CHAPTER III.

Constitution and Influence of Co-operative Associations—Limited Liability—Considerations on the Joint Stock Associations principally carried on by the Labouring Classes.

We have seen the powerful influence of the division and combination of employments1 in increasing the efficiency of industry. But in addition to that co-operation which is universally practised, a great variety of undertakings are carried on by means of companies, or numbers of individuals, associated for specific purposes. Whenever, indeed, the capital required for the prosecution of any undertaking exceeds what an individual could or would be disposed to furnish, it is indispensable, if the project is to go on, that an association should be formed for its prosecution. In all cases, too, in which the chances of success are doubtful, or where a lengthened period must necessarily elapse before an undertaking can be completed, an individual, though ready enough to contribute a small sum in connection with others, would, generally speaking, be very little inclined, even if he had the means, to encounter the whole responsibility of such enterprises. Hence the necessity and advantage of companies or associations. It is to them that we are indebted for the railways and canals by which every part of the country is intersected, for the formation of so many docks and warehouses, for the institution of our principal banks and insurance offices, and for many other establishments of great public utility, carried on by the combined capital and energies of large bodies of individuals.

To ensure a rational prospect of success to a company, the undertaking should admit of being carried on according to a Edition: current; Page: [361] regular systematic plan. The reason of this is sufficiently obvious. The business of a great association must be conducted by factors or agents, and unless it be of such a nature as to admit of their duties being clearly pointed out and defined, the association ceases to have any effectual control over them, and is, in great measure, at their mercy. An individual who manages his own affairs reaps all the advantage derivable from superior skill, industry, and economy; but the agents, and even directors of joint stock companies, labour, in most cases, entirely or principally for the advantage of others, and have not, therefore, however conscientious, the same powerful motives to act with energy, prudence, and economy. “Like,” says Adam Smith, “the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail more or less in the management of the affairs of such a company.” It also not unfrequently happens that they suffer from the bad faith, as well as the carelessness and extravagance of their servants; the latter having, in many instances, endeavoured to advance their own interests at the expense of their employers. Hence the different success of companies whose business may be conducted according to a nearly uniform system,—such as dock, canal, railway, gas lighting, water supply, insurance, and banking companies,—and those whose business does not admit of being reduced to any regular plan, and where much must always be left to the sagacity and enterprise of those employed. Not one of the latter has been able to withstand the competition of private adventurers; they cannot subject the agents they employ to buy and sell in distant countries to any effectual responsibility; and from this circumstance, and the abuses that usually insinuate themselves into every department of their management, no such company has ever succeeded, unless when it has obtained some exclusive privilege, or been protected from competition.

Edition: current; Page: [362]

And even with these advantages, such is the negligence, profusion, and peculation inseparable from the management of great commercial companies, that those that have had the monopoly of the most advantageous branches of commerce have rarely been able to keep out of debt. To buy in one market; to sell with profit in another; to watch over the perpetually occurring variations in the prices, and in the supply and demand of commodities; to suit with dexterity and judgment the quantity and quality of goods to the wants of each market; and to conduct each operation in the best and cheapest manner, requires a degree of unremitting vigilance and attention, which it would be visionary to expect from the directors or servants of a great joint stock association. Hence it has happened, over and over again, that branches of commerce which proved ruinous to companies, have become exceedingly profitable when carried on by individuals.

“The spirit of monopolists,” to borrow the just and forcible language of Gibbon, “is narrow, lazy, and oppressive. The work is more costly and less productive than that of independent artists; and the new improvements so eagerly grasped by the competition of freedom, are admitted with slow and sullen reluctance in those proud corporations, above the fear of a rival and below the confession of an error.” (Miscellaneous Works, i. p. 49. ed. 1814.)

