Editor's Note: Tim Huet is a lawyer and director of the Center for Democratic Solutions, a nonprofit in San Francisco that advises coops. This is an unabridged version of Tim's article which appeared in GEO #30. Email Tim Huet. Tim can be reached at: 733 Baker Street, San Francisco, CA 94115; 415-346-8066.

North American advocates of worker cooperatives, and economic democracy in general, have drawn much inspiration from the Mondragon cooperatives in the Basque region of Spain.  Launched in 1956, the Mondragon cooperative complex has grown into a $2.5 billion dollar enterprise with over 30,000 workers and annual sales of $5 billion.  The Mondragon experience has provided confidence that cooperatives can develop on a large scale in all fields of endeavor.  However, that faith has been somewhat shaken by Mondragon's recent deviations from cooperative principles with centralization of decision-making and widespread hiring of non member workers, often in joint-ventures with capitalist firms.  Mondragon's management defends these changes as necessary to survive intensified competition in the unifying European and global markets.

Recent Mondragon experience bolsters the arguments of cooperative critics, and the fears of some supporters, that once a cooperative reaches a certain scale and affluence it loses its democratic character: management grows unaccountable to a disorganized complacent membership and takes the business towards conventional capitalist business practices.  Perhaps more troubling to cooperative supporters is the possibility that the Mondragon managers are right: maybe it is impossible to face up to intensified capitalist global competition and remain true to democratic cooperative principles.

In March of this year I went to Mondragon to investigate these matters.  In April I went on to a brief study tour of Italian worker cooperatives; while less known in North America, the Italian movement is more extensive than the Basque, with about a quarter million members in Italian worker cooperatives.

The Mysterious Political Economy of Worker Cooperatives

That the Italian and Basque cooperatives have grown so large is somewhat a mystery since, unlike capitalist enterprises, cooperatives are not expansionist by nature.  Capitalist enterprises, like cancer, appear to grow for the sake of growth, regardless of the effects wrought on the surrounding environment or people working within.  Capitalist enterprises tend towards growth because increased scale generally leads to greater returns for a concentrated ownership.  To simplify, if a capitalist bakery owner has a bakery with ten workers each earning $20,000/year but generating $30,000/year of wealth, the owner reaps $100,000 per year ($10,000 "profit" multiplied by ten workers).  The capitalist may very well calculate that if she were to expand to own 5 identical bakeries, she would reap $500,000 (50 workers each generating $10,000 of "profit").  The capitalist would have to re-invest some of her initial profits to get the bakeries up to the same level of profitability, but her annual profits would eventually multiply fivefold -- perhaps higher if she realizes some cost reductions due to economies of scale.

Contrast this with the economics of a typical worker cooperative.  In a worker cooperative, those profits not reinvested are divided among the workers who generated the wealth.  Assuming no reinvestment, in addition to her $20,000 salary, each baker would receive a $10,000 profit distribution at the end of the year.  Even if the cooperative were able to expand with 4 identical bakeries, each baker would still earn the same $20,000 salary with the $10,000 profit share.  Perhaps profit per member would increase somewhat in the long-term because of economy of scale savings but, to reach the economy of scale savings, the original workers would have had to invest rather than distribute their initial profits.  Thus, expansion generally results in an immediate and substantial drop in the key economic indicator for a cooperative, return per member, with the possibility of a relatively small increase in the future.  Hence it is not difficult to see why the capitalist owner has more economic incentive to expand than does the cooperative.

There are also non-economic disincentives to growth for worker cooperatives.  For many a primary benefit of working in a cooperative is being a respected, vital part of a democratic community.  As a cooperative grows from 20 to 200 members, it may lose some of its sense of community and democratic involvement.  No longer can everyone sit together every month and make all the major business decisions.  As work functions become more specialized and the business complex, it is increasingly difficult to communicate and make decisions with anything approximating equal participation.  If you work at multiple sites (e.g., bakeries) the lines of communication and bonds of trust/friendship will be even further stretched.

