Usher Political Economy (Blackwell, 2003)

and cheese among the five people in chapter 3. The ideal is to predict the resolution of a dispute from its circumstances, just as the allocation of bread and cheese is predicted from the initial distribution of the ownership of property. Much is riding on this enterprise. Businessmen and politicians strike bargains all the time. Neither commerce nor government could otherwise be maintained. If bargaining cannot be explained satisfactorily, then we have to recognize that much of the detail of the world escapes our net and cannot be explained with the tools of economic analysis. Recognizing that people often bargain successfully, we would have to treat people’s willingness to strike a bargain as an empirical, unexplained fact of life.

Though the models of arbitration and negotiation to be discussed below are both determinate, they require such strong restrictions on the context of bargaining as to constitute an admission that there really is no satisfactory explanation within the confines of economic analysis of how bargains are struck. The models are insightful nonetheless. Important features of bargaining are highlighted by the strong assumptions required to make bargaining determinate. Both of the models to be discussed are representative simplifications of a large literature on how deals are struck.

The arbitration model prescribes an allocation in accordance with the arbitrator’s sense of what is right, just, fitting, or appropriate as a resolution of the dispute. There may or may not be an actual arbitrator whose decision the parties to the dispute have agreed to accept. If not, the arbitration model would reflect a common understanding by the parties to the dispute of what is appropriate and fair. The underlying principle in the arbitration model is equality. When nothing is known about the circumstances of the parties to the dispute, the only conceivable allocation is a fifty-fifty split. This solution might be modified when there is information about the nature of the dispute and the consequences of a failure to agree. A fifty-fifty split makes no sense when one of the parties’ outside options is preferable. For example, if the revenue from a new enterprise is $500,000 and if the parties’ outside options forgone are $300,000 and $100,000 (rather than $225,000 and $175,000 as assumed in figure 7.1), a fifty-fifty split of the revenue from the new enterprise would leave one party worse off than he had been before. The only reasonable interpretation of a fifty-fifty split in this context pertains to the surplus rather than to the combined income from the enterprise. With outside options of $300,000 and $100,000, a fifty-fifty split of the surplus would supply the parties with incomes of $350,000 and $150,000.

There are additional problems. Bargainers may differ in their attitude to money. One party may have little use for more than, say, $200,000; his utilities of all sums in excess of $200,000 may be almost the same. Another party may have a critical target income; his life’s ambition may require at least, say, $275,000, but, if he cannot obtain that, he may not much care whether he gets, say, $175,000 or $200,000. Bargains may be struck over matters other than money. The employment contract takes account of all aspects of the job: hours of work, obligation to work overtime, overtime pay, safety standards, time off, the right to join a union, or rules for promotion, as well the rate of pay. Bargainers’ attitudes toward money and non-monetary aspects of disputes should somehow be recognized in any rule of arbitration.

The rule requiring a fifty-fifty split is generalized in equation (3) to account for such considerations. Define uA (YA ) and uB(YB) to be the utility functions of person A and person B where YA and YB could be incomes as supposed above but could

also be the entire set of benefits to person A and person B under the terms of an agreement. The outside options, NA and NB, could be specified accordingly. The utility functions, uA and uB, may be discovered by the conceptual experiment discussed in chapter 5 for identifying risk aversion. A possible rule of arbitration is to provide the parties with incomes or benefits, YA and YB, to maximize the product

where YA + YB = Y (because the sum of the payments cannot exceed the total amount to be shared) and where W must be greater than zero as long as there is anything to bargain about.2

The bargain is determinate within the model. One can always find some combination of YA and YB to maximize the value of W in equation (3). It is obvious from the symmetry that the maximization of W in equation (3) prescribes a fifty-fifty split when NA and NB are equal (possibly 0) and when the claimants’ utility functions are the same. With identical utility functions, the maximization of W supplies person A with the larger income if and only if NA > NB. There is however some question about how closely the model fits the real world of negotiation. Bargaining breaks down if each party exaggerates its claim on the other as a means of raising its return from the bargaining process or, more importantly, if one or the other party simply refuses to accept the outcome of the model as binding on himself. One’s sense of fairness may not correspond to equation (3). One may refuse to play fair. One may just say no.

