The Review of Economic Studies, Ltd.

Labour Allocation in a Cooperative Enterprise

Author(s): Amartya K. Sen
Source: The Review of Economic Studies, Vol. 33, No. 4 (Oct., 1966), pp. 361-371
Published by: Oxford University Press
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Labour

in

Allocation

Cooperative

En erpDrisel1
I. INTRODUCTION
Two methodsof income distributionhave been particularlyassociatedwith socialist
thinking," to each accordingto his needs" and " to each accordingto his work". In
the literatureon socialismit is the latter systemthat has been mostly studied. Marxfelt
the formersystemto be appropriateonly at the " higherphase of the communistsociety,"
and emphasizedthe principle of distribution" proportionalto the amount of labour
they contribute", in the " first phase" of the communistsociety.2 While discussions
in the Marxist literaturehave concentratedmainly on distributionaccordingto work,
in particularon the utilisationof the wage system,actuatmethodsof paymentsin socialist
economies have often departedfrom this rule, the most notable example of this being
in Chineseagriculture.
On the other plane of discussion,in the theoreticalliteratureon resourceallocation
with decentralizedplanning,the emphasishas been on reachingPareto-optimality,and
that, with the usual assumptions,has been foundto fit in well with a wage system.3 There
have of coursebeen discussionson correctingthe distributionaccordingto worktowards
the goal of distributionaccordingto needs througha set of taxes and subsidies,but the
basic methodof paymentthat has been consideredhas alwaysbeen some variantor other
of the wage system.
The actual organizationof enterprisesin communistcountriestend to departfrom a
pure wage systemin at least two differentways: (i) in the use of some variantof profitsharingover and above a wage system,4and (ii) in havinga part of the incomedistributed
on some criteriaother than that of work, e.g. some interpretationof " needs".5 There
is not yet a distinct body of literatureon the theoryof non-wageallocation of labour;
nevertheless,in the context of policy debates, the following questions have repeatedly
croppedup.
(1) What are the difficultiesin having a system of distributionpurely accordingto
needs? While in the U.S.S.R. and in EasternEuropethere has not been any large-scale
attemptto have paymentsprimarilyaccordingto needs, the Chineseleadershave tried
to breakthroughthe problemof incentivesinvolvedin this, and it has even been claimed
that " ideally, the party leaderswould like non-materialincentivesto becomethe main
motiveforce impellingthe masseson to greateroutput .6
(2) What difficultiesare therein havinga systemof distributionpurelyaccordingto
work, even profitsbeing sharedon that basis? Based on YugoslavexperienceWard [211
1 I am indebted to Peter Diamond for his helpful comments. This is a revised version of Working
PaperNo. 67 of the Committeeon Econometricsand MathematicalEconomicsof the Instituteof Business
and Economic Researchat the Universityof Californiaat Berkeley,April 1965.
2 Marx [14], pp. 29-31; see also Sweezy [20], pp. 10-11.
3 See Lange and Taylor [10], Lerner [11] and Koopmans [8]. See also Robinson [16], Chapter II.
4 See Ward [21]; the discussionis based on the experienceof Yugoslavia. The " enterprisefunds "
in the U.S.S.R. also imply some profit-sharing(see Bergson [2], p. 109). See also Wiles [22], Chapters1
and 2.
5 Attempted mainly in China, particularlyin agriculture; see Li [13], Hoffman [6], Nove [15]. The
rejectionof the wage system in China may have a lot to do with the well-knownproblems of utilization
of surplus (or near-surplus)labour arising from the rigidity of the wage rate. The efficiencyproblems
arising from a positive wage rate in an economy with surpluslabour are discussedin Sen [18].
6 Hoffman [6], p. 110.
361

