Cord Blomquist found a neat interview with Clay Shirky on the nature of order and governance and the internet. He’s talking about Nobel Laureate Ronald Coase, who contributed greatly to our understanding of firms and markets, something lots of folks find confusing.
Ars Technica: One of the ideas that I really liked is this idea of the Coasean floor. Can you explain who Ronald Coase was and what that concept means?
Clay Shirky: 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. . . .
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.