Proudhon developed mutualism as an economic theory based on a free market. Mutualists oppose employment, and view that individuals would predominantely work self-employed or in workers' cooperatives. Mutualists also claim that no one should own property, but should instead possess property as long as it remains in use. Proudhon, however, predicts that interest and rent will fall toward zero in a mutualistic society. Mutualists argue that in a mutualistic society, the price of a good tends to equal the proportional amount of labor exerted in production, a theory they call the labor theory of value (LTV).
We will argue mutualism as compatible to a free society, but the differences exist in ideology due to some minor theoretical and preferential disagreements.
In a free society, some competing jurisdictions would actually define the mutualistic possession theories. These possession rules may actually benefit in some areas.
Interest and rent would likely decrease as well, and might even decrease near zero, due to relaxation of loaning restrictions, but interest and rent would still exist. While Proudhon find interest and rent as normatively unoptimal, he declared that he does not want to aggressively suppress rent and interest.
Self-employment and workers' cooperatives
In a free society, individuals would likely prefer self-employment and workers' cooperatives over employment. Self-employment eliminates the costs pertaining to the principal-agent problem in employment. Workers' cooperatives, which also avoids the principal-agent problem, and may arise in response to economics of scale.
We should, however, not view workers' cooperatives as a firm in which workers democratically elects its employers. We should define a workers' cooperative as similar to the modern partnership organization with no employees, where the workers equal the ``partners" of the partnership. Kevin Carson, a mutualist, even appears to define a workers' cooperative in that way too.
The current bureaucratic corporations have a several levels of hierarchy, which implies that the principal-agent problem has multiplied several times throughout its hierarchy. Its three-tier hierarchy, from the CEO to the board of directors, and to the shareholders and the consumers implies the monopolization of corporations by the state.
The cooperative, unlike an employer paying an employee, does not have any hierarchy. Employers do not exist in any cooperative firm, but the workers themselves sell their products, and form a partnership with other workers to increase scale effiencies.
The labor theory of value
In a free society, workers would also gain wealth approximately to their proportional amount of labor, but not according to the labor theory of value as in mutualism. This difference seems minor, and largely theoretical. Many people have different interpretations of the labor theory of value. Benjamin Tucker, appearently, interpreted the labor theory of value as the workers get wages approximately proportional to their amount of labor. Therefore, we see Tucker's definitions of the LTV as exactly compatible with our view of a free society.
The labor theory of value presumes that in a free society, the all goods and services will cost approximately the amount of labor it took to produce, plus the value of all the the raw materials the product composes. This generally seems correct, since workers will compete with each other so the amount of labor evens out. This evening-out process makes workers get compensated approximately proportional to their labor, so the products that the workers made generally reflect the cost of raw materials plus the amount of labor. Contrary to some Austrian propaganda, the labor theory of value appears roughly correct in a static economy, meaning an economy with no growth, except a minor glitch in its labor valuation of natural resource extraction.
The original definition of LTV has an inaccurate theory on the pricing of natural resources. A famous example involves the diamond-water paradox. The LTV says that, in a free society, diamonds price more expensive than water because it takes more labor to drill a diamond than get water. However, it does not explain why some rare minerals cost very cheap.
The Austrian School believes in the marginal theory of value (MTV), a theory of prices based on supply and demand. Both the labor theory of value and the marginal theory of value, however, function as abstractions. The MTV also does not apply to the real world, but only an approximation. Since the marginal theory bases on rational choice theory, where the agent orders his preferences which does not change throughout time, it does not accurately explain some things such as how assymetrical information influences prices, just like how the LTV does not accurately explain the prices of some rare minerals.
We should not, however, see LTV and and the MTV as two competing theories of value. We should see these as different explanations of valuation. The LTV describes the optimal price allocation in a static economy, while the MTV describes the physics of how the prices of goods and services adjust in responce to the abundance or the scarcity of natural resources.
Mutualism, an economic system, can exist in a free society. We can disregard the theoretical tics---the labor theory of value, and the theory of rent and interest---from mutualism, because these have no application in real life and these function as predictions, not implementations. With regards to the possession theory of property---yes, some jurisdictions may actually enforce these rules, and may actually benefit some. But we accept the mutualistic prediction that self-employment and workers' cooperatives would predominate in a free society.