Bankruptcy of Mondragon company demonstrates limits of cooperation under capitalism

The announcement that one of Mondragon’s companies is filing for bankruptcy isn’t a commentary on cooperatives, but it is a reminder that even the world’s largest cooperative enterprise is not immune to capitalist competition.

Cooperatives point toward a more humane way of organizing production, but in themselves don’t necessarily alter market relations. That is true not only because cooperatives are yet minuscule islands in a vast sea of capitalism, and thus must make decisions strongly impacted by a continual buffeting by market forces, but because a cooperative economy would require that cooperation, rather than competition, be the basis of relations.

The shuttering of Mondragon’s household-appliances company, Fagor Electrodomésticos, is also an opportunity to ask if there comes a point where a cooperative becomes too big. Mondragon has expanded steadily, through internal growth and creating new businesses but also through buying companies outside Spain. Although that expansion is not a factor in Fagor’s closing, Mondragon has had difficulty absorbing some of its acquisitions, with the result that at least 14,000 workers are actually employees of the cooperative.

Mondragon UniversityThus the cooperative members profit through extracting surplus value from these employees, who do not share in the decision-making. In fact, Fagor’s Polish factory (where the workers are employees, not members of the cooperative) was the subject of a slow-down strike in 2011. Fagor, reacting to capitalist competitive pressures, had moved some production there from France to take advantage of lower wages.

The failure of Fagor, unable to survive the drastic downturn in the Spanish economy, is also noteworthy because it is Mondragon’s original business, and one of the larger among Mondragon’s federation of 110 cooperatives. A manufacturer of washing machines, refrigerators, dishwashers and other “white goods,” Fagor’s revenues declined to €1.1 billion in 2012 from €1.8 billion in 2008, the year of the financial crash, and has not earned a profit since 2008. Revenue has been hurt by the intensity of the economic downturn in Spain, where unemployment is 27 percent amidst a collapse of the housing market.

Cooperative members better off than capitalist employees

Unlike at a capitalist corporation, where workers are routinely laid off merely because of a slight decline in profits, Mondragon strives to keep all its members employed. Decision-making is made by the workers themselves, in assemblies and through their elected, accountable managers, representatives and board members.

In the case of Fagor, its cooperative members had previously agreed to cut their pay by 20 percent. In addition, Mondragon had provided €300 million in financing in an effort to keep the appliance maker afloat. But Mondragon’s general council, which coordinates the policies of the various companies, decided it would provide no more funds, rejecting Fagor’s request for another €180 million that Fagor believed would finally stabilize itself.

A Mondragon press release issued on October 30 said:

“[T]he proposal submitted by Fagor Electrodomésticos is not viable, and [Mondragon’s general council] has unanimously agreed the company no longer responds to market needs, and the financial resources it requests would not ensure its business future.

“The [Mondragon] Corporation has analysed the situation following the financial assistance given to Fagor Electrodomésticos in recent years both by the cooperatives themselves and through sundry corporate instruments, and it has considered that the feasibility plan submitted by Fagor Electrodomésticos is not viable.”

Because each of Mondragon’s companies are autonomous, self-managed cooperatives (which assist each other through mutual support mechanisms), Fagor’s closing has no effect on the viability of other units. But because one of the mutual-support mechanisms is retraining workers in struggling companies and their transfer to stronger businesses, Mondragon may have difficulty absorbing a bankruptcy unprecedented in size.

On the other hand, the cooperative members of Fagor are not simply out in the street, as they would be at a top-down capitalist corporation. Mondragon’s press release went on to say that its general council pledges to:

“[C]ontinue to activate all the support mechanisms required to reduce to the furthest possible extent the impact on employment due to the circumstances of Fagor Electrodomésticos. These measures will range from reassignments to early retirements and the implementation of training schemes that will reinforce the employability of the worker-members of Fagor Electrodomésticos. … The diversity of sectors and markets in which our cooperatives operate is an assurance that leads us to believe they will continue to launch new activities in the short-to-medium term, with a positive knock-on effect on job creation. The fact our businesses are competitive in their respective markets is good news for the absorption of any redundancies forthcoming at Fagor Electrodomésticos.”