These observations have been confirmed by the experience of this and all other countries. All associations for purely commercial or manufacturing purposes, unless when they have commanded adventitious assistance, have uniformly been defeated by individual traders or manufacturers, or by such small companies or partnerships as are really equivalent to individuals. But the superiority of the latter is in great measure lost whenever businesses may be satisfactorily conducted on a system of routine; and these are cases especially suited to joint stock companies. The object in such cases is to carry them on in a beaten track. And hence, supposing their managers and directors to be possessed of ordinary intelligence, Edition: current; Page: [363] industry, and honesty, it may be anticipated that joint stock associations will succeed if they engage only in undertakings that may be wholly or principally conducted on a routine plan, and that they will fail if the undertakings be of a different character.

Down to a late period the partners in Joint Stock Associations, with the exception of the few incorporated by charter, were individually liable for the debts of the association, how large soever these might be. And such would seem to be the only sound rule to be followed in such cases Whether a man contracts debts personally, or in company with others, he is responsible for them, and is bound to pay them. And it has not yet been shown how it is possible to lessen this responsibility without at the same time making people less careful or cautious in the incurring of debts, and less disposed to exert themselves to effect their extinction.

It has, however, been successfully contended that it was desirable to encourage the formation of Joint Stock Companies by limiting the liability of the partners, and making them responsible only, in the event of the bankruptcy of their companies, for the amount of the stock held by them. But it is doubtful whether there was any sufficient ground for seeking to encourage the formation of companies, and least of all by a device of this sort. The principle which it establishes appears to be fraught with mischief. It proclaims that the gains and losses of parties shall no longer be associated, and that while the entire profits made by Joint Stock Associations may go to the partners in them, their losses may wholly or in part have to be borne by the public. It were idle, under an arrangement of this sort, to look for much care or solicitude among the partners. It would be contradictory to suppose that a partner in a limited liability concern, in which, perhaps, not 1/10th or 1/20th part of his fortune is engaged, and for which only he is bound, should take the same interest in its management that he would do Edition: current; Page: [364] were he liable for the entire debts it may incur. A practice of this sort enables a man to escape from that responsibility which naturally attaches to all his actions, and is the grand security for their being fair and honourable. It tempts him to engage in desperate adventures, of which, if successful, he reaps all the advantage, and of which, if unsuccessful, he eludes most part of the loss. It is not easy to see how such a system can be productive of any good result. Something, perhaps, might be found to say in its favour had individuals been with difficulty found to engage in partnerships accompanied with more than the usual risks. But there was no such difficulty. On the contrary, every outlet, whatever may be the hazard attending it, that opened any field for the employment of capital with the prospect of even a moderate return, was immediately filled up. Why, then, should we offer such parties a bonus? Why relieve them of their natural responsibility to make them engage in pursuits into which they were ready and willing to engage without any extraordinary stimulus?

It is needless to say more with respect to this description of companies. The expectations of advantage from their formation will most likely be wholly disappointed. Inasmuch, however, as vast numbers of them have been set on foot, experience will in no very lengthened period finally decide in regard to their merits and demerits.

Hitherto, the funds of joint stock companies have been mostly derived from the contributions of the richer, or well-to-do portion of society. Of late years, however, the principle of association has begun to be extended among the lower or labouring classes. This has been effected by the establishment among these classes of what are called Co-operative Societies, the members of which are usually very numerous, their pecuniary contributions to the common stock being in most instances of small amount. Many conflicting statements have been made in regard to the practical working of these Edition: current; Page: [365] societies, and very sanguine opinions have been expressed in regard to the benefits that may be expected to result from their extension. They may be said, speaking generally, to be of two classes; first, for the purchase and sale, and second, for the production and sale of commodities.

