History of the cooperative movement

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/History_of_the_cooperative_movement 

The history of the cooperative movement concerns the origins and history of cooperatives across the world. Although cooperative arrangements, such as mutual insurance, and principles of cooperation existed long before, the cooperative movement began with the application of cooperative principles to business organization.

Beginnings

Headquarters of the Ambelakia Common Company (Schwartz mansion)

The cooperative spirit spread in Greece earlier than in other European countries. During the 18th century, a particular form of cooperative organization was developed in certain areas under Ottoman sovereignty. It was associated with specific agricultural or craft products destined to international markets. Derived from the Byzantine guilds, it was favored by the Ottoman administration because it was enabling better control of the production and tax collection. The Common Company (Syntrofia) of Ambelakia (1780 to 1812), established in Thessaly and providing Europe with high quality red cotton yarns, is typical of this system. Its development was related with a dyeing technique using the roots of the wild madder (ριζάρι, Rubia tinctorum) and providing an indelible and shiny color. 22 villages possessing 24 factories participated to the Syntrofia, which had 6000 individual members: financiers and landowners providing for capital and land, technicians providing know-how, workers providing labor. It operated several branch stores abroad (Amsterdam, Dresden, Hamburg, Leipzig, Odessa, London, St. Petersburg...). In 1810, its capital amounted to 20 000 000 gold francs, deposited in the Bank of Vienna. Other well-known cooperatives established in Greece during the Ottoman period, are the Shipping Guilds of the islands Hydra, Spetses and Psara; the Community of Mantemi, exploiting the mines of Chalkidhiki (Macedonia); and the Community of “Mastic Villages” (Μαστιχοχώρια) de Chios (North Aegean), whose activities were based on the mastic - a resin extracted from the mastic trees, growing only on this island and used for cosmetic, culinary and medicinal purposes.

In the rest of Europe, primarily in Britain and France, the cooperative movement began mainily in the 19th century. The Industrial Revolution and the increasing mechanisation of the economy transformed society and threatened the livelihoods of many workers. The concurrent labour and social movements and the issues they attempted to address describe the climate at the time.

The first documented consumer cooperative was founded in 1769, in a barely furnished cottage in Fenwick, East Ayrshire, when local weavers manhandled a sack of oatmeal into John Walker's whitewashed front room and began selling the contents at a discount, forming the Fenwick Weavers' Society.

In 1810, Rev. Henry Duncan of the Ruthwell Presbyterian Church in Dumfriesshire, Scotland founded a friendly society to create a cooperative depository institution at which his poorest parishioners could hold savings accounts accruing interest for sickness and old-age, which was the first established savings bank that would be merged into the Trustee Savings Bank between 1970 and 1985.

In the decades that followed, several cooperatives or cooperative societies formed including Lennoxtown Friendly Victualling Society, founded in 1812.

By 1830, there were several hundred co-operatives. Some were initially successful, but most cooperatives founded in the early 19th century had failed by 1840. However, Lockhurst Lane Industrial Co-operative Society (founded in 1832 and now Heart of England Co-operative Society), and Galashiels and Hawick Co-operative Societies (1839 or earlier, merged with The Co-operative Group) still trade today.

It was not until 1844 when the Rochdale Society of Equitable Pioneers established the "Rochdale Principles" on which they ran their cooperative, that the basis for development and growth of the modern cooperative movement was established.

Financially, cooperative banks, called credit unions in the US, were invented in Germany in the mid-19th century, first by Franz Hermann Schulze-Delitzsch (1852, urban), then by Friedrich Wilhelm Raiffeisen (1864, rural). While Schulze-Delitzsch is chronologically earlier, Raiffeisen has proven more influential over time – see history of credit unions. In Britain, the friendly society, building society, and mutual savings bank were earlier forms of similar institutions.

Robert Owen

Main article: Robert Owen

Robert Owen (1771–1858) is considered as the father of the cooperative movement. A Welshman who made his fortune in the cotton trade, Owen believed in putting his workers in a good environment with access to education for themselves and their children. These ideas were put into effect successfully in the cotton mills of New Lanark, Scotland. It was here that the first co-operative store was opened. Spurred on by the success of this, he had the idea of forming "villages of co-operation" where workers would drag themselves out of poverty by growing their own food, making their own clothes and ultimately becoming self-governing. He tried to form such communities in Orbiston in Scotland and in New Harmony, Indiana in the United States of America, but both communities failed.

William King

Main article: William King (physician)

Although Owen inspired the co-operative movement, others – such as Dr. William King (1786–1865) – took his ideas and made them more workable and practical. King believed in starting small, and realized that the working classes would need to set up co-operatives for themselves, so he saw his role as one of instruction. He founded a monthly periodical called The Co-operator, the first edition of which appeared on 1 May 1828. This gave a mixture of co-operative philosophy and practical advice about running a shop using cooperative principles. King advised people not to cut themselves off from society, but rather to form a society within a society, and to start with a shop because, "We must go to a shop every day to buy food and necessaries – why then should we not go to our own shop?" He proposed sensible rules, such as having a weekly account audit, having 3 trustees, and not having meetings in pubs (to avoid the temptation of drinking profits).

Rochdale Pioneers

Main article: Rochdale Pioneers

The Rochdale Society of Equitable Pioneers was a group of 10 weavers and 20 others in Rochdale, England, that was formed in 1844. As the mechanization of the Industrial Revolution was forcing more and more skilled workers into poverty, these tradesmen decided to band together to open their own store selling food items they could not otherwise afford. With lessons from prior failed attempts at co-operation in mind, they designed the now famous Rochdale Principles, and over a period of four months they struggled to pool one pound sterling per person for a total of 28 pounds of capital. On December 21, 1844, they opened their store with a very meagre selection of butter, sugar, flour, oatmeal and a few candles. Within three months, they expanded their selection to include tea and tobacco, and they were soon known for providing high quality, unadulterated goods.

English CWS and Co-operative Group

Main article: The Co-operative Group

The Co-operative Group formed gradually over 140 years from the merger of many independent retail societies, and their wholesale societies and federations. In 1863, twenty years after the Rochdale Pioneers opened their co-operative, the North of England Co-operative Society was launched by 300 individual co-ops across Yorkshire and Lancashire. By 1872, it had become known as the Co-operative Wholesale Society (CWS). Through the 20th century, smaller societies merged with CWS, such as the Scottish Co-operative Wholesale Society (1973) and the South Suburban Co-operative Society (1984).

The old Co-operative building behind the Gateshead Millennium Bridge in Newcastle upon Tyne.

By the 1990s, CWS's share of the market had declined considerably and many came to doubt the viability of co-operative model. CWS sold its factories to Andrew Regan in 1994. Regan returned in 1997 with a £1.2 billion bid for CWS. There were allegations of "carpet-bagging" – new members who joined simply to make money from the sale – and more seriously fraud and commercial leaks. After a lengthy battle, Regan's bid was seen off and two senior CWS executives were dismissed and imprisoned for fraud. Regan was cleared of charges. The episode recharged CWS and its membership base. Tony Blair's Co-operative Commission, chaired by John Monks, made major recommendations for the co-operative movement, including the organisation and marketing of the retail societies. It was in this climate that, in 2000, CWS merged with the UK's second largest society, Co-operative Retail Services.

Its headquarters complex is situated on the north side of Manchester city centre adjacent to the Manchester Victoria railway station. The complex is made up of many different buildings with two notable tower blocks of New Century House and the solar panel-clad CIS tower.

Other independent societies are part owners of the Group. Representatives of the societies that part own the Group are elected to the Group's national board. The Group manages The Co-operative brand and the Co-operative Retail Trading Group (CRTG), which sources and promotes goods for food stores. There is a similar purchasing group (CTTG) for co-operative travel agents.

U.S. Co-operatives

The United States first known Co-op was the mutual fire insurance company founded in 1752 by Benjamin Franklin. The first dairy co-op was founded in 1810 with small locals found nationwide by 1866. The first known consumer co-op in 1845 was Boston's Workingman's Protective Union. The country's first organization to promote cooperative values and the Rochdale Principles was the Order of the Patrons of Husbandry, known as the Grange that started after the Civil War. The co-operative movement grew during the 1890s in response to the expansion of large corporate monopolies. The country's first credit unions were in Massachusetts while The Cooperative League of the United States of America, known today as the National Cooperative Business Association was organized in 1916 to promote cooperatives. In the late 1960s the Co-op movement entered a new phase with Food cooperatives and Food Conspiracies as an alternative to corporate agriculture that linked organic farmers to urban consumers.

