B.J.Pol.S.
II, 309-329 310 MILLER
Printed in Great Britain 309
Market Neutrality and the Failure of
Co-operatives
DAVID MILLER*
Among the arguments that have featured in the recent revival of libertarian
thinking is one purporting to show that a free market economy, protected by
a minimal state1 - or even no state at all2 - is neutral as between capitalism and
a certain form of socialism. The argument runs as follows. The market places
no limits on the manner in which people may associate for purposes of economic
activity. They may choose capitalist forms of organization, in which case those
who become owners of capital assume a greater degree of risk and responsibility
and stand to gain correspondingly higher rewards, or they may choose
co-operative forms, where groups of producers supply their own capital and
share the profits between them. If capitalist forms are overwhelmingly favoured,
as the historical evidence shows, this reveals something about the preference
structure of the population as a whole. Either the bulk of the population actively
wish to avoid the risks and anxieties of capital ownership, and so willingly
transfer these responsibilities to the few willing to bear them; or the efficiency
of the capitalist firm is such that it can pay wages high enough to compensate
the work force for their loss of autonomy in comparison with the co-operative
alternative.
Nozick, for example, argues that if workers' control of industry is considered
a sufficiently important goal by any group of people, they ought to be prepared
to take lower wages in order to join a worker-controlled enterprise.3 The
financial sacrifice would be an accurate measure of the value they find in working
in a democratic environment. So even if co-operatives are less efficient as
economic units than capitalist firms, they will still be established by those with
the appropriate preference schedules. In this way the market responds to tastes
for different modes of economic organization as accurately as it does to tastes
for different varieties of ice-cream. If, by contrast, a particular pattern of
association were to be made compulsory, as occurs in a socialist system which
prohibits the private ownership of capital, the preferences of at least some
people would be ignored in the social calculus. This would not only be inefficient,
but would discriminate between personal tastes in a way that the neutral market
mechanism avoids.
* Nuffield College, Oxford. An earlier version of this paper was searchingly criticized by lain
Hampsher-Monk, Anthony Heath, Brian Hindley and Kurt Klappholz at a meeting sponsored by
the Acton Society. I am extremely grateful to them for their comments, and conscious that several
of their objections remain unanswered. I should also like to thank the Journal's reviewers for a
number of helpful suggestions.
Robert Nozick, Anarchy, State and Utopia (Oxford: Basil Blackwell, 1974).
2 David Friedman, The Machinery of Freedom (New York: Harper and Row, I973).
3 Nozick, Anarchy, State and Utopia, pp. 250-3.
Socialists are sometimes inclined to challenge the historical assumptions that
bolster this libertarian argument. They claim that co-operatives are actively
opposed by capitalists who see that successful co-operative production threatens
their own advantaged position. It is therefore in the capitalists' interests to harass
newly-formed co-operatives by, for instance, refusing to trade with them,
preventing them from obtaining credit, and in the last resort using the power of
the state to suppress them. The relative absence of co-operatives from the
historical record, therefore, testifies more to the power of the capitalist class than
to the preferences of the working population for capitalist forms of organization.
A brief examination of British experience may throw some light on this
question. During the nineteenth century, several hundred small co-operatives
were started by groups of working men, sometimes but not always with
middle-class sponsorship. Very few of these institutions survived for more than
a few years, and indeed none managed to preserve the pure co-operative form
in which all and only workers have a share in the capital of the enterprise.4 There
is little evidence, however, of external hostility as the cause of disappearance.
If a corn-mill was established by subscription because a ring of millers
adulterated the flour and kept up prices, then naturally the millers would try
to have the project stopped.5 But such cases were untypical, as we shall see in
a moment. As far as the state is concerned, the law prior to 1852 was
unfavourable to co-operative associations, but Acts passed in that year and in
1862 gave co-operatives legal recognition as limited liability companies. Rather
than suppressing co-operatives, therefore, the state was willing to offer them its
protection.
Why, then, did the co-operatives fare so badly? The sources of decay were
almost entirely internal. There were three classic patterns of decline. The first
occurred most commonly when the starting capital was supplied to the
co-operative by a middle-class philanthropist. Here the co-operative simply went
bankrupt, or made losses until the philanthropist decided to pull out what
remained of his investment. The cause was 'labour indiscipline': the workforce
refused to produce efficiently, or drew excessive amounts from the capital fund
as income, or both. Such behaviour is intelligible given that the producers had
no stake in the capital, and no assurance that the 'experiment' would be
continued indefinitely. The problem was no doubt amplified by the fact that these
ventures typically opened their doors to all comers, and aspired to be more than
merely productive units; they were intended to be reforming social communities
as well.6 So, for instance, as one contemporary account puts it, 'failure was
4 I therefore exclude the institution which bulks large in 'histories of co-operation', the
Co-operative Wholesale Society, since this was an association of consumers employing workers
rather than a co-operative in my sense.
5 See Benjamin Jones, Co-operative Production (Oxford: Clarendon Press, 1894), Vol. I, Chap.
14.
6 The classic examples were the communities at Orbiston, Ralahine and Queenswood. See Jones,
Co-operative Production, Vol. I. Chap. 6; R. G. Garnett, Co-operation and the Owenite Socialist
Communities in Britain, 1825-i845 (Manchester: Manchester University Press, 1972).
 Market Neutrality and the Failure of Co-operatives
accelerated by the sexes being thrown too much together, in consequence of the
want of separate rooms'.7
The second pattern of decline was manifested by co-operatives that were
launched by share subscriptions, with the members taking up the bulk of the
shares. This is plainly an impure form of co-operative, but I think it deserves
the title so long as it is differentiated from the standard joint-stock company
by the fact that workers are majority shareholders. Here again there were often
'labour discipline' problems: workers who had appointed their manager
apparently found it difficult to accept disciplinary measures from him. However,
the fundamental source of decay came with financial success. As the enterprise's
capital grew, shares passed increasingly to outside investors, who eventually
came to have a majority shareholding. This was liable to happen through
workers retiring, or moving to new employment, or through share issues to raise
new capital. A good example is the Rochdale Co-operative Manufacturing
Society, set up to run a cotton mill, which after a period of financial hardship
suddenly became profitable. One of the promoters described the result.
The original promotors never lost confidence in the principle of profit-sharing. It was
the success of the society that attracted to it persons who only cared for the eternal 'divi'.
These persons brought into the society their money very rapidly for shares, thus raising
the number of shareholders from 200 or 300 to 1,400. It was the new shareholding element
that swamped the original promotors of what was then called 'Bounty to labour'.8
These co-operatives were therefore transformed into joint-stock companies, with
an increasing separation between capital and labour. In their transformed state
they might of course prove commercially viable, and indeed some of the
longest-lasting 'co-operatives' have been enterprises of this form - typically
small and undynamic businesses where the new capital has come from sympathetic
sources like trade unions which allow the workforce to retain a considerable say
in the management of the enterprise.9
The third pattern of decay occurred in cases where the starting capital needed
by the co-operative was fairly small, and could therefore be subscribed by the
founders themselves. Here, too, success was fatal to the co-operative form. When
expansion took place, it was more tempting to take on new workers as wage
labour than to admit them as equal partners with claims to the profits from
capital they had not subscribed. Sometimes this was done surreptitiously by
raising the requirements of membership- for example, by demanding an
unrealistically large capital subscription from new members. The effect was to
Jones, Co-operative Production, Vol. I, p. 70.
