Universal Economics by Armen A. Alchian & William R. Allen

Author:Armen A. Alchian & William R. Allen
Language: eng
Format: mobi, pdf
Publisher: Liberty Fund, Inc.
Published: 2018-08-29T22:00:00+00:00

[print edition page 363]

CHAPTER 23

THE FIRM’S CONTROL AND REWARD STRUCTURE

A GLANCE BEHIND, A LOOK AHEAD

Virtually everything we obtain carries some kind of cost and requires payment of some kind of price. Trade, we have seen, is an activity of simultaneous cooperation and coordination while there is also conflict and competition. Both parties gain from the exchange, but in trading each tries to gain the largest possible advantage over the other.

Production is as socially complex as exchange. People are more productive when associated with others. So we live in families and communities, and we work in teams while we trade locally and globally. But interrelations and webs and dependencies necessarily entail costs and inconveniences and frustrations along with increased efficiencies. Hence we try to protect ourselves from and minimize such burdensome and frustrating aspects of living together.

Chapter 22 dealt with the efficiency benefits of teams operating in a variety of circumstances and challenges. But not all teams are highly efficient or successful, and further complications and difficulties of control and direction are considered in chapter 23. In particular, issues of mutual dependency in production and commerce are examined in chapter 24. And chapter 25 is directed largely to modes of at least partial protection against the inevitable perils of such dependency.

In a firm, you work with the same persons, day after day, relying on predictable actions and reliable information from other members. When changes in the membership occur, they can be disruptive. Without a boss (manager/supervisor), everyone would have to negotiate continually with other members about what to do and who could become a member and how the rewards are shared. With a boss, team members can be more effectively selected, organized, directed, and rewarded.

However, even in the best of teams there’s usually some disagreement about sharing the team’s values and about the behavior of some members. A reason is that though the total output of the team can often be objectively measured, the contributions of each member to the final team output is difficult, if not

[print edition page 364]

impossible, to measure. We’ll examine some resulting conflicts and the methods for inducing and maintaining reliable performance by the members of a firm.

Coordination in teamwork is not always automatic, and “full effort” by everyone, all the time, is never assured. Success depends on:

1)   How well each member’s skills are matched to their tasks and each other.

2)   Effectively addressing “moral hazard”: each member will be tempted to relax or shirk if that is not readily detected by the others.

3)   Achieving and maintaining reliable dependency on the behavior of the other members, recognizing that the team’s worth is uncertain.

4)   Reaching some agreement about who will bear the uncertainty.

Despite substantial obstacles, many firms are successful and persist. How are the difficulties overcome?

THE BOSS

Who will be most interested in good monitoring of the team? Who would pay the most to have those rights? The owner of those resources most dependent on the success of the firm will have the greatest incentive to monitor the members. Therefore, the owner of such

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