The co-operative model has a long history in the U.S., including a factory in the 1790s, the Knights of Labor, and the Grange. In Colorado, the Meadowlark cooperative administered the only private free land program in the United States, providing many services to its members who buy and sell together. In New York City, several food co-operatives were founded around 2010, adding to others, some existing since the 1970s. The U.S. has some diverse worker co-operatives, such as a home care agency, an organic bread factory co-op and an engineering firm. Some have already incorporated environmental and/or Fair Trade criteria into their products, such as the aforementioned bread-maker, Organic Valley, and Equal Exchange.

Credit unions were established in the U.S. by 1908. Their member-owned, co-operative structure created stable governance structure, so that they were only slightly affected by the 2008 mortgage securities crisis.

Electrical co-operatives became an important economic strategy for U.S. rural areas beginning in the 1930s, and continue to operate successfully through events such as Hurricane Sandy in 2012.However, the majority in the U.S. demonstrate that co-operative values do not necessarily lead to a progressive social and environmental consciousness, as many remain focuses on fossil fuel and nuclear fuels. Nevertheless, new generation renewable power co-operatives have begun to be organized.

Agricultural co-operatives in the U.S. have had some mainstream success, including Welch's, Ocean Spray, and Land O'Lakes.

In the United States, a co-operative association was founded by 1920. Currently there are over 29,000 co-operatives employing 2 million people with over $652 billion in annual revenue. To address the need for an organization oriented to newer and smaller co-ops, the United States Federation of Worker Cooperatives was founded after 2000.

An alternative method of employee-ownership, the Employee Stock Ownership Plan (ESOP), was developed in the U.S. by Louis Kelso and advocated by Senator Russell Long to be incentivized in the ERISA law of 1974. For example, a large Southeastern US supermarket chain a California manufacturer, and a furniture-maker with earnings of more than $2 billion, are employee-owned. Employee-owned trusts have also been developed more or less independently, for example at an established iron pipe company

Co-operative Women's Guild

Main article: Co-operative Women's Guild

Alice Acland, the editor of the "Women's Corner" in the Co-operative News publication, and Mary Lawrenson, a teacher, recognized the need for a separate women's organization within the Cooperative Movement and began organizing a "Woman's League for the Spread of Co-operation" in 1883. This League formally met for the first time during the 1883 Co-operative Congress in Edinburgh in a group of 50 women and established Acland as its organizing secretary. By 1884 it had six different branches with 195 members, and the League was renamed the Women's Cooperative Guild.

The Guild organized around working women's issues and expanding the Cooperative Movement. It continued to publish articles advocating for women's involvement in the Cooperative Movement in the "Women's Corner," and later through its own publications such as "The importance of women for the cooperative movement." The Guild also opened the Sunderland cooperative store in 1902, which catered to poor working-class women. It engaged in many political campaigns concerning women's health, women's suffrage and pacifism. Until recently the organisation participated in social justice activism, but has now closed.

Chinese Industrial Cooperatives

Main articles: History of the cooperative movement in China and Chinese Industrial Cooperatives

See also: Gung-ho

Other developments

In Russia the village co-operative (obshchina or mir), operated from pre-serfdom times until the 20th century.

Raiffeisen and Schultz-Delitsch developed an independently formulated co-operative model in Germany, the credit union. The model also moved abroad, reaching the United States by the 1880s and the Knights of Labour's projects. Leland Stanford, the railroad magnate and Robber Baron, became a Senator and advocated for co-operatives. By 1920 a national association had formed in the U.S. This organization began to develop international programs, and by the 1970s, a World Council formed.

Co-operatives in the U.S. have a long history, including an early factory in the 1790s. By the 1860s Brigham Young had started applying co-operative ideas in Utah, and by the 1880s, the Knights of Labor and the Grange both promoted member-owned organizations. Energy co-operatives were founded in the U.S. during the Depression and the New Deal. Diverse kinds of co-operatives were founded and have continued to perform successfully in different areas: in agriculture, wholesale purchasing, telephones, and in consumer-food buying.

James Warbasse, an American doctor, became the first president of the U.S. National Co-operative Business Association. He wrote extensively on co-operative history and philosophy. Benjamin Ward began an important effort in co-operative economic theory in the 1950s, with Jaroslav Vanek developing a general theory. David Ellerman began a line of theoretical thinking beginning with legal principles, developing especially the labor theory of property, and later reaching a treatment which evaluates the role of capital in labor managed firms using the conventional economic production formula Q = f(K, L). At one point in the 1990s he worked at the World Bank with Nobel laureate Joseph Stiglitz.

Modern day

Co-operative enterprises were formed successfully following Rochdale, and an international association was formed in 1895. Co-operative enterprises are now widespread, with one of the largest and most successful examples being the industrial Mondragón Cooperative Corporation in the Basque country of Spain. Mondragon Co-op was founded under the oppressive conditions of Fascist Franco Spain after community-based democracy-building activities of a priest, Jose Maria Arizmendiarrieta. They have become an extremely diverse network of co-operative enterprises, a huge enterprise in Spain, and a multinational concern. Co-operatives were also successful in Yugoslavia under Tito where Workers' Councils gained a significant role in management.

In many European countries, cooperative institutions have a predominant market share in the retail banking and insurance businesses. There are also concrete proposals for the cooperative management of the common goods, such as the one by Initiative 136 in Greece.

An annual general meeting of a retail co-operative in England, 2005.

In the UK, co-operatives formed the Co-operative Party in the early 20th century to represent members of co-ops in Parliament. The Co-operative Party now has a permanent electoral pact with the Labour Party, and some Labour MPs are Co-operative Party members. UK co-operatives retain a significant market share in food retail, insurance, banking, funeral services, and the travel industry in many parts of the country.

Denmark has had a strong cooperative movement, especially in the farming and industrial sectors. Co-housing is also common in Denmark in which residents share a common eating and gathering space. In some instances, the living spaces are financed by the Danish Housing Association, but other times residents collectively own the land and property.

In Germany, the rebuilding of the country after World War II created a legislative opportunity in which politician Hans Boeckler significantly lobbied for the co-determination ("Mitbestimmung") policies which were established, requiring large companies to include a Workers' Council in the Board of Directors. These policies have had some influence on European Union policies.

Emilia Romagna, Italy had two separate and strong co-operative traditions that resisted Cold War interference by US agencies and have worked effectively in conjunction with each other.

Co-operative banks have become very successful throughout Europe, and were able to respond more effectively than most corporate banks during the 2008 mortgage-securities crisis.

Renewable Energy co-operatives in Europe became important in the early development of windpower in Denmark beginning in the 1970s. Germany followed in the early 1990s, first on a larger scale with wind co-ops, then with a citizen's movement which challenged the reliance on nuclear power, organized, challenged the energy monopolists there, and successfully created a successful co-op social enterprise by 1999. A citizen's group began operating wind turbines and involving broad community ownership in the U.K. by 1995. Deregulation of the electricity markets allowed energy co-operative social entrepreneurs to begin to create alternatives to the monopolies in various countries. In France, where an enormous percentage of the power is generated by nuclear sources, this occurred after 2000. In Spain, wind power was developed by corporate-led efforts, and it took longer for a renewable energy-focused social enterprise to get established. Similar renewable energy co-ops around Europe have organized in a network.

Asian societies have adapted the co-operative model, including some of the most successful in the world. Nevertheless, the crises generated by traditional inequalities and the shareholder model continues to require civil society and entrepreneurial responses, such as the Citizens Coalition for Economic Justice in South Korea, the Seikatsu Club Consumers' Co-operative Union in Japan, and the Self-Employed Women's Association in India. Other noteworthy efforts include Sophon Suphapong's efforts as governor in Thailand with agricultural co-ops and Antonio Yapsutco Fortich's contributions in the Philippines helping formulate a co-operative strategy with sugar workers.

The International Labor Organization, originally established in 1919, has a Co-operative Division.

