The Intellectual Legacy of Jaroslav Vanek:

How the Twain Met

John P. Bonin

Department of Economics

Wesleyan University

Middletown, CT 06459

jbonin@wesleyan.edu

 I thank Derek Jones for suggesting this project to me initially, for making extremely useful
comments in correspondences as I worked on the essay and for providing very helpful
editorial suggestions on the previous draft. All remaining errors and omissions are entirely
my own responsibility.

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Abstract

This essay is a tribute to Jaroslav Vanek who spent thirty-two years at Cornell University

where he founded the Program on Participation and Labor-Managed Systems in 1970, which

became the home for economic research on these issues in the United States. As such, it is a

brief intellectual history of a multidimensional scholar. Vanek’s seminal work in the American

Economic Review in 1969 marked the culmination of a decade of work on labor-management

inspired by his brother Jan’s work on Yugoslavia, considered then to be a worker-managed

economic system. In two rapidly following tomes, Vanek laid out the landscape for the

development of a new subfield in economics by providing precursors to many of the results to

follow. In that previous decade, Vanek produced papers in traditional economic theory, e.g.,

international trade and economic growth. His mind set persists in the interplay between the

emerging theory of labor-managed firms and traditional economic literature that takes seriously

the role of organizational form. This essay develops that cross-pollination and seeks to identify

the remaining questions and issues for future work that the economics profession owes to

Jaroslav Vanek.

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The year 2020 marks the fiftieth anniversary of the publication of Jaroslav Vanek’s tour

de force, The General Theory of Labor-Managed Market Economies (Vanek, 1970); hereafter,

“General Theory”. In the introduction to this general theory, Vanek reports that his research on

this topic began in 1961 when he received a grant from the Guggenheim Foundation followed by

a Ford Foundation Research Fellowship in 1967. According to Vanek, his interest in a labor-

managed system was stimulated by discussions with his brother, Jan, who was researching

Workers’ Council in Yugoslavia at the International Labor Organization at the time. Although

he muses that they “… disagreed on just about everything”, Vanek assigns his deepest

intellectual debt to his brother to whose memory he dedicated a volume of essays that he edited

entitled Self-Management: Economic Liberation of Man (Vanek, 1975). 1 Relying on his

training as an economic theorist, Vanek develops a framework for an economic system in the

“General Theory” that rests on five axiomatic characteristics, namely, labor-management at the

firm level, income-sharing by all worker-members of the firm, full reliance on complete

decentralized markets throughout the economy, worker-members’ usufructus2 right to the capital

assets of the firm, and freedom of employment. A companion book published one year later,

The Participatory Economy: An Evolutionary Hypothesis and a Strategy for Development

(Vanek, 1971a) presents the product of Vanek’s heart as he argues passionately that this humane

labor-managed economic system is the only (unique) equilibrium to which the currently

competing (disequilibrium) systems of capitalism and Soviet-type command economies will

converge. I make this distinction between these two books to highlight the two important

1
This volume contains an essay (Chapter 17) that is excerpted from The Economics of Workers’ Management: A
Yugoslav Case Study (1972) by Jan Vanek, Jaroslav’s brother.

2
Usufructus refers to the limited legal right to use without altering and derive financial returns (fruits) from
property that belongs to another legal entity (possibly, common ownership). As such, usufructus requires the user
of said property to maintained it in (or returned it to) its pre-existing state.

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contributors to Vanek’s scholarship: his mind as he thinks as an economic theorist and his heart

as he becomes a passionate advocate for the humane ideal of the participatory economy.

To review briefly his life, Jaroslav Vanek was born in Prague in 1930. He graduated

from gymnasium in 1949 after which he fled with his family to Germany and on to Geneva

where he earned a degree in Economics in 1954. Upon immigrating to the U.S., Vanek earned

his PhD in Economics from the Massachusetts Institute of Technology in 1957 and accepted his

first academic job at Harvard University in 1958. Vanek joined the Economics Department at

Cornell University in 1964 where he continued to work until his retirement in 1996. At Cornell,

Vanek developed and directed the “Program on Participation and Labor-Managed Systems

(PPLMS)” beginning in 1970. Vanek’s first publication on labor-managed systems is in

American Economic Review: Papers and Proceedings (Vanek, 1963a); hereafter, AER. This

paper, entitled “Yugoslav Economic Growth and its Conditions”, attributes the rapid growth at

the time in Yugoslavia to the presence of Workers’ Councils in firms and the resulting new type

of economic system, the labor-managed economy (hereafter, LME). Vanek asserts an

equivalence result between the LME “… a fully competitive system operating under workers’

management and profit sharing…” and a competitive capitalist market economy (hereafter,

CME). By applying the welfare theorems from CME to its equivalent, Pareto efficiency of long-

run equilibrium is guaranteed in the LME (Vanek, 1963a; p. 559.) Vanek’s second publication

in this area is a paper entitled “Workers” Profit Participation, Unemployment and the Keynesian

Equilibrium” (Vanek, 1965b) in which he develops an open macroeconomic model of a profit-

sharing economic system that would, among other characteristics, yield a higher level of

employment than a non-profit-sharing economic system with comparable money incomes per

laborer. A chapter in an edited volume on National Economic Planning published by the

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National Bureau of Economic Research in 1967 entitled “Economic Planning in Yugoslavia”

(Vanek, 1967b) follows chronologically. Analyzing data from Yugoslavia using Input-Output

analysis, Vanek emphasizes the role played by the peculiar Yugoslavian principle of ownership

of capital, namely social ownership with usufructus3 rights allocated to workers. As the first and

last of these papers indicate, Vanek ideas for his theoretical work are based on the Yugoslavian

experiences with its novel economic system.

