Chapter 5 - Equity (1986)


    ----------------------------------------------------------
    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
    ----------------------------------------------------------
                         May, 1986


          (Source:  Co-operative Principles, Today & 
               Tomorrow by W.P. Watkins, pp.73-91)
                         -------------

                        *****************
                           Chapter Five
               
                              Equity
                       ******************

The Rochdale Pioneers proclaimed their Society to be `equitable'
by including that word in its title. Their example was followed
by more than a few other groups of British Co-operators of the
first generation. One of the oldest and best known of the English
workers' productive societies bears the Equity Shoes to this day.
The idea of Equity and its practical realisation were clearly of
great importance to these pioneers. The meaning they attached to
the term is not the jurist's. The meaning they attached to the
term is not jurist's, who has to rectify divergences of law from
natural justice; nor yet the businessman's, who is concerned with
the rights of shareholders to the profits of joint-stock
companies, but rather that distributive aspect of justice,
briefly discussed by the ancient Greek philosopher Aristotle in
Book V of the Nicomachaean Ethics, which is involved in the
exchange of the products of one's man's labour against those of
another's.

The early Co-operators were obliged to consider Equity in two
different but related ways, which may be roughly contrasted as
theoretical and practical. On the one hand, with the theoretical,
they were concerned with the distribution in an equitable manner
among its members of the economic benefits yielded by any Co-
operative society. The more they convinced themselves that the
distribution of wealth in the economic system in general was
inequitable, the more they were bound to devise a system of
sharing the profits and other advantages of Co-operative
association which the members as a whole should accept as
equitable. Failing the formulation and application of such a
system, unity would be undermined by discontent and might prove
impossible to maintain.

The situation of the working classes in Great Britain is
acknowledged to be a classic case and it was more or less
parallel in country after country as the Industrial Revolution
spread across Europe. When the first ventures in Co-operation
were made, the enormous increase in productivity which
accompanied the introduction of the new industrial techniques had
not yet appreciably benefited the wage-earners and their
families. For about a century it had the effect of increasing the
inequalities in wealth and income between different social
classes. The displaced handicraftsmen, smallholders and farm
workers who migrated to the new industrial settlements in search
of employment were in an inferior bargaining position when wages
came to be fixed. As individuals they were powerless and had to
accept what wages a prospective employer saw fit to offer. When
they tried collective bargaining, or `combination' as it was then
called, they were rarely successful and when in desperation they
declared a strike, their families more than half-starved for they
had neither individual savings nor collective funds to support
them.

The workers had not yet learned discipline and their violence
gave the authorities an excuse for suppressing their trade
unions. Their leaders were mostly untrained and inexperienced in
organisation and negotiation. The employers often refused to
recognise the unions and wrecked or suppressed them when they
could. For about a quarter of a century, between 1799 and 1824,
the unions were actually illegal. On the other hand a single
large employer who could offer jobs to scores or perhaps hundreds
of workers was, in the words of the economist Nassau Senior, `a
combination in himself.' In these circumstances, the Iron Law of
Wages inevitably operated and the workers' earnings tended to
sink towards subsistence level rather than to rise with labour's
increasing productivity, the yield of which was intercepted by
the entrepreneur. The shrewder and more enlightened among the
workers understood this very well and they resented bitterly not
only the inequality but still more the injustice of such a
division of the product of industry.

The workers' sentiments were rationalised for them by a whole
school of critics of the orthodox political economy of the day.
These fastened in particular upon the labour theory of value, and
from the proposition that the exchange value of commodities is
determined by the relative quantities of labour entering into
their production they drew the conclusion that labour was the
sole source of wealth. Accordingly, those who lived upon rent,
interest and profits contributed nothing to production to justify
the incomes they drew from it and were exploiting the real
producers. The institution of private property, the penal system
by which it was protected, the State itself, were simply means
by which the well-to-do maintained a distribution of income and
possessions which was based on robbery.