Co-operatives were brought to Latin America and developed there by 1902. Substantial independent efforts to develop employee-owned enterprises or co-operatives have occurred as responses to crises, such as 2001 crisis in Argentina. In Brazil, the World Social Forum process lead to the articulation of Solidarity Economics, a modern, activist formulation of co-operativism.

The Fair Trade certification movement established first in the Netherlands in 1988 with an international headquarters in Bonn nine years later requires member farmers to have established a co-operative.

In 2016, UNESCO inscribed "Idea and practice of organizing shared interests in cooperatives" on the Representative List of the Intangible Cultural Heritage of Humanity.

Transaction cost

From Wikipedia, the free encyclopedia
https://en.wikipedia.org/wiki/Transaction_cost

In economics, a transaction cost is a cost incurred when making an economic trade when participating in a market.

The idea that transactions form the basis of economic thinking was introduced by the institutional economist John R. Commons in 1931. Oliver E. Williamson's Transaction Cost Economics article, published in 2008, popularized the concept of transaction costs. Douglass C. North argues that institutions, understood as the set of rules in a society, are key in the determination of transaction costs. In this sense, institutions that facilitate low transaction costs can boost economic growth.

Alongside production costs, transaction costs are one of the most significant factors in business operation and management.

Definition

Williamson defines transaction costs as a cost innate in running an economic system of companies, comprising the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales. According to Williamson, the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behavior.

Douglass North states that there are four factors that comprise transaction costs – "measurement", "enforcement", "ideological attitudes and perceptions", and "the size of the market". Measurement refers to the calculation of the value of all aspects of the good or service involved in the transaction. Enforcement can be defined as the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal. These first two factors appear in the concept of ideological attitudes and perceptions, North's third aspect of transaction costs. Ideological attitudes and perceptions encapsulate each individual's set of values, which influences their interpretation of the world. The final aspect of transaction costs, according to North, is market size, which affects the partiality or impartiality of transactions.

Dahlman categorized the content of transaction activities into three broad categories:

• Search and information costs are costs such as in determining that the required good is available on the market, which has the lowest price, etc.
• Bargaining and decision costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken. On asset markets and in organizational economics, the transaction cost is some function of the distance between the supply and demand.
• Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action, often through the legal system, if this turns out not to be the case.

Steven N. S. Cheung defines transaction costs as any costs that are not conceivable in a "Robinson Crusoe economy"—in other words, any costs that arise due to the existence of institutions. For Cheung, term "transaction costs" are better described as "institutional costs". Many economists, however, restrict this definition to exclude costs internal to an organization.

History

The pool shows institutions and market as a possible form of organization to coordinate economic transactions. When the external transaction costs are higher than the internal transaction costs, the company will grow. If the internal transaction costs are higher than the external transaction costs the company will be downsized by outsourcing, for example.

The idea that transactions form the basis of an economic theory was introduced by the institutional economist John R. Commons in 1931. He said that:

These individual actions are really trans-actions instead of either individual behavior or the "exchange" of commodities. It is this shift from commodities and individuals to transactions and working rules of collective action that marks the transition from the classical and hedonic schools to the institutional schools of economic thinking. The shift is a change in the ultimate unit of economic investigation. The classic and hedonic economists, with their communistic and anarchistic offshoots, founded their theories on the relation of man to nature, but institutionalism is a relation of man to man. The smallest unit of the classic economists was a commodity produced by labor. The smallest unit of the hedonic economists was the same or similar commodity enjoyed by ultimate consumers. One was the objective side, the other the subjective side, of the same relation between the individual and the forces of nature. The outcome, in either case, was the materialistic metaphor of an automatic equilibrium, analogous to the waves of the ocean, but personified as "seeking their level". But the smallest unit of the institutional economists is a unit of activity – a transaction, with its participants. Transactions intervene between the labor of the classic economists and the pleasures of the hedonic economists, simply because it is society that controls access to the forces of nature, and transactions are, not the "exchange of commodities", but the alienation and acquisition, between individuals, of the rights of property and liberty created by society, which must therefore be negotiated between the parties concerned before labor can produce, or consumers can consume, or commodities be physically exchanged".

— John R. Commons, Institutional Economics, American Economic Review, Vol.21, pp.648-657, 1931

The term "transaction cost" is frequently and mistakenly thought to have been coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. While he did not coin the specific term, Coase indeed discussed "costs of using the price mechanism" in his 1937 paper The Nature of the Firm, where he first discusses the concept of transaction costs, marking the first time that the concept of transaction costs was introduced into the study of enterprises and market organizations. The term "Transaction Costs" itself can be traced back to the monetary economics literature of the 1950s, and does not appear to have been consciously 'coined' by any particular individual.

Transaction cost as a formal theory started in the late 1960s and early 1970s. And refers to the "Costs of Market Transactions" in his seminal work, The Problem of Social Cost (1960).

Arguably, transaction cost reasoning became most widely known through Oliver E. Williamson's Transaction Cost Economics. Today, transaction cost economics is used to explain a number of different behaviours. Often this involves considering as "transactions" not only the obvious cases of buying and selling, but also day-to-day emotional interactions and informal gift exchanges. Williamson was one of the most cited social scientists at the turn of the century, and was later awarded the 2009 Nobel Memorial Prize in Economics.

Technologies associated with the Fourth Industrial Revolution such as distributed ledger technology and blockchains may reduce transaction costs when compared to traditional forms of contracting.

Examples

A supplier may bid in a very competitive environment with a customer to build a widget. To make the widget, the supplier needs to build specialized machinery that cannot be used to make other products. Once the contract is awarded to the supplier, the relationship between customer and supplier changes from a competitive environment to a monopoly/monopsony relationship, known as a bilateral monopoly. This means that the customer has greater leverage over the supplier. To avoid these potential costs, "hostages" may be swapped, which may involve partial ownership in the widget factory and revenue sharing.

Car companies and their suppliers often fit into this category, with the car companies forcing price cuts on their suppliers. Defense suppliers and the military appear to have the opposite problem, with cost overruns occurring quite often.

An example of measurement, one of North's four factors of transaction costs, occurs when roving bandits calculate the success of their banditry based on how much money they can take from their citizens. Enforcement, the second of North's factors of transaction costs, may take the form of a mediator in dealings with the Sicilian mafia when it is not certain that both parties will maintain their end of the deal.

Differences from neoclassical microeconomics

Williamson argues in The Mechanisms of Governance (1996) that Transaction Cost Economics (TCE) differs from neoclassical microeconomics in the following points:

Item	Neoclassical microeconomics	Transaction cost economics
Behavioural assumptions	Assumes hyperrationality and ignores most of the hazards related to opportunism	Assumes bounded rationality
Unit of analysis	Concerned with composite goods and services	Analyzes the transaction itself
Governance structure	Describes the firm as a production function (a technological construction)	Describes the firm as a governance structure (an organizational construction)
Problematic property rights and contracts	Often assumes that property rights are clearly defined and that the cost of enforcing those rights by the means of courts is negligible	Treats property rights and contracts as problematic
Discrete structural analysis	Uses continuous marginal modes of analysis in order to achieve second-order economizing (adjusting margins)	Analyzes the basic structures of the firm and its governance in order to achieve first-order economizing (improving the basic governance structure)
Remediableness	Recognizes profit maximization or cost minimization as criteria of efficiency	Argues that there is no optimal solution and that all alternatives are flawed, thus bounding "optimal" efficiency to the solution with no superior alternative and whose implementation produces net gains
Imperfect Markets	Downplays the importance of imperfect markets	Robert Almgren and Neil Chriss, and later Robert Almgren and Tianhui Li, showed that the effects of transaction costs lead portfolio managers and options traders to deviate from neoclassically optimal portfolios extending the original analysis to derivative markets.

The transaction costs frameworks reject the notion of instrumental rationality and its implications for predicting behavior. Whereas instrumental rationality assumes that an actor's understanding of the world is the same as the objective reality of the world, scholars who focus on transaction costs note that actors lack perfect information about the world (due to bounded rationality).

