1. A plummeting Coasean floor means we can do more things outside of traditional organizations like businesses.
Here’s a question that I try not to ask in earshot of my bosses. Instead of employing me on a salary, why don’t my firm put out a tender for every piece of work I deliver? In an open market, with other people competing to perform broken down chunks of my job, my company could end up paying less. Reassuringly for me, Ronald Coase explained why in The Nature of the Firm in 1937. It is because of the additional transaction costs that my firm would incur – in particular of finding a contractor and enforcing a contract for every piece of work I currently undertake. We can describe these kinds of costs as the cost of cooperating. Companies exist in order to manage these cooperation costs. They do things like employ managers and pay for HR departments – and create, for the most part, hierarchical organizational structures – because, for the activities that they’re engaged in, this is a more effective way of directing a workforce than an open market. But of course this management has a cost, much of it fixed. Firms exist, therefore, when the costs of employing and directing staff to undertake a particular activity are less than the potential gain from that activity.
But what if those cooperation costs exceed the potential gain of an activity? Even if it is a valuable activity it won’t happen because the cost of performing it is greater than the gain. When neither firms nor markets can afford to undertake an activity, that activity doesn’t happen. The significance of this is that there’s a bunch of locked up value out there: stuff that would be great if it happened because it would improve our lives, but it’s just not cost effective to make it happen. Unless the conditions change. Coase goes on to say that if cooperation costs fall, for example when new technology makes communication easier, then some activities that were previously not worth doing become viable. In addition, big firms can get bigger and small firms can get more efficient. This has basically been the story of the impact of communication technology in the twentieth century.
Enter, Clay Shirky. He says in Here Comes Everybody that Coase’s explanation is limited to describing what happens when cooperation costs fall moderately. What happens if these costs collapse? What happens if revolutionary technologies come along – like the internet and the web and those related innovations that have exploded since – that dramatically reduce the cost of cooperating? If cooperation costs collapse then something new occurs. There are still activities that have value but can’t be undertaken by a firm because their value is not greater than that firm’s cooperation costs, but, crucially, some of these activities can be undertake outside of the structures of formal organizations. These activities ‘which were previously out of reach for any other organisational structure, because they lay under the Coasean floor’ can now be undertaken not by a firm (with their fixed cooperation costs) but by ‘loosely coordinated groups’. These groups do not have the same, and in some instances any, fixed cooperation costs. Shirky provides many examples of this, from the aggregating of amateur documentation of the London transit bombings to the collection and collation of thousands of photos of public events on Flickr.
As cooperation costs plummet this opens up the possibility for productive activity to occur outside of formal organizations. As Clay Shirky tells us, it enables organizing without organizations. I think this leads to more experimentation and faster innovation, throwing down a massive, existential, challenge to traditional forms of organization – including the familiar business models of the last century.
2. This doesn’t mean we’re in an egalitarian paradise. In these exponential times we still have big businesses that rise rapidly. But are they also more likely to decline rapidly?
This social, technological and economic shift means that it is easier than it has ever been to engage a large audience and undertake some kind of group effort; and it means that you don’t necessarily need the hierarchical structure of a firm to do it. This does not mean, however, that we have been immediately thrust into some kind of egalitarian paradise. We still have businesses, and we still have big businesses. How do we explain that?
It is the effect of the internet and the web on communication that has most radically lowered cooperation costs. One of the effects of the web has been the emergence of a link economy – one where you are more powerful if more people link to you. In this link economy Michael’s Matthew’s Law exists: “For everyone who has will be given more”, i.e. links beget links; the more you have the more you’ll get, the quicker you can grow and the more powerful you can become. (Check this post out and the further reading at the bottom of it.) This is the other side of the story of the Long Tail, as many have pointed out. Whilst the internet has enabled millions of tiny niche interests to be fulfilled and niche markets to be created, there remain major blockbusting companies, products and services. Although, of course, not just products and services created by companies; loosely coordinated groups can emerge from below the Coasean floor to generate huge value and to challenge traditional organizations. The point is that once you start growing you can grow quickly in the internet age. In these exponential times that much is evident.
The question for anyone looking for an egalitarian, or at least meritocratic, paradise is how much churn are we expecting to see over time in the head of this Long Tail? Are we simply solidifying a small, new-ish, comparably static elite as has been the norm in politics and economics throughout most of history, or is the internet dramatically altering how secure those at the top should feel? Might it be the case that the internet facilitates meteoric rises and rapid declines?
In this last year in America the political fortunes of the Democratic party might seem to suggest so. Or rather, as I wrote in this blog post, because the communication tools of the internet are powerful and ubiquitous, and because it is so much easier to exercise an (informed) choice as a voter or a consumer, anybody seeking our loyalty cannot let up and take us for granted for even a moment. I hope it won’t end up being the permanent tactical revolution that Obama in his State of the Union decried, but I do think political parties need to adopt a philosophy of permanent strategic, or persuasive, revolution (I’m not sure of the phrase yet, I want to develop this idea). And the same is true of companies. Stop fighting for my custom for a second, get a bit sloppy with your delivery, and the massive information availability and tiny switching costs of the internet age mean I can leave you in an instant. Losing my custom to a competitor has a greater potential to snowball, pitching you into a steep decline, than ever before.