A Theory of Cooperation

Author(s): Frank Robotka

Source: Journal of Farm Economics , Feb., 1947, Vol. 29, No. 1, Proceedings Number
(Feb., 1947), pp. 94-114
Published by: Oxford University Press on behalf of the Agricultural & Applied
Economics Association

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 A THEORY OF COOPERATION*

FRANK ROBOTKA
Iowa State College

HE topic assigned was entitled "The Theory of Cooperation."

TBecause other attempts have been made to formulate theories
of cooperation, this attempt must be regarded as a theory. It is
limited to the formulation of a theoretical explanation of the eco-
nomic nature of the cooperative form of business organization, but
others have dealt with the problem even from this restricted view-
point. The outline here presented is necessarily brief and, therefore,
sketchy. It is in the nature of a summary of some of the basic
essentials as they are being developed in a manuscript for a book
on the subject which is in the process of preparation in collabora-
tion with Dr. E. G. Nourse, until recently of the Brookings Insti-
tution.

I. The Evolving Concept of Cooperative Association

In order to establish a point of departure for this discussion it is
desirable to trace in bold brush strokes the evolutionary course that
cooperative activity and thinking has taken and to outline the
limits to which cooperative ideas have developed.
Robert Owen's basic idea that through cooperation people may
provide for their own needs is as valid today as it was then, but his
ideas as to the extent to which they may do so and as to the means
to that end differ considerably from those held today.
The major essential differences between his views and those of
present day cooperators are:
1. Whereas he advocated self-sufficient communal colonies which
would provide all the goods and services needed and which would
eventually transform society, cooperative activity has long since
restricted its objectives to meeting particular needs through spe-
cialized business units functioning within the framework of the
existing exchange economy.
2. Whereas his scheme contemplated a community of interest in
property and common sharing of benefits, practical cooperators
have built upon a recognition of individual private property in-
* A paper presented at the annual meeting of the American Farm Economic
Association, Philadelphia, December 27, 1946.
Journal Paper No. J-1423 of the Iowa Agricultural Experiment Station, Ames,
Iowa, Project No. 725.
94

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 A THEORY OF COOPERATION 95

terests and of participation in benefits in proportion to participa-

tion in the activities of the organization.
3. Whereas Owen's scheme contemplated relying upon public
spirited citizens and philanthropists for capital, cooperators recog-
nize the necessity of cooperators themselves assuming responsibility
for providing the capital necessary, at least for the basic financial
structure, and, in fact, for all of the usual entrepreneurial responsi-
bilities.
4. Finally, whereas Owen's scheme contemplated essentially a
benevolent administration of the enterprise "from the top down",
cooperators insisted upon developing the latent capacity of people
to administer their own enterprises on a democratic basis.
Most of the considerations which have come to be recognized as
essential for the successful conduct of cooperative enterprises were
at least partially recognized even prior to Owen, and certainly
prior to Rochdale, but the manner in which they were finally
worked out and combined at Rochdale, provided the pattern for a
growth so widespread and permanent that it is generally regarded
as the turning point in the history of cooperative developments, at
least as applied to the field of consumer purchasing. This pattern
undoubtedly represents so practical an adaptation to certain wide-
spread circumstances that no essential changes have been made in
it since that time in its application to certain areas of cooperative
activity.
This pattern, however, has not proved to be the best adaptation
to other circumstances, particularly to those in the fields of agri-
culture, credit, finance, insurance, utilities, irrigation, and others.
The development of distinctive types of cooperation organization
in these other fields was as spontaneous and indigenous to other
parts of the world as Rochdale cooperation was to consumer co-
operation in Great Britain. In particular, the so-called nonstock-
nonprofit type of organization evolved by farmers represents not
only a spontaneous development but one that is indigenous to
agricultural areas of the world, particularly Switzerland, Denmark
and the United States. It is, moreover, regarded by many students
of cooperation as representing a significant advance in the evolution
of cooperative ideas comparable to that of Rochdale cooperation,
that is, as the second milepost, if not the final stage in the emergence
of a concept of pure cooperation.
The foregoing developments, however, represent developments

