cross-posted from The Socialist Entrepreneur

Like all businesses, cooperatives can fail. Cooperatives can go bankrupt, but they can fail in another way too. Over time, cooperatives can degenerate. Cooperatives are said to degenerate when, under economic pressure, they abandon their cooperative principles and start adopting capitalist business practices and structures. In the worst case, given enough time and economic pressure, cooperatives can fully degenerate into privately-owned, capitalist businesses. Such businesses might still be economically viable ― they will have avoided bankruptcy ― but they can no longer be considered successful cooperatives.

This can easily happen. Cooperatives have been described as islands of socialism in a capitalist sea, and the pressures to make compromises with the surrounding capitalist business environment can be very difficult to resist, particularly if the economy is in recession. Given that degeneration is such a danger, is there any way that the founders of a worker-owned firm could structure their new business to make this less likely to happen? Are their lessons we can learn from other cooperatives that might help us build new worker-owned firms that are more resistant to degeneration as they grow over time?

[In the spring of 2016], scholars published two separate studies of a particular case of degeneration that go some way toward answering these questions. Both papers are studies of the most renowned and admired group of worker-owned cooperatives in the world: the Mondragon Corporation in the Basque country in Northern Spain. With 74 thousand workers in 260 firms, the scale of the Mondragon Corporation is truly impressive. Further, the Mondragon cooperatives have pioneered a number of business practices that have significantly modernized and strengthened the cooperative business model. The Mondragon cooperatives are frequently praised by economists and activists as an example of how a broader worker-owned economy might feasibly work in the future.

But the Mondragon Corporation is not perfect. Since the 1990s, the Mondragon cooperatives have significantly degenerated away from their founding worker-ownership model in at least one key respect. In the 1990s, to compete with multinational corporations, the Mondragon cooperatives adopted a strategy of ‘internationalization’ and started acquiring subsidiary businesses both in Spain and around the world. This could have been an opportunity to spread the Mondragon model of worker-ownership globally, but critically, the Mondragon cooperatives decided not to convert their new subsidiaries into sister cooperatives, but rather, they continued to administer their subsidiaries as capitalist businesses. The employees of the subsidiaries in essence became employees of the Mondragon cooperatives, rather than worker-owners in their own right. By 2007, this degeneration had progressed so far that only 29.5% of the Mondragon cooperatives’ total workforce remained members-owners. (Storey et al. 2014, cited in Bretos & Errasti 2016, 2)

How did this happen? Why didn’t the Mondragon cooperatives use the opportunity that internationalization presented to grow their worker-ownership model outside of the Basque country? And now that this has been done, are the Mondragon cooperatives doomed to fully degenerate into capitalist businesses or can the damage be reversed? Can the Mondragon cooperatives ‘regenerate’ themselves back into full worker-owned businesses in the future? These two studies come at these questions from two contrasting perspectives, and as such, they are particularly interesting and useful if considered together.

The first study is by Sharryn Kasmir, an anthropologist from Hofstra University who has been strong critic of the Mondragon Corporation in the past. In her recent paper, “The Mondragon Cooperatives and Global Capitalism: A Critical Analysis,” Kasmir comes at the problem of degeneration in the Mondragon cooperatives via a case study of Fagor Electrodomésticos, a flagship business in the Mondragon group. In 2013, Fagor Electrodomésticos went bankrupt. The Mondragon cooperatives are famously resilient, and the bankruptcy of a flagship company was an unprecedented development. But more troubling still, Kasmir’s research shows that the different classes of workers in Fagor Electrodomésticos faired very differently after the failure of the business.

Kasmir describes how degeneration created three distinct classes of workers in the Fagor Electrodomésticos cooperative: full members in the Basque country (1,900), wage labourers on short-term contracts in the Basque country (200), and wage labourers in international subsidiaries (3,500). (Kasmir 2016, 54–5) After the bankruptcy, most of the full members transferred to other Mondragon cooperatives and remained employed, but in contrast, the wage labourers both at home and abroad simply lost their jobs.

Kasmir argues that the Mondragon cooperatives long ago created a labour aristocracy in the Basque country that has undermined working class solidarity in the region, a divide that has only deepened as the Mondragon cooperatives have degenerated. She contends that these failures demonstrate “the inescapable limits of the ability of cooperatives to challenge capitalist social relations.” (Kasmir 2016, 56)

But are these limits actually inescapable, or could Mondragon cooperatives find a way to extend solidarity to the workers in their subsidiaries? Is there any possibility that the Mondragon cooperatives could reverse this trend toward degeneration and extend membership to all their workers? Could the Mondragon cooperatives find a way to regenerate?