1st. In the first class the subscribers to the association select parties in whom they have confidence to buy the articles with which they are to be supplied from its stores, and they bind themselves to resort to these stores for the required articles, paying for them, generally in ready money, such a price as may be needed to defray their cost, with a per-centage for the expense of their purchase, storeage, sale, &c., including, in most cases, a profit for the concern. And it is obvious, when the subscribers to such associations are numerous, and their affairs moderately well managed, that they can hardly fail to be successful. Their object is to get rid of the profits of the retail dealer, and to enable the subscribers to get the articles they want at, or nearly at, the prices charged by the producers or importers. The rule of paying in ready money, which is usually enforced upon those who deal with the society’s stores, is one of their distinguishing features, and is of itself highly beneficial. It is a great check upon unnecessary purchases, or such as may be dispensed with, and gives a powerful stimulus to forethought and to habits of thrift. Wherever such a practice is diffused, the peasantry are cæteris paribus distinguished by their superior prudence and conduct; and if the beneficial influence of the establishment of public stores were limited to the extension of the practice of trading for ready money, it would not be easy to over-rate its importance.

But, besides its advantages, the supply of the society’s stores involves a good deal of expense and risk. Their success or failure depends in great measure on the skill with which purchases are made; and there are always considerable difficulties, especially in regard to rapidly perishable commodities, in adjusting their supplies to the demands of the subscribers. Edition: current; Page: [366] Sometimes, however, these associations succeed, at least for a while, and occasionally divide more than average profits. On the whole, however, it is questionable whether they are ever productive of any real advantage to the members. Were the latter to deal with respectable retail tradesmen for ready money only, they would be quite as well and cheaply accommodated; at the same time, that they would avoid all risk of loss by the mismanagement or failure of the concern. Where competition is so keen as in this country, the profits of the retailers will not generally do more than yield them a fair return for their trouble; and they have every motive to execute their work in the most economical manner.

2d. In the second case, or when Co-operative Societies undertake the production of commodities, they differ in few respects from joint stock companies for the same purpose. Much, or rather everything, then depends on the managers. Where these are properly selected, and left without any needless or improper interference to follow out their own views, there is no reason why they should not succeed as well as other associations of the same class. But the chances are, that the managers will not be properly selected, and that they will be too much interfered with. When they are chosen by numerous individuals, who have no very great interest in the businesses to be carried on, and no special knowledge of the acquirements necessary for their successful prosecution, it is all but certain that they will be selected on quite different grounds from their fitness,—on the suitableness of the place for them, rather than on their suitableness for the place, on their being known by and belonging to the electors, and such like considerations. And should it happen, despite these opposing influences, that a really good manager is selected, it most commonly results that his free action is impeded, and that he is frequently even unable to avail himself of the subordinate officers he is anxious to select. The partners in the concern have sons, brothers, and connexions for whom they wish to provide, and of whose fitness to fill any vacant situation in the association they have no doubt. They Edition: current; Page: [367] press their claims on the manager, who, to conciliate their interest, too often overlooks the defects of their protégés, and sanctions their appointment. The most serious injury may in this way be inflicted on the association, for while ignorant or incompetent individuals are selected to fill important situations, they trust for support to those who forced them forward without exerting themselves to repair their original defects. It is not to be supposed that this is necessarily and uniformly the case. But the circumstances now alluded to are almost always in operation; and they have in various instances had the specified results, and brought ruin on the establishments in which they were manifested.

It would therefore appear as if but little advantage can result to the labouring classes from the spread amongst them of the co-operative principle. When they engage in productive undertakings, they incur risks which involve not only the loss of the capital they have embarked in the association, but the chance of their being overwhelmed with debt. No good can result to them from such hazardous projects. Work-people have neither time nor opportunities for making themselves acquainted with the knowledge required in the conduct of great joint stock associations; and it is idle to expect that establishments over which they have a control should be able to maintain a successful competition with establishments managed by individuals wholly devoted to the business, and having their fortune and position in society dependent on the skill and economy with which they carry it on. They are no friends of the poor who recommend them to engage in so unequal a struggle. There may be a few businesses in which it may be possible to make the remuneration of the labourers depend in some degree on the success of the undertaking. These, however, are of rare occurrence; and their interest will in all cases be best promoted by procuring for them steady employment, substituting, when practicable, piece work for labour by the day, and providing them with safe, convenient, and profitable places of deposit for their smallest savings.

Edition: current; Page: [368]