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96 FRANK ROBOTKA

in the evolution of cooperative activity in practice. What can we

say with respect to progress in the theoretical economic interpre-
tation of these practical developments?
Voluminous as the literature on cooperation is, by far most of it
deals with the subject from socio-reformistic, ethical, sociological,
historical, descriptive or promotional viewpoints, rather than from
the viewpoint of its strictly economic aspects. However, as early
as 1831, Phillip Buchez indulged in some philosophical speculations
in the latter direction. About three-quarters of a century later other
European students addressed themselves to the subject suggestively
from the point of view of economic interpretations. Among the
more significant contributions may be mentioned those of P6nta-
leoni, Rabbeno, Valenti, Mariani, Baranovsky, Liefman, and
Fuchs.
Valenti and Mariani in particular suggested ideas which are re-
flected in present day thinking. For example, Valenti accepted the
"hedonistic nature of the economic behavior of cooperators" and
pointed out that "cooperation is an organic part of the existing
system of exchange economy" and that cooperatives are one of
several "natural correctives to overcome the deficiencies of distri-
bution." Mariani, a follower of Valenti, appears to have penetrated
deeper than any of the others up to that time when he pointed out
that " . . . the members of a cooperative credit association con-
centrate [integrate]1 the functions of the organizers and of the pa-
trons [users] of credit; in marketing associations the functions of
manufacturing are fused [integrated] sometimes with the functions
of producers of raw materials and of middlemen; consumers co-
operatives, with complete potential restoration [integration] of pro-
duction for [with] consumption in some lines of activity at least
can bring in the most radical changes of this kind.... "2
Liefman's definition to the effect that cooperatives are arrange-
ments for the establishment of common facilities through which the
participants as producers or as consumers seek "to complete [their]
acquisitive or consuming activities," suggests that a cooperative is
an arrangement by means of which autonomous economic units
may jointly carry on activities common to their individual eco-
nomic pursuits. He also suggests that a cooperative is not a "firm",
but is a special form of business unit which is to be distinguished
1 Brackets are the author's.
2 Ivan V. Emelianoff, Economic Theory of Cooperation, p. 22.

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 A THEORY OF COOPERATION 97

from ordinary business units. He points out that "since a coopera-

tive is inherently furthering or completing the economic activities
of its members, all the members of cooperative associations neces-
sarily participate in the economic work of the association."3
Fuchs' analysis leads him to challenge some of the traditional
cooperative ideas, particularly the so-called "open membership"
idea, with reference to which, in workmen's cooperatives, he says
that considerations of efficiency dictate that membership shall be
limited to such numbers as will provide "an optimum volume of
employment."
American literature on cooperation is also voluminous, but again,
most of it deals with the subject primarily from historical and de-
scriptive viewpoints, with major emphasis on methods of organiza-
tion and operation. Most of this literature merely reflects the ideas
as they were molded by practical experience. As agricultural eco-
nomics emerged as a specialized field of applied economics in re-
sponse to the pioneering work of H. C. Taylor, T. N. Carver, and
J. L. Coulter, and as agricultural extension developed, agricultural
economists addressed themselves to the problems of the then de-
veloping cooperatives in agriculture and found themselves called
upon more and more to lend their assistance to cooperatives in con-
nection with the many problems incident to the rapid estension of
cooperative activity progressively from one commodity field to an-
other and from local to central markets. Although most economists
who have become identified with the economic problems of agri-
culture have contributed to the literature on agricultural coopera-
tion, few of them have attempted to deal with the subject from an
analytical or interpretive point of view designed to contribute to a
clearer understanding of the essential economic nature of the co-
operative form of business organization. Conspicuous among the
latter are Dr. E. G. Nourse and Dr. J. D. Black. Thus, although
there have been many writers, few have undertaken to advance the
thinking beyond traditional ideas.
Most American economists who have written on the subject
would probably accept the following general ideas about coopera-
tion:

1. Cooperative is a form of business organization-an economic

entity. It is an association whose members are its patrons. It is
organized by them and is essentially owned and controlled by them
3 Ibid., p. 26.

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98 FRANK ROBOTKA

and operated for their benefit as patrons. This is in general contrast

to business units operated for the benefit of either capitalists or
wage earners.
2. Regarding organizational and operational techniques, devices
and business practices, there is substantial acceptance of the so
called Rochdale "principles" relating to democratic control, limit
ing returns to capital, trading "at market prices," participation i
earnings on a patronage basis, prohibition of proxy voting, restrict-
ing control to active patron members, low membership fees, neu
trality in politics and religion, and so on.
The following additional ideas, however, represent a more ad
vanced stage in the evolution of cooperative thinking:
3. As to economic structure, Dr. J. D. Black says, in effect, tha
a cooperative is a horizontal combination of coordinate units, which
may serve many purposes of such units. However, when vertica
integration is contemplated, either forward toward consumers o
backward toward sources of supply, horizontal combinations are
essential among units which are too small to undertake vertica
integration individually.4
Nourse, of course, also recognizes that cooperation, as a means
of effecting large-scale organization, represents a process of vertical
or horizontal integration.5 These terms appear only once in th
entire book. And although the terms are not used at all in his article
"The Revolution in Farming," Yale Review, Oct. 1918, the idea of
integration is implicit throughout the article.
4. Regarding the economic relationship established among the
members of a cooperative, Black says that cooperation is the an-
tithesis of competition; that is, that the members cooperate rather
than compete as among themselves.6
5. Recognition of the implications of the nonstock-nonprofit
type of organization involves departures from Rochdale principle
in several essential respects. Nourse is undoubtedly the outstandin
interpreter of cooperation exemplified by this type of organization.
He raises the question as to "whether we are to regard cooperatio
merely as a somewhat different way of conducting the affairs of th
corporation ... or whether certain distinctive standards shall be
set up to embody certain specific doctrines of cooperation as a di

4 J. D. Black, Production Economics, Henry Holt, New York, 1926, p. 891.

5 E. G. Nourse, Legal Status of Agricultural Cooperation, The Macmillan Com-
pany, New York, 1927, p. 119.
6 Black, op. cit., p. 866.

