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Chapter Seven - page 1


The market economy relies on competition to control the way businesses behave. As this will not work in a community economy, new approaches and attitudes need to be found.

In the mainstream economy, great stress is placed on individual achievement and unless we can reduce or shift this emphasis which has given the industrial system so much of its shape, we will fail to develop a satisfactory alternative. To put this more directly, if we simply begin to use a selection of the methods by which communities can become more self-reliant without changing our attitudes to the balance we strike between community goals and personal ones, we are bound to get disappointing results. Fortunately, as we will see towards the end of this chapter, a new balance does not mean we will have to make significant personal sacrifices. Quite the contrary, in fact; we will gain personally by moving towards it.

In part, the industrial system's emphasis on the individual is a by-product of the Protestant reaction to the Roman Catholic teaching that the church was the road through which the individual reached Heaven. Protestantism taught instead that salvation depended exclusively on the individual's unmediated relationship with God and, eventually, almost everyone in the Western world, Catholics included, came to feel that they were individually responsible for their spiritual destiny. From feeling that one should look after one's own future in the next world, it wasn't too big a step to believe that one ought to do the same in this, particularly after 'the father of economics,' Adam Smith, wrote in The Wealth of Nations in 1776 that if each of us pursued our personal advantage in the economic sphere we would be led by an invisible hand to promote the interests of society more effectively than if we had deliberately set out to do so. But those who wear Smith's mantle today have forgotten or deliberately overlooked that part of what Smith meant by the invisible hand was the acceptance by everyone, businesspeople included, of a set of societal values to which they conformed and which in certain cases were given teeth by the law.

The disregard today's economists display for the social component of the invisible hand is not accidental: the economics profession deliberately excludes morality and social and psychological factors from its scheme of thought. All mainstream economists assume that people make decisions rationally on the basis of narrow, individual self-interest and that a national economy can be understood by aggregating all these individual, rational, selfish decisions. In other words they assume, in Mrs Thatcher's famous phrase, 'there is no such thing as society' to moderate or modify individual behaviour despite the fact that sociologists, a breed economists heartily despise, have produced a great deal of evidence that it is social and group norms which are the main determinants of human behaviour.

Economists are forced to ignore the possibility that irrationality, prejudice, love, community solidarity, idealism, upbringing, and even enlightened self-interest might help explain the way people behave because, if they abandoned their twin simplifying assumptions of rationality and pure self-interest and let some or all of these other possible factors stay in the picture, the world would remain so complicated that they would not be able to say anything definite - and they hope, useful - about it. In many cases, of course, their simplifications seem to work in that they enable them to predict what will happen with reasonable accuracy. However, it is a grossly unwarranted step to go on to say, as most economists do, that the real world ought to be modelled on their simplified theoretical one in order to be efficient and that any actual system, action or outcome which does not accord with what they would have advised under their assumptions is sub-optimal.

Unfortunately, few people realise that most economic pronouncements are so flimsily based. The result is that whenever an economist categorises a proposal as uneconomic, it is abandoned as rapidly and with as little discussion as it would have been five centuries ago had it been described as immoral from the altar. Indeed, morality gives force to the economists' condemnations, just as it did the priests', because anything truly uneconomic involves waste, a moral issue in a world in which people go without.

Like priests, too, economists have affected the way the laity thinks, except that their teachings have made people less rather than more likely to put collective interests on a par with their own. This was demonstrated1 in a series of fascinating experiments carried out by two psychologists and an economist at Cornell University at Ithaca, upper New York State. In one test, for example, first-year graduate students from a number of disciplines were given some money and asked to divide it between two accounts, one 'private' and the other 'public'. They were told that they would be able to keep any money in their private account at the end of the experiment but that money in the public account would be pooled, its total increased by a certain percentage and then divided out equally amongst all participants. For the group as a whole it was obviously best if everyone put all their money in the public account as this would create the maximum sum to be increased by the percentage so everyone could share in the biggest distribution possible. From the individual's point of view, though, the best course was to put all the money in one's own account and to take the share of the pool provided by the suckers as well. So what did the students do? When the results were analysed, it was found that economics students had contributed, on average, only a fifth of their money to the public account whereas other students put in half. Questioned afterwards, nearly half of all the non-economists said they had been worried about the fairness of their allocation but more than a third of the economists refused to answer the question or gave very complex uncodable responses. "It seems that the meaning of fairness in this context was somewhat alien for this group" the research team commented wryly.

