to produce and consume in a more equitable and inclusive way, but it doesn’t happen on its own. It requires a dedicated group of people who uphold the values on which the co-op movement was founded.

Dr. Morris’ model suggests that in order for co-ops to compete, members must sacrifice some of their own benefits to avoid passing costs on to others. This is, perhaps, the true spirit of the co-operative identity; a spirit that recognizes the benefits of co-operation are worth the sacrifices.

Paul Thompson, Knowledge Mobilization Officer, Centre for the Study of Co-operatives, University of Saskatchewan