WORKER MANAGEMENT AND THE

MODERN INDUSTRIAL ENTERPRISE *

A. B. ATKINSON
I. The behnvior of the labor-managed cnterj)ri.se, 377,-11. The capitalist
twin, 381. III. The separation of ownership and control, 385. IV. Selffinancing and investment incentives, 390. V. Conelusions, 391.

Despite the long histor>' of interest in the idea of worker-managed enterprises or producer cooperatives, it is not a subject that
has attracted a great deal of attention from economists. With a few
notable exceptions, there has been little analysis of the behavior of
a worker-managed firm and how this might differ from that of a
corresponding capitalist firm. Yet such analysis is clearly essential
for any assessment of the performance of alternative economic systems and of the impact that increased worker participation would
have on the economy. Among the small number of papers written
on this subject, reference should be made particularly to the pioneering work of Ward and more recently to that of Domar and Vanek.^
However, while the analysis of these authors is of great interest, the
models on which it is based exclude a number of important factors
that are relevant to a modern industrial enterprise. The models considered relate much more happily to the case of an agricultural cooperative than to that of a large industrial enterprise, and indeed
Domar's paper was explicitly concerned w^ith the Soviet collective
farm. Many of the interesting questions about labor management
arise much more sharply, however, in the context of the large industrial enterprise. It is often argued that worker control may work
satisfactorily in small-scale agricultural cooperatives, but would
have quite undesirable effects in a large-scale industrial concern
such as General Motors. How, for example, would the existence of
substantial economies of scale affect the behavior of the labormanaged enterprise? Would it be able to plow back funds in order
* I am grateful to G. M. Heal, M. A. King, J. E. Meade, and D. M. G.
Newbery for their criticism of an earlier version of this paper. It has also
benefited from comments made at seminars at the universities of Essex, Manchester, and Warwick.
1. B. Ward, "The Firm in Illyria: Market Syndicalism," American Economic Review, XLVIII (Sept. 1958), 566-89; B. Ward, The Socialist Economy
(New York: Random House, 1968); E, Domar, "The Soviet Collective Farm
aa a Producer Cooperative," American Economic Review, LVI (Sept. 1966),
734-57; J. Vanek, The General Theory of Labor-Managed Market Economies
(Ithaca, N.Y.: Cornell University Press, 1970).

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to maintain the growth of the enterprise, or would the rate of investment be lower than in a capitalist firm? How would it be affected by the separation of ownership and control in a large enterprise?
The aim of this paper is to examine the microeconomic implications of labor management in the context of a model more appropriate to the modern industrial corporation. In particular, it attempts to do the following:
1. Provide an explicit treatment of the growth of the enterprise
and of decisions about the rate of investment. The models considered
by earlier writers are essentially static in nature and do not allow
one to consider whether a labor-managed enterprise is likely to grow
more slowly than its capitalist counterpart.^
2. Examine the way in which economies of scale affect the behavior of the labor-managed enterprise. There is strong evidence
that these are an important characteristic of a number of major industries, and they are one important feature distinguishing the industrial cooperative from the collective farm.
3. Allow^ for the finance of capital formation by workers plowing back income. In the models of Ward and Domar, capital is assumed to be supplied from outside, and they therefore preclude discussion of the question of insuring adequate self-finance, which has
arisen frequently in the Yugoslav debates.^
4. Allow for the separation of ownership and control in the
typical capitalist corporation. In comparing the performance of
labor-managed and capitalist enterprises, it has been assumed that
the latter maximizes profits in a traditional manner. As has been
stressed in the recent theories of the firm, however, there may be an
important element of managerial discretion, which affects the performance of the capitalist corporation and should be taken into account in the comparison.
5. Allow, correspondingly, for the separation of ownership and
control in the labor-managed enterprise. In any large-scale enterprise the direction of policy would be in the hands of managers, and
while accountable to the workers, they would (like their capitalist
counterparts) enjoy a certain degree of discretion. We therefore
2. After this paper was essentially completed, an article appeared by E. G.
Fnrnbotn, "Toward a Dynamic Model of the Yugoslav Firm," Canadian
Journal of Economies, IV (May 1971), 182-97, discussing the dynamic behavior
of the Yugoslav firm; the approach, however, is quite different from that
adopted here.
3. See D. D. Milenkovitch, Plan and Market in Yugoslav Economic
Thought (New Haven: Yale University Press, 1971), pp. 214-16.