Models of negotiation are more interesting and insightful. With no arbitrator and no common understanding of what is fair, a bargain may nevertheless be struck. A bargain between person A and person B over the allocation of a sum of money Y is rendered determinate by four assumptions about the bargaining process:

(1)A prescribed sequence of offers. The parties make alternate offers separated by prescribed periods of time. Each offer is a proposed allocation of the stake, so much for person A and the remainder for person B. Suppose the process begins in the year 2000. On January 1, 2000, one person is entitled to make a take-it-or-leave-it offer, and immediately the other person says either “yes” or “no.” If the answer is “yes,” a bargain is struck and there is nothing more to discuss. If the answer is “no,” all communication ceases until January 1 of the following year, 2001, when the parties switch roles. Then it is the other person’s turn to make a take-it-or-leave-it offer. The process continues with the parties alternating roles year after year until somebody’s offer is finally accepted.

(2)A gag rule. No communication between the parties is allowed during the prescribed time from the rejection of one offer and the appearance of the next.

(3)The cost of delay. The stake diminishes over time. A business venture that seems promising if undertaken today may not be quite so promising if delayed until tomorrow. Suppose the opportunity that gives rise to the bargain becomes available on January 1, 2000, with an initial stake of Y(2000). By January 1, 2001, the stake has shrunk to Y(2001) which is somewhat less than Y(2000), and so on. For every

Table 7.1 How the allocation of the surplus depends on the timing of the loss from delay in bargaining

[Incomes and surpluses in thousands of dollars.]

year t, Y(t + 1) > Y(t). As the outside options, NA and NB, remain invariant, the surplus each year, Y(t) − NA − NB, diminishes accordingly. Any feasible and mutually advantageous allocation of the available income in the year t − YA (t) to person A, and YB(t) to person B – entails an allocation of the surplus, providing [YA (t) − NA ] to person A and [YB(t) − NB] to person B. The shrinkage of the stake supplies both parties with an incentive to strike a bargain quickly.

(4) Sequential rationality. At no time does party A refuse an offer if he cannot expect party B to accept another offer more advantageous to party A later on. Nor does party B refuse an offer if he cannot expect the party A to accept another offer more advantageous to party B later on.

Under these rules, bargaining terminates when an agreement is reached or in the event that there is nothing left to bargain about because the surplus available when the negotiation began has all been wasted in delay.

To see how this might work out in practice, consider the example of negotiation in table 7.1 above which is based on the bargain between the accountant and the biologist in figure 7.1. Originally, on January 1 of the year 2000, the stake to be allocated is $500,000 and outside options forgone are $225,000 for person A and $175,000 for person B, so that the surplus is $100,000. As the years go by, the stake diminishes but the outside options remain the same. By the year 2005, total income has shrunk to $400,000 which is no larger than the sum of the parties’ outside options, and there is no surplus left. The bargaining begins on January 1, 2000, with an offer {YA (2000), YB(2000)} from person A to person B, meaning that of the available income, Y(2000), person A gets an amount YA (2000) and person B gets an amount YB(2000). If person B accepts the offer, the bargaining process has come to an end. Otherwise, neither party is allowed to speak to the other until January 1, 2001 when

it is person B’s turn to make an offer, indicated by {YA (2001), YB(2001)}. The process continues, person A making the offer in even years and person B making the offer in odd years until either somebody’s offer is accepted or the surplus is dissipated by delay until there is nothing left to bargain about.

The first five columns of the table show the situation confronting the two parties to the bargain. The first column indicates the date, from the year 2000 to the year 2005. The second column shows how the stake diminishes over time from $500,000 to $400,000. The next column shows the corresponding diminution of the surplus each year from $100,000 on January 1, 2000, to $80,000 on January 1, 2001, to nothing by January 1, 2005. The next column shows the loss of the surplus from one year to the next. The next column shows which of the two parties is entitled to make the offer each year. The sixth column is different. Assuming sequential rationality, it shows the offer that would be made each year by the person entitled to make it, in the event that bargaining has not been terminated already by agreement. The final column shows the offered allocation of the remaining stake.

The four assumptions about the nature of the bargaining process are sufficient to establish a unique and determinate bargain in the circumstances described in table 7.1. A bargain is struck at the very first opportunity. On January 1, 2000, person A proposes an allocation of $305,000 to himself and $295,000 to person B, and person B accepts. Other allocations in the final column of the table show what the outcome of bargaining would have been if bargaining had continued beyond January 1, 2000, but those bargains are entirely hypothetical.

