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rious tasks. The single consumercan assign his grocer to the task ofobtaining whatever the customer can induce
the grocer to provide at a price acceptableto both parties. That is preciselyall that an employer can do to an employee.
To speak of managing, directing,or assigning workers to various tasks is adeceptive way of noting that the employer
continually is involved in renegotiation ofcontracts on terms that must be acceptableto both parties. Telling an employee totype this letter rather than to file thatdocument is like my telling a grocer to
sell me this brand of tuna rather than thatbrand of bread. I have no contract to continueto purchase from the grocer and
neither the employer nor the employee isbound by any contractual obligations tocontinue their relationship. Long-term
contracts between employer and employeeare not the essence oftheorganizationwe call a firm. My grocer can counton my returning day after day and purchasinghis services and goods even withthe prices not always marked on the goods
-because I know what they are-and headapts his activity to conform to mydirections to him as to what I want each
day . . . he is not my employee.iyherein then is the relationship between
a grocer and his differentfrom that between a grocer and his cus-
777
778 THE AMERICAX ECONOMIC REL'IE\IT
tomers? It is in a team use of inputs and acentralized position of some party in the
contractual arrangements of all other inputs.It is the centralized contractz~al agent
in a team ProductiCLle process-not somesuperior authoritarian directive or disciplinarypower. Exactly what is a team
process and why does it induce the contractualform, called the firm? These problemsmotivate the inquiry of this paper.
I. The Metering Problem
'The economic organization throughwhich input owners cooperate will make
better use of their comparative advantagesto the extent that it facilitates the payment
of rewards in accord with productivity.
If rewards were random, and without
regard to productive effort, no incentive
to productive effort would be provided
by the organization; and if rewards
were negatively correlated with productivity
the organization would be subject
to sabotage. Two key demands are placed
on an economic organization-metering
input productivity and metering rewards.'
Metering problems sometimes can be
resolved well through the exchange of
products across competitive markets, because
in many situations markets yield a
high correlation between rewards and
productivity. If a farmer increases his output
of wheat by 10 percent at the prevailing
market price, his receipts also increase
by 10 percent. This method of organizing
economic activity meters the
output directly, reveals the marginal product
and apportions the rewards to resource
owners in accord with that direct
measurement of their outputs. The success
of this decentralized, market exchange in
promoting productive specialization requires
that changes in market rewards fall
Meter means to measure and also to apportion. One
can meter (measure) output and one can also meter
(control) the output. LVe use the word to denote both;
the context should indicate which.
on those responsible for changes in oz~tpz~t.~
'I'he classic relationship in economics
that runs from marginal productivity to
the distribution of income implicitly assumes
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