THE WORKER-MANAGED ENTERPRISE

377

bave to examine whether the behavior of a managerial labor-owned

firm would be very different from that of a managerial shareholderowned firm.
The plan of the paper is as follows. Section I sets out the basic
model and examines the behavior of the labor-managed enterprise
with regard to pricing and investment (its rate of growth). Section
II compares its behavior with that of a corresponding capitalist
firm of the "Fisherian" profit-maximizing type. Section III considers the issues raised by the separation of ownership and control in
both capitalist and labor-owned enterprises. Section IV discusses
the question of self-finance.

T, T H E BEHAVIOR OF THE LABOR-MANAGED ENTERPRISE

A. The Basic Model

The basic assumptions of the model, which are common to both
labor-managed and capitalist regimes, are the following: *
1. There is no substitutability in production between capital
and labor.^
2. There is labor-augmenting technical progress at rate y:
(1)
Lt^aKte-y',
where Lt denotes labor employed and Kt denotes the capital stock
at time t.
3. There are economies of scale, and output Yt is given by
(2)
Yt^b Kt'^
^>1.
4. The firm faces a downward-sloping market demand curve
for its output. This demand curve shifts outward over time at a
rate Go; however, by expenditure on sales promotion the firm can
expand its sales (for any given price) at a faster rate G. The net
revenue will depend on the price chosen and on the rate of growth
(since selling costs have to be subtracted).
5. It is assumed that the firm makes a once-for-all decision
about its price (which remains constant over time) and about its
rate of growth (which is a constant proportional rate). The firm is
therefore in "steady state growth." "^
4. The model owes a great deal to the paper by R. M. Solow, "Some Implications of Alternative Criteria for the Finn," in R. Marriw and A. Wood,
eds., T'he Corporate Economy (London; Macmillan, 1971), although it differs
in the introduction of in(;rea.sing return.s to scale.
5. This a.ssumption rules o\it any discussion of alternative choices of
technique under different regimes, but this has already been adequately
treated by Ward and others.
6. This characterization is chosen for its convenience. The analysis could

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T(G)

-*- G
FIGURE I

6. Since output grows at a rate G, the capital stock grows at a

(3)
7. The net revenue of the firm can be represented as a function
of the initial output YQ (or equivalently Ko] and the rate of growth
G:
in which the function F represents the gross revenue and the function T{G)=l~s{G),
where s{G) are the selling (or expansion)
costs as a proportion of sales revenue. The assumed shape of T{G)
is shown in Figure I.^
8. It is assumed that the gross revenue per unit of capital at
time zero {F{Ko)/Ko) has the shape shown in Figure II, For this
to be true, we require that the elasticity of demand be a declining
function of Ko, falling from above

to below this value. This

does not appear unreasonable: for example, with 1/^ = 0.6 (the 0.6
law), we would require e to be above 2.5 for small Ko and below it
for large Ko.
B. The Labor-Managed {LM) Firm
The basic assumption underlying the work of Ward, Domar,
and Vanek is that the labor-managed enterprise aims to maximize
be generalized to the case of firms choosing an output policy Y(t), but concentration on steady state behavior does not seem unreasonable at this stage.
7. In particular it is assumed that T(G) = l, T(Gm.i)-0 and that
{ T'lT) is an increasing function that takes the value zero at Go and tends
to infinity as G-*Gn,^j..