In a second experiment, each student was given $10 and asked to divide it between him- or herself and another student on the basis that if the other student disputed the division, neither would keep any of the money at all. If the dividing student believed in fairness he or she would obviously split the money 50-50 while anyone motivated more by self-interest would calculate just how little they could offer the other - 50c, perhaps - to avoid the distribution being disputed out of jealousy or spite. Each pair played the game only once, so that the receiver had no incentive to dispute the first division in order to get better deals subsequently. And what happened this time? The economists again distributed the money significantly less fairly than students from other disciplines.

After a survey that showed that economics professors gave less to charity than other academics, the researchers conducted a fourth study that showed that it was an economics training that made people less public-spirited rather than the innate disposition of people who took up economics. This they did by asking three groups of students a series of questions about their responses to hypothetical situations over a number of months. Two of the groups were made up of first-year economists: a hard-line one being taught microeconomics by an instructor with an interest in industrial organisation and game theory and a softer one taught by a specialist in the development of Communist China. Members of the third stream, the control, were astronomy students. A consistent pattern emerged, with the hard-line group becoming more selfish than the second one, who in turn grew worse than the astronomers as their course went on.

Just as Catholic attitudes were influenced by the Protestant teaching on salvation, it is not only economics students and professors whose approaches to problems have been profoundly affected by the anti-communal aspects of economic thought: public attitudes have been damaged as well by the constant repetition of economic teachings in the media. And, since economics is not the neutral system of analysis it pretends to be but an ideology that, because of its in-built assumptions, can prejudice our approach to real world, even if we have never studied it we need to try to counteract its baleful influence on our thinking processes. Otherwise, our attempts to establish community-based economic organisations are likely to go wrong.

Sixto Roxas, a Filipino economist who was once vice-chairman of the American Express International Bank argues2 that the main problem with conventional economics is that it focuses its analysis on the interests of the individual and the firm rather than those of the family and the community: "Neo-classical economics is not just a mathematical framework or analytical guideline to facilitate the understanding of reality: it is a full-fledged ideology and design for remaking the world" he says. "The world that we are living in today is being cunningly and insidiously organised to fall into a particular pattern of imposed development, a massive restructuring in the image of the enterprise system" that only engages itself in projects that are profitable to the promoters and which ignores humanity's other needs. "What is left behind is a gigantic mess of virtually unsolvable problems: health, education, environmental preservation, care for the poor and the handicapped" Roxas continues. People are reduced to flesh-and-blood machines that earn wages and salaries and generate profits but whose non-economic existence is not recognised.

In order to remedy this situation, Roxas proposes that a profit-and-loss balance sheet should be drawn up for the community as a whole rather than for just the income earners in its area: "The enterprise paradigm has established an accounting system that measures revenues, costs and incomes for enterprise owners. A new community paradigm must do the same for communities" he says, adding that national income figures such as GDP ought to be compiled from community accounts rather than, as at present, from the incomes of firms and individuals.

But while the implementation of Roxas' idea would be a great step forward, it would immediately run into the problem we discussed in Chapter Two, namely, that market prices cannot be relied upon to provide us with correct values for all the benefits a community enjoys, particularly as these would include things like health, happiness and beauty. And what constitutes a community cost to set against such benefits? Certainly not the current cash price of the goods and services that had to be sent out of the community in exchange for those which came in. Nor the amount of the work community members did: indeed, fulfilling work ought to be counted as one of the gains. Only any harmful side-effects of the way the local economy was being run such as increases in ugliness, unemployment, induced ill-health, inequality, crime, stress, noise, pollution, soil erosion and natural resource use would count as costs to be set against the gains.

Community accounting would therefore be very different from enterprise accounting and would yield very different results. Only one set of figures - those for incomes - would probably be expressed in monetary terms and the dozens of other indices that ought to be monitored would be judged by comparison with their levels of the previous year. Has unemployment fallen? Yes? Well, that's a movement in the right direction. But income inequality has increased? That's a step back. Can we set it off against the unemployment gain? No, except on the basis of personal ethical judgement: there is no measuring stick, no system of units, to help us out. Roxas realises this: "If there is to be a shift in viewpoint, a system will have to be set up that looks at matters that usually escape individual enterprise accounts. This assumes a moral and not a mechanical universe."

