The Future of the Firm [Benkler]
A 9-page, thought provoking essay by Yochai Benkler
Benkler goes deep into the core purpose of the “traditional firm”, looking at it through the lens of innovation and production, and exploring the differences between it, and its almost polar organizational opposite “peer production”.
“Peer production” (think: Wikipedia, free/open source projects, etc.) is defined by three organizational characteristics:
(a) decentralization of conception and execution of problems and solutions
(b) harnessing diverse motivations, and
(c)separation of governance and management from property and contract.
Under Coase Theorem, the firm in its traditional “managerial hierarchy” incarnation exists, since it offers a way to reduce the transaction costs of collaboration among its member.
When technology dropped the cost of communications, distributed the material capital necessary for knowledge work throughout a large population, and allowed individuals to share designs and incremental improvements with each other, these individuals were able to pool their knowledge and resources, and coordinate action toward shared goals, without the mediation of firm hierarchies or markets.
Leading to the emergence of alternative organizational forms to drive innovation and production such as peer product, open innovation, crowdsourcing, online labor markets, etc. They can all be integrated into a more holistic organizational framework illustrated here:
I’m intentionally glossing over the details here and jumping to the bottom line, which is:
Institutionally, that means that as knowledge development and production are more important, in a space that is at the outer frontier of knowledge and problem-solving, the more important it is to adopt an institutional framework that assures freedom to operate, a commons,
[W]hereas the more certain and understood the problem space is, the more firms in the space can focus on appropriation of the fruits of investment.
Now we get to the more interesting question that Benkler explores in this essay: given the decline in transaction costs, and the emergence of alternative organizational structures, is there still room for the traditional firm in the future of work?
The Coase-ian view provides one answer, that traditional firms will shrink to play a niche role in specific edge-cases:
One possible answer is that firms will remain significant only where physical capital costs of production are high and concentrated… firms will continue to play a role:
(a) when they have the advantage in amortizing high capital costs over many diverse innovation efforts, where optimization of that innovation and its manufacture and distribution are core necessities,or
(b) when exploiting legally-created rent extraction opportunities gives an advantage to a continuous legal entity such as a firm over a more fluid market relationship that comes together purely for the purposes of exploration and innovation.
However looking at some of the non-transactional challenges of the other forms of organizations, suggests a second answer, which is far more interesting, in my opinion:
a model of motivation that assumes that belonging to a socially-meaningful interaction is critical for engaging the full capacities of people suggests a continued role for firm that can integrate social meaning and relations into their organizational ethos and practice… [I]n the presence of substantially lower transactions costs and competition from nimble, flash organizations and non-market innovation, building communities of meaning around economic collaboration is the primary form of strategic advantage firms have over dynamic, fluid networks of collaborators.
Building communities of meaning around economic collaboration — now that’s a definition that I can totally get behind.