The WelderDestiny Compass

End Of The Firm - Issue #046

Wednesday, November 15, 2017 / Perth Australia / By Niekie Jooste

In this edition of "The WelderDestiny Compass":

• Reason For Firm's Existence
• Conflicting Goals
• Independent Digital Enterprise
• How To Respond
  

Reason For Firm's Existence

In the last week I was made aware of the work of a British economist called Ronald Coase. He received the Nobel prize in economics in 1991. One of his main contributions to the world was an essay he wrote called "The Nature Of The Firm".

In the essay he tried to answer the question of why firms (corporations) exist in the first place. His argument being that if an entrepreneur could just "sub-contract" out any work required, then surely there would be no incentive to actually hire a lot of people to work with him / her.

The thinking being that hiring people has a risk and obligation associated with it, so it would be much better to just sub-contract any work that the entrepreneur needed to do, rather than to hire people.

To cut a long story short, the conclusion that Ronald Coase came to, was that the firm is a way to minimize "transaction costs". The transactions being mentioned are not just transactions with customers and suppliers, but also with those "sub-contractors" and employees. 

For instance, if the cost of hiring a personal assistant was less than trying to manage a remote supplier of "personal assistant" services on an on-going basis, then the personal assistant will be hired as an employee. This reasoning can be rolled out to hiring just about any skill or service. As long as the cost of hiring is lower than the cost of managing the relationship with a sub-supplier, then the firm will keep growing in terms of employee head count.

If you have been reading The WelderDestiny Compass for the past year, then you will no doubt notice that this touches on a number of topics we have already spent quite a bit of time on. Subjects such as automation, corporate and leadership drivers, the gig economy and distributed ledger technology have the potential to totally change the transaction cost equation.

Today we explore where we are currently headed, and decide if the drivers are there to reduce the size of firms in terms of employees or not. Getting a good grip on this will surely help us to position ourselves for future success.

If you would like to add your ideas to this week’s discussion, then please send me an e-mail with your ideas, (Send your e-mails to: compass@welderdestiny.com) or complete the comment form on the page below.

Now let's get stuck into this week’s topics...

Conflicting Goals

Has it occurred to you that most stakeholders in corporations have conflicting goals? The owners or shareholders want to maximize their return on investment. This means that they will want the most money from the customers as possible, while paying their employees and suppliers as little as possible.

The customers want to maximize their value for money, so they want to pay as little as possible for the goods or services that they procure.

The employees of the corporation want to get the greatest paycheque with the least amount of work possible.

If you live in a "free market / capitalist" economy, then you are used to the dynamics that I have described. In fact, it seems like the best way to establish "market forces" that are determined by supply and demand. This dynamic tension is what determines price points for goods and services and decides which companies grow, and which go out of business.

Now, in the last decade or so, there has been a strange animal that has appeared on the scene: Open source software. People seemingly work for nothing to create some software that is then made freely available for use. In terms of the capitalist model, this piece of property has no owner!

As it turns out, the open source movement was in all likelihood just the first salvo in the move towards the rebirth of the corporation.

Independent Digital Enterprise

While open source software has no real owner, it has a community around it. That community actually makes a living from that software through value added services.

Large "technology" companies such as LinkedIn, Facebook and Google provide "free" services. The way that they make money is to gather data about their users and then sell that to their customers, who are largely advertisers.

These companies grow huge monopolies based on your and my information. We trust them with our information, although we constantly hear about security breaches where a great deal of users' private information have been compromised. Surely users can also make something out of their own information, without the risk to privacy?

The next step in the evolution of "open source" is distributed ledger technology. Through the distributed ledgers, (blockchain) cryptography and a host of very new developments surrounding peer to peer transactions in a trustless environment, we are at the dawn of the age of the Independent Digital Enterprise (IDE).

Basically, the IDE is a software platform that allows different parties to transact directly with each other without the need for a corporation to act as a "trusted" intermediary. The software platform is open source, so it does not belong to anybody. It belongs to the community that uses it.

To "grease the wheels" of the platform, users pay very small transaction fees. The transaction fees are collected by the people that provide the resources and infrastructure to keep the platform running. In blockchain speak, these people are the "miners" on the system. The currency that the miners are paid in, and in which any other transactions happen on the system, is the "token" associated with that system. For instance, it could be Ether on a platform running on the Ethereum blockchain, or any one of the other 1000 odd tokens around.

A user's information is no longer owned by anybody other than the user him/herself. If anybody wants to get hold of some of that information, then it would be possible for the user to make that available in such a way that their privacy is not compromised. In exchange for some information, the user can then also receive a payment in the platform's "tokens".

In this way, people that contribute more to the community than they consume, end up getting an "income" from the system. People that consume more within the system end up supporting those making an income from the system.

As an example, let us consider a platform that delivers the same functionality to users as Facebook. Let us call it "FaceSpace" to ease our discussion. The FaceSpace platform is established by entrepreneurs that are paid in the "Face" token associated with the FaceSpace platform.

Each user can enter their information on FaceSpace, and "link" with their friends and post photos and do all those other wonderful things. Each transaction may cost the user the equivalent of one cent in terms of the Face token.

At some point, an advertiser wants to advertise to people that are interested in motor cars. There is a functionality that allows the advertiser to identify who such a person may be, without actually getting access to any of the user's private information.

If you are such a user, and you have indicated that you are open to advertising, then the system will display the advertiser's advertisement to you. For this transaction you receive a small payment from the advertiser. The person providing the support to make this happen (the miner) also gets a small payment.

We start to see that the data that is captured on the platform (the blockchain) over time becomes very valuable. Data becomes the new oil!

We see that in this system the interests of all the stakeholders are aligned. The more you contribute to the community, the more you benefit. There is however no passive "owner" that makes money from all this activity.

In a world where such Independent Digital Enterprises become common, there will be a huge shift in the economic rent. It will be a society where capitalism will be redefined.

How To Respond

Obviously all corporations will not come to an abrupt end. Any company that provides physical infrastructure or equipment to produce products, will still need to exist in a more traditional sense, although it will have very few employees. Most of the work will be done by artificial intelligence and automated systems.

A very large percentage of people will however end up as part of one or more of these IDE communities where they provide their labour services in return for payments in "tokens". I believe that Welders in general will become part of this "new IDE gig economy". Instead of Welders being contracted through "labour brokers", they will be linked to new opportunities through an IDE platform.

Think of it like LinkedIn, but including functionality to get paid directly on the platform by the organisation that wants you to do some welding on their maintenance shutdown. A contract will be established regarding your payment, and that payment will hit your account when you have met your obligations. No payslip and HR departments to mess up your pay!

Inherent in such a system is some kind of reputation factor. The system must have a way of ranking Welders in terms of their "reputation". To build reputation, we need to build our expertise and experience, and make sure that this information is captured on the system.

We will also be working for ourselves, which means that we need to develop the skills to look after ourselves in terms of how this new world works, and how to build wealth in this new system.

It is still very early days, and the exact way that this will all play out is uncertain. This will also take decades to play out, but the waves of change heading towards us are going to be very disruptive if we are not prepared.

Yours in welding

Niekie Jooste

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