Vanek’s best-known published work on this topic during this early period is in AER

entitled “Decentralization Under Workers’ Management: A Theoretical Appraisal” (Vanek,

1969) in which he previews many of the results found in the two companion volumes mentioned

above and which are cited as forthcoming in the bibliography of this article. The paper begins

with a presentation of what Vanek calls the “dehumanized” general equilibrium model in which

labor is treated as a commodity in the CME. He follows with a characterization of the

participatory nature of labor-management (thus, de-commodifying labor) and an evaluation of

the resulting LME. Vanek attributes an equivalence result between the LME and the CME (and

thus Pareto-optimality of the LME) to free entry and competition in non-labor factor markets

when technologies are identical in the firms. Vanek stresses that the labor-managed firm

(hereafter, LMF) would exhibit little or no real adjustments to shocks and that spontaneous free

entry would resolve any transitory unemployment resulting from layoffs (Vanek, 1969: p. 1010).

However, once the “special dimensions” of labor-management are introduced, Vanek argues for

the superiority of this worker-managed system. He points to mutual monitoring promoting

higher effort levels from workers in LMFs (p. 1011) and to more innovation in the presence of

3
In the Yugoslavian context, usufructus legally required the workers’ cooperative to allocate value-added revenues
to a capital maintenance fund to cover all maintenance and depreciation costs of capital used prior to the
distribution of any earnings to the workers in the form of dividends.

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imbedded (Hayekian-type) information as workers-managers are incentivized to share their

knowledge (p. 1013). In arguing against the implications of the earlier-proposed dividend-

maximizing model of the LMF, Vanek asserts that it would be nonsense for a working collective

to “mutilate” itself by dismissing brethren to gain a small additional amount of income for its

continuing members (p. 1009). As he does in the two companion volumes that follow

chronologically in print, Vanek combines the products of his mind and his heart in this journal

article to make a strong case for preferring the LME over the CME

Lest the reader think that these four papers are a rather modest output for a decade of

scholarly activity, a selective list of Vanek’s publications in other fields of economics from 1961

to 1971 will suffice to demonstrate the contrary. Vanek’s work during this decade built on his

earlier scholarship in international economics with papers in both theory and policy, while he

also branched out to other topics in economic theory. His work on factor proportions in the n-

factor case for a Hecksher-Ohlin model led to publications in the Quarterly Journal of

Economics (Vanek, 1963c), hereafter, QJE, and Kyklos (Vanek, 1968a). This scholarship

resulted in his name being attached to the Hecksher-Ohlin-Vanek theorem in the trade literature

in economics. In 1962, Vanek published a textbook on international trade (Vanek, 1962)

followed by a book on customs unions in 1965 (Vanek, 1965a) and a book on the von-Neumann

turnpike theory of maximal economic growth in 1968 (Vanek, 1968b). He published actively in

growth theory with journal articles in the Economic Journal (1966), hereafter, EJ, AER (Vanek,

1967a), QJE (Vanek, 1971b) and with A. H. Studenmund QJE (1968). In 1963, Vanek

published a paper on the stability of a Keynesian model in Kyklos (Vanek, 1963b). In 1964, he

published a short paper in Review of Economic Studies entitled “A Rehabilitation of ‘Well-

Behaved’ Social Indifference Curves” (Vanek, 1964). In addition, Vanek published several

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policy papers during this decade, e.g., one on the Keynes-Triffin plan in Review of Economics

and Statistics. (Vanek, 1961) and one on tariffs and welfare in EJ (Vanek, 1971c). As this

selective list testifies, Jaroslav Vanek contributed significantly to topics of interest to mainstream

economists at the same time that his heart and mind were turning toward advocating for worker

management as a superior economic system to the competitive market economy enshrined in

traditional economic theory.