The explanation is obtained by reasoning backwards. Suppose no agreement was reached prior to January 1, 2004, the last day when a mutually advantageous deal could be struck. By that time, the stake would have fallen to $420,000 and the corresponding surplus would be $20,000. It would be person A’s turn to make an offer which person B must accept or reject immediately. Since person B can obtain no more than his outside option by waiting for his turn to make an offer the following year, it would be rational for him to accept anything over and above his outside option immediately, even as little as one penny. Knowing that, person A keeps the entire surplus of $20,000 for himself. He proposes an allocation of {245, 175}, meaning $245,000 for himself and $175,000 for person B – strictly speaking $245,000 less one penny for himself and $175,000 plus one penny for person B. Person B would have to accept, for, being rational, he would rather have a surplus of one penny than no surplus at all.

Step back a year to January 1, 2003. The stake would then be $430,000, the corresponding surplus would be $30,000, and it would be person B’s turn to make an offer. Both parties know that person A can assure himself of no more than $245,000, or $20,000 of surplus, by refusing person B’s offer and waiting for his own chance to make an offer in the year 2004. Recognizing this, person B offers party A $20,000 of surplus immediately, keeping $10,000 of the surplus for himself. Person B would offer person A an allocation {20, 10} of the surplus, or equivalently {245,185} of the stake, and his offer would be accepted.

The sequence of offers of surplus and of total income that each person would be prepared to make when his turn comes around is shown in the two last columns of table 7.1. These columns should be read from the bottom up, for the rationality of each

offer stems from the knowledge by the party making the offer of what he can expect in the following year. From this line of reasoning, it follows immediately that each year’s offer would be accepted if, for some reason, no bargain had been struck already. In particular, the first year’s offer is accepted and the bargaining stops immediately, and none of the surplus is wasted by attrition over time. When both parties bargain rationally, each party’s share of the surplus is the sum of the reductions in the surplus during all of the years when that party is entitled to propose the bargain. The actual bargain is {305, 195} as shown at the top of the final column in table 7.1.

The model of negotiation is forward looking. The bargain struck today is determined by what would otherwise happen tomorrow, and that in turn depends on what would happen the day after tomorrow, and so on into the indefinite future or until there is nothing left to bargain about. Bargains that would otherwise have been struck in subsequent years influence the content of the bargain that is actually struck as soon as the bargaining process begins. The bargaining process makes the outcome of the bargain determinate. On the strength of the four assumptions above, there is a unique bargaining equilibrium comparable to the equilibrium market-clearing prices discussed in chapter 3.

The model can be modified in several ways: Instead of supposing that the surplus diminishes over time, it might be supposed that the surplus remains the same but that the parties place a smaller value on a given sum tomorrow than they place on the same sum today. On that supposition, the less impatient person (the person with the lower rate of discount) would get the larger share of the pie. The reader may have noticed that the outcome of the bargain in table 7.1 depends critically on which of the two parties is entitled to make the first offer. That advantage gradually disappears with more frequent offers, for instance every week rather than every year, and when the parties’ time preferences are substituted for the shrinkage of the stake. There may also be uncertainty about the size of the stake in the dispute. Parties may have private information. In a dispute between labor and management, the management may be the better informed about the profitability of the firm as a function of the wage rate.

The solution is correct, but very fragile. All of the four assumptions as set out above are essential. If, for example, silence is not maintained between offers, the bargaining process breaks down in a cacophony of nearly simultaneous offers, counter-offers and threats with no hint of an equilibrium in sight.

The final assumption, sequential rationality, is especially dubious. Suppose, knowing his share of the $100,000 of surplus is to be no more than $20,000 in the circumstances of table 7.1, person B contracts with the local notary to accept nothing less than, say, $60,000 and to pay the notary $100,000 if he does. Now person A is stuck, for, in these new circumstances, he must accept $40,000 of surplus or nothing. Being rational, person A accepts the $40,000 of surplus, even though he could have had twice that much if person B had behaved differently. Of course person A could play the same game, so that whoever plays the game first would seem to win. If they both made credible take-it-or-leave-it demands and if the sum of their demands exceeded $500,000, there could be no agreement at all and the surplus in the bargain could be wasted altogether. In practice, not all mutually advantageous bargains are struck. The accountant and the biologist may fail to come to an agreement even though they

are both made worse off by their failure than they would be under any allocation of the surplus. Some large bargains are struck easily. Some mutually advantageous agreements are thwarted over trifles. Typical outcomes of bargaining can be observed. Outcomes in specific disputes cannot be predicted.