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 A THEORY OF COOPERATION 99

tinct method of conducting business .... ," as contrasted with a

company which represents "a modified form of the ordinary profit-
seeking corporation, employing a particular scheme of profit shar-
ing. "7
His analysis stresses the following basic considerations:
6. Membership in a cooperative rests upon a personal basis,
rather than upon an impersonal financial basis. People will volun-
tarily coalesce on the basis of their community of interest, personal
qualifications, and ability and willingness to assume the obligations
implicit in mutual undertakings, particularly with respect to pa-
tronage, risks and costs. This is in contrast to concentrating a vol-
ume of patronage by competitive ("speculative") trading on the
basis of current market prices, in which case capital contributors,
as such, must bear the risks.
7. A cooperative thus conceived is a means by which participants
may more efficiently perform certain functions, processes or activi-
ties which are integrally related to the economic activities of the
participants. Such a cooperative is not an economic unit which
"pursues its own independent economic career."
8. Membership in a true cooperative is not identified with capital
contribution but with participation in the activities of the organi-
zation; the capital of such a cooperative is completely divested of
its traditional entrepreneurial connotations and is placed on a loan
basis.
9. Since a true cooperative is an association of human beings who
agree to assume mutual obligations in order to gain mutual ad-
vantages in connection with the performance of certain functions
common to their economic pursuits, nonmembers are not a part of
such an organization. Therefore, it is inconsistent for a cooperative
to deal with them. To do so almost inevitably results in the emer-
gence of elements of profits or losses which destroys the distinctive
character of a true cooperative.
Nourse's analysis as presented in his "Economic Philosophy of
Cooperation," American Economic Review, 12: 577-97, and par-
ticularly in his "Legal Status of Agricultural Cooperation, 1927,"
undoubtedly marks the limits to which philosophical speculations
regarding the cooperative as a distinctive type of business organiza-
tion have advanced. Although he has since made numerous contri-
butions on cooperation, these have dealt primarily with cooperation
in particular spheres of action rather than with attempts to further
7E. G. Nourse, Legal Status of Agricultural Cooperation, pp. 49 and 52.

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100 FRANK ROBOTKA

refine the concept of the cooperative organization as such. More-

over, cooperators themselves, although they have continued to ap-
ply the cooperative idea to ever expanding spheres of activity, have
added nothing to the nonstock concept of cooperative organization.
The Sapiro and Farm Board episodes of the 20's and early 30's,
rather than contributing to refinements in the concept, represent
aberrations and retrogressions in this respect. And the subsequent
Federal action programs, some of which, like the AAA production
control and marketing schemes, have been described as being co-
operative because they involved the collaboration of farmers, their
cooperatives as well as other trade groups in some cases, are more
accurately described as socialization or partial socialization rather
than cooperation in the sense in which the term is here applied to
the distinctive type of private enterprise business organization.
These latter developments tend to emphasize some of the limita-
tions of the cooperative type of business organization in dealing
with the comprehensive forces the interactions of which make up
the general economic environment in which all types of private
enterprise business units operate.
At the first session of the American Institute of Cooperation, Mr.
Richard Pattee, one of America's most penetrating lay cooperative
thinkers, raised a question as to "just what we have got to do to be
entitled to be considered cooperative. .," and whether "...
thought along this line has gone far enough to enable us to set up a
definition that is fixed and standard and can be applied with exact-
ness. .. "8 The proceedings of this session do not indicate that he
received a satisfactory answer, at that time. There is nothing to
indicate that Nourse's "Legal Status . . . " was written in response
to Pattee's challenge or whether Pattee found therein an answer to
his question.
It appears that economists have been content to accept the stage
to which cooperative ideas had evolved by 1927 as entirely adequate
and satisfactory, if not final. At least they have given voice to no
protests, criticisms or further elucidations.
Seventeen years after Pattee raised his question, Emelianoff in
his "Economic Theory of Cooperation" addressed himself specifi-
cally to this question. Unique and suggestive as his analysis is, he
appears to have overshot the mark in a number of essential respects.
An adequate theory of the cooperative type of business organiza-
8 American Cooperation, Vol 1, p. 165, Washington, D. C., 1925.

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 A THEORY OF COOPERATION 101

tion must explain and rationalize in acceptable economic terms all

of the considerations with respect to which this type of organization
claims distinctiveness. For example: If the capital of a cooperative
is, in fact, loan capital, how is the transformation from traditional
entrepreneurial capital brought about? What disposition is made of
the traditional functions associated with entrepreneurial capital,
such as decision-making and risk-bearing? If a cooperative is in fact
profitless, a logical corollary is that it must also be riskless, hence
what happens with respect to risks must be explained. If patronage
refunds and returns paid on capital do not constitute distributions
of earnings, what is it that is thus distributed? What are the impli-
cations of the usual assertion that true cooperatives operate at
cost? Since agents derive income from rendering services for their
principals, how can this fact be reconciled with the usual allegation
that a cooperative is a nonprofit organizaton? How may the tradi-
tional "one-man, one-vote" method of control be explained?
The problem will be approached by examining what happens
when a cooperative association is formed.

