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The Participatory Economy: The Case of Yugoslavia
The Participatory Economy: The Case of Yugoslavia
We turn now on to consider a type of market socialism that prevailed in the Republic of Yugoslavia between the 1960s and
the break up of the Yugoslav state in the 1990s and still exists today within Serbia. The term market socialism is revealing
and appropriate because the Yugoslavian system involved elements of both these polar extremes. The socialist aspect is
ownership of the means of production by the state rather than by individuals. However, while in the other socialist states of
Eastern Europe and the former Soviet Union coordination of the economy was brought about by a plan, in Yugoslavia
coordination was left largely to market forces.
Another common term to describe the Yugoslav system was labor management, reflecting that enterprises, while using
capital owned by society as a whole, were managed by the workers, or more precisely by management appointed or elected
by the workers. The theory of labor-managed economies was largely developed by Jaroslav Vanek,1 who used the term
participatory economies because workers were involved in the decisions of the firms in which they were employed and
workers’ income was a function of profits.
Vanek’s Principles
Although Yugoslavia was his model, Vanek’s theory of the participatory economy was a normative ideal, rather than a
positive description of a specific state, that conformed to five basic underlying principles:
1. Participation in management. Every worker should participate in the management of the enterprise in which he or she
worked on an equal footing. In most cases this implies a representative democracy in which workers delegate their day-
to-day responsibility to an elected chief executive, a board
of directors, and a workers’ council who make most decisions on behalf of the workers.
2. Income sharing. In a participatory economy, rather than being paid a fixed wage, the workers in each firm receive their
income by dividing the profits among them in an equitable fashion, usually dictated by a formula democratically
determined by the workers themselves. Differences in the size of workers’ shares should reflect work of different
intensity, skill level, or quality.
3. Capital to be owned by society as a whole. Socialism is defined by society, rather than individuals, owning the means
of production, and Vanek’s participatory economy is socialist in that sense. The capital employed by any enterprise is
not owned by that enterprise or indeed by the workers of that enterprise, but rather by the state, which rents out the
capital for a contractual fee. This fee should not be merely nominal but should reflect the scarcity, or opportunity cost.
4. Coordination via the market not the plan. In Vanek’s conception, the participatory economy should be fully
decentralized. All of the actors in the
system—consumers, enterprises, associations, and the various levels of government—should be free to make decisions
without interference from the government (or the party). While there should be no command planning, some form of
indicative planning to allow better coordination is appropriate. Vanek does call for government intervention to resolve
abuse
of monopoly power and, by implication, other instances of market failure, but the important principle is the sovereignty
of individuals operating through the market, rather than the preferences of planners or politicians.
5. Freedom of employment. The final characteristic of the ideal participatory state is that each individual is at total liberty
to choose his occupation and his particular place of employment. A necessary counterpart to this is that each enterprise
is at full liberty to hire, or not hire, any person. The problem of establishing appropriate grounds for dismissal is more
difficult and enterprises should be free to create their own rules for limiting the ability to dismiss workers, even when
strictly economic criteria might call for it.
be an inherent tendency of worker-managed firms to retain labor during downswings in the economic cycle, because
these employees are part of the “democracy” of the plant. They are enfranchised and help to choose management, and
they therefore have both rights and power. It follows that there will be a tendency to maintain the output of the firm
during recessions because workers will be kept in employment, a feature with obvious counter-cyclical implications.
Because short-term shifts in demand variations are not followed by adjustments of quantity, either up or down, the size
of short-term price movement in response to demand shocks is likely to be greater than under capitalism and quantity
movements correspondingly smaller.
However, there is another reason why the participatory economy is more resistant to unemployment. The state owns
the capital and, for political reasons, it might be slow in enforcing repossession when capital costs are in arrears. Thus
the participatory firm might face a “soft budget constraint,” cushioning against unemployment in the short run but
fostering inefficiency in the longer term by tying up capital in unproductive
enterprises. Moreover, if substantial unemployment does come into being, there is no mechanism to eliminate it in a
more rapid fashion in a participatory economy than under capitalism. With conventional labor markets, unemployed
workers offer themselves for employment at lower wages; this drives down the wages that the capitalists pay and hence
increases employment. Under labor management and profit sharing, each additional worker hired will tend to drive
down the average profit per worker (see Figure 19.1), and therefore adding new workers will not be appealing to the
existing worker managers, except in cases in which the impact on average capital costs outweighs the impact on
average value product.
5. A participatory economy will have a lower long-run tendency toward inflation. It is possible that in the long run (as
opposed to the short-run discussed earlier) the participatory form of organization has a lower tendency to inflation than
conventional capitalism. This stems from two factors. One is the resistance to size and monopolization that is inherent
in this kind of organization; this was discussed earlier. The other is the absence of labor unions. With no unions to
bargain for increased wages, an inflationary cycle cannot start with “wage push.”