THE WORKER-MANAGED ENTERPRISE

379

K,

the income per worker (the rate of dividend), an assumption described by Vanek as "the natural and rational concern of all participants in an enterprise." While it clearly does not capture all
aspects of the motivation of the cooperative firm, it does not seem an
unreasonable "stylization" on which to base the analysis. However,
we have to consider the modifications of this objective required by
the introduction of dynamic considerations. In contrast to the
earlier, essentially static models, we have to make some assumption
about the way in which the time stream of dividends would be
valued by the workers. The assumption made here is that the firm
aims to maximize the present value of dividends at a discount rate
5. There are good reasons for expecting this discount rate to be high,
and these are discussed further in Section II.
In the first part of the paper it is assumed that all capital is
financed by borrowing at an interest rate ;. There are no intermediate inputs or hired workers. The net income of the LM firm is
therefore given by (for simplicity, depreciation is ignored)
Ro e'^^-jpkKt,
where pk denotes the price of capital goods (assumed constant). The
dividend rate is equal for all workers, giving per worker ^
8. For discussion of "egalitarian" and "inegalitarian" LMfirms,see J. E.

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(5)

QUARTERLY JOURNAL OF ECONOMICS

dt = -

aAo
a
The present value of dividends over an infinite horizon is given by
(6)

Do - 7r .
aK,y I

/
I

. xs
1 \\

( it is assumed that ^ ^ 8 y> I 1

-^
a$
)G,nas )

The LM firm will choose its scale of operations (Kf,) and its
growth rate [G) to maximize Do. Let us consider first the scale of
operation, which is the aspect discussed by Ward and others. The
maximization of Do simply requires that gross revenue per unit of
capital be maximized, i.e., the choice of K*o in Figure II. In the
determination of the scale of the LM firm, there is no difference
therefore from earlier results.^ The determination of the growth
rate is less straightforward. Differentiating with respect to G, we
get the first-order condition,^

which may be written (where a = 9/{l l/f>.)),

T{G) /
a-G'
The LM firm equates the marginal cost of an extra 1 percent of
growth (in terms of revenue foregone) to the present value of the
gain arising from the economies of scale. If there were no economies
of scale (/i.= l ) , the LM firm would choose Go; it is only the economies of scale that make it at all interested in growth. It is interesting to see that the rate of growth chosen is independent of the rate
of interest charged on capital (j). It is also independent of the
choice of KQ. The growth rate chosen, however, is a decreasing function of 9. The higher 6, which may be seen as an "effective" discount
rate, the lower the growth rate (as would be expected) ; and in the
extreme case, where the workers were concemed only with the current
dividend do, the growth rate chosen would be GQ.^
Meade, "The Theory of Labour-Managed Firms and of Profit Sharing," Economic Joumal, LXXXII (March 1972). 402-28.
9. At the point K*o, the elasticity of demand^

M-1

, which is the result

obtained by Vanek, op. eit., p. 102.

1. It is assumed that the shape of the functions is such that the secondorder conditions are satisfied.
2. For the enterprise to continue operation, it is clearly necessary for

THE WORKER-MANAGED ENTERPRISE

381

II. THE CAPITALIST TWIN

In the work of Ward, Domar, and Vanek, the behavior of the

LM firm is compared with that of a capitalist counterpart. This
"capitalist twin" is defined by Domar as having "the same production function and prices as the coop, and with a wage rate initially
equal to the coop's dividend rate." The aim of such a comparison
(which is not made very explicit by these authors) is to separate
the differences due to the form of organization from those attributable to changes in the distribution of income. The introduction of
labor management can in this way be decomposed into two parts:
a change in organization with no change in the reward to labor,
and a shift in the distribution of income within a given organizational framework. It is with the former that we are concerned here.
In this section the behavior of the LM enterprise is compared
with that of a corresponding capitalist firm facing the same market
conditions, which aims to maximize the present value of profits. We
first set out the basic model and then specify the precise basis for
comparison.^
A. The Capitalist Profit-Maximizing {CPM) Firm
The capitalist firm has the same net revenue function, but has
to pay a wage itv to its employees. It finances its capital formation
out of retained earnings.^ The dividends paid to the shareholders
at time t are equal to the net revenue minus wages minus retained
earnings:
'
K
The wage rate is assumed to rise at a rate y : Wt^Woe'''. The stock
market value of the firm is assumed to be equal to the present value
at the market rate of interest i of the dividend payments to shareholders;
lG

ilG/ix)

-^

where it is assumed that i > Gmax (and hence > Gmas/;^)

it to "break even." It may be noted that Do"'">O does not imply that the
current dividend is positive, since in maximizing Do. the enterprise balances
current against future dividends. It seems reasonable to suppose, however, that
the current dividend must be nonnegative, so that the growth rate cannot be increased beyond the point where
R,{K,*, G)=j p*Xo*.
3. The model corresponds to that of Fisher, Inc., in Solow, op. cit.
4. In the model considered here, issuing loan capital at the market rate
of interest makes no difference to the firm's behavior, and it can be shown
that new issues cannot increase the finance available.