Rationality may be disadvantageous; irrationality may be advantageous. If person B is rational in the circumstances of table 7.1, he accepts the $20,000 of surplus in the bargaining solution. If he is irrationally attached, for example, to a fifty-fifty split and unwilling to accept any other regardless of the consequences to himself when the bargaining process is complete, then person A, if he is rational, might as well accede to person B’s demand. That is not just true for a fifty-fifty split but for any split whatsoever as long as person B can be expected to hold fast whatever the consequences to himself. A standard maxim of bargaining is to “Make yourself into a force of nature,” compelling your opponent to concede today by denying yourself the option of conceding tomorrow. One says to one’s opponent that “One of us has got to be rational, and it won’t be me.” The strategy often works, but it is dangerous. One’s opponent may be as irrational as oneself, mutually advantageous trades may be lost and a person with a reputation as an unreasonable bargainer may be unwelcome as a participant in associations where bargaining over shares is inevitable.

There is no denying that people do make deals. Bargains are struck. Just how bargains are struck in practice, and when bargaining breaks down, remains mysterious.

SALES AND CONTRACTS

It was supposed in the description of the market in chapter 3 that all transactions are instantaneous. In the model of barter, the bread producer hands over the agreed-upon amount of bread to the cheese producer at precisely the moment that the cheese producer hands over the agreed-upon amount of cheese to the bread producer. Nobody need trust anybody else because each party releases his goods at exactly the same instant of time. Nothing is altered when bread and cheese are exchanged for money rather than for each other. Bread is exchanged for money instantaneously. Cheese is exchanged for money instantaneously. Sometimes actual transactions are like that, but many transactions in business and investment are of the form, “You do this for me today and I will do that for you tomorrow.” An essential requirement for transactions over time is that the parties trust one another. Promises must be believed, either because parties are intrinsically trustworthy or because the law makes them so.

Contracts differ from sales in several respects:

(1) Timing. An ordinary sale of cheese is instantaneous not just in the sense that the sale occurs at a moment of time, but in the more interesting sense that there is no lingering obligation once the purchase is complete. Admittedly, even an ordinary sale has something of the character of a contract if the seller preserves responsibility for defective products. The seller may be required under the customs of trade to refund one’s money in the event that the bread is stale or the cheese is rotten. There are in practice gradations between sales without lingering obligations and contracts binding parties to actions in the future.

238 A S S O C I A T I O N S

(2) The written document. A promise is easier to enforce when it is written down. A grocery store may give me a sales slip when I pay for the cheese, but there is no need for me to provide comparable documentation to the grocery store because it has my money already. A written document might also be dispensed with in more complex arrangements if both parties to the transaction have established reputations for honesty that might be jeopardized in a dispute. One may, alas, have a long-term connection with one’s doctor, but no formal contract. But the less parties to a transaction know about one another and the more complex the terms of contract, the greater the need for a written document, if only to provide the law with a statement of obligations in the event of a dispute. When there is no written contract but it is generally understood what parties to a contract must do, we say that the contract is “implicit.”

(3) Public enforcement. Public protection of private property goes beyond the defense of the fisherman against the pirate. It is more than the protection of things. It encompasses the public support of private promises. An inventor discovers how to make a new and useful product, but he does not have the money to finance its development, manufacture, and distribution of the product. The inventor joins forces with a lender who supplies the money up front in return for a share of the profit from the enterprise. Everybody gains from the arrangement. The inventor and the lender acquire shares of the surplus from the enterprise. The general public gains access to a product that was not available before. Essential to the enterprise is that the inventor’s promise is believed. The lender must have confidence that his agreed-upon share of the profit from the enterprise will actually be forthcoming. He must trust the inventor to give up a part of the profit as he promised. The inventor has every incentive to make the promise in order to acquire the lender’s funds, but he acquires an incentive to welch on his promise and to take the entire profit from the enterprise for himself. The inventor may or may not be honest. Motivated by greed, and by greed alone, homo economicus would surely break his promise. There is enough truth in the economist’s caricature of mankind that many potentially beneficial ventures are lost because people in circumstances like that of the inventor cannot bind themselves, or be bound by the state, to keep their promises. Enterprise, prosperity, and progress are only possible when such promises can be believed.