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REVIEW OF ECONOMIC STUDIES

362

has discussedsome problemsof allocationthat arisein this contextwhenthe cooperatives

are allowed to vary the numberof members,and they use it to maximizereturnsper
person. The problemdoes not disappeareven when the numberof memberscannot be
variedby the cooperativefor this purpose,for thereis also the questionof the amountof
work done. Wardtakes the amountof work done perpersonas given; we shall however
treatthis as a variable,and studythe problemof incentivesin that context.
(3) If a mixedsystemis attempted,what are the " proper" sharesof the two methods
of distribution? In some respects,all systemsactuallyused in these countriesare mixed
ones; even in the U.S.S.R. the " social insurance" is basicallya method of payments
accordingto needs, and it is " usually consideredto add somethingof the order of the
magnitudeof one-thirdto money earnings"'' In the Chineseattemptat communization
of agriculture,heavy emphasiswas put on the so-called " supply portion" of income,
distributedon some criteriaof needs, and in some cases the proportionof this reached
" as high as 80-90per cent with the slim remainderbeing distributedas money wages
But by 1960paymentsaccordingto work gainedpredominanceagain, when the " ideal"
ratio of suppliesto wageswas put at 30 per cent.2
(4) To what extent are these problemsdependenton the attitude of the members
of the cooperativeto each other? It is naturalto expect that the resultsof cooperative
effortswill dependcruciallyon how muchconcernpeople have for each other.
In this note we shall go into this collectionof questionsin termsof a highly simplified
model. A cooperativeis considered,consistingof N families,identicalin every respect.3
The cooperativeuses its own homogeneouslabour and its own land, and hires outside
factorsfrom a set of perfectlycompetitivemarkets. We shall confineour attentionto the
efficiencyproblemsthat arise withina cooperativeenterprise,and not be concernedwith
allocationalproblemsamongthem. Problemsof taxation are not considered. Nor do
we go into savingdecisionsin this paper,which we assumeare left to individualfamilies,
and we relateutilityto familyincomeand not to familyconsumption. If the basicframework is found relevant,then the analysiscan be easily extendedin a varietyof directions.
II. INDIVIDUAL AND SOCIAL WELFARE

There are N identicalfamilies that make up the cooperative. Memberfamilies of

the cooperativelike more and more income (yi) and dislike more and more work (ii),
and eachfamilyhas a givenand identicalutilityfunction,U. Marginalutilityfromincome
is positive and diminishing,and marginalutility from work is negativeand diminishing
(i.e., marginaldisutilityfrom work is positive and increasing),and they are independent
of each other.
U' = U(y', Ii), with Uy>0, U,<0, Uyy<0 U<0,

Uyl = UY = 0.

...(1)

However,the families are not necessarily indifferentto the happinessof other families
(thoughthey might also be that), and theirnotion of " social welfare" takes into account
the utility of other families.4 Individualj attachesa weightaij to a unit of the utility of
individuali in aggregatingthe social welfare,
N

aij. U'.

...(2)

The utility of his own familycan serveas the unit of account(ajj = 1), and it is assumed
that he attachesa weight somewherebetween0 and 1 to a unit of the utility of other
1 Dobb [3], p. 448.

2
3

Hoffman [6], pp. 104-105.

Since the families share the same needs and have the same productiveabilities, we shall find that
distributionaccordingto needs as well as that accordingto work both tend to producean equal distribution
of income, but the level of income varies,and so does welfare.
4 For the underlyingconcepts, see Harsanyi[4].

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LABOUR ALLOCATIONIN A COOPERATIVEENTERPRISE

363

families(0 ? aij < 1). This means that while he may like other people to be happy, he
does not attachgreaterweightto the happinessof otherfamiliesthan he does to his own.'
Equation (2) can now be rewrittenas:
Wi

= U+

<
Ui , with 0 _ aij
Eaij.
1

ii?

1.

...(2.1)

While (2) or (2.1) representsthe welfareof the cooperativeas viewed by individualj,

we definethe " social welfare" (W) to be simplyan aggregateof individualutilities. We
assumethatthis is the Management'snotionalso,whichis assumedto be non-discriminating.
N

Ui
.Ui.

W=

(3)

i= 1

The set of aij for any individual] defines,quite precisely,his attitudeto the welfare
of other families,and we shall find it convenientto extractfrom it an aggregatemeasure
of his " sympathy" for other families,which we shall call, in keepingwith our subject
matter,his " social consciousness" (Si).
N i= i

In view of (2.1), Si residessomewherein the closed range[ IXi]

The more he values

otherfamilies'happinessvis-a-vishis own, the closeris the value of Si to 1.

WhileSi measuresthe sympathythat familyj has for the otherfamilies,we can define
a magnitudeT' thatwill measurethe sympathythatfamilyi receives fromthe otherfamilies.
This we call the " social goodwill" of family i.
T'=-

aij.