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The CPM firm is assumed to maximize tbe difference between

its stock market value and the value of the capital employed:
{10}
Zo-Fo-PfcXo

The scale of the firm is determined simply by

From this we can see that if market conditions are such that the
CPM firm can achieve a strictly positive value of Zo, its scale is
larger, and therefore its price lower, than with the LM firm (see
Figure II). This result corresponds to that of Vanek.^'
In choosing its rate of growth, the CPM firm sets ^
Ro
Koii-G)
( _
(12)

Where Zo>0, the growth rate is greater than Go even if tbere are
no economies of scale, so that we can see at once one significant
difference between the two types of firm. By combining (11) and
(12), the first-order condition for G is
i-T'jG))
1 J
/ Ko ZRQ \
1
TiG)
i-G
1
1-iA
i-G
i
where e is the elasticity of demand (which has been assumed to be
a declining function of Ko).
B. Does the Capitalist Firm Grow Faster?
In the present context the basis for comparison between the
LM and capitalist firms is less straightforward than in the static
models considered by Ward and Domar. The dynamic model considered here introduces two new elements: "^ (1) the comparison of
a time path of payments to labor rather than just the current re5. Op. cit.. Ch. 6.
6. Again it is assumed that the second-order conditions are satisfied.
7. A further important factor not discussed here is uncertainty and the
relative riskiness of different types of income.

THE WORKER-MANAGED ENTERPRISE

383

muneration; and (2) the specification of the rates of time discount

applied by shareholders and workers. The assumptions made here
are that the present value of wages paid by the capitalist firm is
equal to the present value of dividends: iDo = Wo/{^ y)), and that
the rate of discount used by the CPM firm is equal to the rate of
interest paid by the LM firm ii-j).
From (6) we may see that
these assumptions imply that ^
(14)

In the case of the discount rate applied by the workers (S), it might
be felt that this should equal {; on the other hand, it has been argued
that the absence of any property rights in the firm may lead 8 to
be greater than i. Since the return to investment accrues to those
employed in the firm and not necessarily to those who made the investment at an earlier date, it may be expected that workers will be
reluctant to save in tbis form if other savings media are available.
As Furubotn and Pejovich have pointed out, with a horizon of ten
years, a retum of 13 percent is required on nonowned assets in
order for the worker to receive the equivalent of 5 percent on owned
assets; and that for a horizon of twenty years, the equivalent rate
is 8 percent."* This suggests that there are good grounds for expecting that S>{. However, we saw in Section I that the "effective"
discount rate is not S but O=B y (y being the rate of technical progress). It may therefore be possible that the effective discount rate
applied by the LM firm when we allow for technical progress ia less
than i. In what follows, the dependence of the comparison on
a{6/{1 1/fi))

is examined.

In comparing the growth rates of the LM and CPM firms, let us

start wath the value of a applicable to the former. This determines
from (8) the rate of growth of the firm and hence from (14) the
value of H, since KLif.=Ko*. It may be noted that GLM and H are
declining functions of a. The value of H in turn influences GCPM,
through its effect on Kcpn and hence in (13). It may be shown
that GCPM is a declining function of H and hence an increasing function of a, SO that we have a situation such as that shown in the upper
part of Figure III.^ There is therefore a value a such that for a<a
8. No attempt is made here to allow for any possible effects of the introduction of labor management on the efficiency of labor. For a discussion of this
subject see Vanek, op. cit., Ch. 12.
9. "Property Rights and the Behavior of the Firm in a Socialist State:
The Example of Yugoslavia," Zeitschrijt jur Nalionalokonomie, III (1970),
431-54.
1. From the second-order conditions for the CPM firm "dKo/dH and

