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A really interesting economist is Ronald Coase. In his (1937) paper he starts with the question 'why do firms exist.' IE, why aren't we all contractors selling

by netcan 11y ago

A really interesting economist is Ronald Coase. In his (1937) paper he starts with the question 'why do firms exist.' IE, why aren't we all contractors selling the services that we do at companies to each other? In a free market people can bargain to achieve more efficient economic outcomes than a centralised economy can achieve using prices. Why shouldn't this principle apply to firms? Why are firms run like a Soviet dictatorship with a hierarchy and planning? His answer was "transaction costs.^" The cost of organising every activity that requires more than one person, negotiating terms and all the rest are bigger than the benefits. The examples of contracting in this article (eg uber) are essentially market creators. I think the way to think about this trend (if it is a meaningful trend and not just a way of bypassing pesky restrictive labour conventions) is 'markets replacing firms' not 'contractor replacing employees.' If that is really the trend, I would expect to see average company size shrink and thus far, it is not. If Google contract out the development of blue sky ideas to small companies or individuals and that yields products like gmail, that would be a sign. So far though, it's in house or acquisition (a form of contracting?) for really important things. ^Economists have an enormous tolerance for dealing with big hairy concepts like "transaction costs" without unpacking them. I personally that in addition to (or within... damned economists) 'transaction costs' is human beings' inherent skill at operating as a group with all sorts of unnamed dynamics replacing the quid quo pro. If you have an economy instead of a group that people feel a part of, you lose all that.