The Irish landowner, William Thompson, who described himself as
living on `rent', the product of the labour of others' became a
leading exponent of Robert Owen's community scheme for the
precise reason that the workers, when organised in communities,
would retain for themselves the whole produce of their labour.
The same idea underlay the workers' Co-operative productive
society and other social experiments of the 1820s and Thompson
advocated it in his celebrated address to the silk-weavers of
Spitalfields. It was later taken over by Karl Marx to become one
of the foundations of his social doctrine. How far the Rochdale
Pioneers were directly influenced by these ideas there is now
little evidence to show, but it is hard to believe that they were
not debated by the discussion society in the Owenite reading room
from which the Pioneers' Society ultimately sprang. In any event,
the Pioneers, like many other working people, yearned to
emancipate themselves from an industrial and social order that
was fundamentally inequitable and to join in creating a better
society in which social justice should reign.

There was, however, one other factor which helped to deny the
wage earners their proper share of increased productivity. That
was the failure of the distributive trade, wholesale and retail,
to keep pace with industry in modernising its organisation and
methods. At any given level of earnings, the industrial
proletariat depended for its standard of living upon the
purchasing power of money wages, in other words the level of
rents and retail prices.

The technological changes which transformed industry had scarcely
any counterpart in distributive trade until the advent of the
multiple store towards the close of the 19th century indicated
that some of the lessons of large scale economic organisations
were being learned and applied. Retailing especially remained
individualistic, inefficient, conservative of old ways and
traditions, and not over-honest in respect of the purity and
quality of goods, in particular foodstuffs. In the new industrial
settlements the shop keepers earned their living too easily by
exploiting the workers' families. Even though, in a period of
unemployment or a labour dispute, the shop keepers might allow
them credit to keep the wolf from the door, that service was
greatly outweighed by the virtually permanent burden of debt
carried by many families. Here again, as consumers, the wage-
earners were in a weak bargaining position until they turned to
Co-operation as a means of controlling retail distribution and
achieving Equity by fixing prices which represented real costs
rather than inflated values.

The urgent need of working-class households in `the hungry 40s'
for immediate economic relief largely accounts for one important
difference between the consumers' co-operative movement after
Rochdale and the earlier movement between 1828 and 1834 inspired
and guided by Dr. William King's `Co-operator'. Dr. King assumed
that the surplus resulting from trade and production would be
accumulated by the Co-operative society as a capital fund for the
self-supporting community into which it would ultimately evolve.
There is no record of any society which advanced so far, but it
is well-known that many tried one method or another of dividing
profits, whether an equal share to every member or a share
reckoned according to capital contributed or, in one or two
cases, according to purchases. It is not recorded that any
considerable group of the Rochdale Pioneers favoured the
capitalization rather than the division of the profits of their
projected society. Their problem was to formulate and agree upon
a system of division. Their solution, if not original, became
historic. Yet it has been studied and discussed much more in
respect of its business advantages as an inducement to join the
society and purchase consistently from the store than as part of
the application of the Principle of Equity. Even the ICA
Committee of the 1930's seems not to have fully appreciated the
relation of the dividend on purchases system to fixed interest
on share capital and the price policy adopted by the Pioneers
from this point of view.

It is significant that the ICA Commission on the Principles,
reporting after the distributive revolution had been some years
under way, while recommending that Co-operatives should be to a
considerable degree self-financing, declared that interest rates
should be limited but not fixed, and rather elastic. In other
words, interest should be limited but the ate should not be
determined by a rule which could be amended only by a meeting
subject to a six weeks' notice, but should follow the general
trend of interest rates, rather like the building societies.

Of course, if a Co-operative has no capital or does not pay
interest - and there are such - there is no problem. But in
societies where membership implies capital holding and interest
is paid upon it, the rate of interest must be deliberately held
below the rate which would be regarded as fair at any given time
in the ordinary market, or at least not exceed the ordinary bank
rate of discount or some other rate regarded as a fair return.
Theoretically the holder of capital is not entitled to any
element of profit or surplus, which belongs to the consumer or
worker.