II. What Happens When a Cooperative is Formed?

Attempts to explain what a cooperative is frequently proceed by
comparing or contrasting the cooperative with the ordinary corpo-
ration. The writer believes that it is more natural and, consequently
more illuminating to approach the subject from the point of view
of the behavior of participants in a cooperative undertaking, be-
cause, in the final analysis, cooperation consists of a mode of action
on the part of the participants. They act either competitively or
cooperatively. The logical approach therefore, seems to be to ex-
amine the nature of the economic relationships which are estab-
lished among the participants when they choose to function co-
operatively.
The analysis could proceed by making an examination of what
happens in the simple case of two livestock producers who negoti-
ate, in an isolated instance, to make a joint shipment of livestock to
a central market. Would their action in this case result in the
organization of a cooperative association, or would it merely consist
of a transaction? Some collaborative arrangements no doubt are
merely transactions. It would seem that something more permanent
and substantial must take place before it can be said that a co-
operative association has resulted.

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102 FRANK ROBOTKA

Since the essential nature of the relationships established would

be the same whether the number of participants was 2, 200 or 2000,
it will be assumed that the two producers had decided to ship co-
operatively under agreed arrangements as a more or less permanent
policy.
The first essential, of course, is that the participants agree to ship
jointly. Such an agreement involves an entrepreneurial decision on
the part of each participant. It is a decision that only sovereign
entrepreneurial units can make. If they continue to ship jointly, it
simply means that the agreement is a continuing one, or is renewed
from time to time.
Several significant things which must be emphasized have hap-
pened as a result of this simple initial step.
1. A horizontal combination of the participating units had been
effected.
2. The combination was effected by the voluntary mutual agree-
ment of sovereign economic units.
3. The agreement involves only the livestock shipping activities
of the participants, who retain complete autonomy with respect to
all of their other activities.
4. The combination is, therefore, not accomplished by a merger or
consolidation, as a result of which participating units would lose
their individual indentities, but by a federation of sovereign units.
5. The agreement relates to activities which participants as live-
stock producers had previously performed individually; that is, the
marketing of their livestock.
6. Through the agreement, participants have added the perform-
ance of functions which they had not previously performed-i.e.,
the assembling of livestock into economical shipping units. Thus,
they have integrated with their other productive and marketing
activities the functions of the livestock assembling and shipping
firm.
Thus, this simple step illustrates a case of horizontal and vertical
integration, but it is a case of concerted integration-integration
accomplished not by merger or consolidation but jointly by a group
of federated units which retain their individual identities. And the
purpose of their action is to coordinate particular activities inte-
grally related to their individual economic pursuits.
All of the considerations with respect to which cooperatives claim
distinctiveness must be consistent with and are explainable in terms

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 A THEORY OF COOPERATION 103

of this basic concept of the cooperative as a type of business organ-

ization. Some of the more important of these considerations will be
examined in the remainder of this paper
Has a New Economic Entity Emerged? That a cooperative organ-
ization is a business enterprise-a "firm"-is almost universally
accepted without question or verification. Emelianoff's analysis,
however, leads him to the conclusion that a cooperative is not a
firm in the usual technical sense, but that it consists of a loose bond
(perhaps in the nature of a treaty among sovereign units) only
strong enough to accomplish the degree of coordination of activities
desired by the participants, and yet so weak that it does not impair
the sovereignty of participating units. This phase of the problem
cannot be dealt with adequately in a brief discussion. Although a
cooperative does not appear to meet all the specifications of a firm,
it cannot be denied that it is an economic entity. Even in the case
of the two farmers shipping stock cooperatively, a new decision-
making body is created. The essence of the agreement they had
entered into involves a commitment on the part of each of them to
submit certain questions regarding his shipping activity to group
decisions. Each participant must surrender sovereignty to this ex-
tent; hence each participant's status as an individual maker of de-
cisions in this particular respect is modified. Others now participate
with him in this process. Those who thus participate in making
these decisions, therefore, constitute a new decision-making unit.
It must, however, be recognized that this decision-making unit
cannot make decisions which are unrelated or inimical to the inter-
ests of participants as livestock producers. This decision-making
body consists of the participants, but as members of this body they
continue to function in their capacity as livestock producers. Their
joint decisions with respect to the shipping activity will, therefore,
be integrated with their decisions as individual livestock producers.
A New Risk-Bearing Body Emerges. Since the decisions of the
participants regarding their shipping activity are now group de-
cisions, and since those who make decisions must assume responsi-
bility for their consequences, a new decision-making body cannot
emerge without the simultaneous emergence of a corresponding
risk-bearing body.
In the first place, a new risk situation was created when the two
farmers decided to ship jointly. By coordinating their shipping
function, participants may increase some risks and decrease others.

