Cooperative Economics and Green Political Economy

  1. Game Theory and the Environment
  2. Cooperative Economics
  3. The Corporation and the Environment
  4. Economics of Production: The Cooperative View
    1. Adam Smith's Theory of Prosperity
    2. Malthus
    3. The Cooperative Movement and Cooperative Enterprise
    4. "Capital"
    5. Elysian Production and Class Struggle
    6. Elysian Production and Increasing Returns to Scale
    7. The Rise of the Corporation

For a hundred years, Marx' analysis of class struggles in capitalism was the centerpiece of progressive and revolutionary social thinking. While this essay can never approach the breadth and depth of Marx' critical theory of capitalism, there is a need for some rethinking, and I will try to sketch one possibility here, with particular emphasis on environmental politics. In Marx' "radical" conception, the many contradictions of capitalism were traced to their roots: class struggle. ("Radical" means "coming from the roots.") The modern left has no such "radical" theory. Class analysis did not seem to confront such key issues as the subordination of women, the persistence of racism, and the increasing importance of environmental problems. I say it "did not seem" to confront them. With respect to women, racism, and the exclusion or subordination of other groups, class analysis may yet return to the center of progressive thinking, or it may not. Our concern here is with the environment, and on the environment, class analysis in the Marxist tradition does not supply much in the way of leads.

When Karl Marx began his critical theory of capitalism, he began from the best conventional economic thinking of his day, the Classical Political Economy. The Labor Theory of Value, the ideas that division of labor increases productivity and that competition brings prices down to the cost of of production in the long run and equalizes the rate of return on investments were all key ideas of Classical Political Economy and foundational principles for Marx. Suppose, then, that Marx were sitting down to begin his work today. Would he begin with the existing literature of "Marxist Economics?" I suggest that he would not, but would begin with the best of neoclassical economics, which is usually expressed in terms of game theory.

Game Theory and the Environment

Game theory does offer us a theory of environmental problems, and that theory is quite familiar in the phrase "the Tragedy of the Commons." For simplicity (following many examples in informal game theory) we may begin with an example of a very simple society in which there are just two persons. Let us call the two persons A and B, or, more personally, Al and Bob. The two persons share a common resource, such as a pasture. Each person can choose between two strategies: to use the resource intensively (for example, by grazing a large herd of sheep) or with restraint (for example, by grazing just one or two sheep). The benefits to the two persons -- their "payoffs," in game theory terms -- will be given by the following table:

Table 1

with restraint
Al use intensely (1,1) (3,0)
use with restraint (0,3) (2,2)

In effect, Al chooses the row (which corresponds to his choice of strategies) and Bob chooses the column (which corresponds to his choice of strategies). In each cell of the table, Al gets the benefits on the left-hand side of the parentheses, and Bob gets the payoffs on the right. When both use the resource intensively, the benefits to both are reduced, because of the resulting overexploitation of the resource. In this case, overexploitation reduces the benefits from the resource by 50%.

What strategies will they choose? We may approach this example either as an example of noncooperative or cooperative behavior. "Noncooperative" behavior means that there is no way for the two persons to coordinate their strategy choice. In that case (the game theorist supposes) each person takes the strategy chosen by the other person as being given, and tries to adopt his best strategy in the given circumstances. If both succeed in this, we have a "best-response" or "Nash" equilibrium. In this case, Al can reason as follows: "Either Bob will use the resource intensely or with restraint. A) If he uses it intensely, and I do not, I am left with nothing -- my sheep are driven out and starve -- while, if I also use the resource intensely, I can at least gain one unit of benefits. B) If he uses the resource with restraint, and I use it intensely, I can gain all of the benefits myself, three units, whereas if I use it with restraint, I get only half of the benefit, 2 units. In either case, my best-response strategy is to use the resource intensively." And, indeed, the only best-response equilibrium in this game is for each person to use the resource intensively.

This example serves both to illustrate how game theory can capture some environmental problems and as an example of a fundamental dichotomy of game theory, which is central to this essay. For this bad outcome is not the only game equilibrium in the example. We have treated the "game" as an example of noncooperative behavior, meaning that the two persons cannot or do not coordinate their strategies. Suppose, however, that they can coordinate their strategies. In this simple example, it is enough if they just choose the same strategy. Suppose that Bob could commit himself to follow Al's lead, letting Al choose first and then choosing the same strategy Al does, regardless of whether that is his best response strategy or not. The commitment could take the simple form of a bond: Bob could place with a third party a bond equal to 4 units of benefits, to be forfeit if he (Bob) should fail to follow Al's lead in choosing strategies. Since Bob can gain no more than 3, in the game, by choosing a different strategy than Al, he will never do so. Then Al may reason: "If I choose to use the resource intensely, Bob also will do so, and we will each get a payoff of 1. But if I use the resource with restraint, Bob will do that too, and we will get a payoff of 2. My best strategy (given that Bob's choice depends on mine) is to use the resource with restraint." This leads to the cooperative equilibrium for this game, in which both persons use the resource with restraint.

