Coase in the Age of Idea (Networked) Economy: A Rational Explanation for the Great Resignation, Emergence of Gig Economy and Remote Work (Part1)

In his seminal paper on the existence of a firm, Coase notes that "... “a firm will tend to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market…” ([Coase 1937], p. 395; https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0335.1937.tb00002.x).

In laymen terms, a firm (company, corporation, business, take your pick) exist because the type contracts (arrangements) needed to do business cannot be handled in the open market. In the age of industrial revolution and even the early stages of electric/electronics age, the fixed assets and the entire machinery needed for majority of activities were so costly that a firm could make it come true and these firm could become wildly big: Vanderbilt and railroads; Carnegie and Steele, and so on. However, as we have moved away from that kind of economy to the information age, more aptly idea economy, things started to change drastically. A software engineer, unlike her mechanical engineer grandfather, doesn't need large corporate infrastructure to do her job, or rather make a living. A laptop, a good WiFi and a Starbucks Frappuccino would do just fine. Especially if she is sitting by the seaside in a tropical paradise! In her era, the idea economy's transaction costs have fallen so low that it is possible for "market-solutions" to replace corporate ones.

This new reality has not been lost on corporate chieftains: if a software company can dispense with only contracting out the work to the said software engineer, the firm can save on benefits and office space and everything else she would have demanded. The dual forces of individuals not seeing a particularly dire need to be part of a firm, as well as, never-ending hunger for corporate cost-saving thus have given rise to a new age of "entrepreneurship" whereby there are NO careers but rather gigs. We can now free ourselves from the shadows of corporate (business) overloads to make a living our way. (There are tons of buts and ifs but bare with me!).

However, the implications are quite unpleasant: if I want to be free of shackles, so does everyone else! I cannot and will not be able to beholden anyone to my way of making a living, let alone my dreams. If I want to embark on pursuing my dreams, I have accept that everyone else is doing the same thing. Enter the great resignation. I put to you that the process of great resignation had already started long before COVID. The pandemic and the lock-down policies and what has ensued just accelerated the process. The prevalent reaction among many corporate chiefs and business owners is to blame the workers, call new generation names, and on and on. One should remind these baby boomers that their grandfather also called them the same when they partied in Woodstock and protested Wars and demanded every other "freedom loving" thing!

Now if you buy into what I am saying, then you have to admit that there are consequences: the age of elected democracies are over and the age of distributed democracies are upon us! Our societal and business models of governance will, and for that matter has, change(d). Almost universally, people are unhappy with elected official as much as they keep deep disdain for business leaders. The root cause: the liberating effect of being able to make a living (almost) free of constricting nexus of corporate (business) arrangements. But is the firm really a things of the past? No. These masses of liberated "entrepreneurs" now need to make the necessary arrangements outside the boundaries of the firm(s). Someone has to create (and govern) the nexus of contacts. Enter Apple, Amazon, Alibaba, ... Why are these modern age corporate mammoths so large and powerful? Because the build and maintain the necessary networks to allow individuals interact, contract and transact with each other.

Our future and for that matter most of the present is shaped by linking disparate individuals who are not (or weakly) bound by the self-reinforcing business and societal contractual (mostly implicit) arrangements. This form of societal organization demands a different financing, reporting and governance framework. I shall get to this in follow up articles.