Members contribute equitably to, and democratically control, the capital of their co-operative. At least part of that capital is usually the common property of the co-operative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefitting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.

Co-operatives exist to meet the needs of people, not primarily to generate a speculative return on capital invested in them. The primary motive for people forming a co-operative is to be self-reliant. This 3rd Principle describes how members invest in their co-operative, raise or generate capital and allocate surpluses.

This 3rd Principle of Member Economic Participation was approved in its current form when the Co-operative Principles and Values were last reformulated at the Alliance's general assembly in Manchester, England, in 1995. It is a combination of the nature and principles underpinning member economic participation in a co-operative that were previously set out in two separate principles before the 1995 reformulation. These two separate principles were:

• "Share capital should receive only a strictly limited rate of interest, if any."
• "Surplus should be distributed in an equitable way by:
  
  • -- appropriation to reserve
  • -- provision of common services
  • -- distribution in proportion to the use members make of the services of the co-operative."

In the 1966 review of the Principles, the Alliance abandoned cash trading as a core Co-operative Principle, the 1937 review having already stated that adherence to it was not one of the three core Principles necessary for membership. The reformulation of this 3rd Principle in 1995 was, therefore, the fruit of a long period of discussion.

The 1995 general assembly of the Alliance that approved the elimination of the strict limits on remuneration of co-operative members' capital contributions also, by amendment, introduced the notion of collective ownership of capital. This amendment was tabled by the French delegation, which was keen to ensure that the concept of collective ownership, so important to workers' co-operatives, did not disappear. The idea of the collective ownership of capital by co-operatives, like a number of the Co-operative Principles, can be traced back to the "Regulations for co-operative societies unanimously adopted at the 3rd Co-operative Congress held in London in 1832 and chaired by Robert Owen". Their regulations included the following:

"In order to ensure without any possibility of failure the successful consummation of these desirable objectives, it is the unanimous decision of the delegates here assembled that the capital accumulated by such associations should be rendered indivisible, and any trading societies formed for the accumulation of profits, with a view to them merely making a dividend thereof at some future period, cannot be recognised by this Congress as identified with the co-operative world, nor admitted into this great social family which is now rapidly advancing to a state of independent and equalised community."

Professor Ian MacPherson, Dean of the Centre for Co-operative and Community Studies at the University of British Columbia at Victoria, Vancouver Island, Canada, served on the Alliance's committees and wrote the Alliance's guidance to the 1995 reformulation of the Principles. Ian, a delightful and dedicated co-operator, sadly now deceased, explained at the time:

"Similarly, the Third Principle, which deals with members' economic participation, is strongly situated within the member perspective. It is different from the two previous principles on the financial operations of the co-operative in several respects. It is called "Member Economic Participation". It emphasises the vital importance of members controlling the capital of their organisation, and indicates that they should receive limited compensation on the capital they subscribe as a condition of membership. The principle allows for a market return on capital otherwise invested by members. As for capital emanating from other sources, one would have to consider the implications of attracting such capital in light of the Autonomy Principle: the key concern must always be to preserve the capacity of the members to decide the fate of their organisation.

There was much debate over the inclusion of a reference to indivisible reserves. The 1966 formulation did not refer to this normal aspect of co-operative economic structure perhaps because the matter had become increasingly complex and practices were beginning to vary. The unfortunate result had been that many co-operators have lost sight of the importance of commonly owned capital, as a symbol of co-operative distinctiveness, as a security for its financial growth, and as a protector in times of adversity.

The problem of including a reference to indivisible reserves has been finding the best wording for a limited space. After much discussion at two meetings, the board decided … that the most appropriate wording, suggested at the European Region meeting, was to make two additions. The first was a sentence: "At least part of that capital is usually the common property of the co-operative". The second was to indicate that members, in allocating part or all of the co-operatives' surpluses, should consider setting up reserves, "part of which at least would be indivisible."

This background to the debate on the formulation of this 3rd Principle shows that the key economic concept enshrined in it is that in a co-operative capital is the servant, not the master of the enterprise. The whole structure of co-operative enterprise is designed around the concept of capital being in service of people and labour, not labour and people being in servitude to capital. The key question addressed in this 3rd Principle is: "How do we make this work?" Like everything to do with money, this 3rd Principle is the most sensitive and challenging part of the Co-operative Principles, though not necessarily the most important. Indeed, this 3rd Principle is mainly a financial translation of the definition of the identity of a co-operative and of the financial implications of the 2nd Principle of Member Democratic Control.

Given the huge scale and diversity of co-operative enterprise, this 3rd Economic Principle is, necessarily, one that has many caveats to its practical application; caveats shown by "at least" and "usually" in the wording of the Principle. These practical caveats have steadily been incorporated into this 3rd Principle in order to cover the significant range of different practices of co-operatives.

These caveats show the sensitivity and challenging nature of making capital servant not master. They provide some leeway to co-operatives to be creative and innovative in raising capital, an issue which is being considered in depth by the Alliance's Blue Ribbon Commission on Co-operative Capital.2 Co-operatives with highly intensive capital requirements, such as industrial, agricultural or financial co-operatives, may need this leeway in order to comply with regulatory requirements that do not take due account of the nature of members' capital and risk within co-operatives. The essence of this 3rd Principle is that capital should be raised in a way that is compatible with the definition of a co-operative in the Statement on the Co-operative Identity and the democratic nature of a co-operative enterprise.