AI & The Nature of the Firm

“The Nature of the Firm” is a famous paper written by Nobel economist Ronald Coase.

It explains why companies exist.

It also allows us to see why AI is killing the traditional company. 

And what’s next.

Why companies exist

"The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism."

Ronald Coase - The nature of the firm

In other words, companies exist to lower the costs of conducting business.  

When it is cheaper for individuals to do business directly, no company is needed.

And when it is more expensive, a company is needed.

Technology is lowering the cost of doing business outside of vs. within companies.

Example: 

It used to be hard and expensive to find lawyers across all the different specialties.

So we needed a law firm.

Now we can use platforms like Upwork to find and work with individual specialists directly.

No law firm needed.

Expensive phone systems and video conference rooms used to be needed to coordinate those lawyers. 

So we needed a law firm. 

Now we can all use Zoom for free.

No law firm needed.

Document management systems used to be expensive and complicated to administer.

So we needed a law firm.

Now we can all use Google’s G-Suite for a few dollars a month.

No law firm needed.

I could go on and on…

But you get the message.

Technology is lowering the cost of doing business directly vs within a company. 

This is why the traditional company is dying.

And why freelance, contract, gig work, and solo-entrepreneurship are exploding.

This also explains the rise of platform companies.

Uber is the largest taxi service but employs no drivers.

AirBNB is larger than the largest hotel chains but owns no real estate.

Seamless is the largest food delivery service but owns no restaurants. 

The sole purpose of these companies is to lower the cost of individuals transacting directly vs. within a traditional company. 

And AI is about to put this trend on steroids

Soon a single individual will be able to replace the departments of an entire company with AI. 

And we are already in the initial stages of this.

Examples:

It used to be hard and expensive to develop a website.

So we needed to work in a company with a design department to handle this. 

Now we can use AI tools like Jimdo.com to build a website for us…

In just a few minutes…

For free.

It used to be complicated and costly to setup and manage the books.

So we needed a finance department to handle this. 

Now we can use a Intuit Assist which comes free with our QuickBooks account.

We used to need a customer service department to answer customer questions.

Now we can use platforms like Air.ai instead.

These are just a few examples of the thousands of AI tools available across all functions of a traditional business.

Are these tools currently as good as their human equivalent’s? 

In many cases no.

But they are improving rapidly. 

And we are just getting started. 

Thanks for reading.

Dave

P.S. For advice on how individuals can adapt to these changes go here. And for advice on how companies can deal with these changes stay tuned for my next article.