The global economic crisis has caused much soul-searching and contemplation about the efficacy of capitalism. A series of banking crises, wealth disparity, and the growing concern about commodity prices have led people to look at alternative models. Many believe there is no alternative model that can be as successful. However, in the model of Mondragon Corporation, there are principles that suggest otherwise. Rizwan Rahman explores this further.
In the grand tradition of American hyperbole, the upcoming election between the Democrat, Barack Obama and the Republican Mitt Romney is being pitched by certain elements of the media as a battle between socialism and capitalism. The rightwing conservative media has gone to frightening lengths to depict the tenure of Obama as socialism-soon-to-be-communism. For the outsider, this appears so risible that it does not deserve rebuttal. Yet, a review of opinions by right-wing commentators, whether on television or in print edia, indicates that this belief is quite prevalent among those with Republican leanings.
Fundamentally, there appears to be an aversion to socialist principles amongst the Republicans with the word itself causing disgust. Romney has been at pains to extol the virtues of individual hardwork, without the need for mollycoddling or generous assistance from family or government.
For Republicans, the welfare state is an anathema to social harmony of the state and many have subscribed to Ayn Rand’s philosophy of Objectivism, where the individual is the centrifugal force.
The problem for the Republicans in decrying socialism is their own model of capitalism is seemingly faltering and has been thoroughly rebuked as a model for inspiring greed and callousness amongst those who are the heartbeat of the system, the bankers. The cause of the crisis, many argue, was the laissez-faire philosophy propounded by the Republican Regan administration, built upon by the Democrat Clinton and compounded by the Republican Bush (the son) administration. Less regulation meant innovation and profitability but as the Oxford economist Will Hutton has pointed out in his column for the Guardian Newspaper, Anglo-American capitalism is mired in debt, low investment and is being out-innovated by its competitors in Asia and Germany. Hardly a glowing review.
Obama, likewise, has highlighted the virtues of capitalism but his caveat has been to emphasise a cooperative approach between different members of society in ensuring capitalism thrives and rises from the mire of the economic crisis. For all of Obama’s prevarication, failed policies, broken promises and gung-ho military activism, he still represents the ‘people’s president’. Obamacare, as it has pejoratively come to be known, is a bid to ensure that more Americans foot the bill for healthcare. Obama has lectured on length on how his own rise was dependent on the beneficial assistance of others: mentally, physically and financially. Success is truly a group effort. Increased taxes on the rich can only be beneficial to wider society Not everyone agrees. For some of the richer middle to higher classes paying higher taxes for a low income, phlegmatic rabble has caused much consternation. A common groan, not just in America, is that they should not pay higher taxes just to keep afloat lazy. Intuitively, the argument appears logical but discriminatory and disconnected to the situation on the ground. It also ignores the pertinent fact that a democratic government is meant to cater to the need of all its citizens. The essential principle of democracy lies in the words of Abraham Lincoln in his famous Gettysburg Address: “ …government of the people, by the people, for the people shall not perish from the Earth”. Forgetting this, and becoming subservient to moneyed interests, will only build walls of partisanship. In a country like America, this appears to be the case.
The fear of socialism
Socialism can be characterised as a utopian ideal. Very few states have successfully achieved a vibrant, productive socialist state, and it is a model that has tended to evoke images of totalitarianism. It would be hard to argue on the latter point as German Nazism, Italian Fascism and Russian Communism stemmed from a nationalistic, socialist fervour and a desire for unity. Planned management and the control of the means of production have been shown to be inefficient and, worse, fails to truly create social harmony. In the end, the Executive, considered the purveyors of the socialist ideal, have become bloated and more often than not, violently suppressive.
Liberal capitalism on the other hand is considered by many economists as a model which will lead to greater prosperity for the greatest amount of people. Capitalism has shown to be quite attractive to the rest of the world with even communist states, such as China, appropriating capitalist paradigms and practices. It is also remarkably resilient and is likely to perdure after the mollification of the current economic crisis. On a related note, the markets of the classical Islamic world are characterised by the freedom given to the merchants to trade across vast distances without the intrusion of the state.
