Are Networks Replacing Firms as Organizers of Business Activity?

business_ethics_highlights_2One of the interesting fallouts of the dynamics described here is that, when viewed through a Coasean theory of the firm lens, stakeholderism looks more like a reactionary than a progressive movement. As transaction costs outside the firm fall, the relative cost of organizing economic activity inside the firm increases. At the margin, firms become smaller organizationally: opportunities for 20th Century-style employment within the firm become fewer, but opportunities for transactional entrepreneurship outside the firm become greater. Rather than view this as the liberation of workers from oppressive, hierarchical work relationships, stakeholderists have sought mainly to build regulatory and “ethical” barriers to this process in a vain attempt to keep workers inside the firm. >>>

LINK: Networks and the Nature of the Firm (by Tim O’Reilly in The WTF Economy)

One of the themes we’re exploring at the Next:Economy summit is the way that networks trump traditional forms of corporate organization, and how they are changing traditional ways of managing that organization. Uber and Airbnb are textbook examples of this trend.

Esko Kilpi beautifully described the power of networks in an essay on Medium, “The Future of Firms,” reflecting on economist Ronald Coase’s theory of 20th century business organization. He wrote:

“The existence of high transaction costs outside firms led to the emergence of the firm as we know it, and management as we know it….The reverse side of Coase’s argument is as important: If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today, the form and logic of economic and organizational entities necessarily need to change! The core firm should now be small and agile, with a large network. …”

What do you think?

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One comment

  1. Francis Bellamy

    Interesting reversal of fortune:

    Thanks for your hospitality.

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