Given Mondragon’s history, that is not empty talk, although El País reports that Fagor’s employed workers, which would include those in its Polish factory, are not covered. There have been no layoffs in Mondragon despite the exploding Spanish unemployment rate; instead workers have agreed to reduce their wages by an average of five percent with a shifting of some to stronger from weaker companies. Fagor’s cooperative members will be paid 80 percent of their salaries for two years through Mondragon’s own insurance company.

Forced to ‘become their own capitalists’

Mondragon’s growth from a handful of people in the 1950s to its status as a major competitor in a range of industries rests on its ability to successfully compete against capitalist enterprises while riding the ups and downs of market competition. No article about Fagor’s closing — not even the sneering “I told you so” of The Economist’s report — so much as hints at any quality-control issues. Rather, Fagor went under due to slack demand in Spain and France, and stiff competition from low-wage Asian imports.

Therein lies a contradiction. Mondragon operates as a cooperative, fully under the control of its workers (at least those in Spain), in which all management and oversight posts are elected internally, wages are vastly more equal than in a capitalist enterprise, and it is owned exclusively by its workforce. In other words, the cooperative members share in the risks, gains and decision-making, with profits distributed to the workers themselves, to investment funds and to the overall organization’s internal support fund.

Despite that internal cooperation, Mondragon must operate like a traditional capitalist enterprise outside its gates. Forced to compete against capitalist corporations operating in capitalist market conditions, it can not do otherwise if it is to survive. This is the case for other cooperatives today. In essence, cooperative workers in a capitalist economy are, in the words of Karl Marx, forced to “become their own capitalists.”

Because of Mondragon’s size, Fagor’s workers may be able to secure work elsewhere in Mondragon. They didn’t face the prospect of their jobs being moved to a low-wage haven on the other side of the world, but they also could not stay in business in the face of capitalism’s worst slump since the Great Depression.

Moreover, Mondragon also acts like a capitalist corporation in that it acquires businesses and sometimes the employees of those acquired businesses, particularly those outside Spain, remain employees of the cooperative rather than become full members. Such a result flows from the need to expand to survive the rigors of capitalist competition. Any economy that operates on the basis of market competition — that is, in which markets are allowed to determine social outcomes — will lead to some form of “grow or die,” in which enterprises struggle to survive.

Cooperators’ own wages remain a commodity if everything else is a commodity priced by markets. In an economy dominated by cooperatives but with capitalist market relations intact, collective workers would face market pressure to reduce their own wages in order to compete better against their competitors. Some enterprises would become much bigger than others; smaller enterprises would be compelled to sell themselves to larger competitors, consolidating production until an oligarchy arose. Some industries would be much bigger than others. As market competition intensified, survival would require more ruthless behavior.

Democratic control as the basis for a new economy

A cooperative economy, therefore, has to not only be based on enterprises run on cooperative lines, but the cooperatives must cooperate with each other as well. The entire economy would have to be based on democratic control, with commodity prices negotiated in fair and open talks, and with a rational system of distribution that would be supple enough to respond to changes in consumer demand while not over-producing. Such an economy might largely be in the hands of cooperative enterprises, but with critical industries, such as banking and energy, in state hands, under democratic control.

Successful cooperative enterprises such as Mondragon provide glimpses of an economy organized for human need rather than uncontrolled private profit, but are insufficient by themselves. That is not a criticism of cooperatives; on the contrary, the growth of cooperatives should be encouraged as strongly as possible. In present circumstances, they exist on the margins, fully subject to the rigors of capitalist competition.

