Rhodes, V. James

English

Research Papers in Economics

Cooperative Enterprise and
Organization Theory: An
Appraisal
V. James Rhodes
What is a university? The literal minded person may think in concrete
terms: ivy-clad buildings, impressivelaboratories, and a huge library. The
journalistic and legal types may think of the governing board and top
administration. Faculty members may stoutly insist that they are the
university. A management theorist may argue that it is a special type of
organization, invisible and abstract but embodying a nexus ofcontracts
among thousands of stakeholders. A conciliator may suggest all of the
above.
Inlastyear'sclassicreprint, Phillipstreatedthecooperativeasanassoci-
ation of farmers jointly controlling a plant. He pictured an agricultural
cooperative as an organization offirms rather than itselfbeing a firm.
Thisyear's classic by HeImbergerand Hoos asserts thatthe cooperative
should be viewed as a firm. Is this a disagreement comparable to ancient
disputesaboutwhethertheearthis flat orround?Whyisnotthe "correct"
paper alone considered to be the classic? Oris this disagreement a differ-
ence in viewpoints similar to the divergent concepts ofa university?
There were also disagreements among the first two classics published
in this Journal ofAgricultural Cooperation (now Journal ofCooperatives)
series. Nourse, a leadingagriculturaleconomistofhis day,wantedagricul-
tural cooperatives to stimulate competition to the point that they would
nolongerbeneeded. Sapiro, a leadingCaliforniaattorneyfor cooperatives,
campaigned for use of a type of commodity-wide cooperative that had
worked well for some specialty crops grown mainly in limited areas of
California. As Nourse perceived Sapiro endorsinga permanent cartel-like
organization, he wanted nothing to do with such an anti-competitive
approach. SapirosawNourseasbuildingorganizationsonsandthatwould
accomplish far less than commodity-wide cooperatives. These clearly
divergent concepts ofcooperatives for market competition or for market
power still arise from time to time.
We can understand that these two pioneers were addressing general
audiences and arguing for what should happen. We can see the crucial
differences in their education and experiences. Thus, we can understand
their differing conclusions. But what shall we say about the differences
V. James Rhodes isprofessoremeritus, DepartmentofAgriculturalEconomics, Uni-
versity ojMissouri-Columbia.88 JOURNAL OF COOPERATIVES 1995
between Phillips (P) and HeImberger and Hoos (HH)? Presumably, both
papers were objective analyses written for professional peers.
The Cooperative's Economic Structure
Both P and HH appear to be addressing the same issue ofwhether to
considerthecooperativetobea separateidentitycalleda firm. Bothwould
have agreed that, in a literal sense, a cooperative is considered a firm. For
example, most cooperatives were incorporated and "a corporation is an
artificial being separate and distinct from its agents, officers and stock-
holders" (Hulbert 1958, 22). But the question was whether, in economic
terms, a cooperative should be considered as a firm. HH say yes and P
seems to say no. Six years earlier, Robotka at Iowa State had written:
" 'The cooperative organization is a business enterprise firm' is almost
universally accepted without question or verification..." (1947, 103).
What were P's reasons for disregarding such precedent? His reasoning is
quiteexplicit. "Althoughitis descriptivelycorrecttosaythat a cooperative
is a business organization owned and controlled by its patrons and oper-
ated for theirbenefitas patrons, such a statement contributes nothingto
the understanding of the economic structure ofthe cooperative" (Phillips
1994,68; emphasis added). HH were later to use the theory ofthe firm to
exploretheeconomicconductofcooperatives. ButPaddressedissuesabout
the economic structure ofthe cooperative. In order to explore systemati-
callytherelationshipsamongmembersastheyformedandoperatedjointly
a setofmarketing activities, P resorted to a verticalintegrationmodelthat
necessarilypretended that the cooperativewas the association offarmers
rather than a discretely separate firm. The test is whether the fiction is
useful or not.
In contrast, HH ignored the conditions ofhowand whycooperation can
make sensetofarmers andfocused onhowthe cooperativewould setprice
in terms ofits costs, demand for the finished products, the supply curve
ofthe available commodity, and the cooperative maximand. They argued
convincingly that any difference in the maximands of a cooperative and
an investor-owned firm did not affect the treating of a cooperative as a
firm in economic analysis. At the time, neoclassical theory was content
with a black box about the structure of the firm. Nor were economists
appreciative of the idea that different approaches might reflect different
insightsratherthan error. Even today, manyagriculturaleconomistsmay
question Randall's argument that ''The (false) premise ofmuch scientific
pedagogy-that disagreement about the nature ofmaterial reality means
at least one party is wrong-serves us poorly" (1985). Perhaps, if P had
said that a cooperative is a firm, but that we can learn something about
cooperating (the very core ofa cooperative) by pretending it is not a firm,
then HH would have seen their model as new and different but not as a
correction ofP.
A Correction ofP's Error?
Agricultural economists generally concluded that the HH model was a
correction of P's error. See Royer (1994) for his argument that the HHCooperative Enterprise and Organization Theory: An Appraisal/Rhodes 89
model was much the better. In summary, he argued that the HH model
was more realistic, more workable, and more complete than P's model.
The HH model is still in use. The 1989 text on cooperatives by Cobia and
