SELF—MANAGEMENT AND REQUIREMENTS FOR SOCIAL PROPERTY: LESSONS FROM YUGOSLAVIA

DIANE FLAHERTY 1

INDEX

I. INTRODUCTION...... 2 II. THEORETICAL VIEWS OF THE EFFICIENCY OF SELF—MANAGEMENT ...... 3 III. YUGOSLAV SELF—MANAGEMENT...... 7 IV. MARKET REFORM AND SELF—MANAGEMENT ...... 7 V. TOWARD NON—MARKET SELF—MANAGEMENT...... 9 VI. CONTRADICTIONS OF SELF—MANAGEMENT...... 10 VII. CONDITIONS AND MECHANISMS OF SOCIAL PROPERTY ...... 13 VIII. TOWARDS A DEFINITION OF SOCIAL PROPERTY ...... 16 IX. CONCLUSION...... 19 X. BIBLIOGRAPHY...... 20

1 Diane Flaherty: Professor Economics Department University of Massachusetts Amherst, MA 01003 email. [email protected]

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I. INTRODUCTION taxation of established firms or attempts to harden budget constraints so that firms do not 1. Problems with transitions in Eastern Europe squander social capital. have focused attention on alternatives to both 4. Each solution, government intervention or central—planning and unregulated markets. private ownership, does violence to some Naive enthusiasm for the market has already definitions of self—management. For example, begun to wane in the face of growing economic with government intervention to maintain chaos and inequality, precipitating a search for employment, conflict arises between the rights more humane and stable forms of organization. of workers in any one firm to control hiring Theoretically and in practice, worker self— decisions and the right of all workers to have a management is being advocated as a system job. Which right dominates depends upon one's able to produce efficiently and at the same time definition of self—management. If self— distribute goods and power equitably. The management is narrowly construed as purpose of this paper is to evaluate the role of autonomy of workers within any given firm, the self—management in achieving equity and cost of self—management may well be efficiency from both theoretical models of the unemployment. Similarly, if worker ownership, self—managed economy and the experience of not merely worker management, is considered Yugoslavia, the one economy at least nominally to be a defining characteristic of self— self—managed on a system—wide scale. management, the rights of workers who can 2. Theoretical models derive from many afford to own their firms dominate the rights of different frameworks, distinguished from each those who cannot. other by assumptions about property rights, the 5. Other models pose the issue in terms of a level of competitiveness or openness of the different set of defining characteristics of self— economy and even the objectives of the management, including enhanced enthusiasm, worker—managers within their firms. At issue commitment and therefore productivity of fundamentally are the degrees of inefficiency workers who manage their own firms. From and inequality inherent in self—management. this theoretical perspective, the self—managed The major sources of theoretical inefficiency firm is necessarily more efficient than its are an inability of self—management to secure capitalist counterpart because of the greater full employment in the long run, vulnerability effort exerted by a self—determining to inflation and a tendency toward less than workforce. optimal rates of investment due to ambiguous 6. Whether the individualist or the committed property rights. Inequality arises from the character of the self—managed firm prevails in tendency of self—managed organizations to reality derives to a large extent from the nature maximize their internal gains, rather than of the property and social relations in which the satisfy social goals. firm is embedded. For example, considerable 3. Solutions to the unemployment and inflation recent work on the conditions necessary for problems usually call for either further market cooperation focuses on destructive effects of reform to establish private property rights or private ownership on the trust and cooperation government intervention to promote entry of needed to make both heirarchical and self— new firms. Property rights concerns typically managed firms efficient. have been addressed by reformers with calls for 7. The major thesis of the paper, based on an private ownership, based largely on reference to evaluation of Yugoslav experience, is that the tragedy of the commons. On the other hand, efficiency and equity cannot be based on self— concerns for preserving social ownership have management at the level of the firm. However led to government intervention in the form of appealing the ideal of control by direct

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producers, intrafirm organization is not the II. THEORETICAL VIEWS OF THE primary determinant of economic and social EFFICIENCY OF SELF—MANAGEMENT trajectories. Unemployment, inequality among sectors and regions and inefficient investment 10. Beginning with the original Ward (Ward, are hardly features of a desirable transition. 1967) and Domar (Domar, 1966) models of the Moreover, autonomous firms in a competitive producer cooperative, the focus of self— environment seem to reproduce many of the management theory has been the goal of the least appealing features of the capitalist worker—managed firm. Although these models organization of work, among them intra—firm assume social ownership of means of hierarchy. Any new economic system must be production, what is seen to distinguish the construed as a society—wide system of self—managed firm is maximization of income production and distribution, including but not per worker rather than profit as the goal. Thus reduced to structure of the firm. the socialist context of the firm is relegated to 8. Further, the optimal form of organization for the background. The self—managed firm is enhancement of self—management rests upon a different from the capitalist firm not because form of social property that moves beyond a private property in capital is abolished but simple dichotomy between private and state simply because the two firms pursue different ownership. Rather, social ownership and social goals. property are relationships that may incorporate 11. Theoretically, the consequence of reducing aspects of both private and state ownership the difference between capitalist and socialist where necessary, but both must emphasize the firms to management structure is to define social nature of production and distribution. efficiency relative to the performance of the Concretely, social property can be privately or ideal competitive capitalist firm. Several state owned, but the constraints within which conclusions about the inefficiency of self— production and distribution decisions be management follow from using a capitalist defined to reflect norms of equality and social “twin” firm as the standard of reference. responsibility. 12. In the simplest one variable input case, the 9. The first section of the paper briefly reviews behavior of the self—managed firm compared the major theoretical literature on efficiency to its capitalist twin is “perverse”. The supply and equity in self—management. In the second curve is backward—bending and prices are section, the performance of Yugoslav self— highly volatile in response to cost or demand management is evaluated briefly for two changes. Most perverse is the result that if periods of reform, the 1960's in which markets prices rise, the firm produces less, not more as were emphasized and the 1970's, when non— the capitalist firm would do. Therefore, rising market methods of economic coordination were prices are associated with contraction of sought. The third section links failures of self— employment and output in self—management. management to an insufficient development of 13. Many extensions of the basic model have the theory and practice of social ownership and shown that the perversities dwindle with more social property. A final section addresses the reasonable approximations to reality, like role of social property in generating solutions to multiple variable input and substitutability the failures of self—management revealed by among inputs (Milenkovitch, 1984). Yugoslav experience. Nonetheless, maximization of income—per— worker does have the undesirable effect of rendering marginal productivities of labor unequal across firms. Because hiring decisions are made on the basis of payment to the worker

