19.1 Michael feldstein - open source, economics, and higher education  (Page 4/8)

The trouble, of course, is that friction exists. Friction (and gravity) are why baseballs don’t fly forever when you throw them on Planet Earth. The economic equivalent of friction, according to Coase, is something called transaction cost. Transaction costs are anything that contribute to the cost of something being purchased other than the cost of the production. If you pay your broker a commission on a stock, that’s a transaction cost. If you invest time researching and bargaining for your new car before you buy it, that investment is a transaction cost. If you have to pay a lawyer to write up a legally binding contract so that you have clear title to the house you are buying, that’s a transaction cost. When transaction costs are high enough, they make some economic deals too costly. In response to this problem, humans created property and companies. For example, nobody would start a car company by going out and buying all the car components on the open market and then going to yet somebody else (again, on the open market) to have them assemble the cars. The costs would be prohibitive. Instead, somebody hires workers to make the parts and assemble the cars. The automobile workers don’t have the transaction cost of constantly looking for somebody to buy the parts that they are making while the factory owner doesn’t have the transaction costs of searching to find every single part and negotiate for it separately on the open market. In return for providing a steady income to all the producers, the factory owner gets to own their work product.

Of course, there are costs to running a company too. Anyone who has ever worked in a large organization (or even a small one) knows that they are not exactly frictionless either. There is a cost to centralization. Managers don’t always know everything they need to know in order to make optimal decisions. According to Coase, this is the limiting factor on the size of companies. As long as the costs of a centralized organization are lower than the transaction costs on the open market, firms will grow. But as they grow, their internal inefficiencies grow with them. When the internal costs equal the market costs, the firms will reach their growth limits.

In the world that Coase imagined, the choice is binary. There are firms and there are markets. These are the only two means by which economies get things done. And that all makes sense on Planet Earth, where there are gravity and friction to counterbalance the force of inertia. But what about in space? What happens when we radically reduce the amount of friction in the system? According to Benkler, this is exactly the puzzle that the Twenty-first Century information economy poses. Today, an increasingly large percentage of our economy is dedicated to creating goods that are not automobiles and other industrial goods but ideas. They are software code and gene sequences and art. They are goods that have near-zero cost to reproduce and distribute (a characteristic that economists call non-rival). And they don’t require expensive machines and real estate to produce. I help design software for a living, but I work out of my home on a relatively cheap computer. Everything I produce can be reproduced as simply as selecting “Save As…” from a pull-down menu.