
The Nature of the Firm (1937) - maverick_iceman
http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937.tb00002.x/full
======
Animats
This was written back when production cost dominated. The notes on scale don't
really apply today, now that marketing cost and mind share dominate scaling.

Coase quotes Sir Arthur Salter: "The normal economic system works itself. For
its current operation it is under no central control, it needs no central
survey. Over the whole range of human activity and human need, supply is
adjusted to demand, and production to consumption, by a process that is
automatic, elastic and responsive." He's quoting Salter out of context. Salter
was perhaps the first international central planner - he was in charge of
Allied shipping during WWI.

Salter goes on to write, in his "Allied Shipping Control"[1], "By the exacting
criteria of war conditions, this system proved to be, at least for those
conditions, seriously inadequate and defective. By the new standards, it was
blind and it was wasteful. It produced too little, it produced the wrong
things, and it distributed them to the wrong people."

This is the fundamental critique of capitalism. The US produces about 4,000
Kcal of food per capita and still has hungry people. Even with huge productive
capacity, the system doesn't deliver for the little guy.

Salter is describing economic socialism. Bertrand Russell once contrasted
"Allied Shipping Control" with Marx's "Capital" as guides to the achievement
of international socialism. Salter represents the bureaucrat's approach, as
opposed to the politician's. Salter set things up so that the coal commission
had to agree on coal policy across national boundaries, and the steel
commission had to agree on steel policy, and then they'd go argue over
shipping allocation. Arguments were by field, rather than by country. Marx is
all about power - "Who tells whom what to do?", as Lenin put it.

Salter was one of the architects of the European Union, which started as the
European Coal and Steel Commission, and a friend of Jean Monnet. He was
influential in the design of the machinery of the Common Market. That's worked
well; the EU's problems today are over immigration.

Coase and Salter were writing in an era when people considered these questions
seriously. The Great Depression made it clear that unbridled capitalism could
break down. All the productive capacity was still there, the workers still had
their skills, yet people were starving. Something was fundamentally wrong with
the system.

The Communists argued that their system was fundamentally better. (The failure
mode of communism was that it centralized power so much that it encouraged
tyranny. In retrospect, one can ask whether the problem was communism or just
Russia. Since 1900, Russia has had a Czar with absolute power, a brief period
of liberal communism that collapsed, dictatorial communism, bureaucratic
communism, a brief period of liberal capitalism that collapsed, oligarchy, and
now capitalist dictatorship. Russia without a strongman doesn't work. But
that's another subject.)

The US coped with the Depression by trying to get capitalism under control,
moving away from "greed is good, greed works". There was a lot of business
opposition at the time. But not enough to stop it, for two reasons. One was
that the Depression wasn't good for business, either. But the other was fear
of communism as a competing economic system. It looked like communism was
working - they weren't having a great depression. Capitalism had real
ideological competition. This kept it honest.

This worked for a long time, from the 1930s to the 1970s. But by 1980,
communism, as an economic system, wasn't working well. Nobody took it
seriously any more. This freed up capitalism to go to its default "greed is
good, greed works" mode, which is where we are today.

Now we have "secular stagnation" \- plenty of excess productive capacity, but
we can't deliver a good standard of living to everybody. The new thing is that
we need far fewer people to make production go. For most of history, the
problem was making enough stuff. Coase wrote in an era when making enough
stuff was still a big problem. We're past that now. And we have no clue how to
organize an economic system that deals with it.

[1]
[https://archive.org/details/alliedshippingco00saltuoft](https://archive.org/details/alliedshippingco00saltuoft)

------
danblick
Coase is great. On a related note: not long ago, I discovered the wikipedia
pages on "Internalization theory" and the "Eclectic paradigm", which descend
from his ideas.

Those views deal a bit more with intellectual property and the fact that
knowledge is a non-excludable good (as long as intellectual property rights
are difficult to enforce). For me it's interesting to think of how this
relates to giant tech companies, their secrecy, and internal-only software
stacks.

(The eclectic paradigm relates to multinational corporations, which face some
alternatives related to location/ownership/internalization.)

[1]
[https://en.wikipedia.org/wiki/Internalization_theory](https://en.wikipedia.org/wiki/Internalization_theory)

[2]
[https://en.wikipedia.org/wiki/Eclectic_paradigm](https://en.wikipedia.org/wiki/Eclectic_paradigm)

------
RodericDay
Bar none my favourite question in economics, especially as it pertains to
modern political dialogue. People claim central planning has been "proven
wrong" while ignoring ie: Apple being very much centrally planned internally,
which eliminates a ton of interesting discussion.

