True beyond the shores of Harvard

Blog post of the day, from Brad DeLong, excerpt:

Somebody last week–was it Jan de Vries? John Ellwood? Somebody
else? I forget who, but it is not original to me–said that the right
model for Harvard over the past century is Yugoslavia. Remember the
story of the Yugoslavian socialist worker-managed firm? If you add
another worker to the firm, that worker gets a pro-rata share of the
firm’s value added. The firm’s value added has a component attributable
to the firm’s capital stock, a component attributable to the ideas
embedded in the firm, a component attributable to the firm’s market
position, and a component attributable to the workers. Hire another
worker, and only the last of these goes up: the first three do not, and
so average compensation falls.

This means that a worker-managed firm is likely to shrink whenever
it gets good news that makes it more productive–the larger is the
value added due to ideas, capital, or market position, the more
expensive does it become for the existing workers to replace workers
who leave, let alone hire enough workers to expand. While a competitive
market capitalist firm responds to good news about its productivity and
value to society by increasing employment, a Yugoslavian-model market
socialist firm responds to good news about its productivity and value
to society by shrinking. On this analysis, the very success of Harvard
over the past two generations together with its degree of worker
management has created enormous internal pressures not to expand, the
better to share out the surplus among the existing stakeholders.

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