Game theory

In game theory, transaction costs have been studied by Anderlini and Felli (2006). They consider a model with two parties who together can generate a surplus. Both parties are needed to create the surplus. Yet, before the parties can negotiate about dividing the surplus, each party must incur transaction costs. Anderlini and Felli find that transaction costs cause a severe problem when there is a mismatch between the parties' bargaining powers and the magnitude of the transaction costs. In particular, if a party has large transaction costs but in future negotiations it can seize only a small fraction of the surplus (i.e., its bargaining power is small), then this party will not incur the transaction costs and hence the total surplus will be lost. It has been shown that the presence of transaction costs as modelled by Anderlini and Felli can overturn central insights of the Grossman-Hart-Moore theory of the firm.

Evaluative mechanisms

Oliver E. Williamson's theory of evaluative mechanisms assess economic entitles based on eight variables: bounded rationality, atmosphere, small numbers, information asymmetric, frequency of exchange, asset specificity, uncertainty, and threat of opportunism.

• Bounded Rationality: refers to the physical and mental, intellectual, emotional and other restrictions imposed by people participating in the transaction in order to maximize their interests.
• Atmosphere: The reason for increasing the difficulty of the transaction here is mostly because both parties to the transaction remain suspicious of the transaction, and the two sides are hostile to each other. Such a relationship cannot achieve a harmonious atmosphere, let alone a harmonious transaction relationship. This will cause both parties to increase security measures and increase expenditure during the transaction process.
• Small Numbers: Because the number of the two parties is not equal, the number of available transaction objects is reduced, and the market will be dominated by a few people, which leads to higher market expenditures. The main reason here is that some deals are too proprietary.
• Information Asymmetric: The pioneers in the market will control the direction of the market, and will know the information that is more beneficial to their own development earlier, and often these information will make opportunists and uncertain environments finalized, which will form a unique information gap. so as to form a transaction and obtain a profit
• Frequency of exchange: Frequency of exchange refers to buyer activity in the market or the frequency of transactions between the parties occurs. The higher the frequency of transactions, the higher the relative administrative and bargaining costs.
• Asset specificity: Asset specificity consist of site, physical asset, and human asset specificity. The asset specific investment is a specialized investment, which does not have market liquidity. Once the contract is terminated, the asset specific investment cannot to be redeployed. Therefore, a change or termination of this transaction will result in significant loss.
• Uncertainty: Uncertainty refers to the risks that may occur in a market exchange. The increase of environmental uncertainty will be accompanied by the increase of transaction cost, such as information acquisition cost, supervision cost and bargaining cost.
• Threat of opportunism: Threat of opportunism is attributed to human nature. Opportunistic behavior of vendors can lead to higher transaction coordination costs or even termination of contracts. A company can use governance mechanism to reducing the threat of opportunism.

Theory of the firm

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Theory_of_the_firm 

The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as transaction cost theory, managerial economics and behavioural theory of the firm will allow for an in-depth analysis on various firm and management types.

Overview

In simplified terms, the theory of the firm aims to answer these questions:

1. Existence. Why do firms emerge? Why are not all transactions in the economy mediated over the market?
2. Boundaries. Why is the boundary between firms and the market located exactly there in relation to size and output variety? Which transactions are performed internally and which are negotiated on the market?
3. Organization. Why are firms structured in such a specific way, for example as to hierarchy or decentralization? What is the interplay of formal and informal relationships?
4. Heterogeneity of firm actions/performances. What drives different actions and performances of firms?
5. Evidence. What tests are there for the respective theories of the firm?

Firms exist as an alternative system to the market-price mechanism when it is more efficient to produce in a non-market environment. For example, in a labour market, it might be very difficult or costly for firms or organizations to engage in production when they have to hire and fire their workers depending on demand/supply conditions. It might also be costly for employees to shift companies every day looking for better alternatives. Similarly, it may be costly for companies to find new suppliers daily. Thus, firms engage in a long-term contract with their employees or a long-term contract with suppliers to minimize the cost or maximize the value of property rights.

Background

The First World War period saw a change of emphasis in economic theory away from industry-level analysis which mainly included analyzing markets to analysis at the level of the firm, as it became increasingly clear that perfect competition was no longer an adequate model of how firms behaved. Economic theory until then had focused on trying to understand markets alone and there had been little study on understanding why firms or organisations exist. Markets are guided by prices and quality as illustrated by vegetable markets where a buyer is free to switch sellers in an exchange. The need for a revised theory of the firm was emphasized by empirical studies by Adolf Berle and Gardiner Means, who made it clear that ownership of a typical American corporation is spread over a wide number of shareholders, leaving control in the hands of managers who own very little equity themselves. R. L. Hall and Charles J. Hitch found that executives made decisions by rule of thumb rather than in the marginalist way.

Transaction cost theory

Main article: Transaction cost

The model shows institutions and market as a possible form of organization to coordinate economic transactions. When the external transaction costs are higher than the internal transaction costs, the company will grow. If the external transaction costs are lower than the internal transaction costs the company will be downsized by outsourcing, for example.

According to Ronald Coase's essay "The Nature of the Firm", people begin to organise their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.

Ronald Coase set out his transaction cost theory of the firm in 1937, making it one of the first (neo-classical) attempts to define the firm theoretically in relation to the market. One aspect of its 'neoclassicism' lies in presenting an explanation of the firm consistent with constant returns to scale, rather than relying on increasing returns to scale. Another is in defining a firm in a manner which is both realistic and compatible with the idea of substitution at the margin, so instruments of conventional economic analysis apply. He notes that a firm's interactions with the market may not be under its control (for instance because of sales taxes), but its internal allocation of resources are: “Within a firm, … market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur … who directs production.” He asks why alternative methods of production (such as the price mechanism and economic planning), could not either achieve all production, so that either firms use internal prices for all their production, or one big firm runs the entire economy.

Coase begins from the standpoint that markets could in theory carry out all production and that what needs to be explained is the existence of the firm, with its "distinguishing mark … [of] the supersession of the price mechanism." Coase identifies some reasons why firms might arise, and dismisses each as unimportant:

1. if some people prefer to work under the direction and are prepared to pay for the privilege (but this is unlikely);
2. if some people prefer to direct others and are prepared to pay for this (but generally people are paid more to direct others);
3. if purchasers prefer goods produced by firms.

Instead, for Coase the main reason to establish a firm is to avoid some of the transaction costs of using the price mechanism. These include discovering relevant prices (which can be reduced but not eliminated by purchasing this information through specialists), as well as the costs of negotiating and writing enforceable contracts for each transaction (which can be large if there is uncertainty). Moreover, contracts in an uncertain world will necessarily be incomplete and have to be frequently re-negotiated. The costs of haggling about the division of surplus, particularly if there is asymmetric information and asset specificity, may be considerable.

If a firm operated internally under the market system, many contracts would be required (for instance, even for procuring a pen or delivering a presentation). In contrast, a real firm has very few (though much more complex) contracts, such as defining a manager's power of direction over employees, in exchange for which the employee is paid. These kinds of contracts are drawn up in situations of uncertainty, in particular for relationships that last over long periods of time. Such a situation runs counter to neo-classical economic theory. The neo-classical market is instantaneous, forbidding the development of extended agent-principal (employee-manager) relationships, planning, and of trust. Coase concludes that “a firm is likely therefore to emerge in those cases where a very short-term contract would be unsatisfactory”, and that “it seems improbable that a firm would emerge without the existence of uncertainty”.

He notes that government measures relating to the market (sales taxes, rationing, price controls) tend to increase the size of firms, since firms internally would not be subject to such transaction costs. Thus, Coase defines the firm as "the system of relationships which comes into existence when the direction of resources is dependent on the entrepreneur." We can therefore think of a firm as getting larger or smaller based on whether the entrepreneur organises more or fewer transactions.

The question then arises of what determines the size of the firm; why does the entrepreneur organise the transactions he does, why no more or less? Since the reason for the firm's being is to have lower costs than the market, the upper limit on the firm's size is set by costs rising to the point where internalising an additional transaction equals the cost of making that transaction in the market. (At the lower limit, the firm's costs exceed the market's costs, and it does not come into existence.) In practice, diminishing returns to management contribute most to raising the costs of organising a large firm, particularly in large firms with many different plants and differing internal transactions (such as a conglomerate), or if the relevant prices change frequently.

Coase concludes by saying that the size of the firm is dependent on the costs of using the price mechanism, and on the costs of organisation of other entrepreneurs. These two factors together determine how many products a firm produces and how much of each.

