University of Wisconsin Center for Cooperatives

Edwin G. Nourse  and
The Competetive Yardstick School of Thought


By Thomas P. Schomisch
UCC Occasional Paper No. 2, July 1979


The author was a Cooperative Program Specialist, University Center for Cooperatives, University of Wisconsin--Extension, Madison, Wisconsin. He is currently a Professor in the Agricultural Journalism Dept., University of Wisconsin-Madison.

This paper was presented at the Graduate Institute of Cooperative Leadership,
Columbia, Missouri, July 16, 1979.

For further information or permission to reprint, please contact:
UNIVERSITY OF WISCONSIN CENTER FOR COOPERATIVES
427 Lorch St.
Madison, Wisconsin 53706 U.S.A.
Telephone 608/262-3981


    In accepting this assignment I would like to say at the outset that I truly feel that I have been treading on "hallowed ground" the past few weeks in researching the subject. Dr. Edwin Nourse and the competitive yardstick school of thought he initiated have left a profound impact in shaping and molding the agricultural cooperatives we know today in North America.

    To help us develop a clear understanding and appreciation for the unique characteristics of the competitive yardstick school of thought, I would like to share my findings with you in the following framework.

    First, to gain a perspective of his work I believe we need to briefly glance at the factors that influenced his thinking in the period of 1910 on into the 1920s. We will examine the evolving rural community structure, technical advances, the political environment and ongoing cooperative progress at the time Nourse emerged as one of the most respected cooperative scholars of our time. I would also like to share with you a few insights into his personal background and professional development
 
    I have sought to distill the writings about the competitive yardstick and set forth the basic propositions supporting his theory and resulting school of thought. I have identified eight factors upon which he constructed the influential theory. I will also propose a model to help you visualize the theory in operation.

    After we discuss the propositions I would like to present a contemporary analysis of the use and acceptance of the competitive yardstick school thought. I hope my remarks will stimulate your imagination and provoke a lively discussion.

    Competitive Yardstick School Defined
    Simply defined, the competitive yardstick school of thought views the cooperative enterprise as a yardstick for individual members to measure the performance of the capitalistic system. Cooperatives function to improve the competitive performance of the total economic system, thereby restraining the system and modifying any excesses associated with it.

    Many of the characteristics of this school will sound remarkably familiar to you. You most likely will have heard of your cooperative organization espouse the merits of the very same operational premises. This school is regarded as the prevailing school of cooperative thought in most sections of the U.S. today and very well may provide the underpinnings for your organization.

    Background of Forces for Competitive Yardstick Theory
    Joseph G. Knapp, prominent cooperative historian and associate of Nourse, provides an excellent profile of the conditions influencing cooperative development in the first two decades of this century in his information-packed book, The Rise of American Cooperative Enterprise.2

    Let's quickly trace some of these forces which built up to 1922, the date associated with the introduction of the competitive yardstick school. The period of 1897 to 1920 produced a revolutionary change in the character of farming and the position of agriculture in the economy as a whole.



2Joseph Knapp, The Rise of American Cooperative Enterprise: 1820-1920, pp. 99-109.

    It was during this period that the migration West officially brought a close to the frontier movement. The farm population began to take on stability and develop a system of farming efficiency. No longer could producers easily pull up stakes and go West. Now to make a success of farming, families had to improve the efficiency of available land.

    During this time the nation became more and more industrial in character. The rural population fell from 60 percent of the nation in 1900 to 48.6 percent in 1920. Farmers had to depend increasingly on commercial marketing agencies with the urbanization trend or they could provide the necessary linkages to the cities themselves through cooperative activity.

    Another factor which helped promote the growth in cooperation in this period was the influx of immigrants in our rural population from 1880 to 1910. They settled within nationality blocks. Many brought with them an appreciation of working cooperatively from their homelands. The Scandinavians were especially noted for applying their cooperative experience to the conditions in their new environment.

    Technical advances on farms, and the introduction of power machines on farms, promoted the development of cooperation. Machines reduced the time of farm operations so that farmers could attend meetings and educational training sessions. Here they could consider their economic and social problems. They could examine the possibilities of marketing the greater output machines made possible through cooperative methods.

    Improvement in road systems to the country, coupled with the introduction of trucks, also enhanced cooperative development. Farmers from a wider area could exchange ideas. Trucks made greater operating efficiencies possible for cooperatives,

    Likewise the improved communications systems closed distances. The rural free mail delivery stimulated farmer interest in community and national problems and finding methods to improve the standard of living for their famlies. The spread of the rural telephone served to bring people together. Memberships in telephone cooperatives gave farmers a dramatic lesson in the value of cooperation.