The Commission nevertheless foresaw the possibility of a society,
needing more capital than could be raised in this way, being
tempted to break the rule  by offering, under competitive
conditions, higher rates than the rule would justify.
Unfortunately the tendency has been rather in the opposite
direction. Too many societies have been too slow to raise their
interest rates, thus depriving themselves of the means of
effectively meeting competition by self-financing. Today the
advertisement columns of the newspapers reveal only too plainly
what competition for investment capital co-operatives have to
meet, and it is conceivable that some of them are already too
late to take effective action. The Commission even envisaged the
time when local or regional self-financing would be inadequate
and the Movement would depend even more than it does at present
on national institutions which themselves may be obliged to
borrow outside the Movement. Meanwhile, it is important that
societies" interest rates should be raised to the minimum which
is effectively competitive.

It may avoid misunderstanding to remark here that Equity, as
understood for the purpose of the present discussion, implies no
kind of obligation on any kind of co-operative society to divide
the whole or any part of its profits or surplus among its
members. The Raiffeisen type of credit society would keep its
accumulated surpluses undivided, even at its own dissolution.
Many co-operators maintain that on a society's dissolution no
member can equitably claim a share of its surplus assets, if any.
Under the strict Raiffeisen system of co-operative credit, the
rule has always required that the surplus assets of a dissolved
society shall be applied to purposes benefitting the whole
community, not its members alone. The Rochdale Pioneers, in
amended Rules adopted in October 1854, laid down that, if their
society came to be dissolved, `the surplus, if any, of (its)
property shall be applied by the trustees for the time being of
the Society to such charitable or public purposes as they think
fit'. Or the farmers' supply society, which gives its members the
advantage of buying seeds, fertilisers and other farm requisites
at approximately cost-price, is not necessarily less equitable
or co-operative than the consumers' society which pays out most
of its surplus in dividends on purchases (Patronage refunds).

The Principle of Equity is not infringed by those societies which
give the member the option of an immediate discount for cash or
waiting until the year's end for the normal dividend. On the
other hand, the practice of communist ruled countries making no
other division of surplus than the payment of dividends on
shareholdings is dubious and a departure from Principle, whatever
arguments from expediency may be brought to defend or excuse it.
The point is that if the members choose to keep their society's
surplus undivided, no one is entitled to condemn them; but if
there is division, the only equitable method is according to the
individual member's turnover with the society, after interest on
shares has been set aside.

Confusion arises from the habit of regarding the payment of
dividend on turnover as the chief object, the raison d'etre of
a co-operative (as a company normally aims at dividends on its
capital) rather than as a by-product of its successful operation.
The High Court of the Federal German Republic, in a
discriminating judgement handed down in 1963, rightly declared
that dividend on turnover represented not a commercial profit,
but the economic benefit which the members obviously seek by
joining or forming their co-operative. This, however, does not
mean that the economic benefit must always take the form of a
dividend or that the society cannot confer advantages on its
members which are additional or alternative to it. Indeed, with
changing competitive conditions and, especially, diminishing
gross profit margins, the dividend as a form of economic benefit
seems destined for a role of dwindling importance - a question
to be discussed in another connection later in this chapter.

To return to the Rochdale formula we may observe that the
Pioneers, having decided to aim at a surplus by selling at market
prices, had to take into account two different interests - those
of the purchasers whose spending in the store constituted the
Society's revenue and those of the shareholders who provided the
capital without which it could not set up in business at all.
These parties were, of course, the members acting in two
different capacities. The solution adopted by the Pioneers was
based on distinctions which had not yet become clear even to the
professional economists of their day - the distinction between
the capitalist and the entrepreneur and the consequent
distinction between interest and profit. The Pioneers do not
appear to have questioned the premise that capital enhances
productivity or the claim of those who contribute capital to be
paid for its use at rates of interest normal under prevailing
conditions. They were not entitled to more, as the functions of
the entrepreneur rightly belong to the members in their other
capacity as consumers or purchasers. Interest having been
calculated, the surplus remaining accrued to the members as
partners in the business and the only fair principle of division
was according to their purchases. Allocations to reserves and
other common purposes may be left out account for the moment as
they are not involved in this aspect of Equity.

