On the passing of Ronald H. Coase and the New Economy

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Essays

Nobel-winning economist R.H. Coase passed away yesterday. Here are my thoughts. When the crash of 1929 hit, Ronald Harry Coase was an undergraduate student at the London School of Economics, working on a Bachelor’s degree in commerce. Thanks to his professor Arnold Plant, he decided that markets were fascinating, but that he did not want to study the mathematics driving them, but the frameworks – the legal structures. He spent his senior year in the United States, touring companies like Ford Motor Co., Union Carbide, and General Motors, trying to understand how these firms were organized. Radio, electricity, and steel contributed to raising living standards across large swaths of the globe, and new models of mass production and distribution had taken hold. By 1937, at only 27 years old, he wrote ‘The Nature Of The Firm’, one of the foundational essays describing how the 20th century organized commerce.

In ’The Nature Of The Firm’, a pretty short essay, he described why business seemed to be evolving away from a distributed marketplace of individual actors exchanging contracts, and into a system where entrepreneurs had full-time employees, and formed firms. As Coase explained, the firm was the most efficient way of meeting supply and demand, given the new ability to mass produce items, syndicate supply to wide audiences, and save on overhead by centralizing both the inventory creation and the distribution channels.

We take it for granted today, because the world of the 20th century was driven by firms, but until this essay was written, nobody had actually considered why everyone wasn’t just contracting from each other, and why the firm was such an efficient mode of organizing commerce. Coase was amazing for that. And we’re at another inflection point that looks, in many ways, similar to Coase’s time today.

We also had a major economic crash on the heels of rampant deregulation. We also are looking at an economy that is being transformed by a series of inventions that have fundamentally changed the way we create products and communicate. And, amusingly, the set of inventions brought along by the computer and the internet are slowly undermining the processes that made the firm necessary in the first place. Communication costs go to zero, creation becomes co-creation, and networks become the default mode of creating and sharing value. In this economy, the individual contractor, the prosumer, the node in the network, is a buyer And a seller. He is a creator And a producer. Commerce organizes around these nodes of individuals, and creative capacity rules the day.

We organize our thinking at Collaborative Fund around these trends, and we are not alone. Union Square Ventures has noticed it with their focus on networks. Marc Andreessen says “all markets will liquify”. Sara Horowitz of the Freelancer’s Union writes eloquently about the fact that 1 in 3 working Americans today is a freelancer, and that the proportion of gig workers is rising precipitously, and indefinitely. My very wise friend Sam notes: the online and offline worlds are increasingly connected, and the way we co-create products, distribute products, and communicate with each other are more fundamentally collaborative. GitHub, Twitter, Quirky, and Uber are just the beginning. 

It is fitting that we recognize R.H. Coase’s passing at this time in our economic evolution, as we pass the torch to the new economy. I hope he rests in peace.

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