Why do corporations (firms) exist?

Economists used to wonder, from a theoretical perspective, why "firms" including companies, and especially large corporations, exist (aka theory of the firm). In 1937 Coase thought that while corporations didn't allocate labor and capitol as well as the market, this was offset by lower transaction costs.

Of course transactions costs in the net era are far less than in Coase's time, so this doesn't explain why corporations remain so entrenched.

This still seems like a valid question. Does knowledge work, in particular, scale all that well? Movies seem to be put together by loose coalitions of small to medium sized companies, why aren't more things done like that?

I suspect most people familiar with large corporations would agree that often the company seems much less than the sum of its parts. In particular, the absence of internal markets can make intra-company collaboration less efficient than market based collaboration. Corporations, on the inside, operate like the command economies of the Soviet Empire (or, for that matter, like today's China -- which is doing well for the moment).

I'm trying to put together a list of things that large corporations can do uniquely well. I wasn't at all impressed with the conventional "theory of the firm" list. Here's mine ...

1. Act without the restraints of antitrust law. A large corporation can do many things that would require collusion to be done by smaller entities.
2. Change laws, particularly accounting standards and tax laws, to favor large corporations and lower their cost of capitol. This creates a positive feedback loop where tax laws and accounting rules favor large corporations, which in turn influence laws and rules that favor large corporations and so on.
3. Corporations can buy senators and lesser politicians, again without collusion.
4. Corporations can engage in financial warfare, cutting off suppliers to smaller competitors, blocking access to capitol, and so on.
5. Corporations can capture regulators.
6. Corporations may be able to create and institute processes that allow them to do knowledge work with "average" knowledge workers instead of temperamental and expensive "stars". (I don't think this actually works, but a lot of effort is spent on this.)
7. Corporations can buy A and above ratings from (corrupt) rating agencies.
8. Once a corporation exists, it has an unusual ability to sustain itself even when its mission ends (like the inquisition)

Taking these items as a whole, it's apparent that once corporations are established, they are large and powerful enough to change their ecosystem to suit them. Rather like some primates.

I'll update my list as I get more ideas. Any suggestions?

See also:

My stuff

• The Corporation - what next? (8/2010)
• How big should financial firms be? (3/2009)
• Troubled capitalism: The corporate entity (Iain Banks, 8/2010)
• Self sustaining entities: corporations and the Spanish Inquisition (6/28/2006)
• The corporation as psychopath (Economist book review, 2004 - I've updated the post with a copy of the since lost review)
• Beyond the first cause: Deepwater Horizon and the publicly traded company (6/20/21010)
• Understanding the elections - what's really changed (11/4/2010)
• The morality of markets - and a response to hunger (9/28/2010)

Other people's

• The Nature of the Firm - Wikipedia, the free encyclopedia
• Anti-Dismal: Williamson and the theory of firm (10/16/2009)
• Llamas and my stegosaurus: Artificial Persons (1/22/2010)
• The Corporation Film and The Corporation: The Pathological Pursuit of Profit and Power Joel Bakan (2004)

Update 2/25/11: In a Krugman article I learn that Williamson won the Nobel in 2009 for work in the 70s on the theory of the firm. So Williamson extended Coase ...

Williamson argues that the firm is best regarded as a "governance structure," a means of organizing a set of contractual relations among individual agents. The firm, then, consists of an entrepreneur-owner, the tangible assets he owns, and a set of employment relationships ...

Personally I wasn't that impressed with the descriptions I read of Williamson's work, but Krugman likes it (emphases mine)...

Oliver Williamson shared the 2009 Nobel mainly because of his work on a question that may seem obvious, but is much less so once you think about it: why are there so many big companies? Why not just rely on markets to coordinate activity among individuals or small firms? Why, in effect, do we have a lot of fairly large command-and-control economies embedded in our market system?

Williamson answered this in terms of the difficulties of writing complete contracts; when the tasks that need to be done are complex, so that you can’t fully specify what people should do in advance, there can be a lot of slippage and strategic behavior if you rely on market incentives; in such cases it can be better to do these things in-house, so that you can simply tell people to do something a particular way or to change their behavior.

... there are times when it’s better to rely on central planning than to leave things up to the market...

Krugman's "Central planning" comment sent the usual suspects frothing mad. They've obviously never lived in a large corporation. I have. Krugman is spot on.

 

Will this work with your printer?

When I exhausted the (fake) almost empty cartridge that came with my $70 printer I stuck masking tape over the sensor openings to turn off the toner light and ordered a $44 Brother TN360 Toner Cartridge.

Yes, the replacement (real) cartridge is more than half the cost of the printer. Shades of ink jet hell, but only faint shades.

That's not the interesting bit.

The interesting bit is that Amazon told me it would work with the printer I bought my mother and the printer I have now, but not another two bought from Amazon about five years ago.

