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As-a-service upstarts will KILL OFF THE CORPORATES?

Um, NOT BLOODY LIKELY!

Continuity counts

The consolidation of much of the steel industry under Lakshmi Mittal shows firms are still useful

In more modern terms, almost all large firms need accountants all the time and thus employ them, but rarely need barristers, which is a contractual market.

However, that idea of “transactions costs” is at the heart of it all. And this is where we get to a corollary of Karl Marx's contention that social relations are a product of the level of technological development. This is also the case with transactions costs. They depend upon the general level of technology.

Cast your mind back 50 years, when international telephone calls were hugely expensive. You're a publisher, trying to get translations done so you can release your books in many languages and countries. Finding someone, a freelance (freelance translator, publicists, book printer and so on) for each title is going to involve vast search costs (a subset of transactions costs) and you're not going to have much information about who the hell they are, nor how good they are. The natural tendency of the business model here is going to be towards and integrated multinational firm.

Online marketplaces grow

Fast-forward to today and there are any number of such online marketplaces where you can research such things in minutes. I've not checked it but it wouldn't surprise me if it took just 15 minutes to find someone who specialised in translating pulp novels into Czech, for example.

So, given that we've got this technological change going on, we've also got an increase in the areas where a transactional marketplace makes more sense than a unified firm. And, logically, we should also be able to find areas where the firm is still more than the sum of its parts and thus we don't see that change happening: I'd argue that the consolidation of a large chunk of the world's steel industry under Lakshmi Mittal is one such example.

My point here really is that Silicon Valley hasn't found anything particularly new in these marketplaces, nor their ability to undermine the centralised firm. The idea is not emergent from competition, it's not a function of this glorious internet: it's something that has been baked into the basic view of why firms exist at all for 80 years or so now.

Rather, what they've found is a specific example of the more general case: the existence of firms is based upon transactions costs, and that these vary with technology. So, as technology varies, certain industries will be subject to the possibility of disintermediation (cutting out the middleman).

And, of course, it's the forces of competition that sort out which ones are subject to it, and full marks to the people making their billions by discerning this. But it's still not a new idea: it's a new application of an old one.

Or, as I said at the top, some economists really have worked out things which are useful, even in our modern post-crash world. It might not be quite the best way of running a banking system, that's true, but there are still useful things to know about even the most modern trades and industries in the basics of the subject. ®

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