A survey of the scholarship spawned by Vanek’s work justifies ranking him as the main

seminal contributor to the literature on worker management and the participatory economy. The

seminal work on the theory of the LMF is a paper by Ward (1958)4 in which results are derived

from changing the simplistic objective of the firm from profit maximization to dividend (i.e.,

profit per worker) maximization. Given an environment in which labor is the sole variable input

for a firm that has incurred a fixed debt to finance its capital stock, Ward derives two main

results. First, output responds inversely (thus, perversely) to changes in product price due to

changes in labor demanded and, second, labor allocation is Pareto–inefficient in the presence of

positive economic profits for firms. The first perverse result is due to the LMF dismissing

(engaging) workers when economic conditions improve (deteriorate) to yield a higher dividend

return to remaining (continuing) members, the very point that Vanek contests in his AER (1969)

article. The second result follows from the membership of a profitable LMF protecting the

existing rents of the brethren by refusing to include new members with whom they would have to

share these rents. In a closely related paper comparing the Soviet collective farm to a producer

cooperative, Evsey Domar (1966) extends Ward’s model of the firm to a multi-output, multi-

4
Based on earlier work by Ward on Workers’ Management in Yugoslavia (Ward, 1957), this paper is considered
seminal to the LMF literature. Ward characterizes his theory as applying to a firm in Illyria to distinguish it from
actual Yugoslav practice.

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factor, dividend-maximizing firm. Domar shows that the perverse Ward effect is mitigated to

some extent in this more general situation due to a changing product mix but that the tendency to

dismiss members when economic situations improve does persist.5 Vanek’s “General Theory”

contains a thorough development of the model of a dividend-maximizing firm and identifies the

germs of many, if not most, of the ideas pursued in the subsequent literature on LMFs. Vanek

concurs that the key operating principle (objective) of the LMF, following from his five

axiomatic characteristics listed above, is to maximize the dividend, i.e., net income per worker.

Hence, his name is attached to the dividend-maximizing model of the LMF, referred to in the

economics literature as the Ward-Domar-Vanek model (hereafter, the WDV effect).6

In the “General Theory”, Vanek reproduces Ward’s perverse supply result, i.e., dividend-

maximization leads to an increase in labor demanded during bad times (decrease in the market

price of output) and a decrease in labor demanded during good times (increase in the market

price for output),. The increase in labor demanded by the LMF as output price falls follows from

existing members wishing to share an increasingly onerous debt burden among more members.7

Vanek suggests that, when output price rises, reducing labor in the LMF to achieve a higher

dividend per continuing member can occur practically through natural attrition. Moreover,

during such good business times, he argues that any brethren who might be dismissed from the

LMF to increase the dividend share for continuing members could form new coalitions of LMFs

5
Joan Robinson (1967), in a terse comment on Domar’s paper, asks how members would choose whom among the
brethren to dismiss when economic conditions improve to allow higher remuneration for those remaining. Thus,
she anticipates Vanek’s point in the 1969 article about group solidarity and the nonsense of collective mutilation
for a slight gain in remuneration for continuing members.
6
For convenience, I adopt the terms used by Vanek and refer to labor-managed firms (LMFs) and the labor-
managed economy (LME) to characterize worker management and participatory economies. When I wish to make
any further distinction and refer to a related but different organizational form or system, I make this clear by using
different terminology.
7
Hajime Miyazaki and Hugh Neary (1983) identify this as the income component in their decomposition of the
derived demand for labor by the LMF into a pure price (substitution) effect and a fixed-cost (income) effect.

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easily, which he refers to as the “bee-swarm” effect. Accordingly, free mobility of labor and free

entry combine to preclude longer term unemployment in the LME from any temporary labor-

shedding by LMFs.

In a survey of the literature through the mid-1980s, John Bonin and Louis Putterman

(1987) report a growing number of papers on labor management published in mainstream

economics journals from 1970 onward. Vanek’s “General Theory’ is responsible for spawning

the bulk of them to which citations found therein attest. In an insightful review of the Vanek’s

“General Theory”, James Meade (1972) argues that, once an LMF is formed, its members have

certain rights and responsibilities to each other, e.g., members cannot be forced to leave nor can

existing members be forced to accept new members. Applying the Meade rules of voluntary

departure, Bonin (1981) derives short-run supply equivalence between the LMF and the

traditional profit-maximizing firm (hereafter: PMF) when worker-members have an alternative

source of labor income (an outside wage) and temporary work arrangements allow income

pooling by transferred workers and continuing members. Nonetheless, the subsequent literature

does confirm the robustness of the Ward-perverse dividend-maximizing result, e.g., under

conditions of output price uncertainty, i.e., Bonin (1980), and in the long-run planning problem

when both labor and capital are variable, i.e., Saul Estrin (1982) and Norman Ireland and Peter

Law (1982). Various theoretical attempts to mitigate this perverse result leave it somewhat

attenuated but still lurking in the background; e.g., Domar (1966) introduces labor supply

constraints while Ireland and Law (1981) consider allowing variable effort per worker.