Abstracting from its specific (environmental) context, this example serves us as an example of the dichotomy from which this essay begins. The dichotomy is between the cooperative and noncooperative "solutions to a game" or, more concretely, between cooperative and noncooperative arrangements in society and in human interactions. The example we have given is, of course, highly simplified. It is equivalent (in a different context and with a change of signs) to the famous "Prisoners' Dilemma" example, which illustrates the shortcomings of noncooperative behavior in hundreds of textbooks (including some of mine). Real environmental and other human problems are typically much more complex, involving many choices of strategy, uncertainty, problems of sequencing and the timing of commitment, and many more than just two players. When, in particular, there are many players, a simple "leadership" solution such as the one we have seen here may not work. In some of these cases game theorists may have more than one concept of the cooperative equilibrium and more than one concept of noncooperative equilibrium. Experimental results tell us that real human beings are neither as rational nor as predictably selfish as the persons in the example. But what all these examples have in common is that an (ideally rational) cooperative arrangement must first be efficient. If (ideally rational) persons can coordinate their strategies, they presumably will not do so inefficiently. If they find that their strategies are inefficiently coordinated, they will rearrange them so that they are efficient, and share in the gains. Conversely, when we observe inefficiency in human life, it must be because people either cannot or do not coordinate their strategies, so that they fall into (at best) inefficient best-response strategies like the bilateral "use intensively" equilibrium in the game.

Cooperative Economics

We now arrive at the focus of this essay. When I use the term "cooperative economics," I mean the body of studies that examine human behavior as cooperative or noncooperative, that examine the roles of political and economic institutions in determining and mediating cooperative and noncooperative behavior and outcomes, and explores the means to bring about cooperative outcomes in real human interactions. As a subdiscipline, cooperative economics hardly exists. Most of the studies that do in fact advance this program have been conceived with other purposes in mind. But I believe that cooperative economics is what all economics should be, what economics is really about, and I think the example makes it clear that cooperative economics would provide us with important insights about the environmental problems we face.

Cooperative economics has a counterpart in cooperative enterprise. A cooperative enterprise is an enterprise democratically run by its employees. We sometimes say that a cooperative enterprise is worker-owned, and sometimes that is legally true, but in a cooperative enterprise ownership is really beside the point. What counts is membership, and every employee is a member, one person, one vote. The cooperative enterprise is a little economic republic that operates in the interest of its employee-citizens. Although they are very little known, even among economists, thousands of cooperative enterprises have been successful in many fields of operation over the last century and a half. Many have been founded by the "cooperative movement" that began in Britain over 150 years ago, with the idea that the way for the working class to become prosperous and free was for them to join together and support one another -- that is, though cooperative strategies in their economic life.

I believe that every important environmental problem reflects a failure to coordinate strategies cooperatively and consequently is inefficient. Whatever economists and other ideologists may say, real environmental protection is never inefficient, and environmental destruction is never efficient. I do not mean to minimize the importance of justice, and will touch on environmental equity before this essay is finished. But economists have generally focused on efficiency. Individual economists have recognized the link between efficiency and environmental protection, and between efficiency and cooperation. But the majority of PhD economists have been able to preserve their ignorance of these points, and gone on claiming, without any sound basis at all, that environmental preservation inefficient and that ruthless competition is the way to efficiency. This is as terrible a scandal for my profession as bloodletting ever was for the medical profession.

The Corporation and the Environment

I claim that our environmental problems are symptomatic of noncooperative behavior. Corporations are the dominant institutions of our political economy. What is the role of the corporation in this? To answer the question, we need to digress briefly on a basic assumption of neoclassical economics: maximization of profits.

Neoclassical theory assumes that businesses maximize profits. Strictly speaking, it is not true that a proprietorship maximizes profits. Instead, the proprietorship does as the proprietor wants -- and if the proprietor values the environment, and can afford some sacrifice of profit income to maintain the environment, a proprietorship may well allocated its resources in environment-friendly ways. A number of important cooperative enterprises have been formed when the proprietors donated the company to the employees' cooperative group.