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of a share of the firm's net revenue, firms will 17. The first approach to salvaging the only hire workers if the addition to net revenue efficiency of self—management is to posit is greater than the current share, or the average alternative goals for worker managers, net revenue. including maximization of worker utility and 14. It follows that the equilibrium level of maximization of profit, each defined in various employment of each firm depends upon its ways and for various time horizons. Obviously, average net revenue structure, and bears no if short—run profits are maximized, the necessary relationship to the marginal distinction between the self—managed and the productivity of labor in other firms. In general, capitalist firm collapses and both are equally therefore, each firm operates at a different efficient. marginal productivity of labor. As a result, 18. More interesting are goals which admit reallocating labor from low— to high— non—income sources of satisfaction or utility. productivity firms would increase the level of Here the common theme is that workers who output. The conclusion then obtains that self— manage their own firms are more solidaritous management is inefficient because when with fellow workers and desire to see them workers maximize per—worker income the employed. Utility then depends upon both society as a whole produces less than is income per employed worker and the level of physically possible for a given level of inputs. employment. (See, for example, Horvat, 1972, 15. Behind this result is the absence of a 1985; Tyson, 1977; Vanek and Miovic, 1977, conventional labor market in self— and the survey of Yugoslav enterprises in Estrin management. No market wage exists to which and Bartlett, 1982.) To avoid layoffs, workers the employment levels of all firms adjust and self—impose a labor constraint in the form of a hence no mechanism is available for minimum level of employment. However, in equilibrating marginal productivities of labor such models the labor constraint typically across firms. There is also no wage in the sense applies only to firing existing workers, not to of a fixed payment for labor services, because hiring new workers, so the theoretical all workers receive equal shares of the net conclusions about low supply elasticities and revenue. From these characteristic features of resulting unemployment are weakened only models of self—management arises the slightly. possibility of unemployment in long—run 19. A second approach to evaluating efficiency equilibrium. Unemployed workers cannot make of the self—managed firm emphasizes workers' themselves more attractive by lowering their feelings about their jobs as a source of utility. supply price, because if hired they must receive In these models, the key to understanding a proportionate share of the firm's net revenue. relative efficiency of capitalist and self— 16. This simple self—managed economy is thus managed firms is variable effort from workers. theoretically doomed to inefficiency and Workers who manage themselves are argued to inequality. Even without the instability of the be more productive because they are more simple one variable—input model, self— satisfied, but their improved efficiency is not management produces less than maximum captured in the Ward and Domar—type output with less than full employment. producer cooperative models of self— Advocates of self—management have management (Horvat, 1986; Jones and Svejnar, countered with two approaches, both of which 1982; Vanek, 1970). reject the ideal capitalist firm as the standard of 20. The variable effort framework attacks reference and question maximization of income directly the practice of defining the standard of per worker as an accurate description of the efficiency by the ideal capitalist firm as goal of the worker—managed firm. represented in neo—classical economic theory.

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In conventional neo—classical theory, the firm be traced back to maximizing income—per— operates according to a production function in worker. Capital (like all non—labor inputs) which output is a function of capital and labor, receives the same payment in both capitalist each labor unit with an assumed constant level and self—managed firms, but labor must be of effort. Variable effort faults the standard paid a share of the profit in self—management. producer cooperative view of self— As a result, labor is relatively more expensive management for using the fixed effort, neo— in the self—managed firm. This firm thus uses classical production function and thus ignoring more capital (more of the cheaper input) than the very essence of worker control, increased the corresponding capitalist firm. effort. Limiting efficiency comparisons 24. Although self—management is logically between self— managed and capitalist firms to distinct from socialism, the Ward and Domar— criteria derived from neo—classical production type producer cooperative models assume functions is seen to bias the outcome against socialist property relations with no private self—management.i ownership of the means of production. The 21. To deal with potential unemployment in consequences of this assumption, however, are self—management, long—run theories of the largely unexamined. If instead of producer self—managed firm devise mechanisms of cooperative models we consider theories of entry of new firms while still retaining the goal property relations, we find an opposite of maximizing income per worker. The least conclusion about investment. appealing mechanism is to allow existing 25. In non—private ownership, assets are workers to hire new workers as wage labor for a non—vested. Workers have claims only to the fixed wage with no share of the profits. Clearly, income streams generated by their investments this solution reduces unemployment at the and not to the capital itself. Because workers immediate expense of self—management, since cannot capture the full benefits of investing, now only some workers are also managers. they will invest too little. Only in the special 22. Other mechanisms include allowing case of workers expecting to be associated with unemployed workers to found new firms by their firm in perpetuity will the capitalist and permitting them to set their own wages the self—managed firm engage in the same sufficiently low to attract capital. In this case, level of investment. Self—management is workers themselves determine their rate of therefore argued to be inefficient, in the specific return and are self—exploiting to the extent that sense that for the same rate of return and cost of they accept less than the normal rate of return. capital, more investment would be desired (This is a very common feature of workers' under different institutional arrangements cooperatives in Westerm capitalist countries.) (Furobotn and Pejovich, 1974). In other words, To minimize exploitation, the state can provide the rate of investment is sub—optimal because capital at subsidized rates, with loans financed purely capitalist economic considerations by taxes on the employed, whose resistance to would produce a higher rate. expansion is after all the source of the 26. Risk—taking is also seen to be affected by unemployment problem in the first place the lack of private property rights. Self— (Vanek, 1970). managers in the context of social ownership 23. Treatment of capital reveals the second have a strong incentive to take risks because major weakness of self—managed economies costs of failure is socialized while benefits of deduced from the standard producer success— accrue to the firm. Excessive risk— cooperative models. In the same way that the taking is associated with persistence of loss— self—managed economy uses too little labor, it making firms in socialized self— management, uses too much capital. This behavior also can because there is no process of adjustment by

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which losses induce changes in the structure of exhibit low supply elasticities, the degree of investment, production and employment. expansion must be greater than in the twin 27. The central government of course could capitalist economy. Thus, the burden on the enforce bankruptcy on firms whose risks have state to conduct successful macro policy is not borne fruit, but this solution simply imposes greater in self—management. the will of the state on the workers. This is the 31. A second concern is inequality among crux of the property rights challenge: effective enterprises. The low inter—firm labor mobility self—management can be achieved only with associated with maximization of income— private property because otherwise the choice is per— worker, mentioned above, has the between inefficiency or bureaucratic obvious implication that rich firms will tend to interference. get richer and poor firms poorer. The first 28. The clearest hypothesis generated from the important aspect of this problem is an equity various models of self—management is that issue: should self—management be introduced unemployment and barriers to entry will be even at the cost of equal wages for equal work? high relative to some capitalist reference point. 32. Unfortunately, the basic premise of Subsidiary hypotheses include persistence of decentralized self— management, reward wage differentials across sectors, reflecting according to work, makes government misallocation of labor, and existence of intervention to redress inequality suspect. productivity differentials between capitalist and Self—governing firms should be allowed to self—managed firms. Productivity can be keep the fruits of their labor if there is to be true worse in either capitalist or self—managed self— management. The dilemma facing the firms according to the kind of model assumed. government, then, is to allow increasing income With a neo—classical model, misallocation of and employment disparities or violate the labor explains productivity differences and the autonomy of the self—managers. self—managed firm is less efficient. With a 33. Compounding this dilemma is the variable effort model, self—management is theoretical unclarity of the concept of reward more efficient than the typical capitalist firm according to work. Determining that returns are because workers work harder and smarter. the results of worker effort rather than of 29. The same theoretical ambiguity exists historical accidents like endowment of superior concerning capital. Depending upon the precise capital stock or more accessible markets assumptions, the capital/labor ratio may be requires imputation criteria procedures that are expected to be either higher or lower in the vague at best. The usual solution proposed is a self—managed firm compared to its capitalist government agency which calculates, for twin. In either case, however, the criteria for example, the windfall gains from an evaluating efficiency are less clear—cut than autonomous increase in demand. (See, for for employment and productivity, so example, Vanek, 1977, Kardelj, 1981 and comparisons are more difficult. Dragicevic, 1967). The government's role then 30. Clearly, whatever source of inefficiency is is to tax away these gains to equalize the deduced from each of the various models, the “conditions of work” to assure that wages are macroeconomic environment facing the firm is returns to effort alone. The impact of such an critical. In the case of entry, if microeconomic agency, with substantial power to impose intervention like preferential credit to individual almost arbitrary taxes, on the independence of enterprises is seen to be distortionary, the only firms is ignored. alternative for maintaining full employment is 34. There are few choices of site for evaluating expansionary macro policy. Moreover, to the these propositions about self—management. extent that self—managed firms actually do Yugoslavia was the only national economy