This theoretical literature lead to a consideration of the life cycle of the LMF due to the

long-run implication of rent protection by members in a successful LMF when coupled with a

segmented labor market. Avner Ben-Ner (1984) argues that, presented with an opportunity to

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hire outside workers without membership rights, members of a profitable LMF will do so

whenever possible to protect their own rents. He concludes that, over time, any LMF that

becomes viable (profitable) will degenerate into an (almost) PMF as members will continue to

replace any departing brethren with hired workers. 8 Taking an implicit contract approach,

Hajime Miyazaki (1984b) models the entire life cycle of an LMF and, thus, provides a utility-

maximizing rationale for both births and deaths in a mixed economy containing competing

PMFs. Miyazaki assumes a perfect capital market in which workers can insure their

remuneration against fluctuations over time; his death condition mirrors the Ben-Ner result. In

addition, Miyazaki’s birth condition provides an explanation for the creation of an LMF either

from an ailing PMF or by a coalition of dismissed members forming a new LMF, the latter of

which is reminiscent of Vanek’s “bee swarm” effect. Hence, Miyazaki’s model completes the

life-cycle theory of the LMF by including the creation of new firms based on utility-maximizing

behavior by workers.

Proposals to promote Pareto-optimality regarding labor allocation in LMEs involve

arrangements allowing the temporary transfer of workers from a low-dividend LMF to a high-

dividend LMF in accordance with Meade’s rules of voluntary departure and voluntary

admission. Stephen Sacks (1977) discusses temporary transfer arrangements between groups of

workers, i.e., BOALS (Basic Organizations of Associated Labor), within a Yugoslavian firm that

would promote efficiency. The fundamental cause of an inefficient allocation of labor due to the

dividend-maximizing behavior of the LMF is the incompleteness of the labor market in the

LME. Murat Sertel (1982) proposes to complete the labor market by establishing prices for

8
An empirical documentation of this life cycle for cooperative firms is provided in Sydney Webb and Beatrice
Webb (1920) and Mikhail Tugan-Baranovskii (1921). The degeneration notion was first asserted by Beatrice Potter
(1895), the future Mrs. Sydney Webb, in her analysis of the British cooperative movement.

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membership in the LMF based on the discounted present value of expected (entrepreneurial)

rents. Dow (1986) formulates a general-equilibrium model of an LME incorporating Meade’s

rules of permissible membership changes into a competitive market by including such a market

for membership in the LMF. Hence, Dow restores equivalence between the CME and the LME.

However, the feasibility of completing the labor market in this way depends on workers’ ability

to pay up-front membership fees that could be quite high in firms with considerable future

expected profits. Taking a different approach, Tatsuro Ichiishi (1977) formalizes Vanek’s notion

of “bee swarming”, i.e., sufficient entry into product markets by newly formed LMFs to lead to

rent dissipation. He considers coalition formation in a game-theoretic model and demonstrates

that the core equilibrium achieves the equivalence result. Dow (2003) sums up this issue by

asserting that the crucial characteristic is spontaneous free entry in long-run equilibrium driving

(economic) profit to zero in all LMFs. Put succinctly, when economic profit is zero,

organizational form at the firm level does not matter.9

Taking a different perspective, Jacques Drèze (1976) proves an equivalence theorem

under certainty if a perfect (complete) rental capital market is assumed. However, when

uncertainty is introduced, he argues that institutional arrangements compatible with both labor-

management and the efficient allocation of risk may be difficult to find. To formalize this point,

Benedetto Gui (1985) appeals to the principal-agent literature demonstrating the impossibility of

constructing a contract that will both provide optimal incentives to workers and share risk

optimally with financiers when both parties are risk-averse and moral hazard problems arise

9
Within the mainstream literature in economics, the presence of firm-specific (quasi-rents) rents that cannot be
competed away gives rise to issues of organizational form; for example, see Miyazaki (1984a) and Masahiko Aoki
(1980).

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from imperfect information.10 He concludes that economic theory points to a fundamental

tradeoff, namely that the autonomy of worker-managers will come at a cost in terms of requiring

them to save more and bear more risk than subordinate workers in a traditional firm.

During the 1970s and 1980s, cross-pollination of this type between the theory of the LMF

and topics in mainstream economic theory is plentiful. Vanek’s work motivated economists to

take more seriously organizational theory and led some mainstream theorists to publish papers

having implications for LMF theory. James Mirrlees (1976) and Bengt Holmstrom (1982)

develop schemes that elicit first-best effort choices by eliminating the incentive to free ride in a

team framework when effort is unobservable; however, such schemes result in an undistributed

surplus in the firm. Introducing this framework to the LMF model, Chris Archibald and Hugh

Neary (1983) show that, although a fully efficient outcome is unattainable in a one-stage game

assuming Nash behavior, a two-stage procedure with tatonnement11 bidding achieves first-best

effort based on individual optimization. Consistent with mainstream theory, these authors find it

necessary to posit an outside agent that receives the surplus generated in the firm, a result known

as the budget-breaking property in the literature. These authors suggest that Yugoslav BOALS

can play such a role by entering into agreements with banks to resolve the surplus issue. Taking

a somewhat different tact, Bentley MacLeod (1984) proposes a Rawlsian-type social welfare

function to represent the LMF’s proper objective and demonstrates that a repeated-game

cooperative solution achieves the same outcome. In a further example of the symbiotic

10
For examples of the mainstream literature on this issue see Stephen Ross (1974), Steven Shavell (1979), Bengt
Holmstrom (1979) and Tracey Lewis (1980).
11
The term tatonnement, which in French refers to “groping around in the dark”, is defined in economics as an
iterative auction-type process of announcing prices at which transactions are proposed but not consummated until
an exchange equilibrium is eventually achieved in which demand equals supply and then transactions are allowed
to take place.