The problem for capitalism is that unbridled freedom leads to market failure and social unrest. It was a point that both John Maynard Keynes and Friedrich Hayek were well aware of and emphasised regulation. Environmental degradation, increased food prices, and off course the near collapse of the banking system (and its knock-on effect on unemployment) are direct results of a narrow focus on profits and a failure to consider the impact on society. Without looking at the externalities in the long run, the world is suffering. In a recent report by the Tax Justice Report on offshore tax havens, one of the key findings is that the super-rich had £13 trillion hidden in secret tax havens. With no productive capacity, the money sits idle, unable to trickle down and benefit society. Worse, as the rich find ways to legally circumvent tax laws, the government have less tax revenue to spend on public services. One wonders if they are mindful that the roads we walk upon, the healthcare we are provided, the clean streets we appreciate, etc. are results of government investment.
Taxation is a form of socialism. Citizens are compelled to pay taxes in order to enjoy the benefit of goods the government considers its suzerains to be entitled to. Without such largesse, it would fall on the people to ensure such provision but their focus could be narrow and many may not wish for such a responsibility. Leaving it on the citizens could result in weakened infrastructure and inefficiency, and this can be seen starkly in countries with corrupt governments. A successful government is therefore a body which can responsibly distribute throughout the country. In the end, its objective is to look after the people within its borders. Yet with such a responsibility, and in a country with a large population, meeting the needs of each and every citizen is difficult if not impossible. Regardless of the investment from the government, it is unlikely that it will be effectively distributed. Part of the problem is that communities are different. Each has its own socio-economic condition, which a centralised government will never be able to fully appreciate. It may fail to invest in the infrastructure needed for the community to thrive.
In such a situation, it falls upon the community to meet any shortfalls. Too much focus on the government, and a quickness to place culpability for failing to provide will detract responsibility from the community. When there is market failure and an absence of government investment, solutions have to be found. One way to do so is mixing both capitalist principles with socialist principles, i.e. creating a cooperative.
The principles of Mondragon
Cooperatives are generally considered to be the manifestation of a socialist ideal with the essential characteristic being in the concept of sharing between community members, mostly workers. The fundamental values of a cooperative are summarised by International Cooperative Alliance, a representative body, as “… self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility and caring for others.” Such sanctimony can become quite saccharine and vapid, if there is no visible achievement and progress. Mechanisms, structures and institutions have to be in place to give physical manifestation to these values.
This was something that was understood by the Spanish priest Jose Maria Arizmendiarrieta (popularly known as Father Arizmendi), born in the Basque country, Spain in 1914. Following the Spanish Civil war, the young priest was assigned to the parish of the Mondragon in the Basque in 1941. What he found was an area decimated by war, afflicted by poverty and suffering from high unemployment. To make matters worse, the overall Basque area was a target of repression by the Franco regime and had little access to government funds. It created a landscape bereft of economic hope and prosperity.
To reorganise the parish and to commence the path of development, Arizmendi formed a small technical school to teach and train anyone who wished to attend humanist values and methods of working. The institution was supported by donations collected on street corners by community members. Pedagogically, education was based upon Catholic social doctrine, with emphasis on labour as the primary factor of production It was supplemented by Arizmendi’s continuing intellectual progress, the absorption of ideas and the belief that for students to succeed, they needed to have good technical skills. In these formative years, the inculcation of community solidarity and social responsibility within participants appears to be the goal of the young priest’s teaching. He even developed an accounting method which checked greed. He was by no means a charismatic educator, even putting many people off, but he showed commitment. Arizmendi set up sports and other family-related organisations to gather the community.
In 1954, Arizmendi and 5 from his initial 11 students set up a small cooperative enterprise, ULGOR. (initials of the 5 graduates). Its’ one factory contained 24 employees and produced crude kerosene stoves. The project was a success. Arizmendi served as an advisor and figurehead to the project. It also gave him the opportunity to articulate 10 governing principles of this nascent cooperative (Figure 1). Upon these principles, the cooperative model began to grow.
Implementing idealism
An important realisation for Arizmendi in these early days was that the success of any organisation depended on capital. He concluded that two central reasons for the failure of most cooperatives were a lack of credit and a lack of innovation. With this in mind, the nascent cooperative took a dynamic leap with the creation of a credit union, which relied on the donations of the community. From simple beginnings, it became a fully-fledged credit union in 1959, known as Caja Laboral. As a financial intermediary, it relied on the donations of the community and the profits of the cooperative’s productive enterprises. Thus by 1959, today’s Mondragon Corporation had the three foundational institutions of its cooperative and from which it grew: a school, a factory and a credit union, which interlocked with one another. Conceptually, each institution was symbolic and contributed to the overall philosophy of
the cooperative. The school represented education of ethical values, technical skills, and innovation; the factory represented labour, implementation of knowledge and profitability; and the credit union represented financial investment. Each was intended to support the other, and within each institution, the worker was to have a concern of the success of both the organisation he/she worked in and the overall cooperative. What was created was the idea of the worker-owner, with the worker having a say in the management of theinstitution and also working to ensure that managerial vision is being met. One worker meant one vote.