8 Jones, Co-operative Production, Vol. I, p. 262.
9 See Robert Oakeshott, The Case for Workers' Co-ops (London: Routledge and Kegan Paul,
1978), Chap. 5; Derek Jones, 'British Producer Co-operatives' in Ken Coates, ed., The New Worker
Co-operatives (Nottingham: Spokesman Books, 1976). Jones stresses the longevity of these
enterprises and attacks the pessimistic views of the Webbs, but his figures reveal that the surviving
firms are really participatory joint-stock companies rather than genuine co-operatives, with the
employees very rarely being majority shareholders (although more often having a majority on the
management committee).
31I 312 MILLER
convert the original sponsors into small capitalists. Typical examples are the
numerous boot and shoe societies which were set up initially by groups of
artisans supplying a few pounds each, but later took on non-members as
employees.10 Beatrice Webb, who for this and other reasons was implacably
opposed to producers' co-operatives, denounced this particular development as
'the wolf in sheep's clothing, the brotherhood of workers sweating their fellow
men'.
The evidence therefore points overwhelmingly to the conclusion that co-
operatives have disappeared for reasons internal to themselves. They have not
been crushed by outside pressure from capitalists, but undermined by the action
of their own members, whether this led to financial failure or to degeneration.
Thus far it seems that the libertarian case stands. Individuals have followed their
preferences in the market, and their preferences have led them away from the
co-operative form of organization.
A socialist critic might at this point fall back on the claim that the preferences
expressed in market behaviour are corrupted by the market itself. The self-interest
displayed by the co-operators whose behaviour led to the downfall of their
institutions reflects the influence of capitalist society on human motives, rather
than any 'real' or 'true' human preferences. This familiar claim leads, however,
to grave difficulties concerning the identification of 'true' as opposed to 'false'
preferences. I believe that a more economical case can be made out against the
libertarian position. It may be possible to show that the market is an inefficient
means of satisfying preferences of certain kinds, even when 'preferences' are
taken to be those revealed in speech or behaviour rather than imputed 'real
preferences'.
The case relies on the notion that the collective result of many separate
individual actions may be an outcome which is unintended and unwanted by
any of the persons involved. This possibility has often been explored using the
model of the Prisoner's Dilemma, in which two individuals acting self-interestedly
but independently arrive at a result that is worse for both of them than an
alternative which they could have reached by mutual agreement. In such a case
it would pay both participants to employ an agent to compel them to reach the
preferred alternative. The model has been thought to have particular reference
to the supply of public goods, where each person has an incentive to avoid
making his contribution to their cost, whilst enjoying the results of everyone
else's contribution. If everyone follows this policy, no public goods are supplied,
even though everyone would be prepared to contribute on condition that all
others did likewise. In this case again, compulsion appears to be the only way
of reaching the most efficient outcome.12
10 Jones, Co-operative Production, Vol. I. Chap. 19.
11 Beatrice Webb, The Co-operative Movement in Great Britain (London: Swann Sonnenschein,
I891), p. I44. For her general case against producers' co-operatives, see Chap. 5, passim.
12 The Prisoner's Dilemma may also be avoided if the parties are assumed to have a sufficient
degree of altruism. Fordiscussion of such escape routes, see Michael Taylor, Anarchy and Co-operation
(London: Wiley, 1976); A. K. Sen, 'Choice, Orderings and Morality' in S. Korner, ed., Practical
Reason (Oxford: Blackwell, 1974); David Collard, Altruism and Economy (Oxford: Martin
Robertson, 1978), Chap. 4.
 Market Neutrality and the Failure of Co-operatives 313
314 MILLER

I shall suggest that this analysis can be applied to co-operatives operating in

him, then of course there is potential conflict between the capitalist's goal of
a free market economy. In pursuing their preferences the members of such
wealth maximization and the manager's goal of maximizing his income.14 The
groups may be led inevitably to sub-optimal outcomes that involve the failure
firm's behaviour will depend on how successful the capitalist is in inducing the
or degeneration of the co-operative. If my suggestion can be validated, the
nineteenth-century examples will reflect the basic difficulties of any co-operative
manager to pursue the first goal, by threats, bonuses, offers of promotion or
operating in a capitalist society, not merely the mistakes of their members in whatever. I assume in what follows that we are comparing co-operatives with
particular. In a sense this would be reassuring, for although human error should
capitalist firms in which the capitalist either manages himself or succeeds in
getting the actual manager to make wealth maximization his aim.15
never be discounted in such cases, it seems unlikely that so many promising
The co-operative's goal is not wealth maximization but maximization of
beginnings would have come to grief if there were not some overriding defect
income per worker.l6 It is democratically run by its members, who have no
in the co-operative form when placed in capitalist surroundings.
interest in increasing the over-all wealth of the co-operative except in so far as
In the rudimentary economic analysis that follows, I assume that the goal of
this is reflected in increasing income for them. Now that does not mean that they
co-operative members is to maximize their personal incomes.13 This is certainly
will wish to maximize income in any one time period, say the current year. Their
a drastic over-simplification, but it is needed at this point to model the behaviour
interest is to maximize their total earnings from the co-operative. Like the
of co-operatives in the market. Later I shall ask what difference a more complex
capitalist they will need to include a time discount, to reflect the lesser value of
set of goals might make. It seems improbable that income maximization will not
a pound a year hence; unlike him, however, they will also need to consider how
feature among the goals of those entering a co-operative: in many actual cases
it seems to have been the dominant goal, in the sense that workers were driven
long they are likely to belong to the co-operative, and how much capital they
will be able to take out if they choose to leave. These factors will determine how
to seek this alternative by the predatory behaviour of their former employers.
calculations of potential income are made.
What difference does the co-operative's different maximand - income per
THE ECONOMICS OF CO-OPERATIVES worker - make to its behaviour? The effect can be seen easily if we compare a
capitalist firm and an otherwise identical co-operative deciding whether to take
At first sight it may seem that the economic behaviour of a co-operative will
on an additional worker, given a fixed quantity of capital and a fixed price for
replicate that of a technologically identical capitalist firm. The fact that in one
the product to be made. The capitalist, as we have seen, will hire whenever
case the assets are owned by the workforce as a whole and in the other by a
marginal return exceeds marginal cost. If the labourer can be hired for ?5o and
capitalist hiring labour will not affect decisions about production, employment
and investment, although it will of course affect the distribution of profits. A
makes ?5I profit for the enterprise, he will be taken on. In the case of the
co-operative, however, it will depend on the average income already being paid
co-operative is taken to be a productive unit owned and controlled by its
to members. Since the new hand can only be taken on as a full member (if the
members, with profits distributed according to a democratically-made decision.
co-operative is not to degenerate into a joint-stock company), he must be paid
Will such a unit follow the same profit-maximizing goal as a capitalist enterprise
in its external relations?