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relationship between mainstream theory and LMF theory, Masahiko Aoki (1980) models the

bargaining problem over quasi-rents between stockholders and employees of a firm as a

cooperative game, stressing the link between workers and capitalists. Hajime Miyazaki (1984a)

treats a similar bargaining problem over the distribution of quasi-rents arising from firm-specific

human capital that immediately invokes the question of how to provide proper incentives to

persuade workers to acquire such human capital in the absence of decision-making rights. From

the LMF perspective, Ireland and Law (1985) and Jan Svejnar (1982) provide conditions for

Nash-cooperative solutions to the bargaining problem that take account of WDV-type behavior

on the part of dividend-maximizing member-workers. Clearly, the development of LMF theory

did not proceed in isolation; rather, this cross-pollination with economic theory mirrors Vanek’s

own career path in which mainstream economics and labor-management were pursued

concurrently and complementarily.

Financing issues take pride of place in applying the property-rights literature to the LMF.

Initial contributions by Eirik Furubotn (1974 and 1980) and Svetozar Pejovich (1969 and 1973)

identify a fundamental underinvestment problem for any LMF that relies solely on self-financing

of its investment projects. Vanek anticipated this issue in the “General Theory” referring to what

would become known as the horizon problem due to the inability of current members who

contribute to the financing of investment projects to appropriate fully their share of the resulting

future income stream when they retire or leave the firm for any reason. This disincentive for

self-financed investment in an LMF is referred to as the Furubotn-Pejovich-Vanek (hereafter,

FPV) effect. Based on this result, the literature concludes that the availability of external

financing is crucial for any LMF to make appropriate choices about both the capital-intensity and

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term structure of investment projects12. Vanek proposes constituting a national labor-

management agency that would be a depository for private household savings in the LME and

have the responsibility for providing financing both to existing LMFs and to start-ups at a

socially optimal rental rate, i.e., the marginal productivity of capital in the economy. In his

opinion, such socially provided external funding avoids the tension between outside private

investors with no control rights over how the assets they finance are used within the firm and

worker-managers with usufructus rights over capital but with no mechanism to make a credible

commitment to the outside investors that they will husband properly these assets. In the absence

of such social largesse, any interest charged by outside investors or by bank lenders as their

intermediaries would include a premium for the risk taken due to a lack of control over the use of

the assets by the providers of the finance.

Roger McCain (1982) applies bargaining theory to a codetermined firm in which both

labor and capital jointly determine the use of inputs and thus, McCain’s argues, avoid the

horizon problem in which workers who contribute to financing capital may leave the firm before

they can recoup their money from returns on the investment. In the codetermined firm, capital

owners are presumed to have a long-enough horizon to recoup the initial cost of capital and earn

a normal rate of return on invested funds. Hence, in the joint decision-making framework, any

concerns workers may have about insufficient longevity with the firm to appropriate the returns

to their investment can be attenuated in the bargaining process. Norman Ireland (1984) disagrees

claiming that the FPV effect will still cause member-workers to vote to underfinance investment

by selecting projects with a shorter horizon and thus a faster payback period to ensure full

appropriation of the returns to their foregone earnings. Hence, theory indicates that institutional

12
Bonin and Putterman (1987) provide a survey of the relevant literature in Chapter 2.

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constraints must be placed on an LMF and enforceable contracts must be negotiated in the

bargaining environment of a codetermined firm if the horizon problem is to be resolved fully.

Turning to macroeconomics and growth, Anthony Atkinson (1973) compares the

equilibrium growth paths for dividend-maximizing and profit-maximizing firms and concludes

that LMFs grow slower than PMFs due to a FPV-type effect even under conditions of complete

external financing. Masahiko Aoki (1979) mitigates this difference by introducing two groups of

members, junior workers and senior partners, and concludes that growth-stimulating strategies

can be incentivized if junior workers take account of the probability of promotion to senior status

in the future. In a similar vein, André Sapir (1980) models a training program (apprenticeship

period) for a LMF that establishes a connection between promotion and growth to incentivize

growth. In a contrary vein, Bonin (1983) and Branko Milanovic (1982) show that LMFs make

different choices than PMFs regarding technological progress. They conclude that LMFs exhibit

a tendency to choose a more-labor saving technology and expand labor less in response to

exogenous neutral technological change. Basically, in the absence of a complete membership

market of the Dow/Sertel sort, the WDV effect leads to a bias against capital acquisition.

Incompleteness in the labor market with its resulting disequilibrium outcome must also be

coupled with disequilibrium in some other aggregate market due to Walras’ law. The natural

disequilibrium partner to choose would be the capital market; perhaps incompleteness in both

labor and capital markets provides a fundamental connection between the WDV effect and the

FPV effect. Again, complementarity between mainstream economic theory and the theory of

labor management is the result.

