“The Nature of the Firm” (1937) is an article by Ronald Coase (available via Jstore here) published in the economics journal Economica. It was an undergraduate essay, and he put it down later in life, but it still is contributed to him winning the Nobel Prize in 1991, and I come back to it again and again. He starts by wondering “Why isn’t everyone a solo contractor, peddling their skills on the Open Market” ? Working the problem out-lout, he comes around pretty immediately to ‘Transactional costs’ . Transactional costs here, in economic speak, covers a lot of things that I would break out specifically, but yeah, lumping them all together in one term nails it, for the ‘big ideas in a small paper’ angle. But if you want to think about practical situations, it can be more clear to break it down a bit.
Transactional costs, if you want to break them out, are many, varied, and change case by case. Just as an example to breakdown software development, imagine that software developers are Ronin, hired by they day or week. The transactional costs are Training on the problem, Training on the code-base, Training on the tools / CI / CD , test Suite. Then there is the risk of not completing the work, or needing to hire a replacement of someone doesn’t show, or bails, or does a bad job. The risk of leaking knowledge to competitors, or selling it to others. Then there is setup costs. SSH keys, access control, The list goes on and on. All of that ‘First week, and in the background the first month’ work.
In a recent job, we had a pretty big chunk of functionality for a customer that was provided by a small / smaller start-up. Unfortunately, that company went under, leaving our end customer (and us) in the Lurch. Their software didn’t *poof* out of existence, in fact, in theory, we could have gotten a copy and spun it up on our own instance. Instead as part of their shutdown, accounts were frozen, AWS was stalled , unpaid, and they couldn’t (or didn’t want to) write a contract to license, loan, or sell it to us.
I should have some good summary paragraph here to wrap things up, but I have been out of medium / long form writing a while, so for today,. I leave that as an exercise to the reader.
