Labour-managed Firms in Conditions of Imperfect Competition

Labour-Managed Firms in Conditions of Imperfect Competition: A CommentAuthor(s): Alfred Steinherr and Jaroslav VanekReviewed work(s):Source: The Economic Journal, Vol. 86, No. 342 (Jun., 1976), pp. 339-341Published by: Blackwell Publishing for the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2230755 .Accessed: 06/02/2012 18:43

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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.

Article Contentsp. 339p. 340p. 341

Issue Table of ContentsThe Economic Journal, Vol. 86, No. 342 (Jun., 1976), pp. 209-457+i-xivFront MatterEconomic Methodology in the Face of Uncertainty: The Modelling Methods of Keynes and the Post-Keynesians [pp. 209 - 225]Price Restraint, Anti-Inflation Policy and Public and Private Industry in the United Kingdom 1949-1973 [pp. 226 - 242]On the Interpretation and Disaggregation of Gini Coefficients [pp. 243 - 255]The Peak Load Problem with Feasible Storage [pp. 256 - 277]Optimal Forecasting in Models with Uncertainty when the Outcome is Influenced by the Forecast [pp. 278 - 295]The Impact of Earnings Announcements on the Share Price Behaviour of Similar Type Firms [pp. 296 - 306]Diffusion, Convergence and Kaldor's Laws [pp. 307 - 314]Notes and MemorandaThe Determinants of United Kingdom Import Prices--A Note [pp. 315 - 320]The Inheritances of Top Wealth Leavers: Some Further Evidence [pp. 321 - 326]Money Wage Inflexibility and the Keynesian Labour Supply Function [pp. 327 - 332]Union Expectations in Johnston's Model of Wage Determination Under Bilateral Monopoly [pp. 333 - 334]Redundancy, Unemployment and Manpower Policy: A Comment [pp. 335 - 338]Labour-Managed Firms in Conditions of Imperfect Competition: A Comment [pp. 339 - 341]Is There an "Historical Transformation Problem"? A Comment [pp. 342 - 347]The "Historical Transformation Problem": A Reply [pp. 348 - 352]The Welfare Foundations of Cost-Benefit Analysis--A Comment [pp. 353 - 358]The Welfare Foundations of Cost-Benefit Analysis--A Reply [pp. 359 - 361]"Cost Inflation and the State of Economic Theory": A Further Comment [pp. 362 - 363]A Reply to Professor Weintraub [pp. 364 - 365]

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New Books [pp. 419 - 457]Back Matter [pp. i - xiv]