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Industrial Co-operation:

THE STORY OF A PEACEFUL REVOLUTION.

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CHAPTER X.

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Associations of Consumers Economic Theory.

THE results obtained by the Rochdale Pioneers were observed by workmen in all parts of the country, and many new societies were formed, especially in Lancashire and Yorkshire.  These societies, and those formed since, have for their main idea the distribution and manufacture of the necessaries of life in the interests of the consumer, who is also the capitalist.  Hence the acceptance of the general principle that the “profits” made shall be applied to the benefit of the consumer.

The impetus which drove the flannel weavers of Rochdale to adopt co-operation was undoubtedly a desire to improve their industrial position as workers, by self-supply of commodities, by self-employment, and, ultimately, by establishing themselves in self-governed and self-supporting colonies.

The first of these objects offered “the line of least resistance” towards the goal of their hopes, and to the business of distributive co-operation they first set their hands.  “Wealth is not created, it is only economised, by distribution;”[1] but in co-operative distribution it is economised to such efiect that, for the workers at any rate, it has appeared to create wealth where none existed, nor could exist for them under the old system of competitive trading.

WHAT IS PROFIT?

“Profit,” in the economic sense of “a pecuniary gain” accruing from commercial transactions between two persons, cannot exist in consumers’ co-operation wherein buyer and seller are practically one person.  The margin between the prime cost of an article and the price paid for it over the counter by the individual consumer — who, in his corporate capacity, through his elected or paid representatives, has already sanctioned the fixing of this margin — is subject to certain charges which, again, the consumer in his corporate capacity has sanctioned.

These charges consist of —

(1) The inevitable cost of distribution — rent (or its equivalent), wages, rates and taxes, &c., including the fixed interest on capital;

(2) The upkeep of fixed and live stock, insurance, &c.;

(3) Various mutual safeguards, such as building up of reserve funds and allowance for depreciation;

(4) Certain other resolved charges, such as educational grants, charitable grants, and contributions to federal action, as subscriptions to the Co-operative Union.

These charges having been met, there yet remains in well-managed societies an inner margin, which is described in the rules of the Co-operative Union as “the fund commonly known as Profit.”[2]  The economic laws which are held to govern the incidence of “profit” in ordinary commercial relationships, [3] and cause profit to depend not upon “price” but upon the fact that “labour produces more than is required for its support,” apply in part only to co-operative transactions.

We have seen that in consumers’ co-operation the member is at once the buyer and the seller; the functions he hopes that his association will perform for him are —

First, to eliminate as far as possible all agencies or forces which stand between himself and the prime cost of the essential elements of decent human conditions — pure food, comfortable clothing, sufficient house accommodation, reasonable educational and recreative opportunities, provision for sickness and old age; and

Secondly, to accomplish this fundamental object by “honesty and fair dealing.” [4]

DIVIDEND.

The device, which is the distinguishing feature of the Rochdale system, of charging retail prices commonly current in the ordinary working class market, and returning the margin upon cost — “the fund commonly called profit”— to those who had paid it in purchasing the goods, has been found equitable, sound, and practical.

The amount of the “dividend”[5] very often is, but never should be, accepted as the gauge of true success or failure in an individual society.  The divisible margin itself is always variable, is subject to the pressure of a number of arbitrary forces, and may be affected by any or all of the following causes:—

By skill or lack of skill in wholesale purchasing of goods;

By care or wastefulness in distributing them;

By good or bad management, in the adjustment of supply to demand — remunerative use of capital, economy, parsimony, or extravagance in the payment and amount of service employed; by a well or ill-balanced approximation of the minimum of working expenses to the maximum of trade done.

The dividend may be unduly inflated by the following:—

By excessively high prices; by inferior quality of goods; by neglect of such mutual safeguards as ample depreciation and strong reserve funds; by paying insufficient wages; by “cheese-paring” methods of management.

The term “dividend-hunting” is rightly levelled against societies practising any of these methods of obtaining a high rate of dividend.

The dividend may be unduly reduced

By cutting prices; excessive leakage; [6] dishonesty on the part of employees; disloyalty [7] on the part of members; or by causes that are unavoidable, such as a sudden rise in wholesale market prices, or any unexpected misfortune, such as a flood or a burglary. [8]

Following upon a discussion on the “Comparative Merits of High and Low Dividends,” at the Doncaster Congress, 1903, it was resolved with practical unanimity:—

That, in the opinion of this Congress, abnormally high dividends are injurious to the progress of the Co-operative Movement, as the payment of such dividends involves the charging of high prices, which has a tendency to diminish trade and to exclude from the benefits of co-operation those for whom its advantages are chiefly intended, and hereby expresses its opinion that the amount of dividend should not in any society exceed 2s. 6d. in the pound. [9]

PROFIT SHARING.