In a corporation, in pure theory, the stockholders might decide via the annual meeting to "trade off" lower profits for a more environmentally friendly policy. However, that would face some difficulties in terms of corporate law, especially if even a small minority of shareholders disagreed. In effect, a corporate charter is a contract among the shareholders to jointly maximize their profits. In any case, the shareholders are strangers (ownership is anonymous in theory and it is also anonymous in practice in large corporations) who have nothing in common but an interest in the profits of the company. Thus, the corporation abstracts from the rich range of motivations that enter into the decisions of a proprietor. What is left is the urge for profits. This is all the more true as mutual funds become the direct owners of a large proportion of the stock, and, many believe, push for shorter-term profits and nothing but profits. (Socially responsible investment funds are an important exception). Always in theory, and increasingly in practice, corporations maximize profits.

And that makes environmental problems worse than they might otherwise be. Let me use an example in which (in a spirit of disclosure) I have a financial interest. Second-growth forest can be harvested (logged) either by clear-cutting or by "sustainable harvesting," which takes only the mature trees and leaves a thinned forest behind. As owner of a share in such a forest, I believe that sustainable harvesting is more environmentally sound, though I must say that my opinion is not based on scientific research. Sustainable harvesting can also be done more frequently. Thus, although clearcutting, which is cheaper and produces more lumber, will give a larger payoff at the time of harvest, the owner will have to wait a longer time for the next harvest. All the same, if the larger payment for clearcutting can be invested at a high enough interest rate, clearcutting will be more profitable. Anyway, as proprietors, my family were free to choose sustainable harvesting, and we did, partly in the hope that the environment of our tract of northwest Louisiana abandoned farmland would be less damaged as a result. Had the decision been made by a corporation, that decision would have had to be justified in terms of some higher long-term profitability. If that justification were based on questionable accounting assumptions, lawsuits against the company and the accounting consultants and even prison sentences might result. In practice, of course, the corporate decision would be to clear-cut.

If, as I believe, a broader human society gains from environmental protection, then sustainable harvesting in this case, and environmental protection generally, are "cooperative strategies." Profit maximization pushes instead toward noncooperative strategies. Law, custom, and the economic structure of corporations force them toward noncooperative profit maximization. As an economist, committed as I am to the cooperative approach, I must say that there are reasons. Cooperative arrangements among sellers of the same product (at the expense of customers) are a way to create exploitative monopolies. We have antitrust laws to discourage corporations from cooperative strategies of that sort, and, in practice, antitrust laws cannot make fine distinctions, and they discourage cooperative strategies of all kinds. Given the abstract urge for profits that directs corporations, and the power of the big ones, I have to see that as a merely prudent precaution. To ask a corporation to act cooperatively is a bit like asking an elephant to share a pup tent with you. It isn't possible, and it wouldn't be a good idea if it were. Instead, in the world of corporate dominance, we rely on government regulation to enforce cooperative behavior -- and hope for the best, since the corporations can so often control the government.

It is fashionable to blame everything on the corporations, and it may sound as if I am following that fashion. But I am not. Corporations are a product, a symptom, and a complication of the deeper structure of our political economy. There is no point in blaming a symptom for the disease, and placing blame will not lead to a cure. What I do mean to say is that it is very reasonable for environmentalists both to explore what might be the alternatives to the corporation, as a means of organizing production in our economy, and to try to understand what has brought us to this pass. Perhaps cooperative enterprise could give us an alternative form of business organization, but can cooperative enterprises do the job that the corporations have done? How can we say? For both of those purposes, we need a theory of production. Modern economics has no such theory, so we return for it to the economics of the nineteenth century, the Classical Political Economists.

Economics of Production: The Cooperative View

The example in Table 1 is a good starting point, but it is simplified in many ways. It contains no corporations and no production. Here is another way in which the example above is simplified. In it, the two persons in the "game" are symmetrical. As any Marxist will observe, this is a fatal simplification -- we have simplified away class struggle. And, without quite granting the objection, we should take it as due warning. There is no reason to think that environmental problems fall symmetrically on the people involved, and every reason to believe that they do not. Again, the problem of environmental equity is a real and troubling problem. Symmetry is a simplifying assumption, not a fact. I have claimed that "cooperative economics" is what all economics is really about, in the last analysis. That would mean that the Marx' economics of class struggle, David Ricardo's economics as "the study of the distribution of the produce of society among the classes of society" would be included, along with Smith's "Inquiry into the Nature and Causes of the Wealth of Nations" and the neoclassical "study of human behavior as a relationship between scarce means and alternative ends." But how can that be?

As always, we must begin with Smith, since economics, as a separate discipline, begins with Smith. Smith is best known for the "invisible hand" idea -- the profit seeking would lead people "as if by an invisible hand" to promote the general good. It is less understood that Smith put that idea in a quite specific context. That context leaves Smith's theory with some unresolved contradictions. The contradictions can be removed -- modern "neoclassical" economics has removed them -- but in removing them we also remove some of Smith's most important insight. Smith, contradictions and all, is closer to the truth than neoclassical economics!