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104 FRANK ROBOTKA

For example, there is the chance that one of them may desire to ship
at a time when the other is occupied in other urgent activities. On
the other hand, the risk of being denied access to a favorable market
at inopportune times may be reduced. Participants as a group will
be affected by this particular risk situation differently than they
would be as nonparticipants. Certain risks, such as losses in transit,
variations in costs of shipping, and others, will now be shared by
the participants jointly rather than individually. Certain risks will
thus be spread among this particular group of participants.
Again, it must be recognized that the new risk-bearing body con-
sists of the participants as producers of livestock; it is not one that is
dissociated from participants as individual livestock-producing risk
bearers.
The Cooperative as an Income Unit. Thus, although a new eco-
nomic entity emerges, it is not one which, as Nourse, says "pursues
its own economic career," independently of those of participants.
That it is the purpose of true cooperators not to interpose a
profit-making unit between themselves and their market is amply
borne out by positive assertions of purpose to that effect made by
cooperators. This purpose is usually explicitly set forth in articles of
association, by-laws and supplementary marketing agreements fre-
quently entered into by members of cooperatives.
From a legal point of view, a cooperative is a non-profit organ-
ization if it obligates itself to refund to patrons any surplus over
costs. However, the economic fact, to which the law thus seeks to
give expression, is that when autonomous units cooperate with re-
spect to some part of their activities, they still act in their own
capacity as autonomous units and are responsible, as participants
in the cooperative activity, for the results of their decision to so
function. For example, the livestock producers in our illustration
have merely chosen to sell in the central market at central market
prices, rather than in a local or some other market. Access to the
central market was rendered economically feasible for small-scale
producers by coordinating their shipping activity. Cooperative
shipping is only one of several alternative methods of disposal avail-
able to individual producers. Large-scale producers will already
have assembled livestock into economical shipping units and may,
as individual producers, integrate the usual functions of the live-
stock shipping firm. When they do so, the shipping function does
not become an economic entity separate from that of the farm

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 A THEORY OF COOPERATION 105

business unit, hence does not become a separate profit-and-loss unit,

nor a separate income tax-paying unit. Neither the large-scale pro-
ducer who performs the shipping function himself, nor the small-
scale producers who ship cooperatively, have made a sale or
received a price until their stock is sold in the central market and
they have received the gross proceeds. Moreover, each receives
payment for the net market weight, hence assumes any loss due to
shrinkage or damage in transit. He likewise assumes responsibility
for transportation and central market costs, as well as for any costs
incurred locally in preparing the shipment and dispatching it to
market.
The cooperative shipping arrangement merely represents an ex-
tension of the entrepreneurial functioning of the participating units.
It is a method by which several small units may jointly accomplish
the integration of functions which larger units may accomplish in-
dividually. The proceeds from sales in the case of the cooperative
do not belong to the cooperative any more than they belong to the
sales or shipping department of the large-scale producer who shipped
his own livestock. Nor does the cooperative incur expenses for
which it itself is responsible, any more than does the shipping de-
partment of the large-scale producer. The producer, as such, is re-
sponsible for such costs. The cooperative is, of course, authorized
by the participants to incur necessary expenses in their behalf.
Hence the proceeds a cooperative receives from sales of members'
products accrue to participants as liabilities of the cooperative, and
expenses which it incurs in their behalf are receivables which pa-
trons are obligated to pay. Hence the cooperative, as such, cannot
realize a profit nor incur a loss.
Patronage an Obligation. Obviously, the benefits which the pro-
ducers in our illustration anticipate gaining by shipping coopera-
tively can be realized only if each of them fulfills his part of the
agreement. Neither of them could afford to go to the trouble and
expense of delivering his livestock for shipment at the appointed
time and place except on the assurance that the other would do
likewise. In consideration of the mutual advantages to be gained
each participant obligates himself to function as contemplated or
to reimburse the other to the extent of any damage sustained by
him in case of a default. Each has therefore placed himself under a
moral obligation to function as contemplated. In more formal ar-
rangements, such obligations are usually explicitly set forth in a

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106 FRANK ROBOTKA

legally binding contract, with provision for the payment of stipu-

lated damages in case of a breach thereof. Every cooperative ar-
rangement involves an implied if not explicit obligation to utilize
the facilities jointly provided as a means of carrying out the purpose
of the participants.
Moreover, acceptance by the participants of the obligation to
ship livestock jointly through specific facilities provided for the
purpose means, in effect, that the participants have decided to ab-
stain from shipping or selling in competition with others. Their
combined offerings enter the market supply as a single unit of prod-
uct rather than as several competing units. As a consequence, par-
ticipants abstain from competing against each other in their search
for sales or marketing facilities and are no longer free to respond
individually to the solicitation of competing dealers or sales agen-
cies. Instead of vying against each other in these matters, they act
in coordination with each other.
"Service at Cost." One of the basic tenets of cooperation is that
participants shall receive service at cost. The customers of an or-
dinary business unit may and frequently do receive service at cost,
sometimes even at less than cost, or there would be no business
failures. This does not mean that such businesses are functioning on
a cooperative basis. Involved in the service-at-cost idea as it relates
to cooperative operations is the fact that participants authorize the
cooperative to incur and assess against them only the actual costs
of serving them. This is only a partial explanation, however, be-
cause customers may enter into a contract to the same effect with
an ordinary business, provided a business can be found which is
willing to forego profits. The real reason why cooperative activities
are said to be conducted at cost is because they are a part of the
integrated activities of the participants. When a farmer does his
plowing himself, he receives service for what it costs him to render
it. If he hired it done, he would normally have to pay not only the
expenses of the plowman but something extra to induce him to
assume the risks and for planning, organizing and supervising the
operation. When cooperators jointly conduct an integrated activity,
they themselves incur the expenses of conducting it, and in addition
assume the risks and the responsibility for planning, organizing and
supervising the operation. They thus "earn" or "save" what they
would otherwise have to pay someone else for performing these
latter functions.