a committee ofleading cooperative economists contains three citations of
HH and only one of P. More telling, the two chapters in the Cobia text
on the economic theory of cooperatives are based mainly on HH. How
cooperatives would price-both up front and including patronage
refunds-andwhethertheywould close membership are issues onwhich
the HH model throws light.
Cotterill (1987) has built more elaborate models on the HH base. He
credits Royer and Enke for their contributions. Cotterill develops market
equilibriumpositionsfor a cooperativewithinvariousmarketstructures-
particularlyoligopolyand oligopsony-as it is guided byalternative maxi-
mands, patronage refund policies, open orclosed membership, and U- or
L-shaped economies of scale. He then explores the inclusion of certain
investment and finance considerations within the model. Clearly the HH
formulation has been helpful.
Recent Theoretical Developments Closer to P
We have discussed the earlierclassics, and especially P, in order to put
the publication of HH in its historical and intellectual context. It turns
out that recent theoretical developments extending the theory are more
closely related to P than to HH.
Alfred Marshall (1890), thegreatsynthesizerwho invigorated neoclassi-
cal economics, treated a firm interchangeably with a single proprietor in
his Principles. An earlyexceptionto this orthodoxy, J.R. Commons (1924),
treated the firm as a going concern, an organization ofpeople. Williamson
resumed that idea more recently. "The firm as production function needs
to makeway for the view ofthe firm as governance structure ifthe ramifi-
cationsofinternalorganizationaretobeaccuratelyassessed" (Williamson
1981, 1539). Williamson has enriched firm theory with his emphasis on
transactioncostsastheyaffectboththehorizontalandverticaldimensions
oftheorganizationoffirms. Hisfocusonthefirmasa governancestructure
has encouraged other economists to look at the firm in organizational
terms. Fama (1980) has exploredtheconceptofa firm as a setofcontracts
among all its stakeholders. Theusageis partiallysimilarto thatofP when
he says "The cooperative association consists of the sum of the multi-
lateral agreements among the firms participating in thejoint activity..."
(Phillips 1994, 68). The difference is that P did not conceive ofcallingthis
set ofagreements a firm. Nor would his reviewers have done so in 1947.
Galbraith (1967) argued that the supreme importance ofinformation
reqUired effective control ofthe large firm to be in the hands of a small
managerialtechnostructure. His firm became a setofcommittees-acon-
ceptthathasneverappealedtothoseacademicssickofcommitteeservice.
HH chose to assume that their cooperative was managed by a person
or group of persons that they dubbed a peak coordinator. While such
centralized decision-making is convenientfor theirconceptoffirm as pro-
ductionfunction, itisnothelpful to those interestedinexploringmanage-
ment and control issues in large investor firms or cooperatives. Sexton90 JOURNAL OF COOPERATNES 1995
(1986) and Staatz (1987 and 1994) have used game theory in exploring
someoftheeconomicsofthecoalitionofthestakeholderswithina coopera-
tive. They have helped us to understand how much differences in the
economic interests ofmembers can threaten a cooperative's progress and
even its existence. Staatz (1994) credits P as a forerunner. Cook (1994)
explored some of those issues in a context that derives more from the
management than the economics literature. Sociological studies ofmem-
bership structureand control ofthe cooperative organization are summa-
rized in a recent Journal ofAgricultural Cooperation paper by Gray and
Butler (1994). While Cook's paperwas favorably received by discussants
AndersonandLang,manyeconomistsareuncomfortablewiththeimpreci-
sionofmanagementtheory. Thatis evenmoretrue for sociological theory.
But as our profession squirms from criticisms of too much attention to
theory for theory's sake and an alleged lack of usefulness in attacking
real world problems, it may be that considerable discomfort is a price
worth paying.
Insummary, theHHmodelisanessentialtoolofagriculturaleconomists
today. I have tried to show that HH 's contribution should no longer be
considered a refutationofP. Theircontributions are separateand comple-
mentary. Both models are more restricted than they once appeared. But
wesurelyshouldnotlookdown onthose onwhose professionalshoulders
we stand.
References
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1994.The role ofmanagementbehaviorinagricultural cooperatives: Discussion.

1994.Therole ofmanagementbehaviorinagriculturalcooperatives: Discussion.

A model for the short-run production and pricing decisions ofcooperativeassociations. InDevelopmentandapplicationojcooperative theory and measurement oj cooperative performance.

A theory of cooperation.

Agency problems and the theory of the firm. Joumal of Political Economy 88:288-307.Cooperative Enterprise and Organization Theory: An Appraisal!Rhodes 91

Agricultural cooperatives: A unified theory ofpricing, finance, and investment.

anorganizationaltheoryofmembership structural design.

Consumer cooperatives and economic efficiency.

Cooperative enterprise and organization theory. Thisjournal 10:87-91.

Economic nature of the cooperative organization. This journal9:67-79.

Economicnatureofthecooperative association: Aretrospective appraisal.

Legalfoundations ofcapitalism.

Legalphases offarmercooperatives. Revised and extended by

Methodology, ideology, and the economics of policy: Why resource economists disagree.

Principles ofeconomics.

The formation ofcooperatives: Agame-theoretic approach with implications for cooperative finance, decision making, and stability.

Cooperative Enterprise and Organization Theory: An Appraisal

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