The Role of Capital in 'Capitalist' and in Labor-Managed Firms

25 Pages Posted: 25 Dec 2004

Date Written: December 2004


This paper is divided into two parts. The first part outlines the fundamental myth about the structure of property rights in a capitalist economy, namely the idea that being the residual claimant in a productive opportunity is part of a bundle of property rights known variously as ownership of the firm, ownership of the means of production, or, to economists, ownership of the production set (or function). Residual claimancy is contractually determined and there is no ownership that legally determines how future contracts are made. The fundamental myth leads to a basic fallacy in capital theory and in corporate finance theory. Understanding the myth also allows us to clarify the role of capital in the system misnamed capitalism. The underlying theme is that the key institutional feature of capitalism is not the role of capital or the private ownership of the means of production but the employment contract for the renting of human beings. In the second part, slightly more formal models are first used to analyze the fallacies in capital theory and corporate finance theory. Then attention is turned to a right-by-right comparison between the structure of rights in a conventional corporation and in a democratic firm (a labor-managed firm). Of key importance is the role of the internal capital accounts in a democratic firm.

Keywords: Property appropriation, capital rights, ownership of the firm, labor-managed firm

JEL Classification: P

Suggested Citation

Ellerman, David, The Role of Capital in 'Capitalist' and in Labor-Managed Firms (December 2004). Available at SSRN: or

David Ellerman (Contact Author)

University of Ljubljana ( email )

School of Social Science
Ljubljana, CA


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