Convenient, yes. Unnerving? No, I've gotten used to this.

Guatemalan STD in 1946, American torture in 2006

The American physicians who tested the use of penicillin to prevent syphilis in the Guatemalan schizophrenics they infected knew they were doing evil in the 1940s. They feared exposure of their experiments.

Cutler went on to run the Tuskagee experiments. I suppose he had a successful career. The medical school that graduated him should create a monument to this alumnus.

We're no better now. Cheney and Bush authorized war crimes. Physicians, medics and especially psychologists participated in some of those crimes. A substantial percentage of Americans, generally close to a majority, support the use of governmentally sanctioned torture. The GOP effectively runs on a pro-torture platform.

It may be another 60 years before the American people come to terms with our crimes.

Sometimes I regret the absence of hell. Cheney and Cutler could spend some quality time together, but then I suppose a large percentage of Americans would need to join them.

Warp drives and extracting energy from information

I'm behind the curve on metamaterials (emphasis mine) ...

Technology Review: Blogs: arXiv blog: How to Build a Warp Drive Using Metamaterials

...Metamaterials are substances in which their ability to support electric and magnetic fields can be changed. Fiddle with these properties in just the right way and you can steer electromagnetic waves in all kinds of strange and exotic ways.

The highest profile use of this idea is to build invisibility cloaks but there's another more fascinating application. It turns out there is a formal mathematical analogy between the way metamaterials bend light and the way gravity does it. Inside metamaterials, electromagnetic space becomes distorted in exactly the same way as spacetime in general relatively.

That means physicists can use metamaterials to simulate the universe itself and all the weird phenomenon of general relativity. We've looked at various attempts to recreate black holes, the Big Bang and even multiverses...

I liked the May 2010 multiverse link ...

Today, Igor Smolyaninov at the University of Maryland in College Park... says it is possible to create metamaterials that are analogous to various kinds of spaces dreamt up by cosmologists to explain aspects of the Universe.

In these theories, space can have different numbers of dimensions that become compactified early in the Universe's history, leaving the three dimensions of space and one of time (3+1) that we see today. In symmetries of these spaces depend on the dimensions and the way they are compactified and this in turn determines the laws of physics in these regions.

It turns out, says Smolyaninov, that it is possible to create metamaterials with electromagnetic spaces in which some dimensions are compactified. He says it is even possible to create substances in which the spaces vary from region to region, so a space with 2 ordinary and 2 compactified dimensions, could be adjacent to a space with just 2 ordinary dimensions and also connected to a 2d space with 1 compactified dimension and so on.

The wormholes that make transitions between these regions would be especially interesting. It ought to be possible to observe the birth of photons in these regions and there is even a sense in which the transition could represent the birth of a new universe."A similar topological transition may have given birth to our own Universe," says Smolyaninov.

He goes on to show that these materials can be used to create a multiverse in which different universes have different properties. In fact it ought to be possible create universes in which different laws of physics arise.

That opens up a new area for optical devices. Smolyaninov gives the example of electromagnetic universes in which photons behave as if they are massive, massless or charged depending on the topology of space and the laws of physics this gives rise to...

In more recent related news Hawking radiation has also been detected in a non-metamaterial optical experiment that created a physical system with the mathematical properties of black hole.

Talk about the unreasonable effectiveness of mathematics. The universe is feeling awfully recursive; maybe Wolfram was on to something. If you're going to run a simulated universe, it's good to make it highly recursive.

Meanwhile another group of physicists have implemented Maxwell's demon, and have allegedly demonstrated the extraction of energy from information. Soon they'll extract so much information they'll create  a black hole (sorry, I'm feeling a bit giddy).

Oh, I almost forgot. You can't make an FTL warp drive, but maybe you can make a 1/3 c warp drive. I wonder if the warped space time would make gravitational wakes ...

Update 10/4/10: More on information physics. How long before someone announces that they've discovered how to reboot the universe?

A habitable planet around Gliese 581

Twenty light years away an ancient largeish planet is tidally locked to a red giant.

The star system is about 9 billion years old.  Time enough.

The last time I ran a Drake Equation estimate I ended up with between 10 and 170 civilizations currently active in our galaxy. This data point pushes the posterior-probability to the higher end of that range.

We don't run into them though. So they must all be pretty darned shortlived ....

iPad Mathematica and Rainbow's End

Rainbow's End (2006) was a bit of a disappointment compared to Fast Times at Fairmont High, but Vinge still did a good job of anticipating this 2010 Mathematica post on learning in the computer era.

Hey, these days 4 years is pretty good for science fiction prognostication.

Synchronidentaly Wolfram is singing the praises of the iPad as the best platform for his "new kind of science" tome ($10). You can't (yet) run a true Mathematica client on an iPad, but you can run the $1.99 Wolfram Alpha iPad app -- which is closer than you might think.