heimatau 11y ago
Market replacing firms. I like the way you phrased things. It's more precise than my current explanation. I don't have much to add other than I really liked your breakdown. We have an complex market, thanks for describing Coase's paper.
- netcan 11y ago
  If you're interested, the original paper is very accessible. He also interviewed on econtalk shortly before his passing. Still sharp (and cranky about everyone misunderstanding "Coase Theorem" well into his 90s. http://www.econtalk.org/archives/2012/05/coase_on_extern.html http://www.econtalk.org/archives/2012/05/coase_on_extern.htm...
_delirium 11y ago
I like your hypothetical of Google contracting out its programming (maybe on oDesk?) instead of using in-house employees. I agree that that would be a major shift. Uber seems to be the go-to example in these kinds of articles, but is not very convincing as an example of a fundamental market shift, because the taxi market already operates similarly to how Uber operates. Taxi drivers are typically contractors, and companies like "Yellow Cab" just handle dispatch services and such in return for a cut [1]. So Uber vs. Yellow Cab is an example of a new market creator competing against an incumbent for the taxi-dispatch business. [1] Example of a Yellow Cab "non-job" posting: http://www.yellowcabaustin.com/driver.aspx http://www.yellowcabaustin.com/driver.aspx
- netcan 11y ago
  I agree. I don't think Uber is a hard sign of change. It's the creation of a market with one big firm and lots of small contractors in place of a market with lots of small firms. This is a normal sort of restructuring that happens a lot. Shipping in the early "age of the sail" was usually controlled and operated by monarchs or crown backed monopolies. The task was suited to this structure at the time. One big, expensive & risky journey. Technology has shifted this around a bunch of time before and after that time then. Before the medieval collapse of european trade those same routes were alive and well (eg Italy to China) but were handled by a "market" of camel drivers, corsairs, merchants, markets and who knows what all along the spice and silk "roads." Transaction costs still played a big role and technology dictated the structure of the economy. Along the silk road items could be traded dozens or hundreds of times over years before reaching users who had no idea what strange distant people made them. Beautiful, but inefficient relative to a single flotilla traveling the whole way. The internet has done these things too. eBay enabled tiny traders and decentralised retail. Amazon concentrated and centralised retail. This is normal creative destruction and it doesn't seem to have an obviously dominant current. It seems to me that this is fact and metric picking. OTOH, maybe those stats on "contractors" is indicative of some shift in our labour market conventions. Who knows.
jessriedel 11y ago
I agree with your description [1]. However, I disagree with this: > If Google contract out the development of blue sky ideas to small companies or individuals and that yields products like gmail, that would be a sign. So far though, it's in house or acquisition (a form of contracting?) for really important things. Blue-sky research is the classic example of the sort of stuff that is particularly hard to build a market around, hence most such research is publicly financed (shielded within universities and government labs) or privately financed by huge, private pseudo-governments like IBM, Microsoft, Bell, etc. The fact that venture capital has allowed the market to compete with firms for certain kinds of "short term blue-sky research" (i.e., research that is very high risk, although still relatively short time-to-payoff) is certainly a great development. But that doesn't mean we should expect other blue-sky research to be the first area where the technological suppression of transaction costs allows markets to displace firms. Rather, it seems to me that the conventional wisdom is still mostly correct, and we should expect work that is more easily measurable than research to be freed from big firms first. See also economist Robin Hanson for arguments and data that typical firm size will increase in the future, technology not withstanding: http://www.overcomingbias.com/2013/09/expect-bigger-orgs.html http://www.overcomingbias.com/2013/09/expect-bigger-orgs.htm... [2] I wrote a similar comment once, doubtlessly channeling Coase: http://slatestarcodex.com/2014/09/24/book-review-red-plenty/#comment-147532 http://slatestarcodex.com/2014/09/24/book-review-red-plenty/...
- netcan 11y ago
  I think you might be using a different (more accurate) definition of "blue sky" than me. I didn't mean that blue. I meant something more like product development with a lot of rope.
  - jessriedel 11y ago
    Oh, OK, gotcha.
ChuckMcM 11y ago
Oh I really would have liked to have talked to Coase, on your reference I tracked down his paper on the nature of the firm [1] and thought it was excellent. His point is a bit more nuanced than why firms exist but more why is it that markets can self organize and firms do not. The interesting thing is that historically it seems that part of the reason was all the non-firm stuff that was needed. So doing payroll, providing benefits, managing coverage when people went on vacation, but those things arose in a large part because of labor unions. So as labor union's influence has declined, so has the value of the "package" provided by a firm to the employee, and the value equation of contractor or employee can more easily swing back over to contractor. That is just such an awesomly interesting thing to think about. Thanks for the reference. [1] http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937.tb00002.x/pdf http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937....
- netcan 11y ago
  Check out this podcast. It's as close as you can get to talking to the man :) http://www.econtalk.org/archives/2012/05/coase_on_extern.html http://www.econtalk.org/archives/2012/05/coase_on_extern.htm...
brador 11y ago
Because information has value and is very difficult to protect. Notice how all contractors are being shown NDAs as standard now. This is the replacement for employees having job security for keeping shut about the knowledge they have. Now, sign an NDA and you secure the knowledge with legal threats and chilling effects. It works.
- netcan 11y ago
  I think this would technically also be "transaction costs." IE, contractors stealing your (other contractors') ideas. All the lawyers you need to sue them when they do and NDA them when they don't.
  - brador 11y ago
    It's only a cost if you can expend resources to solve the problem, but once the knowledge/information is out you can't put the genie back in the bottle.

by netcan 11y ago

heimatau 11y ago

Market replacing firms. I like the way you phrased things. It's more precise than my current explanation. I don't have much to add other than I really liked your breakdown. We have an complex market, thanks for describing Coase's paper.

netcan 11y ago
If you're interested, the original paper is very accessible. He also interviewed on econtalk shortly before his passing. Still sharp (and cranky about everyone misunderstanding "Coase Theorem" well into his 90s. http://www.econtalk.org/archives/2012/05/coase_on_extern.html http://www.econtalk.org/archives/2012/05/coase_on_extern.htm...

_delirium 11y ago

I like your hypothetical of Google contracting out its programming (maybe on oDesk?) instead of using in-house employees. I agree that that would be a major shift. Uber seems to be the go-to example in these kinds of articles, but is not very convincing as an example of a fundamental market shift, because the taxi market already operates similarly to how Uber operates. Taxi drivers are typically contractors, and companies like "Yellow Cab" just handle dispatch services and such in return for a cut [1]. So Uber vs. Yellow Cab is an example of a new market creator competing against an incumbent for the taxi-dispatch business. [1] Example of a Yellow Cab "non-job" posting: http://www.yellowcabaustin.com/driver.aspx http://www.yellowcabaustin.com/driver.aspx