Sometimes promises can be relied upon because of the concern of the promisor for his reputation. He keeps promises today to ensure he will be welcome as a partner in future transactions. The threat of ostracism may be sufficient enforcement in dealings among small groups of traders who expect to continue dealing with one another for a long time to come. That is a common explanation of the trading success of tight ethnic groups – the Jews of medieval Europe, the Chinese in South-east Asia and the Parsees of India – within societies where the law is lax and inefficient. Allegedly, the diamond trade still operates without legally binding contracts. These are exceptions. In general, and especially in transactions among strangers, promises require enforcement by the state. As long as the inventor’s promise to the lender was made in the proper manner, the lender can sue the inventor for breach of promise and the courts will supply redress. Then and only then is the inventor believed.

Just as the local policeman stops me from stealing a pound of cheese, so too does he stop me from reneging on my contract. The policeman supplies the trust without which most mutually advantageous contracts would in practice be blocked. But, by invoking the protection of the state, a contract engages the entire society and creates a universal interest in what would otherwise be a private arrangement between two parties. I gain from public enforcement of contracts not just so that I can rely on your promises, but so that you can rely on mine. Economies run on trust which can only be secured by public enforcement. Enforcement of contracts can be seen as an aspect of the protection of property rights without which neither prosperity nor economic growth can be attained.

(4) Limits to public enforcement. Not all private promises can or should be enforced by the state. The state cannot place itself so completely at the service of each and every person that all private agreements acquire the force of law and are treated as property rights. “I’ll stick up the bank teller and you drive the get-away car” is a promise that is obviously not in the public interest to enforce. The state does not enforce contracts to violate the law. The state does not enforce my promise to supply you with a pound of my flesh in the event that I fail to pay back a loan. The state does not enforce my promise to sell myself or my children into slavery, though at other times and in other societies such promises would be enforced. Nor does the state enforce a contract to engage in prostitution or, among firms with similar products, to restrict output to raise the market price. There is considerable dispute today about whether and in what circumstances a pregnant woman may consign her child for adoption. Human blood and organs are saleable commodities in some societies but not in others. Rules about the governance of corporations can be interpreted as bounds on the state’s enforcement of promises. The prohibition on insider trading by executives and directors of corporations is a kind of public enforcement of the contract between management and shareholders in which management promises to desist from actions reducing the value of the firm.

(5) Ambiguity at the edges. It is difficult, often impossible, to specify the terms of a contract completely. Some contracts are so well specified that no dispute over their meanings can arise. An agreement to buy a number of shares of stock at a given price at some designated date in the future may be a contract of that kind. Most contracts are different. They are well defined at their core but ill defined at the edges. You are to rent me a hall for a wedding. Have you honored your side of the bargain if one of the curtains is torn or missing, if some of the tables are smaller than I, in good faith, had believed they would be, or if there is a rock band playing in the next room? Have I honored my side of the bargain if I pay less than we had agreed upon as a consequence of some of these conditions? Even as simple a contract as the renting of a hall is somewhat ambiguous. Or, I am a contractor who has agreed to build you a house at some specified price. Have I complied with the contract if I fail to complete the house on time, employ what you claim to be inferior materials or demand extra payment for features of the house you now claim were covered by the original agreed-upon price? Important contracts among large corporations can be a mine-field of ambiguities. Billions of dollars turned on a court’s decision whether

a handshake constituted a contract to sell the Getty Oil Corporation to Penzoil rather than to Texaco. Fortunes have been spent on legal fees in disputes over whether a contract is valid, what it means, and who must pay what to whom when a contract is breached. The simple fact of the matter is that it is frequently impossible to write so complete a contract that every possible eventuality is covered. Almost all contracts are somewhat incomplete. Disputes can arise no matter how carefully a contract is drafted.