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-a

FIGURE III

the first-order conditions indicate a faster rate of growth for the

LM firm, and for a>a' the CPM firm grows faster. Moreover, a
can be seen to lie between i and i/(l l//i,) from an inspection of
the right-hand sides of equations (8) and (13). It should also be
noted that ZQ is an increasing function of a (as shown in the lower
part of Figure III), so that Zo is negative for lower values of a, and
at these values the capitalist finn would not produce. In particular,
at a, ZQ has the sign of

The first term is less than or equal to unity (from the definition of
KQ*). From the definition of aiGLj^^Gcr^) the right-band sides of
(8) and (13) have to be equal, i.e.,
1 _ 1
(1-lA)
a-G' ~ i-G'
i-G'/p. '
/
cannot, both be positive; and using the assumption about e, we can
deduce from (13) that they have the same sign.

THE WORKER-MANAGED ENTERPRISE

385

which can be rearranged to give

i-G'
i-G'/1.
Now Zo>O implies \/t-\-\/\x.>\, which in turn implies from (16)
that the second term in (15) is greater tlian unity, and hence that
2o<O, which is a contradiction. It follows that the CPM firm cannot achieve a positive value for Zo at a . Finally, it may be noted
that if the CPM firm were to choose the same scale and growth rate
as the LM firm, ZQ would have the sign of
'^Gi,^

G/
G
which is positive for a(l l//i) >iG^iif. It follows that Zo is
strictly positive for ail l/fi)=i, since the CPM firm can do at
least as well adopting its optimal policy.
The results obtained may be summarized as follows: ^ (a) if the
workers' effective discount rate is greater than or equal to that of
the shareholders, then the capitalist firm grows faster. This corresponds to the case where the rate of technical progress is less than or
equal to the premium required for workers to invest in nonowned
assets (y^S I, whieh implies a(l l / ^ ) ^ i ) ; (b) if the workers'
effective discount rate is less than i, then either the capitalist firm
grows faster, or the capitalist firm cannot break even.
III. THE SEPARATION OK OWNERSHIP AND CONTROL

The capitalist firm considered in Section II was of the traditional Fisherian type the firm was assumed to act entirely in the
interests of the shareholders. The more recent theories of the firm,
however, have emphasized the separation of ownership and control
and the possibility of the managers of modern corporations pursuing independent goals sueh as the maximization of the rate of growth.
If we are concerned with the effects of introducing worker control,
we should therefore compare the LM firm not only with the CPM
firm but also with the managerially controlled firm, which may be
more typical of modern advanced economies.
2. The partial nature of the comparison should be emphasized: we are,
for example, comparing tinn.s facing the same prices for investment good.s. No
attempt is made here at a general equilibrium treatment, and the comparison
is perhaps best seen in terms of a single firm becoming labor managed in
a capitalist economy.

386

THE WORKER-MANAGED ENTERPRISE

A. The Majiagerial Capitalist {MC) Firm

The model of the managerial firm discussed here is based on the
work of Marris as developed by Solow. According to this model,
managers aim to maximize the rate of growth subject to a takeover constraint.^ This constraint is usually formulated in terms of
the valuation ratio,
(17)
Vo^mp.Ko,
where m is a constant ( m ^ l ) . In other words, if the stock market
value of the firm falls below a certain proportion of the value of its
assets, it is subject to the risk of a take-over bid.* This constraint
will, in fact, hold with equality, and can be written as Zo =
- (1-m) pk Ko or
(18)

- - - = [i-Gj
Ao

mpfc+
"-

:--lli/ix

.
-"