Reconsiderations of transaction cost theory

According to Louis Putterman, most economists accept distinction between intra-firm and interfirm transaction but also that the two shade into each other; the extent of a firm is not simply defined by its capital stock. George Barclay Richardson for example, notes that a rigid distinction fails because of the existence of intermediate forms between firm and market such as inter-firm co-operation.

Klein (1983) asserts that “Economists now recognise that such a sharp distinction does not exist and that it is useful to consider also transactions occurring within the firm as representing market (contractual) relationships.” The costs involved in such transactions that are within a firm or even between the firms are the transaction costs.

Ultimately, whether the firm constitutes a domain of bureaucratic direction that is shielded from market forces or simply “a legal fiction”, “a nexus for a set of contracting relationships among individuals” (as Jensen and Meckling put it) is “a function of the completeness of markets and the ability of market forces to penetrate intra-firm relationships”.

Managerial and behavioural theories

It was only in the 1960s that the neo-classical theory of the firm was seriously challenged by alternatives such as managerial and behavioral theories. Managerial theories of the firm, as developed by William Baumol (1959 and 1962), Robin Marris (1964) and Oliver E. Williamson (1966), suggest that managers would seek to maximise their own utility and consider the implications of this for firm behavior in contrast to the profit-maximising case. (Baumol suggested that managers’ interests are best served by maximising sales after achieving a minimum level of profit which satisfies shareholders.) More recently this has developed into ‘principal–agent’ analysis (e.g., Spence and Zeckhauser and Ross (1973) on problems of contracting with asymmetric information) which models a widely applicable case where a principal (a shareholder or firm for example) cannot costlessly infer how an agent (a manager or supplier, say) is behaving. This may arise either because the agent has greater expertise or knowledge than the principal, or because the principal cannot directly observe the agent's actions; it is asymmetric information that leads to a problem of moral hazard. This means that to an extent managers can pursue their own interests. Traditional managerial models typically assume that managers, instead of maximising profit, maximise a simple objective utility function (this may include salary, perks, security, power, prestige) subject to an arbitrarily given profit constraint (profit satisficing).

Behavioural approach

Main article: Behavioural theory of the firm

The behavioural approach, as developed in particular by Richard Cyert and James G. March of the Carnegie School places emphasis on explaining how decisions are taken within the firm, and goes well beyond neoclassical economics. Much of this depended on Herbert A. Simon's work in the 1950s concerning behaviour in situations of uncertainty, which argued that “people possess limited cognitive ability and so can exercise only ‘bounded rationality’ when making decisions in complex, uncertain situations”. Thus individuals and groups tend to "satisfice"—that is, to attempt to attain realistic goals, rather than maximize a utility or profit function. Cyert and March argued that the firm cannot be regarded as a monolith, because different individuals and groups within it have their own aspirations and conflicting interests, and that firm behaviour is the weighted outcome of these conflicts. Organisational mechanisms (such as "satisficing" and sequential decision-taking) exist to maintain conflict at levels that are not unacceptably detrimental. Compared to ideal state of productive efficiency, there is organisational slack (Leibenstein's X-inefficiency).

Team production

Armen Alchian and Harold Demsetz's analysis of team production extends and clarifies earlier work by Coase. Thus according to them the firm emerges because extra output is provided by team production, but the success of this depends on being able to manage the team so that metering problems (it is costly to measure the marginal outputs of the co-operating inputs for reward purposes) and attendant shirking (the moral hazard problem) can be overcome, by estimating marginal productivity by observing or specifying input behaviour. Such monitoring as is therefore necessary, however, can only be encouraged effectively if the monitor is the recipient of the activity's residual income (otherwise the monitor herself would have to be monitored, ad infinitum). For Alchian and Demsetz, the firm, therefore, is an entity that brings together a team that is more productive working together than at arm's length through the market, because of informational problems associated with monitoring of effort. In effect, therefore, this is a "principal-agent" theory, since it is asymmetric information within the firm which Alchian and Demsetz emphasise must be overcome. In Barzel (1982)’s theory of the firm, drawing on Jensen and Meckling (1976), the firm emerges as a means of centralising monitoring and thereby avoiding costly redundancy in that function (since in a firm the responsibility for monitoring can be centralised in a way that it cannot if production is organised as a group of workers each acting as a firm).

The weakness in Alchian and Demsetz's argument, according to Williamson, is that their concept of team production has quite a narrow range of applications, as it assumes outputs cannot be related to individual inputs. In practice, this may have limited applicability (small work group activities, the largest perhaps a symphony orchestra), since most outputs within a firm (such as manufacturing and secretarial work) are separable so that individual inputs can be rewarded on the basis of outputs. Hence team production cannot offer the explanation of why firms (in particular, large multi-plant and multi-product firms) exist.

Asset specificity

For Oliver E. Williamson, the existence of firms derives from ‘asset specificity’ in production, where assets are specific to each other such that their value is much less in a second-best use. This causes problems if the assets are owned by different firms (such as purchaser and supplier), because it will lead to protracted bargaining concerning the gains from trade, because both agents are likely to become locked into a position where they are no longer competing with a (possibly large) number of agents in the entire market, and the incentives are no longer there to represent their positions honestly: large-numbers bargaining is transformed into small-number bargaining.

If the transaction is a recurring or lengthy one, re-negotiation may be necessary as a continual power struggle takes place concerning the gains from trade, further increasing the transaction costs. Moreover, there are likely to be situations where a purchaser may require a particular, firm-specific investment of a supplier which would be profitable for both; but after the investment has been made it becomes a sunk cost and the purchaser can attempt to re-negotiate the contract such that the supplier may make a loss on the investment (this is the hold-up problem, which occurs when either party asymmetrically incurs substantial costs or benefits before being paid for or paying for them). In this kind of situation, the most efficient way to overcome the continual conflict of interest between the two agents (or coalitions of agents) may be the removal of one of them from the equation by takeover or merger. Asset specificity can also apply to some extent to both physical and human capital so that the hold-up problem can also occur with labour (e.g. labour can threaten a strike, because of the lack of good alternative human capital; but equally the firm can threaten to fire).

Probably the best constraint on such opportunism is reputation (rather than the law, because of the difficulty of negotiation, composition, and enforcement of contracts). If a reputation for opportunism significantly damages an agent's dealings in the future, this alters the incentives to be opportunistic.

Williamson sees the limit on the size of the firm as being given partly by costs of delegation (as a firm's size increases its hierarchical bureaucracy does too), and the large firm's increasing inability to replicate the high-powered incentives of the residual income of an owner-entrepreneur. This is partly because it is in the nature of a large firm that its existence is more secure and less dependent on the actions of any one individual (increasing the incentives to shirk), and because intervention rights from the central characteristic of a firm tend to be accompanied by some form of income insurance to compensate for the lesser responsibility, thereby diluting incentives. Milgrom and Roberts (1990) explain the increased cost of management as due to the incentives of employees to provide false information beneficial to themselves, resulting in costs to managers of filtering information, and often the making of decisions without full information. This grows worse with firm size and more layers in the hierarchy. Empirical analyses of transaction costs have attempted to measure and operationalize transaction costs. Research that attempts to measure transaction costs is the most critical limit to efforts to potential falsification and validation of transaction cost economics.

Boundaries of the firm

Boundaries of the firm explores the restrictions on size and output variety of firms, and how and why these restrictions affect production and enterprise success. There are two boundaries, horizontal, and vertical. As part of their corporate strategy, firms must choose between being horizontally broad, vertically deep, or both. Firms with horizontal breadth have numerous product lines or types, whereas firms with vertical depth are integrated into various stages of the value chain. Generally, a firm's capabilities are specific to a particular scope direction, for example, marketing skills lead to horizontal breadth, and production expertise lead to vertical depth.

A firm is horizontally broad when it utilises excess indivisible resources to expand into various products, and obtain scope economies. Horizontally broad firms leverage capabilities such as marketing skills, product knowledge, customer service, and reputation for their expansions. Scope economies, or economies of scope, describe the aspect of production wherein cost savings result from the scope of an enterprise, as opposed to its scale (see economies of scale). Meaning, there are economies of scope where it is less expensive for firms to combine two or more product lines into one, than it is to produce each product separately. Scope economies, wherein resources are synergistically used, has been found to improve firm performance. However, coordination, adjustment and execution costs related to producing products synergistically are limiting factors.