netcan 11y ago
I agree. I don't think Uber is a hard sign of change. It's the creation of a market with one big firm and lots of small contractors in place of a market with lots of small firms. This is a normal sort of restructuring that happens a lot. Shipping in the early "age of the sail" was usually controlled and operated by monarchs or crown backed monopolies. The task was suited to this structure at the time. One big, expensive & risky journey. Technology has shifted this around a bunch of time before and after that time then. Before the medieval collapse of european trade those same routes were alive and well (eg Italy to China) but were handled by a "market" of camel drivers, corsairs, merchants, markets and who knows what all along the spice and silk "roads." Transaction costs still played a big role and technology dictated the structure of the economy. Along the silk road items could be traded dozens or hundreds of times over years before reaching users who had no idea what strange distant people made them. Beautiful, but inefficient relative to a single flotilla traveling the whole way. The internet has done these things too. eBay enabled tiny traders and decentralised retail. Amazon concentrated and centralised retail. This is normal creative destruction and it doesn't seem to have an obviously dominant current. It seems to me that this is fact and metric picking. OTOH, maybe those stats on "contractors" is indicative of some shift in our labour market conventions. Who knows.

jessriedel 11y ago

I agree with your description [1]. However, I disagree with this: > If Google contract out the development of blue sky ideas to small companies or individuals and that yields products like gmail, that would be a sign. So far though, it's in house or acquisition (a form of contracting?) for really important things. Blue-sky research is the classic example of the sort of stuff that is particularly hard to build a market around, hence most such research is publicly financed (shielded within universities and government labs) or privately financed by huge, private pseudo-governments like IBM, Microsoft, Bell, etc. The fact that venture capital has allowed the market to compete with firms for certain kinds of "short term blue-sky research" (i.e., research that is very high risk, although still relatively short time-to-payoff) is certainly a great development. But that doesn't mean we should expect other blue-sky research to be the first area where the technological suppression of transaction costs allows markets to displace firms. Rather, it seems to me that the conventional wisdom is still mostly correct, and we should expect work that is more easily measurable than research to be freed from big firms first. See also economist Robin Hanson for arguments and data that typical firm size will increase in the future, technology not withstanding: http://www.overcomingbias.com/2013/09/expect-bigger-orgs.html http://www.overcomingbias.com/2013/09/expect-bigger-orgs.htm... [2] I wrote a similar comment once, doubtlessly channeling Coase: http://slatestarcodex.com/2014/09/24/book-review-red-plenty/#comment-147532 http://slatestarcodex.com/2014/09/24/book-review-red-plenty/...

netcan 11y ago
I think you might be using a different (more accurate) definition of "blue sky" than me. I didn't mean that blue. I meant something more like product development with a lot of rope.
- jessriedel 11y ago
  Oh, OK, gotcha.

ChuckMcM 11y ago

Oh I really would have liked to have talked to Coase, on your reference I tracked down his paper on the nature of the firm [1] and thought it was excellent. His point is a bit more nuanced than why firms exist but more why is it that markets can self organize and firms do not. The interesting thing is that historically it seems that part of the reason was all the non-firm stuff that was needed. So doing payroll, providing benefits, managing coverage when people went on vacation, but those things arose in a large part because of labor unions. So as labor union's influence has declined, so has the value of the "package" provided by a firm to the employee, and the value equation of contractor or employee can more easily swing back over to contractor. That is just such an awesomly interesting thing to think about. Thanks for the reference. [1] http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937.tb00002.x/pdf http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937....

netcan 11y ago
Check out this podcast. It's as close as you can get to talking to the man :) http://www.econtalk.org/archives/2012/05/coase_on_extern.html http://www.econtalk.org/archives/2012/05/coase_on_extern.htm...

brador 11y ago

Because information has value and is very difficult to protect. Notice how all contractors are being shown NDAs as standard now. This is the replacement for employees having job security for keeping shut about the knowledge they have. Now, sign an NDA and you secure the knowledge with legal threats and chilling effects. It works.

netcan 11y ago
I think this would technically also be "transaction costs." IE, contractors stealing your (other contractors') ideas. All the lawyers you need to sue them when they do and NDA them when they don't.
- brador 11y ago
  It's only a cost if you can expend resources to solve the problem, but once the knowledge/information is out you can't put the genie back in the bottle.