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organized legally on the basis of self— limited set of national targets which measure management. Experiences elsewhere have been growth. In the Yugoslav case, this degree of limited to individual firms or sectors, with the centralization was also consistent with the exception of Mondragon, which is a region of second concern of the period, regional self—managed firms linked by a central inequality. The central government used its financial and planning authority. The next control to reallocate resources to the less section examines the Yugoslav experience with developed regions (and poorer areas of self—management in light of theoretical developed regions) to create jobs and improve debates about efficiency. the quality of social infrastructure (Flaherty, 1982). III. YUGOSLAV SELF—MANAGEMENT 39. Self—management in the 1950's, then, allowed workers only limited control over their 35. The history of self—management in firms, with the limits established by broader Yugoslavia began in the early 1950's, when the economic and social goals. In the resulting break with the Soviet Union led Yugoslavia to conflict between rights of workers in any one find a distinct road to socialism. In the almost firm and rights of workers as a whole, the forty years since, both the theory and the whole clearly dominated. Full employment and practice of self—management have changed equalization of conditions of work among radically. regions and sectors were integral parts of the 36. In the first decade, self—management was concept of self—management. conceived of primarily as a society—wide phenomenon. While its core was expanded IV. MARKET REFORM AND SELF— rights of firms to make decisions, the goal of MANAGEMENT greater worker power was not firm autonomy per se, but a more committed and productive 40. By the end of the 1950's, neither the work force. While the rhetoric of self— economic performance nor the degree of self— management proclaimed unlimited rights for management were satisfactory. After a decade workers, in practice economic rights were of great success in economic growth and limited to such decisions as relative wages equalization across regions, the strategy of within a centrally—determined wage bill and industrialization ran into familiar barriers. hiring and firing of managers. Shortages, low output/capital ratios and a 37. The shape of self—management in this stagnant agricultural sector called into question period was dictated by two overriding concerns, the case for constraining firm autonomy to economic growth and equalization among promote growth. At the same time, workers regions. Therefore, some degree of self— who had expected their rights to be extended management was desirable because increased with prosperity now saw a widening gap productivity would finance growth. However, between the rhetoric of self—management and despite the break with the Soviet Union, the their near—term prospects for greater prevailing growth strategy was very orthodox, independence. The final blow was emphasizing industrial growth and requiring dissatisfaction of richer regions, who argued careful husbanding of scarce resources for the that they had paid heavy taxes to advance expansion of priority sectors. backward regions whose continued inefficiency 38. Such a growth strategy leaves little room was a drain on the entire economy (Flaherty, for firm autonomy. Most decisions about 1982; Milenkovitch, 1971). allocation of capital, output and even labor need 41. Rising disenchantment with the narrow to be centrally determined to achieve the conception of self—management and with

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economic performance culminated in the unemployed to these regions did not occur. economic reforms of the mid—1960's. The Consistent with theoretical expectations, thesis of reform was that efficiency could only workers in the richer areas were reluctant to be imposed by introducing a neutral arbiter of expand employment once they had one of the success, the market. A typical package of basic freedoms of self—managers, power to liberalizing reforms was enacted, all designed allocate their firm's net revenue to wages. to open up the domestic economy to the 45. Laying the blame for post—reform discipline of the world market. The carrot to economic chaos on self—management is accompany this stick was broader self— nonetheless complicated by several management in an economy in which firms considerations. First, and most important, the were free to make their own decisions about effect of reform on the degree of self— pricing, investment and hiring. management is questionable. Second, 42. For economic performance, the reforms investment, not consumption, was the major were a disaster. Inflation, unemployment and contributor to inflationary pressure. Third, balance of payments deficits all soared from excessive investment was due more to 1965 to 1970. A series of stop—go cycles competitive pressure and the role of the state attempted to achieve a compromise between the than to self—management maximizing political commitment to reform and the behavior. Finally, barriers to entry having attendant economic disruptions. In external nothing to do with self—management inhibited relations, only the migration of Yugoslav absorption of the unemployed in the more workers to Western Europe and the resulting developed areas (Milenkovitch, 1984). remittances from abroad kept the trade deficit 46. More generally, the crisis cannot be under control. attributed to self—management alone because 43. The central issue for an evaluation of self— of the obvious added complications from management is the extent to which the self— introducing markets on firms and their management component of the reform was environment. As subsidies were withdrawn and implicated in the escalating instability. Both foreign competition encouraged, Yugoslav inflation and unemployment appear to some firms found themselves forced to modernize extent to be consequences of greater firm and rationalize to survive. The consequences autonomy. In reaction to earlier constraints on for worker participation are fairly wages and to inflationary expectations, workers' straightforward and have indeed been found by councils used their new freedoms to disburse a the few studies available of the behavior of high percentage of firm net revenue as wages. workers' councils. After reform, the role of Consumption grew at a rate almost 4 times managers and technical experts in initiating faster than expected and the internal savings of items to be considered by the councils and in firms plummeted (Dubey, 1975). determining outcomes have been shown to have 44. Across the country, but especially in the increased substantially, while blue—collar less—developed regions, open unemployment influence on firm decision—making declined. for the first time became a problem. Rates of 47. Competitive pressure has also been a major unemployment in the poorest regions rose from contributor to overinvestment. Ironically, less than 2 percent to 12 percent between 1965 reform was supposed to shift the economy and 1970 and to almost 18 percent by 1975. At away from the excessive investment of the the same time, labor markets in the developed planned economy, but instead it forced firms to regions faced labor shortages due to migration escalate investment to adjust to the new of skilled workers to Western Europe (Schrenk, environment. While immediately after reform 1979). Yet internal migration of the firms did allocate most net revenue to wages,

