A Property-Rights Analysis of the Yugoslav Miracle

The Yugoslav experiment with labor participation in the management of business firms captured worldwide attention. The critics of capitalism seemed confident that the labor-managed economy would provide a long-sought alternative to the accomplishments of capitalism. Instead, the labor-managed economy has produced a crisis of enormous proportion in Yugoslavia. The article argues that the economic crisis in Yugoslavia is a predictable consequence of the system of labor participation in the management of business firms. It demonstrates that inherent in the structure of property rights of the labor-managed economy are some positive transaction costs and negative incentives that are specific to its institutional structure. Those transaction costs and disincentives are responsible for inflation, unemployment, declining income, and other economic problems in Yugoslavia. The conclusion is that the labor-managed economy is not a viable institutional arrangement.