...(5)

Onceagain,in view of (2.1), T' residessomewherein the closedrange[!X1], andthe more

" goodwill" that this familyhas, the closerwill be the value of T' to 1.
We now introducetwo crucialassumptions,one of which will be used immediately,
and the other later. The assumptionof symmetricsympathyis that all familieshave the
same measureof " social consciousness".
Si = S, for all j.
(4.1)
The assumptionof symmetricgoodwillis that all familieshavethe samemeasureof" social
goodwill".
T' = T, for all i.

...(5.1)

Note that neither assumptionrequiressymmetryin the exact distributionof the values

of aij. Both the notions of symmetryare aggregateones.
III. CENTRALIZEDALLOCATION
The cooperativeowns a given amount of land (A) and hires m outside factors (F",
with k = 1, 2, ..., m) at constant prices (pk, with k = 1, 2, ..., m). Labour (L) is provided
by membersof the cooperative. The productionfunction Q is given by (6).
Q = Q(L, A, F1, F2, ..., Fm).
...(6)
Qis assumedto be a " well-behaved" productionfunction,with the usualnice properties,
throughout,andpositivebut diminishingmarginalproduct
includingtwicedifferentiability
of each factor.
1 Of course he can attach a greaterweight to a unit of another family's income than to his own, if
there is significantinequality.

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364

REVIEW OF ECONOMIC STUDIES

Given (1), it is easy to check that welfare maximizationrequiresequal division of

total income (V) and of total work (L). Hence, undercentralizedallocation, we should have:
V
yi ==V=
N

y,

ii = L _1,
N

for all i

..(7)

for all i.

... (8)

Given (7) and (8), the social welfarefunction(3) simplifiesinto:

W=N.U(y,l)-

...(3.1)

The income generatedin the cooperative(V) is given by the differencebetweenthe value

of the output (Q) and the purchasecosts of the m inputs. We take the factorprices(pk)
to be expressedin units of the output.
v = Q-

m
F,

F k.

(9)

pk...

k= 1

Given (1), (3.1), (6), (7), (8) and (9), maximizationof social welfare(W) undercentralized
allocationrequires:1
for k =1, 2, ..., m
Qk = Pk,
...(10)
UQyUU,(y,
u(Y

1) a
1)_

R.

...(11)

Here R is definedas the individualmarginalrateof indifferentsubstitutionbetweenincome

and non-labour(leisure). The rate is the same for all individuals. The interpretationof
rules (10) and (11) is obvious.
Note that rules (7), (8), (10) and (11), which describethe allocationdecisions,yield
not only Paretian optimality (the usual competitiveresult), but also maximizationof
total socialwelfare. Thiscompletingof the incompleteParetianorderinghas beenpossible
by assuminga social welfarefunctionwith additivecardinalutility.2
IV. VOLUNTARY ALLOCATIONOF LABOUR
One featureof the allocationalrulesof the last sectionis that the individualmembers
of the cooperativeare not allowedto determinehow much work they would like to put
in; it is all decidedfor them by the Management. We now relax that assumption,and
examine the voluntaryallocationalresults given the system of rewards. It is assumed
that a proportiona of income is distributedaccordingto " needs", and the rest (1-oc)
accordingto " work ". The value of a lies in the closed intervalbetween0 and 1. Needs
are equal, and thus a proportionof the income is equally distributed; the rest is distributedin a way such that familyi gets
y =V(

(L)proportionof it.

We have then:

+(1-oc(L)).

...(7.1)

Individualj maximizesWi for variationsof his own labour li, given the amount of
labourperformedby others,3and giventhe use of otherfactorsof production. He is thus
1 These are the firstorderconditions. The second order conditions are given by the usual restrictions
on the " bordered" determinants(see Hicks [5], p. 320). Qkrefersto the partialderivativeof Q with respect
to Fk, and QLthat with respect to L.
2 We discuss this questionfurtherin section VIII.
3 We are abstractingfrom behaviour based on " game" considerations. When the number of
individuals(N) is small, this may be an importantlimitation.

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LABOUR ALLOCATIONIN A COOPERATIVEENTERPRISE

365

guidedby (1), (2.1), (6), (7.1), and (9), and his optimalallocationcan be seen to require
the followingcondition:
-

a j.