The capitalist's aim is wealth-maximization. He will hire labour and invest 14 For analysis of this conflict, see E. G. Furubotn and S. Pejovich, eds., The Economics of
PropertY Rights (Cambridge, Mass.: Ballinger, 1974), especially Chaps. 15, 22.
capital whenever marginal return exceeds marginal cost; that is, whenever an l'- One can see the possibility of developing a 'convergence thesis' here, if managers in both
extra labourer yields more in profit than he receives in wages, and whenever a capitalist enterprises and co-operatives are able to wrest control from the nominal owners.
pound invested yields more than a pound in return. This will have to be modified Moreover, if, instead of having a single owner, the capitalist firm is a joint-stock company, the
slightly to take account of time - a pound today being worth more in most problem of control is compounded, since the shareholders have to co-ordinate their efforts in order
to constrain the manager, which may prove a costly undertaking. For an analysis, see S. Pejovich,
circumstances than a pound in a year's time - but with this modification the
'The Capitalist Corporation and the Socialist Firm; a Study of Comparative Efficiency' in
assumption holds. The capitalist's wealth and the enterprise's value are one and K. Brunner, ed., Economics and Social Institutions (Boston: Martinus Nijhoff, 1979), who points
the same, so maximizing the latter means maximizing the former. If the capitalist out, however, that the threat of shareholders selling up and depressing the value of the firm's stock
chooses not to run his own business but hires a manager to make decisions for may act as an automatic constraint.
16 This is now a fairly standard assumption. See Benjamin Ward, 'The Firm in Illyria: Market
Syndicalism', American Economic Review, XLVIII (1958), 566-89; Vanek, The General Theory of
1: The analysis is presented informally and draws upon the rapidly growing body of literature
on the economics of co-operatives. Readers wishing for a more formal treatment should begin by Labour-Managed Market Economies; Meade, 'The Theory of Labour-Managed Firms and Profit
consulting the following: J. Vanek, The General Theory of Labour-Managed Market Economies Sharing'; P. Wiles, Economic Institutions Compared (Oxford: Blackwell, 1977), Chap. 4. It has,
however, been challenged by Furubotn who argues that a long-run analysis needs to take account
(Ithaca: Cornell University Press, 1970); J. E. Meade, 'The Theory of Labour-Managed Firms and
of the possible effects of an income-maximizing policy on the size and composition of the co-
Profit Sharing', Economic Journal, LXXXII (I972), 402-28; A. Steinherr, 'The Labour-Managed
operative's membership. See E. G. Furubotn, 'The Long Run Analysis of the Labour Managed
Economy: A Survey of the Economics Literature', Annals of Public and Co-operative Economy, IL
Firm', American Economic Review, LXVI (1976), 104-23.
(1978), 129-48; A. Clayre, ed., The Political Economy of Co-operation and Participation (Oxford:
Oxford University Press, I980).
JPS 11
 Market Neutrality and the Failure of Co-operatives 315
according to the current income schedule. So the hiring decision depends on
whether the profit he can create raises or lowers the existing average. Suppose
for simplicity's sake that income is distributed equally, and that the rate
currently paid is ?55, then the extra labourer will not be hired, since to do so
would reduce average income. One can see immediately the temptation to take
on this person as a non-member for ?50, which ex hypothesi he is willing to
accept. The basic logic of hiring is likely to create self-destructive pressures in
the co-operative.
We can infer from this that, ceterisparibus, co-operatives which remain as such
will be smaller than capitalist firms. They will grow so long as there are
economies of scale such that adding extra workers increases the productivity of
those already in the partnership; whereas capitalist firms will grow beyond this
point so long as the net marginal return remains positive. However, the biggest
difference concerns not hiring but investment. This, I shall argue, is the Achilles'
heel of co-operatives competing in the market with capitalist enterprises.
Consider a capitalist firm and a co-operative at the end of a time period when
a net profit has been made after agreed wages have been paid out. Should the
profit be consumed or reinvested? In the case of the capitalist I have postulated
that investment will occur whenever the expected return is greater than the
capitalist's discount for time. This postulate is over-simple, because the capitalist
will certainly want to pay himself a minimum income over any time period, and
may not be indifferent as to the distribution between time periods (i.e. he may
prefer ?5,ooo per annum to ?2,000 in year I and ?8,000 in year 2). But those
complications aside, a pound invested is worth little less than a pound in the
pocket, and so investment will take place whenever it promises to yield a
reasonable return.
How the co-operative will behave depends on the structure of ownership which
it has established. At one extreme the capital may be held as a collective asset
with no individual having any claim to withdraw it; at the other, individual
shares may be identified, with rules governing the crediting of accounts and the
withdrawal of assets. There are infinitely many possibilities in between, but let
us consider the two extreme cases.
If assets are held collectively, than a pound invested in the co-operative is,
from the point of view of any individual member, irrecoverable. Consequently
he will only support the investment if he thinks that the income it will produce
for him outweighs the immediate loss of revenue. As we have seen, he needs to
estimate how long he is likely to remain a member - a quantity sometimes
referred to as his 'time horizon' - to do this. It will always be true that the rate
of return needed to persuade such a member to invest is higher than that needed
by a capitalist. To see the magnitude of the difference, suppose that everyone's
time discount is covered by a rate of return on investment of 5 per cent, so that
a capitalist will invest whenever the promised yield is 5 per cent or greater. What
is the minimum yield demanded by a co-operative member? If his time horizon
were one year, he would require a yield of I05 per cent before investing his
potential income. To take more realistic cases, a five year time horizon requires
I 1-2
316 MILLER
a yield of 23 per cent, a ten year horizon I3 per cent, a twenty year horizon 8
per cent.17
Any actual co-operative will have members with different time horizons
depending on age, mobility and so forth. If investment decisions are made by
majority vote, as has been assumed, the yield required will be determined by the
median voter (voters being arranged in order of ascending time horizon). If
everyone expects to remain within the co-operative for the whole of his working
life - say forty years - and there is a normal age distribution, the median time
horizon will be twenty years. But there is an unrealistically favourable assumption
from the co-operative's point of view, and I should guess that a median time
horizon of about ten years is the most one could expect. If so, we see that the
necessary rate of yield is considerably higher than that required for investment
by a capitalist, from which it follows that the co-operative is likely to invest a
good deal less than its capitalist counterpart.
Might this unfortunate result be avoided by having assets owned individually?