For any Ko we can find the largest G that satisfies (18), as illustrated in Figure IV. From this it is clear that the managerial firm
chooses Ko to maximize R,)/Kn, i.e., the same scale of output as the
LMfirm.*^The output is different from that of the CPM firm unless
in that case Zo = 0.
That the scale of output is the same for both the MC firm and
LM firm is explained first by the fact that both types of firm have a
ratio maximand. In effect the MC firm maximizes the average rate
of profit, since it is the average rate that would interest a potential
take-over bidder he cannot (in general) bid for part of the firm's
activities. In this respect, therefore, the MC firm resembles the LM
rather than the CPM firm it could be seen as a "capitalist cooperative." Secondly, the assumption of fixed coefficients means
that maximizing income per worker is effectively the same as maximizing profit per unit of capital as far as the scale of operation is
concerned.
In order to eompare the growth rates of the LM and MC firms,
let us assume as before that the present value of the payments per
3. R. L. Marri.s. The Economic Theory oj 'Managerial' Capitalism (London: Macmillan, 1964).
4. The form of the valuation ratio constraint depends on the assumptions
made about the extent to which a take-over bidder could exploit the existence
of economies of scale. The assumption made here is that the bidder would
assess the potential profits on the basis of running the firm as a separate unit.
5. The solution obtained here is different from that of Solow, since the
combination of increasing returns to scale and the assumptions about the price
elasticity of demand insure that Ro/Ko has a maximum.
6. It should be noted that these conclusions depend on the assumption
that managers are interested in growth and not in size. If the managerial utility
function included both g and Ko as arguments, then the scale of operation
could clearly be greater than Ko*.

THE WORKER-MANAGED ENTERPRISE

387

R.H.S. of equation (18)

FIGURE IV

worker are equal and that i = i. Let us consider first the case where
m = l. If we denote by ZQ* the value for a CPM firm with K = KQ*,
then it is clear that for H such that Zo*>0, the growth rate for the
managerial finn is greater than that of the CPM firm. Hence, we
may deduce from the results of the previous section that GMC>GLM
where H is such that the capitalist firm can break even (see
Figure III). However, if m < l , then it is possible for low values of
a that Gi_M may exceed GMC but that the MC firm continues operation (with Zo<O).
B. The Managerial Labor-Owned {MLO) Firm
In the model of the labor-managed firm presented to date, it has
been assumed that the firm pursues, singlemindedly, the goal of
maximizing income per worker. In practice, however, the direct
control of any large-scale enterprise will be in the hands of elected
(or appointed) managers. These managers will be accountable to
the workers, but like their counterparts in the modern corporation,
they may have some latitude to pursue their own goals. Although
the workers, like the shareholders in a capitalist finn, will be able to
prevent gross disregard of their interests through the threat of not
replacing the managers at the next election, there is likely to be a
certain element of managerial discretion.'^
In order to formalize this aspect of the labor-managed firm, we
need to specify the objectives of the managers and the constraints
7. See, for example, B. Ward, "The Nationalized Firm in Yugoslavia,"
Amencan Economic Review, LV (May 1965), 646-52.

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QUARTERLY JOURNAL OF ECONOMICS

imposed on them. In the latter case, it seems reasonable to suppose

that the workers are concerned with the level of the dividend and
that there is a minimum dividend below which the workers dismiss
the managers (or leave the enterprise). The situation in Yugoslavia
has been described by Pejovich as follows:
The institution of the Workers' Council is reminiscent of the role played
by stockholders in a free-market economy. . . . The workers, thougli they do
not know much about the art of management, know surprisingly well how
to compare their earnings with the earnings of other workers. . . . If they
find their earnings lower than those of other workers, the director . . . may
find himself fired.^

This constraint could relate to current dividends or to the present

discounted value, but from the description given by Pejovich, the
former seems the more plausible assumption.^ The objectives of the
managers are clearly very difficult to specify, but there are some
reasons for expecting that they will he interested, like their eapitalist counterparts, in the rate of growth of the enterprise. It seems
likely that remuneration would be related to the size of the firms,
hence providing the same incentive for growth as in the capitalist
corporation. As Marris has remarked, "the world over. Presidents
are paid more than Vice-Presidents, Commissars more than DeputyCommissars, . . . , and middle managers more than junior managers." It may also be reasonable to suppose that growth is an
important political objective and that managers would be more responsive to political pressures than workers as a whole. According
to Furubotn and Pejovich,^ "since [the director] represents the central government, he is particularly aware of national purposes and
priorities; at the same time, he knows his long-term career is likely
to be influenced by the degree to which his guidance of the firm
contributes to the realization of national goals. On this logic, the
maintenance of relatively high investment rates by the firm may
seem essential to the director." In what follows it is assumed that
the managers of a LM enterprise aim to maximize the rate of growth,
an assumption similar to that adopted by Furubotn and Pejovich.
On these assumptions, the aim of the managerial labor-owned
firm can be seen as maximizing G subject to
8. S. Pejovich, The Market-Planned Economy of Yugoslavia (Minneapolis: University of Minnesota Press, 1966), p. 91.
9. The constraint could also be seen as a supply function for labor in the
way described by Domar: a single LM firm in a capitalist economy could not
pay a dividend less than the going wage rate unless the workers are willing
to accept less for idealistic or other reasons.
1. Furubotn and Pejovich, op. cit., p. 439.

