But you are totally right about the irony. There are of course internal cost transfer arrangements in large companies, to maintain an actual economy among organizations, but there is still far too much friction compared to the external economy.

The really weird thing is that Coase’s model is almost being turned on its head in some cases of pure information work. The external economy is actually vastly more transparent on the 3 costs (discovery, negotiation, monitoring). Dan Miller, who just wrote the book ‘No More Mondays’ coined a phrase ‘eaglepreneur’ for an entrepreneur who outsources everything (different from a free agent or self-employed…)

Venkat

At work, I was struck by the realization that we seemed to do splendidly when we outsource packets of work – say, some GUI design – there’s a nice contract, work starts, work gets done, money gets paid.

If I had to do the same thing internally, there’d be no end of hassles. First I’d have to request an internal group to do it, then they’d tell me they have no resources, no budget, no bench strength. Then I’d have to convince them to convince their management to get some headcount. Or I’d have to give them some headcount (but it’s only a 6 month project – what happens after that? I can’t afford to give up a whole headcount for that!)

And what happens when the Grim Reaper stalks forth after a bad quarter to do some ritual bloodletting – how does this headcount get affected? What’s the optimum strength of the GUI design team?

Given the way finance is handled here: beginning of the year, you think you’ll need an absolute minimum of X. You ask for 2X, because you know it’ll be cut down by half. So you actually get X/2 if you’re lucky. Then you scrimp and save and at the end of the last quarter, you figure you still have $100k left and indulge in an orgy of spending. Why? Otherwise it’ll disappear, and if you return the budget, you’ll get less next time.

It’s richly ironical that big companies in a capitalist economy are run in exactly the same way as planned economies. And they inherit the same problems – the economic calculation problem, for one. There is no good currency to facilitate trade between groups. and money cannot be retained or saved but disappears at the end of the budget cycle, and headcount – which is retained – is too coarse-grained to facilitate numerous and frequent transactions.

I guess my company is on the wrong side of Coase’s theorem, which fits in well with the thesis that large companies will – or should – shrink.

As for Freakonomics – interesting stories, but I got really irritated with the cheerleading. I would have liked Pulp Fiction‘s Mr. Wolf to have been present, with his classic response to some fawning on the part of Jimmy and Jules: “Let’s not felicitate each other quite yet.” Well, he used a different word, but there are children present.