By 2014, 485 of Tafalla’s total workforce of 688 had become member-owners.

The second study by Ignacio Bretos and Anjel Errasti of the University of the Basque Country tries to answer these questions. In their paper, “Challenges and opportunities for regeneration of multinational cooperatives: Lessons from the Mondragon Corporation — a case study of the Fagor Ederlan Group”, they evaluate the success of the Fagor Ederlan cooperative in its efforts to convert its subsidiaries to worker-owned businesses. The Fagor Ederlan Group is an automotive supplier in the Mondragon Corporation comprised of eight factories located in the Basque country and six subsidiaries located in Spain, in Brazil, in Slovakia and in Kunshan, China. In 2003, the Mondragon Cooperative Congress approved a new strategy of ‘social expansion’ to try to reverse the trend toward degeneration in the Corporation as a whole, and shortly thereafter, the Fagor Ederlan Group began work on extending worker-ownership to its subsidiaries.

To date, Fagor Ederlan has had its greatest success with its Tafalla subsidiary in the neighbouring region of Navarre, Spain. By 2014, 485 of Tafalla’s total workforce of 688 had become member-owners. (Bretos & Errasti 2016, 9) Fagor Ederlan also had some success with two other subsidiaries in Spain, to the extent that worker-ownership in the Fagor Ederlan Group as a whole has risen from 36% in 2007 to 65% in 2015. (Fagor Ederlan 2009 and Koop 2015, cited in Bretos & Errasti 2016, 9)

However, Fagor Ederlan has been much less successful with its remaining subsidiaries, and has found its foreign subsidiaries particularly challenging to reorganize as worker cooperatives. In the second half of their paper, Bretos and Errasti ask why this is the case. Scholars have theorized that a number of external factors may make extending worker-ownership to employees of subsidiaries difficult: extending membership to workers in subsidiaries is economically risky for the parent cooperative, particularly if the future viability of the subsidiary is uncertain; the legal framework in some countries may make establishing new cooperatives difficult or practically impossible; the work culture in some countries may make it difficult to establish cooperative values in a subsidiary firm; and members of the parent cooperative may also risk losing control of their investments if employees of subsidiaries become members.

In their research, Bretos and Errasti found evidence that all four external factors acted as barriers to regeneration in the Fagor Ederlan Group, but they also argue that internal factors may have been even more important. They contend that the reluctance to extend solidarity to the workers in subsidiaries may be more a result of a general weakening of the cooperative ideology in the Mondragon Corporation over time:

This is also consistent with research conducted by Heras (2014) who concludes that there is a clear decoupling between Mondragon’s principles and the daily activity of the worker members, and that the strongest tie binding them to the organisations is not their closeness to the cooperative model and culture, but rather job security. Ultimately, if the members of the Basque plants are not themselves strongly bound to the cooperative principles and values of Mondragon, it seems unlikely that strong interest in extending the cooperative model to foreign subsidiaries will arise.

(Bretos & Errasti 2016, 14)

And this I think that is the core message: ideology matters. Worker-owned businesses are not only creating jobs and building social wealth, they are also advancing an new ideology about social ownership, and this research suggests that unless this ideology is nurtured in each new generation that comes to work in a cooperative, degeneration is all but certain.

As islands of socialism in a capitalist sea, there will always be strong pressures on worker cooperatives that can push members to compromise on their values. The final bulwark against degeneration is a workforce that is committed to collective ownership and to work-place democracy.

Together, this research shows that while degeneration over time poses a real threat to the worker-ownership movement, full degeneration is not inevitable; with the right effort, regeneration is also possible. However, Bretos and Errasti’s research in particular shows that rebuilding solidarity in a degenerated cooperative is not easy, particularly across boundaries of geography, nation and culture. It would be far better to structure a cooperative so that degeneration did not take place in the first instance.

Cooperative education has been a central pillar of the cooperative movement since the Rochdale Principles were first agreed, and a strong ideological commitment to workplace democracy among worker-owners is the best long-term defense against degeneration, but this research raises the practical question: how is this commitment fostered in a worker-owned business as it grows over the years, decades, generations?

Bretos, Ignacio and Anjel Errasti (2016) “Challenges and opportunities for the regeneration of multinational worker cooperatives: Lessons from the Mondragon Corporation — a case study of the Fagor Ederlan Group.” Organization.

Kasmir, Sharryn. (2016) “The Mondragon Cooperatives and Global Capitalism: A Critical Analysis.” New Labor Forum 25(1): 52-59.

A video of Sharryn Kasmir giving a brief talk on some of her research can be seen here.