A share of the profit invested would be credited to each person's account, and
could be withdrawn when the person retired or left the co-operative. Under these
circumstances a member may be expected to approach investment decisions in
the same way as a capitalist, investing whenever the expected rate of return more
than covers his time discount. Against this, however, investment in a co-operative
has two features which may make it less attractive to members than withdrawing
profits in the form of income and investing elsewhere. One is the inflexibility of
the investment, which prevents money being drawn out to meet current needs,
obviously an important consideration for most private savers.18 Although a
capitalist may for the same reason wish to save some of his profit outside his
enterprise, the amount in question will be much less than the combined total
required by the N members of a similarly sized co-operative. Furthermore the
capitalist is aware that, should his liquid 'cushion' fail to shield him from some
large financial misfortune, he can in the last resort sell up and realize his assets;
for the co-operator the existence of this option will depend on the rules of the
co-operative, and therefore (in all likelihood) on finding a 'buyer' for his job
with the right combination of working skills and capital. It will probably be
difficult to do this quickly. The other feature which makes investment in a
co-operative relatively unattractive to its members is that such investment
prevents the spreading of risk. If the co-operative should go bankrupt both
income and capital would be lost, whereas a capitalist can disperse risk by
investing some capital elsewhere and allowing others to invest in his own firm.
As Meade has said, 'while property owners can spread their risks by putting
small bits of their property into a large number of concerns, a worker cannot
easily put small bits of his effort into a large number of different jobs. This
presumably is a main reason why we find risk-bearing capital hiring labour rather
17 Calculated by Furubotn and Pejovich in Furubotn and Pejovich, The Economics of Property
Rights, p. 240.
18 Might banks be willing to lend to co-operative members, using their investment accounts as
security? Only if bankers could be convinced that co-operatives were financially sound, on which
see below.
 Market Neutrality and the Failure of Co-operatives 317
than risk-bearing labour hiring capital.'19 One may conjecture whether this
second feature explains the observed fact that when nineteenth-century co-
operators began to hire labour, they often preferred to take paid employment
outside the co-operative themselves.20
The main difficulty, however, with individualized assets is that once the
co-operative begins to lose members through retirement or transfer, it has to
require newcomers to supply capital equivalent in amount to the withdrawals.
If this requirement were not imposed, the co-operative would be steadily drained
of capital, and moreover, the newcomers would benefit unfairly from the assets
accumulated by the founding generation, creating pressure for them to be taken
on as employees rather than as equal members of the co-operative. But the
requirement would quickly become a daunting hurdle as the capital per worker
increased; even if the money could be borrowed privately, it would make the
co-operative a less attractive employment prospect than a capitalist enterprise
paying similar wages.21 So although individualized assets may reduce the
co-operative's investment problem in the short term, in the longer run the effect
will either be to deter incoming members or to cause the co-operative to
degenerate into a joint-stock company owned by the founding generation but
employing newcomers as wage labourers.22
Some partisans of the co-operative form favour a mixed solution, with
assets being held partly individually and partly collectively.23 Profits which were
being reinvested would then be divided between the individual accounts of
members and the collective account in a fixed proportion (or perhaps on a sliding
scale). The argument behind this proposal is that workers need to have some
visible 'stake' in their enterprise to ensure that they make decisions responsibly,
while on the other hand the co-operative becomes vulnerable to withdrawals if
all its assets are held individually. But as far as the investment problem is
concerned, the mixed solution can only succeed if workers are induced by the
ownership structure to behave irrationally. Suppose, to take the extreme case,
that they make their investment decisions as though all reinvested profit was to
be credited to individual accounts. Then, although they will not invest quite as
readily as their capitalist counterpart (for reasons given above), they will
19 Meade, 'The Theory of Labour-Managed Firms and Profit Sharing', p. 426.
20( Cole observed that 'workers who invested money in cotton mills preferred not to invest it in
the mills in which they were employed; for if they did this they ran a big risk of losing both their
wages and their dividends if their particular mill fell on bad times, whereas there was more chance
of avoiding the double loss by placing their savings elsewhere'. G. D. H. Cole, A Century of
Co-operation (Manchester: Co-operative Union, 1945).
'" Nowadays professional partnerships such as those formed by solicitors may loan incoming
members the purchase price of a share, to be repaid out of income over a set period. But these are
low capital-high income enterprises, and it is difficult to envisage such an arrangement being adopted
throughout industry generally.
22 For evidence of the latter effect, see D. C. Jones, 'The Economic and Industrial Relations of
American Producer Co-operatives, 1791-1939', Economic Analysis and Workers' Management, xi
(1977), 295-317.
2: E.g. Oakeshott, The Case /6r Workers' Co-ops, pp. 32-4, 82-4, 190-4; 'Piecemeal' in Clayre,
ed., The Political Economy of Co-operation and Participation.
318 MILLER
certainly invest a good deal more readily than if all assets were held collectively.
At the same time they will not deplete the co-operative's capital unduly when
they cash in their assets on retirement. Now this is plainly not the behaviour
of rational income-maximizers, and a priori there is no reason to expect
departures from rationality to go in this direction rather than its opposite (i.e.
towards regarding all assets in the mixed scheme as collective assets). If none
the less it is empirically true that mixed solutions have the desired result (as
Oakeshott and others claim), the best ownership structure for any co-operative
will be that for which the 'investment effect' of individualized assets most
exceeds their 'withdrawal effect'. This may be visualized diagrammatically.
Net rate of capital gain Rate of capital gain through investment
A\ 45? F
Rate of Fully \
capital collectivized
loss assets
through B4
with- tI C \- Optimum
drawals Mixed -- , solution
solutions
Fully D
individualized
assets
Fig. i.
The curve AD shows levels of investment and withdrawal for all possible
structures of ownership running from fully collectivized to fully individualized
assets. In drawing it as shown I assume:
(i) that between A and B individual stakes are too small to produce much
'investment effect', so that workers continue to perceive invested capital as
largely irrecoverable;
(2) That between B and C an increase in the proportion of individualized assets
quickly 'triggers' a perceptual change, and workers begin to think of
invested capital as accruing to them personally;
(3) that between C and D perceptions and therefore investments hardly alter,
while withdrawals steadily increase as the ownership structure becomes
further individualized.
All that this analysis shows is that, on certain psychological assumptions,
a mixed system of ownership may produce the highest level of net investment.
It does not show that this level of investment can match that achieved by the
co-operative's capitalist rivals who ought, according to the foregoing argument,
to be willing to invest at least as much as the co-operative does at D without
the accompanying withdrawal effect, and therefore have a net investment of at
least OF, compared with the co-operative's maximum of OE (when it has its
optimum structure of ownership at C). No system of ownership which does not
involve the co-operative degenerating into a joint-stock company can avoid this
result.