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this did not last for long. Investment on the equalization of regional incomes, the stage was other hand accelerated in the early 1970's. set for the present civil war. 48. The shift from consumption to investment as the primary source of inflationary pressure is V. TOWARD NON—MARKET SELF— explained in part by the role of the state in the MANAGEMENT early years of reform. Once the consequences of reform for economic stability and equity 51. In reaction to the continuing crisis in the became clear, the state intervened to control the early 1970's, Yugoslavia launched another worst consequences of reform. Wages were at reform, this time explicitly addressed to the times frozen to keep managers from using wage conflict between self—management and increases to smooth over discontent at lack of centralization. The central premise was that worker participation. At the same time, the reform had carried centralization too far and government supported over—investment. Faced that more control over the economy was with a choice between massive bankruptcy and necessary. The problem then was to design a supporting even unwise investment, it chose the system of central guidance of the economy latter. This behavior constitutes the notorious consistent with self— management. The soft budget constraint so beloved of critics of solution was based on reduction in the size of socialism, but it also reflects Yugoslav autonomous production units to allow more commitment to maintaining levels of direct participation by workers and on a employment and equity consistent with a combination of voluntary and mandatory socialist society. targets to maintain macroeconomic balance. 49. It is impossible to determine with any 52. Firms were broken down into BOALs precision the degree of responsibility for the (Basic Organs of Associated Labor), in theory failures of reform borne by the market v. self— the smallest unit producing a marketable management. Government intervention output. Relations among BOALs and between muddied the waters by restricting the autonomy BOALs and the central government were of the firm as well as by mitigating the regulated by social compacts and social influence of market forces. Inside firms, the contracts. Among BOALs, the goal was role of managers and experts replaced the role negotiated contracts establishing long—term of party officials in determining what the firm prices, quantities and other terms. In addition to did in fact maximize, but it is unlikely that being longterm, the contracts were supposed to income per worker was the goal. Neither take into account the social as well as the markets nor self—management existed in firm—level costs and benefits of the prices, etc. anything like pure form. The mechanism for incorporating social 50. These caveats notwithstanding, the information into firm decision—making was Yugoslav case does suggest that the market the community of interest, defined loosely as combined with some worker control over wages any segment of society affected by the contract. and employment is a particularly crisis—prone For example, residents of a neighborhood near mix. Adding fuel to the fire is the intense a factory would have a say in the process of regional differentiation in the country. While production and would be able to impose on 'the self—management may be prone to labor firm any cost of cleaning up pollution. immobility, ethnic divisions in themselves are 53. Between BOALs and the state, agreements formidable obstacles to the absorption of concerned such items as the relation between unemployed workers from the poor regions by wage and productivity increases, limits to the relatively prosperous areas. When reform foreign borrowing, price ceilings and reversed a decade—long trend toward employment quotas. The purpose of the

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agreements was to maintain consistency power to BOALs, further limiting its ability to between requirements for national economic construct and carry out a coherent national balance and firm—level decisions without economic program, on the assumption that relying on a full—blown central plan. BOALs would be motivated to promote 54. The BOAL system marked a renewed national stability. When the assumption turned commitment to worker participation, but the out to be invalid, the government had few concept of self—management upon which it levers of control and the crisis escalated. was based proved deficient in several respects. 56. The BOAL system was introduced as a way The degree of decentralization resulting from to enhance worker participation within a non— break—up of firms into their constituent units market environment of negotiated prices, was excessive. Although the expectation was outputs and investment decisions. Participation that the smaller units would be forced to may well have improved, but any cooperate to survive, instead of pooling productivity—enhancing effects at the level of resources and arranging joint investments the the firm were swamped by the global BOALs tended to act individually, each inefficiency of an economy in which every embarking on its own expansion plan. Pressure small production unit was allowed to borrow as on investment resources multiplied in line with much as and invest in whatever activity its the proliferation of production units empowered individual interest demanded. Reaction to to make, investment decisions. The government continued crisis focused on the role of the state was then faced with the same choice as in the in supporting inefficient firms. A return to 1960's reforms, but on a much, larger scale. It markets, emphasizing bankruptcy, began in the could allow widespread bankruptcy of the early 1980's, with the usual results of increased BOALs or continue to emit credit in inequality, inflation and balance of payments destabilizing amounts to control problems. (Flaherty, 1988; Flaherty, 1993) unemployment. Deepening the dilemma in the mid—1970's, recession in Western Europe sent VI. CONTRADICTIONS OF SELF— between a third and a half of Yugoslav MANAGEMENT guestworkers back home. As before, the choice was to support a level of employment 57. Yugoslav experience highlights the consistent with some notion of socialist equity contradictory nature of self— management. On (and, of course, political stability) regardless of the one hand, self—management entails inflationary consequences (Milenkovitch, freedom of direct producers to control their 1984). firms. On the other hand, decisions made by 55. Communities of interest and social autonomous, uncoordinated firms can in contracts and compacts also did not work as aggregate actually impede realization of self— expected. As mechanisms of coordination they management within the firm as well as the were cumbersome, but the more fundamental survival of the firm itself. problem was the way in which the mechanisms 58. Market reform in the 1960’s defined self— were used. Decentralization did not make the management in terms of the first pole of the new production units, the BOALs, less subject contradiction. Firm autonomy was made to decisions favoring their own individual synonymous with worker control and the interests. In practice, it simply provided an market was seen as the only neutral opportunity for fuller expression of the coordinating mechanism consistent with tendencies toward individualism unleashed by autonomy. The BOAL system of the 1970's in the market reforms of the 1960's. The state had theory repudiated the market as the ceded both resources and decision—making coordinating mechanism, replacing it with

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negotiated contracts incorporating social and compete to gain access to the most profitable aggregate economic goals. However, by common assets, limiting realization of defining self—management as autonomy of the economies of scale within the firm smallest production unit, the 1970's reforms 62. At the second level, relations among firms decentralized to the point that conscious and between firms and society, individualism coordination of any sort was rendered virtually manifested itself in many different ways. Local impossible. banks, for example, validated the debt of firms 59. To link the problems arising from these in their area to avoid bankruptcy and contradictions to social property, let us first unemployment, creating an economy—wide divide problems into two categories, those inflationary pressure that eroded potential gains affecting intra—firm self—management and even to these localities. Firms did not report those raising issues of inter—firm relations, or earnings accurately to avoid paying taxes and at relations between firms and society as a whole. the level of regions and political resistance to Into the first category fall issues such as decline redistributive taxes mounted (and is one of the of worker participation in decisions, unequal main causes of the ultimate demise of the payments to old and new workers and relations republic). Investment fluctuated widely, among the various BOALs within an individual depending upon the perceived interests of the firm. These issues all stem from related firm or BOAL. Where investment borrowing vulnerabilities of self—management to both was financed by banks, firms tended to over— autarchic goals and competitive pressure. invest and accumulate large and unpayable 60. Autarchic or individualistic goals certainly debt. Where and when it became clear that debt existed prior to reform, and are traceable to was unsustainable, firms simply paid out the several structural features of the Yugoslav surplus as wages and left investment and social economy, most importantly lack of history of funds to wither. self—management, resistance to central 63. In short, problems of realizing self— determination of returns according to work and management at either the level of the firm or ethnic differences. Nonetheless, successive the level of society as a whole persisted decentralizations of decision—making, throughout all the periods of Yugoslav ultimately to the level of the BOAL, reinforced experimentation. In the early, centrally— an atomistic view of self—management. Each planned period the contradictions of self— new decentralization pitted ever larger numbers management were manifest mainly within each of ever smaller production units against each firm, but with each successive attempt to other, sacrificing inter—unit cooperation for resolve intra—firm failures of self— expected improvement in intra—unit equality. management both intra—firm and inter—firm Market reforms at the same time had already contradictions grew stronger. increased competitive pressure on self— 64. The common theme across all these time managed firms and BOALS, reducing the periods and levels of analysis is the nature and expected gains in intra—unit equality as firms role of cooperation and trust. The initial move turned to experts to save them from failure in to self—management suffered from a fatal the face of chaotic market conditions. blindness concerning property rights, assuming 61. As workers ceded control within the firm to that a system of social ownership of property ‘experts’, firms began to implement payment would guarantee sufficient cooperation and schemes antithetical to self—management, in trust to construct self—managment at both the some cases offering new workers less than firm and the social levels. For example, the proportional shares of the surplus. The BOAL concept of reward according to work, although system went further, inducing BOALs to vague and difficult to operationalize, was not