Adam Smith's Theory of Prosperity

The context, and the point Smith put first in his book, is his theory of prosperity. For Smith, of course, that was the point: his book was "An Inquiry into the Nature and Causes of the Wealth of Nations." By contrast, modern economics has no theory of prosperity, and that is the cost of getting rid of Smith's contradictions.

Smith's theory of prosperity was that prosperity is a result of high labor productivity, and that high labor productivity, in turn is a result of extensive division of labor and specialization. (If this idea is new to you, you might want to look at a more extensive discussion). Now, Smith's ideas fit the facts well. Increased prosperity, in the modern world, has gone hand in hand with increased division of labor and specialization. There may be more to it than just that, but Smith was taking the first step in the development of economics, and it was the right first step.

Smith's idea can be easily interpreted in terms of cooperative games. A group of workers who get together and divide up the work are a "coalition," coordinating their strategies. Once again, let us begin with a very simple numerical example. We do not need to know specifically what the strategies are, or how they are coordinated. For a cooperative analysis, all we need to know is how much each possible coalition can produce, in dollar value terms. Let us see how things work out in a very small and simple economy with only three workers, Tom, Dick and Harry. With three players there are seven coalitions: three coalitions of just one person, three coalitions with two persons, and one grand coalition of all three workers.

(A coalition of just one person is called a "singleton coalition." It may seem strange to speak of a "coalition of just one person." That's the way mathematicians count, and the mathematicians got game theory started. The point is that we want to enumerate all of the ways that workers can be grouped, and having everyone "go it alone" is one possible way.)

So let us suppose that, in our small society, a singleton coalition of one worker "going it alone" can produce three units of output. Two workers who form a coalition and divide up the work, specializing in different tasks, can produce ten units. If all three workers get together, they can divide up the labor and specialize even more completely, they can produce twenty units of output. Labor productivity is output per worker, and so we have a relationship between labor input and productivity as shown in Table 2.

Table 2

labor input total output labor productivity
1 3 3
2 10 5
3 20 6.67

This is the basic idea of cooperative economics: cooperation is the basis of prosperity. Smith does not contradict this. His explanation is a little narrower: cooperation is the basis of prosperity because cooperation is necessary for division of labor and division of labor is necessary for prosperity. Thus, Smith's economics is one particular kind of cooperative economics.

This idea developed in several different directions in Smith's own subsequent work, that of his nineteenth century successors, and in practice. Seeing division of labor as the key to prosperity, Smith opposed practices that seemed to limit the growing division of labor, and he found these obstacles in the form of government intervention in the market. Conversely, therefore, Smith favored free markets, on the grounds that free markets allow for the greatest division of labor. In this, Smith differs fundamentally with neoclassical economics, which favors free markets (when it does) for quite different reasons. Smith was also quite opposed to corporations, which he saw as relics of feudalism and obstacles to the division of labor. In this (as we will see, and as later history suggests) Smith was mistaken.


Smith's theory of prosperity was very optimistic. With free markets and good government, Smith felt, a country could enjoy a virtuous circle -- more production leading to wider markets leading to more division of labor leading to more production. But nonhuman, living nature is strangely missing from Smith's conception of the economic process. The great pessimistic critic of this optimistic view was Thomas Malthus, and, of course, Malthus is important for modern environmental thinking. I suspect that if environmentalists knew him better, they would be less enthusiastic about his ideas. He was utterly reactionary, explicitly the advocate of the idle rich, and scandalized by any thought of birth control through contraception! His specific forecast, that population growth would lead to misery though food shortage and starvation, has proven wrong to date. At the same time, he was an enormously original thinker, giving economics the concepts of diminishing returns, unemployment, and recession on account of inadequate aggregate demand. And whatever else, he brought living nature, the environment, into economic analysis for the first time.

Malthus' pessimism focused specifically on the limited availability of agricultural land, leading to hunger as populations grow. Later generations of pessimist have focused on other resources. For Jevons, it was coal that would limit industrial growth; for the resource pessimists of the 1970's, petroleum. Today, in many countries, fresh water is the limit and agricultural production again in question as a result. In the future, as global warming proceeds and the planet must be put on a heat budget, the capacity to radiate heat may prove to be a limit for Smithian growth. What all these possibilities have in common is that nature does constrain production, and a political economy that leaves out natural constraint will fail and may endanger the survival of the planet. But any one-sided pessimism will miss another equally important point. What we have seen over the last two centuries is a dialectic of natural constraint and human creativity. As Smith expected, creative human beings have continued to find new ways to divide labor and produce with less resources. But, again and again, new limits have been discovered. Each must judge for herself how long this balancing of increasing division of labor and technology against natural limitations can or should be continued with increasing production. But the kind of one-sided pessimism that sees no role for human creativity, and hence no continuing progress in human life, is certain to be wrong -- and that is a pitfall that green political economy must avoid.

