I have always been interested in the question of how individuals organize themselves to perform work. In this I am not alone as this issue lies at the heart of a rich vein of modern economic scholarship. The seminal work in the field was and remains The Nature of the Firm written by Nobel economist Ronald Coase in 1937. I argue below that “gig” economy innovators such as UBER and Airbnb and the advent of blockchain and its promise of smart contracts and initial coin offerings will extend the boundaries of efficient market contracting into what was once the exclusive province of the firm.


The central tenet of Coase was that there was a dynamic tension between those functions a company chooses to perform internally and those functions that it would choose to contract for externally. The tension exists because there are transaction costs that act upon the form of organization chosen. An entrepreneur who overly relies on external production will soon find that the transaction costs associated with price discovery, contracting and enforcement will outweigh returns. Similarly, but at the other extreme, the costs of managing an overly large and sprawling enterprise will outweigh the benefits of the command and control system of firm management. William Baumol and Oliver Williamson, among others, further explained the boundaries of the firm by introducing the behavioral elements of principal-agent conflicts: In large firms mangers seek to maximize personal benefits that range beyond returns to disaggregated shareholders


In Coase’s Penguin, or Linux and the Nature of The Firm (112 Yale L.J. 369 (2002)), Yochai Benkler reviews the traditional tug-of-war between the individual and the firm as analyzed by Coase through Williamson and posits a third way: “Free software is only one example of a much broader social-economic phenomenon emerging in the digitally networked environment, a third mode of production [called] ‘commons-based peer production.’” (Benkler at 369). The volunteer army that supports, edits and enlarges Wikipedia is perhaps the best known, but by no means the only example of large-scale software/data projects maintained by the commons (see, e.g., Linux, Apache, Mozilla, Symphony). Promoters of open source collaboration rely upon a variety of motivational mechanisms to substitute for markets and contract rights, on the one hand, and internal managerial command, on the other, more familiar to Coase. For example, individuals choose to contribute to open source projects for their own psychic and social benefits, to enhance their reputations (socially as well as with potential employers), or to build consulting or service businesses around the open source code. Benkler does not claim that commons-based production will replace firms or markets, just that it represents a novel “third way” not heretofore witnessed.


I think we have now entered a period in which many of the attributes of the open source movement will be absorbed into the vastly distributed forms of commerce made possible by cloud computing platforms, “gig economy” services, and blockchain and other distributed ledger systems. Through each wave of technology innovation, the new capabilities have tended to reduce transaction costs (friction), unbundle offerings, and expand the possible scope of the enterprise (e.g., steam engine, telegraph, TCP/IP, etc.). Cloud services like AWS permit small businesses to deploy very sophisticated and resilient computing resources, now priced per second of compute time or lines of code. Gig economy services such as UBER, Airbnb, WorkFusion and Mechanical Turk allow asset owners to fractionalize the offering of third party transportation or lodging, and parcel out work to part-time workers. And finally, blockchain will enable firms to raise capital via initial coin offerings, transfer funds and settle property transactions using near zero cost payment “rails” and smart contracts, and greatly reduce the transaction costs that Coase recognized as the primary driver of organizing work within firms.


While these blockchain developments will not eliminate all of the reasons individuals contribute to open source projects (e.g., pride of authorship, joy of creation), the combination of micropayment functionality, crowdfunding, and smart contracts will permit global coordination of work outside the walls of the firm on a scale unimaginable to Ronald Coase.