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 A THEORY OF COOPERATION 107

Patronage Dividends. The patronage dividend is another feature

characteristic of cooperative operations under certain conditions.
Occasion to use this device has thus far not arisen in our coopera-
tive shipping illustration. As is generally recognized by students of
cooperation, operations which are conducted on a "net returns" or
"agency" basis normally result in no balance to be distributed in
the form of patronage dividends, as the net balance is distributed
among patrons at the end of each pool period. In 1936, 56 percent
of the agricultural marketing cooperatives in the United States (85
percent if grain marketing cooperatives are excluded) operated on
a pooling, commission or other type of agency basis, as distin-
guished from the so-called purchase-and-sale basis.
Students of cooperation would probably agree that the so-called
patronage dividend is not a true dividend in the sense that it rep-
resents a distribution of profits. However, where the patronage
dividend is used, as it frequently is, as a profit-sharing device (as a
competitive device to attract patronage) it becomes a method of
distributing profits. Ordinary corporations may distribute some of
their profits to their customers in this manner. Where business
operations are conducted on a competitive price basis, and where it
is not contemplated that patrons, as such, shall assume responsi-
bility for costs and risks, then it is a fortuitous matter as to whether
the operations result in a profit or a loss. If under such conditions a
loss results, stockholders must bear it. Such a business cannot at-
tract capital unless investors are offered inducements in the form of
profits. It is, of course, for them to decide whether or not they wish
to share their profits with the customers of the business. If they
decide to do so, the refund consists of a share of the profits dis-
tributed as a gratuity to customers.
Although the operations of many so-called cooporatives re-
semble those of a profit-sharing corporation more than those of a
true cooperative, the patronage dividend as used by true coopera-
tives functions in quite a different manner. It is only when it is used
as a truly cooperative device that the patronage dividend is not a
true dividend. No true cooperative deals with its patrons on a
competitive price basis. Technically a price is a consideration in-
volved in the transfer of title. The risks of ownership pass with the
title. When a customer pays or receives a price, his interest in the
transaction or its consequence in terms of profit or loss ceases. How-
ever, when a cooperative patron's interest in the transaction con-

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108 FRANK ROBOTKA

tinues in the sense that the transaction is not consummated until

it is adjusted to a cost basis, then the settlement at the time of the
transaction is not a price settlement but a tentative or "provisional"
settlement subject to adjustment after a final accounting. The pa-
tronage refund under such circumstances is a device designed to
adjust the transaction to a cost basis. In such case, there would be
no profit to distribute in the form of a true dividend.
True patronage dividends might arise in the case of our shipping
illustration under either of two circumstances.
First: If it is assumed that each of the participants advanced a
lump sum to cover the costs of preparing the shipment for market
such an advance, if it is to serve its purpose, would necessarily have
to be somewhat more than it is estimated the actual expenses are
likely to be. After the actual costs are ascertained, the excess would
accrue to the participants as an overcharge for services and would
be refunded as a patronage dividend.
Second: If it is assumed that the cooperating shippers preferred
to receive advances of a part of the market value of the livestock at
the time of its delivery for shipment (presumably by means of a
loan) the advances would not represent payments at purchase
prices, but advances in the nature of loans or "provisional" settle-
ments pending arrival of sales proceeds. Since the cooperating ship-
pers could not consistently advance themselves more than the net
amount of the sales proceeds and since the amount of the latter
cannot be known until they arrive, the advances must necessarily
be conservative. Actual sales proceeds would thus normally exceed
the advances made. The excess would accrue to participants as a
liability of the cooperative and would be paid them in settlement
of the underpayment made at the time the livestock was delivered.
A true patronage dividend is thus a device designed to adjust
provisional settlements to a cost basis. In actual practice, adjust-
ments in the form of patronage dividends for underpayments for
products delivered as well as for overcharges for services rendered
are, of course, not calculated separately but are combined in a
single patronage dividend adjustment and usually at the end of the
year. Any such underpayments or overcharges accrue to patrons as
liabilities of the cooperative by virtue of the predetermined purpose
of the participants to coordinate their activities as autonomous
units on a jointly integrated basis. When the cooperative makes
such adjustments, it merely discharges a liability.

