All Commentary
Wednesday, October 1, 1997

Capitalism and Cooperation

Despite Socialism's Refusal to Recognize It, Capitalism Is Founded on Cooperation

Mr. Levite is a freelance writer residing in San Francisco, California.

In a 1989 article appropriately titled “The Triumph of Capitalism,” socialist economist Robert Heilbroner, who deserves to be commended for his honesty, observed: “. . . at this moment socialism has no plausible economic framework.”[1] Perhaps socialists have finally reached the point where they will no longer argue that socialism or communism can ever outperform capitalism, confining themselves to the old argument that socialism is a more moral system than capitalism.

Morality, however, is not something that can be demonstrated by facts. It is an outgrowth of shared values, such as cooperation. In the past, socialists have tried to convince people that their doctrine not only adhered to this commonly accepted behavioral norm, but actually epitomized it. The program of utopian socialist Robert Owen, for example, was referred to as a system of “Mutual Cooperation and Community of Goods.”[2]

By using the word cooperation as its own exclusive property, socialism has always implied that capitalism produces competition at the expense of cooperation. Without a doubt, capitalism involves competition, but socialism seems to view competition as entirely harmful, placing little value on its role in economic improvement. Competition between products, however, launches the best ones to the forefront, while the makers of inferior products suffer losses. Price competition results in lower prices for consumers, and even when price “wars” are not taking place, competition keeps prices down.

But in the midst of making these complaints about capitalism’s alleged suppression of cooperation, socialists joined liberals in complaining about oligopolies, price-fixing, and other efforts by manufacturers to divide up markets and keep competitors out—activities that would necessarily involve cooperation between manufacturers who were trying to avoid competing with each other. Under American law, conspiracies to fix prices and allocate market shares became illegal. Although socialists would probably applaud the motives behind antitrust laws, it would be hard to deny that one of the aims of these laws was to prevent cooperation between capitalists.

Who Doesn’t Cooperate?

Despite socialism’s refusal to recognize it, capitalism is founded on cooperation, and not only between capitalists within a given industry who might seek to regulate their markets and freeze out competitors. The farmer cooperates with the milling company, selling it grain at a price freely agreed upon by both. The railroad cooperates with the miller and ships the grain at agreed-upon rates to an agreed-upon destination, where both miller and railroad know that factory workers will cooperate by being on hand to receive and process it. The supermarket cooperates with the food processing company, buying the finished products and reselling them, and honoring the manufacturer’s coupons. In turn, the manufacturer cooperates with the supermarket by reimbursing it for coupons received. The bank cooperates with both by enabling them to make these millions of transactions very efficiently, and to transfer large sums electronically or by check. Banks also cooperate with families by making secured loans (e.g., mortgages), enabling them to buy homes, which also pleases real estate and residential construction companies.

Consumers have cash to pay for what they buy because they have cooperated with their employers by showing up for work on time and performing labor, for which the employers cooperate by paying them. Consumers also cooperate with supermarkets by buying the products and paying cash (and sometimes even by returning shopping carts to the rack).

Actually, even if relations between merchants and their suppliers are not taken into account, there is nothing new about inter-firm cooperation due to mutual self-interest. About a century ago, fire insurance companies began to suspect that electrical equipment was causing building fires, and backed William Henry Merrill’s idea for an independent testing laboratory for electrical products. Thus was born Underwriters Laboratories Inc., an independent, not-for-profit, nongovernmental organization that now conducts over 77,000 product investigations each year. Manufacturers voluntarily submit products to UL for testing and safety verification, and use of UL is not required by law. But few electrical manufacturers would even consider marketing an electrical product without the UL’s coveted seal of approval, which is placed on more than nine billion products annually and is known and trusted the world over.[3] Here is an organization that fulfills the function of a government bureau, helping make sure that products comply with rigid safety standards—all without costing the taxpayers a cent—and accomplishes all this because capitalists want to cooperate with it! As this example illustrates, self-interest does not necessarily lead to competition at the expense of cooperation.

Capitalism also features cooperation in a more formal sense: what is now known as strategic partnering. Despite this impressive new description, joint ventures and licensing agreements have taken place for quite a long time, and newer industries have merely adopted these standard practices. In the computer industry, for example, it is routine to buy a hardware device and find it “bundled” with software made by a different company, whose software the hardware company had licensed in order to include with their own product. Many companies have also been making agreements with other firms, by which marketing, manufacturing, or research will be conducted jointly between them. IBM, for example, jointly built a $200-million plant with Toshiba, for the manufacture of screens for laptop computers. IBM also began in 1991 to jointly develop dynamic RAM chips with the German electronics firm Siemens. In Japan, Mitsubishi sells IBM mainframes under its own name, which augments IBM’s own sales efforts.[4] No U.S. manufacturer produces its own color television sets, VCRs, or CD players; all electronics products sold under the Kodak, General Electric, RCA, Zenith, and Westinghouse brands are made by these firms’ foreign alliance partners and imported into the United States.[5]