 Market Neutrality and the Failure of Co-operatives 319
A third possible way of dealing with the investment problem is to have the
co-operative financed externally. The co-operative would borrow all of its
capital from a bank, say, and pay interest on its borrowings. At first sight this
seems to solve the difficulties we have been considering, for the co-operative
would invest whenever the expected return exceeded the rate of interest, and
there would be no problem created by members withdrawing their assets. This
solution may indeed be the best where it can be achieved: the question is whether
it is a viable solution in an environment dominated by capitalist enterprises.24
The question can be examined from two points of view: that of the co-operative
and that of the lending agency. From the co-operative's point of view, repaying
the loan will be equivalent to investing in capital, in the sense that once the loan
is repaid assets of a certain value will be held collectively. In the light of the
argument so far, it will be seen that members will resist any such repayment
unless the yield from their investment is unusually large. The likely outcome is
that the co-operative will borrow as much as it can from the bank and repay
as little as possible.25 It therefore faces two problems. One is that it becomes
particularly vulnerable to year-by-year fluctuations in profit, having no reserves
to draw on in lean years, on the reasonable assumption that bank credit has an
upper limit.26 On the same assumption, secondly, investment ceases (in normal
cases) when the ceiling is reached. So finite credit really only masks the basic
weakness of the co-operative structure, namely the reluctance of income-
maximizing co-operators to invest in collective assets. Of course the masking
might be effective for a considerable time, depending on the size of the
credit.
Consider now the question from the point of view of the bank. Why should
24 See Jaroslav Vanek, 'The Basic Theory of Financing of Participatory Firms' in Jaroslav
Vanek, ed., Self-management. Economic Liberation of Man (Harmondsworth, Middx.: Penguin,
1975).
2:5 Empirical support for this proposition comes from labour-managed enterprises in Yugoslavia,
which when not required by the government to re-invest a fixed percentage of their earnings have
chosen to finance themselves almost entirely by bank credit. See E. G. Furubotn and S. Pejovich,
'Property Rights, Economic Decentralization and the Evolution of the Yugoslav Firm, 1965-72',
Journal of Law and Economics, xvI (1973), 275-302; and S. Pejovich, 'The Banking System and the
Investment Behaviour of the Yugoslav Firm', in M. Bornstein, ed., Plan and Market (New Haven:
Yale University Press, 1973).
26 To avoid this difficulty it has been suggested that the co-operative should finance itself by
issuing equity, paying dividends that reflected profits in any year rather than a fixed interest charge.
See Peter Jay,' The Workers' Co-operative Economy' reprinted in Clayre, ed., The Political Economy
of Co-operation and Participation. But since on this scheme shareholders would have no voting rights
in the co-operative, it is difficult to believe that it would seem an attractive channel for investment
if other channels were available. No dividend would be guaranteed, and indeed the only incentive
for the co-operative to pay one at all would be a wish to maintain the market value of its equity.
Meade has proposed that enterprises might instead take the form of' Capital-Labour Partnerships'
in which both suppliers of capital and workers have voting shares. See J. E. Meade, 'Labour
Co-operatives, Participation, and Value-Added Sharing' in Clayre, ed., The Political Economy of
Co-operation and Participation. This proposal clearly makes investment in the enterprise more
attractive, but equally clearly does so at the cost of losing the co-operative form and moving half-way
towards a joint-stock arrangement.
320 MILLER
any bank, not influenced by ideological considerations but pursuing a wealth-
maximizing goal itself, lend to a co-operative when it can lend instead to
capitalist firms? The bank's agents can see that the co-operators have no
incentive to repay their borrowings; they can predict that the co-operative will
either have to borrow ever-increasing sums, or else be outperformed by the
competition and go bankrupt. Neither prospect is attractive; the bankruptcy of
a firm collectively or jointly owned by a large number of individuals would be
a banker's nightmare. Indeed, a rational banker would only lend to a co-operative
if he could impose conditions on the loan such that the co-operative was forced
to behave in a way analogous to a capitalist firm. (This kind of solution to the
problems of co-operatives is considered in general terms later.) But why go to
this trouble if he can lend to a capitalist without it? Let me reiterate that this
consequence follows directly from the bank's attending to its own self-interest,
not from any wish on the part of bankers to suppress co-operatives or 'preserve
the capitalist system'. Co-operatives are simply a bad investment from the bank's
point of view.
We have seen that there is no really satisfactory solution to the co-operatives'
investment problem. Each possibility we have examined - collectivized assets,
individualized assets, external financing - has serious drawbacks. The likely
result is that co-operatives will be unwilling to invest as heavily as capitalist
enterprises, and will therefore be unable to compete in an open market whenever
investment is needed to maintain technological advance. It does not of course
follow that every co-operative will fail immediately. For one thing, competition
is never perfect, and for another a co-operative may be able to achieve higher
levels of productivity than its capitalist rivals, given its members' more direct
interest in profit maximization.27 Our analysis shows that, other things being
equal, the chances of a co-operative's surviving in competition with capitalists
will increase to the extent that three conditions are fulfilled. First, it should
belong to an industry where small-scale production is technically efficient, since
resistance to expansion will then be less important, and the motivational
advantages of the co-operative form will be at their strongest. Secondly, it should
belong to an industry requiring labour-intensive methods of production, so that
the capital-labour ratio is kept as low as possible. Thirdly, it should belong to
an industry where technological change is slow or non-existent, so that high
levels of reinvestment are unnecessary. It is interesting in this connection to note
that the longest-lasting British 'co-operatives' (as we have seen, their ownership
structure prevents them being regarded strictly as co-operatives) are firms in the
printing, footwear and clothing industries which have managed to survive
without growing and without much technological innovation. Research on the
footwear industry has shown that the 'co-operatives' in the industry are in
general both smaller in size than the capitalist firms, employ less capital per
27 In a co-operative of several hundred people, the link between any one individual's efforts and
the share of profits he receives is of course fairly slight. But at the same time each has an interest
in seeing that others work hard and produce efficiently, so each will contribute to formal and
informal methods of penalizing slackers and eliminating waste.
 Market NeutralitY and the Failure of Co-operatives 32I
worker, and have (over the post-war period) invested less capital per worker.28
Yet the nature of the industry is such that some of these enterprises have survived
for almost a century. One is said to specialize in 'good, stout walking shoes
for middle-aged and older women in which, apparently, fashions change but
slowly'.29 These cases aside, the pursuit of income-maximization by co-operators
leads to one of two unintended outcomes: competitive failure through under-
investment, or degeneration into a capitalist mode of organization.
CO-OPERATIVES WITH NON-ECONOMIC GOALS
The unpromising results we have so far obtained depend on the assumption that
co-operators are interested solely in maximizing their personal incomes. This
may seem an excessive simplification. After all, the point of forming co-operatives
is not only to avoid the depredations of capitalists but to enjoy certain
non-monetary benefits: first and foremost control of the workplace by the
producers themselves, but flowing from this a greater range of possibilities in
organizing production. Among such secondary goods might be more varied
work, greater individual responsibility for the results of work, and a new balance
between work and leisure (more flexible hours, more holidays for those who want
them, etc.). Although some of these benefits might be provided by a progressive
entrepreneur or manager, their presence can only be guaranteed by democratic
control of the workplace, and so industrial democracy takes on a twofold value.
It is valued intrinsically, since active involvement in making decisions is
satisfying, and moreover develops qualities of character and intellect,30 and it
is valued instrumentally, for the desirable outcomes it renders possible.