6. Firms in the participatory economy will be more socially responsible than a capitalist firm. Finally, there is the claim
that a worker-managed firm is likely to be more socially responsible than a capitalist firm, especially with respect to the
environment. Consider the case of pollution, which tends to be “oversupplied” under capitalism because real costs of
production are imposed on third parties, with no compensation. Since the owners of the capital live far away from the
factories, their lives are not adversely affected by a decline in environmental quality, nor are their children likely to
suffer poor health as a result. However, since the workers who control a participatory firm live locally, they are more
likely to “internalize” the externality of pollution and trade lower monetary rewards for a better environment.
Investment
One of the most important negative characteristics of the Yugoslav economy was the absence of capital markets with any real
role in the rationing of investment funds among competing uses. One of the important tenets of Vanek’s system was that
capital should be owned publicly and rented out to the enterprises at realistic charges, but in reality interest rates were never
allowed to play a significant role. Real interest rates were always low and frequently were negative. The demand for
investment capital by the enterprises at these rates was practically limitless, and therefore allocation among competing uses
had to be on the basis of political decisions rather than economic ones.
An additional potential source of investment funds in the labor-managed firm was retained earnings, an excess of revenue
over costs not distributed to the workers in income. To some extent profit retention was a legal requirement because by law
each firm had to maintain the value of its capital, accounting for depreciation of capital equipment and amortizing it in a
“business fund.” Workers could in theory vote to distribute even less of earnings as income, increase the business fund, and
hence contribute to the purchase of new capital equipment. However, workers do not have full ownership rights in the firm,
and no individual worker is secure in knowing that his or her share of the principal invested will be recovered in full at the
end of his or her time horizon. Unlike a worker in a capitalist enterprise, who is sure that any money he or she puts into
shares in the company is to some degree liquid (although there is risk of capital loss, as well as the prospect of
capital gain), any investment made by the Yugoslav worker is highly illiquid. In
contrast, if the money is received as income and deposited in individual savings accounts, the worker has security over both
principal and interest. Moreover, the fact that financial repression kept interest rates below market clearing values ensured a
black market for funds that paid even higher rates than the savings accounts. Consequently, workers would be motivated to
invest in the firm only if the expected rate of return were considerably above that offered in savings accounts or black-market
loans.
Unemployment
One of Vanek’s predictions for the participatory economy was a high level of employment, going so far as to write:
the participatory economy does guarantee full employment. It does so in the sense
that the economy will normally operate at, or very near, full employment, and if as the result of some drastic disturbance,
unemployment were to arise, there are forces, inherent in the system, that will tend to restore full employment. In this respect the
participatory economy has a definite edge over capitalist economies.
While one of the enduring problems of capitalism has been unemployment, it is not clear that the participatory economy
has the edge over flexible labor markets. It is true that worker-managed firms will be less willing to shed labor in downturns,
but once it is established unemployment can prove very stubborn. The same factors that militate against the growth of
worker-managed firms act to prevent surplus labor being absorbed by existing enterprises. Only if the marginal revenue
product of an additional worker is above the average revenue product of existing workers will new hires be made. Otherwise
the income of existing workers will fall.
The data show that Yugoslavia suffered from acute unemployment. In the mid-1980s about 1,000,000 workers were
registered as unemployed. Part of this total was frictional, comprised of workers who were between jobs or receiving
education; however, it is probable that about 700,000 of the total were properly described as unemployed and seeking work.
In addition, some 350,000 Yugoslavs were working abroad, mostly in Germany5 as Gastarbeiter, (guest workers). Finally, it
should be noted that Yugoslavia retained a “reserve” of potential industrial workers employed in low-productivity
agriculture. On the whole, the participatory Yugoslav economy did not do an excellent job at eliminating unemployment.
During the 1980s, most of the unemployed were young people. Layoffs were rare in Yugoslav industry (a feature Vanek
had accurately predicted), but startups of new firms were few and job creation sluggish. Much of the responsibility lay with
the highly imperfect capital market, which tended to allocate funds to existing large and politically powerful enterprises.
Unemployment, like income, was distributed very unevenly between the republics. In relatively wealthy Slovenia, next to the
Austrian border, the unemployment rate was less than 1.8 percent, while in impoverished Kosovo, largely inhabited by ethnic
Albanians, it was close to one-third. Cultural and religious barriers prevented labor mobility and allowed disequilibrium in
the federal labor market.