A firm is vertically deep if it possesses stronger capabilities than external producers, and thus can produce and distribute its goods or services more efficiently internally - either upstream or downstream on the manufacturing chain. Vertically deep firms leverage capabilities such as production and process expertise, including technology selection, asset utilisation, and supply chain management. Vertical depth often improves a firm's governance of activities, and contributes to a beneficial exploitation of internal capabilities, but is limited by the costs of hierarchical management, such as monitoring and coordination.

The concept of boundaries can be linked to Coase's understanding of The Nature of the Firm, as it recognises that transaction costs are a significant factor in a firm's decision to outsource, or internally produce, but also considers other influences specific to firms, such as their relevant capabilities, and governance decisions.

Importance of boundaries

A study of firms in France illustrated how distortions to the number of employees and size of a firm directly impacts levels of productivity, wage and welfare within the organisation. Firms with at least 50 workers are subject to a number of additional regulations, which leads some firms to stay below the 50-worker threshold. The distortion acts like an additional tax on hiring workers, thereby preventing the reallocation from less productive to more productive firms, and reducing overall welfare.

Economic theory of outsourcing

In economic theory, the pros and cons of outsourcing have been discussed since Ronald Coase (1937) asked the famous question: Why is not all production carried on by one big firm? An informal answer has been provided by Oliver Williamson (1979), who has emphasized the importance of different transaction costs within and between firms. The boundaries of the firm (i.e., the distinction between transactions taking place within a firm and transactions between different firms) have been formally studied by Oliver Hart (1995) and his coauthors. According to the property rights approach to the theory of the firm based on incomplete contracting, the ownership structure (i.e., integration or non-integration) determines how the returns to non-contractible investments will be divided in future negotiations. Hence, whether or not outsourcing an activity to a different firm is optimal depends on the relative importance of the investments that the trading partners have to make. For instance, if only one party has to make an important non-contractible investment decision, then this party should be owner. However, the conclusions of the incomplete contracting theory crucially rely on the specification of the negotiations protocol and on whether or not there is asymmetric information.

Firm as a Sociotechnical System

The concept of viewing firms as sociotechnical systems finds its roots in the studies conducted by researchers at The Tavistock Institute of Human Relations, particularly the seminal works of Trist and Bamforth and Emery and Trist. These pioneering scholars observed, through extensive field observations employing a systemic perspective, that firms could be comprehended as structured sociotechnical systems. These systems were recognized as being open to the environment, possessing the capacity for self-regulation to achieve their objectives, and adapting by creating alternative pathways when necessary.

Sociotechnical Approach

The sociotechnical approach delineates firms not merely as economic entities but as systems that amalgamate social and technical facets. It delves into the interplay between the human and technological elements within organizations, emphasizing the interconnectedness and interdependence between the social structure—comprising people, relationships, and interactions—and the technical system—encompassing tools, processes, and resources. This approach acknowledges that the effectiveness and functionality of a firm arise not solely from its technical prowess but also from the way its social system interacts and interfaces with the technical framework. The dynamic between these systems, as articulated by Trist, Bamforth, Emery, and Trist, illustrates the need for an integrated understanding of human behavior, organizational culture, and technological systems within the framework of a firm.

Evolutionary and Complexity Theory-Based Approaches.

Evolutionary approaches to understanding firms arose as a parallel branch to classical theories, stemming from the pioneering work of Joseph A. Schumpeter. Schumpeter diverged from the abstract concept of the firm, introducing the notion that each firm possesses a distinct structural identity. He unified the creation and management of a firm into a single economic theory, emphasizing the dynamic nature of firms as evolving entities that learn and innovate within their fundamental routines. He also differentiated between firm development and growth, previously considered interlinked concepts.

Symbiotic Perspective

This structural description paved the way for Terra and Passador to propose a dynamic perspective on firms that goes beyond profit-centric views. The authors utilize sociotechnical concepts, describing firms where the social system meets the self-regulation and self-preservation requirements proposed by Luhmann, imparting an autoreferential dynamic to this subsystem, while technical structures exhibit a goal-oriented dynamic. These two systems symbiotically form the firm's supersystem, also manifesting an autoreferential dynamic, where social systems act as the mind animating the organization's physical body.

From this standpoint, firms represent a system traversed by a continuous flow of information and resources, enclosed within themselves, ensuring their unity. Therefore, they lack inputs or outputs in the same sense as in finalistic views of firms. Due to their structural determinism, once the system emerges, its development inherently involves a history of recurrent interactions within the environment that both emerges with it and contains it. Both the system's structure and the environment spontaneously change congruently and complementarily as the firm strives to maintain its organization and operational coherence. Its ultimate product refers not to its outputs per se but to its own organization and realization of identity and autonomy.

As an organization is a self-referential entity, enclosed within operational closure, its function focuses on its own constitution. In this context, the exchanges it conducts with its supra-systems merely represent disturbances and residues allowing it to capture from the environment the necessary order for its survival and sustenance of its identity. This contrasts with finalistic conceptions of firms, where the scope is to meet external demands. Under this perspective, the firm's purpose is to ensure its own existence.

Boundaries

Under the perspective of the firm as a symbiotic entity, boundaries are defined through its operational closure. These boundaries encompass not only hierarchical relationships among agents but also various classes of relations linking social agents to a particular technical and social system. This occurs through the values and bonds of trust established by agents, ensuring the self-production of the organization's values and their relative stability over time.

Viable Contour

The viability of the firm, as a self-referential entity enclosed within operational closure, is linked to the rate of regeneration of its sociotechnical systems and the flow of resources and information traversing it. If the rate of disintegration exceeds the pace at which the firm can repair itself, the structure of this network of interactions unravels. This makes disintegration a powerful constraint on the maximum size for a viable contour structure. The flow of resources and information also places the firm in a situation of constant threat since such structures rely on relationships with the environment to sustain their dynamics. This underscores the necessity for an adjustment field that compensates for environmental disturbances—a crucial factor in preventing the system from reaching thermodynamic equilibrium, which ultimately signifies the demise of the structure.

Social Attractors

Experiments conducted by Terra and Passador underscored the significant role of attraction basins governing firm dynamics. In this context, technical systems emerged as the central element of organizational dynamics, around which social attractors orbit. These social attractors create secondary attraction basins and are surrounded by their own social "satellites" in a structure analogous to a planetary system. Here, the star can be understood as the technical system, the planets as leaders, and other agents as satellites or free bodies not confined to a single social attraction basin but related to the technical system.

Although the experiments highlighted technical systems as primary attractors, the authors' model also demonstrates a recursion in this system, where agents contribute to what attracts them in the technical system, just as the technical system shapes social structures by attracting agents. Hence, an intimate and symbiotic relationship exists between the social and technical systems, wherein the former shapes the latter. This grants leaders a crucial role in the growth and regeneration of structures since their control capacity directly impacts the organization's viable boundary.

The model also reveals that relocating or including an agent or subsystem in an organization can affect its dynamics by altering the attraction basins governing it. This may lead to undesired qualitative leaps or even rupture of the organization's self-referential network, potentially resulting in the collapse of one of its subsystems. Simultaneously, such restructuring in relationships and social attraction basins can also promote innovation, akin to DNA mutations, creating new dynamics and altering the variety and redundancy within organizations.

Essential conditions for a firm's emergence

Regarding the essential conditions for a firm's emergence and sustenance, Terra and Passador identified four crucial elements: (1) the ability to integrate external agents into its formal network of relations; (2) being pervaded by a resource flow sustaining its self-referential network; (3) offering advantages for agents to associate with it; and (4) the capability to regenerate its formal network of relations when an agent is lost, especially at the supervisory level.

While regeneration of the formal network of relations appeared possible without specialized structures, organizations lacking such systems tend to be structurally unstable. Establishing routines specialized in replacing and reconstituting the social network enhances stability and significantly extends the organization's lifespan. This suggests that mechanisms specialized in reconstructing the organization's social network topology, even in simplified forms, are vital to ensure the longevity of such structures.

