"Divergent equilibrium" in a labour-managed economy

Abstract

In this note I demonstrate a potential theoretical problem in achieving general equilibrium in an economy composed of competitive firms that maximize income per worker, under conditions of fixed capital; a problem which suggests that disequilibria in some markets might be a rule rather than exception. This result is in contrast with Dreze's (1976) well-known general equilibrium model of a labor-managed economy in which he argues that competitive equilibria in LM and profit-maximizing economies in the long run (with free entry and exit) lead to the same set of allocations, which are also Pareto optimal. The model presented here is not directly comparable to that of Dreze, since I keep the number of firms and households constant and, in contrast to Dreze, I do not introduce a distinction between two types of LM firms (one that pays a fixed rental charge for capital - equivalent to profits, and the one that does not). The result in this note, however, reinforces the conventional view that a number of the behavioral peculiarities of LM firms may have serious repercussions for the behavior of an LM economy in general equilibrium.