It has more than once been observed, however, that the payment
of a uniform dividend on purchases ignores the difference in
profit margins for different classes of goods. Experiments are
made from time to time with differential dividends or no
dividends at all for special categories of goods or services, but
they have never brought about any general modification in
practice and have more often than not been abandoned, after
longer or shorter experience, as being too troublesome or
expensive to calculate. Uniformity remains the rule.

It is not claimed on behalf of the Pioneers' formula that it was
an example of perfect Equity, nor would there by any point in
doing so, were it possible. The formula was fair enough to
satisfy the bulk of their members and of the generations of
consumer co-operators who followed them. It has rarely been
seriously challenged. This is not by implication to dismiss as
lacking in seriousness, the objections of numerous co-operators
to the payment of interest on the minimum shareholding required
for full membership rights. But, except in so far as Co-operative
organisation can put aside non-interest-bearing capital from its
own revenues, it is obliged to hire capital either from its
members or from outsiders, e.g. banks and insurance institutions,
at interest rates determined by the state of the capital market,
the security offered, the period of repayment and other
conditions. Most Co-operators therefore accept interest as a
practical necessity which the movement must accept until it grows
powerful enough to do without it.

Parallel considerations apply to the just price. The Rochdale
Pioneers and many others since their time have had to accept
prices reached by the higgling of the market until they grew
powerful enough to impose fairer or more stable prices in the
interests of their associated consumers or producers. At times,
objection has been raised to rates of interest as unnecessarily
high, thus reducing the amount of disposable surplus, and to the
use of the society for investment purposes by non-purchasing
members. The practice of paying lower rates of interest on the
shares of members whose purchases failed to exceed a prescribed
minimum was at one time fairly widespread among consumers'
societies in the North of England. At the beginning and for a
considerable period afterwards the Pioneers' distribution problem
was not complicated. Labour, in the persons of the Society's
employees - Samual Ashworth, the first shopkeeper, and his
assistants - was not a claimant to a share of surplus. Consumer
co-operators were content to pay the wages then prevailing for
shop and officer workers and trade union rates for skilled
craftsmen. For over two generations, the whole consumers' co-
operative movement benefitted from the fact that distribution was
one of the industries characterised by low wage rates.

Nevertheless, the labour theory of value and the workers' claim
to the whole product of their labour were by no means dead or
done with. The workers' co-operative productive societies
promoted by the Christian Socialists and their successors were
attempts at industrial organisation on lines which would enable
the associated workers after paying the rent of their premises,
interest on capital, salaries and wages at normal rates, to
dispose of any surplus by adding it to capital or dividing it
among themselves on any basis they considered equitable, such as
the numbers of hours each member had worked.

The entry of the consumers' societies and their wholesales into
production touched off a controversy which raged for over 20
years and in the end died away without being finally resolved.
On one side, the advocates of productive societies, without
challenging the right of consumers to dispose of the whole
surplus accruing from distribution, contended that workers in
productive enterprises had the right to at least a share, if not
the whole, of its profits. To which the defenders of the
consumers' organisations retorted that the distinction between
production and distribution drawn by their opponents was false.
Distribution, since it added use-values to the products of
industry by making them available where and when and in what
quantities they were required by consumers, was not essentially
different from production but in fact the latter's final stage.
They were also able to refute the doctrine of the workers' claim
to the whole product because economic science had rejected the
labour theory of value in favour of the marginal utility theory.
In other words, the determinant of value was to be found on the
demand side and not the supply side of the market. And in any
case, they maintained, the workers were able as members of
consumers' societies to share in the surpluses.