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seen to be a locus of conflict, since workers in end of the 1950’s were still not forthcoming. different firms were all equal as owners of Citizens as well as firms saw little difference social property and therefore a priori must be after all between Soviet planning and self— cooperative. Workers in richer firms were also management and the concepts of social citizens of the larger socialist society and as ownership and social property remained such would trust that their taxes (formally elusive. called contributions) to social funds were fair. 67. In the reform periods, the concepts were Workers in all firms in turn would trust refined in ways which reflected these government (whose workers were also self— dissatisfactions of the 1950’s. By decentralizing managed) to devise macroeconomic policy to economic decision making and control, achieve self—management and maintain social Yugoslav theorists of self—management hoped ownership. to realize social property by ceding economic 65. These assumptions were not necessarily resources to individual firms, communities and purely utopian. Yugoslavia’s war experience regions. Much has been said already above was a powerful source of solidarity and about the tensions and problems produced by cooperation. In the early post—war period, the reform. With specific reference to social very motivation for self—management, property, the tendency of all the reforms was in repudiation of Soviet—style planning, was fact to de—socialize property by putting it itself reflective of a common social goal. under the control of firms or groups who faced Nonetheless, the burden of continuation of increasing pressure to in effect loot social cooperation and trust was placed on a concept property to maintain their economic and social of social ownership and social that was existence. With the simultaneous introduction underdeveloped both theoretically and in of markets both domestic and international, the practice. In the early period firms did have concept of social property was thoroughly workers’ councils, but as the preceding analysis undermined again, this time at the level of the describes, the definition of social ownership economy as a whole. Firms and communities, allowed firms only to use the assets and to not who might in fact have wanted to be sell or alienate them. Indeed, even the income cooperative, were forced into beggar—thy— from use was narrowly constrained by neighbor strategies by the nature of the centrally—determined limits on wages and economy into which they were now thrust choice of investments. Accepting this practical unprepared. definition of social then required individual 68. As a result, the core proposition of social firms to believe in self—management at the property heretofore, that users of the property level of the entire society, which was difficult cannot destroy or alienate it, came into conflict to achieve when the political and economic with stark realities of a crumbling economy. decisions were concentrated within a ruling While still legally proscribed from selling off elite. The rhetoric of social property and rule of assets, firms could and eventually did devalue self—managed workers was confronted with a social capital, either by borrowing money they centralized state apparatus that left little role for could not repay or by actual running—down of real participation in decision making atany machinery without putting aside required level. depreciation funds. This tendency was simply 66. The obvious gap between the ideal and the accelerated by the BOAL system, which took reality of social ownership explains part of the the path of further individualizing social push to reform. For example, the state had ownership and property. promised to use social property to deliver increasing levels of consumer goods, but by the

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VII. CONDITIONS AND MECHANISMS OF however, the knife—edge property of rent. Rent SOCIAL PROPERTY must be taken away to avoid exploitation, but excessive transfer of surplus above the amount 69. The problems experienced by Yugoslav not attributable to a firm’s effort is also self—management are inherent in the structure exploitative. The choice of mechanism for of participatory institutions and the failures calculating rent is therefore critical. contribute to our identification and 72. Unfortunately, the difficulty in determining understanding of the core requirements and rent for this purpose (known as differential rent) pitfalls in such a system. Two of the central is well—known. In socialist societies, the components of Yugoslav self—management, calculation problem may be particularly acute reward according to work and redistribution to because there is no benchmark of competitive achieve equal conditions of work, are market prices of inputs and outputs to use as fundamental to a society that is both efficient reference points for calculating rents. (Kornai, and just. At the same time, however, unless 1992; Sorensen, 1996, p.1323; Dragicevic, these principles are applied within proper social 1967, pp. 73—77)ii Moreover, socialist societies institutions, they are bound to fail. This section tend as deliberate policy to foster productive explores what might be the defining elements structures that generate monopoly rent. of such institutions, focusing on social property Monopolies in production are created to take as the central concern. advantage of increasing returns to scale; 70. Reward according to work is a principle that monopolies and rent—seeking behavior are addresses what has come to be seen as a major widespread in shortages, which most impediment to efficiency even in market centrally—planned economies have economies, rent and rent—seeking behavior. experienced chronically at least with respect to Rent in the classical sense of a return to the consumer goods. ownership of a scarce resource can also be 73. Yugoslav theorists of self—management defined as ‘...payment to the owner of a debated the solutions to these problems of rent resource independent of the effort or past for several years before concluding that the best savings put in by the owner’. (Sorensen, 1996, response was to move toward market reform as p. 1338) Viewed in this light, any higher the mechanism best suited to further earnings of self—managed firms that derive development of self—management.iii For from historical accidents of market access or example, Ervard Kardelj, in analyzing the inherited higher—quality capital are not be reasons for the failure of differential rent to rewards to effort but rents. Conversely, the achieve rewards according to work, concluded vagaries of the world market can reduce the 74. I think that our failure to ensure equal incomes of firms independent of their efforts, conditions of economic activity and income— yielding negative rents. earing was due to a considerable extent to lack 71. In this framework, rent is clearly a basis for of respect of objective market laws. So we had exploitation. For example, John Roemer argues to resort to taxation. (Kardelj, 1964, p.26) that the owners of rich land may be said to 75. In this conclusion, Kardelj anticipates and exploit the owners of poorer land. (Roemer, largely agrees with discussions of property 1982) This is one case of the more general rights as the major explanation of the failure of concept of exploitation in Roemer: exploitation self—management. Furobotn, Pejovich, Kornai exists whenever there is inequality in ownership and others in the property rights school argue of resources and any group could be better off that the lack of private property produce by withdrawing with its share of the resources. artificial incentives, while market relations (Roemer, 1988) This latter point underscores, grounded in full ownership rights create

