Source of of "Entrepreneur" is

title:Adam Smith's MISTAKE
by Kenneth Lux

ISBN 0-87773-593-X

A student of Catholic social doctrine in the 1930s was the
young Basque priest Father Don Jose Maria Arizmendi-Arrieta.
When civil war broke out in Spain in 1936, Arizmendi---at the
time a Basque student priest loyal to the constitutional govern-
ment---joined an army battalion against Franco's attempt to
overthrow the government. When the constitutional Spanish
government fell to Franco and the fascists, Arizmendi spent a
month in prison and barely escaped execution. Upon his release
he returned to studying for the priesthood, and at the seminary
library in the Basque town of Vitoria he pursued a strong interest
in social problems and social theory. When the time of his
ordination approached, he applied to be sent to the University of
Louvain in Belgium to pursue a degree in sociology. His request
was turned down; instead he was sent to a small and inconspic-
uous Basque town, Mondragon, to serve as a parish priest.
The name Mondragon derives from "tail of the dragon" and
refers to the ragged shape of the mountain ridges that surround
and isolate the town. Arizmendi arrived in Mondragon on Feb-
ruary 5, 1941, succeeding a priest who had been executed by the
Franco regime. The Mondragon that Father Arizmendi found
upon his arrival was a defeated community---hopeless, de-
pressed, and with widespread unemployment. Later on this time
came to be called the "hunger period." Father Arizmendi told
the people that work should not be seen as a punishment but as
means of self-realization. There should be dignity in work. He
also spoke of the need for cooperation and social solidarity. But
he had a poor public speaking style, and his ideas were new and
strange and hard to follow. He did not deliver sparkling oratori-
cal sermons as the previous priest had done, and in general his
debut in his new parish was a disappointment to the people. But
they found him a very active priest, particularly with regard to
his study circles. These discussion groups covered a wide range
of topics, and seemed to be as much about sociology as they
were about theology. They discussed conflicts between capital
and labor, reform of private enterprise, and the participation of
workers in management.
The major employer in Mondragon was a foundry and metal-
working company, the Union Cerrajera. This traditional, con-
servative company had successfully overcome efforts at unioni-
zation and was continuing to keep a list of people who were not
to be employed because they were potential troublemakers. The
company ran a technical training school for their apprentices,
and entrance into the school was restricted to the sons of
employees. As was the custom, the new priest was invited to
provide religious instruction as part of the apprenticeship pro-
gram. Father Arizmendi took advantage of this opening to urge
the company to expand its program by accepting boys who were
not related to employees. The company refused.
Father Arizmendi then decided to try to interest local parents
in making contributions toward starting an independent school.
This effort proved to be successful, and about fifteen percent of
the adult population of Mondragon responded with pledges of
support. In 1943 the school opened, with twenty students. The
enrollment eventually included girls---a first for Mondragon.
What was notable about the school, however, besides its very
existence, was the degree of democratic participation of the
sponsors and supporters. There were four different membership
groups: those who simply expressed an interest, those who made
a certain minimal contribution, active members, and teachers.
Each membership group elected ten representatives to a general
assembly, which then elected a fourteen-member school board.
This may seem overly elaborate for what appears to be a rather
small operation---as if Father Arizmendi were playing at democ-
racy the way children play house. However, time proved this not
to be the case (perhaps in the same way that time proves playing
house to be more than just playing).
The school expanded its program by adding a new grade level
each time the students had completed the previous one, so that
eventually it had all the grades through the American equivalent
of high school. Its first graduating class went to work, of course,
in the Union Cerrajera, but they were interested in continuing
their education---something which no Mondragon student had
ever done before. At first this seemed impossible because there
was no university anywhere near Mondragon. Father Arizmendi
looked into this, and eventually he was able to work out an
arrangement with the University of Zaragoza, outside of the
Basque country, where the students could matriculate by study-
ing off-campus---something that was no doubt unusual back
then. Out of this arrangement, eleven men of the first graduating
class of the Mondragon school went on to receive de‚‡rees in
technical engineering from the university.
Meanwhile, the students continuing their employment at the
Union Cerrajera were finding the traditional and archaic labor/
management environment stifling. After a number of unsuccess-
ful attempts to introduce some measure of worker participation
in the plant, five of these new graduate employees---Luis Usa-
torre, Jesus Larranga, Alfonso Gorronogoitia, Jose Maria Or-
maechea, and Javier Ortubay---became interested in forming
their own company, along the lines that they had been discussing
over the years with their mentor, Father Arizmendi. Though they
had by this time a small amount of their own funds, they did not
have nearly enough capital to get a manufacturing business off
the ground. They discussed this problem with Father Arizmendi,
and he suggested they go to the community, as he had done to
start the school. These proponents of the new business venture
did not know what their new firm would produce, or where it
would be located, or anything else about it. Nevertheless, be-
cause of the respect they had as the first university-educated
children of blue-collar working parents, and also because of the
townspeople's faith in Father Arizmendi, the group was able to
raise about $360,000 in pledges---an enormous sum for that
community at the time (1955).
But that was only the first challenge. In Spain at that time,