Vanek himself played an active role in the evolution of the labor-managed literature

throughout this time period, often in collaboration with colleagues, students and academic

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visitors at the Program on Participation and Labor-Managed Systems (PPLMS) at Cornell

University. In 1977, Vanek published a collection of essays entitled The Labor-Managed

Economy consisting of a compilation of this work. Some chapters had already been published in

journals, e.g. QJE, World Development, and EJ. Citations to published versions are

acknowledged when relevant but references to Cornell working papers are also provided so that

the reader can track the progression of Vanek’s ideas on these topics. In a paper with Peter

Miovic (Ch. 5), Vanek explores the “realistic” behavior of a Yugoslav firm relying on work by

Branko Horvat (1971). By considering the planning behavior of worker-members, the authors

conclude that the WDV perverse supply effect is mitigated if not entirely muted and that, in the

short run properly defined, supply elasticity of the LMF would likely be zero. The result follows

from the stability of membership in the face of changing product market conditions and

reinforces the notion of worker solidarity in a proper LMF. This paper characterizes the LMF as

an organization promising stable employment but variable earnings to its members based on

macroeconomic conditions.13 Extending his result in the “General Theory” that the LMF allows

members to make efficient choices regarding hours worked, Vanek with Juan Espinosa (Ch. 7)

considers the labor-leisure tradeoff facing a worker having a subsistence income constraint in a

developing economy. The authors show that the LMF affords better outcomes for such workers

13
This formulation is reminiscent of Vanek’s analysis in a previous paper (Vanek, 1965b) in which he demonstrates
how profit-sharing leads to higher employment by firms. Martin Weitzman (1983, 1984 and 1985), in what he calls
the share economy, proposes profit-sharing as an alternative payment scheme to fixed-wage contracts in firms and
concludes that this simple change generates a vacuum-cleaner effect leading to significant improvement in short-
term employment outcomes in his share economy compared with short-run unemployment in the traditional
capitalist economy. Bonin (1988) contrasts the LME with such a share economy by identifying the implicit tax
imposed on workers who have no decision-making rights in Weitzman’s share economy. In addition, neither
Weitzman nor Vanek in his earlier analysis of the share economy considers any potential gains to labor productivity
from profit-sharing. Derek Jones and Takao Kato (1995) identify a positive impact on labor productivity from
adopting profit-sharing in Japanese firms that should also arise in a share economy.

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and that the LME is superior to the CME in advancing economic development when a

subsistence-oncome constraint is relevant.

Considering further extensions, Vanek and Alfred Steinherr (Ch. 12) analyze the

advertising decisions taken by an LMF and show, that contrary to a conjecture made by Meade

(1972) in his review of the “General Theory”, the LMF spends less per unit of output on

advertising than the PMF. Hence, these authors conclude that, in an LME, less money will be

spent on (in their view, unproductive) advertising than in the CME. Joined by Andrew Pienkos,

Vanek and Steinherr (Ch. 14) consider the impact of imperfect competition on the LME in

response to a paper by Meade (1974) that confirms perverse WDV results in such an economic

environment. The authors demonstrate that Meade’s results depend on positing simple dividend-

maximizing behavior as the objective for the LMF and, as such, do not take account of later

literature that suggests invariance of membership (labor) to changes in product market conditions

and the impact of any possible changes in labor input by members’ variation of effort or hours

worked. When these three authors introduce these additions developed in later theory, the

perverse WDV results are attenuated. Taking a related institutional approach, Vanek explores

the implications of imposing conditions drawn from real-world experiences with labor

management in Peru (Ch. 2) and Yugoslavia (Chs. 3 & 4) that mitigate any perverse theoretical

results. With Milena Jovicic (Ch. 4), he investigates from both a theoretical and an empirical

perspective the distributional implications of the requirement to maintain the value of capital

imposed on Yugoslavian firms to preclude the FPV effect. Continuing to address the FPV effect,

Vanek develops further his argument for the importance of a risk-neutral external financing

institution at the economy-wide level in three chapters (9, 10 and 11). To extend his work on

macroeconomic theory in the “General Theory”, Vanek introduces a foreign trade sector and

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 18

develops a theory of an open LME (Ch. 13). The final chapter (Ch. 15) returns to a point that he

first proposed in Vanek (1971a); it contains a rigorous analytical development of the evolution of

a socio-economic system based on axiomatic conditions that supports an equilibrium outcome

consistent with labor-management. Continuing this theme in scholarly publications during the

1990s, Vanek turns his attention to promoting economic democracy as the best strategy for the

transition from central planning to a decentralized economic system in East European countries

after the Berlin Wall was dismantled, e.g., Vanek (1990). Interestingly in his later work, Vanek

(2011) returns to his early scholarship in international economics by presenting his version of the

history of economic thought in international trade. After 50 years of scholarly work, Vanek

showcased his mental versatility by opining once again on issues in mainstream economics.

