Alleged Problems in Labor-Managed Firms

This paper for the 2018 IAFEP Conference in Ljubljana will discuss two problems that have plagued the literature on the Ward-Domar-Vanek labor-managed firm (LMF) model, the perverse supply response problem and the Furubotn-Pejovich horizon problem. The paper shows how the perverse supply response can also occur—under similar assumptions about a control group being able to manipulate membership to their advantage—in a conventional corporation. There is even a discussion in the Harvard Business Review as early as 1927 about that problem. The conventional assumption that such manipulations would not be allowed in a joint stock company with a far-flung anonymous ‘membership’ but would be allowed in a LMF with its face-to-face membership only shows the desperation to find some ‘problem’ in the idea of workplace democracy.

Unlike the perverse supply response ‘problem,’ the horizon problem is a real problem and it has a real solution, namely the system of internal capital accounts. However, the LMF literature also has the alleged ‘solution’ of a membership market. Several problems, some obvious and some more subtle, in that ‘solution’ are analyzed.

Then the paper reviews how the standard bundle of conventional ownership rights is parsed into personal right and property rights in a worker cooperative with internal capital accounts. Finally the paper reviews the four independent ways that the idea of internal capital accounts was discovered and rediscovered. Throughout, the paper touches on the ideas and contributions of the late Jaroslav Vanek, to whom the paper is dedicated.

Click here to download the 2018 IAFEP Conference paper.