Relationships with the environment and sustainability

The theory of Symbiotic Dynamics is based on the intimate association between organizations and the systems that surround them, in such a way that the survival of these is correlated. Thus, it is important for the organization's survival that the deterioration and transformation of supersystems, such as markets, society, and the environment, occur at a pace that allows them to regenerate to maintain their identity and organization, or that enables the firm itself to adapt to the new realities imposed by qualitative leaps that may occur in the dynamics of supersystems. If this need is neglected, it can lead the environment to deteriorate at a rate greater than the compensatory fields of organizations can support, leading them to disintegrate.

In this context, organizations need to be guided by a hybrid logic, blending proactivity and reactivity, where organizations recognize their impact on the environment as a whole and act in an organized manner to reduce their degeneration, while adapting to the demands that may arise from these interactions. In the context at hand, organizations need to include in their decisions all the other systems with which they are coupled, making it possible to envision the construction of complex socio-economic systems where they integrate in a stable and sustainable manner.

Other models

Efficiency wage models like that of Shapiro and Stiglitz (1984) suggest wage rents as an addition to monitoring, since this gives employees an incentive not to shirk, given a certain probability of detection and the consequence of being fired. Williamson, Wachter and Harris (1975) suggest promotion incentives within the firm as an alternative to morale-damaging monitoring, where promotion is based on objectively measurable performance. (The difference between these two approaches may be that the former is applicable to a blue-collar environment, the latter to a white-collar one). Leibenstein (1966) sees a firm's norms or conventions, dependent on its history of management initiatives, labour relations and other factors, as determining the firm's "culture" of effort, thus affecting the firm's productivity and hence size.

George Akerlof (1982) develops a gift exchange model of reciprocity, in which employers offer wages unrelated to variations in output and above the market level, and workers have developed a concern for each other's welfare, such that all put in effort above the minimum required, but the more able workers are not rewarded for their extra productivity; again, size here depends not on rationality or efficiency but on social factors. In sum, the limit to the firm's size is given where costs rise to the point where the market can undertake some transactions more efficiently than the firm.

Recently, Yochai Benkler further questioned the rigid distinction between firms and markets based on the increasing salience of “commons-based peer production” systems such as open source software (e.g., Linux), Wikipedia, Creative Commons, etc. He put forth this argument in The Wealth of Networks: How Social Production Transforms Markets and Freedom, which was released in 2006 under a Creative Commons share-alike license.

Grossman–Hart–Moore theory

In modern contract theory, the “theory of the firm” is often identified with the “property rights approach” that was developed by Sanford J. Grossman, Oliver D. Hart, and John H. Moore. The property rights approach to the theory of the firm is also known as the “Grossman–Hart–Moore theory”. In their seminal work, Grossman and Hart (1986), Hart and Moore (1990) and Hart (1995) developed the incomplete contracting paradigm. They argue that if contracts cannot specify what is to be done given every possible contingency, then property rights (and hence firm boundaries) matter. Specifically, consider a seller of an intermediate good and a buyer. Should the seller own the physical assets that are necessary to produce the good (non-integration) or should the buyer be the owner (integration)? After relationship-specific investments have been made, the seller and the buyer bargain. When they are symmetrically informed, they will always agree to collaborate. Yet, the division of the ex post surplus depends on the parties’ disagreement payoffs (the payoffs they would get if no ex post agreement were reached), which in turn depend on the ownership structure. Thus, the ownership structure has an influence on the incentives to invest. A central insight of the theory is that the party with the more important investment decision should be the owner. Another prominent conclusion is that joint asset ownership is suboptimal if investments are in human capital.

The Grossman–Hart–Moore model has been successfully applied in many contexts, e.g. with regard to privatization. Chiu (1998) and DeMeza and Lockwood (1998) have extended the model by considering different bargaining games that the parties may play ex post (which can explain ownership by the less important investor). Oliver Williamson (2002) has criticized the Grossman–Hart–Moore model because it is focused on ex ante investment incentives, while it neglects ex post inefficiencies. Schmitz (2006) has studied a variant of the Grossman–Hart–Moore model in which a party may have or acquire private information about its disagreement payoff, which can explain ex post inefficiencies and ownership by the less important investor. Several variants of the Grossman–Hart–Moore model such as the one with private information can also explain joint ownership.

Solidarity economy

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Solidarity_economy 

Solidarity economy or social and solidarity economy (SSE) refers to a wide range of economic activities that aim to prioritize social profitability instead of purely financial profits. A key feature that distinguishes solidarity economy entities from private and public enterprises is the participatory and democratic nature of governance in decision-making processes as one of the main principles of the SSE sector. Active participation of all people involved in decision-making procedures contributes to their empowerment as active political subjects. However, different SSE organizational structures reflect variations in democratic governance and inclusive participation. Ultimately, SSE represents a crucial tool in guaranteeing that social justice ideals are upheld and that the wellbeing of the most vulnerable populations is paid attention to during the planning processes.

Overview

Some refer to solidarity economy as a method for naming and conceptualizing transformative monetary qualities, practices, and foundations that exist throughout the world. These incorporate, yet are not constrained to, egalitarian and participatory monetary conduct by people, laborers, and makers, for example, by a person who is a moral shopper, specialist, and additionally financial specialist, or by a specialist co-op, reasonable exchange business, or dynamic association. It is an economic formation which seeks to improve the quality of life of a region or community on the basis of solidarity, often through local business and not-for-profit endeavors. It mainly consists of activities organized to address and transform exploitation under capitalist economics and the large-corporation, large-shareholder-dominated economy and can include diverse activities. For some, it refers to a set of strategies and a struggle aimed at the abolition of capitalism and the social relations that it supports and encourages; for others, it names strategies for "humanizing" the capitalist economy—seeking to supplement capitalist globalization with community-based "social safety nets".

Historically, classical utilitarians argued that individuals should adopt a system which maximizes the total of all individuals' utility. When the utilities of people are summed, the personal utilities become equivalent. In other words, one's personal utility is equivalent to the utility of others. Individuals can then comprehend how other people feel, forming the foundation of the solidarity economy. Solidarity might be more effective than alienated individuality in certain instances. Game theory can explain greater productivity via solidarity. Sometimes in game theory contexts, cooperative instances might lead to a larger benefit, however game theory fundamentally presupposes the selfish nature of individual individuals. A major distinction between solidarity and game theory is that solidarity economy places and recognizes the selfless component of humans above their egotistical features.

History

"Solidarity economy" was used as an economic organizing concept as early as 1937, when Felipe Alaiz advocated for the development of economic solidarity among worker collectives in urban and rural areas during the Spanish Civil War  It emerged more widely as a term in Latin America over the past twenty years in response to community and worker demands to expand forms of social inclusion and unity. Different conceptions of Solidarity Economy originated among movements seeking to create grassroots economies during the military dictatorships that dominated Latin America during the 1970s and 1980s and subsequently, flourished as of the emergence of financial neoliberal democracies in the 1990s up to the present.

The term "Social Solidarity Economy" started to be used in the late 90s.  The first meeting of what would thereafter become the RIPESS (Intercontinental network for the promotion of social solidarity economy) network, took place in Lima, Peru on July 4, 1997 and the participants from more than 30 countries agreed that there needed to be a strong integration between the more traditional social economy structures (collective enterprises – a sector of the solidarity economy) and the more holistic and alternative approaches of solidarity economy practices and communities. The notion of solidarity economy has gained popularity, particularly since the early 2000s. In fact, while in most francophone and hispanophone countries the expression used is "Social AND Solidarity Economy", when the RIPESS network was formally announced in December 2002, it chose to eliminate the "AND" in its official name, in order to stress solidarity economy's aim of transformative system change, which includes going beyond the social economy. Another global network with the same aims, the Alliance for a Responsible, Plural and United World, produced an enhanced definition: "Production, distribution and consumption activities which contribute to the democratisation of the economy via citizen engagement at the local and global level. Many networks continue to use the term Solidarity Economy and institutions usually refer to SSE as Social and Solidarity Economy. 

According to previous revolutionary trends, we could be in the midst of a historical shift away from marketism and towards solidarity.

