The Future of the Firm

Peer production, the commons and the future of the firm

A 9-page, thought provoking essay by Yochai Benkler

Benkler goes deep into the core purpose of the “traditional firm”, looking at it through the lens of innovation and production, and exploring the differences between it, and it’s almost polar organizational opposite “peer production”.

“Peer production” (think: Wikipedia, free/open source projects, etc.) is defined by three organizational characteristics:

(a) decentralization of conception and execution of problems and solutions

(b) harnessing diverse motivations, and

(c) separation of governance and management from property and contract.

Under Coase Theorem, the firm in its traditional “managerial hierarchy” incarnation exists, since it offers a way to reduce the transaction costs of collaboration among its member.

However:

When technology dropped the cost of communications, distributed the material capital necessary for knowledge work throughout a large population, and allowed individuals to share designs and incremental improvements with each other, these individuals were able to pool their knowledge and resources, and coordinate action toward shared goals, without the mediation of firm hierarchies or markets

Leading to the emergence of alternative organizational forms to drive innovation and production such as peer product, open innovation, crowdsourcing, online labor markets, etc. They can all be integrated into a more holistic organizational framework illustrated here:

benkler.png

I’m intentionally glossing over the details here and jumping to the bottom line, which is:

Institutionally, that means that as knowledge development and production are more important, in a space that is at the outer frontier of knowledge and problem-solving, the more important it is to adopt an institutional framework that assures freedom to operate, a commons,
[W]hereas the more certain and understood the problem space is, the more firms in the space can focus on appropriation of the fruits of investment.
Now we get to the more interesting question that Benkler explores in this essay: given the decline in transaction costs, and the emergence of alternative organizational structures, is there still room for the traditional firm in the future of work?
The Coase-ian view provides one answer, that traditional firms will shrink to play a niche role in specific edge-cases:
One possible answer is that firms will remain significant only where physical capital costs of production are high and concentrated… firms will continue to play a role:
(a) when they have the advantage in amortizing high capital costs over many diverse innovation efforts, where optimization of that innovation and its manufacture and distribution are core necessities,or
(b) when exploiting legally-created rent extraction opportunities gives an advantage to a continuous legal entity such as a firm over a more fluid market relationship that comes together purely for the purposes of exploration and innovation.
However looking  at some of the non-transactional challenges of the other forms of organizations, suggests a second answer, which is far more interesting, in my opinion:
a model of motivation that assumes that belonging to a socially-meaningful interaction is critical for engaging the full capacities of people suggests a continued role for firm that can integrate social meaning and relations into their organizational ethos and practice… [I]n the presence of substantially lower transactions costs and competition from nimble, flash organizations and non-market innovation, building communities of meaning around economic collaboration is the primary form of strategic advantage firms have over dynamic, fluid networks of collaborators.
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The Future of the Firm

3 thoughts on “The Future of the Firm

  1. The interesting thing is that when someone works for a firm they still have their own motivations. Some firms pretend that suddenly the firms motivations are theirs. People work for many different reasons ranging from totally extrinsic to totally intrinsic (while still collecting a paycheck).

    For example, I was a Mac user for a long time and then started using Windows when I worked for Microsoft. I still had a Mac at home. My motivations to use Windows was mostly driven by the fact that it was required to show alignment with my firm.

    Does this mean the different between the old firm and the ‘future of the firm’ is really one that we acknowledge the different motivations and ask for certain minimum amounts of alignment to be part of the org?

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    1. I think it goes deeper than that. “Certain minimum amounts of alignment” is at the core of Coase Theorem – you can view “getting to minimal amount of alignment” as a transaction cost. I’ve only worked for firms that I had that minimum amount of alignment with, but still ran into similar challenges around this. This quote from the Benkler piece highlights the deeper challenge: “Organization theory and economics need to learn how to design not better “incentive schemes” as they were traditionally understood, but how to manage competing systems of motivations, that cannot be maximized additively but must instead by balanced and managed culturally so that increases in one, relatively easy domain — pay or material reward or punishment —does not undermine intrinsic and socially motivated contributions either within a firm or from complementary efforts on whose innovation a firm depends.” No easy feat.

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