There is an economics article I’ve brought up several times on HN. It has a lot of non obvious deep implications: “
The Nature of the Firm' (1937), By Ronal Coase” It tries to answer the question of why companies exist rather than bilaterally trade of goods and services between individuals in a market. IE, if centralised economies are so bad, why are free market economies dominated by enormous companies that are internally run like a Stalinist country. Instead of Apple making all the software and hardware and the babushka doll of precursor software and hardware, couldn’t we have Apple replaced by a market?
The economics of the time (especially among proponents of centralized systems) focused a lot on “inefficiencies.” Why produce hundreds of iPad screen designs when only one is needed. Economies of scale. Coase’s answer to the question was transaction costs. The “cost” of weighing all the options and negotiating a deal to have you write a thousand lines of code to go into my bigger bundle of code.
In modern companies like Apple this is extreme. But, if you think about it in a manufacturing economy, it makes more sense.
Anyway, as I said, the more I think about it the deeper some of the concepts and implications seem to be. For example: (a) There are inefficiencies out there on the scale of East/West Germany. (b) Transactions costs are at the root of many/most major inefficiencies.
The part of this blog that got me thinking about this was “working for equity vs. salary.”
I think that for most people, the choice company they work for wass 80% chance and 20% uninformed bias. Applying for a job and interviewing is a big overhead (transaction cost) and your ability understand the company’s chances of success and the magnitude of this success isn’t very good. The fact that many people don’t know what percentage of the company their stock represents is the glaring proof. Prospective employees don’t have anywhere near the information that investors do. How much money is in the bank? What are revenues? Burn rate? Valuation at previous rounds?
The poverty of information and the fact that transaction costs make it impossible for one to consider more than the tiniest semi-random sample of opportunities is exactly the kind of dynamic I think Coase’s work implies.