    Political Environment Builds Cooperative Movement
    President Theodore Roosevelt appointed the Country Life Commission in 1908 and charged them with developing policies which would improve the plight of farmers. The Commission surveyed a vast number of rural people (550,000) and conducted hearings at 30 locations across the land.

    The upshot of the Commission finding, just a year later, was that the introduction of effective agricultural cooperation throughout the United States is of first importance to helping farmers help themselves.3

    Cooperatives Marketing Progress
    The Granger Movement of the late 1800s spawned widespread organizational development. While this movement opened up cooperative activities like stores for goods, machinery manufacture ant handling farm commodities, much of it succumbed to the strain of inadequate business organization when early enthusiasm waned.4

    When Nourse entered the agricultural scene in the early 1900s, farmers were struggling to make the cooperative concept work in agriculture, including dairy, livestock and grain, fruit and vegetable industries. California was advancing rapidly in attempts to organize the commodity marketing.



3John Daniels, American Cooperatives, Yesterday-Today-Tomorrow, pp. 9-14.
4H. E. Erdman, "Trends in Cooperative Expansion," Journal of Farm Economics, November, 1950

    The first integrated cooperative marketing system - the California Fruit Grower Exchange - had a lasting influence on Nourse. Their system of growers united into local associations which in turn were joined together in a series of district exchanges, federated together in one central exchange, intrigued him. It was while studying the trial and error development of this system that Nourse developed his model for the competitive yardstick school of thought. However, it appears that the greatest influence in provoking Nourse to prepare and promote a grass roots approach to cooperative development was an ideological conflict with Aaron Sapiro. Nourse simply could not accept Sapiro's emphasis on monopoly you learned about earlier today. He attempted to counter Sapiro's evangelistic moves to built top-down autocratic cooperative doctrine with a solid business efficiency model.5

    Nourse Personal Background
    It is against this sketchy backdrop of conditions in 1900 to 1920 that I would like to now consider Nourse the man and identify the major propositions of the competitive yardstick.

    Nourse could readily identify with farmer needs from his own mid-western experience. Born in Lockport, Nourse was reared on a small farm in northern Illinois. He received his first degree from Cornell University in 1906. He served as an Instructor at Wharton School of Finance and Commerce, and professor and head of the Department of Economics and Sociology at the University of South Dakota. He completed his Ph.D. at the University of Chicago in 1915.



5Joseph Knapp, "Nourse - Dean of American Scholars," American Cooperation, 1974-75, pp. 372-374. pp. 9-14.

    He reached an academic position of influence as an agricultural economist serving as professor and department head for Economics Departments at the University of Arkansas, 1915-1918, and Iowa State College, 1918-1923. A chance for national exposure lured him to take charge of the agricultural studies for the Institute of Economics in Washington, D.C., from l923-27. He was named Director of the Economics Institute of the Brookings Institute When it was established in 1927.

    Nourse was deeply involved with the cooperative movement throughout his career. He helped establish the American Institute of Cooperation in 1925 and was called upon once again to breathe life into the organization following the lapse caused by World War II. His thinking was instrumental in many of the farm programs developed in the New Deal era.

    President Truman called upon his talents to serve as the first Chairman of the Council of Economic Advisers under the Employment Act of 1946.6

    Basic Proposition of Cooperative Yardstick School of Thought
    While he was head of the Agricultural Economics Department at Iowa State College he had the chance to study the problems of farmer cooperatives in depth. His outstanding publications soon gave him the stature as a cooperative marketing authority. His article published in the American Economic Review in December, 1922, "The Economic Philosophy of Cooperation," is considered a classic in cooperative enterprise theory. From it has developed the competitive yardstick school of thought.

    The theory embraces at least eight distinct propositions. Let's examine each:7



6Joseph Knapp, Great American Cooperators, chapter by Orion Ulrey, pp. 366-378.
7Edwin G. Nourse, '-the Place of the Cooperative in Our National Economy," American Cooperation, 1942-1945 (Propositions adapted from pp. 33-39.)

