Labour-Managed Firms in Conditions of Imperfect Competition: A Comment

Author(s): Alfred Steinherr and Jaroslav Vanek

Reviewed work(s):
Source: The Economic Journal, Vol. 86, No. 342 (Jun., 1976), pp. 339-341
Published by: Blackwell Publishing for the Royal Economic Society
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The Economic Journal, 86 (June 1976), 339-341
Printed in Great Britain
LABOUR-MANAGED FIRMS IN CONDITIONS
OF IMPERFECT COMPETITION: A COMMENT1
In a recent contribution to this JOURNAL Professor Meade (I974) re-examined
and reconfirmed three results for a labour-managed firm (LM) operating under
conditions of imperfect competition previously obtained by Vanek (I970) and
Ward (I958): (i) an elasticity-preserving increase in demand will cause a
decline in the output of the LM firm; (2) the LM firm will employ less labour
with a given stock of capital and hence produce less and
(3)
a reduction in
financial charges on fixed financial debts of the firm tends to reduce the optimal
level of employment in the firm.
These results are interpreted by Meade as implying a misallocation of
resources.
However, the analytic part of Meade's paper is limited to the short run with
fixed capital and variable labour inputs.
A number of points can be made in reference to the short run. First, it is by no
means certain that a positive subsidy will bring about tlle desired increase in
output. As Vanek (I970, pp. 33 I-2) has shown, when capital is fixed a lump-sum
tax and not a subsidy is required to increase output; the reason for this result
being that in this way the fixed tax will be reduced per unit of labour. Second,
as shown by Vanek (I970, p. 332), for the one variable factor case (and as has
been demonstrated for the more general case of variable labour and capital
inputs)2 there does exist a policy combination achieving a Pareto-optimal
solution. This optimal policy consists of combining price ceilings to expand the
output of the monopolistic sector with a lump-sum tax to equalise marginal
returns to factors in both the competitive and the monopolistic sectors. Finally,
it should be noted that the suggested and, to be sure, unattractive policy of
fixing employment by an outside authority is clearly inappropriate since it would
imply a general equilibrium solution off the contract curve. If returns to scale
are increasing to such an extent that least cost production would only be as-
sured by a monopoly, then, of course, policy intervention is needed for both LM
and capitalist firms.
The result that the LM firm may react to an elasticity preserving increase
in demand by reducing its output holds only when it is assumed that
labour is the sole variable input and joint production is ruled out (see Vanek,
1970, ch. i). But more important: Is it really meaningful to derive general
conclusions from a model which assumes that all that changes under LM is
the simplified objective function to be maximised?3 Clearly, LM will affect
the goals and the internal organisation of the firm in still other, more
1
The authors thank Professor Joan Robinson for helpful comments.
2
Copies of this demonstration can be supplied to members of the Royal Economic Society on request
from Dr A. Steinherr, I2I Parkstraat, I.S.E., B-3000 Louvain, Belgium.
3
Note thAt Vanek (1970) uses this simplified objective function only in parts I-and II of his book, but
devotes part III to the discussion of a more general and realistic objective function.
E 339
]
I2-2
340 THE ECONOMIC JOURNAL [JUNE
significant ways, with repercussions on the structure of motivation, informa-
tion, etc. Two illustrations of the reservations one should have about Meade's
results are offered.
First, the Marshallian short run is likely to misrepresent the short run under
LM. Joan Robinson (I967) argued, supported by empirical evidence, that the
employment level in LM firms is practically invariant in the short run and is
certainly likely to vary a great deal less than in entrepreneurial firms. Indeed, a
reduction of the employment level would maximise the revenues of those
workers remaining in the firm, but the decision must be taken ex ante - with the
risk of laying oneself off. It is easy to show that if labour is risk-neutral lay-offs
can only occur when average income falls below income levels in alternative
employments. As a consequence the negatively sloped supply curve disappears.
Note also that the business cycle tends to be more stable with workers accepting
a lower average income instead of laying off part of the workforce.
Second, the Marshallian short run implies a strict relationship between
employment of labour and product supply. In fact, labour input can be
varied not only by changing membership in a LM firm, but also by chang-
ing the duration, quality, and intensity of effort of the existing membership.
Since LM can be expected to provide for a more flexible effort-leisure
trade-off and greater motivation structures, it is again no longer clear
whether short-run supply curves of LM firms are less elastic than those of
capitalist firms.
When turning to policy considerations, Meade brings in long-period con-
siderations such as economies of scale to an enterprise. This, of course, involves
the investment policy of LM firms, which cannot be treated in terms of the
comparative static analysis which Meade uses.
It is worthwhile, however, to remark that since LM firms attain their
efficient size at smaller levels of output, entry should be easier and market
structure more competitive in such an economy. The objection that these firms
will be producing at less than minimum-cost output levels under increasing
returns to scale (over the relevant range of production) is attenuated by the fact
that the more firms there are, the more elastic will be the demand curve facing
each one. Each firm will produce a larger output, possibly as large or even
larger than the output of a lower number of capitalist firms which face more
inelastic demand curves.
Moreover, a more complete view of the issue clearly increases the likeli-
hood that market structure under LM will be closer to its optimal form. More
often than not entrepreneurial oligopolies are at the same time oligopsonists
in factor markets; for LM oligopolies the magnitude of resulting distortions
is reduced due to their smaller scale of operation. And as can easily be shown
for a pure LM monopsony, selling at a constant price, labour will not be ex-
ploited in the sense of receiving less than its marginal product as is the case
of a capitalist oligopsony especially in the absence of countervailing union
power.
Our discussion leads us to reject Meade's conclusion regarding the non-
viability of LM firms. A full analysis of the problem suggests that imperfectly
1976] LABOUR-MANAGED FIRMS AND IMPERFECT COMPETITION 341
competitive markets may be a less significant problem under LM than under
traditional capitalism, and when they are a problem the proper control policy
can yield optimal or near optimal solutions for the LM case.
ALFRED STEINHERR
JAROSLAV VANEK
Universite Catholique de Louvain
Cornell University
Date of receipt offinal typescript: October 1975
REFERENCES
Meade, J. E. (I 974). " Labour-Managed Firms in Conditions of Imperfect Competition." ECONOMIC
JOURNAL, December.
Robinson, J. (I967). "The Soviet Collective Farm as a Producer Cooperative: Comment." American
Economic Review, March.
Vanek, J. (1970). The General Theory of Labour-Managed Market Economies. Ithaca, Cornell University
Press.
Ward, B. (1958). "The Firm in Illyria: Market Syndicalism." American Economic Review, December.