(6) Adjudication of disputes. There are two sides to public oversight of private contracts: enforcement and adjudication. Enforcement is required when non-compliance by one party to a contract is tantamount to theft, when, for example, a contractor absconds with the money he has accepted in payment for building a house. Adjudication is required to settle disputes where parties disagree in good faith about the interpretation of the terms of a contract. You demand a discount on the price of your house because I, the contractor, failed to complete construction by an agreed-upon date. I contend that the delay was not my fault because an ice storm had made it impossible to complete the building on time and that our contract has an implied waiver for acts of God. Either of us may take the other to court, but that route to dispute resolution is sometimes capricious and always expensive. It is capricious because judges and juries are likely to know less about the relevant commercial customs than do the parties to the dispute. It is expensive to litigants even though the cost of the court itself is usually born by the state. To avoid the expense and uncertainty of litigation, parties to a dispute acquire a special incentive to “bargain in the shadow of the law,” to agree privately to whatever they guess the courts will decree. Thus, the real social benefit of litigation lies not so much in the resolution of disputes that are actually before the court but in the resolution of other similar disputes without litigation. More will be said about this in the last chapter of the book.

MARKETS AND HIERARCHIES

Every country requires an army and a civil service which must inevitably be organized as hierarchies. Privates are commanded by sergeants, who are commanded by majors, who are commanded by colonels, who are commanded by generals who are commanded by the supreme commander. The hierarchy may be more or less rigid, more or less oppressive, but there must be a hierarchy. There is simply no other way to run an army. More relevant to our main concerns in this book is that firms must have hierarchies too. There were no firms in chapters 3 and 4 because each person connected to the market, as seller and as buyer, individually. Some markets are really like that. Others are not because production requires large factories, complex machinery, and many workers with different and complementary skills to be directed toward a common goal. Firms had a shadowy existence in chapter 6 as a reflection of the optimal scale of organization identified by the base of the U-shaped cost curve, but hierarchy was hardly mentioned.

The economy can be looked upon as a complex interaction between two modes of organization of production: a command structure within the firm and a price

mechanism among firms and between firms and people. Both modes are indispensable. The models in chapters 3 and 4 were of governance by prices. Organization within the firm is governance by direct command that is similar to but less rigid than the army, for workers may quit while soldiers may not. The boundary between pricing and command, between markets and hierarchy, is a trade-off between the costs and advantages of each. Recall the discussion in chapter 6 of the optimal size of firm. Sometimes, as in most farming, the optimal size of firm is whatever can be managed by one farmer and his family. Sometimes, as in most modern industry, the optimal size of firm requires an army of employees whose work can only be coordinated within a hierarchy.

One way or another, the profit motive guides the formation, size and dissolution of firms. If one thousand cars can be produced more cheaply in one large firm than in ten small firms, then one large firm will emerge from the merger of smaller firms or from the expansion of one of the ten small firms driving the rest out of business. If the balance were the other way round, the owners of the one large firm would acquire an incentive to break it up, or the large firm would be driven out of business by its smaller competitors. Prices guide firms, large and small, in choosing what to produce and what factors of production to employ, but prices cannot coordinate an assembly line, decide when to hire the lawyer, pass judgment on the potential usefulness to the firm of two job candidates with equal paper qualifications, choose where and how to invest, or administer research and innovation. Like the army, business has to be administered. The boundary between firms and markets is the outcome of a trade-off between the advantages of information supplied by prices and the advantages of coordination within the firm. Difficult though it may be to explain the location of the boundary in detail, there is no doubt that profit-maximization by the actors in the economy does resolve the problem in practice.

The enormous improvement in the means of communication over the last few hundred years – from the pony express, to the telegraph, to the telephone, to email – coupled with our capacity to keep track of massive amounts of data, has greatly enhanced the comparative advantage of deliberate coordination over the price mechanism, and has led both to the internationalization of firms and to an increase in their absolute size. There was a time when, for all practical purposes, the firm was synonymous with the shop that could be, quite literally, watched over by its owner. That, of course, is no longer true. Conglomerates grow dangerously large, threatening monopolization of their industries and wielding disturbingly large political influence. Yet, at the same time, innovation churns out thousands and thousands of tiny independent firms that operate quite profitably within a niche. The corner grocery and the local café give way to massive chains, but new independent biotech firms are starting every day. Inevitably, there is concern about whether and to what extent the virtues of the competitive market can be preserved in this environment.

The hiring of labor by the firm is like the purchase of ordinary goods and services if and to the extent that workers are as substitutable one for another as, for example, boxes of cornflakes on the shelf at the grocery store. The hiring of labor becomes more problematic when the employer cannot specify the worker’s job in detail or readily observe the amount of work performed. Worker and employer may agree upon the wage per hour, but they cannot always agree upon the intensity or quality of worker