1. Establish organizations with bottom-up democratic cooperative philosophy
    Nourse felt cooperatives should grow democratically from the ground up with a body of informed participating members. He could not subscribe to Sapiro's emphasis on monopoly power for he did not believe it was attainable on a voluntary basis even with iron-clad membership contracts. He warned that the technique of bottom-up development is slower and more difficult than any other business form, but once perfected outruns and outlasts the others.

2. Cooperatives become integral segment of existing capitalistic system
    While Nourse could not accept a monopoly position for cooperatives in the agricultural economy, he did expect cooperatives to become a legitimate business force within the existing capitalistic system. He viewed cooperatives as being supplementary to capitalistic enterprise. He argued that the place for cooperatives in the national economy is not to displace other forms of businesses, but to occupy certain strategic points. The true place for the cooperative is "that of economic architect, not commercial Napoleon."

3. Build business efficiency of total economic system
    Nourse advocated people joining hands in a business enterprise to promote maximum efficiency, stability and prosperity for the economic business as a whole

4. Control a modest share of commodity, supply or service market segment
    Nourse contended the success of the cooperative movement should be judged more by the quality of its performance than by the size of its membership or volume of its operation. When a cooperative has to maintain its position by constant evangelism, sentimental appeals to membership or government favors and special aid, Nourse felt the organization would have overgrown or outlived its true economic need and value. Cooperation is hard-headed business, not an ideological crusade. He did not affix an actual market share percentage he felt adequate to introduce competition in a given business area. He felt the amount would vary greatly, but a goal of 15 to 30 percent would likely permit cooperatives to meet their normative goal.

5. Keep other business forms competitive with balance function
    This proposition is the very core of the competitive yardstick school of thought. Nourse viewed cooperatives as correcting many of the evils associated with capitalism. He felt cooperatives should perform a balance wheel or checkpoint function that would improve the performance of the entire economic system. The place in the nation's business marked out for cooperatives is that of "pilot plant" and ''yardstick operation." Cooperatives should set a pace of competition which will assure for the farmer efficient service at true long run cost/income benefits.

6. Preserve individual producer freedom of decision making
    Nourse sought economic freedom for individuals. The cooperative is merely an extension of the farming enterprise. The system must maintain a delicate balance between gaining high economic efficiency gained through group discipline while protecting the individual freedom to make effective decisions for their total business operation - farm and off farm enterprises.

7. Organize only if competitive influence is necessary
    Nourse asserted that the farmers' role in the economy is that of raising crops and producing livestock. He expects that under traditional principles of division of labor and specialization, industrial agencies will manufacture market, distribute, and finance these functions.

    He felt that when such services are furnished efficiently and in a truly competitive manner, there is no need for the farmer to divert his resources of limited capital and managerial time. Farmers shall have both the legal institutions and organizational "know how" to step into these non-production fields when and to the extent that service is inadequate or costs unduly high. Farmers must then remain in these fields with cooperative organizations large enough to attain high efficiency to protect themselves from lapses in quality of service or non-cooperative profiteering.

8. Government should provide assistance with basic framework for organization and operation
    Nourse felt there should be definite limits to the extent of government control of cooperatives: He fought for the need of enabling legislation to establish the legal framework for cooperatives to organize and operate. But he vigorously opposed temporary gains by invoking government aid and support to enlarge the power of the cooperative.

    He contended that these temporary gains would be costly when an outraged public opinion would eventually kick the props out from under any such artificial economic structure.

    Model of Competitive Yardstick School of Thought.
    The model below illustrates the three points where cooperatives exert a competitive influence in the agricultural economy within the framework of the competitive yardstick school of thought. (1) Cooperatives introduce any inputs or services not currently supplied by capitalistic system (2) Cooperatives seek to hold down prices of supplies and services for production, (3) Cooperatives seek to raise prices received for commodities within limits of acceptable price variation.

    Contemporary Analysis of Competitive Yardstock School of Thought
    Cooperatives organized and operating under the provision of the competitive yardstick school flourish today in the United States. That fact alone is valid proof that the theory Nourse espoused has left a lasting impact.

    However, I believe we must attempt a brief analysis of how the propositions of his theory have withstood external and internal pressure. Surely the pressure of time is embodied in each of the factors we will consider.

    First, let's examine the external pressures.

1. How have cooperatives weathered economic conditions?
    The pressures of depression, inflation and war times took their toll of some of the organizations which could not turn to greater business efficiency to weather these economic stores. However many cooperatives matured through these times. Increasingly, farmers have turned to cooperative organizations to exert a competitive influence on supply, service, and marketing sectors of the economy.