(1 +(

+U

(L)(-)(l-)j

)(3))

(I.IooO)

(12)

Given (1) and (4.1), we shall find at equilibrium,the same amount of labour offeredby
each family. As a result,the income of each familywill also tend to be equal, as is seen
from (7.1). Thus conditions(7) and (8) will also hold at equilibrium. There is no inconsistencybetweenthis and the assumptionof labour allocationunderlying(12). Each
familydecideson how muchlabourto applygiventhe amountof labourof otherfamilies;
but sincetheircalculationsare identicalthey end up by offeringthe same amount.
Since(7) and (8) hold, and sinceeveryonehas the sameutilityfunctionU, the marginal
utilities of income and the marginaldisutilitiesof work that enter in (12) are respectively
identicalfor all families. It is easy to checkthat underthese circumstances(12) simplifies
into the following:
R =

where j3=

V
-,

QL[S+(1-S)(1-c)

o noet

oa

upt

the ratio of income to total output, q

(/!)],
QL

.L

...(13)

elasticity of output with

respectto labour. S and R havebeen definedbeforeas the measureof " social consciousness " (see (4)) and the relevantindividualmarginalrate of indifferentsubstitutionbetween
income and leisure(see (11)). The voluntaryallocationalresult(13) has to be compared
and contrastedwith the optimalrule (11).
V. PURE SYSTEMS AND OPTIMALITY
If the systemthat is followed is one purely accordingto needs, then we have a = 1.
Under those circumstances,result(13) becomes:
R = QL S.

.. .(13.1)

This correspondsto the optimumrule (11) only when S = 1, i.e. only when sympathy
for other familiesis perfect,with each family attachingequal weight to the happinessof
every family in the community.' Barringthis specialcase, the allocationof labour will
not be carriedto the point requiredfor optimality,but stoppedbefore that, since S<1,
and thereforeR < QL
If, on the other hand, the system of distributionis one purely accordingto work,
we have a = 0. Then, result(13) becomes:
R=

QL

[S+(1-S)

()1.

... (13.2)

This can coincidewith the optimalityrequirement(11) if eitherthereis completesympathy

for all, i.e. S = 1, or if,B = q. The latter condition can be analysed a little further. It

equatesthe relativeshareof the incomeof the cooperativein gross outputto the elasticity
of output with respectto labour. If we assumethat the productionfunction is homogeneousof the first degree,2and also that the cooperativedoes not own any factor (like
land) otherthan labour,then this conditionof fl being equal to n will indeed be fulfilled.
1 Cf. Marx's position that payments according to needs will not be the right system in the " first
phase " of socialism when the society is " in every respect tainted economically, morally, intellectually
with the hereditarydiseases of the old society from whose womb it is emerging" ([14], p. 29), and that
it could work well only when " all the springsof cooperativewealth are gushing more freely togetherwith
the all-rounddevelopmentof the individual" ([14], p. 31).
2 More generally, in an equilibriumwith no " abnormal" profits, as under perfect competition, this
result will hold. Constant returnsto scale is not needed throughout; only at the point of equilibrium.
2B

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366

REVIEW OF ECONOMIC STUDIES

The proof is obviousfrom Euler'sTheoremand the fulfillmentof the allocationalrulesfor

otherfactorsgiven by (10).
If, however, sympathyor " social consciousness" is not perfect, i.e. S< 1, and the
cooperativeowns some factors other than labour (in our assumptionland), it is easy to
show that with a productionfunction homogeneousof the first degree, we have /3> q.
And it followsfrom(13.2)that R> QL, i.e. labourwill be appliedbeyondthe pointrequired
for optimization. Thus barringthe special cases of complete sympathyfor all, or of a
cooperativedevoid of non-labourresources,a pure system of allocation accordingto
work will tend to make the amountof labourofferedto be greaterthan the optimum.
One commenton the distributionsystem accordingto work may be worth making
here. We have assumedthat the part that is distributedaccordingto work is given out
directlyin terms of the proportionof labour contributedby each family. If instead a
part is distributedas straightforwardwages, and if the surplusafter paying for wages
and for the part of the income that is distributedaccordingto needs (still X proportion
of total income of the members)is again split up in proportionto the amountof labour
contributed,the result will be the same as in our distributionalequation (7.1), and all
consequenceswill hold.
Y=-

