I mentioned in my previous post “The Crowdsourced Cooperative Business Platform” how firms act differently than the market economy. This article discusses that topic further.

As described in the previous post, the economy has an emergent nature driven by the price system, whereas the firm supposedly does not. The observation was first made in writing by Rondald Coase in his paper “The Nature of the Firm” in 1937 which was cited in his nobel prize in economics in 1991. In that paper, a definition for a firm emerges as: an organization of people with central planning, i.e. a hierarchical structure that determines allocation of resources (Ex. a firm pays employees long term to fulfill tasks determined by management instead of each task bid on by entrepreneurs).  He argued the main reason for the existence of firms comes down to transaction costs. For some tasks, it would take too much effort to figure out which vendor is able to fulfill the required task at the required quality in the required time, and how much to pay. Receiving bids may take too long, and someone might give you a low bid and then provide a terrible service. These are all transaction costs. For these situations, the firm decides to perform the task themselves rather than pay the transaction cost for the task to be performed by someone else.

The quandary with Coase’s firm definition
Requesting bids for services was presented as an alternative to central planning. Isn’t the very fact that the service was requested still the result of some central planning, regardless if that task is completed through employment or entrepreneurs bidding for the task? Wouldn’t every customer that is buying a service (as opposed to a good) in the market economy be considered a firm in Coase’s definition? Example: If John Doe pays a house cleaner for two hours a week, then John is considered a customer of the cleaning company. If John pays a house cleaner forty hours a week, he is considered an employer of the house cleaner. You can see there is little difference between a customer and employer other than the employer monopolizes the employee’s time. Likewise, John tells the cleaner what to clean based off of his central plan, and he doesn’t piece out every object that needs to be cleaned, and have each object’s cleaning bid on in the market. So why consider firms any different than other customers in the market? If it is organization that is important, would you consider Groupon customers organizing to buy something to be a firm? Maybe it is implied in Coase’s paper, but not stated explicitly that the firm is taking the place of the customer to become a customer itself. This is obvious in staffing agencies where the firm doesn’t actually produce anything. Instead, they are good at finding the right vendor to satisfy the customer’s need. They become the customer for their customer and the employees become their own separate firms. Coase believes there is no price system within a firm. If there is no distinction between a customer and firm, isn’t a price system present essentially the same as in the market economy? It is implied by the term “labor market”. Firms-as-a-customer can choose which firm-as-employee to buy from (hire/fire), what to pay (wages based off what employees will work for and what quality of work is expected at each wage, i.e. price), and what services to buy. The firm-as-employee could ask for more money or quit, thereby testing the price as a business in a typical market would. Coase’s observations about transaction costs remain true, but the major benefits of organizing as a large customer become more clear: economy of scale, i.e., increased buying power and capital, and shared risk. This is the insight Groupon had.

Why is this important?
There is something special about the employee-employer relationship that we don’t often see in an efficient market. Companies normally have a variety of customers, so if one customer is not willing to pay the desired price, the company can decide to sell to other customers willing to pay their price. In contrast, considering the firm-as-a-customer and the employees as their own separate firms, it is apparent that the firm-as-a-customer often has monopsony power over their employees-as-firms. Most of the time, employees cannot easily change jobs if they feel they are not getting the price they want. They might need to relocate to find other employers, they could be blacklisted in the industry, and unstable employment on their resume may be a red flag for future employers, etc. This is a market failure because the price system breaks down when customers (employers) can basically set their own price. It is also helpful to think of the firm-as-customers because we notice how economists believe customers in a free market should not be told what to buy, how much to pay, or who to buy from because the customer knows best what they need. Also, if we apply this to the firm-as-a-customer, we see minimum wages, unions, worker regulations, etc. all standing in the way of customer-firms getting what they want. If we are concerned with worker rights and worker compensation (which I am), we need to see there is a propensity for market failure due to monopsony, that we may be disrupting a price system (standing in the way of customers getting what they want), and we should look for ways to help workers while supporting a price system.

Some thoughts on self-employment
Freelancing gives you a more typical Coase-ian price system, and it has been applied recently in the Uber, AirBnB, TaskRabbit, and Fiverr business models. Is this the future of work?
1) The internet should be lowering the transaction costs for self-employment: easy to search for products/pricing, online transactions, customer reviews, online portfolios, etc. You would expect occupational licensing to also lower transaction costs for self-employment as it legitimizes and standardizes services (customers know better what they are buying). NCSL.ORG shows the percent of workers with occupational licenses has been going up for decades. It is around 23%. At the same time, union membership has been decreasing, so the power of the employee has decreased. These combined should add more pressure to be self-employed, but self-employment and those hired by the self-employed has gone down since 1994. It could be due to older people (who have higher rates of self-employment) retiring or because older people are flocking to bigger businesses due to the employer health insurance mandate (BLS.GOV) and generally higher medical costs associated with advanced age. 
2) Why are some industries dominated by self employment? Pew shows the top two are ag/forestry/fishing and construction which are low skilled and require almost no licensing. Third is professional and business services which is more skilled, and almost always requires licensing. Should we expect these industries to become more corporatized or is there something special about these industries that make them competitive with large corporations? It could be that local laws make it difficult for large corporations to exist. Further, these top two industries are fraught with tax evasion, misclassification of workers, and subversion of safety laws. Larger corporations are less capable of circumventing these laws, while smaller companies may be too numerous to enforce effectively.
3) Why don’t experts create their own businesses instead of becoming management? Working for firms offers many advantages: 1) An expert has succeeded because they have specialized in a specific task, but they don’t necessarily know how to run a business. 2) Firms often offer more stable pay. 3) Customers prefer the large firms because they have a track record of providing the expected good at an expected quality in an expected manner in an expected time. 4) They lack the capital.

