In a famous 1937 paper, the economist Ronald Coase asked: Why do entrepreneurs create firms?
In theory, an entrepreneur could purchase everything he needs from contractors. So why bother forming an organization and hiring employees?
In Coase's theory of the firm, an entrepreneur creates a firm when it's too costly to source everything through discrete transactions on the market. These costs are called "transaction costs." It takes time and money to find contractors, negotiate contracts, etc. Instead of purchasing labor from someone many times in a row, for example, the entrepreneur does it once in the act of hiring them. In this way, the firm accomplishes more—faster and cheaper.
The benefit of integrating transactions within a firm must eventually saturate, he theorizes, as it becomes too complicated to manage. However, technologies that "tend to reduce the cost of organising spatially will tend to increase the size of the firm," as entrepreneurs are able to orchestrate larger sets of people and materials. Coase mentions the telephone and telegraph specifically, but obviously the internet and digital technology more broadly should be expected to have the same effect.
And for most of the 20th century, this is what happened. The digital revolution allowed firms to integrate tremendous amounts of value through complex supply chains and employees spread around the planet.
But then something interesting happened.
At the end of the 20th century, in 1995, Craigslist started a new trend.
Suddenly, people were buying and selling goods and services in a nearly real-time digital marketplace.
Of course, people had been buying and selling online for a year before then, but the transaction costs remained prohibitively high.
With the emergence of digital marketplaces, it became much faster and easier to buy and sell things only precisely when you wanted to buy or sell them.
Digital technology had enabled the growth of massive firms, but then it also reduced transaction costs across the board, generating a whole new "gig economy" of contractors working outside of firms.
The result was not to decrease the significance of the firm, but to radicalize and generalize it: The marketplaces became firms in their own right (Airbnb, Uber, etc.) with much smaller headcounts per unit of value compared to big 20th century firms like General Motors. At the same time, the average individual became more like an entrepreneur contracting with a whole portfolio of firms.
If the digital marketplace represents the second wave of the digital firm, we suspect the blockchain may well represent the third wave of the digital firm.
The unlimited proliferation of user-generated media increases cognitive insecurity across the board, thereby increasing the cost of making decisions in general. Spam, as we've said, is a general problem. Though we can buy or sell almost anything in real time, it is now less clear what one should buy or sell, and how one should buy it or sell it.
In Coasian terms, transaction costs are on the rise in the marketplace of ideas.
A small amount of unsophisticated digital media was a boon for one-off contractual games (Craigslist), but a large amount of sophisticated digital media is a curse for one-off contractual games (deepfake phone scams).
In the blockchain era, all digital media will eventually be constrained and weighted by Proof of Work.
The introduction of rigorous, market-based, programmatic filtering logics will introduce new firm-like tendencies in our thinking, believing, and acting.
As it becomes harder to form beliefs and make decisions due to rising "transaction costs," there will be profit opportunities for cultural entrepreneurs to form new types of firms. Whereas the 20th century entrepreneur merely integrated "factors of production," the 21st century entrepreneur will move further down the stack to integrate beliefs and values as well. For it will no longer be possible to choose "goods" and "services" at all, without first selecting a cognitive security provider.
Historically, there is a term for any organization that specializes in the integrated provision of cognitive services.
It's called a "cult."