=N

=V[+

+1l*w +[V(1-a)-L

.w](L

(1 -a)(_

In particular,when nothingis distributedaccordingto needs (oa= 0), the same tendency

to over-contributelabour will follow, except in the special case of complete sympathy
(S = 1), or no ownednon-labourresource(/B= 'i). This is a basicproblemof syndicalism,
in fact of any economicsystemwith profit-sharingby workersaccordingto work.
Of the two pure systems,the result that there is too little work done in a system of
distributionaccordingto needsis easier to see intuitively. The result of too muchwork
done in a system of distributionaccordingto work can be explainedin the following
heuristicterms. When an individualcontributesan additionalunit of labour, he gets
two compensationsfor his troubles: first, the income of the cooperativegoes up, and he
gets a share of the marginalproduct, though not the whole of it; second, he gets an
enlargedshareof the totalincomebecausehis sharein the total labourcontributedis larger.
The former,on its own, is insufficientto make him offerthe optimumamountof labour,
since he gets only a part of his marginalproduct,but the latter over-compensatesfor it,
as long as the averageincomeper unit of labouris greaterthan the marginalproductof
labour. Hence the over-allocationof work. When, however,the cooperativepossesses
no factor other than labour, and the productionfunction has constant returnsto scale,
the averageincomeper unit of labourjust equalsthe marginalproduct,and the two effects
exactly balance out. Similarly,when he has complete sympathyfor all other families,
he does not mind other people getting a share of his marginalproduct,nor does he see
any gain in gettinga largerincomeat the cost of others; and once againthe allocationis
right. When, however,the cooperativepossesses non-labourfactors and the sympathy
of work, arisingfrom
is not quite complete,thereis a tendencytowardsover-contribution
a desireto get a highershareof the existingincome exploitingthe systemof distribution
accordingto work.
VI. THE OPTIMAL RULE
In orderto achievewelfaremaximization,result(13) has to coincidewith the requirement (11). This coincidenceholds if and only if:

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367

LABOUR ALLOCATIONIN A COOPERATIVEENTERPRISE

This is alwayssatisfiedwhen:

S= 1.

... (14a)

If (14a) does not hold, and " social consciousness"is not complete,we requirethen:
...(14b)
Thismeansthat the proportionof incometo be distributedaccordingto workshouldequal
the ratio of the elasticityof output with respectto labour to the share of cooperative
incomein total output.
It shouldbe noted that rule (14b)has a close affinityto the competitiverule. If the
productionfunction is homogeneousof the first degree, and if the allocationalrule (9)
for hiredfactors(Ek) is followed,thenthe shareof the cooperative'sincomein total output,
i.e., the value of /3, will simplyequal the sum of the elasticitiesof outputwith respectto
all factors of productionsuppliedby the cooperative. Also, underthose circumstances,
labour'sshareof output(Q) will be givenby i andlabour'ssharein the cooperativeincome
(V) will be givenby ($). And it is thisportionthat is to be distributedaccordingto work
if rule (14b) is followed. And the proportionof the cooperativeincome that is to be
distributedaccordingto needs shouldequal the rest, i.e. what would have been the competitive share of non-labourproductivefactors (land, in our example) owned by the
cooperative.
However, the similaritywith the competitive case, while striking, should not be
over-stressed. First of all, the correspondenceis not completewhenwe take a production
function with diminishingreturnsto scale. Then it is not clear what the competitive
distributionwould have been. It is, however,clear from observing(14b) that the right
proportionto be distributedaccordingto work is what would have been the share of
labour if it got its competitivesharewhile the owned non-labourresourcesobtainedthe
surplusthat remainedafter paying all hired factors and labour their respectiveshares
equal to their elasticities. The result quoted earlierthat the right proportionto be distributedaccordingto needs is what would have been the competitiveshareof non-labour
factorsof production(land) ownedby the cooperative,does not any longerhold.
Second, while rule (14b) correspondsto the competitive solution, the method of
distributionneed not involve any wage system at all, and might thereforebe free from
sociological constraintsthat apply to boundaryvalues of the wage rate as such. For
example,the well-knownallocationalproblemsraisedby the existenceof a minimumlevel
of the wage rate in preventingproperutilisationof surplusor near-surpluslabour in the
underdevelopedcountries,lmight not necessarilyapply to this case whereno explicituse
of a wage rate need be made. That is, if the constraintappliesnot the minimummarginal
returnto labour (irrespectiveof the form of it) but to the minimumwage rate as such,2
then rule (14b) need not be interferedwith by such a constraintwhile the competitive
solutionmight be.
Third, rule (14b) is not strictlynecessaryfor optimalityand condition(14a) is quite
sufficient. That is if people do have complete social consciousness(S = 1), any choice
of a will do just as well.3 This introductionof externalconcernmakesour model different
from that of the usual competitivemodels. However,for any value of S<1, rule (14b)
is necessaryfor optimalityin the voluntarysystem.
1 See Sen [18], ChaptersII, V, and AppendixA.

