Companies exist to lower transaction costs. At least, that’s what Nobel Prize-winning economist Ronald Coase argued in 1937.
Coase built much of his reputation examining how transaction costs prevented markets from functioning effectively. In his famous Coase theorum, he demonstrated that provided there are no transaction costs, the individuals who make up a market are capable of dealing with and internalising externalities like pollution. This works well when only a handful of people are involved, but if a polluter has to deal individually with hundreds or more affected by his or her actions, such resolution is unlikely to occur.
Lowering such transaction costs is where companies come in. When companies representing different market interests deal with each other, transaction costs are vastly lower, Coase argued in his treatise, The Nature of the Firm.
But is this still the case?
In an extract (paywalled) from an uncoming book published in today’s Australian Financial Review, former Telstra chief executive and current Suncorp chairman Ziggy Switkowski picks up Coase’s insight and asks whether it still applies. He examines how the internet has bought transaction costs crumbling down in multiple industries, and concludes that much large-scale commerce may soon be conducted without the mediation large corporations.
Given the inability of most large corporates to plan for the long-term, Switkowski argues, surviving the next few decades will be the hardest thing they’ve ever done.