The Market Socialism of the Former Yugoslavia: Labormanaged Economy

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The Market Socialism of the Former Yugoslavia
Labor-managed Economy
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Definition

• Public ownership of non-labor factors of
  production
• Decentralized decision making structure
• Decentralized information structure
• Both material and non-material rewards
• primarily material
• Coordination by markets

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A Prototype The Lange Model

• A more centralized version of market socialism
• Three decision-making levels
• central planning board (CPB)
• industrial ministries
• enterprises

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• CPB initially sets all prices arbitrarily
• thus enterprises face parametric prices just as
  perfectly competitive firms do
• Enterprises instructed to
• minimize costs
• produce output at which marginal cost equals price

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• Result will either be a shortage or surplus
• if shortage, price adjusted upward
• if surplus, price adjusted downward
• State owns non-labor factors of production
• Income (social dividend) used to
• finance investment to achieve growth goals
• achieve distributional goals

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• Control of pricing can be used to correct
  externalities
• State control of investment could be used to
  control business cycle

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• Criticisms of the Lange model
• information needs too great
• what motivates managers to follow the rules?
• what motivates managers of perfectly competitive
  firms to follow the PMC rule?
• do managers of perfectly competitive firms have
  to calculate MC in order to follow the PMC rule?

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The Cooperative Version of Market Socialism
(Participatory Economy)

• Market socialist system in which labor
  participates in decisions at the enterprise level

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• Major features
• enterprises managed by the workers
• equitable income sharing
• i.e., labor democratically decides how to
  distribute the enterprises income
• state owns non-labor factors of production
• market coordination
• Any central planning will be strictly of the
  indicative rather than of the command sort.
• freedom of occupational choice

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• Closer to a true market system than Lange version
  of market socialism
• prices set by markets, not by planners
• Still socialist because of state ownership of
  non-labor factors
• Supposed to combine the best aspects of
  capitalism and socialism, the third way

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Modeling Cooperative Market Socialism

• Economic method requires that we start with some
  objective to be maximized
• maximize per-worker (or average) dividend
• dividend is revenue minus cost, not including
  labor cost

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• why?
• Look at it from individual decision maker/worker
  perspective
• If Q is the quantity of output
• L is the quantity of labor
• K is the quantity of capital

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• Then, if labor and capital are the only two
  inputs, the production function (which shows
  relationship between output and inputs) is
• Q f(L, K)

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• In the short run, capital (K) is fixed
• Suppose that the enterprise pays the government a
  tax or rent (T) for the capital it is using
• since K is fixed in the short run, T is fixed
• So if we let Y total dividend and
• P the price of the output, then
• Y PQ - T

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• This equation says that dividend is revenue (PQ)
  minus the tax
• a more complicated (i.e., more realistic)
  production function would include more inputs
  (like fuel, intermediate products, etc.) but
  would not change the basic result we are after
  here
• Per-worker dividend (which we want to maximize)
  is just Y divided by L
• Y/L (PQ - T)/L

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• A little wizardry (i.e., calculus) shows that
  when per-worker dividend is maximized the
  following relationship holds
• VMPL (PQ - T)/L
• where VMPL is the value of marginal product of
  labor PdQ/dL

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• Thus, to maximize per-worker dividend, the
  enterprise must employ just that quantity of
  labor such that per-worker dividend is equal to
  the value of marginal product of labor
• If VMPLgtY/L, then adding an additional unit of
  labor will raise Y/L

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• VMPL is the additional revenue when a unit of
  labor is added
• if T is fixed, the additional revenue raises
  dividend by the same amount, so VMP is marginal
  dividend
• if marginal is greater than average then average
  rises
• If VMPLltY/L, then reducing L will raise Y/L

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Relationship Between VMP and Y/L

Y/L
VMPL
0
L1
Le
L2
Labor
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Comparison With Capitalist Firm

• Assuming profit (J) maximization
• J PQ - wL - T
• where w wage

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• At the profit maximizing employment of labor
• VMPL w
• Value of labors marginal product equals wage

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Arguments in Favor of Cooperative Market Socialism

• Eliminates capitalist dichotomy between
  management and labor
• Greater social justice in distribution of income
• distribution according to decision of the workers
  involve

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Criticisms of Cooperative Behavior

• Misallocation of labor. Cooperatively managed
  firms tend to hire less labor.
• efficiency requires equality of VMP in all uses
• if VMPL w and all firms face same wage, then
  all firms VMPL will be the same

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• no such mechanism to equate VMPs in market
  socialism. If VMP1 gt VMP2 then greater value can
  be produced by reallocating labor from Enterprise
  2 to Enterprise 1
• We can show that the cooperative monopolist
  restricts output (i.e., misallocates resources)
  even more than the capitalist monopoly
• Labor managed economy may underinvest in capital
  in the long run because workers will drain firms
  of extra income in the short run, especially the
  lack of property rights in firm assets reduces
  their incentive for supporting long horizon
  investment.

