
The Nature of the Firm (1937) - ayanai
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0335.1937.tb00002.x
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alexpetralia
As someone who studied economics, "the nature of the firm" was something I
could never bring myself to read because it just doesn't seem relevant or
accessible.

I finally bit the bullet recently, read the actual paper, and wrote about a
1000 word summary here:
[https://alexpetralia.github.io/2018/03/05/NL-2018-03-05.html](https://alexpetralia.github.io/2018/03/05/NL-2018-03-05.html)

I'll summarize briefly because I'm happy I did bite the bullet:

* We pay for a lot of things, and that "price mechanism" seems to be pretty good. If something's bad, we pay less; if it's good, we pay more. Everything relevant to a transaction seems to be "consolidated" into this thing called price

* Our whole economy runs on this price mechanism. Everyone pays for goods and services, and the economy works pretty well because of it ("the invisible hand")

* But for some reason, most of us work jobs. This means _someone tells you what to do_ inside the walls of the firm. There is no price mechanism here.

* That is bizarre. We coordinate all of production in the economy using "the price mechanism," but suddenly within a firm we don't coordinate production using it.

* Why don't we use the price mechanism inside a firm? Why does someone tell you what to do? Is it better or worse (ie. "more efficient") than the price mechanism? Why?

* This is what Coase tried to figure out, and he came up with a lot of really insightful conclusions

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rayiner
Coase’s paper on the FCC is also a must read. It is an amazing and
surprisingly approachable introduction to the economics of regulation.

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jonnydubowsky
A fascinating update to the economics of the firm examines how peer
production, mainly open source software development changes the fundamentals
of this discussion. [https://www.yalelawjournal.org/article/coases-penguin-or-
lin...](https://www.yalelawjournal.org/article/coases-penguin-or-linux-and-
the-nature-of-the-firm)

The quick summary from the same Yale Law Review post: “Peer production” is
when many individuals use social signals to cooperate on large-scale projects
without being paid or directed by managers, motivated by nonmonetary concerns.

The Internet has enabled the growth of many peer production projects. Open
source software has been produced in this way.

Peer production is better than markets and firms when the product being
produced is information, and when the capital needed for production, such as
computers, is dispersed.

Peers are less likely to forget who the best person for a particular job is.

When many contributors access large amounts of information, potential gains
are great.

Removing property and contract rights reduces transaction costs; individuals
may simply use the resources they want and work as they will.

Peer production uses technological and social strategies to overcome problems
usually solved by property and contract, like shirking:

Projects are broken into small parts.

Nonmonetary rewards like enjoyment let projects proceed that would otherwise
cost too much.

Stronger intellectual property rights will not increase growth, if peer
production is important to tapping human capital efficiently

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jonnydubowsky
The paper is titled Coase’s Penguin, or, Linux and The Nature of the Firm

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evrydayhustling
I've always loved this book for opening my eyes to think about the motivations
for human structures rather than just enumerating and studying the common
structures around us.

Theory of the firm has many applications for technologists. In considering
"disruptive" business models: why are transactions bundled together in an
existing business model, and where would there be benefit in bundling them
differently? In structuring dev teams: why does one mission lend itself to
informal coordination within a team, while another can be trusted to
collaborative processes across teams? And even in factorizing code: why does
this set of concerns require informal coordination between functions (e.g.
within a module or class), while this other set of concerns can be addressed
at the app level through published interfaces?

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ghaff
So many things can be explained by transaction costs even if they're "just"
mental. For example, Clay Shirky argued a long while back that mental
transaction costs were a big reason why micropayments don't work and that
still seems like a reasonable theory.

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jamespitts
A classic read! With smart contracts and other decentralized tech, the nature
of the firm and it relationship with stakeholders is about to be utterly
transformed.

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

~~~
maxxxxx
When you look around you may notice that there actually big trend towards
centralization. Companies are getting bigger and bigger and the economy also
concentrates around places like Silicon Valley and big cities.

~~~
igorkraw
Which makes sense if you think about it: better technology in forecasting and
decision making makes central planning more efficient

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peatmoss
If people are interested in further reading on transaction cost economics,
Oliver Williamson should be the next stop on your reading tour.

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soVeryTired
Here's some interesting pushback on Coase's work - in particular how it's been
used to justify some sloppy business practices over the past few decades:

[http://www.harrowell.org.uk/blog/2018/01/31/in-the-
eternal-i...](http://www.harrowell.org.uk/blog/2018/01/31/in-the-eternal-
inferno-fiends-torment-ronald-coase-with-the-fate-of-his-ideas/)

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npudar
I met Dr. Coase at a small meeting/conference that a consulting firm put
together for its clients back in the mid-nineties. It was my first encounter
to his thinking, and it was transformative for me. Today when I think about
blockchain technology, I can't help but imagine how Coase would jump all over
it and theorize about the further disintegration of large companies and how
they will be organized. Reading about this tech with a Coasian mindset will
also lead one to conclude that blockchain tech without an open digital token
has limited value.

