The Conservatives and public sector cooperatives

Fresh from their tragic mauling in The Curious Affair of the Misplaced Decimal Point, the Conservative party have lurched on to their latest policy disaster announcement, which is a relaunch of a three-year-old policy idea: namely, that groups of public sector workers will be encouraged to operate as ‘not for profit’ [sic.] cooperatives.  This will, according to David Cameron, lead to ‘a new culture of public sector enterprise and innovation’.

Now, I’m a big fan of cooperatives.  So far as I’m concerned, they’re clearly and without question the most rational and reasonable way of organising economic activity.  Unfortunately, I’m not a fan of the Conservatives’ proposals, for reasons I’ll come on to.  I want to start, though, with an explanation of why I think co-ops are such a good idea, because it helps to explain where the Conservative proposals fall down.

Privately-owned companies are operated in the interests of their investors, which means they have an overriding (in fact, a legally-mandated) concern to maximise their profits for those investors.  This means they have to pay workers as little as is compatible with retaining a workforce, whilst simultaneously charging their customers as much as they can possibly be induced to pay.  Under this system, virtually everyone loses: the workers, because they don’t receive their fair share of the wealth they generate for their employer; the customers, because they are paying more than cost price for the goods or services they are buying.  Only the investors are laughing all the way to the bank.

Nationalised companies were an attempt at solving the manifest problems of private enterprise, and on paper it seems like they should work really well.  Theoretically, the state can act as an honest broker, ensuring a fair balance between pay for workers and price for customers.  Theoretically, with the need for generating profits for third parties removed, the costs to the customer can be reduced at the same time as the rewards for the workers are increased.  Theoretically, pretty much everyone benefits, with only the investors sobbing all the way to the workhouse.

Unfortunately, as we know from multiple experiments in dozens of countries, nationalisation doesn’t often work in practice (there are exceptions – the Bank of England, for example).  It tends to lead to companies that are massively bureaucratic, ponderous, and slow to respond to customer demand.  It leads to workforces who become wholly detached from economic reality, and demand no redundancies and ever-better wage settlements regardless of how badly the company is doing.  Both managers and workers know their jobs are safe, no matter how badly they perform, which means they have no incentive (beyond a feeling of pride in a job well done, which only goes so far) to make the company’s products better, or more reliable.  Assuming customers are given a free hand in choosing what they want to buy (which under traditional communism, of course, they weren’t), the state is forced to bridge the gap between what customers are prepared to pay for the company’s increasingly shoddy products and the costs of manufacturing those products.  The nationalised company becomes a bottomless money pit, ultimately the state is forced to pull the plug or go bankrupt itself, and there are mass redundancies.  Result: everybody loses, even more than they do under a private system.

This is where cooperatives come in, and, especially, employee-owned cooperatives.  (A cooperative can also be customer-owned, or jointly owned by customers and staff.)  Employee-owned cooperatives share with nationalised companies the advantage of doing away with investors.  With no investors to appease, there’s no pressure for the business to maximise profits at the expense of the workers, and, since they are their own employers, staff almost always enjoy better working conditions.  At the same time, the products or services the cooperative provides are sold directly on the open market without any state mediation or control, which forces the cooperative to be competitive.  This provides the same basic level of price-control for customers as private enterprise does (if the prices are too high, customers vote with their feet; a cooperative owned by customers would offer better scope for price control).

It also acts as a mechanism for controlling the demands of employees.  As the employees own the business, the people asking for a pay rise and the people assessing whether or not there is enough money for a pay rise are one and the same – this does away with the possibility for industrial disputes at a stroke.  It also provides a powerful incentive for employee efficiency and innovation, since any financial benefits for the business as a result are directly enjoyed by the employees, either in the form of increased job security as a result of enhanced investment, or better pay and conditions, or an annual profit-share bonus, or all three.

It’s worth bearing in mind, by the way, that this isn’t a utopian pipe dream.  John Lewis is often described as the most successful retailer in the country, and has achieved this position by operating as an employee-owned cooperative in just the way that I’ve described.  If you live in the north of England or north Wales then there’s a good chance your local traffic lights are maintained by another successful employee-owned cooperative.  And then, of course, there’s the Co-op itself, which is the largest customer-owned (rather than employee-owned) cooperative in the world, and has a range of successful businesses across retail, banking, insurance, funeral services, travel agents and so on.

