Retail Food Cooperatives: Testing the “Small Is Beautiful” Hypothesis: Comment

Abstract

In a Journal note, Cotterill tested the Small is working together; while ownership by employees, Beautiful hypothesis advanced by Schumacher for i.e., users, constitutes the basic distinction accordnew wave food cooperatives. These cooperatives ing to Wright (p. 16). Knapp (pp. 5-6) lists four are small grocery stores which have direct condistinctive purposes for cooperatives: services at sumer participation to contain costs. The small is cost, benefits to members as users rather than ownbeautiful hypothesis predicts that small cooperaers, proportional distribution of earnings, and tives can be cost competitive because of costs member control ordinarily involving one vote per saved through the use of voluntary labor. Cotterill's member. The features suggested by these authors empirical assessment did not support Schumacher's offer a more accurate insight of the special nature of hypothesis and presaged a conclusion that the surcooperatives than Cotterill's assumption that goals vival of retail food cooperatives probably requires other than a return on invested capital serve as the expansion and the use of proportionately less volprimary feature to distinguish cooperatives from unteer labor. other businesses. The note commenced with a claim that cooperaMembers using the cooperative own the busitive business enterprises are primarily distinguished ness. For traditional cooperatives, this ownership from other business organizations by the fact that entails an investment of capital in the form of memcooperative members consider goals other than a bership certificates, common or preferred stock, or return on invested capital. This assumption, which retained patronage. In most instances, some type of was not limited to new wave food cooperatives, is member investment in the cooperative is required questionable and obfuscates the real meaning of before members may enjoy the benefits accruing cooperation, i.e., member ownership and demofrom their membership in the cooperative. Thus, cratic control. Another assumption in the note is economic and other benefits that arise from belongthat organization as a cooperative enabled the busiing to and using a cooperative are inextricably tied ness to employ special factors of production, techto member investment and arguably constitute a nologies, and marketing strategies. This may not be return on this investment. true and may not have been followed since Ohio The economic return on members' capital inconsumer cooperatives are nonprofit corporations. vested in their cooperatives is most often an indiFinally, the empirical test applied to the small is rect return rather than stock dividends or interest beautiful test for food cooperatives neglected to payments. This enables the cooperative to comply account for the cooperative characteristics of with legal restrictions limiting the dividend rates on member ownership and democratic control. Memcooperative stock and to avoid income taxation at bers usually serve as directors and sometimes as the firm level by taking advantage of the favorable managers of their cooperatives. The author's use of cooperative income tax provisions of subchapter T a decentralization index that failed to account for of the Internal Revenue Code. Indirect benefits may members serving in various decision-making capacinclude lower costs for goods purchased from the ities in their cooperatives limits the usefulness of cooperative, higher prices for produce sold to the the index. cooperative, and patronage refunds which arise from cooperative savings that are returned to paDistinguishing Cooperatives trons. The nature of these benefits causes them to be proportional to the amount of business the member