4 ms·

My (novice) highest-level summary of the argument in this paper: firms emerge as a result of transaction costs between people. By being in a firm together, peop

by narush 4y ago

My (novice) highest-level summary of the argument in this paper: firms emerge as a result of transaction costs between people. By being in a firm together, people build shared structures, and as a result can reduce these transaction costs. A firm is like a ball of low transaction costs, pretty much. This paper is the first economics paper I ever read (a long time ago, excuse my if my summary is awful lol), and still one of the most thought-provoking and interesting papers I've encountered. The fun-to-think-about questions that it leads me to: 1. What sort of transaction costs between people today are _practically_ the most important to leading to a creation of a firm? 2. What if we built technology that reduced those transaction costs to near zero? E.g. what would it mean for there to be less incentives for a firm to form? 3. How does questions of transaction costs relate to market structure and monopoly? I guess mostly this paper is amazing b/c it made me realize I never really thought to ask the question "why companies in the first place?"

mooreds 4y ago
> What sort of transaction costs between people today are _practically_ the most important to leading to a creation of a firm? Discovery of services (what can I help you with? what can you do for me) and trust (can I trust you to do task <x>? Can you trust me to pay you) are two of the biggest person to person transaction costs I see nowadays.
- Animats 4y ago
  Yes. The transaction cost includes both trust for this transaction, and trust for future transactions. Supply chain issues are much more of a concern today than two years ago.
  - pineconewarrior 4y ago
    I was thinking the same. Leverage and trust as a mechanism of "sunk cost" on both parties.
deleted 4y ago
[deleted]
sigil 4y ago
On (2), here's something I've been wondering. Shouldn't the explosion of SaaS and remote work tools close the gap between internal/external transaction costs, and lead to a decrease in firm size? Because we've been seeing the opposite. [0] Maybe this just hasn't shown up in the numbers yet, because there's a delayed effect? Or do SaaS and remote work tools benefit firms internally just as much, or more, than someone contracting out work on the open market? [0] https://marginalrevolution.com/wp-content/uploads/2019/01/HNS1.png https://marginalrevolution.com/wp-content/uploads/2019/01/HN...
- pragmatic 4y ago
  I think you are right but underestimating the sheer number of small SaaS companies out there. Just rode through a startup and acquisition in a space I’d never thought much about (way underserved but all kinds of money sliding around) until I worked there with a smaller than I would have thought possible team.
- wrineha2 4y ago
  Having taught this paper a couple times, the best way to think about it is a binary. Why is there 1 (a firm) and not 0 (the market)? This way shifts the internal/external viewpoint slightly. The resting state should be 0 (the market), we need to understand why we get 1 (the firm). All of that being said, SaaS and remote work tools should reduce the cost of transactions in the firm, which means expanded control of capital and more productive monitoring systems. In effect this means that the company can coordinate restrictions on output, monitor agents, and curb the costs imposed by the agents on the firm. Theory is ambiguous when it comes to markups, what the company charges versus the price that consumers pay. This might go up or go down. There is a lot of current debate on this. But the theory does suggest that markets should get more monopolized. Let me know if you need more. This is one of my research foci.
IAmEveryone 4y ago
Just to make it explicit: the woah-effect of the idea is that the firm, a concept rather central to our experience of capitalism, contradicts a (common conception of a) central idea of capitalism, namely that competition assures efficiency.
evrydayhustling 4y ago
> What if we built technology that reduced those transaction costs to near zero? E.g. what would it mean for there to be less incentives for a firm to form? Costs of organization can also drop, making firms more competitive compared to individual contracting.
- zozbot234 4y ago
  In a way, an "organization" is just a very complex smart market or mechanism that we don't bother to analyze the incentive structures of. Organizational arrangements also involve transaction costs, and these can be quite high especially as size grows, personal loyalties decrease and inside politicking dynamics become prevalent. "The Nature of the Firm" is more about exploring the contrast of these different ways of arranging cooperation among agents than asserting one as consistently better than the other.
vmurthy 4y ago
> 1. What sort of transaction costs between people today are _practically_ the most important to leading to a creation of a firm? My take on this : I have skill-a , you have skill-b. Skill-a plus skill-b would make a device that would solve a big problem in the world. Company solves the transaction cost of finding two people with complementary skills.

by narush 4y ago

mooreds 4y ago

> What sort of transaction costs between people today are _practically_ the most important to leading to a creation of a firm? Discovery of services (what can I help you with? what can you do for me) and trust (can I trust you to do task <x>? Can you trust me to pay you) are two of the biggest person to person transaction costs I see nowadays.

Animats 4y ago
Yes. The transaction cost includes both trust for this transaction, and trust for future transactions. Supply chain issues are much more of a concern today than two years ago.
- pineconewarrior 4y ago
  I was thinking the same. Leverage and trust as a mechanism of "sunk cost" on both parties.

deleted 4y ago

[deleted]

sigil 4y ago

On (2), here's something I've been wondering. Shouldn't the explosion of SaaS and remote work tools close the gap between internal/external transaction costs, and lead to a decrease in firm size? Because we've been seeing the opposite. [0] Maybe this just hasn't shown up in the numbers yet, because there's a delayed effect? Or do SaaS and remote work tools benefit firms internally just as much, or more, than someone contracting out work on the open market? [0] https://marginalrevolution.com/wp-content/uploads/2019/01/HNS1.png https://marginalrevolution.com/wp-content/uploads/2019/01/HN...

pragmatic 4y ago
I think you are right but underestimating the sheer number of small SaaS companies out there. Just rode through a startup and acquisition in a space I’d never thought much about (way underserved but all kinds of money sliding around) until I worked there with a smaller than I would have thought possible team.
wrineha2 4y ago
Having taught this paper a couple times, the best way to think about it is a binary. Why is there 1 (a firm) and not 0 (the market)? This way shifts the internal/external viewpoint slightly. The resting state should be 0 (the market), we need to understand why we get 1 (the firm). All of that being said, SaaS and remote work tools should reduce the cost of transactions in the firm, which means expanded control of capital and more productive monitoring systems. In effect this means that the company can coordinate restrictions on output, monitor agents, and curb the costs imposed by the agents on the firm. Theory is ambiguous when it comes to markups, what the company charges versus the price that consumers pay. This might go up or go down. There is a lot of current debate on this. But the theory does suggest that markets should get more monopolized. Let me know if you need more. This is one of my research foci.

IAmEveryone 4y ago

Just to make it explicit: the woah-effect of the idea is that the firm, a concept rather central to our experience of capitalism, contradicts a (common conception of a) central idea of capitalism, namely that competition assures efficiency.

evrydayhustling 4y ago

> What if we built technology that reduced those transaction costs to near zero? E.g. what would it mean for there to be less incentives for a firm to form? Costs of organization can also drop, making firms more competitive compared to individual contracting.

zozbot234 4y ago
In a way, an "organization" is just a very complex smart market or mechanism that we don't bother to analyze the incentive structures of. Organizational arrangements also involve transaction costs, and these can be quite high especially as size grows, personal loyalties decrease and inside politicking dynamics become prevalent. "The Nature of the Firm" is more about exploring the contrast of these different ways of arranging cooperation among agents than asserting one as consistently better than the other.

vmurthy 4y ago

> 1. What sort of transaction costs between people today are _practically_ the most important to leading to a creation of a firm? My take on this : I have skill-a , you have skill-b. Skill-a plus skill-b would make a device that would solve a big problem in the world. Company solves the transaction cost of finding two people with complementary skills.