The Cooperative Movement and Cooperative Enterprise

Smith's optimism was taken in another direction by some working people who were more concerned to improve their own condition, and that of their neighbors, than with theory. If division of labor was the key, they though, then why should capitalists and employers play any role in it? Why should the workers not get together and divide the labor among themselves, obtaining the prosperity and benefits of division of labor without dividing them with any idle or domineering wealthy people? That was their program, and they put it into practice, founding the first cooperative enterprises. A cooperative enterprise is a business in which the workers themselves make the decisions, and hire the managers, by majority vote, one worker, one vote. Since then thousands of more or less "cooperative" enterprises have been formed. We sometimes call them "worker-owned," but really they are the rejection of the whole idea that an enterprise can be "owned." After all, an enterprise is a group of people, a coalition who divide their labor, and ownership of a group of people is simply slavery at wholesale. These cooperative enterprises are very important for cooperative economics -- and it is not just a play on words! If cooperative work is the secret of high productivity, we would expect that these enterprises, designed on cooperative principles, would achieve higher labor productivity than other kinds of enterprises in comparable circumstances. And the evidence is that they do -- but we shall have to return to that. The pioneer cooperators hoped for a cooperative society to come -- a society in which most or all production would be organized by cooperative enterprises, and these cooperative enterprises would coordinate their production either through markets, demand and supply or through longer-term, federative mutual arrangements. In this cooperative ideal society, there are workers and associations of workers -- but no "masters," no capitalists. In the terminology of the day, this meant that the cooperative society would be a kind of socialist society, and indeed it was the program of the Christian Socialist Movement. We need to get back to that idea.


One thing that is missing from the Tom, Dick and Harry example is what modern economists (other than Marxists) call capital and Smith called stock. Investment, in other words, plays no role in that oversimplified example. In fact, Smith and his immediate successors were pretty vague on the role of investment. Their idea was that capital was necessary as a wages fund. When many workers joined together to divide up labor and specialize, they would have to have some income, in order to eat, before the products would be finished. Thus, to have division of labor, it would be necessary for some wealthy person to "advance" the wages out of his "stock" or "capital." Thus, investment was seen as a necessary means to division of labor. The wage fund theory was also supposed to determine the level of wages, and it didn't work very well in that application. Modern economics has abandoned this "wages fund" theory, but in some ways it may still contain an important insight.

In the early 1800's, mechanization was under way, and it was increasingly clear that (at that time) mechanization was a key to increasing production (at that time). Mechanization can be seen as a kind of division of labor. Some workers specialize in the production of shoemaking machines, and others in using the machines to produce shoes: this is division of labor. (And it is particularly clear that, if the machine-makers are to eat and wear shoes, they will have to be paid before their machines are used to produce shoes). But it was not seen in that way. It seemed that mechanization was something different, and that the wage fund theory could not account for it. Nassau Senior "solved" the problem by simply assuming that investment can always increase labor productivity. Modern neoclassical economics is built on that assumption. And the assumption is not wrong, but it begs an important question. Why does investment increase productivity? The Austrian economist -- and a founder of the "Austrian School" -- Bohm-Bawerk came up with an answer: investment permits more roundabout methods of production, and more roundabout means of production can (often enough) be more productive. This fits the example of mechanization. But, as we have said, mechanization is a form of division of labor -- and roundabout production and division of labor are one in the same thing. One way that labor can be divided is by sequencing one task before another. This takes time, so we can expect that production with more thoroughly divided labor will take longer, be more "roundabout," and require more investment per person.

An American economist, Richard Ely, put all this together before 1900. Roundaboutness and division of labor were two aspects of what he called "cooperative production," and cooperative production was the key to prosperity. In what follows, to keep confusion to a minimum, I'll use the term "Elysian" production for what Ely called "cooperative" production, and that will help to distinguish between production based on division of labor and roundaboutness -- Elysian production -- and production in cooperative enterprises and cooperative behavior and solutions in general.

Ely was a founder of the American Economic Association, a believer in cooperative enterprise, and a committed pro-labor progressive. To this day, the annual distinguished lecture at the convention of the American Economic Association is known as the Richard Ely lecture. To the best of my knowledge, though, it has been many decades since there has been a Richard Ely lecture that honored Richard Ely's ideas. No sooner had Ely perfected Smith's ideas on the division of labor than the economics profession abandoned them. The profession had other ideological fish to fry.