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automatic and ‘spontaneous’ incentives. Moreover, even the ‘tragedy’ of the commons (Furobotn and Pejovich, 1974; Kornai, 1992) is coming to be seen as less a tragedy than an Still, Kardelj and the major Yugoslav oppportunity for exploiting the advantages of contributors to the debate were aware of the collective action. As Seabright concludes, inherent tensions involved in relying upon 79. To summarize, it should be clear that market indicators to achieve self— private property rights not only may fail to management: solve the problems of externalities that bedevil 76. For self—management presupposes common property resources. When contractual equality based on the objective laws of material relations remain in important respects or economic development, on the one hand, and incomplete, private property may also weaken on a conscious adjustment and guidance of that the mechanisms of cooperation that previously development, particularly of economic and existed, either by shifting the bargaining power social relations among working people, on the of the parties so that they no longer share other. Consequently, economic activities enough interdependence to make cooperation governed by the laws of the market, social credible, or by weakening the credibility of planning and economic and social solidarity long—term contracts. (Seabright, 1993, p. 129) among working people are three inseparable 80. Common results found in these explorations components of our socialist system of self— of efficient institutions point to several management. ...True enough, these components necessary characteristics for trust and are in a contradictory relationship. (Kardelj, cooperation. First, people must develop 1964, p. 27) knowledge that long—term interests can be 77. We are left, then, in a dilemma. In Kardelj’s harmed by acting to maximize short—term terminology, there is a contradiction between interest. In a game theoretic framework, this markets and economic and social solidarity typically is seen to require repeated interaction, among working people. Although he sees so that the individuals deciding upon collective market relations as necessary for achieving a action have information about the past and core principle of self—management, reward therefore expected future behavior of the according to work, market outcomes are not various actors. Without such information and necessarily consistent with the second principle, expectations, cooperation can fall victim to high equalization of conditions of work. discount rates for future gains, leading to the 78. This same dilemma has received kind of looting of social assets seen in considerable attention in current work on Yugoslavia. cooperation, trust and social norms. Working 81. In addition, there must be costs to defection within a game theoretic framework, this from collective action, and these costs must be literature offers a forward from the sufficient to offset benefits from being the first contradictions of self—management discussed to defect (or simply an early defector). Costs above. Several analyses of trust and cooperation can be monetary, as when loss of reputation have concluded that market relations are leads to loss of credit, or social, as when inimical to trust and cooperation. (For example, defecting leads to expulsion from the group. Seabright, 1993; Bardhan, 1993; Ostrom, 1994 Finally, and critically, trust and cooperation and 1999; Coleman, 1988)iv Private property may not result from either of these two and markets fail because contracts are conditions without broadly common incomplete or unenforcable. Contracts need to perceptions of the norms of fairness. Thus, in be supplemented with informal norms and the Yugoslav case, although monetary and agreements but private property and marke social costs could be imposed relatively easily, relations can damage these mechanisms. at least in the era of more central control,

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disagreement among regions on norms of determined. (Ostrom, Gardner and Walker, fairness still made defection worthwhile. Under 1994) these circumstances, the costs would have to 84. These results of the recent research on rise to such a degree to counteract differing norms, collective action and social capital put norms that fairness would be increasingly the Yugoslav experiment in self—management difficult to establish. in a more positive light. The crisis—driven and 82. Supplementing theories of collective action, erratic shifts in Yugoslav policy did still research on the nature and role of social capital incorporate critical features identified in yields insights about the necessary conditions analyses of trust and cooperation. Social for trust and cooperation. Ostrom provides the ownership as the environment in which to most useful definition of social capital: it is the embed self—management was originally ability to construct commonly understood and designed exactly to develop cooperation and practiced, self—enforcing rules of behavior. trust by reducing inequality and competition. (From Sobel, 2002, p. 147) The existence of Decentralization and later the BOAL system social capital clearly affects incentives to both explicitly aimed at enhancing local participate in groups and work within networks. participation, hence creating dense networks, In societies with high levels of social capital, and also at preserving and using local and people are more willing to trust, or as Sobel informal mechanisms of decision—making. defines trust, ‘...to permit the decisions of 85. However, the research on norms, trust and others to influence...[their]...welfare. (Sobel cooperation also highlights the same problems 2002, p. 147) With respect to Yugoslavia, a faced in Yugoslavia, namely the inability of higher level of social capital presumably would purely local arrangements and decisions to have led self—managed firms and BOALs to satisfy broader social norms and goals. One choose less autarchic paths, to permit decisions caution is that perfectly efficient local of other firms and of the state to influence their arrangements may make people outside the welfare. local group worse off v, as happened in 83. Requirements for high social capital vary Yugoslavia. Ownership poses a second and across cultures and times, but the literature on related difficulty. Formal or legal ownership is social capital identifies several general not sufficient to achieve any of the goals characteristics applicable to all societies. The purportedly associated with specific forms of number of decision—makers and the frequency ownership. For example, as noted above, of their interactions are important (Ostrom, private property can produce inefficiency when Gardner and Walker, 1994), since ‘dense’ it ignores or conflicts with established informal networks facilitate both commonality of norms practices of decision—making and control and and information flows identifying obedience to state ownership is not necessarily either norms and imposition of sanctions for efficient or equitable. The heart of the problem disobedience. (Coleman, 1988) Work on is that property relations, like market management of the commons suggests in transactions, involve incomplete contracts that addition that informal mechanisms of work in practice due to informal (and most decision—making, monitoring and sanctioning likely local) arrangements and networks. also support high social capital. However, a key 86. The core of the institution of owership is a condition of informal mechanisms is local matter of unquestioned and largely unconscious participation. Social networks can lead to social and economic practices that must be efficient and equitable outcomes to a large rooted in nonlegal developments….When degree according to the extent that the obedience breaks down on a large enough scale, institutional arrangements are locally—

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no authority is strong enough to police ownership can in fact be made contingent upon everyone. (Rapaczynski, 1966, p. 88) such conformity, so that property rights, while 87. When the formal institutions are either decentralized, are not absolute. This approach insufficient to achieve desired goals or in has historical precedent in both the Soviet conflict with goals, informal institutions Union and in developing capitalist countries. develop that can undermine the formal. This is For example, land reform legislation in the true not just of Yugoslavia, but of the Soviet Soviet Union in the 1920’s called for Union, where the notorious tolkachi are a clear distribution of land to small producers as long example of the use of social capital to make as they continued production. Many tribal institutions work, and of market economies, forms of land distribution, for example in South where open and tacit collusion undermine Africa, also allow individual ownership competition. contingent upon productive use. 91. Moving from ownership to the form of VIII. TOWARDS A DEFINITION OF transactions, we can begin to specify the SOCIAL PROPERTY constraints that should operate on property to make it social. In general, transactions must be 88. To achieve efficiency and equity, then, we guided toward fulfillment of social goals. If we need institutions that support common assume for now that economic goals are perceptions of fairness and enhance trust so that embodied in the overall growth strategy of the the informal practices reinforce and do not society, market relations must be shaped toward impede or repudiate social goals and norms. achievement of the growth strategy. This is The arguments concerning collective action and perhaps obvious, given that this was the main social capital, combined with Yugoslav point of central planning. However, in an experience, provide some guideposts for environment of social property the nature of redefining social property to strengthen trust these goals and the links between goals and and cooperation. limits on markets must be made transparent. 89. First, with respect to the economy—wide For example, if the development of a domestic requirements for social property, we need to capital—goods sector requires high levels of consider the type of transactions, the social imports, and the country is foreign—exchange goals toward which the economy is headed, the constrained, imports of consumer goods will policies needed to reach those goals and the decrease, either by government decree or de consistency of policy with existing norms of facto by rises in prices of these goods. If the fairness. It is clear that market relations, the latter is allowed, rent—seeking behavior will form of transaction favored by Yugoslavia to drain productive resources to activities which realize self—management, are fundamentally at increase the supply of consumer imports, odds with trust and cooperation. Therefore, the legally or illegally. A more constructive first characteristic of social property is that it alternative in this case would be a rationing must constrain market criteria for either scheme, allowing for a rational and equitable production or distribution decisions. distribution of goods. These kinds of decisions 90. Note that this does not necesarily mean are made constantly, hence the tendency to state ownership or the amorphous social streamline mechanisms for decision—making, ownership of Yugoslav socialism. Property can in order to respond to changing condisions. be owned by individual production units or by 92. Nonetheless, such decisions must not be individuals, as long as the uses to which the made by a central planning board, but from a property is put are in conformity with social broader base of participation in economic goals. This kind of group or individual decision—making. In this respect, the Yugoslav

