Equality, Participation, Transition: Essays in Honour of Branko Horvat

Dinko Dubravcaić 81
and reasonable, with no visible harm done to other aspirants under
normal competitive conditions.
Illyrian scholars agree on one important characteristic of the LMF: if
d does not differ from the wage w that workers would obtain, in market
equilibrium, in a twin EF, 2 both LMF and EF would have identical
optima. However, as Keren and Levhari 3 point out, whereas the EF
competitive equilibrium is stable, an economy populated by LMFs has
no forces that tend to lead it toward equilibrium.
Whenever d exceeds w, and this case is almost the exclusive domain
of Illyrian research, all the symptoms of the ‘Illyrian disease’ become
apparent. The most notorious are the negative slope of LMF’s supply
curve, the insensitiveness to changes in labour price w (which obstructs
movement of labour from a poor to a rich LMF), increased hazards
concerning the allocation of resources in monopoly markets, 4 and a
capital-intensive expansion path. 5
Some Illyrian scholars, who were attracted to the subject out of interest
for social reform, suggested various remedies for the malfunctioning
of the LMF, such as modifications of the maximand, special measures
taken by a benevolent government, or institutional arrangements that
remodeled the LMF.
Horvat’s proposals to amend the maximand are dated at a very early
stage of Illyrian research. In a later contribution, 6 he reasserted his basic
premise: the worker-managers in the LMF increase employment in discrete
intervals and in the short run, while the workforce is fixed, they
use a non-ratio maximand, making all abnormalities in LMF’s behaviour
disappear. Ireland and Law (1978) tried to remove the barrier for
labour to move from a poor to a rich LMF by transfer payments from a
central investment fund to each LMF, so that d-maximizing becomes
identical to profit-maximizing at a given shadow wage rate. A simple
systemic remedy would be to allow the division of LMF’s members into
those with full membership, and those employed on wage terms 7 who
would be allowed gradually to filter into the tenured group.
In general, free entry is a panacea recommended for all troubles that
befall a LMF economy – it obviously causes the difference between d
and w to disappear. But this must, then, be the clue for the Illyrian
affliction: we can safely conclude that when d is larger than w, a rent in
the LMF exists that all its members share. Free entry must, as expected,
destroy this rent.
However, if members succeed in defending the rent, their LMF will
not employ labour to the point where the wage equals the value of
the marginal product of labour, which would satisfy the job-seeking