In a free-market society, individuals may enter freely into voluntary associations. As we saw in Section 2 (p. 2.4:8), human beings cannot be coerced to participate in such associations, but join in order to further their personal purposes. Voluntary associations benefit all participants on their individual value scales. They arise from contractual agreements among those participants, ranging from tacit understandings to informal and formal contracts. Contracts may be either written or oral; a simple contractual transaction, such as a purchase in a retail store, may even be executed wordlessly.

One kind of agreement that is often misinterpreted is the contract by which an employer procures labor services from an employee. For practical reasons, compensation is usually provided on an hourly or other temporal basis, rather than by more direct measurements of the employee's output. In attempting to predict the marginal products of those services, therefore, the employer typically examines the evidence of the employee's record. Past performance thus becomes an important determinant of the demand for a worker's services and the pay rate bid for each new contract period. For example, the employer may offer "merit increases" to those employees who have proven most productive in the recent past. (Such increases may also reflect an employee's developing skills.) Although the salary or wage may therefore be adjusted to reflect past performance, it is offered in exchange for expected services to be rendered during the new period, and not—as sometimes imagined—for the worker's past services. Payment for those past services has already been rendered, except for any long-term benefits expressly provided by contract, such as pension payments.