In a recent appearance on Joe Rogan’s podcast, Naval Ravikant referenced economist Ronald Coase’s 1937 paper, “The Nature of the Firm,” which later helped Coase win a Nobel prize.
The mathematical details of this paper are dense, but on Rogan’s show, Ravikant summarizes its core idea: firms hire more people instead of contracting out the needed work when the transaction costs associated with setting up external relationships are high, making it easier and cheaper to do the work internally.
As Ravikant notes, the internet is driving down these transaction costs as it reduces the friction required for an entrepreneur to find and hire the right contractor for a specific task. Coase’s theory predicts therefore that businesses will become smaller and more people will migrate from stable positions to a freelance lifestyle.
I was intrigued by this discussion because it overlaps with some concepts that I’ve been developing as I work on a new book about email and the future of work.