THE WORKER-MANAGED ENTERPRISE

(19)

389

ado = --^i Pk'^a d'.

As before, the firm chooses Ko such that Ro/Ko is maximized. The

growth rate, however, is increased to the point where (19) holds with
equality, and if d' is less than the current dividend paid by the LM
firm, the MLO firm grows faster. To this extent, allowance for
managerial discretion tends to narrow the gap between capitalist
and cooperative enterprises.
With the objectives assumed here, the separation of ownership
and control leads to a rise in the growth rate in both labor-managed
and capitalist firms. Whether the MLO enterprise grows faster than
the managerial capitalist firm depends on the degree of managerial
discretion. If the MC firm pays a current wage Wo, and m 1, then
a necessary (but not sufficient) condition for GMr.o>Oifc is that

'! ~ ,^

_a^ ( ^ _ ^ 1 j ( 1

)-l.

If C denotes the ratio of capital to labor costs in the MC firm

(
1, this may be written
^ au'o'
(20)
< 1 - The right-hand side of (20) is evaluated for different values of Go,
l/fi, and C in Table I. From this it is elear that where there are
substantial economies of scale, for the MLO firm to grow faster, it is
necessary that there be a considerable degree of managerial discretion; for example, where l//x = 0.6 and Go^4 percent, the MLO firm
would only grow as fast if the dividend requirement were less than
three quarters of the wage paid by the MC firm.
TABLE I
Rate of Growth Go
l//. = 0.9

1
0.5
0.25

2%

4%

6%

0.95
0.96
0.97

0.87
0.91
0.92

0.74
0.80
0.84

0.82
0.86
0-89

0.58
0.68
0.74

0.25
0.44
0.53

l//. = 0.6

c
Note: i = lQ%

1
0.5
0.25

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IV. SELF-FINANCING AND INVESTMENT INCENTIVES

Throughout the foregoing analysis we have retained the assumption made in the work of Ward and Domar that all capital employed by the enterprise was supplied from outside. In reality, however, the enterprise is likely to have to rely in part on self-finance
and a proportion of the funds for investment will have to come
from the reinvestment of profits. The institutional background to
the plow-back decision in Yugoslavia has been described by Milenkovitch as follows: There arc
two possibilities, one based loosely on Yugoslav experience to date, and the
other drawing from Yugoslavia as it is scheduled to be after 1970. In the former
version, the chief source of new investment funds is the tax on socially owned
capital, which may be regarded as the interest paid to society for the use
thereof. The proceeds of this tax are allocated, through the banking system,
to the enterprises seeking investment loans. The latter variant has no capital
tax and the principal source of investment funds is enterprise profits.^

In order to examine the consequences of these two systems, let

us assume that a fraction A of total eapital is financed by borrowing
and (1 A) by retained earnings. In this situation the present value
of dividends becomes
Ro
1
P'^
^' ^0 i0-Gil-l/,))
a
The scale of operations is unaffected. Thefirst-ordercondition for
determining the growth rate for the LM firm discussed in Sections I
and II becomes
(21)

( -^^A

igp

p,Ko(l~\)U~G)

Insofar as capital has to be financed internally, this reduces the

right-hand side and hence the growth rate chosen; investment is
lower in the second of the situations described by Milenkovitch than
in the first. Moreover, this is independent of the terms on which
loan finance is made available a reduction in A decreases the
growth rate whatever the interest rate ; (assuming that the enterprise can continue to break even). However, the eonclusions reached
for the managerial MLO enterprise are rather different. As set out
in Section III, the firm chooses the highest G consistent with

In this case, the terms on which loan finance is made available are
2. Milenkovitch, op. cit. p. 222.