However, Arizmendi did not want the cooperative to become insular and limited to considerations of its members only. While community development was important – and was the initial goal – for sustainability and growth, spreading the ideas of cooperation as well as interacting with other parties, especially when commercial enterprises needed to sell its products, was imperative. One of Arizmendi’s ten principles was universal solidarity and it is something that Mondragon has kept to since inception.
From this initial model, the cooperative grew. They entered into other services such as healthcare, research and development, insurance companies, etc. More worker-owned commercial enterprises were being set up. ULGOR became FAGOR, a larger industrial cooperative producing large domestic and commercial appliances. Caja Laboral opened branches outside of the Mondragon region and added various product lines to basic intermediary services. Caja Laboral is known as a second-degree coop, as it is a collection of members and other coops. Schools, medical clinics, research institutions and insurance companies are also second-degree coops.
In the 1990s, Mondragon transformed itself from a federation of coops loosely connected through their second-degree coops and became Mondragon Corporation Cooperativa (MCC). A more centralised management structure was created which allowed MCC to pursue common strategies in order to compete on the global market. The network of cooperatives was categorised under 4 headings: industrial, retail, financial and knowledge; and under these headings, the various cooperative entities would fall under.
As of 2010, under Mondragon Corporation (as MCC is now known) there are 120 workplaces, 87 of which are industrial factories making everything from computers to machine appliances. 85% of the workers are worker-members. There are supermarkets (Eroski) and other retail ships. There is a university, Mondragon University, which according to its website has 9000 students. IKERLAN is an applied research centre borne from the University. Its work is divided into three areas: product development, processes and energy, and there is a high ethical component to the work. The centre does not conduct research into nuclear weapons and weapon development. Every coop under the Mondragon umbrella invests a percentage of its profits into research and development reflecting the importance of innovation in sustaining the cooperative.R&D within MC now employs 800 people with a budget of over $75m. In 2010, 21.4% of sales of Mondragon Corporation’s industries were new products and services that did not exist five years earlier. ALECOP is a worker-student cooperative, a type of community college with technical shops producing items for sale in the markets. In addition to the worker-members, students work part-time, learning and earning in order to support themselves. There are 6 social agencies managing healthcare, pensions and other insurance matters. Caja Laboral is today a major bank with assets of over 21 billion Euros and 1.5 billion in equity.
Management is selected by the workers. There are yearly assemblies where workers set strategies and elected governing boards. Each coop contributes to a solidarity fund to help individual coops that are struggling. Mondragon worker-members collectively choose, hire and fire the directors, whereas in capitalist enterprises the reverse occurs. One of the co-operatively and democratically adopted rules governing the Mondragon limits top-paid worker/members to earning 3-9 times the lowest-paid workers depending on the cooperative. Nothing more dramatically demonstrates the differences distinguishing this from the capitalist alternative organization of enterprises. In US corporations, CEOs can expect to be paid 400 times an average worker’s salary – a rate that has increased 20-fold since 1965. One can therefore see there is a cooperative spirit that runs through the Mondragon model, which has spilled into the local community. As David Smathers, founder of Team Works Cooperative in California, observes after visiting Mondragon:
“Mondragon has created a total system wherein people can learn, work, shop, and live within a cooperative environment. The town, in its isolated valley, has a vital, prosperous feel—a small bustling city with a comfortable mix of young people from the university, new middle-class families, and those who have been in the valley for generations. The surrounding hills are verdant and productive, dotted with villages and farms. The MCC’s influence reaches into every aspect of community life.
Mondragon Corporation’s motto is ‘Humanity at Work’, a slogan imprinted on coop walls. It is a powerful reminder that the cornerstone of the cooperative is the efforts of the workers. Today Mondragon Corporation is one of the ten biggest companies in Spain (in terms of employment) and produces goods which are sold throughout the world. It is also operating 77 businesses outside Spain. From the outside, the organization resembles any capitalist organisation but its internal framework, imbued with a high regard for the worker and the community, shows that even organisations founded on socialist principles can succeed in a capitalist world.
In Part II, in the next edition of ISFIRE, we explore similarities between Mondragon and Islamic principles and see what Islamic finance can learn from such a model.
