Coase’s law – craze for collaboration explained

By June 17, 2007Enterprise2.0

In 1937  British socialist Ronald Coase published his seminal paper The Theory of the Firm in which he argued that business is done in corporations rather than through a multitude of peer to peer agreements because transaction costs are lower in corporations.  In particular they reduce the cost of finding other people to co-operate with and of contracting with them once they have been found.  (Check out the Transaction Costs section of this wikipedia entry for a fuller but still brief explanation).

By this argument companies got big because the search and contracting costs of e.g. finding new suppliers were high enough that it made sense to bring everything in house.

As we all know the internet has driven transaction costs through the floor.  Search costs in particular are fast headed towards zero.

The result?

A big improvement in the economics of collaboration.  It just got much cheaper.  This explains the recent craze for collaboration.

This argument comes from Wikinomics – and it makes a lot of sense to me.  So much so that when I read it I immediately wanted to post it here – a quick aid to understanding one of the key developments of the internet age.

However, as I came to the end of the post it suddenly dawned on me that I’ve never seen any data which shows we are collaborating more and in smaller groups these days.  In my water I feel it is true, but that isn’t the same thing as data.  So consider this post appropriately caveated and if you know of any good information on the subject please point me to it.

  • Nic, quite a lot of the thinking / modelling in Web 1.0 was driven by Coase’s thinking (the disintegrating corporation, clover leaf career etc etc was a common mid 90’s thingy).

    Turned out that a transaction is often far more than just the search / find bit…there is a whole dance around trust (in the broadest sense – can you deliver / are you honest / will you survive / can I sue you / etc ) that also comes into play.

    Wikinomics as a book – imho – is too much on the “rah rah” stuff and a bit light on the “cynic” parts of overall transaction economics eg agency theory, asymmetric market theory etc etc.

    You just have to look at Wikipedia, Digg etc to see how these more cynical sides of transaction games are played

  • Nic, quite a lot of the thinking / modelling in Web 1.0 was driven by Coase’s thinking (the disintegrating corporation, clover leaf career etc etc was a common mid 90’s thingy).

    Turned out that a transaction is often far more than just the search / find bit…there is a whole dance around trust (in the broadest sense – can you deliver / are you honest / will you survive / can I sue you / etc ) that also comes into play.

    Wikinomics as a book – imho – is too much on the “rah rah” stuff and a bit light on the “cynic” parts of overall transaction economics eg agency theory, asymmetric market theory etc etc.

    You just have to look at Wikipedia, Digg etc to see how these more cynical sides of transaction games are played

  • nic

    Thanks Alan. Wikinomics is definitely on the ra ra side. You’ve got to find a way to believe though, right?

  • nic

    Thanks Alan. Wikinomics is definitely on the ra ra side. You’ve got to find a way to believe though, right?

  • In the late 90’s Brian Arthur (and some other guys at the Santa Fe institute) did quite a bit of thinking on the economics of “increasing returns” (aka +ve feedback loops ) – another part of webonomics, more recently Eric Beinhocker wrote a magnum opus on this too.