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 A THEORY OF COOPERATION 109

The Capital of a Cooperative. It may appear that thus far the

illustrative shipping case has involved no capital. This is not strictly
true, for someone financed the livestock and the shipping expenses
pending receipt of the proceeds from the market. Participants, of
course, provided this capital by advancing funds for shipping ex-
penses and by waiting for the proceeds to arrive. However, since
each of the participants financed his livestock and shipping ex-
penses individually and directly, no unit of funded capital has, as
yet, emerged.
If it is now assumed that the number of participants is increased
to the point where it becomes feasible to provide a continuous
shipping service, it will be found desirable to maintain a small in-
ventory of feed, bedding, and other supplies. Participants will now
have to provide capital to finance the inventory of supplies. In
order to achieve effective management of such a fund of capital in
the interest of the whole group, it will obviously be necessary for
participants to surrender individual control over their respective
contributions to it and to be willing to submit questions regarding
its use to group decisions. A unit of funded capital would emerge at
this point. It would be administered by a decision-making and risk-
bearing body consisting of the participants. Although normally
members delegate broad general authority to a board of trustees,
and they, in turn, to hired managers and employees, members as-
sume responsibility for all decisions and will retain veto power,
which at the extremity may be exercised by withdrawal from the
cooperative.
This unit of capital, however, is not a unit of entrepreneurial
capital in the usual sense. Each participant, instead of advancing
only enough to finance the expenses of a current shipment, as in
our original illustration, will now make an advance designed to
finance the expenses of future shipments. The advance is thus in the
nature of a deposit against which the expenses of future shipments
will be charged. Any unabsorbed balance of a patron's advance will
accrue to him as a liability of the cooperative. In order to maintain
a continuing inventory of supplies, it will, of course, be necessary
to continue to replenish the fund as supplies are drawn upon. This
will be accomplished by assessing a charge for supplies actually
used against each patron each time he ships livestock.
The capital fund thus created would differ from ordinary entre-
preneurial capital in several respects. Participants would not be

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110 FRANK ROBOTKA

accorded a voice in the management of the association by virtue of

their advances of such capital, but by virtue of their participation
in the shipping activity. They would not contribute the capital for
the purpose of deriving an anticipated income from it, as such, but
as a condition to receiving shipping services. They would likewise,
as contributors of capital, have no claim to a share of the proceeds
from the sales of livestock, nor to residual assets. Nor would they,
as capital contributors, assume risks of losses occasioned by the
shipping activity, because, as already indicated, participants as-
sume such risks as participants in the shipping activity by virtue of
the fact that they assume responsibility for costs (including losses)
which are deductible before sales proceeds are distributed.
The same reasoning would apply if the participants should now
decide to advance additional capital, for example, to build a shelter
for the supplies, or pens and other facilities to care for the livestock
pending loading for shipment. Such capital would likewise repre-
sent advances made by participants to cover the costs of services
to be received in the future. The facilities in which such capital
might be invested would constitute a "plant" owned jointly by the
participants, the costs of the current use of which being included in
current service charges. Such capital would likewise be a liability
on the books of the cooperative, since any part of it which has not
been absorbed by costs of services rendered for participants would
accrue to them. Each participant, thus, in effect, allocates a part
of his entrepreneurial capital to the association to be expended in
providing him with desired services.
Where contributions of such capital are evidenced by shares of
capital stock, as it still often is in practice, the holders of such stock
are usually restricted as to voting rights, claims to income or assets
and responsibility for risks to such an extent that it resembles
capital stock in its traditional sense in name only. Because of legal,
accounting and business precedents and practice, the tendency is to
regard it in the light of its traditional connotations in ordinary
corporations.9

9 It is recognized, of course, that theoretically pure cooperation can only be ap-

proximated in practice. Because cooperating patrons in practice seldom assume re-
sponsibility completely for all costs and risks, capital contributors, as such, must
assume these residual risks. Hence, in practice the capital of most cooperatives re-
tains in varying degrees the characteristics of entrepreneurial capital. This is par-
ticularly true in the case of the "profit-sharing" type of cooperative which deals
with its patrons on the basis of competitive prices, rather than on a "net returns"
basis.

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 A THEORY OF COOPERATION 111

Interest or "Dividends" on Capital. Since, as already indicated,

the participants in a true cooperative assume responsibility for
costs and risks on a patronage basis, capital as such is relieved of
the usual business risks. Contributors of such capital, therefore,
are not entitled to receive a return on capital in the nature of
profit as a reward for assuming risks. Moreover, the capital which
participants advance is not advanced in anticipation of the returns
they may receive upon it, but as a necessary condition in order to
make certain desired services available to them. In any case, since
the operations of a true cooperative are conducted on a cost basis,
there would be no residual income to distribute to capital as such.
Moreover, since any return members receive on their capital con-
tributions would either be added to the expenses of the services
they receive or be deducted from proceeds from sales accruing to
them, there would be no point in paying such a return. Members
would merely be shifting such amounts from one pocket to the
other. In practice, however, capital contributions are frequently
not made in proportion to the use participants anticipate making of
the services of the organization. In such cases, the payment of a
return on capital is justified on the ground that it compensates
for disproportionalities in capital contributions. The members who
contribute capital in excess of their proportionate share, in effect,
loan to those who contribute less than their proportionate share,
and the return is, therefore, in the nature of interest rather than a
distribution of residual income.
The Basis of Control. As already indicated, the members of a
cooperative participate in control, not because they have con-
tributed capital, but because they participate in the activities of
the organization. In a farmers' marketing cooperative, for example,
a member may contribute $100 of capital but may entrust products
to the association worth may times that amount. Obviously he
would not be willing to do this if the organization's policies were
controlled by capital contributors, as such, or others whose in-
terests were not identical to his own. Hence, control in a coopera-
tive is identified with patronage because it is with respect to
patronage that the member normally assumes major risks. In an
ordinary corporation it is consistent to identify control with capital
contribution, because in that case the major risk is borne by stock-
holders as contributors of capital.
A question arises, however, as to how much control a member of