Cooperation, Not Collusion

This cooperation between competitors is a far cry from the collusion that some capitalists have used on occasion to stifle competition or restrict output. Such conspiracies attracted criticism from writers and politicians, but the agreements never lasted long. The reason why Adam Smith observed that capitalists were always colluding to try to control markets is that markets were always changing, making yesterday’s agreement obsolete and constantly necessitating a new agreement to try to hold together the previous conditions. Today, different reasons have been inducing capitalists to cooperate, and with different results. The fragmentation and spiraling complexity of today’s mass markets have made it increasingly difficult for any single firm to possess everything it needs to succeed. Such agreements as those entered into by IBM were designed not to restrict output or control markets, but to acquire the skills, resources, or markets that one firm lacked and could obtain only from another—which, in return, would receive something it lacked. Sometimes, the parties to such agreements are competitors, but these partnering agreements are cooperative, not collusive. In the fast-changing world of today’s capitalism, competition and cooperation are becoming indistinguishable.

This does not mean that this increased cooperation will result in rigid oligopolies in which the major players share resources and keep out the newer, smaller players, because the cooperation itself was forced upon the major players by the same technological changes that tore apart their previous market structures. If anything, strategic partnering bodes well for small, emerging firms, because instead of having to compete against the giants, they will find themselves in a better position to offer skills or facilities to the large firms. IBM North America already has over 4,000 “partners,” many “creating highly specific software for smaller customers.”[6]

Indeed, partnering and “outsourcing” show no signs of leading to increased market concentration or reduced levels of competition, because, as one study has shown, 70 percent of all the alliances of this type that cross national borders break up within a short time.[7] While there are still oligopolistic markets, and mergers that turn large firms into even larger ones, it is overlooked that capitalism has produced a constantly increasing number of different industries and markets, just as it has generated an ever-expanding number of products. This fact refutes the old Marxian idea of a trend toward a final, very small group of giant, highly profitable firms that buy up failed rivals until they control everything.

To those who lack understanding of how markets operate, such increased concentration may have even appeared to be happening during the 1960s, which featured the rise of the “conglomerates”—corporations that acquired smaller firms that belonged to completely different industries. For example, in 1969, Quaker Oats, a well-known food products company, acquired Fisher-Price Toys. But Quaker sold Fisher-Price in 1991, two years before tobacco giant Philip Morris sold Birds Eye frozen vegetables to Dean Foods.[8] The furniture company I worked for in the early 1970s was acquired by a food conglomerate, which soon regretted its decision, for the furniture company proved unprofitable. A few years later the food company closed it down.

While large firms often find it advisable to diversify, they do not simply buy up everything in sight just so they can own everything. They do not want to own assets that fail to make money. A division that becomes unprofitable will be “spun off,” and since few conglomerates will show equal profitability for each of their divisions, there will always be some divisions that are less profitable than others, even if they are all making money. The incentive exists to sell the less-profitable divisions and retain only the most lucrative ones—the “core competencies”—and rely on outsourcing for the rest. Thus, although partnering and outsourcing will increase inter-firm cooperation and help make firms more competitive, the increased reliance on agreements as opposed to acquisitions will prevent ever-increasing economic concentration.

Words and More Words

In spite of this trend toward increased collaboration between corporations, many writers still cling to the idea that capitalism is competitive in ways that forestall cooperation, while other forms of economic organization (such as socialism) would engender true cooperation. Discovering the basis of this interpretation, however, involves sociological rather than economic analysis. The great economists F.A. Hayek and Ludwig von Mises were well aware of the importance of the intellectual class and the extent to which it had embraced socialism. This was discussed in Hayek’s article “The Intellectuals and Socialism” and Mises’s book The Anti-Capitalistic Mentality. Both Marxism and socialism are doctrines that claim to exist to improve the condition of the working classes, but the doctrines themselves were the products of intellectuals. For example, when Karl Marx and Friedrich Engels began to call themselves the Communist Party, they asked socialist friends in Brussels to join, recruiting 15. Of this total of 17 members, including themselves, 15 (88 percent) were writers.[9] To a very great extent, socialism has always been the product of what is now called the “knowledge class,” the “information elite,” or “symbolic analysts”—academics, writers, journalists, and others who make their living by processing and analyzing documents and ideas.

Because socialism was originated by the social class that lives by words, it has always been highly productive in the use of labels, slogans, and buzzwords. Despite its failure as an economic system, socialism has never lacked the ability to have itself described in the most glowing terms, which explains why the cooperation produced by capitalism is not called cooperation, and why the jealousy and friction produced by socialism’s arbitrary division of goods is called cooperation. Because the origin of this descriptive divergence is sociological rather than logical, the triumph of capitalism over socialism is unlikely to affect it.

Instead of resorting to the use of favorable labels (such as “cooperation”) for the things they approve of, and unfavorable labels such as “dog-eat-dog competition” for the things they disapprove of, it would have been more accurate for socialists to eschew these devices in favor of such descriptions as profit-making and non-profit-making. For it is clear that socialism does not distinguish “cooperation” from “competition” by the nature or results of these acts, but by the intentions of their initiators. No matter how much cooperation goes into a profit-making activity, socialists will claim that it is competitive rather than cooperative, and will treat economic competition as destructive and divisive, as if it could never contain cooperative elements.