Now if co-operators are interested in these non-financial aspects of industrial
democracy, then of course they have an interest in the survival of their co-operative,
this being the condition for enjoying the non-monetary benefits in security.
Nozick relies on this idea when he argues that co-operatives should be able to
survive by their members taking lower money incomes, the loss being compensated
by the non-monetary rewards. This, however, only deals with the effects on
productivity of workers' control and its results (e.g. the fact that more varied
work might be less efficient in terms of output). It does not attack the dynamic
problems we have been examining, particularly that of investment. How would
a co-operative which values survival over and above its monetary rewards
approach the investment decision?
One extreme possibility is that it might decide to simulate capitalist behaviour.
2s D. C. Jones and D. K. Backus, 'British Producer Co-operatives in the Footwear Industry: An
Empirical Evaluation of the Theory of Financing', Economic Journal, LXXXVII (I977), 488-510.
Similar evidence of under-capitalization has been found in the case of French co-operatives (mainly
in the building industry). See Eric Batstone, 'Some Aspects of the Economic Performance of French
Producer Co-operatives', unpublished paper delivered to the Walton Symposium, Glasgow, 1979.
29 Oakeshott, The Case for Workers' Co-ops, p. 67.
30 As argued, for instance, by J. S. Mill in the second chapter of Considerations on Representative
Government in J. S. Mill, Utilitarianism; On Libert'y; Considerations on Representative Government
(London: Dent, I9IO). For the extension of this argument to industrial participation, see Carole
Pateman, Participation and Democratic Theory (Cambridge: Cambridge University Press, 1970).
322 MILLER
If its members regard survival as their only goal,31 they will respond to their
position in a capitalist market by following capitalist investment patterns, thus
ensuring ceteris paribus that they remain in the competition. To dramatize this
idea, imagine that they borrow the services of an entrepreneur and ask him how
he would act in each contingency as it arises, supposing that he owned the firm's
capital. At the same time they bind themselves to accept his recommendations,
irrespective of the effect on their own incomes. In this way they can escape the
underinvestment trap which dogged them throughout the discussion in the
previous section of this paper.
This solution, however, quickly reveals its absurdity. Survival was valued for
its non-monetary benefits, but the conditions we have just imposed exclude most
of those benefits. Decisions about investment cannot be isolated from decisions
about hiring and firing, methods of production and so forth, so that the only
issues left for the assembled co-operators to resolve are those that have no
bearing on the economics of the firm. Everything else is settled by the hired
entrepreneur. Participation is devalued because it is restricted to relatively trivial
questions that an enlightened capitalist would allow his workforce to decide in
any case. This result does not of course depend on the actual presence of a
surrogate capitalist making recommendations accepted as binding; that is merely
a dramatic device. It follows from the co-operative's decision to respond to the
constraints of a capitalist market by behaving as a capitalist itself. Even if the
self-binding took the impersonal form of a set of constitutional rules requiring
the co-operators to invest, produce, etc. in a specified manner, the power of the
co-operative to determine its own manner of operation has been seriously
eroded.32
Besides being self-defeating in the sense just explained, the extreme solution
also rests on an implausible premise, namely that survival is now the only goal
valued by the co-operators. A more realistic assumption is that survival is valued
alongside other benefits, both monetary and non-monetary, and that the
co-operators will therefore adopt a strategy which aims at survival but not at
the expense of everything else. So, for instance, they may reinvest rather more
of their profits than would be required by a policy of maximizing income per
worker, but less than would be required by a wealth-maximizing policy, giving
themselves some leeway (by comparison to a capitalist firm) for distributing extra
benefits either in monetary or non-monetary form. In other words whereas a
capitalist will pursue an aggressive investment strategy (investing whenever the
return is positive), the co-operative will adopt a defensive strategy, investing
whenever it judges that not to do so would seriously reduce its chances of
31 There are in fact two ways in which this goal might be interpreted: as survival per se, and as
survival during the lifetimes of the members. The appropriate interpretation will depend on whether
the co-operators' non-monetary desires are altruistic or egoistic in nature.
32 It is difficult to conceive how such a constitution might be formulated. A rigid set of rules
would hamper any co-operative operating in an uncertain and fluctuating market. If, for instance,
it were a requirement that the co-operators should reinvest a certain percentage of their profits each
year, this would disadvantage the co-operative in relation to a capitalist who was free to adjust his
rate of investment to his estimate of market trends.
 Market Neutrality and the Failure of Co-operatives 323
survival. Whether this strategy collapses into the former depends of course on
whether the co-operative is competing in the market with aggressive capitalist
firms.
We are driven again to the conclusion that the survival of co-operatives
depends on contingent factors such as the existence of an enclave within which
competition is muted, and in which the mixed strategy I have outlined can
therefore be followed successfully. It can, however, be said confidently that a
market containing both capitalist firms and co-operatives is not in stable
equilibrium. In the long term the capitalists will always tend to drive out the
co-operators. It remains to consider the political implications of this result.
THE TRANSITION TO A CO-OPERATIVE ECONOMY
I suggested earlier that the problem of co-operatives producing in an open
market might be illuminated by the Prisoner's Dilemma model. To see how this
model applies, suppose that the workers in a given population value both the
increased income and the non-material benefits promised by the co-operative
form of organization. Faced with a choice between working for a co-operative
in competition with other co-operatives and working for a capitalist firm in
competition with other capitalist firms, all would choose the former option. On
the other hand the option of working for a co-operative in competition with
capitalists is less attractive than either of these, since the short-term benefits of
co-operation are heavily outweighed by the insecurity of their employment - the
workers in question having grasped the argument that co-operatives are unlikely
to survive in a capitalist environment. For safety's sake they prefer to work for
a capitalist in such circumstances. These preferences may be expressed by the
values in the following table.
Other firms
Co-operative Capitalist
Co-operative I -I
Our firm
Capitalist x o
We have still to give a value to x - the option of working for a capitalist in an
environment of co-operative enterprises. Opportunistic workers will see that this
puts them in a strong long-term position, a consideration which may outweigh
the benefits of co-operation. If so we have x > I and the game takes the form
of an n-person Prisoner's Dilemma; in this case workers will opt for a capitalist
mode of organization whatever they expect other workers to do. If, on the other
hand, workers rate the benefits of co-operation more highly than the material
chances offered to those who strike out first along the capitalist road, we have
x < I and an 'assurance game'. In this case workers will opt for the co-operative
system if and only if they expect other workers to do likewise. In the second
case but not the first, a market composed entirely of co-operatives will be a stable
system; but in neither case can there be a spontaneous transition from a capitalist
324 MILLER
system to a co-operative system, even though the latter is the system preferred
by all workers.