Elysian Production and Class Struggle

But Ely's insight can be useful to us. We can understand that prosperity depends on "Elysian" forms of production that are roundabout and in which labor is highly divided. Because it is roundabout, this sort of production cannot be undertaken without increasing investment up front. This is where class struggle comes into the picture. Most people do not have enough wealth to get started in roundabout production; they constitute the working class. The working class face a dilemma. They can go it alone or work for come capitalist who has enough money to get the enterprise started. If they go it alone, they will be unable to participate in the broad division of labor and roundabout production, and therefore their labor will be less productive, and they can be competitive only by cutting their own incomes or doing something else to compensate. Thus most workers, in practice, have no real alternative to working for the rich minority who can put the money up front.

There is an ideological myth that says that investors "create jobs." They do not. One might as well say that the toll-taker built the highway. Every toll-road was built by human labor, not by the person who collects the toll. But the toll-taker has the power to prevent me or you from travelling on that highway, so he can demand a toll, even if he has created nothing at all. Similarly, the minority of the very rich have the power to prevent the working class from making use of the potential benefits of division of labor and roundabout production. So the rich can take their toll. They can insist on control of the division of labor, making themselves lords over those who have to work for a living -- or, if they can prefer, they can hire someone else to manage the work, and just enjoy the profits. Or they can use the profits to buy the legislature. In general, I define a capitalist as someone who derives power over others from his greater wealth, and whether that power is exercised by seizing control of the division of labor on the job or seizing control of the government by buying the legislature, it is integral to the role of a capitalist. (Are you a capitalist? Do you have enough money to buy power over others? If not, you are not a capitalist, even if you are in favor of capitalism).

We have already seen that some workers opted out of this dilemma by founding cooperative enterprises. Cooperative enterprises can work -- hundreds of them have -- but they are usually short of capital. What the cooperative enterprise does to compensate for this is to work more effectively together. The experience of the cooperative movement has been that when everyone has an equal stake in the outcome and an equal say in running the enterprise, labor is more effectively divided, and so is more productive even if it is a bit less roundabout. So, while many have survived for decades despite their capital shortage, they have not been able to match the growth of the resources available to the rich, and so have been unable to create opportunities for the larger majority of workers. The experience of the cooperative enterprises of the world is of key importance for cooperative economics, because it shows us that democratic organization of production is more effective in promoting cooperative "solutions" to the game of production than the power of capitalists is. Historically, though, the inability of cooperatives to offer opportunities to the working class presented a dilemma to progressives: to aid a few workers by supporting cooperative enterprise, or to aid the greater number have to knuckle under to the rich by fighting for good, strong labor unions?

Elysian Production and Increasing Returns to Scale

But what about corporations, which are so central to the modern economic system? As we have seen, Smith thought of them as relics of a feudal past, but Smith's own ideas contained a contrary insight that Smith himself did not recognize, and that created a contradiction that runs through the classical political economy and Marxism, and is only partly resolved in modern economics. Let us take Table 2 and transform the last column from labor productivity to labor cost per unit of output. Arithmetically, labor cost is just the inverse of labor productivity. Here is the table:

Table 3

labor input total output unit labor cost
1 3 0.33
2 10 0.2
3 20 0.15

In this simplified example, recall, labor is the only input resource. One, two or three workers are combined in a "coalition" to coordinate their work. What the table tells us is that the more resources the coalition controls, the more cheaply the coalition can produce. Put differently, the bigger the enterprise is, the lower its costs per unit are. This condition is called "increasing returns to scale" in the jargon of economics. In general, "increasing returns to scale" means that a bigger organization can produce more cheaply or do better work, just because it is bigger. "Increasing returns to scale" are a predictable result of what Smith called "division of labor" and what we are calling Elysian production

In the real world, division of labor and Elysian production are the basis of prosperity. In this real world, what happens when a big company gets into competition with a smaller company? The answer is that the big company can produce more cheaply or do a better job, because of "increasing returns to scale," so the bigger company wins out and absorbs the smaller company.

The main limit to increasing returns to scale is the difficulty of managing large organizations. Economies of scale may make it possible for a bigger firm to produce at lower cost than a smaller one, even when the smaller "lean and mean" company is, on the whole, better managed. But (in some fields, at least) the difficulty of coordinating a large working group overcomes the advantages division of labor and roundaboutness, and "diminishing returns to scale" set in, that is, costs rise faster than production. That is especially important in agriculture, where the advantages of division of labor are limited, and the problems of management increased, by the fact that the work has to be spread out over the land.

