The village and the corporation – they seem like opposite poles, yet the previous article suggests that at least some corporations are rediscovering the importance of community and of the village scale. The following article is about a group of industrious people who have carried this process considerably further and developed a form of business organization that could well be the basis for a significantly new economic system.
WHAT MAKES NEWS and what makes history are often very different things. It should then not surprise us that what may be one of the most important happenings of the last few decades has been going on largely unnoticed in the Basque region of northern Spain. This "happening" is the development of the Mondragón Industrial Cooperatives. On the surface it is not a particularly flashy story, but as the meaning of their achievement sinks in, it becomes clear that they have pioneered a new social invention that makes Capitalism, Communism, Socialism, and all the squabbles between these "isms", crude, irrelevant and obsolete. It is as if we were still communicating by pony express, and then discovered that a small region in northern Spain had been successfully using the phone and radio for more than 25 years.
What is the Mondragón story, and why is it so important? It has roots that go back at least into the Spanish Civil War, but we can begin in 1941 when a young Basque priest, Father Jose Maria Arizmendi came to Mondragón. Arizmendi, like most Basques, had fought on the losing republican side. He had been imprisoned as a POW, and after his release, had entered the church. His bishop had sent him to Mondragón with the charge of tending to the young, and he began his work by teaching in the apprentice school of the Union Cerrajera, the main industrial company in town. He soon found this too limiting, and by 1943 he had opened a technical training school with the support of the townspeople. In this school, he provided his students with not only a good technical education, but also a sophisticated understanding of Catholic Social Doctrine with its emphasis on cooperation and "the primacy of labor among the factors of production".
After continuing their education, a number of his students tried, but without success, to apply his teachings within the traditional companies where they had found work. By 1954, five of his original 11 decided to form a new company (ULGOR) where they could implement these teachings, and by 1956, after raising funds from local townspeople, they opened their factory with 24 worker-members.
Twenty-six years later, in 1982, the Mondragón Cooperative Movement had 20,000 worker-members, 85 industrial cooperatives (producing everything from machine tools to refrigerators to electronic equipment), 6 agricultural cooperatives, 2 service cooperatives, 43 cooperative schools, 14 housing cooperatives, a large consumer/worker cooperative with over forty stores, plus four second level cooperatives that provide services to the primary cooperatives. These four are a bank (Caja Laboral Popular) with 120 branch offices, a technological research institute (Ikerlan), the League of Education and Culture (including a Polytechnical College, a Business School and a Professional College), and a social security and medical cooperative (Lagun-Aro). During this remarkable growth they have had only one failure – a fishing cooperative.
To appreciate these statistics, it helps to see them against the usual success rates for both new small businesses and producer cooperatives in general, neither of which have been very impressive. For example, in America 80 to 90 percent of new small businesses fail within 5 years. The situation with producer-cooperatives, which have been tried in various forms since the middle of the last century, is more complex, but basically most have either failed through poor management or succeeded as businesses only to be bought out after a short cooperative life.
What makes the Mondragón movement so effective? It seems to me that there are three key elements:
1) The cultural and economic condition of the Basque region;
2) The specific pattern of rights and responsibilities for worker-members;
3) The supporting institutions they have developed, particularly their bank.
The Basques are a proud, industrious, thrifty, and socially cohesive people with strong nationalist ambitions. The Spanish Civil War left their economy devastated and left them politically under the control of a vengeful, repressive and suspicious central government. These conditions seem to have been a great help in focusing Basque energy into the Mondragón movement since it provided a means of rebuilding their economy and expressing the strength of their community in a way that was not seen as politically threatening. Whether or not Mondragón type businesses could function as well in a less socially cohesive setting is currently an unanswered question.
The financial and organizational structure of these cooperatives is, in significant details, different from many of the less successful British and American attempts. The essential features of their system are as follows:
1) All employees and only employees are members, with a one person – one vote control of the Board of Directors (all of whom must also be worker-members).
2) The Board of Directors selects the top management, which then functions in a more or less conventional way. However, the general membership also independently elects a Watchdog Council to monitor the financial performance of the cooperative and a Social Council which deals with a wide range of personnel affairs and makes binding decisions on safety, pay scale, and social welfare.