Despite this theoretical deadlock, many of the consumers'
societies and most of the workers' productive societies in Great
Britain adopted compromise solutions. Many consumer co-operators
felt that the crude wage system prevailing in ordinary private
enterprise, especially in the distributive trade, was
inconsistent with Co-operative ideals and therefore unworthy of
the Movement, which should show itself to be a more humane and
generous employer than the hard-fisted man. Scores of retail
societies and the Scottish Co-operative Wholesale Society paid
their employees from the surplus a regular bonus in addition to
their wages. The English Co-operative Wholesale Society, however,
after trying different bonus schemes, quickly abandoned them on
the grounds that it could not devise a uniform scheme that would
be equitable for all the varied classes of workers it employed
in production and distribution and it became the chief defender
of the consumers' right to the whole of the surplus where they
initiated and controlled a given enterprise. On their side, the
workers' societies introduced a similar modification in the
opposite direction by admitting their customers, who were very
often consumers' co-operatives, to a share in surplus in the form
of a dividend on their purchases. This frequently went along with
the admission of consumers' societies to membership, and even
included the right of representation on the management board. The
result was a blended type of organisation to which the term Co-
operative Co-partnership is usually applied and it is
characterised by the declaration, at one and the same time, of
dividends on purchases and bonus to labour.

As the present discussion is not concerned with passing judgement
on any of the accepted types of Co-operative enterprise but
simply with illustrating the importance attached by Co-operators
to considerations of Equity and their concern that they should
be given due weight, it is desirable to describe briefly some
examples from other countries than Great Britain and their
producers as well as consumers' Co-operative Movements. Charles
Fourier, who stands in a similar relation to co-operation in
France to that of Robert Owen in Great Britain, had ideas on the
distribution of income which influenced one remarkable experiment
in consumers' co-operation and many workers' productive
societies. In Fourier's ideal community, in which the members
would be at one and the same time producers and consumers, the
total revenue should be divided between labour, capital and a
third factor which he called `talen' or management in the ratio
5:4:3. Nine years before the opening of the Pioneers' store in
Rochdale a disciple of Fourier, Michel Derrior, founded a
consumers' society called Le Commerce Veridique et Social at
Lyons. This society which was in business about three years,
divided its surplus on a variant of Fourier's method. The surplus
was divided into four equal portions, one of which was allocated
to reserve, one distributed among the employees, one assigned to
interest on capital, the remaining quarter being divided among
the customers in proportion to their purchases. In the first six
months of 1836, when the society was running well, capital's
portion was equal to a rate of five per cent on shares, whilst
that of the customers was about one and half per cent on their
purchases. The society's profit margins were deliberately kept
low so that it might influence current prices in the consumers'
favour. The society's very success led to its liquidation after
three years. The shopkeepers, alarmed by its competition,
contrived to bring upon it the suspicion of the authorities by
suggesting it was a camouflaged revolutionary association. At the
same time they involved Derrion in a lawsuit which ruined him
financially and obliged him to leave Lyons.

In the 1840s there were many little grocery shops and bakeries
promoted by Fourier's disciples desirous of applying their
master's ideas, but there is no historical continuity between
them and the French consumers' co-operative movement of today,
which is based on the Rochdale Principles. Partly as the result
of circumstances and partly because of policy, however, the
dividend on purchase system in French and many other European
consumers' co-operatives has been some what different in its
operation from the British, although there is no real difference
in principle. Lower standards of living on the Continent caused
the members to require from the consumers' societies immediate,
tangible advantages in the form of lower prices than were charged
by private traders. Co-operative prices calculation therefore
aimed at a level slightly, but consistently, under market prices.
In Great Britain, on the contrary, the Rochdale rule of sale at
market prices was generally observed, but in localities where the
Co-operative stores dominated the market, there was also a marked
tendency for prices to be some what above the market level. In
periods of high employment and earnings co-operators did not
object to paying higher prices because any excess would be
returned later as part of their dividend on purchases. Another
factor was the fairly widespread practice, when managements were
fixing selling prices, of taking the usual rate of dividend into
the reckoning. Whereas it was customary to say that in Britain
prices may be a little higher than the market level, but the net
price after deducting dividend lower, on the Continent it could
be said that prices were lower than the market level in the Co-
operative store with the members receiving a dividend in
addition.