Smith didn't know that division of labor would lead to increasing returns to scale -- and that's no disgrace. After all, he was just beginning the study of economics. Much of the evidence for the existence of "increasing returns to scale" came in the nineteenth century, with the rise of the trusts and modern corporations, and the concept itself was developed only toward the end of the nineteenth century. Smith could hardly know what the future century would bring. Marx -- who lived long enough to see some of this -- had a strong inkling of this.

("Increasing returns to scale" also challenges the labor theory of value. The labor theory says that the competitive price of a good or service is proportional to the labor costs. As Table 3 shows, the labor cost is not a constant, dropping as the coalition gets bigger. Which labor cost should we use for the labor value? Smith avoided the issue, relying on a labor theory of value only in an "early and rude stage of society." Marx associated the labor value with the "socially necessary labor time," that is, the cheapest labor value with the given organization of production, and taking it for granted that the labor values would be continually revolutionized by capitalist development.)

"Increasing returns to scale" have another implication that is not understood by many economists and by hardly anyone who is not a mathematical economist. Once again, we begin by modifying Table 2. In the third column of Table 4, we answer the question, "How much does worker 1, 2, or 3 add to the production of the coalition?" The answer, in the jargon of economics, is the "marginal product" of labor. Working backward, what the third worker adds is the difference between 20 units of output and 10, that is, 20-10=10. The second worker adds the difference 10-3=7, and the first adds 3-0=3 units to the production of a coalition with no labor at all.

Table 4

labor input total output marginal product
1 3 3
2 10 7
3 20 10

So far, so good. But there is an idea, in both economic theory and common sense, that people should be paid according to their contribution. The third man, then, could expect to be paid his marginal product -- 10 units of output. But who is the third man? Tom could say "My labor adds 10 to the output of Dick and Harry -- so I insist on being paid 10 units of output, according to my contribution." But Dick can equally well say "My labor adds 10 to the output of Tom and Harry -- so I insist on being paid 10 units of output." Harry, too, can say "My labor adds 10 to the output of Tom and Dick -- so I insist on being paid 10 units of output." Each has made a reasonable claim, but their reasonable claims add up to 30 units of output, and the coalition can produce only 20. Here is the lesson: in the kind of economy Smith and Ely described, the kind we live in, it is not possible to pay everyone in accordance with his contribution.

Of course, the individual's contribution could be interpreted in a different way. In response to Tom's demand, Dick and Harry might say, "If you worked alone, you would be able to produce only three units, so that is your contribution. The rest, the remaining 7 units of the marginal product of the third person, is a result of the three of us working together -- it cannot be assigned to you at all." So Tom is paid only three units of output. But Dick and Harry, with their pay determined the same way, each also get 3 -- and the total is nine, 11 less than the production of the group as a whole.

In a world of increasing returns to scale, the whole is both more and less than the sum of the parts. The ideal of pay according to one's contributions loses its clear meaning and may not be possible, since (on one interpretation) it would cost more than the group can produce. In a world of increasing returns to scale, big companies usually win out over smaller ones despite being worse managed. Does that sound a bit like the modern world? Elysian production, like "the force" in Star Wars, has its dark side -- and the dark side includes huge organizations, dull jobs, arbitrary pay scales, and (as we will see later on) the potential for destructive environmental impacts -- but the dark side cannot be separated completely from the good side: prosperity, interesting jobs worth doing, and the potential for environmental preservation and restoration.

The Rise of the Corporation

Once again, the example in Tables 2-4 is simplified in that investment plays no role in it. In practice, roundaboutness and division of labor are highly associated in Elysian production. The larger-scale enterprises, with their large work forces and highly divided labor, will also require investment in a proportionate or (perhaps) more than proportionate scale. And that is why the corporation assumes its central role.

The capitalism known to Smith and Marx was proprietary capitalism -- a capitalism in which each enterprise was the personal property and business of some individual capitalist, or of a partnership of individual capitalists. But this means that the investment, and thus the roundaboutness, scale, and division of labor of an enterprise, would be limited by the wealth of the proprietor. Some socially useful enterprises could be mounted only by the very richest, and some, such as canals, railroads, and, later, electrical utilities and the largest manufactories, might be infeasible unless undertaken by the state. On the continent of Europe and in Latin America, generally, they were undertaken by the state. But especially in the United States and Britain, the modern joint-stock corporation, combining anonymous ownership and limited liability with a claim on a proportionate share of profits, proved able to marshall the enormous amounts of investment necessary for highly roundabout, modern Elysian production.