Strike Activity
Vanek’s assertion that a labor-managed firm would be largely immune from labor disputes and strike activity would seem on
the face of it likely to be borne out in fact. Surely workers who could elect their own management, and who could have a
powerful say in the operation of the enterprise, could have little to complain about and would be unlikely to indulge in such
self-destructive behavior.
However, the social sector of the Yugoslav economy was by no means insulated from labor unrest, especially as real
incomes fell in the late 1970s and early 1980s. Despite the fact that they had elected them, workers mistrusted management,
especially over layoffs in the face of falling demand. Moreover, the complex structure of Yugoslavia’s OALs allowed areas
of dispute among the various BOALs that made up the enterprise, particularly about contributions toward the overhead
(management, maintenance, sales, etc.) of the firm as a whole. It is not wholly surprising that there were more than 1,000
strikes in the first nine months of 1987.
Industrial Concentration
Another of Vanek’s predictions was confounded by Yugoslav experience. He argued that the participatory economy would
tend to a low degree of product market concentration compared to capitalist countries. He based this on the idea that while
capitalist profits would rise with market share, income per worker would be largely unchanged (except when monopoly
power might be exploited or substantial economies of scale exist).
In fact, Yugoslav industry showed a remarkable concentration in many markets. Table 19.3 gives some evidence from
1985. In food products, for example, 10 percent of the subdivisions of the industry were completely monopolized, and over
half had less than eight producers. Moreover, barriers to inter-republic trade meant that the de facto monopoly power of many
enterprises was even greater than the data indicate. Often there was a single producer in each republic, protected by
substantial barriers to entry.
We can speculate about the causes of such concentration, but much of the responsibility lay with the system of allocating
investment funds. Because the interest rate on investment capital was below its opportunity cost, every firm was interested in
attracting as much funds as possible. In general, the larger firms had a greater voice and political influence and were able to
attract more capital for expansion and modernization, and so they progressively squeezed smaller firms out of the market.
Inflation
The Yugoslav economy did not exhibit the low inflation that Vanek expected. Part of his case rested on the absence of union
power, which in capitalist economies was a powerful factor for “cost push” inflation through high wage settlements. He also
argued that a socialist economy was less prone to unemployment than a capitalist one, and therefore there would be less need
for expansionary fiscal and monetary policy, a frequent policy response of capitalist governments and one that accelerates the
rate of inflation.6 Despite these theoretical conclusions, Yugoslav inflation was brisk relative to other European countries,
and both federal and the republic governments tried to use price controls to fight it. The effect of these controls was to create
series of shortages, excess demand, and black markets for key commodities.
Environmental Quality
Finally, Vanek believed that a labor-managed economy would be more respectful of the environment and lead to a lower
level of pollution than would occur under capitalism. He argued that workers who lived near the factory would be resistant to
the emission of pollutants because of the negative effect on their own quality of life. Managers in capitalist firms, responsible
only to distant shareholders, would be more inclined to pillage the environment for an increase in profit. Again Vanek’s
prediction proved wide of the mark. Capitalist economies in the postwar period have been “cleaner” than socialist ones,
Yugoslavia included. The reason for this is that environmental regulation is more advanced in the wealthier economies of
Western Europe, perhaps because environmental concern is a “luxury” better afforded in wealthier nations. Also the
widespread environmental chaos throughout socialist Eastern Europe reflects the “problem of the commons”—that which
belongs to everyone in fact belongs to no one.
CONCLUSION
Despite the promise of labor-management, its overall performance in Yugoslavia must be regarded as disappointing. Vanek’s
predictions proved wrong on almost every score, in part because his expectations for participation were overly optimistic and
in part because Yugoslavia adopted only three out of the five basic institutions of the ideal participatory economy. It is
impossible to do more than speculate on the development of Yugoslavia if truly free markets for goods, and realistic charges
for capital services that would have equated supply and demand, had been adopted.
KEY TERMS AND CONCEPTS
basic organization of associated income maximization
labor (BOAL) labor management
capital charge market socialism
nonproductive expenditure participatory economies
organization of associated work points
labor (OAL)
RESOURCES
Books and Articles
Dyker, David A. Yugoslavia: Socialism, Development, and Debt. London: Routledge, 1990.
Flakierski, Henryk. The Economic System and Income Distribution in Yugoslavia. Armonk, N.Y.: M.E. Sharpe, 1989.
Ireland, Norman J. The Economics of the Labor-Managed Enterprises. London: Croom Helm, 1982.
Jackall, Robert, and Henry M. Levin, eds. Worker Cooperatives in America. Berkeley, Calif.: University of California Press, 1984.
Mellor, Mary. Worker Cooperatives in Theory and Practice. Milton Keynes, England, and
Philadelphia: Open University Press, 1988.