citizens did not have the freedom to create their own companies.
This was a privilege jealously guarded by state authorities, who
had to issue permits, and who did so relatively rarely and with
great reluctance. The five new graduates presented the idea of
starting a foundry to the licensing officials, but the proposal was
buried in the government's files. A break came when they found
out that an existing firm in a nearby town had gone bankrupt
and was up for sale. The assets of the firm were of little value,
but the Mondragon group realized that by buying the firm they
would also gain the firm's license; to them that was up for sale.
They were able to do this, and they then moved that company to
Mondragon. They renamed the company Ulgor, an acronym
made up of the first letter of the last names of the five founders.
With Father Arizemendi they discussed the form that the company
should take, and they all agreed that it should be a cooperative.
Since the company was chartered to produce electrical and
mechanical products for home use, they took this direction with
their first product, which was a small kerosene heater and cooker
of British design.
Father Arizmendi, having studied the history of cooperatives,
knew that conventional wisdom said that, while consumer coop-
eratives might succeed, manufacturing or producer cooperatives
were bound to run aground. The idea of a worker cooperative
had always existed as a romantic ideal---one that various econo-
mists, including John Stuart Mill, the last of the great classical
economists, had waxed enthusiastic over. In practice, though,
these enterprises had invariably run into a curious dilemma.
Either they were destined to remain as small, labor-intensive
companies, with little economic significance and impact, or, if
they were successful and grew, they were doomed as cooperatives
by their own success.
This latter fate is illustrated by the case of one of the earliest
and best-known experiments in producer cooperatives, the Roch-
dale Cooperative Manufacturing Society, which was begun in
England around 1850. It began when, twenty-four weavers who
were jobless organized a consumer cooperative grocery store,
which proved to be successful. They then ventured into manufac-
turing and began a woolen mill. Again, their enterprise was
successful, and in 1859 they decided they needed to raise addi-
tional capital to expand. They did the natural thing, which was
to sell share was quite valuable. However, as more and more of
the original worker-owners sold out to outside investors, who
could afford the shares, the company rather quickly began to
resemble a conventional firm. Outside stockholders received the
profits, and they employed workers in the company, who were
paid a wage.
This same pattern had proved to be the fate of other coopera-
tive ventures, for example a number of highly successful plywood
companies on the American West Coast, such as the Olympia
Veneer Company and Anacortes Plywood. As these companies
became successful, new workers could no longer afford to buy
shares and they had to come on as hired employees. The shares
of these companies were eventually sold to the United States
Plywood Corporation.
Through studying the history of cooperatives, Father Ariz-
mendi knew that the problem was share ownership. He felt that
in principle it was wrong for someone to profit from the work of
others, and also direct their work life, when they themselves did
not work in the company with the workers. To have one group
of people, the stockholders, deciding the fate of another group
of people, the employees, was like having the citizens of one
country making decisions for the citizens of another country.
Therefore, the idea of stock shares had to be dropped, and
investment in the firm had to be separated from rights of partici-
pation in the firm's governance. Father Arizmendi's solution,
based on what came to be called the individual capital account
(ICA), was an ingenious one.
In the Mondragon cooperative, each worker owner had a
record with the company of his or her capital input into the
company (a capital account, or ICA). All of the company's
capital assets were covered by these accounts, so that the worker-
owners, or members, constituted the total capital holders of the
firm. The firm could seek outside capital, but only through loans
or bonds, no through selling shares of stock in the company.
Only members---those who actually worked in the company---
could have capital accounts. Furthermore, and this is the most
critical point, voting participation in the company's policies and
direction occurred on a one person/one vote basis (one member/
one vote), regardless of the amount in one's capital account. This
is the full implementation of the principle of democracy in the
context of work, in contrast to the stock ownership principle of
voting, which is based on number of shares, or wealth. If we
applied the latter principle to the political arena, it would be
comparable to people voting in elections in proportion to what
their income was: those who earned more would have a greater
vote. In the Mondragon cooperative, labor employed capital,
rather than capital employing labor.
The one person/one vote principle does not mean, however,
that everyone makes every decision, so that the company soon
bogs down in a welter of inefficiency. The Mondragon coopera-
tive was to have a board of directors and a general manager like
any other large, efficient business organization. The difference
was that the worker-owners elected their own board, which in
turn appointed or hired a manager. This manager had a term of
office or appointment just like any other executive, but the vote
for renewal (through the board) was based on a one person/one
vote of the company membership, not on any outside interests.
In the early discussions of the Mondragon cooperative form,
Father Arizmendi articulated this need for organizational disci-
pline, and that the need did not have to be incompatible with the
cooperative form:

Human work must be subjected to discipline and its per-
formance as a team effort requires order and thus author-
ity. The members of this cooperative, once they have elected
those most suitable for governance, must show spontaneous
and rigorous respect for the order of those who hold
positions of command within their internal structure.

