The Economist’s Schumpeter column this week is an exploration of the work of Nobel prize winning economist Ronald Coase whose influential paper The Nature of the Firm (1937) sought to explain – from an economic perspective – why firms exist. Simplistically put, Coase suggested that firms existed because transaction costs within an organisation could be lower than those incurred in contracting with a large number of individuals.
The column goes on to explore later work which further expanded on Coase’s theory but what it misses is how Coase’s work also helps to explain the recent growth in those pursuing freelance or portfolio careers. The rapid growth in powerful and cheap IT has made it feasible for people to set up on their own and for large organisations to interact with them, i.e. the growth in IT has lowered the transactions costs which were the reason for firms coming together and growing in size in the first place. Thus, if we follow the theory, and the much more recent suggestions of Charles Handy, the core of large organisations will continue to shrink whilst the body of sovereign individuals supplying skills to the core will grow.
Food for thought.
I learn that Ronald Coase and I share our birthday. He was born on 29th December 1910 and has a new book coming out in 2011 (How China Became Capitalist). I hope I will be as productive at 100. In the meantime, Coase’s original paper has made it to the top of my holiday reading list.