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We’ve just flipped Coase and The Nature of the Firm

Amazon’t what you can get a Nobel for. Ronald Coase asked, well, why do we have firms? What’s the point? We can just have networks of people who cooperate some of the time and don’t at others. So, why that central monolith of the firm?

The answer being that sometimes the centrality is more efficient, sometimes the network. Not something that can be known a priori, it’s one of those “It Depends” answers so common in economics. At any particular technological elve of production such it and see. Shrug.

Public sector workers and well-paid Londoners are driving the working-from-home boom, according to new figures from the Office for National Statistics.

Around two fifths of workers are now working remotely some or all of the time, up from only 12pc before the pandemic.

But the new figures show the perk is much more common among people with degrees, high-earners and those working for the state.

More than one in three employees in the public sector do hybrid working, compared with around a quarter of those in the private sector.

Working remotely is not an option at all for half of private sector staff, while this is only the case for 42pc of those in public jobs.

However, the share of people working purely from home was slightly lower among public sector employees.

The ability to WFH has been around for some time. Not unusual that established ways need a bit of a shock, a prod, to really produce the experimentation.

But there’s some fun here – for that debilitatingly boring definition of fun used by economics types. That greater division and specialization of labour enabled by capitalism and markets led to one particular outcome in terms of firms and networks. Some operations still naturally gravitate toward the small independent – plumbing, say. Sure, there are large plumbing firms (Pimlico Plumbers etc) but even they’re largely networks of independent contractors. There’s just no way around the end work being done by a skilled bloke with a spanner, onsite. There’s no grand efficiency gain from centralisation into the firm that is.

On the other hand much of actual accounting (no, not firms of accountants, but actual accounting) did need to be done in that centralised manner. Simply because much of it was accounting within centralised organisations. And the comms tech to enable that to be done remotely wasn’t really there.

Those are just two examples, plumbing and accounting. The economy is packed with tens of thousands of similar examples, each more or less like one of those two.

OK, now we’ve changed the comms tech. We’ve changed the calculation about centralised and dispersed networks. At present this is evidencing itself in changes in WFH and office. Plumbers never did used to go to central offices, accountants did. Now accountants don’t again.

What – I think – we’re going to see is not just the change in place of work. But that butchery of the centralised organisations into the networks. For the comms, the transactions costs, have gone down. Therefore the firm as a form of organisation is – relative to the network – less efficient than it used to be. Therefore there will be fewer of them.

The actual driver of all of this though? The bureaucratic leeches that so slow those centralised organisations. HR power skirts, the woke and diversity advisors, the subcommittee on chocco biccies. These are all considerable costs and the networks of independents who cooperate for a task or a time simply won’t have them. They can see the costs coming out of their specific incomes and payments. It’s not just comms costs which have changed, it’s visibility of the centralised corporate costs. And those unproductive costs will get canned under the competition.

More tasks in the economy will be undertaken like plumbing, fewer like corporate accounting. Even corporate accounting I expect to be done more like plumbing. Actually, one firm I do some (network) work for seems to have its corporate accounting in Valencia and Berlin. For no reason other than that the two birds who do it happen to like living in those places.

Now, my confidence level in this over the next century is really very high. Because underlying economic forces really will work their way through the body economic. What the exact outcome will be, dunno, equally dunno on how fast. But the value of going right back to the original question – Coase on The Nature of the Firm – is that this is an excellent way of thinking through how the firm will change given a change surrounding it.

Nwtowrked working is now cheaper, relative to firm centralisation, than it used to be. So, we should expect more of the one and less of the other.

You know, exactly the opposite of the usual lefty whine about the inevitability of monopoly capitalism?

17 thoughts on “We’ve just flipped Coase and The Nature of the Firm”

  1. I would query the use of WFH in the case of public employees. It’s more truthfully GPWAH.
    Get paid while at home.
    Work is entirely optional.

  2. I’ve probably misunderstood the point, but I’m fairly sure your point about accounting is wrong. The whole point about double-entry book-keeping is that it allows people to work in different places, while retaining a check over whether they’ve done the work properly. It’s that system which allowed both separation of ownership and control and remote operations.

  3. in the case of public employees … Work is entirely optional.

    Whether they’re staring out the window from within an office or a back bedroom, is not going to change their (lack of) productivity one iota.

  4. Jobs with no tangible way of measuring productivity are ideal candidates for WFH. Jobs like cleaning floors, unblocking sinks and stacking shelves are not so amenable.

    Then there are those jobs that are about doing things, so not suitable for WFH, yet they require enough paperwork and admin to make WFH a day or two a week reasonable. These jobs are the real enemy as they incentivize movement from productive to non productive activity.

  5. Bit of a typo frenzy today Tim.

    In response to Andy F…
    A lot of office jobs have no measurable output, so measurement moves to the meta level. Turning up, looking keen, looking busy, putting in the hours. Can still be doing sod all but will win the promotion game.

    Most civil servant jobs are like that.
    Actually working out what the heck they are supposed to be doing and then measuring the output would be great. Because then we could get rid of 50-80% of that overhead. As a short cut first stage just sack half of them randomly.

  6. the perk is much more common among people with degrees, high-earners and those working for the state.
    The people more in a position to game the system?
    Which is going to be the problem. It’s not going to be what’s economically efficient. It’ll be who can maximise their personal advantage.

  7. Something wrong with the numbers in the quoted article?
    “Around two fifths of workers are now working remotely some or all of the time, up from only 12pc before the pandemic.”
    two fifths is 40%
    “More than one in three employees in the public sector do hybrid working…”
    i.e. about 34%.
    “…compared with around a quarter of those in the private sector.”
    i.e about 25%

    Therefore, the total number of people working from home is somewhere between 25% and 34%. So, about 30%, not 40%. Or is my arithmetic wrong?

