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1/ New post: Markets are Eating the World. Seeing as it is really long, here's a summary: ribbonfarm.com/2019/02/28/mar…
2/ For the last hundred years, many (if not most) individuals have worked for firms, and, by historical standards, large ones.
3/ Many internet pioneers in the 90’s believed that the internet would start to break up corporations by letting people communicate and organize over a vast, open network.
4/ This reality has sort-of played out: the “gig economy” and rise in freelancing are persistent, if not explosive, trends.
5/ With the re-emergence of blockchain technology, talk of “the death of the firm” has returned. Is there reason to think this time will be different?
6/ To understand why this time might (or might not) be different, we need to grok a bit of Coasean economics and the history of mechanical clocks.
7/ In his 1937 paper, the Nature of the Firm, economist R.H. Coase had a pretty legit question: If markets are so great? Why even do the firm thing? Why not just contract out everything? 
8/ Coase's answer was transaction cost: if the cost of making the indvidual transaction is high, it's more effecient to just keep someone on payroll
10/ Coase's idea was that firms will grow to the size where making something in the firm will equal the size of buying it on the market.
11/ Low transaction costs mean everything gets done in the market, including the labor market.
12/ High transaction costs mean firms tend to grow very large.
13/ Here's a graph that looks at consumer preference and firm size in light of transaction costs
14/ If the structure of the economy is based on transaction cost, then what determine transaction costs? Short answer: Mostly technology
15/ From horses to wheel to the legal system, nearly all technologies impact the transaction costs present in a given market. Here's the long answer:
16/ Consider the humble mechanical clock as @NickSzabo4 did in his essay - A Measure of Sacrifice - fon.hum.uva.nl/rob/Courses/In…
17/ In 1314, The city of Caen installed a mechanical clock with the following inscription: “I give the hours voice to make the common folk rejoice.” Why was everyone in Caen so jazzed about the mechanical clock?
18/ The main reason was mechanical clocks (compared to sun dials) provided a fair (lower trust costs) and fungible (lower transfer costs) measure of time.
19/ This was a necessary pre-requisite to going from a society based on slavery and serfdom to one based on employment and contracting.
20/ That merits some rejoicing.
21/ Mechanical clocks enable greater coordination scalability, the distringuising trait of homo sapiens.
22/ Homo sapiens prevailed over other species like Homo neandertalis because increased neocortical size allowed them to coordinate
23/ Since then, homo sapiens have invented many other external structures to promote coordination like the mechanical clock.
24/ We can group these intro four coordination revolutions: Neolithic, Industrial, Computing, Blockchain.
25/ The Neolithic marked the emergence of division of labor -A city of 10,000 people requires, but also makes possible, specialists.
26/ This increased the ability of humans to coordinate from hundreds to thousands within a state
27/ The next revolution was Industrial which linked the states of the world together.
28/ The technology that probably kicked this off was coinage, which made possible the first retail market in ancient Lydia.
29/ Coordination scalability stretched from within state across states.
30/ This coordination was only possible with large firms. Coming back to Coase's idea that firms will expand or shrink until making=the cost of buying, it made sense in the industrial era for firms to get big.
31/ In part this was because the supply chain was really fragmented and to get the efficiences of mass production, you needed to standardize the whole supply chain.
32/ Because the most efficient way to produce products was in large organizations, specialized workers could earn the most by working inside large organizations, be they Ford, AT&T or Chase Bank.
33/ In the Industrial Era, there were two dominant institutions: firms (which optimized for organization and standardization in the presence of high txn costs) and markets which optimized for motivation.
34/ This started to dissolve in part because of (1) supply chains getting more standardized and reliable and (2) computers and telecommunication technology made coordinating across firms a lot easier (read: lower txn. costs)
35/ Computers, and the software and networks built on top of them, had a new economic logic driven by lower transaction costs.
36/ Internet aggregators such as Amazon, Facebook, Google, Uber and Airbnb reduced the transaction costs for participants on their platforms. For the industries that these platforms affected, the line between “making” and “buying” shifted toward buying.
37/ Computers and aggregators reduced triangulation costs through digitization and proliferation of smart phones.
38/ They brought down transfer costs through cheaper matchmaking. Take Yelp as an example:
39/ The “sharing economy” is more accurately called the “renting economy” from the perspective of consumers, and the “gig economy” from the perspective of producers.
41/ The result was that in industries touched by the internet, we saw an industry structure of large aggregators and a long tail of small business which were able to use the aggregators to reach previously unreachable, niche segments of the market. (h/t @stratechery)
42/ Though there aren’t many cities where a high-end cat furniture retail store makes economic sense, on Google or Amazon, it does.
43/ For these industries, coordination scalability was far greater, leading to the emergence of micro-multinational businesses for producers and personalization for consumers.
44/ However, this trends has only affected a small subset of all possible industries. Only a thin subset of industries are ready to be marketized at any time
45/ And what about that pesky transaction cost of trust? What about areas where trust is essential? I'll cover that in a second tweetstorm or you can read the article - ribbonfarm.com/2019/02/28/mar…
46/ Part Two, now available:
