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One has to wonder why "large" companies even exist in the first place. Why a building full of freelancers could not do the exact same thing. And then it dawned

• seiji 14y ago
  Take a look at http://en.wikipedia.org/wiki/The_Nature_of_the_Firm http://en.wikipedia.org/wiki/The_Nature_of_the_Firm Given that "production could be carried on without any organization [that is, firm] at all", Coase asks, why and under what conditions should we expect firms to emerge? Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.
  • jseliger 14y ago
    This is an excellent answer. Peter Thiel uses some similar ideas in his answer about why people form companies: http://blakemasters.tumblr.com/post/20400301508/cs183class1 http://blakemasters.tumblr.com/post/20400301508/cs183class1 : If we want technological development, why look to companies to do it? It’s possible, after all, to imagine a society in which everyone works for the government. Or, conversely, one in which everyone is an independent contractor. Why have some intermediate version consisting of at least two people but less than everyone on the planet? The answer is straightforward application of the Coase Theorem. Companies exist because they optimally address internal and external coordination costs. In general, as an entity grows, so do its internal coordination costs. But its external coordination costs fall. Totalitarian government is entity writ large; external coordination is easy, since those costs are zero. But internal coordination, as Hayek and the Austrians showed, is hard and costly; central planning doesn’t work. The flipside is that internal coordination costs for independent contractors are zero, but external coordination costs (uniquely contracting with absolutely everybody one deals with) are very high, possibly paralyzingly so. Optimality—firm size—is a matter of finding the right combination.
    • toddh 14y ago
      This is pre information revolution thinking combined with ideas generated by the fears of an age when socialism/communism was really was competing with democracy as a form of social organization. This muddled thinking makes no sense presently, especially given Corporations are purely creations of the government monopoly of power and should be anathema to any free thinker. For those not fighting the last war led by generals like Hayek, all coordination costs follow the technological cost curve as there is no longer a difference between internal and external actors.
      • alex_c 14y ago
        I almost can't tell if this comment came from some sort of Markov text generator.
        • slurgfest 14y ago
          I understood it just fine. Guess different people have different parsers.
      • anamax 14y ago
        > all coordination costs follow the technological cost curve as there is no longer a difference between internal and external actors. That's not true. For one, internal actors have pre-arranged deals.
    • washedup 14y ago
      This is great. Coase Theorem explains governments as naturally large corporations, or at least an entity similar to a for profit corporation. Brilliant. Yes, governments create laws; unlike other corporations, they have surpassed the threshold of size (not sure whether to measure that as number of employees, money, information, etc) and support to and been given one of the ultimate money makers in society. Laws exist to direct wealth, property, and rights. They produce laws and regulation for the voter population to consume. However, the "inequality" on the Coase spectrum is slowly balanced out as we gain access to decentralized technology. I bet that pretty soon company set-ups, like Valve's, will become much more prominent. I just hope the same thing happens with governmental institutions.
  • ralfn 14y ago
    Would it be fair to say that "costs of transactions" are in some part due to government bureacracy and taxing? And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?
    • Symmetry 14y ago
      Would it be fair to say that "costs of transactions" are in some part due to government bureacracy and taxing? Some costs of transactions are due to the need to document compliance with government regulations. The existence of regulations with compliance burdens will tend to make firms bigger than they would otherwise be, but many and probably most transaction costs aren't due to government, and there would be many additional sorts of transactions costs if there weren't a government at all. And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction? It probably could, depending on what you mean by "optimal". Its pretty well established[1] that in the absence of transaction costs you can get a Pareto efficient[2] outcome, but Pareto efficiency is probably not the same thing you would call optimal (though what you'd call optimal is almost certainly Pareto efficient). I would tend to expect that, given that we live in a world with transaction costs, firms are not the ideal size. But its hard to say whether firms ought to be bigger in general or smaller. Countries with relatively efficient economies (Germany) tend to have larger firms than countries with less efficient economies (Italy) but its really hard to tease out in those cases which way causality is flowing. Most countries tend to have laws that favor small businesses, and those might end up more than making up for their proportionally higher regulatory burden. [1]http://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare_economics http://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare... [2]http://en.wikipedia.org/wiki/Pareto_efficiency http://en.wikipedia.org/wiki/Pareto_efficiency
    • Evbn 14y ago
      Yes. When members of a firm create value for each other, they don't pay sales tax. It is huge unfair advantage for large firms. There is also the huge savings where teams have an executive authority to settle disputes and prevent them from trying to rip each other off with unfair contracts and nonpaid bills.