Did I mention the iPad app is $2? Excuse me while I hide in the corner and wimper a bit.

See also.

Newfoundland hammered by hurricane

Not only was a born in Canada, I spent a formative two months as a medical student in St. Anthony Newfoundland.

So if there'd been any US coverage, I'd have noticed Newfoundland was hammered by Hurricane Igor a week ago ...

Hurricane Igor (2010) - Wikipedia, the free encyclopedia

... Significant wind and flooding damage was reported across much of the island of Newfoundland as Igor passed just to the east. Many communities had to declare a state of emergency and some parts of the community of Clarenville were evacuated due to flooding. 238 mm (9.37 inches) of rain fell on the Burin Peninsula at St. Lawrence, making Hurricane Igor at least the third wettest tropical cyclone to be recorded in Canada; roads and bridges were completely washed away as well.[30] The Bonavista Peninsula and Avalon Peninsula were also hard hit, with severe flooding in many communities in those areas as well. Power outages were also reported in many communities in eastern Newfoundland as a result of the strong winds.[31] Preliminary assessments place losses in Newfoundland well over $100 million.[32] One person is dead from Random Island after reportedly being swept out to sea...

There are only 480,000 people in Newfoundland, and it is as poor as it is beautiful. Poor by Canadian standards, that is.  100 million is a lot of damage there.

The lead article in The Telegram today is a convenience store robbery. So either they're recovering well, or St John's leading newspaper is only a facade. I suspect both are true. Newfies are a tough crowd though, a hurricane might not really register.

Trust and credential management: MyOpenID

I've been preoccupied lately with credential (un/password) management. I think the geek community has gotten confused by identity management isseus. We need to start with credential management, then associate identities (avatars, facets, personae, etc) with credentials.

I like my four un/pw proposa1 + one major password. So I wondered if anyone was going to do it.

That made me think again about MyOpenID, and what I wrote about Simplenote. I love Simplenote, but there are security risks to trusting them with a large volume of private information.

How much greater then, is the risk of trusting one's most precious credentials to MyOpenID.  What business model do they have? Why don't they already provide the approach I'm advocating? Should I be concerned that the MyOpenID blog link goes to a blog that never mentions the service?

To their credit MyOpenID provides an easy to find and use account deletion process. I have deleted my account. It just doesn't make sense to make a company that might vanish at any time a major holder of my digital identity.

See also:

• Gordon's Tech: security
• Gordon's Notes: security
• Gordon's Notes: Google's two factor authentication and why you need four OpenID accounts
• Gordon's Tech: My Google (gmail) account is hacked - by ductus.com
• Help

The morality of markets - and a response to hunger

There is no Good in markets Krugman writes. It's short and good, and it should be read in every high school as an antidote to Marketarianism. Markets are not divine, theys are simply satisficing mechanisms for seeking local minima.

Krugman is responding to accusations that he favors war as a solution to the Great Waste (sequelae to the Great Recession).  He gives a smart response to dumb questions, but reading how major wars do Keynes better than politicians made me think about What Would the Market Do?

What do I mean? Well, consider this. Charlie Stross, one of my mind expanding writers included "Finance Economics 2.0" in the novel Accelerando. Economics 2.0 was what emerged when trading/Finance AIs remade the solar system in their own image. It wasn't a pleasant place. [1]

The story captured a sense I often have that the large, complex adaptive systems we live in are, seen from a certain angle in a certain world as real and unreal as our own, alive. Not smart like we are, but alive in a landscape dominated by very powerful amoebae.

In this worldslice Markets are entities with their own agenda -- mostly to eat and grow. Sometimes, though, the growing is slow. The Market has to find new food. It moves along a chemotropic gradient to a new source of nutrition.

War.

[1] I updated this paragraph thanks to a helpful comment.

The cultural impact of the Pill - neuroendocrinology

Modern imaging methods show hormonal contraceptive use changes brain structures.

That's interesting. It means it's now probably safe to mention one of the most interesting papers I ever wrote. For obvious reasons it was quickly buried.

I was an itinerant Watson Fellow in early 1982, staying with a very generous USAID worker and his wife in Dakka, Bangladesh. I was basically a parasite, but somehow I got it into my head to write a paper on the sociocultural implications of widespread OCP use in Thailand.

The premise of my paper was simple. Different OCPs, and progesterone implants, where known to have different effects on mood. Testosterone biased OCPs had one set of effects, estrogen biased another set, progesterone yet another. It seemed obvious that if you gave these medicines to millions of women the sum of the individual mood changes might have social implications.

If you wanted to change a society in a certain direction, you might favor one OCP over another. I was keen on social engineering in those days. That was before I was drummed out of the Trilateral Commission [1], and before a subsequent social engineering paper almost ended my first year of medical school.