This will be the case when there is a conventionalminimumlevel of the wage rate which does not
come in when the method of rewardsis altogetherdifferentfrom the wage system.
3 This might explain why the Chinese attempt at having a system of payment not closely related to
work in agriculturein the " Great Leap Forward" period was accompaniedby attacks on the " familycenteredpsychology" (Nove [15], p. 22; Hoffman [6], p. 100).
2

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368

REVIEW OF ECONOMIC STUDIES

VII. THE ROLE OF EXTERNAL CONCERN

It is interestingto note that the optimalrule (14b)is completelyindependentof the

extent of externalconcernthat people have for each other. The coincidenceof (13) with
the optimalityrequirement(11) when rule (14b) is followed, is independentof the value
of S.
One reasonwhy this appearssurprisingis the practice,in " new welfareeconomics",
of rulingout all types of externaleffectswhile derivingpropositionsabout the optimality
of competitiveequilibrium.' But it can be checkedthat some types of externalconcern
do not matterat all as far as the optimumallocationis concerned. At the competitive
equilibriuman individualis paid at a ratejust equal to the productivityof his last unit
of labour,so that the real incomeenjoyedby the othersis not affectedby this allocational
decision, and how much weight he wants to attach to other people's happinessdoes not
makeany differenceto his choice. Similarly,sincehe stops at the point wherehis marginal
net gain fromthe last unit of labouris nil, otherpeoplealso do not carewhetherhe applies
this unit of labouror not, even thoughthey may attachvalueto his utility.
It is to be noted that the externaleffects allowed here are of a kind differentfrom
the usual utilitarianpresentation. In the utility functionsof each family we have introduced only the labour and income of that family, but we have assumedthat members
try to maximizenot this utilityfunctionof theirfamilybut a weightedsum of the utilities
of all families,representingtheirnotions of welfare. Thereis, however,a well-established
tradition in economics of taking as people's " utility" whateverit is that they try to
maximize,so that familyutility in this model might be taken to be equivalentnot to our
set of (Ui) but to the set of (Wi). The consequencesof taking social welfareto be the
sum of (Wi) ratherthan of (Ui) may be pursued.
N
W= E
j=l

WJ

j=l

i=l^

aij. Ui = N.iT.
i=l

...(3.2)

At this stage, the assumptionof symmetricgoodwill (5.1) is helpful. With that

assumption,we have:
W= N.T.W.

...(15)

SinceN and T are given,maximizationof W is equivalentto that of W.2 Aggregatesocial

welfare is still maximizedby following rule (14b), even though the identificationof the
set of individualutilitiesas the set (Wi) ratherthan the set (Ui), makesit a straightforward
case of " direct (i.e. non-market)interdependence,"where " the individual person's
satisfaction . . . depends not only on the quantities of product he consumes and services

he rendersbut also on the satisfactionof other persons."3 The optimalityof the rule
seemsto be completelyindependentof the exact size of such externalconcern.
One extremecase of symmetricgoodwillis the case when people are completelyegocentric (family-centric)and other people's (families')satisfactionssimply do not enter
into the individual utility functions, which is the favourite neo-classicalassumption,
which correspondshere to T =

-.

The other extremecase is that of full " social con-

sciousness,"which Marx expectedin, and only in, the " higher phase" of socialism,4
and which correspondshere to the case of T = 1. The value of T can lie anywherein
1 " The new welfareeconomists, despite their name, actually said little that was new. They accepted
the usual simplifyingassumptionsof Pareto and Barone: to wit, the independenceof differentpeople's
satisfactions and the absence of external economies and diseconomies." (Scitovsky, in " The State of
Welfare Economics ", in [17], p. 79.)

