Transaction Costs and the Future of the Firm

NOVEMBER 30, 2006


Attempts to grasp what the internet will mean for the future shape of business, now the dotcom bubble has inflated and subsequently burst, have led to an explosion of interest in the ideas of the 93-year-old economist Ronald Coase. Coase won the economics Nobel in 1991, but he did the work for which he is chiefly known as long ago as the 1930s, and this is the work which has acquired a new audience with the rise of e-commerce. The standard textbook “Business 2.0” [6] has a foreword by business-strategy guru Don Tapscott saying that the digital economy is “destroying the old model of the firmâ” and explaining that Coase’s early writings are the key to this. The Economist magazine’s publication E-trends notes that “parts of established companies are vulnerable to being “blown to bits” [5, p. 193], and quotes as its reason for this judgement Coase’s classic 1937 article on “The Nature of the Firm” [2], based on a lecture given in the Scottish city of Dundee in 1932. References to Coase abound in writings about e-business. His name has become much better known in recent years than at any earlier point in his long career.

There is indeed a link between Ronald Coase’s theory of the firm, and changes in the business environment brought about by information technology. But the implications of Coase’ ideas have been misunderstood. Coase’s theory does not justify the conclusions which are being drawn about “diminishing firms”.