Given that "production could be carried on without any organization [that is, firm] at all", Coase asks, why and under what conditions should we expect firms to emerge? Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.
If we want technological development, why look to companies to do it? It’s possible, after all, to imagine a society in which everyone works for the government. Or, conversely, one in which everyone is an independent contractor. Why have some intermediate version consisting of at least two people but less than everyone on the planet?
The answer is straightforward application of the Coase Theorem. Companies exist because they optimally address internal and external coordination costs. In general, as an entity grows, so do its internal coordination costs. But its external coordination costs fall. Totalitarian government is entity writ large; external coordination is easy, since those costs are zero. But internal coordination, as Hayek and the Austrians showed, is hard and costly; central planning doesn’t work.
The flipside is that internal coordination costs for independent contractors are zero, but external coordination costs (uniquely contracting with absolutely everybody one deals with) are very high, possibly paralyzingly so. Optimality—firm size—is a matter of finding the right combination.
This is pre information revolution thinking combined with ideas generated by the fears of an age when socialism/communism was really was competing with democracy as a form of social organization. This muddled thinking makes no sense presently, especially given Corporations are purely creations of the government monopoly of power and should be anathema to any free thinker. For those not fighting the last war led by generals like Hayek, all coordination costs follow the technological cost curve as there is no longer a difference between internal and external actors.
This is great. Coase Theorem explains governments as naturally large corporations, or at least an entity similar to a for profit corporation. Brilliant. Yes, governments create laws; unlike other corporations, they have surpassed the threshold of size (not sure whether to measure that as number of employees, money, information, etc) and support to and been given one of the ultimate money makers in society. Laws exist to direct wealth, property, and rights. They produce laws and regulation for the voter population to consume.
However, the "inequality" on the Coase spectrum is slowly balanced out as we gain access to decentralized technology. I bet that pretty soon company set-ups, like Valve's, will become much more prominent. I just hope the same thing happens with governmental institutions.
It is already happening, though very slowly. Part of the city's budget here is decided online and via presential polls [1] since 1989, and the model has since spread to cities like Brussels and Barcelona.
Would it be fair to say that "costs of transactions" are in some part due to government bureacracy and taxing?
And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?
Would it be fair to say that "costs of transactions" are in some part due to government bureacracy and taxing?
Some costs of transactions are due to the need to document compliance with government regulations. The existence of regulations with compliance burdens will tend to make firms bigger than they would otherwise be, but many and probably most transaction costs aren't due to government, and there would be many additional sorts of transactions costs if there weren't a government at all.
And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?
It probably could, depending on what you mean by "optimal". Its pretty well established[1] that in the absence of transaction costs you can get a Pareto efficient[2] outcome, but Pareto efficiency is probably not the same thing you would call optimal (though what you'd call optimal is almost certainly Pareto efficient).
I would tend to expect that, given that we live in a world with transaction costs, firms are not the ideal size. But its hard to say whether firms ought to be bigger in general or smaller. Countries with relatively efficient economies (Germany) tend to have larger firms than countries with less efficient economies (Italy) but its really hard to tease out in those cases which way causality is flowing. Most countries tend to have laws that favor small businesses, and those might end up more than making up for their proportionally higher regulatory burden.
And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?
Sure. The extreme example is competition vs a monopoly. It is certainly more profitable for a single firm to be a monopoly and be able to set prices. It is always less optimal to have real competition, but it is always better for the economy as a whole.
Taken to the extreme of course, the economy might be best if perfect competition ruled everywhere, which would mean largely a nation of small businesses, artisans, and shopkeepers. But this would be bad for Microsoft, as it would likely mean networks of open source developers controlling the software market.
Yes. When members of a firm create value for each other, they don't pay sales tax. It is huge unfair advantage for large firms.
There is also the huge savings where teams have an executive authority to settle disputes and prevent them from trying to rip each other off with unfair contracts and nonpaid bills.
> Yes. When members of a firm create value for each other, they don't pay sales tax. It is huge unfair advantage for large firms.
This is very, very close to the sales pitch of a VAT. In a proper VAT system, there is effectively no difference between purchasing an intermediary good or service or producing it yourself.
In the US services aren't taxed. Most internal value created is in the form of services (e.g., IT). Most companies don't have their own internal computer production facility, for instance.
Your second point makes sense. There are usually much lower coordination costs for internal agreements.
in the US, I pay sales tax to the people who do repair work on my house and who fix my dad's computer, and for the software I get from Apple engineers, all of which are not taxed within a firm.
I have always interpreted http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-155 regarding computer repair as the idea that if I am replacing a piece of faulty hardware that I must charge sales tax for the attached service, but if I am merely cleaning off viruses, that this is a professional service and therefore not subject to sales tax. I have not been able to find a clear authority for this however, and it isn't clear as to whether hooking up and configuring an external modem that the customer bought from someone else is taxable.
Repair however is a problematic term. A lawyer might be involved in sending a letter threatening action of a problem is not repaired but that service is not taxable itself.
In Washington State, professional services not directly tied to an improvement of tangible property are not generally taxable. So landsacping and lawn care is generally taxable, but open source software development is not (since it is not a sale of a license, or a one-of-a-kind development aimed at one customer only).
Given that "production could be carried on without any organization [that is, firm] at all", Coase asks, why and under what conditions should we expect firms to emerge? Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.