It is not proposed in this book to discuss in argumentative form the question of the right of workers to a share in the “divisible margin” available for dividend, whether great or small.  “Profit sharing” has been a rock from which co-operators have struck out copious streams of argument pro and con, by voice and by pen, since the time when [10] the Rochdale Manufacturing Society,[11] by a large majority vote of shareholders, ceased to pay “bounty to labour.”

The student will find the arguments on each side fully laid down by Mr. G. J. Holyoake on the one hand [12] and Beatrice Potter (Mrs. Sidney Webb) on the other, [13] and in innumerable essays, pamphlets, and recorded utterances of more or less authoritative co-operators.  It is purposed that the student shall be able, in this chapter and in Chapters XV. and XVII. to trace clearly the application in practice of the various theories regarding division of profit accepted by the several main sections into which co-operators are gathered within the movement.  These main sections may be broadly enumerated as follows:—

ASSOCIATIONS OF CONSUMERS.

(1) Societies formed by individual shareholding consumers for the joint purchase and distribution of commodities retail to themselves, and employing workers in the manual processes of weighing, parcelling, and delivering goods, in the clerical processes of bookkeeping, and in the more widely intelligent processes of management.

(2) Societies distributing commodities retail as above, and in addition manufacturing certain commodities required by the consumers; employing workers in distribution, and in addition certain workers in the processes of making bread, boots, clothing, &c.

(3) Societies which are federations of consumers’ societies, distributing commodities wholesale to retail societies, and employing workers in all the processes of distributing, account keeping, management, and manufacturing.

ASSOCIATIONS OF PRODUCERS.

(4) Societies formed, usually, by groups of workers, alone or in co-operation with shareholding individuals or shareholding societies of consumers or both, manufacturing certain commodities and employing themselves and others in the processes of making and marketing their products.

The theory of “profit making” in associations of consumers has been vividly put by Mr. Henry W. Macrosty, B.A. [14]—

A number of men and women combine together and start a Co-operative Store, agreeing for reasons of convenience to sell their goods to one another at the ordinary shopkeepers’ prices, and to divide the surplus later in proportion to their purchases under the name of dividend.  They save the retailer’s profit and obtain their goods at what they would have cost the shop-keeper, plus the expenses of distribution; they save the surplus, but they make no commercial. profit.  If a number of Stores combine together to establish a wholesale agency for purchasing directly from the manufacturer or producer, they save all middle profits but make no profit for themselves.  The net result is the same as if they sold their goods at once at cost price.

THE CONSUMERS
THEORY OF PROFIT.

This, the “consumers’ theory” — implying the right of the consumer to the whole of the “profit” — is that accepted by the large majority of societies under groups 1 and 2 of the main sections enumerated above, and by certain of the societies in groups 3 and 4.

As will be seen in Chapter XVII., the theory that the worker has a right to share in profits (on the ground that he helps to produce them) is that put into practice by the majority of societies in group 4, and by a small minority in the other groups.

The question of profit-sharing has always been, and will probably continue to be, more hotly contested in connection with groups 2, 3, and 4, than in connection with group 1, in which the workers employed are engaged in distributive processes only.  The problem of co-operation in manufacture is admittedly far more complex and difficult to work out than in distribution.  Largely owing to the teaching of the older economists, the producer was for long commonly held to render a more valuable service to society than did the distributor.  Later economists, however, have in large degree rectified this view of the relative value of human labour, and in co-operative practice, except in rare cases [15] no real distinction between these two classes of workmen has ever been drawn.  Whenever a consumers’ association has accepted the theory of profit-sharing with its employees, usually all workers alike have shared, without reference to the kind of service rendered.  But the earlier view has had considerable weight in theoretic discussions upon this problem.

The existence of these conflicting theories is, however, brought to notice here, because of the important bearing they have upon the subsequent development of the movement, especially in regard to the idea of “self-employment,” embodied in Objects IV. and VI. of the Pioneer Society.  See Chapter VIII.

ROCHDALE CORN MILL AND MANUFACTURING SOCIETY, 1850.