For all these reasons, worker cooperatives tend to stop growing once members feel their business has reached a healthy and productive size.  Unlike capitalist cancers which grow for their own sake and destroy their host environment, cooperatives aim for homeostasis, a healthy balance.  Unfortunately this pro-social characteristic of cooperatives can be a fatal weakness in economic competition with capitalist businesses.  The cooperative grocer, bookstore, etc. enjoying its homeostasis can be devoured by a malignant capitalist growth (chain, mega-wholesaler, etc.). Small cooperatives can demonstrate the superior economic efficiency that results from their motivated workforce, flexible use of human resources, pride in quality work, rooted relationship in the community/customer base, etc., but still lose out when the price-slashing chain or mega-outlet comes to town -economic efficiency is often crushed under piles of money and advertisements.

And even if a worker cooperative wishes to grow, perhaps spurred by the realization of a growing capitalist threat, it will encounter special obstacles.  It is true that all small businesses, capitalist or otherwise, are threatened by the growing scale of economic competition, but cooperatives face particular challenges of capitalization and acculturation when trying to rapidly expand into a market or "catch up."

Acculturation is always a challenge for democratic workplaces as they must re-shape the behavioral/thought patterns incoming workers have acquired from autocratic employers and schools. This process of democratic cultural development works best through a slow process of absorption; culture transfer may be very difficult if the workforce is suddenly doubled by an influx of workers ignorant of democratic management.  It is a singular challenge to develop a democratic culture from scratch, which a cooperative might have to if it needs to develop branches remote from its base.

Capital accumulation also naturally occurs slowly for worker cooperatives.  The people joining a cooperative rarely can contribute much capital to the venture.  Yet cooperatives are limited in what outside capital they can attract or accept.  Conventional banks are wary of lending to worker cooperatives, those "commie groups lacking conventional authority and ownership structures.  And, even if a cooperative can muster loans from understanding banks or individuals, rapid expansion generally requires an infusion of long-term equity investment; only under special circumstances can worker cooperatives internally generate sufficient equity, by reinvesting profits, to power rapid growth. Equity investors also have suspicions regarding "commie" cooperatives, but practical concerns in addition.  One concern is that lack of a public market for the worker cooperative's stock denies outside stockholders an exit strategy for realizing increased worth.  Moreover, a cooperative, as a one-person- one-vote democratic enterprise, will rarely be willing to give outside stockholders their customary voting rights.  Even a worker cooperative willing to grant voting power to outside shareholders will not relinquish the majority of stock.  Therefore, cooperatives are bereft of the typical express route from small business to major player: develop a strong product/approach and float a public offering selling perhaps 90% of the stock for a massive capital injection.

Given these obstacles, why have the Mondragon and Italian cooperatives grown so extensive?

Mondragon: Background and History

The Mondragon cooperative movement was founded by a priest named Jose Maria Arizmendiarrieta (commonly called "Arizmendi").  When Arizmendi was assigned to the Mondragon parish he found a town devastated by the Spanish Civil War.  He established a school for the town's many working class children without educational opportunity, providing vocational education as well as moral guidance. With Arizmendi's continuing tutelage, five of the schools graduates went on to get engineering degrees and, in 1956, start their own factory in Mondragon.  This plant became the Fagor cooperative.

Considering the isolated Spanish market of the Franco years, the cooperatives' founders surmised that any quality consumer product they could produce would find a ready market.  They were correct and their domestic appliances company began generating sizable profits.  The cooperative developed a system by which all profits were immediately reinvested in the business with a minority of the profits being credited to individual "capital accounts," which members drew from only upon departure from the cooperative.  The discipline to reinvest heavily for expansion and defer profit distribution was due, in part, to a principled commitment to create jobs for the oppressed Basques and, more generally, further opportunities for democratic work.  But ideology alone accomplishes nothing; the Mondragon cooperative founders developed a system that channeled and reinforced their ideological commitment.

In 1958, the cooperatives encountered a crisis when the Spanish government deemed members to be self-employed and, hence, ineligible for the government system of social security and unemployment benefits.  The cooperatives turned this to their advantage by creating, at substantial savings, their own social security system.  In 1959, the cooperatives increased the advantage by using the reserves of this benefits system as seed capital for their own bank.  The bank drew deposits from community members attracted not only be a competitive interest rate but knowledge that their funds would be lent to the cooperatives to create local jobs.