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112 FRANK ROBOTKA

a cooperative should exercise. In our original shipping illustration,

there were only two participants. Obviously there could be no col-
laboration between them if either of them dissented. Even though
one of them contributed 9/10 of the patronage and was accorded 9
votes to the other's one, he would not be in a position to impose his
will upon the other without the latter's consent.
The traditional idea that control in a cooperative must be on a
personal (democratic) basis, rather than on a financial basis, no
doubt to some extent stems from the idea that a cooperative is an
association of human beings rather than an impersonal organiza-
tion of capital. It should also be remembered that during the
period of cooperative beginnings in England, the question of
suffrage was also being agitated. It is only natural that workers,
being denied representation in the affairs of government, should
insist that in their own organizations there should be no discrimina-
tion among the members in the control of their affairs. It should
also be remembered, however, that, at least from a property owner-
ship viewpoint, a high degree of homogeneity existed among the
cooperators of that time.
Nevertheless, for over a century equal voting has continued to
meet with the almost universal approval of cooperators, perhaps
primarily for political and phychological reasons, but also probably
to some extent because of the fear that unequal voting might result
in favoring interests represented by wealth rather than the interests
of members as patrons. It should be clear, however, that equal
voting would tend to exclude those who might feel that their
interests might not thus be adequately protected. For example,
large-scale producers may refuse to join an organization consisting
predominantly of small-scale producers, and vice versa. Under
certain circumstances which necessitate the collaboration of a
heterogeneous group, unequal voting has been found to be the
only basis on which the necessary amount of participation was
obtainable. Voting in irrigation cooperatives is commonly on an
unequal basis. Voting in some of the Pacific Northwestern coopera
tives is based on acreage, fruit trees, cows milked, etc. Certain
Czechoslovakian electrical cooperatives have persistently failed
until voting according to patronage was introduced.
From a strictly economic point of view, voting rights would b
apportioned according to risks assumed, and since in a cooperativ

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 A THEORY OF COOPERATION 113

these are borne proportionally to patronage, voting would be based

on patronage, if not strictly proportional thereto.

Conclusions

It is believed that a satisfactory basis for the rational explanation

in economic terms of the distinctive features which characterize
the cooperative association is provided when a cooperative arrange-
ment is conceived as a federation of autonomous economic units
whose avowed purpose it is to function in their individual capacities
but in a coordinate manner with respect to specific activities in-
tegrally related and common to their individual economic pursuits.
A new economic entity emerges when a cooperative association is
formed because participants must agree to submit to group
decisions questions relating to the activity being coordinated. The
cooperative association, as such, however, is a sovereign unit only
with respect to its external relationships. Internally, the partici-
pants act in their individual capacities in a mutually agreed upon
manner, hence the acts of the cooperative represent the sum of the
acts of the participants. Functioning cooperatively thus represents
a choice on the part of participants of alternative methods of
functioning; that is, it represents an extension of their entre-
preneurial functioning.
It is only on the basis of such a concept that the nonprofit
character of the cooperative arrangement, as such, its "service-
at-cost" basis of operation, the nature of its capital, the patronage
basis of members' participation in benefits, risks, costs, and con-
trol, and the other distinctive features of true cooperation are
explainable in an economic sense.
When a group of units associate themselves in the manner in-
dicated, it results in the establishment of a distinctive type of
multilateral economic relationships among themselves which have
to do essentially with their entrepreneurial functions of decision-
making and risk-bearing with respect to the coordinated activity.
Their purpose to thus function is given legal effect when partic-
ipants enter into a multilateral agreement in the form of articles
of association, by-laws, and often supplementary special contracts.
The basic purpose of the enactment of special cooperative laws for
the incorporation of such associations is to give legal recognition
and a legal status to the distinctive type of economic relationships

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114 FRANK ROBOTKA

established when a cooperative association is formed. Many co-

operative laws, however, only partially recognize the economic
nature of a true cooperative association. Many of them are de-
signed to give legal recognition to intermediate stages in the
evolution toward true cooperation, such as modifications of
ordinary corporations designed to permit them to share profits
with patrons on a patronage basis, etc.
Although it is not anticipated that pure cooperation will be
realized in practice in a large majority of cases, the formulation of
an economic concept of pure cooperation should serve many useful
purposes, among the more important of which are:
1. To provide economic criteria for the scientific analysis and
evaluation of cooperation in practice.
2. To provide a goal which cooperation in practice may strive to
attain.
3. To establish a scientific basis for the teaching of cooperation
as a branch of applied economics.
4. To provide criteria for the guidance of lawyers, accountants,
lawmakers, public officials, the courts, and others in dealing with
cooperative problems.
The ultimate effect of the foregoing results should be to exert a
salutary influence upon the average level of practical cooperative
performance.

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