Technology Could Usher in a Post-Corporate Era

By Tom Lloyd
Visiting Fellow to Northampton Business School

New technology can create problems for business, such as the added volatility of capital markets caused by ‘flash’ trading systems. But it can also help to solve problems. Flash trading systems, for example, are the forerunners of smarter algorithms that will lead, in a few years, to fully automated capital markets. This will be a boon, because it will make investment bankers redundant, and help to eliminate one of the greatest threats to the liberal-capitalist consensus - the enormous, socially-divisive pay packets of a small self-serving elite.

New technology can do more than create and solve problems - it can also invalidate our assumptions about business, and even undermine the theoretical foundations of our business institutions.

Ronald Coase argued that integrated firms had evolved, because, by suppressing the internal price system, they saved the ‘transaction costs’ that arose when markets balanced supply and demand.

Coase’s ideas were later developed into a broad theory of the firm by his former student, Oliver Williamson, winner of the 2009 Nobel Prize for economics. According to Williamson the modern company is ‘..the product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs’.

Williamson acknowledged that the reduction in transaction costs in an integrated organization must be set against the growing ‘agency costs’ of management – the tendency of senior executives to pursue their own ends, at the expense of the company’s shareholders. He, as we now know, mistakenly, saw the giant company as a solution to this problem, because its scale enabled it to capture transaction cost economies and, as he supposed, the independence of the profit centres controlled agency costs.

In his fine book, The Visible Hand, Alfred Chandler suggested that ‘multi-unit business enterprises’ (MUBEs) replaced the traditional single-unit enterprise when ‘routinizing’ of transactions reduced transaction costs, and linking production, buying and distribution reduced information costs.

If Coase, Williamson and Chandler are right, therefore, the modern company is the creature of market inefficiencies, and particularly of substantial transaction costs. These are of three kinds:

1.  Search and information costs incurred while finding the required goods or services at the lowest price.

2.  Bargaining costs incurred while reaching an agreement with the other party, drawing up contracts, etc..

3.  Policing and enforcement costs incurred while ensuring the other party sticks to the terms of the contract.
 

The implication is that, in the absence of substantial transaction costs, the evolution of enterprise since the birth of the modern company (Alfred Chandler’s MUBE) in the mid-19^th century would have followed a very different path.

Modern technology (search engines, price comparison sites, on-line auctions) have greatly reduced search and information costs in the modern era. If Chandler’s MUBE was, as Coase suggested, invoked by the superiority, in the mid-19^th century, of ‘administrative’ over market coordination of business activities, it seems possible that the reversal of this balance of advantage will invoke another more collaborative, less integrated kind of organization.

As transaction costs fall, the economics of collaboration relative to integration will improve and forming partnerships will become a better and cheaper way to assemble the components of value chains. In time communities of like-minded ‘collaborators’ could emerge in which transaction costs are close to zero.


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