> _As D. H. Robertson points out, we find “islands of conscious power in this
> ocean of unconscious co-operation like lumps of butter coagulating in a pail
> of buttermilk.” But in view of the fact that it is usually argued that co-
> ordination will be done by the price mechanism, why is such organisation
> necessary? Why are there these “islands of conscious power”? Outside the
> firm, price movements direct production, which is co-ordinated through a
> series of exchange transactions on the market. Within a firm, these market
> transactions are eliminated and in place of the complicated market structure
> with exchange transactions is substituted the entrepreneur-co-ordinator, who
> directs production. It is clear that these are alternative methods of co-
> ordinating production. Yet, having regard to the fact that if production is
> regulated by price movements, production could be carried on without any
> organisation at all, well might we ask, why is there any organisation?_

> _In view of the fact that while economists treat the price mechanism as a
> co-ordinating instrument, they also admit the co-ordinating function of the
> “entrepreneur,” it is surely important to enquire why co-ordination is the
> work of the price mechanism in one case and of the entrepreneur in another._

~~~
neffy
Yes, it´s a lot more complicated than that.

Fundamentally, it´s an issue of scale. It can be proven that central planning
is the least efficient form of organisation at scale, because the information
capacity of a hierarchically organised network will always be less than that
of a mesh or federal mesh system.

However for small systems, those network capacity limits aren´t reached - so
it doesn´t matter, and there´s also a joker in the pack for mesh networks, in
that if they can´t self-regulate their traffic, the resulting broadcast storm
(which socially we are now in worldwide) will drive their good-put (user
traffic) to very low levels.

Besides the information capacity issue though, there are also considerations
of command and control, so if you have a central planner that really knows
what they´re doing (and the issue of information capacity is essentially that
most central planners can´t), then that topology will be advantageous.
Especially in competition with other centrally planned organisations - like
Microsoft say.

~~~
Animats
We have so much information capacity now that's no longer an issue.

Gosplan, the Soviet state planning apparatus, ran on an monthly information
cycle and a yearly planning cycle. WalMart runs on a daily information cycle
and a weekly planning cycle. Amazon is near real time.

China, interestingly, goes to the opposite extreme. China is now on the 13th
5-year plan since the Revolution.[1] It's a set of 32 general policy goals to
be emphasized for the next five years. These seem general, but this overall
guidance determines on what the government spends time and resources.

[1]
[http://news.xinhuanet.com/english/photo/2015-11/04/c_1347835...](http://news.xinhuanet.com/english/photo/2015-11/04/c_134783513.htm)

~~~
dilemma
That's not the point. That information needs to be processed by a human being
who then outputs decisions. If you have too much "big data", that data becomes
useless because it overwhelms thereby making itself useless.

~~~
Animats
Only some of the information needs to be processed by a human being. How much
inventory to carry of each item has been automated in retail for decades. Only
unusual situations and new items need human attention.

------
oli5679
Coase's internal vs external transaction costs is a really good way of framing
lots of tradeoffs between internally production vs outsourcing trade-offs.
Should the government run jails or pay contractors to? Should apple build its
own components or ship them in from China? It depends on whether internal or
external transaction costs are higher

~~~
ghaff
Over time, various economists have argued for additional factors. For example,
there's often a degree of path dependence to why a given firm might be
structured in a particular way. But, yes, especially for a paper that's almost
80 years old, its core concepts hold up remarkably well and provide a useful
framework to think about sourcing decisions.

And it's often very clear (at least in retrospect) that those outsourcing
trends that fall out of fashion over time often do so because many transaction
costs associated with the outsourcing turned out to be ignored or at least
underestimated. Conversely, there are countless examples today of companies
using external services for things because the transaction costs associated
with doing so have been so dramatically reduced.

------
rayiner
Coase also had some fundamental insights into regulatory economics (insights
which have been often misunderstood by modern neo-liberals). Two other
excellent papers to read:

The Problem of Social Cost (1960):
[http://econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/coase.pdf](http://econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/coase.pdf)

The Federal Communications Commission (1959):
[http://web.ntpu.edu.tw/~guan/courses/Coase59.pdf](http://web.ntpu.edu.tw/~guan/courses/Coase59.pdf).

------
macmac
54 years later he got a Nobel prize for ideas that were essentially present in
this paper.

------
dang
A small previous discussion from 2012:
[https://news.ycombinator.com/item?id=3622639](https://news.ycombinator.com/item?id=3622639).

------
alienjr
Classic paper of a brilliant economist.