Dividend rates were on the average lower on the Continent than
in Great Britain and in addition, Continental consumers'
societies often had no liability for interest on share capital,
especially where Socialist ideas were influential. As no interest
was paid on shares, the members had no special inducement to take
out more than the minimum number or value prescribed by their
society's rules. If members entrusted savings to their society
they did so in the form of loan deposits on which, of course,
they were paid interest. The role of share capital in building
up consumers' societies' financial resources in Britain is not
paralleled in any other country known to the writer. Conversely,
reserves play a more important part on the Continent than in
Britain. Allocations to reserve funds from surplus naturally tend
to reduce the amount disposable for dividends, but these open
reserves are supplemented in all well managed societies by hidden
reserves from liberal depreciation of fixed assets before surplus
is declared. Both methods of accumulating reserves of
collectively-owned capital are employed, especially at the
wholesale level. The Swiss and Scandinavian wholesale societies
in particular pay little or no dividend on purchases to their
affiliated societies but capitalise the bulk of their surplus and
devote the rest to various common purposes.

Although these differences of method and practice have
considerable interest from the point of view of business
technique, they have no great significance from the standpoint
of Equity. What arrangement the members of a co-operative accept
as fair among themselves and between the individual members and
the society can scarcely be challenged by any outsider.
Nevertheless it is interesting to note that, with the passage of
time and under the pressure of competition, British and
Continental practices tend to approximate to each other.
Shrinking trading margins have made it impossible for British
societies in general to maintain their traditional high dividend
rates. Dividend has lost its potency in comparison with low
prices and the quality and presentation of commodities as an
attraction to prospective purchasers. On the other hand, the
Continental consumers' co-operative movements, in order to
finance the modernisation of their business structures, equipment
and techniques, have been obliged to raise as much capital as
possible from their members by raising the value of their shares
or the minimum shareholding, or interest rates. Naturally, while
the Principle of Equity applies to all the economic benefits
offered by a Co-operative to its members, certain of them are at
any given time more important than others and with changing times
the order of importance can change also.

Turning from consumers' co-operation, we may now consider some
examples of the application of the Principle of Equity in
producers' co-operative movements. Taking the practice of the
workers' co-operative productive societies, we may note that
Fourier's plan for income distribution mentioned earlier finds
echoes in the model rules for such societies issued by their
Confederation Generale in France. Article 44 of the rules
provides for the division of the net profits, after deduction of
the allocation of 15 per cent to reserve required by law, between
capital, labour and management (which corresponds to what Fourier
called `talent'). The share of profit assigned to capital as is
a percentage fixed by rule and by law may never exceed the share
allotted to labour. Only paid-up shares rank for dividend.
Members whose shares are not yet paid up in full do not draw
their interest or their workers' share of profit, but both are
credited to their share capital account. Labour's percentage of
profit, which by law may not be less that 25 per cent and by
custom may be as high as 50 per cent, is also fixed by rule. The
sum available is divided among the workers and employees in
proportion to the wages or salary earned during the accounting
period. Auxiliary workers are included for the society for at
least a month. The participants in the profit allocated to
management are the general manager or director and the individual
shares are percentages of profits fixed by rule. If a society
adopts the model rules, the amount of surplus disposable for
distribution to members, officials an auxiliaries is reduced not
only by the legal reserve, but also by fixed percentages reserved
for development and for assistance to members in distress to a
specially constituted fund for retirement pensions. The reserves
for development are usually greater in those societies whose
industry requires greater amounts of capital per worker.

In those humbler relatives of the skilled workers' productive
societies, the labour contracting societies, which are numerous,
for example, in Italy, the worker-members' share of surplus is
calculated on the number of days he has been employed by the
society and the wages he has earned during the accounting period.
Employment in these societies is liable to be irregular, varying
according to the work in hand, and societies are often not able
to employ all their members all the year round. Another
circumstance of importance is that, since labour societies
operate with a minimum of fixed capital, the claim of capital
upon surplus is minimal also. In effect, the principal question
to be decided is the relative importance of the claims of the
present and the future; in other words, how much the workers
shall receive as an immediate supplement to their wages and how
much shall be set aside for sickness and unemployment pay,
retirement pensions and assistance to widows and orphans, from
which the workers or their families may one day benefit.