  8. “just sack half of them randomly” A young acquaintance who works for Facebook tells me that their recent sackings seemed to have two components. (i) They fired some outstanding duds. (ii) Thereafter it seemed to be just random.

    (I realise that The Young use “random” to mean ‘haphazard’ but I don’t think the distinction matters much here.)

  9. Anyone got the Medema paper, Coase Theorem at Sixty?

    Anyway, plumbers go where the plumbing is. There are larger firms, but like the larger taxi firms, there are centralised functions, job booking (matching), purchasing, accounting, what-have-you, that don’t have to be anywhere close to the delivery point. In a sense, they’re more like franchises, where the car/van is liveried up (sharing brand IP), and presumably, there is some sort of exclusivity arrangement centred around matching supply/demand.

    Shifts in geographical location have already occurred. Lloyds Bank shifted functions out of the City down to Bristol way back. Chase had functions in the City, and a large site down in Bournemouth. Post-Big Bang, Canary Wharf proved that, given the change in telecomms, investment banks did not have to be located within the traditional cluster. Specialists shifted out as well, hedgies went West. Similar thing for PE/VC.

    Saga recently announced the closure of a central site, and a shift to a hub/spoke arrangement on the back of WFH/Hybrid. The locations will change, but the firm hasn’t. You’ll probably get lots of hubs, clusters.

    Because the contracts haven’t. And there’ll still be a need for contracts between firms.

  10. @FrankH

    If the 34% and 25% numbers are for hybrid workers, they exclude full-time remotes. For, say, travelling reps, reclassifying as a remote worker rather than office-based changes very little but has certain tax benefits.

  11. @Swannypol: Turning up, looking keen, looking busy, putting in the hours

    Or your spare suit jacket is in the office, over the back of your chair, 7×24.

  12. Agree with BIS- used to “look after” the home office contingent for our firm as a side role. The gaming starts early. What broadband speed is the minimum? How close do you have to be to the office/ your sales area. If i don’t go with BT can i still expense this? No policy and people go nuts. The things the bureaucracy didn’t care about in the past, e.g.up to you if had a 20 minute or an hour commute everyday suddenly you need a policy on where people live. To an extent things work themselves out with experience, but then exceptions are made for individuals and then its not really a policy just a guideline and then its people who are awkward customers- they find an exception and use that to justify theirs’ possibly with a threat of discrimination, or they truly are v valued and know it and use it. This translates to more bureaucracy i.e. inefficiency, the only question is whether the benefits out weigh it and ultimately as Tm alludes to whether it will be out competed by a network model of “we need this done can you do it?- we don’t care about your digital commute.”

  13. In fairness, I had this a decade ago with the American company I worked for. They had an office in London and I lived in Stevenage, so about an hours commute both ways, but the actual work was done on client sites all over Europe and little-to-none in the UK. London was only the “European Office” because the American CEO wanted it that way.

    So, I moved to the Isle of Man and on the infrequent days I was in the London office (about 4 or 5 days a year, mostly for training), I took a hotel in Stevenage and commuted in as always.

    Saved me a fortune in tax and the additional travel and hotel costs were negligible.

    So, if physical presence in an office becomes meaningless, then these other sorts of dynamics come into play.

    This sort of thing becomes possible at the corporate level as well, because if you can break the mentality of “Work done at site x”, then it doesn’t matter if the company holding the contract is in Basingstoke, Berlin or Brasilia. Potential tax and cost advantages galore and the ability to trade off a big countries dead hand of bureaucracy for a more flexible arrangement in a small country / tax haven.

    The problem with this sort of future is that the smart and nimble exploit it and minimise their costs (especially tax) and the rest are left with “traditional” options that require geographic location (shelf stacker, barista, etc.)

    Can’t see UK Gov liking that future.

  14. I changed career into IT (it was DP then) at 28. I can’t imagine how I would have learned the job if I hadn’t been in an office with many helpful colleagues who showed me how to do it. They could presumably have worked from home but a whole dynamic of co-operation would have been missing. I couldn’t have learned at all left to my own devices.

    (My neighbour is a serving RAF officer who works from home much of the time. I’m pretty sure he isn’t aircrew..)

  15. Swannypol,

    “In response to Andy F…
    A lot of office jobs have no measurable output, so measurement moves to the meta level. Turning up, looking keen, looking busy, putting in the hours. Can still be doing sod all but will win the promotion game.”

    You can have measurable output. The problem is that a lot of managers don’t know how to judge who is a good from a bad worker, so rely on stuff they can measure, like whether you are on time, how you look etc. They hate remote work because it means they actually have to understand what is going on. You can see the resistance to it in people measuring key clicks or having cameras for remote workers.

    The people I work for who are entrepreneurs just set objectives and measure them. They don’t care if I’m sat on a beach in Tahiti writing code at 3 in the morning. At the end of a week, they just want the thing delivered.

  16. John Galt
    The problem with this sort of future is that the smart and nimble exploit it and minimise their costs (especially tax)

    Don’t tell Professor Kartoffel. His head would explode.

  17. Don’t tell Professor Kartoffel. His head would explode.

    Nope, because Professor Potato Head has said repeatedly that people (and companies) don’t make behavioural changes in response to tax.

    I mean, in some ways he’s right (even though he’s an idiot), since taxes can rise significantly before most people tend to do anything to avoid or evade them.

    The problem is that those with the most dynamism (not your government HMRC blodgers) are the ones that are most reactive / responsive to it and when they leave, not only does their tax take, but everything else associated with their presence.

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