• toddh 14y ago
  The rise of the bureaucratic corporation and the rise of a white collar managerial class during the industrial revolution was a natural pre technology evolution of the corporation because lots of people we required to carry out all the necessary communication and managerial roles. With the information revolution that is no longer true, but old ways of thinking die hard and it will take a while for new organizations to develop and establish themselves. This will be a long a period of creative destruction.
• Dn_Ab 14y ago
  I suggest you read this excellent piece my Cosma Shalizi. http://crookedtimber.org/2012/05/30/in-soviet-union-optimization-problem-solves-you/ http://crookedtimber.org/2012/05/30/in-soviet-union-optimiza... There he talks about the computational complexity and limits to planning. He also talks about markets, how non convexities leads to inefficiencies (allowing polarization of wealth) and why large firms form: difficulty in setting prices and being informed enough to make optimal decisions benefit concentration of complementing talent. As computational power increases and communication friction decreases I expect we will start to see company size decrease and lifetimes to within an order of magnitude of the sceanrio in alluded to in Rainbows End where companies are old at 5 years and large ones have 3 people.
• dimitar 14y ago
  I think the ultimate anti-Valve is a military and everything else falls in-between. Some businesses are required by nature to be military-like - logistics for example.
  • tikhonj 14y ago
    And the military itself, of course :P. This actually reminds me of an interesting observation in Homage to Catalonia by Orwell. The book is about Orwell's personal experiences in the Spanish Civil War. The particularly interesting bit was about the organization of some of the anarchist forces fighting against Franco. Essentially, they did not have any centralized organization at all. Even a military force can be organized like Valve and not in an authoritarian manner. Unfortunately I don't have the book handy to find the pertinent passage, but it really stood out. It makes me wonder how much of the military-style management is due to necessity and how much is due to tradition. Of course, the fascists won in Spain, so this is hardly a great example, but there were too many other factors at play (e.g. support from Germany) to make it conclusive.
    • saraid216 14y ago
      Arguably, Anonymous acts like a military with Valve-style management as well.
  • tomjen3 14y ago
    I don't buy that the military is required to work that way. Take a look at Iraq and Afghanistan to see how many losses are inflicted on the superior military by groups who are not organized in any traditional military sense. Do you think they would be more effective if they wore uniforms and had a formal command structure?
• einhverfr 14y ago
  I think it's pretty clear from the pro-market critiques of Capitalism (from the Distributists, like Chesterton or Belloc) that pure, unadulterated Capitalism inherently unstable and prone to failure. Large corporations paradoxically need to pay their workers only what the market requires but also enough they have discretionary money to go out and buy the products they are manufacturing. Socialists recognize this inherent paradox too, but their answer to it is different --- more government intervention to counter corporate control. To a Distributist, however it seems insane to try to address issues of centralized economic control by adding additional centralization. The existence of large corporations introduces inherent instability into our system. We'd all be better off if there were more self-employed and more small corporations out there.
  • yummyfajitas 14y ago
    Large corporations paradoxically need to pay their workers only what the market requires but also enough they have discretionary money to go out and buy the products they are manufacturing. This fails the test of basic arithmetic. Suppose you increase your workers pay by $X and they spend the entire $X on your products. Suppose your profit margin is Y. Then for every $(1+Y) your workers spent, you earned $Y. I.e., you get back $XY/(1+Y) < $X. So no, it's always better for the bottom line (holding all else equal) to pay your workers less. You might be able to attract better quality workers by paying more, or perhaps you can cook up incentive plans to get workers to work harder (both of these are what Henry Ford did, for example). But that has nothing whatsoever to do with workers buying your products.
    • einhverfr 14y ago
      But the point is that if everyone pays workers less there is no market for anything non-essential you can make. This works if you are making plastic stuff to export to the US and you are in China. It doesn't work so well if you are in the US. In essence corporations individually do better if they pay their workers less, but collectively they die.
      • yummyfajitas 14y ago