3) All new worker-members must contribute (over two years) around $5000 to the capital of the cooperative. While this may seem like a large sum, it is still only about 10% of the capital cost of creating the new job, and it emphasizes the seriousness with which they take their role as owners as well as workers.
4) To insure a sense of equality and solidarity among all the worker-members, they restrict the range of highest pay to lowest pay to an effective ratio of 4.5 to 1. In practice this means that the lowest paid earn more than comparable workers in ordinary companies, while the executives earn less than their capitalist peers. Those managers who have grown up within the system seem to appreciate the non-monetary rewards, but this rule has so far prevented the establishment of a cooperative hospital. (The doctors aren’t willing to lower their pay scale.)
5) Only part of the cooperative’s earnings are paid out as immediate "wages", while the rest are retained in internal capital accounts that are assigned to each worker but available to them only when they retire. They have done this in a way that allows each worker to benefit from the equity value of his or her ownership, but does not threaten the integrity of the cooperative. Unlike ordinary corporate shares, these internal accounts cannot be sold and they carry no voting rights.
The second level cooperatives, for example the bank, have a slightly different structure. As usual, all workers are members, but the other cooperatives are also considered members. (Unlike credit unions and mutual savings banks, depositors are not members.) The Board of Directors is made up of representatives from the other cooperatives (2/3) as well as worker- members of the bank (1/3). Aside from this broader definition of membership, the internal structure of the second level cooperatives is similar to that of the others.
The bank has two main divisions, the Banking Division and the Empresarial Division. The Banking Division provides normal banking service to its 1/2 million customers through 120 branch offices. It also serves as a major source of new capital for the first level cooperatives. The unique feature of the bank, however, is the Empresarial Division, whose basic function is to aid in the creation of new cooperatives and provide management assistance to the existing ones, especially when they are making any major changes such as entering a new market or launching a new product. The following list of departments should give you some idea of the scope that the 116 staff- members of this division cover: Research, Library and Documentation Center, Agricultural/Food, Industrial Products, Industrial Promotion and Intervention, Export, Marketing, Productions, Personnel, Administrative-Financial, Legal, Auditing, Information and Control, Urban Planning, Industrial Building, and Housing.
The Bank also serves as the hub of the whole Mondragón Cooperative Movement. Each cooperative runs itself through its own Board of Directors, but they are all linked to the bank (and each other) through a "Contract of Association". This contract grants the cooperative membership rights in the bank, and spells out the basic principles the cooperative must follow to be part of the Mondragón movement. There are also special relationships worked out between cooperatives in related areas so that they can work together like the divisions of a larger company.
Time now to step back and look at the significance of all this. What have they achieved? First, they have made worker-ownership – or as I prefer to call it, group self-employment – work and work beautifully in a mainstream business setting. Why is this important? Because it is more efficient as a means of production, it offers more flexibility to the society, it offers better working conditions, and it leads to more socially responsible corporate decision-making. It is a major step in the direction of true participatory economic democracy. Both corporate-capitalism and Soviet communism assume that when it comes to economics, people can’t (or shouldn’t) run their own lives. The important decisions must be made either by an industrial/financial elite or by government bureaucrats. Mondragón, by its very existence, proclaims all that to be nonsense.
At the heart of their approach is a new relationship between capital and labor, and new rules for corporate ownership. What is the usual relationship? We often use the word "capitalism" very loosely to refer to some vague notion of "our system", but its essential basis is the idea that labor should be rented while those who have ownership rights to the equipment (capital) should take the risks and rewards and control the decision making. If you think about this for a minute, you will see that it is absolutely backwards in terms of motivation. Given adequate equipment, the performance of a company depends entirely on the human beings who are actually doing the work. The quality of performance by a machine is relatively fixed, but the quality from a human can vary over a wide range from moment to moment. It is the humans who need to feel the direct feedback through risks/rewards and the commitment that comes through participation and control.