    Time does not permit a detailed summary of the progress farmers have made through their cooperatives. A quarter century comparison by the Farmer Cooperative Service, USDA, (1950 - 1975) showed that cooperatives handled 27 percent of agricultural products marketed in the U.S. in 1975. This was an increase of 7 percent from 1950.8



8Statistics of Farmer Cooperatives, 1974-1975, Farmer Cooperative Service, US Research Report 39.

    Farm supplies handled through cooperatives totaled 1? percent in 1975 compared to only 12 percent 25 years earlier. Organization numbers declined from 10,064 to 7,645 as farmers merged, consolidated and strengthened their cooperatives.

    2. How did cooperatives survive the challenge of "quick-fix" champions"?
    Numerous organizational challenges surfaced during the past half century - milk strikes, union-type tactics for collective bargaining, boycotts, demonstrations, even a tractorcade. The temptation of a quick cure-all for the farmers price-cost squeeze has lured members from cooperatives. However, the proposition of establishing sound business efficiency for the economic system has regained the hallmark for cooperation.

    3. Have cooperatives continued to grow to remain a competitive influence in the marketplace?
    Yes, but the growth has resulted in vertical integration to the source of supplies as witnesses by the drastic achievement of the interregional and regional cooperatives. Likewise, integration forward into the marketplace has occurred as cooperatives sought to control farmers' destiny. The establishment of franchises of consumer acceptance squares with Nourse's proposition of only entering the market when competitive influence is deemed necessary.

    The growth of cooperatives produced an interesting paradox. The democratically controlled organizations in many of the service-supply and marketing segments of the economy have reached a growth point where they are now each others greatest competition.

    This duplication and overlap certainly are not embodied in Nourse's concept of business efficiency.

    Now, let's briefly look at the impact of internal challenges.

1. How have cooperatives resisted government interference?
    Many organizations have fallen victim to the internal pressure to control production, prop up commodity prices and turn to the government to protect their economic success. As Nourse predicted, public opinion pressures are currently attempting to strip cooperatives of their temporary gains - and their operational framework in the challenge of antitrust activities.

    Cooperatives will need to demonstrate the value of their pacesetting activities upon the entire economy to survive the current governmental pressures.

2. Have cooperatives built an informed membership?
    To grow slowly from a grass roots organization of an informed participating membership was a major underpinning of Nourse's concept. He might well have extended that notion to perpetuation of-cooperative organizations beyond the first generation of members. Cooperatives have made major efforts and expenditures to educate youth and young members. Whether their attempts are adequate will be manifested in acceptance of cooperatives as tools farmers will use to improve their economic lot.

    The basic concept of the need to control only a modest share of the market may be encouraging the current generation of producers to take advantage of "free ride" the system makes possible. Only continued informational and educational efforts will sustain cooperatives as a competitive force in the economy.

3. Have cooperatives maintained member interest above organizational perpetuation?
    The best measurement of this internal pressure is the level of continued membership. Cooperatives have held their own in recent years. However, a number of factors may be eroding support of the organizations, The inter-cooperative competition and "free ride" issues identified above any be leading factors.

    Nourse may not have envisioned another serious issue cooperatives face today. Failure to return earnings retained by Cooperatives for operational financing certainly does not measure up to his insistence of not tying up the member's limited capital in an organization.

    Just last week, Randall Torgerson, Deputy Administrator for Cooperatives, USDA Economics, Statistics and Cooperatives Service, warned Wisconsin cooperative leaters that the lack of adequate programs to meet the finance revolving issue may be costing cooperatives the participation of would-be members.

    He reported that a 1977 study of the Farmer Cooperative Service found, "Only 32 percent have programs for retiring retained equities. Another 39 percent have programs for retiring equities under special circumstances such as death, retirement or hardship. The remaining 29 percent had no redemption program."9

    Cooperative leaders will need to keep member welfare above all other considerations if they expect their organizations to flourish.

Summary
    Nourse's theory and resulting competitive yardstick school of thought lives on. The terms may have been popularized within the notion of cooperatives serving as "pacemakers." Cooperative organizations have built slowly but their efforts have been rewarded with economic institutions that "outrun and outlast" other forms of business established to meet farmer needs. Cooperators will be well advised to return to the basics of Nourse's competitive yardstick theory to build their future on a solid foundation of business efficiency.



9Randall Torgerson, Talk presented to Legal-Finance Conference, July 11, 1979, Fond du Lac, Wis.


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