Pancaking the Pyramid Economy

In 1937, Ronald Coase gave economics something new: a theory for why companies should exist. Oddly, this hadn't come up before. His paper was called "The Nature of the Firm". He wrote it at age 27, as a class assignment in grad school. He based it on a talk he gave at 22. It has since earned him a Nobel prize.

Says The Economist:

Mr Coase argued that firms make economic sense because they can reduce or eliminate the "transaction cost" of going to the market by doing things in-house. It is easier to co-ordinate decisions. At the time, when communications were poor and economies of scale could be vast, this justified keeping a lot of things inside a big firm, so car-makers often owned engine-makers and other suppliers.

In that same piece (a 2013 obituary for Coase), The Economist adds:

Mr Coase's theory of the firm would suggest that firms ought to be in retreat at the moment, because technology is lowering transaction costs: why go to the bother of organising things under one roof when the internet lowers the cost of going to the market?

Could be that Coase has an answer for that one too. In a 2012 interview with Russ Roberts on the EconTalk podcast, when Coase was 102 years old, he said, "It's not possible to study how things are dealt with without realizing the importance of the stupidity of human behavior."

Perhaps that's why Hugh MacLeod (aka @gapingvoid) in 2004 produced the cartoon shown in Figure 1 outlining his own model for the firm.

Figure 1. Cartoon by Hugh MacLeod (aka @gapingvoid) from 2004 that outlines his own model of the firm.

That same year, Hugh and I brainstormed the future of business for a (now gone) open-source company we both consulted. As happens with Hugh, this generated lots of great illustrations. Figure 2 shows Hugh's drawing of a company like the one above, embodying what he called "egology".

Figure 2. Hugh MacLeod's drawing of a company embodying "egology" from 2004.

Figure 3 shows what we both saw happening, inevitably.

Figure 3. Hugh MacLeod's Drawing of the Internet Ecology


Doc Searls is Senior Editor of Linux Journal