Conflicting claims between groups of worker-members belonging to
different trades or professions are not unknown, although the
record of harmonious relations between workers' productive
societies and the professional workers they engage is in general
very good. An example of the reverse is a dispute which broke out
early in 1964 in the workers' productive society at Amiens,
France, producing the daily paper Le Courrier Picard. The dispute
arose on the question of remuneration between the editorial staff
and the typographical workers. Thanks to first-class management
and favourable local conditions, both groups and, indeed all the
society's worker-members were being paid rates considerably in
excess of those fixed by the collective agreements covering their
respective trades or professions and higher than those prevailing
generally in the Press. After the printers had been granted an
advance in wages equal to an award made under the collective
agreement for their trade, the journalists demanded a
corresponding increase in their salaries. The claim that wage
increases granted to one class of worker should be automatically
applied to another covered by different collective agreements was
not one with the management board, on which the printers were in
the majority, was willing to grant. Nevertheless the journalists
persisted in their demands. The board was equally firm in its
refusal. The ensuring deadlock was eventually resolved by
arbitration, the arbitrator upholding the decision of the board.
This conflict is not merely an ironic comment on the prosperity
which co-operation had brought to both groups of workers. It is
also a warning against taking the Principle of Equity and the
considerations which derive from it too much for granted, and
against neglect of that education and re-education in co-
operative principles which every branch of the Movement should
provide for its members.

In co-operative Movements of agricultural producers, the supply
societies, it has already been remarked, usually charge their
members prices only slightly above the manufacturers' or
wholesalers' prices rather than accumulate a surplus for ultimate
distribution as dividend on purchases. In the marketing societies
the Principle of Equity obviously requires that the distribution
of profits shall be based on the amounts of produce the members
offer their societies for sale or processing or both. The quality
of the produce must also be taken into account, however, because
quality influences prices. Where an organised market exists, a
system of produce grading inevitably grows up and may even be
enforced by some form of regulation, either adopted by the market
itself or imposed by the State. A co-operative marketing society,
therefore, in order to obtain the maximum price advantage, must
persuade its members to accept the grading system and agree to
be paid according to the grade of produce and not simply the
quantity they deliver to the society. For example, in a coffee-
growing region, the payments made by a marketing society to
coffee-growing members will vary according to how much arabic and
how much robusta they deliver and the relative values of the two
varieties of coffee bean on the market. For a wide range of
products, the producers' co-operative, especially if it engages
in processing, extracts the most valuable element from the raw
material it receives in its natural state; the only equitable
method is thus to test each member's produce by sampling as well
as weighting it, as soon as it is delivered. Hence a dairying
society manufacturing butter tests its members' milk deliveries
for their fat content and the resulting figures are a factor in
calculating payments. Similarly, in a wine-making society with
modern equipment, each member's grapes are weighed on delivery,
immediately crushed and the juices tested for sugar content which
determines the strength of the alcohol in the wine eventually
made.

In both these cases and in numerous others, the society is able
to dispose of the `waste' products, the skim-milk or the marc,
either by sale in bulk or by subsidiary processing or by
returning them to the members for use on their own farms. These
economies, plus the price of the main product, constitute a more
equitable return for their production than they are usually able
to obtain from private dealers. One of the great advantages of
the system of co-operative slaughter-houses established in
Denmark since the 1880s springs from the fact that their
operations are on so large a scale that, in addition to curing
and marketing the bacon (their main product), they are able to
make and sell large quantities of pork products besides such non-
edible articles as hides, bristles and blood and bone fertiliser,
the revenue from which increases the disposable surplus applied
to the benefit of the societies and their members.