The Mondragón cooperatives are based on the much more sensible principle that capital should be rented and labor should have risks, rewards, and control. To do this, they have reorganized the ownership rights normally associated with capital and control. Normal corporate shares entitle the shareholder to 1) voting rights, 2) profit rights, and 3) equity rights – each in proportion to the amount of shares owned. The Mondragón approach splits the equity rights off from the other two which become membership rights. These membership rights can not be bought or sold, and they entitle each worker-member to one vote and to a proportion of the profits based on pay-scale, not equity. The members also have equity rights (internal capital accounts) that are accumulated profits retained in personal accounts and available when they retire. These accounts earn interest, and are obviously much larger for old workers than new, but the amount of equity does not affect the amount of profits earned or voting rights. Thus even from themselves, the worker-members rent capital and base control and rewards on actual involvement.
(It is this change in the basic ownership structure that, to me, makes the Mondragón model so much more profound than some of the organizational changes going on in American businesses. I don’t mean to minimize significance of those changes – they are definitely in the right direction – but I would see them as incomplete as long as the standard relationship between labor and capital remains.)
The second thing they have done is to create a total system – a federation with its own services provided by the second level cooperatives. In fact, they cover the whole gamut of modern economic activity – heavy industry, light industry, agriculture, retail distribution, finance, housing, education, and research. In the last issue of IN CONTEXT, I suggested that the cutting edge of the new culture was not in the village by itself, but in the network of villages. When we say "village" we tend to think in residential terms, but the traditional villages were not suburbs. They were primarily economic units.
In this light, I find it very interesting that the Mondragón group has decided that no cooperative should be larger than about 400 to 500 members – the village scale. This decision grew out of their only strike that took place in 1974 in their first and largest cooperative, ULGOR with 3,462 members. What they saw in hindsight was the near impossibility of establishing adequate communications channels in such a large unit. This helps to emphasize that the Mondragón system is not just built on a few rules and principles. It thrives on an active "village culture" within each cooperative. Yet it thrives even more because they have built a supportive network of these economic "villages", and the whole network has a supportive relationship with its region.
Yet perhaps most important, they have healed the split between labor and management/ownership, thereby allowing much more balanced and wholistic decision making. Consider what happens in our system when a plant fails to produce the profit expected of it. The owners look at the situation purely in terms of the return on capital, and if they could get a better return elsewhere, they may well close the plant. The investments the workers have in their community and all the social costs of the closing do not enter into the accounting of the relative profitability of keeping the plant open.
In the Mondragón system, all these factors are considered. The Mondragón worker- owners are not sentimental and they will not tolerate a non-performing business, but when a cooperative runs into trouble, they are willing to put out the extra effort to find a new and better way. If it means lower income and lower profits for a while, they – as workers and owners, the business and the community – are willing to put up with it. They can make hard choices much more creatively and with more balance than those who are locked into adversarial roles.
Finally, to all this praise of the Mondragón system I should add a note of balance. Their model does not cover the full spectrum of business types, but only certain medium scale businesses. These cooperatives happily coexist with a large number of small businesses, and it is not clear if an international airline or a major oil company could be successfully organized on the basis of a federation of self-governing units with less than 500 members. Perhaps, but there may be yet another way that is better. Even for the kind of medium sized industrial business that is the normal Mondragón type, different cultural conditions may make changes in the model appropriate.
The people of Mondragón have been very pragmatic and we should be no less so. Yet their model stands out as so much more effective than other attempts at industrial cooperatives that it would be wise to take their achievement as a starting point. We have a lot to learn from the people of the Pyrenees.
Campbell, Alastair, Keen, Norman, & Oakeshott, Worker-Owners: The Mondragón Achievement (London: Anglo-German Foundation, 1977).
Carnoy, Martin & D. Shearer, Economic Democracy (New York: M.E. Sharpe, 1980).
Cort, John, "The Marvels Of Mondragón", Commonweal, June 18, 1982.
Curl, John, History Of Work Cooperation In America (Berkeley: Homeward Press, 1980).
Ellerman, David P., The Socialization Of Entrepreneurship: The Empresarial Division of the Caja Laboral Popular (Somerville, Ma: Industrial Cooperative Association, 1982).