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Yugoslavia

• Unique economic and social structures
• worker management and market socialism
• underdeveloped by European standards
• open economy

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• very diverse cultures
• extreme and troubling regional economic
  differences
• northern republics (Slovenia and Croatia) much
  better off
• combination of cultural and economic differences
  causes troublesome labor immobility between
  regions

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History

• Post-WW II
• much of Yugoslavia destroyed by German occupation
• war hero Josef Tito emerges as leader and head of
  Communist Party
• initially follows Soviet mode

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• 1952-1965
• develops concept of worker management
• replace central planning with indicative planning
• non-binding macro goals
• rapid growth
• reduction of regional differences through
  investment in lagging regions
• integration into world economy

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• major decentralization of decision-making
  structure
• however, investment remains highly centralized
• significant forced saving especially through high
  taxes

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• 1965
• year of reform in response to high inflation and
  unemployment
• state basically gives up
• substantial decentralization and increased
  reliance on markets
• much less state control
• Enterprises get control of profits for investment
  or distribution

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• 1974
• new constitution
• creation of new institutional structures to
  enhance horizontal channels of information
• 1990-1992
• events leading to war in 1991 and final breakup
  in 1992

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Micro Organization

• Enterprises employing five or more workers must
  be organized as workers cooperatives
• Workers elect the workers council
• workers council elects a management committee

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• Workers council much like a board of directors
• focus on long range planning
• dividend sharing structure
• allocation of dividend between distribution and
  investment

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• Workers council hires a director to manage the
  enterprise
• very powerful and safe position
• Entry
• new enterprises could be formed by either private
  individuals or government
• when privately owned small firm grew to 5 workers
  had to be converted to cooperative

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• Exit
• exit was a real problem
• government would routinely bail out failing
  enterprises
• soft budget constraint

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Worker and Enterprise Organizations

• Basic Organizations of Associated Labor
• within enterprises, workers organized into BOALs
  with own workers council (much like the profit
  center)
• Work Organizations of Associated Labor
• BOALs combined to form WOALs

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• Composite Organizations of Associated Labor
• WOALs combined to form COALs
• Enterprises joined Economic Chambers
• These organizations combined workers within and
  among different enterprises

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• Purpose of these worker/enterprise organizations
  was to enhance horizontal communication
• Two outcomes of these organizations
• social compacts
• non-binding policy objectives to guide decision
  making by workers councils and government
  agencies

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• self-management agreements
• legally binding contracts
• e.g., SMAs drawn up to determine dividend
  distribution
• Slow and cumbersome
• Highly politicized
• Connection to price system uncertain

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The Public Sector

• Indicative planning
• bottom up
• informational
• Fiscal and monetary policy
• minimal
• no use of fiscal or monetary policy to stabilize
  economy

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• Role of Communist Party unclear
• party members participate in decision making at
  all levels

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Resource Allocation Capital

• Investment rate was high
• The rent that firms pay to the state was well
  below an equilibrium interest rate. As a result,
  capital was always in short supply
• Poor allocation of capital
• during 50s and 60s many new enterprises were set
  up in the lagging south where lack of skilled
  labor made these investments inefficient

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• continued investment in the latter period to prop
  up these inefficient enterprises
• profitable enterprises would invest heavily to
  ensure future capacity while less profitable
  enterprises would under-invest dividends to keep
  workers incomes from falling behind
• exacerbates differentials in the future

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Labor

• Sharp differentials by region
• cultural and other barriers prevented market from
  equalizing wages
• skilled workers in north could not be used in
  south where they were needed
• unemployed workers in south could not seek jobs
  in north

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• Differentials by enterprise
• workers incomes depend on enterprise performance
• Overall distribution of income fairly equal
  compared to most capitalist economies
• Excess supply of labor overall
• many had to leave families for extended periods
  to work in Italy, Austria, Germany etc.

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Foreign Trade

• Open economy
• very susceptible to world market conditions
• Trade balance worsened over time
• exports declined while imports rose

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• exports fell because of
• protectionist policies in Western Europe
• high inflation
• opportunities to develop comparative advantage in
  labor intensive industries wasted
• poor quality
• world recession of late 70s/early 80s

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• Became increasingly reliant on Soviet Union and
  Eastern Europe because West would not buy its
  products
• Communities of Interest for Foreign Economic
  Relations
• international trade decisions by CIFERs
• composed of BOALs with common interests

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Agriculture

• Mostly private, peasant farms
• Low investment in agriculture
• highly non-mechanized
• low productivity
• Agricultural share declined over time

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Performance

• Good growth performance prior to 80s
• structural change rapid as country industrialized
• Relatively equal distribution of income
• major differences regional

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• Poor macroeconomic stability
• high inflation
• high unemployment

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Despite the promise of labor management,
Yugoslavias overall performance must be regarded
as disappointing. It was the personal authority
of Tito and the presence of supranational
ideology, communism, that managed to keep the
Yugoslav state in one piece. After Titos death
and the widespread disruptions in communist
states around world, the breakup is inevitable.