No cooperative today, no matter how successful, can operate outside the demand of the “market” — and the capitalist market is the aggregate interests of the world’s largest industrialists and financiers. As more industries follow the leads of textiles and electronic gadgets — that is, move production to places with ever lower wages and ever less regulations — the more pressure there will be to follow suit or go out of business. Fagor will not be the last cooperative to face this dilemma. It is inevitable as long as cooperatives remain small islands at the mercy of capitalist competition.

A better world, a rational economy geared to human need, requires a different system. As large as Mondragon is, it is has no ability to operate outside the logic of capitalism. Overall, it has thus far competed successfully, but at the price of becoming too large to integrate all its workers. The world would need many more Mondragons, cooperating and negotiating with one another, to even begin to crack the façade of capitalism, and capitalists are not likely to sit by idly while an alternative to their rule grows.

As worthy a model as cooperatives can be, they are not a substitute for working people around the world struggling collectively to create a better world. All the advances of the 20th century are the product of collective struggles, but because those movements settled for reforms while leaving the system in place, the gains have steadily been taken back.

If capitalism is to be transcended, the relations among enterprises, and between people and enterprises, have to be put on a new footing — one based on cooperation, not competition.

14 comments on “Bankruptcy of Mondragon company demonstrates limits of cooperation under capitalism

  1. Ed says:

    Quite a few of the more blood-sucking capitalist organizations began life as cooperatives, mutual aid societies, and the like. This is especially the case in the insurance industry.

    I broadly agree with GB Shaw that not only cooperatives but also unions are, at best, strategies to ameliorate capitalism’s effects for specific groups of workers, and these strategies work well for those workers, but may have a negative effect on workers outside of the cooperative or union. That is not to say that socialists shouldn’t ally with them, since alliances with one bit or another of the capitalist ecosystem is inevitable. But they aren’t a solution to the problem.

    • I see the value of cooperatives in that they demonstrate another way of organizing production — that the workers themselves can run the enterprise without the whip of a management under exploitative conditions. The more examples of something different, the faster “there is no alternative” loses its force. But because cooperatives are today beholden to the logic of capitalist competition, the risk of degeneration is indeed all too real.

  2. Thanks for this article – really informative and well argued. Not enough people pointing at the limitations of co-operatives as clearly as this. There is, however, one additional, game-changing point, that the entire radical left needs to more fully embrace and come to terms with: we face severe limits to growth. Encourage you to read the works of socialist scholars such as Richard Smith, Saral Sarkar and Ted Trainer to have this perspective, and its major implications, clearly articulated.

  3. Great!!! Thank you for such article. I found the cooperatives have limitations as any entity in real world. So, they should play inside some limits. To find out those limits is the need for a new science to background the whole process. I liked more the cooperative spirit instead of competitive one. Even a kind of competitiveness should exist, but a healthy one. Thank you for your thoughts!

    • Daniel, thank you for your generous comments. If production were run by cooperatives rather than capitalist enterprises, but they competed against each other in capitalist markets, many problems would recreate themselves. The spirit of cooperation — that enterprises cooperate with one another and their surrounding communities — is an aspect that shouldn’t be ignored.

  4. unity100 says:

    That is not a matter of capitalism or cooperatives. Its a matter of technology. It has lagged behind, therefore it has fallen. It went bankrupt, dozens of other companies are still expanding. Not to mention being in negotiations to buy steel plants in usa.

    A cooperative is just a method of distributing the profit, in addition to democratic governance. It has NOTHING related to size.

    In capitalism one majority shareholder dictates governance and takes all the profit.

    Compared to that, cooperative format has become much more successful – whereas mondragon had been still growing and going strong since 2008, dozens of major megacorps in usa needed bailouts and subsidies to stay afloat and profitable. Leaving aside the fact that almost all of u.s. megacorps do NOT pay taxes, but get tax subsidies – like how boeing recently made $14 BILLION profits, and got ~$500 MILLION tax refund instead of paying any tax.

    mondragon doesnt do any such thing. This alone should tell you how successful it is.