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communities of interest are an instructive must find some social glue that allows groups model. Criticisms of the participatory decision to both express their individual preferences and making structures of the 1974 constitutional yet adhere to a set of social preferences perhaps reform center on the inefficiency of both at odd with theirs. processes and outcomes. Focusing for now on 95. Networks are clearly one form of social issues of process, the research on norms and glue, and to develop and sustain networks is a collective action show that this criticism requirement of social property. To facilitate seriously undervalues the role of perceived positive interaction between group and fairness in the efficiency of outcomes. Contrary society—wide preference, though, networks to neo—classical fascination with costs of must cross group boundaries. Democratic participation, if we look instead at costs political structures like separation of powers incurred from lack of cooperation, we come to a and bi—cameral legislative branckes are one more favorable conclusion about institutions mechanism designed to transcend boundaries like communities of interest. and allow for majority rule, but these structures 93. It is also important to consider the are both themselves subject to erosion of economic environment in which the representativeness and not easy to insert into communities of interest were embedded, societies with no traditions of such institutions. namely a highly chaotic and vulnerable open The most important lesson learned from market. If the role of market criteria is Yugoslav experience and the research on constrained, both the uncertainty surrounding networks and norms is that structures and the impact of decisions and the necessity to norms with which a society is not yet familiar make quick decisions (at the macro level) will won’t work, even if they are intrinsically be reduced. The first requirement of social desirable. capital is to embed the participatory decision— 96. Fortunately, every society has in place both making structures in an economy not subject to local networks and networks that transcend the wide fluctuations characteristic of a small local interests. The trick for defining social and open economy. With this requirement met, property is to find and build upon these broader participatory mechanisms are likely to work networks. At the local level, as we have seen more smoothly, at least with regard to process. above, networks function best when they are 94. This point is relevant to outcomes as well as dense, when people and groups are relatively processes of participatory decisions. As small and have frequent communication. These discussed in previous sections, the competitive conditions cannot hold when we are talking pressure faced by BOALs and communities of about transmitting norms and information interest led them to take increasingly autarchic across groups throughout the whole society. At decisions, which did lead to inefficient this level, social capital must facilite outcomes when viewed from an economy— communication among groups, which requires wide perspective. The autarchic outcome what has come to be called ‘bridging social suggests further requirements for social capital’ in contrast to dense networks, which property. Property must be used in ways that are ‘bonding’ social capital. (Putnam, 2000) are consistent with the overall goals of society Burt (1992) views this problem as one of holes and yet are also not in conflict with more local in networks, which he calls structural holes. goals. This is the crux of the difficulty of Typically these holes are filled by individuals defining social property. Even if the society can who earn rents for their activities (this is similar agree on an overall growth strategy, for to the Soviet tolkachi phenomenon). example, individual firms or areas may be 97. The role of social property here is to negatively affected by the strategy. Societies construct alternatives to filling holes by

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wasteful rent—earning and rent—seeking and consistent, and, unlike the targets of central behavior. I will outline here only a skeleton of a planning, defined through broad consultation structure for social property that can expand with interested parties. bridging social capital through society—wide 99. In both requirements, balancing of networks. The first requirement is that basic competing needs and interests and systems of incentives and rewards be designed accountability, the specific nature of the and implemented to balance competing needs ‘bridging social capital’ must come out of and interests. Mechanisms for doing this based existing institutions and norms. In Yugoslavia, upon communities of interest are for example there was no tradition of self—management or industry—wide groups of firms, economy— even of economic and social cooperation across wide groups of consumers (such as consumer regional and ethnic boundaries. The pre— cooperatives) and society—wide groups conditions did not exist for self—management concerned with specific issues such as to bear the heavy burden of bridging local education or health care. Social capital requires networks by creating a new pan—Yugoslav and fora for expression of the norms of each of socialist consciousness. At the same time, these groups and inter—group discussion of central planning that tried to impose a growth ways to reconcile competing interests. strategy clearly unfavorable to richer regions However, in the end, resolution of competing did not take sufficient account of entrenched interests must be assigned to a body of policy— local norms of fairness. More suited to the makers in which is vested authority for existing conditions would have been a looser ‘bridging social capital’. This body should not economic federation that balanced competing earn rents for its activity, but would have the norms and needs through ceding ownership to final decision—making power. Thus, what puts groups and individuals but closely controlling the social back in social property is the ability the use of that capital and the distribution of the of a governing body to impose limits on surplus. Building on the post—war solidarity individual and group behavior consistent with noted above, a looser federation could have the social goals (as embodied for example in a avoided fetishizing of self—management and growth strategy). rather focused more clearly on both bonding 98. Any such governing body of course must and bridging networks. Instead, the uni— refer to the preferences of competing groups dimensional concept of self—managemend and provide as widely as possible for undermined central control of economic policy expression of difference of opinion. The second and led to elevation of the market as the only requirement for social capital is that this body is economic coordinating mechanism consistent accountable to the groups whose opinions it is with self—management. To be sure, a looser soliciting. Typically in capitalist countries federation would have initially redistributed electoral recall is the mechanism of less to poor regions, but it would more likely accountability, but this is not a necessary have produced greater longer—run satisfaction feature of a viable system of social capital. of the broader social goals of economic growth Sanctions short of removal, such as have been and alleviation of poverty. In other developing used to provide incentives to managers to fulfil countries, existing producers and consumer central targets, are one alternative. Criteria for cooperatives might provide the strongest social determining success or failure can be glue for bridging across networks, while in performance—based and/or based on the degree more developed countries federations of trade to which social cohesion is maintained in the unions would be valuable in bridging. face of policies with clear winners and losers. The overriding necessity is that criteria are clear

