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The purpose of the paper is to carry out a theoretical appraisal of a labor-managed economy of Yugoslav type. It is this type of economy that represents, by and large, the true aspirations of reformers in eastern Europe. The labor-managed economy will be producing the maximum producible output from given resources and the maximum social satisfaction for a prescribed distribution of income. These conclusions follow from the fact that competitive labor-managed firms equalize factor marginal products to factor returns for all factors including labor, from competition in nonlabor factor markets, free entry of firms and identical technologies. The most significant comparative advantage of the labor-managed oligopoly arises in connection with product differentiation and sales promotion. It can be shown that the labor-managed firm will in equilibrium produce less and engage in a less intensive advertising campaign than an equivalent capitalist firm as long as the latter makes positive profits, a condition which obtains virtually without exception.