As an alternative to private or nationalised companies, cooperatives are a brilliant idea.  They’re fairer to their staff than private companies, as (or more, in the case of customer-owned cooperatives) responsive to customer needs as private companies, and avoid the sad problems of nationalised industries.  They have a proven track-record demonstrating that they are capable of out-performing nationalised industries, and are also capable of matching, and sometimes out-performing, private enterprise.  As a way of organising economic activity, cooperatives are hard to beat – but that’s not what the Conservatives are proposing.  Instead, they are suggesting cooperatives in the public sector, which are a wholly different kettle of fish, and pretty much a terrible idea, so far as I can tell.

For a start, it’s hugely indicative of the Conservative mindset that they think their new cooperatives will have to be motivated by money, and that introducing a profit motive into public service is a good idea.  The Conservatives simply can’t conceive of the idea that a person might be primarily motivated by a desire to help others, and that, beyond a decent living wage and reasonable working conditions, they can’t be incentivised by the promise of more cash.  Nurses and teachers and other public sector workers aren’t demoralised and out of sorts because they’re not rich enough (although, like anyone else, if you offered them free money, I’m sure they’d say “Yes, please!”).  They’re demoralised because of heavy-handed bureaucratic control, and the imposition of management ‘solutions’ by people who don’t understand how the job needs to be done, and the relentless proliferation of paperwork, and the endless funnelling of money into political vanity projects at the expense of real improvements.

It’s true that reconfiguring public services in such a way that they are operated by small, self-organising teams might be a great way of overcoming the proliferation of bureaucracy and managerialism – I suspect a hospital where the doctors and nurses tell the managers what to do would be rather better run – but doing this doesn’t require the setting up of cooperatives.  In fact, the particular model of cooperatives that the Conservatives are proposing is likely to leave all of the worst problems in the public sector unaddressed, and create new ones into the bargain.

As we’ve seen, the Conservatives intend that these cooperatives are going to be financially motivated – they will be allowed to keep and share any surpluses left over after they have done their jobs.  But, because these cooperatives are going to be operating in the public sector rather than the open market, they’re going to be monopoly providers.  If I’m housebound and need a District Nurse to come in once a week to change the dressings on my leg ulcers, I don’t have the option of taking my ‘custom’ elsewhere: all I can do is sit in my bandages and wait for the nurse to come and change them.  Straight away this creates a huge problem: employee-owned cooperatives are responsive to their customers because of the pressures of the market.  If the market isn’t operating – if customers patients can’t go elsewhere, and the money arrives from government just the same whether customers are happy or unhappy – then there’s no natural corrective to the tendency of employees to reward themselves at the expense of customers.  In these circumstances (and assuming, as the Conservatives do, that the behaviour of public-sector employees won’t be modified by their public service ethic), an employee-owned cooperative is going to be no better than a nationalised company.

Now, the Conservatives have said that they’ll be actively involved in ‘outcome measurement’, and are presumably hoping that this will act as a proxy for the market – the customer may not be able to walk away if the cooperative offers a lousy service, but the government can threaten to penalise a cooperative that doesn’t reach an acceptable standard.  The major problem with this is that this kind of ‘outcome measurement’ is necessarily going to be heavily bureaucratic.  It’s inevitably going to involve a whole panoply of targets, and paperwork that exists only to prove that the targets are being met, and takes up time that could be used for providing a better service to the patient.  If the experience of the ‘micromanage everything’ approach to the public services beloved by Labour has taught us anything, it’s that this approach is counter-productive: nurses can’t nurse patients because they’re stuck in offices with paperwork instead.  This is one of the major problems in the public sector at the moment, but far from addressing it, the Conservatives’ proposals will only perpetuate it.

There’s another important difference between a cooperative that’s trading on the open market and is directly funded by its customers, and one that’s operating within the public sector and is funded by government.  A cooperative trading on the open market has two ways of increasing profitability, assuming that it’s already charging the maximum the market will support for its current goods or services.  The first method is to squeeze costs so the profit margin increases.  The second is to find a way of enhancing the quality of the product or service received by the customer, so that they see it as more valuable, and are prepared to pay more for it.  In the public sector, the first method is available, although only to a limited extent.  David Cameron has said that employees in the new cooperatives will continue to receive the same pay, benefits and conditions as other, directly-employed public sector staff, which means the ability of the cooperatives to manage their costs will be hugely curtailed – staff costs will make up the bulk of the costs for these organisations, after all.  Even more worryingly, because the cooperative can only benefit from providing a cheaper service, not a better one, the second option for increasing profitability isn’t available.  This has two effects, both of them detrimental to customers.

