1/ For the last 100 years, individuals have worked in large firms - Why and will that change?
2/ A thread on transaction costs, mechanical clocks, feudalism and social scalability
3/ Economist Ronald Coase’s thesis was that in the presence of these transaction costs, firms will grow larger as long as they can benefit from doing tasks in-house rather than incurring the transaction costs of going out into the market.
4/ Economist Douglas North Outline Different Types of Transaction Cost like:
5/ Measurement - the calculation of the value of the good or service involved in the transaction (e.g. is this car a lemon or a good car?)
6/ The size of the market - this affects the partiality or impartiality of transactions (you are less likely to rip off your brother than a total stranger)
7/ Enforcement - the need for an unbiased third party to ensure that neither party involved in the transaction reneges on their part of the deal. (e.g. the cost of "settling" to the legal system)
8/ Technological Paradigms and Transaction Costs - The primary determinant of transaction costs is technology.
9/ @NickSzabo4 paper "A Measure of Sacrifice" illustrates "The Unreasonable Effectiveness of the Mechanical Clock" - fon.hum.uva.nl/rob/Courses/In…
10/ Prior to the advent of the mechanical clock, slavery and serfdom was the primary economic relationship in part because the transaction cost of measuring time beyond just sun up and sundown was so high, workers were chained to their masters or lords.
11/ The advent and proliferation of the mechanical clock allowed a system based on time-rate wages rather than slavery or serfdom.
12/ A workers time became now fungible and tradable in a unit of measurement on which employers and employee could agree.
13/ If the talented craftsman could get a higher time-rate wage from a competitor, he’s able to do that.
14/ The advent of a trusted measure of time led to an increase in the quantity, quality and variety of goods and service because urban work was now more feasible and to a shortening of the work day and work week.
15/ The advent of the clock then decreased the transaction costs of measuring time which lead to an increase in social scalability.
16/ Social scalability is a phenomenon unique to homo sapiens
17/ We can invent technology which reduce our vulnerability to other participants, intermediaries and outsiders, which lowers our need to spend scarce cognitive capacity worrying about how an increasingly large and diverse group of people might behave.
18/ Together, all these technological innovations facilitate the economic miracle that has taken place over the last few hundred years.
19/ The essential component of all of them is that these lower transaction costs lead to trust minimization and thus increased social scalability.
20/ The mechanical clock is a good example because it's easy to see how blockchains could for many different things what the mechanical clock did for time.
21/ By creating a trusted measure of some scarce resource (money, time, file storage), it reduces the transaction cost facilitating more social scalability and greater economic prosperity.
22/ Perhaps in a hundred years, people will look back on how we live today similarly to how we look back on feudalism?
23/ As always, this is just me thinking out loud. Thoughts, feedback and criticism welcome.
