Posted by Mitch Townsend on February 20th, 2006 (All posts by Mitch Townsend)
I still remember when I got my first adult library card, & could take out books from upstairs without my mom signing. It was an oaktag card with a little sheet metal plate bent around two slots in the card. The metal plate had my number on it. The ka-CHUNK as the machine stamped the card was musical to me. My greatest disappointment was that I could not sign out the Encyclopaedia Britannica & instead had to sit and read it in the library.
The library is much bigger now. Google, the Gutenberg Project, Wikipedia, Blogger, … Even better, if I had wanted to read a foreign newspaper, or even one from out of town, I would have had to go into the nearest big city (Hartford at the time) and use their library. Of course, I would never have known if there was something I wanted to read until I got there. When Apollo 11 landed on the moon, the New York Times retracted an editorial from 1920 that had said that Dr. Robert Goddard’s invention would never work in space because “there was nothng to push against.” I was such a fan of space exploration that I took a bus into Hartford just to read it myself. Now, except for the squishy brown rotten parts of the New York Times, I can read the whole thing online for free. The cost of information has plummeted.
Why do you care?
You care about this because it is going to make your life better. You will have more money. Your children will have a library card that is close to the one the angels have in their wallets.
The second portrait from the right on our masthead is Ronald Coase. He is perhaps best known for the “Coasean bargain” (more on this subject when I get around to it), but his wonderful short essay, The Nature of the Firm, injected some reality into economic analysis. As he pointed out, information is not free. From the 1991 Nobel Prize award announcement:
Coase showed that traditional basic microeconomic theory was incomplete because it only included production and transport costs, whereas it neglected the costs of entering into and executing contracts and managing organizations. Such costs are commonly known as transaction costs and they account for a considerable share of the total use of resources in the economy.
Ronald Coase’s greatest contribution was to show not only that reality is different from theory, but how and by how much.
It costs money to find out what the market is willing to pay for your product. It costs money to find out what vendors are charging for the materials you need, and where you can get the best price. Most vendors will charge you less per unit for a large order than for a small one because their set-up and transportation costs are less. In other words, the real world has friction, and it matters. On the other hand, while trying to overcome these external costs of getting information, a firm is creating internal costs. More people must be hired, and information is distorted as it percolates through the organization. At a certain point, the value of information equals the cost of obtaining it. This is the equilibrium point. The firm has reached its maximum efficient size.
What the internet has done has moved the equilibrium point. The cost of information has fallen off the table. This means that the firm can be much smaller and still obtain the information needed to function efficiently. I recently spoke to a game developer who has been earning a meagre living from an online game he wrote. He did the original design, wrote the logic, designed the databases that lie beneath everything, etc. He has the artistic sensibility of your average mollusc, so he outsourced the graphics to some friends he has never met in Japan and the Netherlands (they love anime in the Netherlands), gave some free licenses to more friends in Russia and India to get more server space, swapped some other goodies for some games he wanted (they did the same & gave some valuable word of mouth), and basically earned enough to stay in bed an extra hour each day and play more games. He still works late, but this firm is a messy bed and a kitchen table with access to every time zone.
What is the optimal size of a firm now? Small, and getting smaller. Friction has met Teflon. If you can get marketing information from Google and sell your stuff on e-Bay, there are a lot of salaries you don’t have to pay. Luckily, the people you didn’t have to hire have internet connections themselves and are selling stuff you want to buy. Somewhere out there is a one-bedroom apartment with empty pizza boxes and a great idea. This time, they don’t even need a garage.