Thus, in the one stroke of internal democracy, and with no
outside control, the worker's place in industry as a commodity
ends. He or she is no longer an "input" into the productive
system, serving the interests of outside stockholders, or a mere
tool of the industrial process to be discarded or replaced when
conditions warrant. The member of a Mondragon cooperative,
by being a full owner with voting rights equivalent to any other
member's, no matter how disparate their capital holdings in the
firm, becomes master of his or her own fate and attains full
human dignity. The paternalism of feudalism is abolished; the
indifference of the wage labor system is abolished; and the
fraternalism of human community comes into being.
A few other details of the system that the early Mondragon
pioneers worked out need to be mentioned so that the reader can
have a minimally sufficient idea of how it works and of how
some of the long-standing problems of producer cooperative
businesses have been solved. Each member receives a regular
weekly paycheck, which is viewed as a measure of that member's
contribution to the company's performance. This is not a wage,
but an advance on profits. At year's end the remaining profits (or
losses) get credited to each member's ICA, in proportion to his
or her weekly paycheck. The buildup of capital in one's ICA is
gradually paid out to each member in a certain schedule that
balances the need for the internal retention of funds by the firm
for its capital development and the return to members of their
earned equity. Upon retirement of leaving the firm, the remainder
of one's ICA is paid out over a several-year period (in order not
to risk too-sudden decapitalization of the firm). Again, this is
not retirement pay, but real equity which exists in addition to a
retirement income program.
Now what about the question that all previous cooperative
businesses stumbled over: how to add needed new workers
without turning them into the hired hands of the existing owners,
thus eventually reducing and devolving the firm back into a
situation where capital employs labor? The answer has already
been foreshadowed in the discussion of the ICA. The existing
wealth of current owners presents no barriers to new members
coming in, since they don't have to buy out anyone's shares of
stock. All they have to do is make an investment in the firm,
which can be any amount that the firm has chosen as the entering
investment fee. This fee becomes capital for the firm, and it is
also the start of the new member's own ICA; the fee gets
recorded in his or her account. But what is to be done if an
interested person wants to join, and would apparently be good
for the firm (and thus accepted by the firm), but cannot afford
the starting investment fee? The firm, in this case, makes a loan
to the individual in the form of the requisite beginning balance
in their ICA, and he or she can pay it back to the firm over time
through deductions from the weekly paycheck. And what is to be
done if the firm itself wants to take on new member(s) but
cannot afford to loan them their entrance investment fee? In that
case the firm can turn to the bank. What bank? Ah, we have
gotten ahead of the rest of our story of how all this came to be.
In 1956, in the spirit of the new business form they had created
and through their genuine business and technical skills, the small
new company that was founded and designed by Father Arizmen-
di's former pupils did well. They began with 24 worker-owners,
but by 1959 there were 170, making this a fairly large company
for the district. They built several new factories and also estab-
lished their own brand name, Fagor. Each of the new plants was
set up as a separate cooperative, independent of Ulgor, the
founding company, but naturally connected to each other
through their common origin and form. These growing, success-
ful firms, which were producing technological products, would
need even more capital than they were able to generate internally
to be able to thrive in the greater Spanish economy, beyond the
local Basque areas. But where was this new capital to come
from? Most private banks in Spain at the time would hardly lend
large sums of investment capital to a worker cooperative. This
time Father Arizmendi came up with an idea that was too much
even for most of his followers and students: they should start a
bank. One of them reports their reaction: "We told him, yester-
day we were craftsmen, freemen, and engineers. Today we are
trying to learn how to be managers and executives. Tomorrow
you want us to become bankers. That is impossible."
But part of the moral of this story is that with vision, faith,
persistence, and a little bit of cleverness nothing may be impos-
sible. So in 1959 a small bank was chartered, the Caja Laboral
Popular, "the bank of the people's labor." And now we can
move ahead very fast with our story. The bank has since become
one of the biggest success stories in Mondragon. Ten years after
its founding it had 54 branches, and by 1986 the number was
171. In 1986 it had assets of over two billion dollars and an
overall staff of 1,223, making it one of the two dozen largest
banks in a now thriving Spanish economy. The large number of
staff is very pleasing to the Mondragon group, since they have
never forgotten that the main purpose of their enterprises is to
create employment, with profit serving as the means to this end.
Apart from supplying investment capital, the bank also of course
makes loans to new member-owners so that they can join the
growing firms.