What can we say about efficiency in a labor-managed socialist market economy? Beginning in the late 1950's, a number of economists explored that question. As in the neoclassical theory of capitalism, they began from the assumption that the enterprise would maximize something. If it is managed in the interest of the employees, the enterprise would not maximize profits, but it might maximize income per employee. That is the assumption with which we begin. Next, we make the usual assumptions of "perfect competition:" all inputs and outputs are homogenous, including labor, and prices of all goods and services are determined by supply and demand. Wages are not determined by supply and demand, however -- the enterprise' wage is simply its average sales revenue per worker.
Figure 5
We can visualize the difference between an ideal labor-managed enterprise and an ideal market capitalist enterprise in Figure 5. The downward sloping line VMP is the value of the marginal product curve -- the price of output times the marginal product of labor. The curve AR is the average sales revenue per employee, excluding the costs of inputs other than labor -- the price of output times the average productivity of labor, net of the fixed costs of production. The line OC is the opportunity cost of labor -- the market value of the marginal product of labor in other industries. Thus, in an ideal market capitalist system, OC is the wage, and the enterprise would employ N2 units of labor. By contrast, the labor-managed enterprise will employ only N1, since income per employee is largest with N1. This is inefficient. There has been a good deal of controversy about this analysis, but what it seems fair to say is this: in at least some circumstances, a labor-managed enterprise would have a motivation to restrict its hiring to a work force smaller than the efficient size.
This applies only in the short run. We know that this result would not be stable in the long run, in an ideal market capitalism, since the enterprise is making an economic profit. That is, there is revenue in excess of the labor cost and also in excess of the nonhuman costs (because of the way the curve AR was constructed). Therefore, with free entry, more companies will enter this industry and compete for some of those profits. So the price will drop, and the AR will shift downward until we have the situation shown in Figure 6:
Figure 6
What we see in Figure 6 is that, in a long-run equilibrium, the capitalist firm and the labor-managed enterprise employ the same labor force, N1. Since we know this is efficient, we see that the labor-managed enterprise, like the market capitalist enterprise, is efficient in long-run equilibrium.
Problems of Labor-Management Copyright