2 Even the condition of " symmetricgoodwill " can be relaxed when the object is to achieve only
Pareto optimalitythrough the competitivemechanism,as can be seen from the argumentoutlined in the
previousparagraphin the text.
3 Scitovsky," Two Conceptsof ExternalEconomies," in [17], pp. 70-71.
4 Marx [14], pp. 29-31.

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LABOUR ALLOCATIONIN A COOPERATIVEENTERPRISE

369

the closed interval[1. I], and irrespectiveof whereit lies, rule(14b)yieldsthe maximization of the aggregatewelfareof the cooperative. However,in the extremecase of T = 1,
we also have S = 1, i.e. condition(14a) holds, so that the policy impliedby rule (14b),
while still optimal, is redundant,and any proportionof total income (even all) can be
distributeddirectlyaccordingto needs.
VIII. CONCLUDING REMARKS
We have examinedthe problem of labour allocation in a cooperativesystem both
in termsof centralizeddecisionsas well as in termsof voluntaryallocation. The optimal
(rules7, 8, 10 and 11), and it
rules of allocationin the formersystemare straight-forward
is the lattersystemthat raisesinterestingproblems. The conflictingprinciplesof distribution accordingto " work " and accordingto " needs" were specificallyexamined in
termsof maximizingaggregatesocial welfare. The followingare the main conclusions.
(1) Distributionpurelyaccordingto " needs" tends to resultin an under-allocation
of labour in the cooperativeenterprise,and that purely accordingto " work " tends to
producean over-allocationof it.
(2) Optimizationrequiresa mixed system of distributionaccordingto work and
needs. More specifically,the proportionof income to be distributedaccordingto work
should equal the ratio of the elasticityof output with respect of labour to the relative
share of cooperativeincome in the value of total output. The correspondencebetween
this rule for a cooperativeenterprisewith the resultof competitiveequilibriumis striking,
but some differencesare also noted.
(3) An exceptionto conclusions(1) and (2) is providedby the case when there is
complete" social consciousness", i.e. in the case in which everyindividualattachesthe
same weight to his own happinessas he does to that of everyoneelse. In this case, a
system of distributionaccordingto work, or one accordingto needs, or any mixtureof
the two, producesthe optimumallocationof labour.
(4) Barringthe specialcase discussedin (3), the optimumproportionto be distributed
accordingto needs, or accordingto work, is completelyindependentof the amount of
sympathythat the membersof the cooperativehave for each other (i.e. is independentof
their " social consciousness ").

(5) A corollaryof conclusion(4) is that the optimaldistributionrule, which closely

correspondsto the competitiveresult,is not influencedby the existenceor not of " external
effects" in the shapeof concernfor each other. An incidentalobservationis that to show
the optimalityof competitiveequilibrium,all " externaleffects" do not have to be ruled
out, as is the practicein the now classic presentationof " New WelfareEconomics".1
Existenceof concernfor each other'shappinessis seen to be harmlessfor the optimality
of competitiveallocation, provided there is symmetry(strictly defined as " symmetric
sympathy" and " symmetricgoodwill") in the pattern of such externaleffects. Zero
externaleffectsamountto no more than a special case of that symmetry.
So muchabout the conclusions. Now aboutthe assumptionsunderlyingthe analysis.
Someassumptionsareeasilyremovable,e.g. that the cooperativedoes not own any resource
other than land. Even if the cooperativeowns some other resource(e.g. capital goods)
alongwith(or without)land,it makesno differenceto the results. Someotherassumptions
are seriousbut not especiallyodd in this branchof economics. We have assumedwellbehavedutility and productionfunctions;automaticfulfilmentof the second orderconditions of welfaremaximizationand of equilibrium;no uncertainty;perfectlycompetitive
markets; homogeneityof labour; and other assumptionscommonly employedin this
field.
We have also abstractedfrom some of the more perplexingproblemsin the practical
1

Perhapsthe best presentationsare to be found in Lange [9], and Koopmans [8].