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IX. CONCLUSION much concete to say about how trust is nurtured in different societies. 100. Unhappily, the Yugoslav experience 103. Clearly, we know that simple changes in suggests that the conditions under which self— form of ownership of assets are not sufficient. management can be achieved simultaneously Yugoslavia’s many false starts arise exactly with social goals are elusive and fragile. This from missing this point. In the early years, conclusion does not engender optimism that transferring assets to the state was seen to be self—management is a cure for the ills sufficient to establish norms of self— experienced in transition economies. management. In later reforms, decentralizing 101. The underlying problem, however, may be assets to the regions, firms and communes was more with the narrowness of standard seen to be sufficient to achieve participation conceptions of self—management than with and cooperation. The cost of ignoring the real self—management itself. The first producer effects of papering over tensions between cooperative models of self—management individual firms and society was we now know explicitly assumed social ownership of was a revival of ethnic hatred and ultimate production bu the implications of this disolution of both the country and the assumption were not examined. Indeed, the experiment in self—management. socialist content of self—management was 104. We also know that the requirements of either merely an article of faith, as in Ward and social capital (and self—management), namely Domar's producer cooperative approach or seen cooperation and trust, are embedded in the to be irrelevant, as in Vanek's work. In either broader history of each country. The task facing case, the fact that the firm is embedded in and Yugoslavia in constructing a unique and less affected by its broader economic and social alienated society than existing models was new environment is not central to most theories of and uncharted. Moreover, the norms that give self—management. Yugoslav problems with rise to trust and coooperation are embodied in self—management, however, point to the informal and local institutions and necessity of connecting self—management to arrangements. By their very nature, they are strong central institutions and networks, since difficult to identify and to formalize. Therefore, the individual firm, whatever its internal forging relations of trust and cooperation across organization, is not strong enough to absorb networks must be a careful and gradual process. unscathed the impact of volatile markets or Large—scale change in property relations or misguided planning. social relations in order to impose any ideal, 102. Self—management must be embedded in a free market or ‘socialist man’, is doomed to social context in which good economy—wide failure. Only a slow iterative movement, decisions are made and at the same time local through free discussion of competing interests norms of fairness respected. Conventional within a managed and stable economy, can criticisms of self—management from the reveal and strengthen both the dense networks property—rights school and from neo— and the bridges between networks necessary for classical economists who call for market reform as fragile as system as self—management. may be largely misleading. The point is still valid however that the optimal nature of social property remains difficult to specify precisely. We know that trust and cooperation are essential to resolving conflicts between local autonomy and social goals, but we don’t have

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117. Horvat, Branko (1982) The Political X. BIBLIOGRAPHY Economy of Socialism (Oxford: Martin Robertson) 105. Burt, Ronald (1992) Structural Holes: The 118. Jones, Derek and Jan Svejnar (1982) Social Structure of Competition (Cambridge: Participatory and Self—Managed Firms Harvard University Press) (Lexington: Lexington Books) 106. Domar, Evsey (1966) “On Collective 119. Kardelj, Edvard (1981) Contradictions of Farms and Producer Cooperatives” American Social Property in a Socialist Society Economic Review Vol.56:No.4, pp. 734—57 (Belgrade: Socialist Thought and Practice) 107. Dragicevic, Adolf (1967) “Income 120. Milenkovitch, Deborah (1971) Plan and Distribution According to Work Performed” Market in Yugoslav Economic Thought (New Socialist Thought and Practice Vol. 18:No. 26, Haven: Yale University Press) pp. 70—87 121. Milenkovitch, Deborah (1984) “Self— 108. Dubey, Vinod (1975) Yugoslavia: Management and Thirty Years of Yugoslav Self Development with Decentralization (Baltimore: 122. Management” ACES Bulletin The Johns Hopkins Press) Vol.XXV:No..3, pp. 1—26 109. Estrin, Saul and William Bartlett (1982) 123. Putnam, Robert (2000) Bowling Alone: “The Effects of Enterprise Self—management The Collapse and Revival of American in Yugoslavia: An Empirical Survey”, in Jones, Community (New York: Simon and Schuster) Derek and Jan Svenjar Participatory and Self— 124. Rapaczynski, Andrzej (1996) “The Roles Managed Firms (Lexington: Lexington Books) of the State and the Market in Establishing 110. Flaherty, Diane (1982) “Economic Reform Property Rights” Journal of Economic and Foreign Trade in Yugoslavia” Cambridge Perspectives Vol.10:No.3, pp. 87—103 Journal of Economics Vol.6:No.2, pp. 105— 125. Schrenk, Martin, C. Ardalan and N. el 142 Tatawy (1979) Yugoslavia: Self—management 111. Flaherty, Diane (1988) “Plan, Market and Socialism and the Challenge of Development Unequal Regional Development in Yugoslavia” (Baltimore: The Johns Hopkins University Soviet Studies Vol.XL:No.1, pp. 100—124 Press) 112. Flaherty, Diane (1993) “Socialism and 126. Sorensen, Aage (1996) ‘The Structural Nationalism: Ethnicity, Class and Civil War in Basis of Social Inequality’ American Journal of Yugoslavia” Rethinking Marxism Vol.6:No.2 Sociology Vol.101:No.5, pp. 1333—65 113. Furobotn, Erik and Svetozar Pejovich 127. Tyson, Laura (1977) “The Impact of (1974) The Economics of Property Rights External Economic Disturbances on (Cambridge: Ballinger) Yugoslavia: Theoretical and Empirical 114. Kornai, Janos (1992) The Socialist Explorations” Journal of Comparative System: The Political Economy of Communism Economics Vol.3:No.4, pp. 346—75 (Princeton: The Princeton Uniersity Press) 128. Vanek, Jaroslav (1970) The General 115. Horvat, Branko (1972) “Critical Notes on Theory of Labor—Managed Market Economies the Theory of the Labor—Managed Firm and (Ithaca: Cornell University Press) Some Macroeconomic Implications” 129. Vanek, Jaroslav and Peter Miovic (1977) Ekonomska Analiza Vol.6, pp. 291—294 “Explorations into 'Realistic' Behavior of the 116. Horvat, Branko (1975) “On the Theory of Yugoslav Firm”, in Jaroslav Vanek, ed. The the Labor—Managed Firm”, in Horvat, et al., Labor—Managed Economy: Essays (Ithaca: eds. Self—Governing Socialism: A Reader Cornell University Press) (White Plains, N.Y.: International Arts and Sciences Press)

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130. Ward, Benjamin (1967) The Socialist Economy: A Study of Organizational privatization has its equity and efficiency Alternatives (New York: Random House) problems, nationalization of the local common property resource and its i An empirical case for variable effort is management by a distant bureaucracy is made in efforts to measure different kinds rarely any better, and in some cases of efficiency loss. Most studies that find actually much worse.’ (Bardhan, 1993, p. allocational inefficiency due to violation 89) of—neo—classical static marginality criteria amounts to only about 1% of GNP while losses of productive efficiency “may be 10, v As Sobel puts it ‘The ability to use 20 or more times greater”. (Horvat, 1986, p. network relationships to obtain beneficial 14) outcomes need not be good for cosiety or even for the network. In many ii Dragicevic (1967) presents one of the circumstances, these benefits come at a clearest discussions of the link seen by cost to individuals outside the group. Yugoslav reformers between reward Society may lose when group members according to work and competitive markets. exploit social capital.’ (Sobel, 1992, 146) He argues that complaints about injustices in distribution arise from a misunderstanding of the role of fluctuations in market prices. In fact, variations in earnings due to market are necessary: ‘The differences in income earned by the same kind of work organizations, the losses of one and the extra incomes of others,...,is the “price” paid for the general economic development of society’. He then goes on to argue that the price paid will be higher the more the domestic economy is protected from foreign competition. Dragicevic, 1967, p. 76—77)

iii Property rights theory generally supported this link between self— management and market reform. Staellerts (1995) provides a usefule summary of the main themes in the property rights approach to understanding Yugoslav experience.

iv This does not mean that state ownership is viewed as a better alternative. Bardhan, for example, argues that ‘Although

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