Miller, David. Market, State, and Community: Theoretical Foundations of Market Socialism.
Oxford: Oxford University Press., 1989.
Stephen, Frank H. The Economic Analysis of Producers’ Cooperatives. London: Macmillan, 1984.
Vanek, Jaroslav. The General Theory of Labor-Managed Market Economies. Ithaca, N.Y.: Cornell University Press, 1970.
Vanek, Jaroslav. The Participatory Economy: An Evolutionary Hypothesis and a Strategy for Development, Ithaca, N.Y.: Cornell
University Press, 1971.
Wachtel, Howard. “Workers’ Management and Inter-Industry Wage Differentials in Yugoslavia.” Journal of Political Economy, May–
June 1972.
Wachtel, Howard. Workers’ Management and Workers’ Wages in Yugoslavia. Ithaca, N.Y.:
Cornell University Press, 1973.
Ward, Ben. “The Firm in Illyria: Market Syndicalism,” American Economic Review,
September 1958.
1See Jaroslav Vanek, The Participatory Economy: An Evolutionary Hypothesis and a Strategy for Development (Ithaca: Cornell University Press, 1971).
2The various behavioral theories of the firm deal with issues concerning the practicability of profit maximization and the “real world” constraints on this
objective.
3There is no reason why the principle of diminishing marginal returns will not hold in such economies, since it is at base a technical consideration. The
amount of capital is fixed and as the number of workers increases, beyond some point, the marginal product of labor will decline, ultimately bringing down
the average product with it.
4Benjamin Ward, “The Firm in Illyria,” American Economic Review 48 (1958): 566–589.
5This figure was down from a peak of about 535,000 in the mid-1970s and the returning workers had exacerbated the problem at home.
6Indeed, modern literature in this “trade-off” suggests that any attempt to reduce unemployment below the natural rate is necessarily reflected in increased
prices rather than in expanded output and reduced unemployment.
BOX 1
Yugoslavia
Area (thousand sq. km.) 102
Currency dinar
1990-2000
GNI per capita 2000 --
Agriculture 20%
Industry 50%
Services 30%
FIGURE 19.1
FIGURE 19.2
Response to Price Increase in a Two-Factor Labor-Managed Firm
TABLE 19.1
The Regional Distribution of Income: 1947–1986 per Head Income
as a Percentage of Average
Republic or Population
Autonomous (millions)
Region 1947 1953 1979 1986 1986
Kosmet 58 53 31 30 1.8
Bosnia-Herzegovina 72 79 70 72 4.3
Macedonia 71 69 68 66 2
Montenegro 43 58 64 78 0.6
Serbia 100 91 96 94 5.8
Vojvodina 125 96 120 121 2
Croatia 105 111 125 123 4.7
Slovenia 157 182 200 211 1.9
All Yugoslavia 100 100 100 100 23.2
Highest/Lowest 3.65 3.43 6.45 7.03
SOURCE: Richard Carson, Comparative Economic Systems (Amonk, N.Y.: M. E. Sharpe, 1990), 365.
FIGURE 19.3
The Flow of Funds of a Yugoslav Social Sector BOAL SOURCE: Carson, 377.
TABLE 19.2
An Example of Work Points Assignments: Zagreb Textile Factory, 1961
Skill and Respon- Physical Mental Working
Education Experience Authority sibility Effort Effort Conditions Total
Managing director 100 170 150 190 10 100 10 730
Technical director 130 140 140 160 10 90 10 680
Works manager 100 130 100 120 10 90 30 580
Foreman 80 60 40 50 10 40 40 320
Skilled weaver 50 40 0 40 35 30 40 235
Skilled spinner 30 20 0 20 30 10 40 150
Sales manager 100 130 100 140 10 90 10 580
Accountant 100 100 50 90 10 80 10 440
Truck driver 80 60 0 70 30 40 40 320
Female cleaner 20 10 0 10 40 10 40 130
SOURCE: Bicanich, Rudolf, “La Politique des revenue Ouvriers en Yougoslavie,” Economie Appliquée, October–December, 1963, 587, cited in Carson,
381.
TABLE 19.3
Incidence of Monopoly and Oligopoly in Consumer-Oriented Industries, 1985
Number of Divisions
Single ,8
Industry Total Producer Producers
Final wood products 112 4 38
Finished leather products 101 7 36
Footwear and accessories 40 2 14
Food products 221 22 90
Beverages 24 2 10
Final tobacco products 4 1 3
SOURCE: John P. Burkett, “Self-Managed Market Socialism and the Yugoslave Economy, 1950–1991,” in Morris Bornstein, Comparative Economic
Systems (Homewood, Ill.: Richard Irwin, 1994), 333.