Gregory Dow (2018) divides his survey of the existing theory of the LMF into two time

periods: the past from 1958 to 1992 and the present from 1993 to 2018.14 Dow attributes the

beginning of his second (denoted, current) period to a survey of both the theoretical literature and

the empirical literature by John Bonin, Derek Jones and Louis Putterman (1993) subtitled “Will

Ever the Twain Meet?” Dow makes an empirical observation about the paucity of LMFs in

real-world economic systems, reporting that they make up a small niche in developed economies

having no more than a 5% share in number of firms, employment, assets or sales in any country.

Should these data be taken to indicate a revealed preference for the PMF organizational form in

developed market economies? This fundamental question about the paucity of LMFs in real-

world economies can be posed as two slightly different but related questions. First, as Dow

(1993), Putterman (1984) and Dow and Putterman (2000) ask: why do capital suppliers (usually)

hire workers? Second, as a characterization issue, under what conditions would worker control

14
Dow also considers a third period, the future, to which I will return toward the end of this essay.

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be a viable and even superior organizational form? As the literature indicates, firm-specific

quasi-rents (returns to factors that cannot be competed away on markets) render the equivalence

theorems invalid and induce members of LMFs to act to increase the per-member share of the

firm’s value-added, i.e., the WDV effect. Taking a game theoretic approach, the mainstream

literature identifies the crux of the issue to be bargaining over these rents in which two notions

are comingled, namely the creation of this value and the distribution of the resulting rents.

Viewing the organization as both capital and labor suppliers that are combining to produce value

through synergies that cannot be separated into components (team theory) leads to an analysis of

the complementarity of human and physical capital, e.g., the role of worker-specific information

in technical innovation. Arising from this complementarity is the question of how to promote the

proper incentives within an organization for the acquisition of firm-specific human capital and

firm-specific physical capital and, thus, create added value for the firm. In the LMF literature,

the inability to appropriate fully the gains by the party incurring the costs, i.e., the members,

leads to suboptimal investment in physical capital, i.e., the FPV effect. In a compensating vein,

this literature argues that the LMF may incentivize workers to acquire firm-specific human

capital and to provide any impacted knowledge that would be useful to further the firm’s

activities. Hence, the fundamental issue becomes how the controlling party (capital or labor) can

commit credibly to refrain from opportunistic behavior against the non-controlling party. In

game theory, the role of exit options is an important factor in mitigating such opportunism.15

15
An example of this in the mainstream literature is the efficiency wage paid by a PMF.

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Taking account of differential exit options, Dow (2003) asserts that labor is lumpy and

inalienable whereas financial capital is divisible and transferable leading to a fundamental

asymmetry between capital and labor. By focusing on the transferability and divisibility of

ownership over these two factors, Dow explains how market imperfections arise that prevent

LMFs having a productivity (value-enhancing) advantage over PMFs from becoming viable.

Addressing the first question posed above, Dow argues that control by capital suppliers will be

prevalent when physical assets are durable enough and specific to the activities of the firm

leading economic agents to place sufficient weight on future firm-specific quasi-rents.

Addressing the second question, he argues that worker control will be prevalent when production

requires specialized human capital but uses easily acquirable physical assets. Hence, control by

capital suppliers and thus PMFs are likely if asset specificity leads to considerable firm-specific

quasi-rents. In contrast, we might expect to see more organizations organized according to the

principles of the worker control, and thus LMFs, in activities requiring extensive firm-specific

human capital but using more generic physical assets. The rise of a knowledge-based economy

with the resulting crucial role played by human capital may augur well for worker control both in

new start-ups and in the conversion of PMFs to viable LMFs in the future.

Taking a somewhat related approach, Samuel Bowles and Herbert Gintis (1993) argue

that shared control between workers and capital suppliers is necessary to provide proper

incentives both for innovation and to ensure adequate risk-taking in any organization. Would a

true LMF require workers as a group to hold a majority capital stake in the world of shared

ownership? Dow (2003) considers the corporate governance of such a hybrid organization in

which the proportion of workers on the board of directors would be determined according to

their combined capital stakes but the election of individual representatives for labor’s share

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 21

would be held according to the principle of one worker – one vote to preserve workplace

democracy. In addition, to facilitate employee buyouts of firms, Dow proposes setting up a labor

trust to accumulate shares from payroll contributions to finance a leveraged buyout. Can theory

provide any indication of the conditions under which such a conversion is likely? Can theory

suggest whether, and if so under what conditions, large publicly traded U.S. companies with

ESOPs would find it useful to cede decision-making control over certain workplace activities to

their employees? Answers to these questions will help to characterize an environment in which

shared control of the firm between capital and workers is the superior organizational form.

Perhaps a new philosophical question needs to be asked. Do workers have an inalienable

right to control their work environment (and thus the firm)? David Ellerman (1992) argues in the

affirmative and concludes, from a normative perspective, that workers should control firms.