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370

REVIEW OF ECONOMIC STUDIES

runningof a cooperative. In particular,we have avoided the complexitiesof resource

allocation when differentmembers have differentlyshaped utility functions, or have
differentdegreesof " socialconsciousness" (or of " socialgoodwill"), if we take the social
welfarefunctiongivenby (3.2)as opposedto (3). Thesearerelativelyrestrictiveassumption.
However, both symmetric sympathy and symmetric goodwill are aggregate constraints

and do not impose any detailedpattern of actual sympathies(aij). The values of (aij)
can vary in manymannerwithinthe two sets of linearconstraints.'
The natureof the social welfarefunction used, given by (3), (3.1) and (3.2), is also
open to question. There are, first of all, the generaldifficultiesof the impossibilityof a
social orderingbasedon individualorderingssatisfyingthe set of conditionspostulatedby
Arrow [1]. This problem we avoided by deliberatelyviolating Arrow's condition of
"the independenceof irrelevantalternatives . The use of cardinalindividualwelfare
to arrive at a social orderingalways violates this condition.3 The acceptabilityof the
particularsocial orderingused dependson our assessmentof the relevanceof the condition
of the " independenceof irrelevantalternatives". Secondly, even within this general
framework,the use of the Marshallianmethodof simplyaggregatingunweightedindividual
welfare indices may be found objectionable. However,its high intuitive appeal (from
Benthamonwards)is an argumentfor the retentionof this simpleformula. Thirdly,nonutilitarianconsiderationsare excludedfromthe social welfarefunction,whichis a limiting
assumption.
Similar problems arise with the individual welfare functions also. The general
homogeneous,linearform (equation2) of individualwelfarebased on the set of individual
utilitiesis open to challenge. WhileHarsanyi[4] has shownthatthis is the only acceptable
form for an individual'sjudgmentsabout social welfare,if a numberof highly appealing
postulates have to be fulfilled,4an individualmay not act, even in a cooperative,to
maximizewhat he recognizesto be the social welfareof that cooperative,as opposedto
his own welfare.
However,even if we do not restrictourselvesto the linearform used in equation(2),
our analysisneed not requiresubstantialchange. ConsiderWJin the more generalform
below:
Wi= Wj(Ul.U2,

...,

UN),

W2Wj
aui2

a
wn

with 0 < aw

1,

...(2.2)

.=1

Equation(12)will still givethe firstorderconditionsof individualequilibriumif we interpret

ajas the partialderivativeof Wi with respectof U~,i.e. a1j =

a=w

The assumptionsof

1 There are 2(N- 1) linear constraintsgiven by symmetricsympathyand symmetricgoodwill.

N

E
i=I

ail

E
1 = I

i=

ai2--=

...

t4.2)

all=

ajiv

=1

a2j *=

j = I

F, aNi ..(52
= 1I

The set of (at,), in number N2, has to satisfy these 2(N- 1) linearequations.
2 An alternativeway out of the " impossibility" problem is to assume that the individualshave a
certain pattem of " similarity", e.g. " single peaked preferences", or more generally "value restricted
preferences" (see Arrow [1], Inada [7], and Sen [18D.
3 On this see Arrow [1], ChapterIII.
4 See Theorem V in Harsanyi [4]. Note that when Harsanyi speaks of " social" preferences,he
"always mean[s] preferencesbased on a given individual'svalue judgmentconcerning' social welfare' "
([4], p. 310). Incidentally,to justify that equation (2) is of the right form for WJusing Harsanyi'sproof,
we may assume that (a) WJfor each j satisfies Marschak'sPostulatesI, II, Ill' and IV; (b) Ul for each i
satisfiesthe same postulates,and (c) if each U' is the same in two situations, WJmust have the same value
in both the situations.

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371

LABOUR ALLOCATION IN A COOPERATIVE ENTERPRISE

symmetry will need to be redefined to take account of the variability of aij. Symmetric
sympathy can be defined as equal " social consciousness ", i.e. equations (4.1), whenever
the utilities of all individuals are equal. Similarly symmetricgoodwill will now require the
fulfilment of (5.1) in a situation of equal utility. It is easy to check that our main results
stand even with this more general definition of the individual welfare function (2.2)
instead of the homogeneous, linear form (2) used in the foregoing analysis.
Delhi School of Economics

AMARTYA

K.

SEN.

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