Needless to say, I never got any comments about my pill paper. I was remarkably obtuse at that age, but even I had a sense this was not a wise topic choice. If anyone read my paper, they would have torched it immediately.

I suspect, however, that I was right.

[1] Joke. Sort of.

The smartest president in decades

Obama comments on Murdoch's empire ...

'Destructive' Fox News And The 'Darker' Parts Of The Tea Party: Obama's Rolling Stone Interview | TPMDC 

... The golden age of an objective press was a pretty narrow span of time in our history. Before that, you had folks like Hearst who used their newspapers very intentionally to promote their viewpoints. I think Fox is part of that tradition -- it is part of the tradition that has a very clear, undeniable point of view. It's a point of view that I disagree with. It's a point of view that I think is ultimately destructive for the long-term growth of a country that has a vibrant middle class and is competitive in the world...

I am grateful he's willing to be president.

Murdoch is anti-civilization. Maybe he's trying to avert the singularity by collapsing America. Hey, it explains a lot.

The $80 ultra-portable - in unexpected form

Jean-Louis Gassée, once CEO of Apple head of Mac development, drops a stunner in mid-column ...

The Carriers’ Rebellion | Monday Note

... Google wants to see smartphones priced at $79, without subsidy, thus taking away the carriers’ opportunity to dictate features. At $79 and no contract, consumers can change handsets and carriers at will. This frees Google to have a direct relationship with the consumer, allowing their money machine—advertising today, entertainment and business services tomorrow—to run unimpeded.

That's quite a precise number. Not "below $100", $79.

Think about that. Take your time. I'll be back.

We're talking about a computer that outclasses the desktop G3 iMac of 2001. There's no reason it couldn't work with an external monitor as well as an external keyboard. Incidentally, it's a phone too.

Yeah, they're thinking big. Forget the "Chromebook" I was so excited about a year ago (though I still hope we see it). This is so much bigger.

Can they do it? Today's smartphones cost about $500-$800 without a (carrier) subsidy. This seems like a big price drop -- unless you're about 50 years old.

If you're old enough, you remember the calculator price drop. In a few years they went from about $500 to cereal box prizes.

That never happened with computers. Instead the capabilities skyrocketed -- but the price never truly fell. A 1988 Commodore 64 and a 2010 bottom-of-the-heap netbook cost about the same. The difference was partly moving parts, calculators were almost pure silicon -- computers had drives and big power supplies and keyboards and so on. A lot of the difference though was IP protection and patent licensing.

I think this would have happened to the original Palm III if it had survived, but they didn't have a business model supporting a $10 PalmOS device. Google has the business model.

I don't doubt that it will be possible in 2012 to produce a somewhat junky version of a 2009 iPhone for a marginal manufacturing cost of less than $80 -- if you can manage the IP costs and if the payor has a separate (subsidizing) revenue stream. To do it Google will have to buy some IP, and cut deals that appeal to IP holders only when you start to talk a billion devices.

In the meanwhile, China will be doing the same thing internally -- and they don't really worry about IP costs.

Interesting times.

In Our Time - the number series

This IOT season starts with bang. In the first 3 minutes of Imaginary Numbers our guest professor runs through thousands of years of the develop of number, from positive integer to zero (ok, I think he skipped zero) to fraction to irrational to negative to imaginary to infinity.

As he spoke I realized IOT has done a programme on all of these save fractions. Taken together, it is a wonderful introduction to mathematics and some of the better sides of human history.

Nice way to start the year.

PS. Love the archives Melvyn, but you do realize they could be vastly improved, right? Also, how about selling episodes on iTunes for $1 apiece? I understand the BBC needs new revenue. Time to rethink the fruit aversion.

Progress

We glass-half-empty-but-that's-good-because-it's-poisoned sorts need to say something positive once in a while.

WiFi is much better than it was. 802.11g is commonplace now, and it is so much better than 802.11b.

We now return to our usual programming ...

A Google-Apple detente - why?

It's not just the return of GV Mobile. It's also changes in Apple's advertising revenue model, a general quieting of Apple-Google rhetoric, and hints from well connected bloggers.

There are hints of a truce in the Apple-Google wars.

If a truce is coming, it's fair to ask why now. My guesses ...

1. Google has realized how evil Verizon is -- and Brin/Page are pushing back against Schmidt. The carriers are the great enemy.
2. Apple and Google believe the Windows Phone will not suck, and that Nokia will use it.
3. Facebook shafted Apple at the Ping product launch, and the Apple/Facebook affair is over.
4. Google has realized they can't do end user software.
5. Apple has realized it can't do the Cloud.
6. Apple and Google see big money in a joint approach to credential and identity management.
7. The iPad.
8. Schmidt is on the way out (ok, that's a bit farfetched).
9. China.

Update 9/28/2010: Detente is real.