THE WORKER-MANAGED ENTERPRISE

391

important: a reduction in A only decreases the growth rate where

j<G/fi.. In fact, it seems rather unlikely that this will be satisfied:
for example, with G ^ 8 percent, l/|U^0.6, it would require j less than
4.8 percent. It is quite possible therefore that a rise in A would have
the reverse effect on the MLO enterprise from that on the LM firm.
If the rate of growth chosen by the enterprise is thought too
low by the government, there are a number of policy instruments
at its disposal that could be employed to stimulate investment. The
most obvious of these is the rate of interest (;), and at first sight it
appears that this would be an important control. However, we have
seen that changes in ; do not directly affect the scale or growth rate
of the LM enterprise discussed here. An increase in j is effectively
a lump sum tax on the operation of the enterprise and only has an
effect if Do falls below the reserve price of labor or if the current
dividend falls to zero. In the case of the managerial MLO enterprise, however, an increase in j does reduce the current dividend and
hence force the firm to reduce G in order to satisfy the constraint.
The effectiveness of variation in j must rest therefore on there being
an element of managerial discretion. A second policy instrument is
the proportion of investment that is financed from outside the
enterprise (A). We have seen that an inerease in A raises the rate of
growth of the LM enterprise. However, in the case of the MLO
enterprise, an inerease in A would only raise the rate of growth where
i<G/fi.; and if, as seems likely, jyG/fi, then it would have the
reverse effect. The fact that LM and MLO enterprises might respond
in opposite directions to changes in A suggests that it is not a particularly suitable control instrument. More effective than variations
in ; and A in stimulating investment is a reduction in the price of
investment goods (through, for example, investment grants). A reduction in Pk increases the growth of the LM firm, providing A < 1
and does not affect its scale of operation. In the case of the MLO
firm, a reduction in p^ increases the growth rate whatever the value
of A.
V. CONCLUSIONS

The principal aim of this paper has been to examine the pricing
and investment behavior of the labor-managed firm in conditions,
which, while highly stylized, seem more relevant to modern largescale industry than those made by earlier writers. In particular,
it has allowed for economies of scale, decisions about the growth of
the firm, and the separation of ownership and control, and has shown

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that each of these factors is important. The main conclusions may

be summarized as follows:
L The rate of growth of the labor-managed enterprise depends
on the extent of economies of scale and on the workers' discount rate.
If there were no economies of scale, the enterprise would not be
interested in growth. The growth rate is independent of the rate of
interest.
2. If the premium over tiie return on owned assets required by
the workers to invest in the enterprise exceeds the rate of technical
progress, the labor-managed enterprise chooses a lower growth rate
than its capitalist counterpart. If the premium is less than the rate
of technical progress, then either GcpM>Gt3i or the corresponding
capitalist finn cannot break even.
3. The separation of ownership and eontrol in the capitalist
firm makes a major difference to the basis for comparison. If labor
management replaced not a Fisherian capitalist but a Marris-style
manager maximizing the rate of growth, the difference in pricing
policy would disappear (given fixed coefficients of production).
4. The separation of ownership and control leads both laborowned and eapitalist firms to grow faster, but if there are significant
economies of scale, a considerable degree of discretion is required
for the managerial labor-owned firm to grow as fast as the managerial capitalist firm.
5. If the government wishes to increase investment, reductions
in the price of investment goods are likely to be more effective than
variations in the rate of interest or in the availability of external
finance.
It should be emphasized, however, that these conclusions are derived
from a highly stylized model of the behavior of a cooperative enterprise and, while the formulation is a natural development of earlier
static models, alternative approaches may lead to rather different
results. Two qualifications in particular should be stressed: the
specification of the objectives of the LM firm may well not be an
adequate representation of the goals of a cooperative enterprise; and
no account has been taken of the distributional changes that would
accompany the introduction of labor management.
UNIVERSITV' OF ESSEX