I’m looking forward to a few weeks off before I begin a new role in a technology & management consulting company (which I’m also very much looking forward to).
I’m planning on going on an ‘information diet’ during my break and have already cleared inboxes, unchecked starred items, and unsubscribed from plenty of RSS feeds.
But what sort of a diet would it be if I didn’t ensure I got enough nutrition? So I’ve also enrolled in a course at the Mises Academy. I’ve chosen “Networks and the Digital Revolution: Economic Myths and Realities” because I’ve always liked reading snippets of Peter Klein.
One of the features of the Mises Academy (other than that the courses are cheap and on line) is that the readings are generally available for free. While working through the readings for my course I came across:
… They hit gold with ”The Nature of the Firm,” a 1937 paper written by the Nobel laureate Ronald Coase.
The Coase paper asked a deceptively simple question: If the market is such a great tool for allocating resources, why isn’t it used inside the firm or company? Why doesn’t one worker on the assembly line negotiate with the worker next to him about the price at which he will supply the partly assembled product?
That sort of negotiation rarely happens. Instead of using markets, companies tend to be organized as hierarchies, using a chain of command and control rather than negotiation, markets and explicit contracts. Paradoxically, the primary unit of capitalism, on close inspection, looks a lot like central planning.
Mr. Coase didn’t just ask this question; he also provided a provocative answer: it all hinges on the costs of making transactions. What economists call firms, he said, are essentially groups of activities for which it is more effective and less costly to use command-and-control than markets to have things done.
New-economy advocates found this a compelling idea. One consequence of the Internet has surely been to make it cheaper to communicate. This should, in turn, lower transaction costs and change company boundaries. Their conclusion was that companies would inevitably downsize and outsource, spin off unnecessary functions, and carry out more and more transactions using the Internet instead of internal memos.
Not so fast. The Internet lowers communication costs, that’s for sure. But that means it lowers transaction costs within organizations as well as across organizations. The internal memo might disappear, but only because it is replaced by the internal e-mail message.
It just doesn’t follow that lower communication costs lead to smaller companies. In fact, Mr. Coase himself said that ”changes like the telephone and telegraphy, which tend to reduce the cost of organizing spatially, will tend to increase the size of the firm.””
– from here with my emphasis added
I’ve read some of the original Coase papers over the years and the idea of reduced transaction costs have been at the heart of the MWT Model. I like this idea that a key capability required in a low transaction cost world is likely to be the ability to work effectively with, and generate value from, low transaction costs within organisations and also across organisations. To me this is the whole point of how management is changing / needs to change.
I also like that this is still an interesting idea to me. It’s a calling of sorts and something I tend to think about even when I don’t have to. It gives me energy and purpose.