Solidarity-based economic approaches

Protest for the poor with banner reading "solidarity without limits"

One SSE approach focuses primarily on making the current economic system sustainable. Its objective is the creation of enterprises that serve its members or the community, instead of simply striving for financial profit by prioritising people and work over capital in the distribution of revenue and surplus. Human, financial, and environmental assets are just a few instances of the variables that influence a company's sustainability. This notion, which is relevant to SSE enterprises, is integrated into social systems like social accountability and social balance.United Nations Research Institute for Social Development has concluded that "social and solidarity economy, a science-in-the-making, cannot go very far in framing discourses and in engaging with the bigger picture, as an alternative to the crisesridden "dominant economic paradigm"" and calls for further developing SSE into a new scientific theory with its own foundations which would offer an alternative to the homo economicus. Environmental development, furthermore known as sustainable development, is a type of economic and social advancement that ensures living standards within the ecosystem and therefore is tailored to the needs of each sustained region in order to become both humanistic and sustainable throughout time.

Another approach in this regard could be the "Bill on the Hook" project of the Istanbul Metropolitan Municipality. The initiative primarily aimed to provide much-needed financial support for the citizens of Istanbul during the COVID-19 pandemic. The platform anonymously matches the donors with households that have outstanding utility bills. In just 31 hours, the campaign generated over 1 million USD (18,600,000 TL) and helped 57,423 people in Istanbul pay their water and gas bills. "Bill on the Hook" is still keeping its popularity, mainly because a large number of households are still unable to pay their utility bills on time due to the current hyperinflation environment in Turkey.

Specialized literature includes the following variables as contributing elements to the sustainability of entrepreneurship in the SSE:

• Social factors. It is vital to acknowledge that belief systems should have solid grounds and also acknowledge the possible risk that particular designations may cause as to understand how social psychology contributes to the sociological growth and organizational strength.
• Politics, religion, and culture. Within each historical and cultural heritage, it is important to ensure factors such as cultural legacy, ancient traditions, as well as the implementation of awareness, while also keeping a sense of community and identity.
• Associativity. Associativity is a component of competition which enables the implementation of organisational structures that enable decision-making procedures centered on sustainability through time.
• Education. Consequently, functionality of SSE will rely on the input of the involved stakeholders, on the learning programs that are tailored to the experience, literacy, and educational backgrounds of their staff.
• Models of intervention in sustainable development. Models should not be uniform processes; rather, these should be created and implemented as part of collaborative initiatives under participatory operations.

Core values and principles

The RIPESS Charter of the Intercontinental Network for the Promotion of Social Solidarity Economy sets out eleven core values to promote the ethical and value-based economic model:

1. Humanism – putting human beings, their dignity, culture and full development at the centre
2. Democracy – promoting democratic values
3. Solidarity – mobilizing resources and establishing relations with other social collectives
4. Inclusiveness – establishing dialogue based on the respect for ideological differences
5. Subsidiarity – promoting grassroots development to overcome common problems
6. Diversity – encouraging representation of players of all sectors of society
7. Creativity – promoting innovation that contribute to social change
8. Sustainable Development – respecting the balance of the ecosystem by protecting the environment and biodiversity
9. Equality, equity and justice for all - fighting against all forms of discrimination and oppression
10. Respecting the integration of countries and people - opposing economic, political, and cultural domination of the North over the South
11. A plural and solidarity-based economy - providing an alternative to the neoliberal economic model by taking actions towards a plural and solidarity-based economy

Also, sharing some of the above-mentioned points, six principles have been described in the REAS Charter for Solidarity Economy:

1. Principle of equity. Introduces an ethical or justice principle in equality. It is a value that recognizes all people as subjects of equal dignity and protects their right not to be subjected to relationships based on domination regardless of their social condition, gender, age, ethnicity, origin, ability, etc. Society must satisfy, in an equitable manner, the respective interests of all people.
2. Principle of work. Work is a key element in the quality of life of people, community and economic relations between citizens and states. Importance of recovering the human, social, political, economic and cultural dimension of work that allows the development of people's capacities. Work is much more than a job or an occupation.
3. Principle of environmental sustainability. All productive and economic activity is related to nature. The good relationship with nature is a source of economic wealth and health. Therefore, environmental sustainability must be integrated into all activities, evaluating the environmental impact (ecological footprint).
4. Principle of cooperation. Cooperation instead of competition. Model of society based on harmonious local development and fair commercial relationships. Solidarity Economy is based on participatory and democratic ethics, which wants to promote learning and cooperative work between people and organizations.
5. Principle of non-profit-making. The economic model to be pursued is aimed at the integral, collective and individual development of people, and as a means, the efficient management of economically viable, sustainable and profitable projects, whose benefits are reinvested and redistributed. This "non-profit-making" is closely linked to the way of measuring results, which take into account not only the economic aspects, but also the human, social, environmental, cultural and participatory aspects; and the final result is the comprehensive benefit.
6. Principle of territorial responsibility. Participation in the sustainable local and community development of the territory. Organizations fully integrated into the territory and social environment in which they carry out their activities, which requires involvement in networks and cooperation with other organizations of the nearby social and economic fabric, within the same geographical area. This collaboration is a way for concrete positive and solidary experiences to transform the structures that generate inequality, domination and exclusion.

Challenges of a solidarity economy

Market relation pressures – As Solidarity Economy enterprises expand, it often becomes more immersed in market relations and global value chains, making it confront new pressures that force large SSE organizations to adopt practices that are characteristic of for-profit enterprise and dilute core SSE principles. An example of such a case could be the growing criticism of microcredit practices.

Informal economy vulnerability – Solidarity Economy interacts with the informal economy of atomized workers and producers a complex web of social relations. The challenge lies in transitioning out of this informality, transforming a wide array of informal social relations with multiple actors into governance and adopting necessary regulations.

Internal dynamics – Solidarity Economy organizations can be prone to elite capture and social exclusion. This might be because of the types of producers that integrate organizations such as cooperatives and/or due to the fact that those with better education and skills end up dominating governance structures.

Balancing multiple objectives – Solidarity Economy enterprises are required to balance a variety of potential objectives related to efficiency and equity, or economic, environmental, social and emancipatory dimensions. This could be made additionally difficult by the organization's membership homogeneity, misalignment of incentives between managers and members, increased reliance on external support etc.

These initiatives' variety and fragmentation – For the social economy stakeholders/ institutions and their associated monetary sponsors, this is regarded as a regular difficulty. Certain strategies appear to be appropriate, whereas others seem to be less effective for the social economy, due to its increased heterogeneity of initiatives.

Social economy businesses

Social economy businesses (SEB) are situated at the overlap of the social economy and the private sector. This kind of hybrid organisations earn all or some part of their income from the marketplace and they may be in competition with private sector organisations. As many businesses that are primarily viewed as part of a private sector have modified their business imperatives and taken on social business models, it can sometimes be difficult to distinguish between private sector and social economy businesses. The main difference with private sector organisations is that SEB are guided by social objectives that are reflected in their business mission and strategies and built into their structure. In other words, in case of SEB the prerogatives of capital do not dominate over the social objectives in the organization's decision making.

Examples of organizations

The term social and solidarity economy alludes to a wide scope of organizations that are recognized from ordinary revenue driven venture, business and casual economy by two center highlights. To start with, they have unequivocal monetary and social (and frequently ecological) goals. Second, they include differing types of co-employable, affiliated and solidarity relations. They include the following examples:

• Fair trade organizations form part of the solidarity economy, as their aim is to express practical solidarity with farmers in the developing world by paying them fair prices for their produce.
• Self-help organizations also form part of the solidarity economy as members support each other in dealing with their problems as a practical form of solidarity.
• Co-operatives and especially worker cooperatives form part of the solidarity economy if their aims include a commitment to solidarity in some form.
• Trade unions are often considered a key part of the solidarity economy as they are based on the principle of solidarity between workers.
• Tenants unions provide advocacy and support for the rights of tenants in rental housing.
• Free software movement, open-source development, and other forms of commons-based peer production
• Social center
• Give-away shops and other forms of gift economy
• Local exchange trading systems (LETS) as a way of replacing money.
• Solidarity lending
• Ethical purchasing
• Economy for the Common Good
• Global Social Economy Forum
• Trade School, a participatory art project co-founded by Caroline Woolard, where participants barter materials, ideas, and services for knowledge.
• Solidarity Economy Networks, such as the U.S. Solidarity Economy Network (USSEN), co-founded by Julie Matthaei (professor of economics with a focus on feminist economics and the political economy of gender, race and class at Wellesley College)