ONE OF THE FUNDAMENTAL questions that economists have wrestled with in the past century is this: If markets are so efficient, then why do we have firms? Theoretically, entrepreneurs should be able to buy and sell labour and expertise in the marketplace wherever and whenever they need it, just as they do with goods. Instead, large companies, even with all their incumbent levels of bureaucracy and inefficiency, have flourished. In the 1937 paper "The Nature of the Firm," Ronald Coase (who would later win the Nobel Prize in economics) argued that firms thrive in our system because transaction costs in the marketplace are so high. It takes time and money to find the right people, negotiate with them, and organize them to do a job. So, cost-wise, having an established organization at the ready is almost always superior to setting one up ad hoc every time you need one.
Almost always superior.
According to Coase, if a firm gets too big or tries to do too many things, management costs spiral out of control and the firm loses its advantage over smaller competitors. The corollary is also true: If it suddenly becomes cheaper to find and organize people on the fly, firms would become largely irrelevant.
In Here Comes Everybody: The Power of Organizing Without Organizations, author Clay Shirky argues that we are now living in the age of "ridiculously easy group-forming" (a phrase he credits to Canadian social software expert Seb Paquet). Thanks to the increasingly social nature of Internet technologies, it has never been easier to bring people together for a common purpose. If Coase's theory holds, this shift will have profound implications for companies of every size. In fact, Shirky, a well-known technology consultant and NYU professor, believes we are on the verge of an epochal shift, when the economic repercussions of new social technologies will start to reshape the world and the way we do business.
As an example of this, consider Firefox, the upstart web browser that has been steadily eating into the market share of Microsoft's Internet Explorer. In 2003, Microsoft won what appeared to be a decisive victory in the web browser war when AOL announced that it would be indefinitely suspending development on the Netscape browser. The browser had been Microsoft's only serious competition. Even so, by 2002, Internet Explorer held an estimated 95% share of the web browser market. No company in its right mind would invest serious money to compete against that.
Mozilla, the creators of Firefox, might have been in its right mind, but you couldn't really call it a company. The Mozilla Foundation is a non-profit organization. AOL helped launch it as a way of ridding itself of Netscape, along with the community of developers who had donated their time in the fanciful hope of creating an alternative to Internet Explorer. AOL contributed a couple of million dollars to the project, along with some hardware, mostly as a token gesture. Mitchell Baker, the former Netscape legal counsel, was so dedicated to the project that she decided to join Mozilla as a volunteer.
And look at the browser wars today: Mozilla's Firefox now has more than 100 million users worldwide and recently held more than 20% of the market share; it regularly bests Internet Explorer in independent reviews of speed, security and features; the organization even generated revenues of more than $75 million (U.S.) in 2007. What Mozilla really needed to succeed, it turns out, was to be free of traditional corporate hierarchies and inefficiencies, and to really empower the loosely knit community of developers who contributed to the project.