Many communities, particularly in the United States, have already started keeping accounts, taking their lead from the Sustainable Seattle project which began in 1980 and which monitors over a hundred factors which affect the quality and sustainability of human life in King County, the administrative area within which Seattle stands. Its 1993 report showed more factors moving away from sustainability than towards it. The county became less sustainable because, amongst other things, its population grew, it used more non-renewable energy, had more traffic, generated more waste, had more children living in poverty, had fewer people who could afford adequate housing, more juvenile crime, more babies with low birthweight and smaller wild salmon runs in local streams. On the positive side, however, there was an improvement in air quality, the streets became more pedestrian friendly, less water was used, the proportion of those employed who worked for the ten biggest employers fell, more young people were involved in some sort of voluntary service, the libraries and community centres were better used and there was wider participation in the arts.

Jacksonville in Florida followed Seattle's example for largely the wrong reason: it began monitoring its quality of life primarily to show big companies that the city was a good place to relocate in, rather to help its citizens make it better for themselves. Nevertheless the programme has worked out well. It monitors seventy-four indicators covering nine aspects of the city's life: education, the economy, public safety, natural environment, health, the social environment, government/politics, culture/recreation and mobility - that is, 'opportunities for and convenience of travel within Jacksonville and between Jacksonville and other locations.' The indicators were chosen by several committee involving over a hundred volunteers in 1985 and in 1991 another, larger group of people agreed targets for the indicators to reach by the year 2000. In 1993, Red Flag Indicators - that is, serious movements in the wrong direction - included a big rise in the proportion of black people unemployed in comparison with the total population, fewer people feeling safe walking alone in their neighbourhood at night, an increase in the number of newly-diagnosed AIDS cases, a decline in the physical fitness of schoolchildren, a decline in the number of people rating local government leadership as 'good' or 'excellent' and a drop in the number of people travelling by bus.

Several British local authorities are experimenting with the Seattle model3. However, just because this will give them a better idea of what is going wrong does not mean that they will be able to put things right. Companies and self-employed businesspeople need to make profits to survive but the mainstream economic system does not provide any method of linking those profits to the extent to which the firms which made them have helped the community to reach its goals. Indeed, it is frequently the firms that cut costs by ignoring the common good that are the most profitable. Moreover, even genuinely community-spirited enterprises are only able to tackle problems revealed by civic audits to the extent that they can do so without seriously damaging their financial performance. In other words, communities are very limited in the extent to which they can employ business, perhaps the most powerful human force for transforming the world, to achieve the collective as opposed to the private good.

This is one of the industrial system's most serious failings and as competition increases as a result of international free trade, the situation will worsen and each firm's freedom to act for the common good will decline. Instead, the world market will more rigidly dictate what a manufacturer should produce, at what price and with what technology. Should a firm try to resist the market's decision because its directors have moral scruples about, say, the emissions a new chemical process would entail, it will make lower profits than its rivals unless it can make a marketing feature out of its refusal to adopt the technique, as the Body Shop has done with its rejection of animal testing, and thus persuade enough people to pay its higher prices. In most cases, however, taking a moral stance would cut its profits and hence its ability to exploit commercial opportunities, giving its less-moral competitors the advantage and jeopardising its survival. As Adam Smith knew, only if the law imposes morality or public obligations on every firm can all firms afford to observe them.

Competition forces firms to don a commercial straightjacket and act in a very particular way. It is more effectively totalitarian than ever a Soviet central planner was able to be, which is exactly what its supporters like about it because they believe that only one way of operating a company or an economy is 'efficient'. They are happy to admit that their definition of efficiency is entirely commercial and excludes social objectives because they think that non-commercial objectives should be tackled separately once maximum profits have been made. However, as these profits are likely to be made at the expense of social objectives, the ultra-competitive, maximise-profits-first-and-then-use-some-of-them-for-social-ends-later approach is a highly inefficient of achieving them. What our communities need, then, is a form of economy that gives the producers within it sufficient protection from outside competition for them to meet societal objectives as well as their own.