Representation on the bank's board of directors was distributed two-thirds to the cooperative depositors and one-third to bank staff.  The bank's board became the de facto governing body of the Mondragon cooperative movement as the financial institution became both engine and linchpin of the cooperative movement.  Through a Contract of Association with all cooperative members, the bank set forth the standard structures, practices, and principles the associated cooperatives were to follow.  The bank also established a Business Division that promoted the development of new cooperatives.  In some cases, the Business Division would identify a market opportunity and create a new cooperative from scratch. In other cases the division would assist a larger cooperative that would -- to maintain efficiency and democratic vigor -- shed off a division as a separate cooperative when a certain size was established. The bank also encouraged these smaller cooperatives to form groups with shared services to maximize economy of scale and marketing potential.  In one case, the bank reorganized existing consumer cooperatives into hybrid worker-consumer cooperatives -- each constituency having 50% of the voting power -- and forged them as a united retail chain which has grown to be the largest in Spain with annual sales of $2.6 billion.

The record of business creation achieved is remarkable. of the 103 cooperatives founded in the first three decades of the Mondragon Experience, from 1956 to 1986, only 3 closed.  This is particularly impressive considering the deep recession suffered by Spain from 1975 to 1985.  While the Basque region lost well over 100,000 jobs during this period, the Mondragon cooperatives added workers.  In part, the cooperatives were able to do this by retraining workers and transferring them from depressed cooperatives to expanding ones.  Credit is also due to financial and managerial assistance provided by the bank in restructuring troubled cooperatives.

While the cooperatives emerged from the recession stronger than ever, the crisis provoked a process of reflection and restructuring that marked a new phase in the Mondragon Experience.  Following the recession, creation of new cooperatives ground to a halt with resources devoted to expanding the existing cooperatives.  One reason to accelerate the development of existing cooperatives was the entrance of Spain into the European Economic Community in 1986.  The cooperatives were gearing up to compete in their "domestic" market with capitalist companies many times their size.

A series of Cooperative Congresses were convened to address the changing economic conditions.  The convening of Cooperative Congresses rather than planning change through the bank was a significant development in itself, flowing at least in part from a perception that the industrial cooperatives were overly dependent on the bank during the recession.  The shift might also reflect that the bank had outstripped the growth of its associated cooperatives and, by 1985, less than a quarter of the bank's resources remained invested in those businesses.

At a critical 1988 gathering themed "Facing Up to the European Economic Community," Cooperative Congress leaders considered shifting from their collision course with the multinationals:  

• When we established our companies we paid no heed to multinational consortiums, nor the Single European Market ... The fact is that the products most important to the Group: domestic appliances, machine-tools ... etc., etc., are in most cases also those favored by the big multinationals, and now, in the new entrepreneurial confrontation which is on the horizon, we shall have to measure up to a completely different scenario which requires that we at least pause to ask the following questions. Are there any specific products not favored by large capitalist companies?  Is it possible to find a market segment more accessible to worker cooperatives due to their capacity to adapt, taking advantage of their singular nature as community based companies?  Would it in any case be possible to adapt our companies to a new product-market relationship scheme if we saw that there was a redoubt which had been scorned by or was at least less accessible to, capitalist companies?  

• The Mondragon managers concluded that most of their key industrial companies had "passed... the point of no return" -that they had invested too much in their current products, machinery, etc. to radically change course.  Having committed themselves to competing with the multinationals, they adopted characteristics of their rivals.  Those gathered concluded that quick centralized decision-making was necessary to compete in a rapidly changing and complex global market.  The result was Mondragon Cooperative Corporation (MCC), incorporated in 1990, a centralized management and support body over three cooperative divisions of finance, industry, and distribution (,'distribution" is a vertically integrated system of agricultural and retail enterprises).  Each division has unified channels of distribution and marketing, utilizing a common divisional trademark as well as the "MCC" identifier in the global market.