The difficulty and usefulness of this accomplishment should not be undervalued. It is not enough just to pull a great deal of capital into one mass, although that is difficult enough without government directly appropriating the capital. It is also necessary to assure that the capital actually will be used for roundabout production, rather than being diverted to someone's consumption -- it is here that many state enterprises have failed. It is also necessary to direct the investment to the uses in which it will be most productive. On this, the profit-orientation of the corporation and the capital markets induces resources predominantly toward the uses that are most productive in a market-value sense. We need not suppose that the direction of investment into useful investment is done very effectively, let alone (as some neoclassical economics would have it) "optimally." Indeed, as with the old comment about a dog walking on his hind paws, the wonder is not that it is done imperfectly. The wonder is that it is done at all.

This very issue -- the "efficient allocation of resources" and the role of markets and competition in bringing it about -- came to be the central issue of economics as the corporation became the central institution of capitalism. "Neoclassical economics" or "microeconomics" studies the allocation of resources in general, of course, and there is a vast body of abstract microeconomic theory that does not even mention corporations -- but it is no accident, I think, that this kind of economic theory has become predominant at the same time that corporations, wielding vast agglomerations of investment funds and capital goods, have become the dominant economic institutions. The real issue is the allocation of investment funds for roundabout production through the "capital markets." The main ideological project of neoclassical economics, from the first, has been to demonstrate that markets induce an efficient allocation of resources -- and not incidentally, that capital markets induce an efficient allocation of investment funds, in particular. When we keep that ideological goal in mind, much that is puzzling about modern economics becomes more clear. Of course, efficient allocation of resources is a key issue for central economic planning, as well, and the greatest pioneers of neoclassical economics, from Pareto to Kenneth Arrow, have pointed out that neoclassical microeconomics could be a tool for the economic planner. (To date, no economic planners have attempted to use the tool.) no successful ideology is ever based simply on falsehood, so everyone has a great deal to learn from neoclassical economics -- though it must be used with care and critical thinking.

The increasing dominance of corporations has also changed the nature of class struggle, in two opposite ways. Marx foresaw a time when the great majority of the people would work for wages, under the direction of some capitalist and for the profit of the capitalist. Yet in Marx' time, the majority were not wage-workers. In most countries, most were dependent agricultural workers -- serfs, peasants, peons, share-croppers, and such, but not wage-workers, except in Britain. In a few fortunate countries such as post-revolutionary France and the United States, many were self-employed landowning farmers. Many others were self-employed artisans and small merchants, neither wage-workers nor employers. The rise of corporate capitalism has changed all that. By 1900, no more than about half of working Americans were farmers. While the corporations have never come to dominate farming (because diminishing returns to scale are so important in farming) productivity increase has made it possible for 3% of Americans to feed the rest and much of the world. The descendants of those who farmed have had to find jobs for wages, if they found work at all. The artisans and small merchants have progressively been replaced by corporate enterprise -- more efficient, in many senses, but bureaucratic and hierarchical. Today the vast majority of people in a modern economic system are wage-slaves -- as Marx anticipated, but did not live to see.

On the other side: in Marx' time, workers had no savings, no old-age pensions, and little wealth of any kind. The wage-worker lived from hand to mouth. If he lived to old age, without children to support him, he worked until he dropped, or suffered the most desperate penury, quite possibly to starvation. If he died, his dependents faced the same penury. Even if he could set a little aside in the hope that his widow might have something, it could hardly be enough to create a business to supply an income, and in any case, the business would be hardly likely to survive the death of its principle. The best hope might be to own a home that the widow might then let rooms in, for an income to lighten her poverty. But anonymous ownership in the modern corporation opened the possibility for retired workers, "widows and orphans," to obtain some income from savings invested in the biggest and most efficient enterprises. The emergence of open-end stock mutual funds as widespread investment vehicles in the 1990's has carried the trend still further.

From the beginning, this has inspired some utopians to predict that a "people's capitalism" could arise, in which a rough equality of incomes and wealth could coexist with capitalism. A balanced view is important here. There is no "people's capitalism" nor any sign that there ever will be. While many Americans own stock, directly or indirectly, stock is owned very unequally, and most Americans have to obey the direction, on the job, of those who own much more of it than they do. The huge volume of stock mutual funds may destabilize stock markets, which have never been very stable. One of the biggest dangers to working people's saving is that their pension funds will be looted by their employers, including the Republican government of the State of New Jersey. Most of the investment deployed by modern American capitalism has been financed by the savings of workers -- but the workers do not control what they "own." It is controlled by the big shareholders and managers. The traditional justification for the control of business by the rich -- that they put up the money -- is no longer true, but they continue to control, simply through power, essentially through the power of the government, which they control.

To be continued.