A Short Discussion on Economics of Organization

This article will make a few short points on the economics of organization. I will argue that in the long run the optimal structure of organization is the individual within a network, that we are progressing towards that model but that we are also still a long distance away. There will be no attempt at being thorough or covering the whole science in this article.

The site has posted several articles on crowdfunding recently. <a href="http://afterecon.com/economics-and-finance/crowdfunding-continues-to-evolve/">This article on Pozible would be one example. In the article on Pozible it is mentioned that crowdfunding primarily benefits a particular business model as it stands today, which is the project based business model, although Pozible and others are beginning to change that. The reasons for this link are tied to economics of organization.

In the short term the efficient model of a business or other social organization will be determined by government regulation, coordination costs and administrative costs. A firm which operates on a short term or single project basis will find that it can avoid administrative costs by obtaining labor on a project basis. An example would be hiring a contractor to build a custom home. A firm which operates on a long term or many project basis will find that it is in their interest to hire traditional employment labor. This is because it may be cheaper to pay coordination costs one time than to pay administration costs like training costs, but it is usually not cheaper to pay coordination costs many times than to pay training costs, except where government regulation provides various loopholes to advantage or disadvantage each kind of work.

In the long term all of these costs will approach zero due to the effects of technology. A great example would be the reduction in coordination costs seen in the wave of crowdfunding technology which we have discussed, as well as social media technologies and before that the internet. With all of these costs at or near zero the optimal organization structure simply becomes that structure which can most efficiently pursue its own interest.

This structure is usually the individual. The reason for this is that when people enter a contract and agree to something, their personal interest is almost always not perfectly represented. Instead, the overlapping interest is reflected in the agreement. It could be that the overlapping interest is the same as the individual interest, but this is not usually the case.

One predictive hypothesis which results from these theoretical ideas on the economics of organization is that the structure of all manners of social organization will converge toward the individual as costs of all manners of social activity approach zero. If we look at the structure of business and governance we will see that both of these reflect that the principle is true. Democracies are more distributed than monarchies. The parliamentary model is arguably older than the US model of democracy and the US model emphasizes both vertical and horizontal distribution relative to the parliamentary model.

The first modern and recognizable business structure was the large monopolistic corporation as typified by the industrial revolution in the US. Corporations prevailed a good while but they grew increasingly smaller, more competitive and leaner through the 1900s. The late 1900s saw the emergence of the consultancy and small business classes. While these classes are still somewhat new, we are already seeing the development of an even more granular and small organization structure today in the face of social media, crowdfunding and the internet. I think we are still very much in the midst of the rise of small business and consultancy, but we can also see an era of the individual on the horizon.