Additionally, it was concluded that if MCC is to compete against large industrial multinationals, it must develop its own multinational supply and distribution network.  MCC has now established traditional capitalist plants in such low-wage countries as Egypt, Morocco, Mexico, Argentina, Thailand, and China.  Within Spain as well MCC has been developing businesses with either strictly non-member workforces, many of them joint ventures with capitalist partners.  Even in its traditional cooperatives, MCC is using an increasing number of non-member workers.  Approximately one-third of MCC workers are now non members.  This far exceeds the original Mondragon commitment that no cooperative would employ more than 10% non members.  In an interview, the director of MCC's temporary services cooperative informed me that a cooperative can now apply to MCC for permission to use up to 40% non-member workers.  The justification for this change is that the increased volatility of the global market requires a more dispensable sector of the workforce.

MCC can provide many valid reasons -- cultural, legal, financial, and organizational -- why it could not expeditiously establish a sizable cooperative in Thailand or even central Spain.  But what most disturbs critics/opponents is that MCC does not seem to be establishing these capitalist operations with any demonstrated intent for conversion to cooperatives.  Indeed, circumstances such as joint ownership with capitalist partners may preclude cooperative conversion.

MCC's direction has generated considerable criticism from within the ranks.  In March of this year, the elected Social Council for Fagor -- the largest and original cooperative group in MCC -issued a strident critique of MCC policy: {insert quote, still in translation}. one might ask why, if there is such strong internal opposition to MCC's policy and the cooperatives are democratic enterprises, MCC's transformation continues unabated.  One part of the answer may be that the centralized and expedited MCC decision-making structure has removed meaningful opportunities for opposition and consideration of alternatives.  From my exchanges with opposition leaders, I would say another part of the answer is that the opposition is not confident it can provide an alternative -- they worry MCC is correct that survival in the global market requires compromises of critical cooperative principles.

However, even if one concedes that MCC must develop as a multinational, it could do so with a commitment to converting its overseas factories into cooperatives gradually.  This might involve seeking partners in the social economy of other countries V willing to assist in adapting and encouraging cooperative culture in their homelands.  A cooperative approach to global development might mean hiring native managerial talent rather than coupling with a capitalist company; or it may mean negotiating up-front with your capitalist joint-venture partner for buy- out rights to facilitate later cooperative conversion.

And perhaps it is possible for cooperatives to find a market niche even in MCC's traditional industries.  The experience of Italian worker cooperatives may be instructive.  In the industrial sector, Italian cooperatives have taken advantage of their labor flexibility and dedication to quality work to serve new niche markets created by the volatility of the global market.  The rapid evolution of technology and the move toward just-ontime delivery systems has created a demand for small orders of customized industrial parts.  Small to medium-sized manufacturers with highly-skilled work forces can band together in "flexible manufacturing networks" to fill orders that require multiple components and materials.  While capitalist businesses also participate in flexible manufacturing networks, cooperatives are particularly adept at fostering the critical relationships because of their collaborative cultures.  The small size of the productive plants in flexible manufacturing networks facilitates robust democracy for cooperatives involved.

In the service sector, Italian cooperatives have taken advantage of their community-based nature to fill the vacuum left by privatization of social services.  Moreover, Italian cooperatives remain leaders in a number of industries, including construction.  Some of the construction cooperatives have thousands of members but retain a good deal of democratic involvement., As Bruno Bruzagga, an officer of the largest Italian cooperative federation, explained to me, "it would be a mistake to make a generalization that the bigger the coop the less participation;" describing a cooperative of 2,500 workers in Bologna, he noted "this coop has more than a few branches and you can create smaller groups of members that then participate in meetings and are delegates to report on their findings." It is not simply a matter of size but how the numbers are organized; the challenge is to democratically coordinate the smaller bases of direct democracy.

Lessons and Applications for North America

The experience of MCC demonstrates the difficulty if not impossibility of cooperatives competing with multinationals in the industrial arena.  Developing in the realm of heavy industry is simply not an option still available to a North American cooperative movement.  Should we then concede that worker cooperatives can only develop in the crevices unreached by global capital and that such is not even worthwhile?