Taking a more pragmatic approach, Bowles and Gintis (1993) base their argument for workplace

democracy on its equivalency to political democracy and assert that if you support the latter you

must support the former. However, unlike Ellerman, these authors argue that both workers and

capitalist should share control of the firm. The topic of alienability of worker control arises in

the LMF literature regarding the ability of workers to appoint manager/bosses and delegate

decision-making to them by consensual approval. The issue becomes whether or not such

abrogation of control leads to a serious coordination problem for LMF members because their

work environment is a collection of basic public goods. On a pessimistic note, Dow and Gil

Skillman (2007) conclude that unanimity of collective decision-making cannot be achieved on

this score due to the public-good nature of diverse characteristics in the workplace. Might

Vanek-type entry of small(er) LMFs mitigate this problem in the same way that the formation of

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communities of somewhat like-minded individuals alleviates a similar problem in the local

public goods literature? What sectors and activities would be conducive to such a resolution?

In his survey of the literature, Dow (2018) asserts the theoretical literature in the present

period is fragmented along various dimensions but he sees an encouraging trend toward

sophisticated econometric work on producer cooperatives (PCs) emerging during the last twenty-

five years. He divides his survey of this empirical literature into three categories: LMF

objectives (WDV tradition), capital financing (the FPV effect), and lastly the productivity and

survival rates of LMFs. With respect to the WDV effect, Dow reports empirical results

suggesting that PCs “… respond to shocks by maintaining stable employment levels while

allowing incomes to vary…” (p. 74). In my opinion, this is consistent with the early theory and

certainly with Vanek’s work stressing worker solidarity. Regarding the FPV effect, Dow reports

empirical work asserting that PCs are smaller in size measured by assets and have significantly

lower capital/labor ratios than PMFs (his term is KMFs) in some industries. Dow concludes that

these results suggest that PCs may face higher capital costs than similar PMFs, a claim

reminiscent of Gui’s assessment and certainly consistent with Vanek’s work in the “General

Theory”. With regard to productivity, Dow reports considerable empirical work16 that finds

clear benefits for PCs in terms of higher worker productivity, which would surely come as no

surprise to Vanek but would rather vindicate his mind and warm the cockles of his heart.

Regarding survival and the life-cycle hypothesis, Dow reports one study (Burdin, 2014)

from Uruguay that finds better survival rates for LMFs than for PMFs. In earlier empirical work,

Ben-Ner (1988) finds evidence that PCs have a higher formation rate than conventional firms

16
In an early contribution to this empirical literature, Jones and Svejnar (1985) investigate productivity advantages
in Italian PCs.

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 23

under conditions of high unemployment and stagnation using data from several countries. He

finds no statistically significant differences regarding death rates (the opposite of survival rates)

for the two types of firms. Virginie Pérotin (1987) divides French PCs into two groups, those

that die and those that survive from 1979 to 1982. She finds that surviving PCs have

significantly more participation by workers in decision-making than those that do not survive.

Saul Estrin and Derek Jones (1992) use data on continuously operating French cooperatives from

1970 to 1979 and find no evidence of long-term degeneration due to the hiring of non-member

workers. Surprisingly, these authors find the strongest evidence for degeneration among

unprofitable PCs in direct contradiction to the life-cycle hypothesis on LMFs. Andrés Dean

(2019) uses recent Uruguayan data from 1997 to 2013 in which PCs are considered to be worker-

managed (i.e., LMFs) if hired employees do not constitute more than 20% of the members to test

the life-cycle hypothesis directly. By controlling for other factors, Dean shows that successful

LMFs, defined as firms paying a membership premium above the market wage, do not increase

the percentage of hired workers to protect or increase the members’ share. Clearly, Vanek’s

work extending the theory of LMFs beyond the WDV effect and his advocacy for the social

benefits of worker control are vindicated by this empirical work.

In his discussion of the future, Dow argues that the empirical literature during this present

period lays waste to many of the results in the theoretical literature from the past period.

Specifically, he asserts that it is time to put the workhorse of the past, namely the WDV tradition,

out to pasture. In my view, the tendencies captured by WDV effects and FPV effects are still

alive and well in the empirical literature suggesting that the earlier workhorses may be old and

dying but that they have sired younger, more sophisticated offspring that continue to gallop into

the future. More importantly, when the “V” component of these effects is expanded to take

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 24

account of the totality of his contributions to the literature, the intellectual legacy of Jaroslav

Vanek is alive in the present and is likely to continue to have significant influence into the future.

Regarding future theoretical work, Dow (2018, p.80) opines: “Although research on

LMFs will always involve distinctive issues, such research should not be isolated from broader

intellectual trends within the profession.” Jaroslav Vanek’s seminal work on the labor-managed

economy led to such cross-pollination with mainstream economic theory in both Dow’s past and

present periods. Mainstream economics, especially work on organizational theory, owes a

substantial intellectual debt to Jaroslav Vanek, even if the contributors to this literature would

perhaps disagree with him on almost everything! Vanek’s own scholarship exhibits an

intellectual integration of mind and heart that is showcased in his advocacy for a more humane,

more participatory, and more equitable workplace. In memory of Jaroslav Vanek, let us all strive

to ensure that those twain continue to converge in the future.

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 25

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