I don’t think freelancing eliminates central/top-down planning. Further, if a firm needs to do things to ensure a freelancer will be more similar to a long term employee, such as ensuring their work is prioritized over other employers’ work (either through paying an inefficient (higher) price or by forcing the freelancer to sign a contract), then what is the great advantage of the freelancer? They are essentially an employee. It could make things worse for the worker as it changes the ease of severing the employment. Further, the worker: pays self employment taxes, loses employer sponsored benefits, and loses bargaining power. Long term employees offer several advantages to a firm compared to hiring freelancers. Freelancers would tend to work for several firms, so they may not be available when needed. 1) There is a track record for long term employees that gives firms confidence the employee will work when needed. 2) Some work requires specific experience to be most efficient, and that experience can only be gained during long term employment in the same position. Freelancers may move around too much to gain that experience.

My crowdsourced cooperative platform idea described previously, is truly an alternative to top-down central business planning since the entire business’s workforce has voting power not only to determine who performs the work, but also what work needs to be performed (which would normally be determined by management). Now, Coase did not say anything about self-employment. My crowdsourced cooperative was one solution, but isn’t necessarily the only one. You don’t need freelancers or small businesses to reduce top-down planning within a firm. The problem is in lowering the transaction costs to use someone else’s services. Large firms could be made that specialize in a very specific thing. Being specialized, they create a standard product, so customers have a good idea of what they are buying and what it should cost, therefore transaction costs are low enough to trust someone else with producing something for you instead of producing it yourself. The specialized firms require little hierarchy because everyone in the firm is doing about the same thing. I think specialized large companies are more likely to appear than freelancing. Look at my employer Intel as an example. Intel makes so many things, and are having a hard time competing with specialized companies. They recently exited the 5G modem market. They are starting to have a hard time competing with TSMC (which specializes in manufacturing only), and competing with ARM (which specializes in chip design only). I could imagine each part of Intel broken into its own company since these other specialized companies are finding success. Maybe large corporations should split into more specialized ones yet provide services in a “most favored customer” way, i.e., the separate arms would still provide each other with discounted pricing, but this way they can take on other customers (if not direct competitors with their parent company), and use other company’s services instead of their own if advantageous. This creates competition for each child company, and either the child company competes or goes out of business. For example: If you have a great accounting team, maybe that would be a more successful business than the business they are working for. If they are that great, why not have them make more money taking on other companies’ business? If the accounting team underperforms, than maybe the accounting should be contracted out to some other company. At least this way, the accounting team is competing for the work. This should maximize efficiency. On the flip side, specialization is dangerous. The one trick pony is in trouble when the trick stops working. A large company can have many products, so if one product stops selling, they can fall back on a different product to keep them afloat. Also, if the child company does not break away from the parent company, there would be a risk of self-dealing and breaking anti-trust laws.

Thoughts on management
A firm with hierarchical structure needs feedback for worker performance. They cannot rely on the worker to give honest feedback about themselves, and workers may have little visibility of each other’s work to give valuable feedback on each other. A worker’s performance should in theory be visible to their manager. Managers normally rise through the ranks of a company because they learn and understand important things about the business, and how to maintain or improve it. We don’t often have managers switching companies that have nothing related with each other. Managers should know at a higher level what needs to be done and why, and reallocate resources and priority as needed if things change. In contrast, workers can simply be laborers that do what is asked of them in order to make a paycheck, but they won’t necessarily ask why the work needs to be done. If needs change, the worker might not care to change what they are working on if the pay is the same either way. The workers may be unable to see the forest for the trees, as the idiom goes. I’m being kind to the management structure. In reality, management can make a toxic work environment. Bad management creates laborers that don’t care about the company. Even with an ideal employee, the firm may not want them to have much visibility to the business’s strategy: they want to keep it hidden from competitors, and it might be a distraction from what the firm wants from the worker, i.e., it is outside their scope of work.

Conclusions
The problems I am hoping to improve on are (in no particular order):
#1) Inefficiency in employment (Quit paying people to stick around and do nothing or work on things outside their specialty. Find the best employee for the task)
#2) Labor mobility
#3) Worker rights
#4) Worker pay (workers have not been successfully extracting value from shareholders and redirecting it to themselves)
#5) Short-termism (CEO’s and shareholders might be hurting the company in the long term to make gains in the short term)
#6) Lack of local knowledge (The people running the company may be too far removed from the actual work/product that they make bad decisions)
#7) High capital costs
#8) Worker empowerment  

I suppose the crowdsource cooperative also has a price system, but you don’t really know what you’re getting paid right away (instead you get equity). It also addresses the monopsony labor market failure, gets rid of central planning, and hopefully solves all eight problems posed. If you think of the government as a firm, how would you run it? There is a big push now for direct democracy since it is so easy to query the public. If you agree it is a good way to run the government, then why not a company? The crowdsourced cooperative is essentially democratizing the firm. Democracy isn’t perfect, but in this case, at least you are being selective who you are allowing into your business (only “smart” voters with skin in the game).