The men of Rochdale seem early to have differentiated between distribution and production, though not between distributor and producer, for when in 1850 the establishment of a corn mill was mooted and finally decided upon, the Rochdale District Corn Mill Society was inaugurated as a separate society, the Equitable Pioneers investing in shares to the amount of 400 to 600. [16]  No question of participation of the workers in profits appears to have been considered in regard to the corn mill, but upon the establishment of a cotton-spinning mill in 1854 — largely organised by the Rochdale Pioneers, but entirely separate from the distributive society — it was embodied in the rules of the Rochdale Co-operative Manufacturing Society that the profits, after paying five per cent. interest on capital, should be divided between the members, “giving an equal percentage to capital subscribed and labour performed.”  In 1862, owing, it is held, to the pressure of outside capitalist shareholders, this division of profits was given up and all profit given to capital, the mill becoming practically a joint-stock company.

It is unprofitable to speculate as to the direction co-operative effort might have taken had the Manufacturing Society maintained its first rules regarding division of profit; but it is valuable to notice that the subsequent controversy following upon the reversal of this policy resulted, as we have seen, in societies "Formed for both distribution and production giving a share of profits to labour or not doing so, as the promoters leaned to one side or the other in the controversy. [17]

BONUS.

In distributive societies the share of “profit” accorded to labour takes the form of a “bonus” on wages, sometimes as a percentage on “profits” and turnover, but more generally at a rate per pound on wages corresponding to the rate per pound of dividend on purchases paid to members.

The following table has been prepared from the statistics of societies for 1902 given in the Congress Report for 1903 [18]:—

Number of societies making returns . . . . . . . . . . 1,476
                                     paying bonus  . . . . . . . . . . . 241
                     distributive workers affected . . . . . . 11,722
                     productive . . . . . . . . . . . . . . . . . . . . . . 3,663
Amount of bonus paid . . . . . . . . . . . . . . . . . . . . . .38,226

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NOTES

1. Joseph Smith on Some of the Weaknesses of Co-operation.

2. Rule 8, sub-section (2). 
Note.  The English language is responsible for the fact that this word, which so ill describes the fund implied, is the only one available.  Its compulsory use in relation to co-operative transactions has been, and still is, to some extent, the cause of serious misunderstanding between co-operators, and in the minds of casual outside observers.  It is hoped that this present work will help to clear away for the serious student such misunderstanding as yet remains.

3. See Mill’s Principles of Economics.  People’s Edition (1885), p. 252, Book II., chapter XV.

4. Laws of the Woolwich Co-operative and Provident Society, l851.

5. The term “dividend” is, like “profit,” a not wholly accurate definition of the divisible margin which is allocated to each individual customer in the shape of a cash return of 2s. 8d. in the of purchases (the average rate paid in 1902).  In commerce, the term is properly used only in relation to the earnings of capital or stock.  Usage, however, and the lack of a more accurate term, has in this case also sanctioned and now compels, the continued acceptance of this term.

6. LEAKAGE. — In sub-dividing and weighing out articles for retail sale a certain amount of waste is unavoidable, as in cutting up a side of bacon into saleable pieces or rashers.   Unskilful or careless handling of articles, or following them to deteriorate in selling value, makes excessive leakage.  It is a general practice to allow 1.25 per cent (3d. in the ) on trade done for ordinary leakage.

7. By “disloyalty
is meant members dealing elsewhere instead of at the stores and so preventing the business from being carried on economically, relative to the fixed charges for working expenses.

8. A case may be cited in which a small and struggling society was mulcted in heavy damages for an accident which happened to a pedestrian who fell into an excavation made for drainage purposes outside the shop door, but within the store precincts.  The amount of damages awarded to the injured person reduced the society’s dividend for three successive quarters.

9. Congress Report, 1903.

10. March, 1862.

11. See page 85.

12. The Co-operative Movement To-day. Chapter XIII.

13. The Co-operative Movement in Great Britain. Chapters IV. and V.


14. Productive Co-operation: Its Principles and Methods.  Co-operative Wholesale Societies’ Annual, 1903, p. 183.

15. E.g., Scottish Co-operative Wholesale Society.  See Chapter XIV., page 118.


16. Holyoake’s History of the Rochdale Pioneers, page 29.

17. E.g., Rochdale Equitable Pioneers’ Society does not give bonus to labour.  Rochdale Provident Co-operative Society, established 1870, does.

18. Retail distributive societies only are enumerated in this table.