The moral of the Prisoner's Dilemma is that both parties should seek a way
of binding one another to reach the preferred outcome. In the present case, the
moral is that workers with preferences as described should use political means
to convert the capitalist market into a co-operative market. The state must be
used to transform the ownership structure of private firms into the co-operative
form. Whether it need then continue to operate depends on whether we have a
strict Prisoner's Dilemma (i.e. whether workers will revert to the capitalist form
once given the opportunity) or an assurance game. In the latter case the state
might wither away once the transformation was complete. It seems more
realistic, however, to suppose that at least some workers will be tempted to take
the capitalist road in a co-operative environment (i.e. have x > I), in which case
degeneration will set in. So the state must continue to enforce the co-operative
form, or in Nozick's words forbid capitalist acts between consenting adults.
My aim has been to show that the market is not necessarily an efficient means
of satisfying preferences. Rather than being a neutral device, it discriminates
against certain preferences, such as those for co-operative modes of organization.
Even if everyone has these preferences, they may still arrive at a sub-optimal
outcome by following market mechanisms. The argument about the economics
of co-operatives is designed to show this. The upshot is that enforced market
socialism (enforced in the sense that capitalist relations are forbidden, not in the
sense that it is imposed upon an unwilling population) may be the system which
satisfies desires most efficiently.
Suppose now that instead of all workers preferring co-operative production
to capitalist production, only part of the workforce have such a preference.The
optimum arrangement will plainly be one in which those who prefer to work
in co-operatives can do so, and likewise those who prefer to work for capitalists.
We have seen that this arrangement cannot be achieved by market mechanisms
alone. We again require the state, but this time to perform the role of sheltering
the co-operative sector from its capitalist environment. It can do this, very
broadly, either by hindering the growth of capitalist firms (say by imposing a
wealth tax upon them) or by encouraging the co-operatives (say by providing
investment capital on favourable terms). This rigging of the market would
depend upon a political decision that preferences for the co-operative form
should be respected, and one can imagine a consensus emerging on this issue
which included those who chose to work for capitalist firms themselves.
The possibilities here are illustrated by the Mondragon group of co-operatives
recently discussed by Robert Oakeshott.33 The success of this group, in contrast
to the largely dismal record of co-operatives elsewhere, appears to depend on
several connected factors. First, the co-operatives are physically concentrated
in one geographical area (in the Basque region of Spain). Secondly, the number
of co-operatives is quite large (eighty-two at the last count) and each co-operative
supports the others by, in particular, providing a market for its products.
33 Oakeshott, The Case for Workers' Co-ops, Chap. 1o.
 Market Neutrality and the Failure of Co-operatives 325
Thirdly, a 'people's bank' supplies both investment capital and expert advice
about the setting up and running of each co-operative. This factor is perhaps
the most crucial, for the bank is not merely in business to make money, but is
ideologically committed to fostering co-operative enterprises. It can therefore
act as an external constraint on the behaviour of the co-operatives, requiring
them for instance to adopt a particular structure of ownership and to follow
approved financial practices.
This particular 'sheltered' environment depends on regional solidarity, which
led to the establishment of the bank in the first place and which ensures a regular
flow of funds into its reserves. It could therefore not be reproduced generally.
One can see, however, roughly what ingredients are needed to make a co-operative
enclave successful. The Mondragon group depends partly on the people's bank
behaving non-capitalistically, and partly on its being able to induce the
co-operatives to behave more capitalistically than they otherwise might. These
ingredients could be provided by a Co-operative Enterprise Board whose brief
was to encourage the founding of new co-operatives, supply them with funds
and offer financial guidance. The point to be stressed is that such a Board could
only be a political creation, reflecting a public consensus that those whose
preference is to work in co-operatives should be given the opportunity to do so.
Market mechanisms alone would not produce such an institution.
LIBERTARIANISM, MARKET NEUTRALITY AND THE SATISFACTION
OF DESIRES
The argument offered here to show that co-operatives are likely to fail in market
competition unless given political protection has important practical implications
for those committed to fostering co-operative production; but it also illuminates
in a broader way the shortcomings of libertarianism as a political philosophy.
The specific libertarian assumption which the argument challenges is that a free
market is a neutral and efficient mechanism for satisfying desires. A 'free market'
here means inter alia one whose ground rules permit capitalistic forms of
association. The claims made for the neutrality and efficiency of such a market
are analytically distinct but none the less closely related. The market is neutral
because it responds to desires of various kinds in an even-handed manner. The
extent to which any person is capable of satisfying one of his desires depends
only on his purchasing power and the (naturally-determined) cost of producing
the object of satisfaction. If, by contrast, there were to be political intervention
in the market, in the form (say) of a tax on some commodities whose proceeds
were used to subsidize the price of others, this would discriminate against those
whose optimum bundle of commodities under given purchasing-power
constraints included relatively more of the tax-liable items. If grapes are taxed
to subsidize potatoes, grape-lovers suffer at the expense of potato-lovers. The
fairness at stake here is likely to be particularly important to libertarians,
because they eschew substantive ideals of social justice (applying, for instance,
to the distribution of income). Moreover the claim about market neutrality is
linked to a claim about efficiency by the observation that, other things being
326 MILLER
equal, a discriminatory intervention such as that described will reduce the over-all
amount of satisfaction obtained: the net loss to the grape-lovers is likely to
outweigh the net gain to the potato-lovers.
It has often been observed that both claims fail when desires for public goods
are in question. Because public goods are, by definition, goods which cannot
be made available to one person without being made available to large numbers
of others, it will rarely be possible to produce and sell them through the market
mechanism.34 Even if private production is possible, no consumer will be willing
to pay the cost of production himself, since by refusing he may hope to enjoy
the good at someone else's expense. Consequently under a pure market regime
public goods are underproduced, and those in whose desire-schedule such goods
feature prominently are discriminated against. Libertarians have responded to
this charge by looking for ways in which ostensibly public goods can be
converted into private goods and so provided through the market.35
The examples which figure in this debate are mainly goods which for physical
reasons have the property of being public, although the satisfaction that they
provide is itself private. Clean air is a public good because it is impossible to
separate the air you breathe from the air I breathe, but on the other hand the
act of breathing itself and the enjoyment it brings have no essential connection
with what anyone else does. Equally a public park must be provided for everyone
if it is provided for anyone, but the actual satisfaction to be gained from visiting
the park is a private matter (I ignore such problems as crowding). Because of
this feature, the goods in question are only contingently public, and the debate
about their possible privatization hinges on technical questions (Can air-polluters
be identified? Can park-users be charged?). But other goods are necessarily
public, because they meet desires which are interpersonal in nature. If I gain
satisfaction from living in a society which has certain over-all features, this good
necessarily cannot be provided for me without simultaneously being provided
for everyone else. Here there is no question of'privatizing' the public good, and
if the market fails to provide such goods its failure is irremediable.
To make this more exact, let me distinguish private desires, group-oriented
desires and social desires. Private desires are desires for states of affairs which
involve no essential reference to other persons, whether the desire to eat grapes
or to breathe clean air. Group-oriented desires are desires for states of affairs
involving at least one other person (but excluding over-all social states).
