Ars has posted my review of Clay Shirky’s Here Comes Everybody, which is coupled with an interview I conducted with him a couple of weeks ago. Shirky’s a fount of interesting ideas. One of the central ideas in Here Comes Everybody is the concept of a Coasean floor:
Coase is the economist who asked and answered one of the most famous questions in all of economics: if markets are such a good idea, why have firms at all? Why do we have these sort of institutional and organizational frameworks? Why can’t you just have everybody offer their services to everybody all the time, and have markets and contracts put it all together? And his answer was that there’s a huge transaction cost in simply finding who’s available, what they offer, making some kind of deal. And so what firms do, in Coase’s answer, is they lower transactions costs for group effort. And that gives them an economic advantage over markets in certain situations.
Everybody has understood since that article was published in the mid-1930s that there’s a Coasean ceiling: a point past which, if a firm grows too large, it just breaks down. And we’ve seen this with giant conglomerates, whether it was ITT in the 1970s or InterActiveCorp today. The question is: when is it too big?
What we all missed, because it was never really an open question until now, is that there’s also a Coasean floor. Which is to say, there’s a set of group activities that would create some value but it isn’t worth forming an institution to create.
Read on to learn how the collapse of the Coasean floor affects abusive priests, Microsoft and Novell, Wikipedia, and businesses trying to make money in a changed technological landscape.