ABSTRACT
There can be no doubt that the exceptionally high productivity of developed market economies is, to a large extent, due to the institution of the market itself, which on the one hand provides strong incentives for productive behaviour and on the other hand admirably co-ordinates the decisions of independent individual units. The recent breakdown of the socialist economies has once more confirmed this claim. This is not to deny that part of the success must be credited to the state for compensating market failures. But apart from this reservation, there still remains one point of irritation in this praise of market economies, which has troubled economists (and other observers) for quite some time. The outstanding economic performance of market economies seems to be the result not only of pure market transactions, adequately supported by state intervention, but also by the internal organization of capitalist firms, which looks (at least at first sight) vastly different from that of ordinary market transactions. In sharp contrast to market relationships, which are characterized by independent, autonomous decisions of market participants, the relationships within the firm are usually described as hierarchical command structures. The centre of this internal structure of the firm is the employment relationship, in which the employer has the authority to impose rules and orders upon his employees, who (within certain limits) have simply to obey them. Instead of the unconscious co-ordination achieved through market transactions, firms seem to attain co-ordination by the conscious use of directives and power.2