Firstly, it removes any incentive for the cooperative to improve the customer experience beyond the basic legal minimum, since there’s nothing to be gained by doing so.  Secondly, and more seriously, it has the effect of refocusing the cooperative’s attention away from serving the customer, and towards the cost of doing so.  This means that it will actually be in the cooperative’s interest to provide an adequate but cheap service to the customer, rather than an excellent but fractionally more expensive one.  This is obviously bad news for the customer, but it’s also the exact opposite of the way a market would function.  In the open market, it would always be in the cooperative’s interest to find ways of making things as good as possible for the customer, but under a monopoly position monitored by government, there’s no incentive to make things better than they have to be.  It’s really quite a significant achievement for the Conservatives – the party that likes to claim it has an instinctive understanding of markets, and how they can be used to make everything all better – to manage to create a ‘market’ solution that incentivises staff to behave in the opposite of the way we want them to.

It’s also worth bearing in mind that the Conservatives’ public sector cooperatives will be organised in such a peculiarly obtuse way that, at the same time that they are encouraged to provide a poor service to their customers, they will also be incentivised to offer poor value for money to the taxpayer.  If a cooperative is able to pay its employees, provide the services it’s contracted to, and still have a surplus left over at the end of the financial year, then it stands to reason that the cooperative is being paid more than it needs to be.  It’s certainly possible that taxpayers would be happy to see effective public sector workers rewarded with bonuses, but it’s also possible that they might not be, especially if hatred of public sector workers is being whipped up by the tabloids.  It’s possible that taxpayers might prefer to see the money they pay out for public services being used to provide services to the public, not bonuses for tabloid-decried ‘fat-cat staff’.  They might prefer that some or all of the surplus left over in one area of public service was redistributed to some other area that was less well-off.  If they were good little Tory-voting Thatcherites, they might even prefer that the excess was returned to them in the form of a tax rebate.

In reality, I strongly suspect that the question of surpluses and bonuses will never come up.  I suspect that the setting-up of public-sector cooperatives is intended to be a smokescreen for disguising significant reductions in public sector budgets.  I suspect that the Conservatives are hoping for a triple benefit from their plans.  Firstly, that the arms-length nature of cooperatives will make it possible for them to argue that it’s not their fault if public services are failing.  Secondly, that the highly fragmented method of delivering services will make it much harder for anyone to conclusively prove that levels of investment are falling.  And thirdly that, by making them directly and personally accountable for the management of services as well as the delivery of them, public sector workers can be guilted into working unpaid overtime.

There are other structural problems with Mr Cameron’s cooperatives.  For example, it’s far from clear how a failing public sector cooperative could be penalised in a way that doesn’t impact on the services provided to customers, given that the cooperative is a monopoly provider, and so the customer can’t take their ‘custom’ elsewhere.  It’s also unclear what would happen in the case of a cooperative failing so badly that it had to have its responsibilities taken away from it.  It couldn’t just be a case of firing the management, as would happen in a traditionally-organised team, because, as the owners of the cooperative, all the employees would share responsibility for the failure.  But if the employees lost their jobs, then who would provide the services the cooperative used to offer?

In the case of a cooperative operating in the open market this question is easily answered, of course – their competitors take up the slack.  But when the cooperative is a monopoly provider, and (as would very likely be the case with public services in rural areas), the only people qualified to operate the service are the people who have failed – who takes over then?  If it’s the same employees, incorporated into a new cooperative, then what’s to prevent them repeating all the same mistakes, seeing the new cooperative fail, being instantly re-organised into yet another new cooperative – and starting the process all over again?  These are essential public services, so they can’t simply stop just because a local cooperative runs out of money.  It would be like the banks all over again – the cooperatives couldn’t be allowed to fail, and so they’d have to be bailed out regardless of what they did.

There are some people who are genuinely convinced that David Cameron’s Conservative party has been radically disconnected from its Thatcherite roots, that it has been brought to its senses by three crushing general election defeats in a row.  These people will, I’m sure, be encouraged by these kinds of announcements from the Conservative leader, even if it does look like there are practical problems to be ironed out.  They’ll take them, even in their imperfect form, as evidence of a more flexible, less ideological approach to politics.  Perhaps they’re right.  It still strikes me, though, that there’s a terrible oxymoron at the heart of the phrase ‘Conservative Cooperative Movement’.

