The Corporate Hierarchy Dies, Again
| Peter Klein |
Ronald Coase described his 1937 paper on the firm as “much cited, but little used.” He was referring to the academic literature, but these days it seems to apply to the popular press as well. Almost every week brings a new article on the death of the corporate hierarchy: you know, firms only exist to deal with transaction costs, and the Internet has reduced them to almost zero, so who needs firms? This argument shows up again and again. But it’s wrong. Of course there are transaction costs between firms (search, bargaining, enforcement). But there are also transaction costs inside firms (agency and information costs, the Misesian calculation problem). The firm straddles these margins. Both sets of transaction costs matter, and both can be reduced through technological change. Coase was not as clear on this point as he could have been, but Williamson has been explaining it for decades, in terms of “comparative contracting costs.” You have to compare both sets of costs, not just look at one. Why is it so hard to see?
Saturday’s WSJ gives us the latest version of the bogus argument, this time from Alan Murray. Same old story: Internet, transaction costs, Tapscott and Williams, wikipedia, yada yada yada. “Mr. Coase received his Nobel Prize in 1991 — the very dawn of the Internet age. Since then, the ability of human beings on different continents and with vastly different skills and interests to work together and coordinate complex tasks has taken quantum leaps. Complicated enterprises, like maintaining Wikipedia or building a Linux operating system, now can be accomplished with little or no corporate management structure at all.” Yawn. “[T]he trends here are big and undeniable. Change is rapidly accelerating. Transaction costs are rapidly diminishing. And as a result, everything we learned in the last century about managing large corporations is in need of a serious rethink.” Zzzzzzzzzzzzzzz. Mr. Murray, please read The Victorian Internet three times fast and have a report on my desk first thing in the morning. “The new model will have to be more like the marketplace, and less like corporations of the past. It will need to be flexible, agile, able to quickly adjust to market developments, and ruthless in reallocating resources to new opportunities.” Right, no corporations of the past ever tried to do this.