The cooperative solution

Another proposal for solving  the economic crisis is to organize the world into cooperatives.

I have a small soft spot for cooperatives in that once upon a time I worked as a journalist for credit unions on the Canadian prairies and I have on a shelf in my study a “Certificate of merit” awarded to my grandfather by one of those credit unions.

My difficulty with cooperatives as a solution to the economic crisis is that we are all in the same ship.  The type of organization – private ownership, government ownership or cooperative – may make a difference in relationships but the overall prosperity is more dependent upon the resources available.

As a journalist I met a number of old timers who told stories about running their affairs from somebody’s kitchen table.  Some of them were agonizing over having to merge into larger units and thus become more like banks.

Theirs was quite a different attitude from a local credit union teller who told me they would lock the doors at quitting time no matter how many members/customers were lined up at the door.


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One Response

  1. Regarding Credit Unions.

    They are deceptively competitive and profitable (if well and honestly run, and not administered by ignorant buffheads – a big ask at that level).

    But under the old econonomic tool of ‘ceteris paribus’, the general impression that credit unions have to grow to compete has no basis in economic theory.

    Why? It all comes down to the concept of ‘constant returns to scale’ (look up on the web for a theoretical descriptiopn if you are not sure what this means). Anyway, banks, credit unions and so on operate under onstant returns to scale. Empirical research shows that even the most efficient bank loses scale economies after 10 branches. After that they have to squeeze ‘rents’ out of the business to make an increased profit.

    So? A bank, no matter how large, is not more profitable than a small credit union.

    Thus if a bank makes an offer for a credit union, its aim is not to increase profits but to reduce competition. A credit union can compete with even the largest bank indefinitely. The argument often put by self serving banks that the ‘loan market improves with increasing size’ is economic nonsense.

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