Explaining co-operative performance: from neo classical to behavioural economics

“Can fair firms survive in the market place?” is the topic of a new paper presented at the International Co-operative Research Conference in Antalya. Professor Morris Altman has...

“Can fair firms survive in the market place?” is the topic of a new paper presented at the International Co-operative Research Conference in Antalya.

Professor Morris Altman has published around 100 refereed papers on various topics, including behavioural economics and co-operatives. At the conference Co-operatives and the World of Work in Antalya he talked about his latest research, which examines whether behavioural economics contributes to a better understanding of the relative success of co-operative businesses.

His analysis also looks at the conditions for success for co-operatives, both on the supply and demand side. Prof Altman is dean and head of the Newcastle Business School and professor of Behavioural & Institutional Economics at the University of Newcastle.

He highlighted that while the correlation between data and assumption was important, economists needed to lead from the right assumption as well. Behavioural economics takes a different approach, he said, by looking at the effects of psychological, social, cognitive and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation.

“So economists build models and it looks like the prediction is right, sometimes the prediction is wrong but data contradicts old theory. People say ‘let’s go back until we end up with data that confirms the theory’.

“The conventional economics model makes simplifying assumptions that assume away the importance of particular incentives and characteristics within the co-operative that can make co-operatives competitive and even more productive than investor-owned firms. We need theory that better predicts reality. Behavioural economics applies to all types of co-ops.”

Prof Altman’s model breaks with the conventional model in assuming that the quality and quantity of effort inputted into the process of production is variable. The analysis looks at two aspects – the supply side and the demand side.

“Co-operatives can be successful even if they are higher cost producers because this leads to higher productivity. They are also more flexible by their nature if they follow co-op principles and this helps them overcome crisis in a fairer more just manner,” he said. According to Prof Altman, critical to co-operative success is adhering to co-op principles such as democracy, accountability and transparency, as well as co-operative education.

On the other hand, the more co-operative an enterprise is, the more the average cost goes up – but so does productivity, he explained.

In terms of demand, Prof Altman’s analysis concludes that most people would purchase from co-ops if the co-ops followed co-operative principles and they understood that. “This is a huge co-operative advantage, this would be true even for those that are not members of the co-op,” he said.

“If co-op prices rises above non-co-op prices, then the conventional model predicts that demand will collapse, especially for those people that are not members. But this is not true. There is a co-operative advantage on the demand side – most people are sympathetic towards co-ops unless they behave in an anti-social manner. So educating people about co-operatives is crucial. There is not enough emphasis in co-ops on co-op education.”

Prof Altman thinks that the behavioural assumptions one makes have a large impact on the analytical prediction generated.

“We need to be careful not to treat co-operatives as religious cult. They can fail and we need to understand why,” he warned.

“Even in the face of the evidence, arguments are made that co-operatives can’t be successful and only provide a disadvantage. Theory plays an important role in guiding public policy. One also needs to address theories about distributing surpluses.”

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