It seems to me that there are two fundamental ways of understanding the behaviour of people: the bitter, Ayn Rand notion of lonely individuals locked in a permanent struggle to achieve supremacy over their rivals; or the opposed notion of interconnected individuals within a group, who will gladly sacrifice a measure of their own self-interest for the benefit of the group.  These two views are contradictory and mutually exclusive – either there is no such thing as society, or there is – and the Conservatives have been, for decades, the party of the former view.  They have been the party who have argued that no-one ever acts, except in their own self-interest; they have been the party who have argued that the greatest benefits flow from setting the individual ‘free’ from all forms of social responsibility, locking everyone in permanent competition with everyone else.  This bitter, bleak, desperately pessimistic world view is the absolute opposite of cooperatives.  Cooperatives are based, strangely enough, on the spirit of cooperation, not competition.  Employees in a cooperative don’t struggle to increase their success at the expense of their fellow employees, they work with their colleagues to achieve benefits for all, secure in the knowledge that their colleagues are doing the same for them.

I’m sorry to say that I really don’t believe that David Cameron and the Conservative party have swapped from being disciples of Margaret Thatcher to disciples of Robert Owen.  I don’t think they have any interest in the principles and spirit of social or economic cooperation.  In fact, having looked at their proposals, I’m not even sure they understand the principles of cooperation.  I think we can boil this announcement down to one simple fact – it’s an attempt to undermine the idea of public service in our public services.  Admittedly, it’s more subtle than the party’s previous attempts – it’s not privatisation by means of a stock market flotation.  It’s still an attempt, though,  to do away with the idea that teachers teach, and nurses nurse, for the benefit of the people they teach and nurse, and to replace it with the idea that teachers and nurses go to work for the chance of making a quick buck, and the only thing preventing them from working harder or better is the lack of opportunity to make a bigger buck.

Like I said at the beginning, the Conservatives don’t understand the public service ethos, and because they don’t understand it, they want to destroy it.  They want to reduce everything to a financial transaction, because buying and selling is all they understand.  That’s all these putative cooperatives are – an attempt to turn the care of one human being by another into a purely commercial transaction.  I almost wish we could have the old, nakedly Thatcherite Conservatives back.  At least they were honest about what they were trying to achieve.

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3 Responses to The Conservatives and public sector cooperatives

  1. I sadly don’t have time to read this post properly, but I have read the stuff on normal cooperatives and skimmed the rest. I have a lot of time for coops too – The Co op and John Lewis are fantastic examples, but they can be an absolute disaster.

    The Dairy Farmers for Britain Cooperative was in theory a great idea. Farmers working together to run their own dairy system – collection, processing and distribution. Cutting out the middle man and making a system that works for them. Problem is all the farmers invested large sums of money, but the management were incompetent and it fell through. Thousands of dairy farmers losing thousands of pounds – most well over £50,000, many into the hundreds of thousands.

  2. The CoOp, if anecdotal evidence (ie my friends) are anything to go by, treat their staff appallingly.

    A company that it seems does treat staff well and is employee-owned is UPS.

  3. aethelreadtheunread says:

    Thanks for the comments.

    intothesystem – yes, sorry, it was one of my longer posts, wasn’t it? :o)

    I don’t know a huge amount about the dairy farmers cooperative – mainly what i can remember from blearily listening to Farming Today at 5-30am on long, insomniac nights – but from what i remember, i think the fundamental problem is that they were being paid very little by the milk wholesale companies, and they assumed (not unreasonably) that this was the fault of the wholesalers. It was only once they’d spent a huge amount of money setting up the cooperative that they realised the problem was actually the big supermarkets, who were ruthlessly determined to maximise their profits at the expense of everyone else – even to the ludicrous extent of farmers being paid less for milk than it costs to produce. I think there were then problems with the way the co-op was run – particularly, i think, it handled price negotiations with the supermarkets in a very weak way – but the basic problem was that the co-op was designed to cut-out the middlemen when it wasn’t the middlemen who were doing anything wrong.

    Of course, the thing about a cooperative is that it only works if the members of the cooperative actively involve themselves in the way it’s run. The bottom line is that if you set up a cooperative you are, collectively, responsible for everything about it, so you can’t then turn round and blame ‘the management’ if it goes wrong – you are the ultimate authority in the business, so it’s your fault if you fail to supervise it properly. I know that sounds harsh, but it’s true – self-organising structures only work if the people in them know how to organise themselves properly.

    DeeDee Ramona – that’s pretty much why i think employee-owned cooperatives are better than customer-owned ones like the Co-op. With a customer-owned cooperative, there’s a potential for the balance of power to shift too far towards the customer at the expense of staff. I’m sorry to hear about your friends being so badly treated.

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