    • Excellent points. Mondragon as a whole of course remains highly successful. I don’t believe there is any ultimate limit on the size of a cooperative, or collective of cooperatives, but at some point it does become difficult to maintain an entire operation as fully cooperative, and that is reflected in the labor troubles in Poland. Given enough time, I suspect Mondragon would have been able to integrate its more far-flung parts.

      It is true, as you indicated, that size had no bearing on Fagor’s difficulties; those resulted from a combination of external factors. Mondragon’s workers are vastly better off than those at enterprises run on capitalist lines.

  5. unity100 says:

    This analysis will show you how solid and well planned the principles and mechanisms of mondragon are.

  6. DemolishingBS says:

    Do you agree with this articles conclusions:

    The magazine is an extremely mixed bag and run by incompetents IMO but I do like some of their articles, and I liked this one especially.

    • I do agree with the conclusion. And Sam Gindin’s discussion was very good, and necessary. One passage that stuck out for me is this:

      “Above all, it is that competition trumps everything. Despite isolated exceptions, competing on capital’s terms while trying to hang on to values that don’t enhance competitiveness means repeatedly facing a choice between jettisoning those values and accepting defeat in competitive terms.”

      The distorting effects of capitalist competition tend to be greatly under-appreciated. All too often, the actions of capitalists is denounced in moral terms, implying that if only we had nicer people running corporations things would be much better. But the personality of the capitalist does not matter; he or she could be the nicest person around and he or she would have to do the same things to survive competition. Capitalism is a completely impersonal system, and most people have yet to get their heads around that.

      As it happens, I have reviewed both Rick Wolff’s Democracy at Work: A Cure for Capitalism and Gar Alperovitz’s re-issued America Beyond Capitalism. I found both books interesting but saw the limitations that Professor Gindin discussed. In regards to Professor Alperovitz’s concepts, my partner said that we’d have to build such a huge movement to bring his vision about that we might as well go ahead for the whole revolution. She does have a point there.

      Nonetheless, I do believe both of these concepts are valuable, and could be very useful as pre-figurative movements. We do have to have concrete ideas that are workable and conceivable if we are to break down the “there is no alternative” consensus. Professor Gindin’s stress that cooperative ideas will not meaningfully challenge the capitalist system in the long term unless there is a strong political movement behind it is critical to understand. He writes:

      “[T]he project’s dominant populism underestimates the limits of doing so within capitalism and overlooks the fundamental necessity of comprehensively challenging and overturning existing property relations — which cannot happen without developing the class cohesion and institutional capacity to confront the capitalist state.

      The result is the worst of all worlds: while self-management is confined to the fringes, the dominant corporations continue on their merry way; the hated state is ignored and left to continue hammering us; there are occasional outbursts that absorb energy but leave little of substance behind; the working class, for all its potentials as an actor, stumbles aimlessly on.”

      We can ignore the state all we wish; the state is not going to ignore us. The seeds of a better world have to be grown now and nurtured, and cooperatives are some of those seeds. But there is far more to a democratic economy, nor should cooperative enterprises be islands unto themselves, outside and separate from the surrounding community.

      • I don’t understand the hostility to “the state” among some extreme leftists, it’s like opposing rules and laws, which I guess it is what they’re doing. I don’t see how one can oppose a tool, especially a tool that is necessary and honestly probably always will be, a “socialist state” (a real one) is a good thing, not a bad thing IMO, but then again I’m not an anarchist.

        Also it’s interesting the famous Argentine takeovers and cooperatives from 10, 15 years ago originally wanted nationalization, which IMO is a much better strategy.

        • Many (by no means all) did want nationalization. They lost that argument at the time because the state had no interest in taking them over and they had to do something fast to save their jobs and their workplace. The takeovers were a product of necessity. At least they give people the idea that they can run their workplace instead of a boss. And why not? The workers on the floor are the ones who actually do the work.

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