Coasean firms in the age of digital communication

In honor of Ronald Coase’s 101st birthday, this will be a short post about something he published in November, 1937, his classic article The Nature of the Firm. For those who haven’t read the paper, and don’t want to read it just now, Wikipedia has the summary.

What I want to consider here is the addition of digital communication to the entrepreneur’s toolkit. Information can be sent and acquired much faster than was possible before this, either within a firm or between a firm and an external source. Where previously a company with offices in New York and San Francisco had to communicate “inside” information by telegram, telephone, mail, or in-person verbal delivery, they are now able to coordinate their efforts in real time at very low cost and in a greater range of functions. This is one factor that decreases diseconomies of scale, allowing for firms to be larger than they had been previously when coordination was more costly. At first glance, we might expect firms on average to have become larger over the last twenty years as a result.

But there is another angle to the story. The US Census Bureau says:

About three quarters of all U.S. business firms have no payroll. Most are self-employed persons operating unincorporated businesses, and may or may not be the owner’s principal source of income. Because nonemployers account for only about 3.4 percent of business receipts, they are not included in most business statistics, for example, most reports from the Economic Census.

While people have been doing this for the entire history of the US, their geographical range was limited by the difficulty (i.e. costliness) of doing business outside of their immediate locale. To reach a nationwide audience, one had to advertise in newspapers, magazines, or comic books, and the difficulty of giving enough information about the business in a timely fashion (write for a free booklet!) inevitably hampered business opportunities. The ease with which a small shop owner can put his entire inventory online today, for example on his business website or on eBay, allows these firms to flourish in ways that were unimaginable twenty or thirty years ago. The marginal effect seems pretty clearly that more people would attempt to run small businesses who otherwise might have gone to work for someone else before digital communication was possible.

The data are ought there, but this is more an exercise in economic thinking than a formal treatment. Chew on it for a minute. What do you expect the results to look like?

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Author: rfmcelroyiii

Student and instructor of economics.

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