We are a long way from such an economy at present. As a result, one of the largest and, in some terms, most successful examples of community enterprise, the Mondragon co-ops we discussed in Chapter 4 , have been unable to protect themselves adequately against the forces of international competition, even though they had no outside investors and their own source of low-interest funds. "The particular genius of the Mondragon co-operators is not that they have found a mechanism to make money or create wealth - something done all the time - or that they have discovered a way to institutionalise the establishment of new business" Roy Morrison writes in his book We build the road as we travel. 4 "Those are only part of the means to the end of creating and strengthening the bonds of chosen and discovered community." Unfortunately, since the early 1980s, the wealth-creating means Morrison mentions have increasingly become the end and the goal of strengthening community has been diluted or lost.

When the first Mondragon co-ops were set up, demand for their products was high because Spain was just entering the consumer age and the Spanish market was protected by high tariffs. As a result, 'management was easy, without great burdens, and profitability flowed with abundance' according to Jose Maria Ormachaechea5, one of the founders of Ulgor, the original enterprise that became a cash-cow for the system. Even as late as 1980, the Spanish manufacture of domestic appliances, the co-ops' most important activity, was sheltered from foreign competition by a 35% duty. By 1991, however, the barrier had been lowered to only 5% and it disappeared completely with the creation of the Single European Market on January 1st, 1993.

As the tariffs came down in the 1980s, foreign competition increased and the Spanish consumer became much more sophisticated. This made marketing and management more important activities within the co-ops than actual production and the wages of younger people performing these functions - who, as a generation, were in any case less committed than their predecessors to the co-operative ideal - had to be increased to persuade them not to move elsewhere. To enable this, the old rule that no-one could earn more than three times the wage of the least paid had to be relaxed, first in 1973, when the limit was raised to 4.5 and again in 1983, when it was increased to six. Then, in mid-1992, relativity restrictions on managerial wages were lifted altogether, a move that inevitably damaged the solidarity between the worker-members of the co-ops concerned. The heightened competition also caused the co-ops to concentrate on increasing labour productivity despite the fact that unemployment in the area had risen to over 16%. So, while the amount of capital employed per worker has increased substantially since 1985 and output has also gone up, the number of people in the manufacturing co-ops has been static.

In 1992, the co-ops signed contracts of association with a new organisation, the Mondragon Co-operative Corporation (MCC) instead of with the system's bank, which now only makes about 15% of its loans to them. The word 'corporation' in the new organisation's title is significant. Since it was set up, the MCC has merged some of its smaller co-operatives by moving their worker-members and equipment into a single building. It believes that co-ops with 40-60 members cannot compete and any that cannot meet strict market criteria must die. It is also reducing the number of products produced by the co-ops as a whole and has made profit-sharing between them mandatory. Joint ventures with ordinary private firms are increasingly important and most of its new investment and new employment creation has taken place outside the Mondragon area in places with no co-operative tradition. Moreover, whereas in the past it would have been unthinkable for a worker not to have been a shareholder, this has become quite common as profit- rather than people-driven managers think it desirable to be able to hire and fire staff easily to cope with fluctuations in demand. Overall, much of the consciousness of being a partner with a group of others in one's own enterprise has been lost as a result of the MCC's increased power in relation to member co-ops, the compulsory profit-sharing and the bigger co-operative units themselves. "The Mondragon co-operative system increasingly looks similar to some decentralized US corporations (e.g. Johnson & Johnson)" David Morris notes6. In 1995, it abandoned enough of its community and co-operative principles to raise $96m. by selling shares7 to outside investors on the stockmarket.

It had little alternative. Making car parts for Volkswagen, Ford and General Motors and holding 35% of the Spanish refrigerator market against competitors like Electrolux and Bosch who also manufacture in Spain impose extremely tight commercial straitjackets. Consequently, once the directors had decided that executives' wages in Mondragon should be equivalent to those outside, the organisation was well on the road to becoming conventionally commercial. What other path could it have taken, given that three of the ways we identified in Chapter Two of breaking out - lower wages, shorter distribution chains and the protection afforded by being able to price part of the output in a community currency - were not available to it, and the fourth - access to cheap funds through a community bank - was no longer as important as in the past? Mondragon may still be a network of community enterprises but it is not serving a community market. If it was, it would now be operating in a more stable, less competitive, commercial environment under a very different set of constraints and obligations.Click for 2003 update on Mondragon by Caroline Whyte

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