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Week 41, 2021—Issue #173

Nature of the Firm: Transactions, Scarcity, and Complexity

Photo by Beth Macdonald on Unsplash

1. Transactions

The answer to that existential question won Roland Coase the Nobel Prize for Economic Science in 1991. The answer: organizations exist to mitigate transaction costs inherent in production and trade. Specifically, they help mitigate the time and money we spend on things like sourcing goods and services, negotiating contracts, and enforcing delivery, etcetera.

2. Scarcity

Markets aren’t efficient. If they were, there’d be no transaction costs because everyone would have easy access to the goods and services they need, when they need them. But that’s obviously not the case. Some products and services are more scarce than others. And the more scarce they are, the higher the transaction costs will be.

3. Complexity

But that’s not all. Some products and services are more complex than others: products might not be plug-and-play; they might require integration. Services might require not just domain knowledge but also context-specific experience. Etcetera. And with the risk of stating the obvious: the more complex the product or service, the higher the transaction cost.

  • Bureaucracy tends to drive up internal transaction costs. The bigger an organization gets, the less efficient it tends to become. This is how we get red tape, endless approval cycles, and million-dollar paperclips, etc.
  • Blockchain and related technologies can drive down external transaction costs. That’s the promise of the trustless economy. In fact, the building and maintaining of trust is a key source of costs in this current paradigm.



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Andreas Holmer

Designer, reader, writer. Sensemaker. Management thinker. CEO at MAQE — a digital consulting firm in Bangkok, Thailand.