I believe worker cooperatives have substantial economic potential today and a critical role in our future.  The global industrial arena is not the only arena worth fighting in.  It is a postindustrial age and this provides new opportunities for cooperatives.  Like the Italians we can utilize the community orientation of cooperatives to fill in the holes left by the decay of the old order and state.  We can also involve ourselves in the next wave of economic development, the computer/knowledge sector, where intelligent motivated workers often matter more than capital; there is a democratic ethos developing in the internet community that lends itself to cooperatives (in my role as attorney, I have incorporated two internet/computer cooperatives in the last few months: CLIQ Services Cooperative, www.cliq.com, and 4SD Consulting, www.intercoop.com).

Moreover, there are many areas of the current economy where small cooperatives rooted in their communities have an advantage, particularly if they are connected to a larger cooperative network.  I am a member of a technical assistance cooperative that is helping to grow from a highly successful local business a cooperative chain of bakeries.  These bakeries thrive in part because the worker- owners care about quality product/service and are able to connect with their communities more than the high turnover low-paid drones of capitalist chains.  The technical assistance cooperative and bakeries constitute the Association of Arizmendi Cooperatives, an effort to apply lessons drawn from the positive and negative experiences of Mondragon (and other) cooperatives; the Association aims to provide technical support and economy of scale to a mutually-supporting network of thriving democratic businesses.

I believe the sum of these small or niche cooperative developments will be of the greatest importance. I harbor no illusions that cooperativism will gradually overtake capitalism in a "free market" competition.  Only capitalism will bring down capitalism, collapsing under its own weight, costs, and contradictions.  When global capitalism gives way, we must be able to point to working examples of economic democracy, of local economies that continue to function and serve their communities; purely theoretical arguments for economic democracy will be drowned out by demagogic appeals to fear and hunger.  History leads me to dread the consequences if, once crisis becomes collapse, we cannot offer tangible hope for a more democratic society and economy.      

Sidebar: The Role of Government in Cooperative Growth

A key to the flourishing of the Italian cooperatives has been political support.  The Italian constitution recognizes the social contribution of cooperatives and directs that legislation should promote and favor cooperatives.  Italian tax legislation treats worker cooperatives as non-profit entities requiring surplus to be invested for further job creation; i.e., in exchange for favorable tax status, worker cooperatives are restricted from distributing profits among current members in favor of reinvesting towards new democratic employment. Another interesting aspect of Italian tax law is that it requires 3% of each cooperatives surplus to go into a fund to develop new cooperatives.

The Spanish Constitution also endorses the value of cooperatives and financial policy is starting to reflect this with the creation of funds and tax benefits to promote worker cooperatives.  The Basque autonomous government has embraced worker cooperatives with particular gusto: in July of this year, the Basque government contributed $18.3 million dollars to a fund specifically for development of MCC cooperatives. There are additional funds for cooperatives outside MCC.

It is important to understand that this outpouring of government support is at least as much a result of cooperative growth as a cause.  The recent government support results in part from recognition of the impressive role cooperatives played in helping rebuild the Basque region and Italy following the Spanish Civil War and World War II.  The Mondragon pioneers managed to thrive despite considerable opposition from the Franco regime and earned government backing through their independent success.  This should provide a lesson to North America cooperators who feel legislative support/recognition is a prerequisite to our flourishing.

Sidebar: Governance

The typical governance structure is quite similar for Italian and Mondragon cooperatives.  Each cooperative has a board of directors elected at an annual meeting of its general assembly.  Only members of the cooperative are allowed to be members of the board; top management, which is hired by the board, is only allowed ex-officio status in board proceedings.  General assemblies often meet only once per year but can be called more frequently by the board or a set percentage of the members.  General assemblies adopt general policy which the board and management are charged with executing; in practice general assemblies often debate and commonly accept proposals generated by the board and management.

The most dramatic governance difference between the two cooperative systems is that Mondragon cooperatives do not have unions whereas Italian cooperatives typically do.  Traditional labor issues of wages, hours, and working conditions are dealt with by Social Councils in Mondragon cooperatives (Social Councils will also sometimes engage in more comprehensive critiques of  board/management direction).  While Social Councils occasionally serve as effective lobbying bodies  to change board/management policies, they have come under growing criticism as advisory bodies with no real powers to counteract an increasingly aggressive and "capitalist" management agenda.  I was  told by Mondragon workers that this situation has led to increased interest and organizing regarding unionization.