Examples include the desire to enjoy a more equal relationship with one's
partner, to participate in making collective decisions, or to live in a Christian
community. Finally, and as a separate category, there are social desires, where
the desired state of affairs is an over-all social state. Included here are the desire
to live in an egalitarian society, or to live in a society composed exclusively of
orthodox Muslims. These categories are analytically distinct, although actual
desires may be composites, involving elements from more than one class - for
instance, the desire to drink a glass of beer with one's friends.
34 For a recent general discussion, see M. Laver, 'Political Solutions to the Collective Action
Problem', Political Studies, xxvIII (1980), 195-209.
35 See, for example, Friedman, The Machinery of Freedom, especially Chaps. 26, 34, 39.
 Market Neutrality and the Failure of Co-operatives 327
Social desires plainly pose the greatest difficulties for the libertarian. The
objects of these desires will often have the properties of public goods. I may wish
to live in an egalitarian society, but be unwilling to act in the way that such a
state would require (for example, abstaining from increasing my income above
the mean) unless others are obliged to do likewise. Goods of this kind cannot
be' privatized': there is no conceivable way in which I can pay to have 'equality'
supplied to me privately. Consequently libertarians tend to react to social desires
in one of two ways: either they try to eliminate such desires from political
consideration by arguing that they are intrinsically impossible to satisfy, or they
try to reduce them to group-oriented desires, and then claim that satisfaction
may be obtained on a small scale, through the combination of a like-minded
group of people. Nozick, for example, dismisses the desire for equality on the
grounds that if men are made equal along any dimension which is currently
thought to give rise to objectionable inequalities (wealth, for instance), some
other dimension or dimensions on which men score differently will come to
assume the importance the first dimension once had. Thus the quest for equality
is doomed to perpetual frustration; by implication there is no point in
undertaking the quest in the first place.36 On the other hand he responds to such
desires as those for fraternity and authority by arguing that in a libertarian
society individuals are free to band together in communities whose internal
relations are fraternal, authoritarian or whatever they wish. The implication in
this case is that social desires are reducible without loss to group-oriented ones.
Anyone who claims that he wants to live in a fraternal society, not merely a
fraternal group, is ruled out of court.37
Neither of these moves seems to me particularly convincing. But even if we
choose to ignore irreducible social desires, and accept that other social desires
are reducible to their group-oriented analogues, we may still ask whether the
free market responds in a neutral fashion to group-oriented desires, a question
that now becomes doubly important. It may be true that a libertarian society
will not prohibit any particular pattern of association; in theory people can
arrange their micro-environment in any way that they see fit. There may none
the less be a systemic bias in favour of some types of association and against
others. If that is so, the market mechanism cannot be regarded as a neutral
device, and its efficiency in satisfying desires will be called in question.
The argument about co-operatives points strongly to this conclusion. Co-
operatives may be chosen partly to satisfy private desires (income-maximization)
and partly to satisfy group-oriented desires (such as equality at work and
participation). If a free market dominated by capitalist firms makes co-operative
failure likely, group-oriented desires of this kind will remain unsatisfied. The
market discriminates in favour of those who prefer the authority structure of
the capitalist firm, whether as givers or receivers of commands. Similar
arguments might be developed to show that a capitalist market favours nuclear
families at the expense of other modes of domestic life, and that it favours
:i Nozick, Anarchy, State and Utopia, pp. 232-46.
:7 Nozick, Anarchy, State and Utopia, Chap. Io passim.
328 MILLER
increasing consumption at the expense of increasing leisure. The form of the
argument in each case is that the market operates to reward those who conform
to the favoured model while penalizing those who depart from it.
To show that this is a serious source of market inefficiency, two further theses
must be defended. The first is that the group-oriented desires against which the
free market discriminates are as a matter of fact important desires felt by a
considerable number of people. The truth of this thesis may seem obvious, but
in any case I shall not try to defend it here.38 The second thesis is that there exists
some more efficient means of satisfying those group-oriented desires which the
market fails to satisfy. This deserves a brief examination.
A large-scale change in the pattern of desire-satisfaction must of necessity be
brought about by political means. The new pattern is chosen by a decision-making
procedure and then implemented. Libertarians tend to view this process in a
stereotyped way: the decision procedure is (at best) simple majoritarianism, and
implementation takes the form of prohibiting certain activities which were
permitted under the previous set of market rules. Thus politics is seen as a
process whereby the majority imposes its preferences on the unwilling minority.
Even on this view political methods may sometimes achieve desirable results
which the market itself cannot. If the majority comes to prefer driving on the
right to driving on the left, there is everything to be said for a political edict
which makes driving on the right compulsory. But the simple model of politics
is less likely to be appropriate where group-oriented desires are involved. Either
there will be no majority for the policy which allows these desires an adequate
chance of satisfaction, or the policy adopted will be oppressive to the minority
which does not share them. We need therefore to recall that political decisions
need not be mandatory in nature: they need not prohibit activities or modes of
association. They may simply facilitate alternative modes of association, or
change the financial terms on which different institutions compete in the market.
In the discussion of co-operatives we saw that, in cases where the distribution
of preferences makes compulsory market socialism inappropriate, the state
might act as the sponsor of a minority co-operative sector. We should also recall
that political processes need not follow the logic of simple majoritarianism.
Given communication between voters, intense minorities on several issues may
agree to support one another against their respective majorities. In a society
where many minorities have important group-oriented desires that can only be
satisfied politically, a bargain may be struck whereby each group is awarded
political backing for its own project. Of course, as libertarians will be quick to
point out, the cost of such support must be met through taxation, and therefore
through reducing each person's capacity to meet desires of other kinds. The
result may none the less be efficient (more desires being satisfied on balance) just
as taxation to provide public goods of the more familiar kind may be efficient
Faced with this challenge, libertarians may abandon the attempt to defend
an unfettered market in terms of efficiency and rely instead on the claim that
38 For some evidence in the particular case of the desire for participation at work, see H. Ramsay,
'Participation: The Shop Floor View', British Journal of Industrial Relations, xIv (I976), I28-41.
 Market Neutrality and the Failure of Co-operatives 329

only a market order is compatible with individuals' property rights, or on the

claim that only such an order preserves personal freedom, or both. They might,
in other words, defend the market on the grounds of justice or liberty, while
conceding that the protection of these values may involve some sacrifice of
efficiency. In the particular case in question, a libertarian might concede that
preferences for co-operative production could not be satisfied in an open market,
but claim none the less that the only means available for satisfying them - state
sponsorship supported by (non-voluntary) taxation - necessarily abridged pro-
perty rights or diminished freedom. These defences rely on controversial
accounts of the values in question (justice and liberty) and seem no stronger than
the vindication of the market discussed here.39 In general, the enthusiasm with
which even natural rights libertarians such as Nozick press the argument for
the neutrality and efficiency of the market suggests that this defence is fairly
central to the libertarian case.

::' I have examined these two other pillars of libertarianism in 'Justice and Property', Ratio, XXII
(1980-I), I-I4, and 'Constraints on Freedom', Ethics (forthcoming).