Another way in which Co-operative marketing enables the producer
to secure more equitable prices is by regulating the flow of
products to market. It thus tends to minimise the downswing in
prices which is inevitable when the whole of a crop is offered
at or about the same time. The pressure on the market of small
producers, anxious to obtain some ready cash and repay their most
urgent debts, always offers opportunities to the dealer to buy
cheaply in order to hold what he buys for a rise in prices later
in the crop year when supplies are running down. The most
celebrated example of the co-operative method are probably those
given by the `pools', the marketing agencies of the Canadian
wheat growers. The grower receives a down payment on delivering
his crop to his local elevator. This is a portion of the price
of the grade of wheat he delivers. In the course of the ensuing
crop year, he will receive one or more interim payments, if the
state of the market and the operation of the Pool warrant them,
and a final payment after the crop-year closes, accounts are
balanced and surplus ascertained. The real return to the grower,
the true price of his crop, is the aggregate of the several
payments. Apart from the advantages of spreading his income more
evenly over the 12 months, this system yields him something close
to the full product of his labour and enterprise at the
prevailing price level.

Difficulties in achieving Equity are liable to arise in
agricultural co-operatives, probably more in the future than
hitherto, from differences in the scale of farming operations
among their members. These differences are often reflected in
varying costs, both to the farmers and their co-operatives. A
large farmer may be able to collect the fertiliser or machinery
he has purchased or deliver his produce to his society in his own
vehicles, whereas the small farmer may have no choice but to rely
on the society's transport for either purpose. In the one case,
there is saving, in the other an expense to the society. Should
this difference be reflected in the sums due to or from the
society payable or receivable by these members? If prices are
uniform to all members, may there not be a certain unfairness to
the members who save the society expense? Under present-day
competitive conditions when attention is focused chiefly on
prices and co-operative societies are obliged to offer their
members every inducement to reject attractive offers from private
trade and loyally keep their business in co-operative channels,
the old solidarity which led the wealthier to make common cause
with the poorer farmers is difficult, even impossible, to
maintain beyond a certain point. A society with a mixed
membership of large and small producers may not be able to
contemplate the loss of volume it would suffer if the larger
producers withdrew; the management will therefore be inclined to
make concessions to retain their support.

Strict uniformity and equality of prices and treatment in other
ways may not necessarily be equitable. In fact, in the
agricultural co-operative movement, it is frequently necessary
to extend the consideration of equity to what a society demands
from its members, notably in regard to capitalization. The
shareholdings of individual members of agricultural marketing
societies, for example, may be based on the area of land under
a given crop or the number of cows or other livestock for which
they need the services of the society. In housing co-operatives
again the member's deposits of capital are often required to be
proportional the value of the dwelling he wishes to acquire. Many
credit societies relate the amount of credit they extend to
members to the amount of members' deposits, share or loan
capital.

Consumer co-operatives have also had the need (or the expediency)
of a similar refinement in adjusting prices to costs forced on
their attention as retail trading margins have grown narrower.
Supplementary services, such as home delivery, formerly included
in the prices of goods, are being more and more abandoned. If
prices are uniform, then it seems equitable to impose a special
charge on those members who require goods delivered to their
homes, in order to meet special costs not incurred for those who
do not ask for this service. In the reverse direction,
experiments have been made by offering price reductions to
members who buy their requirements in bulk and carry them home
in their own vehicles.

The justification for discussing these apparently minor aspects
of the application of the Principle of Equity is that, as both
managements and members grow more economically-minded, these
questions will play a role of increasing importance in co-
operative business, whether that be retailing or agricultural
marketing or supply. The achievement and maintenance of success
in business may well depend upon their satisfactory solution -
satisfactory that is to members as a whole. It must be borne in
mind that the factors which have to be taken into account in
distributing equitably the economic benefits of any co-operative
are to a high degree interdependent. Overall net profit depends
on the relations between turnover and costs. In the latter, wages
and salaries usually constitute the principal element and they,
in turn, depend on the state of the market for the kinds of
ability and skill which the co-operative employs. Revenue from
sales is also affected by the price policy - whether it is an
active or a passive following of market movements - and the
extent to which a system of cash discounts or rebates is
practised. The disposable surplus may on the other hand be
swollen by income from investments and dividends on purchases
from co-operative wholesale federations. Involved in every type
of co-operative are the specific interests of those who create
the society and bear the final responsibility of entrepreneurs,
those who supply the capital for its operations and the personnel
of various grades it employs. The Principle of Equity requires
that substantial justice shall be done to all of these interests.