Socialists were aware, of course, that the parties to a transaction must cooperate with each other in order to make the exchange, but insisted that this cooperation was merely formal, hiding a deeper relationship that is actually exploitative, and which “forced” one of the parties to act. Yet even a highly paid athlete might consider himself to be exploited, because although he is a millionaire, his employer makes a great deal more money from his performance than he does. Still, most people would disagree, because his earnings are high, and even socialists do not spend their time complaining about the exploitation of highly paid employees. This indicates that socialism does not always define exploitation as a relationship between persons occupying positions of greatly unequal power. A very highly paid worker, such as a film star, might make a great deal less than his employer, but could hardly be considered powerless: some film stars become directors and even producers!

Therefore, at some wage level, the amount of remuneration is what determines whether exploitation exists. But if a sufficiently high wage negates exploitation, it means that workers can decide that if their wages exceed a certain level, they are not being exploited, making their decision to accept employment at those wage levels a free and unencumbered choice. If workers use their wage levels as an indicator of whether they are exploited, then the indicative point can be set at any level, and an unemployed worker might very well consider any job offer to be an acceptable bargain. What is a bad wage offer now might be a good one later, depending on one’s circumstances, in the same way that a good price now might be a bad price later.

This refutes the notion that workers who are not receiving as high a wage as they would like are not cooperating willfully with their employers, even though they show up for work on time and do their jobs. From the employee’s viewpoint, the remuneration is always insufficient. No matter what the agreed-upon wage is, workers seek the highest wages they can get, just as merchants seek the highest prices they can get. They will always conclude that if conditions had been more favorable, they could have gotten more. To call this “exploitation” because the worker was “compelled” by economic circumstances to accept a job at lower wages than he wanted is no different from saying that a merchant who is “forced” to offer close-out prices on his goods is “exploited” by consumers because they would not offer him the higher prices he wanted. To make an offer and settle for the best deal available, in the absence of the ideal deal—which is never available—is a function of self-interest, and it is difficult to say with a straight face that people who are following their self-interest are being exploited.

Intellectuals and Sacrifice

When the interests of two parties intersect, cooperation results, and a transaction occurs. If socialists consider an activity to be cooperative only if it lacks the element of personal gain, then the socialist definition of cooperation must include, if not focus on, some element of self-sacrifice. From this standpoint, “cooperation” must be mainly an act of renunciation or submission. “Cooperation,” however, sounds much better to working-class people than renunciation or submission, so this favorable word is used instead. It is the foundation of sacrifice that best explains why capitalistic endeavors cannot qualify as “cooperative” under the socialist definition. Governments can disburse goods or cash to their citizens, but only by taking them from other citizens. However, all market exchanges of goods or services reap gains for both parties. Sellers value the money they receive for their goods more than the goods themselves, and buyers value the goods more than the money, otherwise the exchanges would not have occurred. Whatever name might be given to such transactions, the two parties have in fact cooperated with each other, and sacrifice was absent.

The intellectual class, however, might well have felt uncomfortable about its separation from the workaday world. Its members grasped pens and spent long hours in cafes, while others had to swing hammers and wield sewing needles to make their living. Capitalism’s replacement of sacrifice with gain did not constitute a happy change for such remorse-ridden thinkers who, unlike working-class people, place a high value on sacrifice because it alleviates their uneasiness, while gain only adds to it. They could not change reality, but they could, at least, rename it, especially since the application of names and labels was their natural function. Accordingly, economic sacrifice soon became known as “cooperation,” while gainful cooperation became “dog-eat-dog competition.”

It is time to start insisting that the labels used to describe economic activity give a more accurate depiction of that activity and its results.

  1. Robert Heilbroner, “The Triumph of Capitalism,” The New Yorker, January 23, 1989, p. 109.
  2. James H. Billington, Fire in the Minds of Men: Origins of the Revolutionary Faith (New York: Basic Books, Inc., 1980), p. 253.
  3. Underwriters Laboratories publications: “An Overview of Underwriters Laboratories,” “Questions & Answers About the UL Mark,” and “This Inventive Century.”
  4. David Kirkpatrick, “Breaking Up IBM,” Fortune, July 27, 1992, p. 54.
  5. David Lei and John W. Slocum, Jr., “Global Strategy, Competence-Building and Strategic Alliances,” California Management Review, Fall 1992, p. 82.
  6. Kirkpatrick, op. cit., pp. 54–58.
  7. Robert Michelet and Rosemary Remacle, “Forming Successful Strategic Marketing Alliances in Europe,” The Journal of European Business, September–October 1992, p. 11.
  8. Hoover’s Handbook of American Business 1995, pp. 870, 900.
  9. Eugene H. Methvin, The Rise of Radicalism (New Rochelle, N.Y.: Arlington House, 1973), p. 157; Joel Carmichael, Karl Marx: The Passionate Logician (New York: Charles Scribner’s Sons, 1967), p. 128.