16
April
2013

Theory of Nobel Prizewinning Economist Predicts Entrepreneurship vs Employment

Today, a new tribute website to Professor Coase (now age 102) was published in which I am a Contributor (see Coase’s new website here)–select “Coase” to watch the video in which I appear.

The question many employed people ask today is “if” should they go out on their own as an entrepreneur. The question they should be asking themselves is “when” should they become an entrepreneur.

Most of the downsizing and layoffs we see today are the permanent dismantling of our large employers vs a temporary increase in unemployment. The larger the salary you earn today, the faster your job is likely to be eliminated by a better method or overseas source.

In 1991, the Nobel Prize for Economics was awarded to Professor Ronald Coase for a paper he had written in 1931, 60 years earlier at age 21.

Coase’s 1931 paper explained why large companies exist rather than there just being millions of self-employed people: Big companies were more efficient. The “transaction costs” of individuals doing business together who weren’t under one roof were so high—with transportation costs, telephone expenses, postal delays and so on—that costs would exceed their economic output.

For the next 60 years, Coase’s great work, The Nature of the Firm, was used to explain the growth of America’s largest corporations. From 1928-1960 the Ford Motor Company ran a 1.5 mile long automobile plant called “The Rouge” which employed more than 100,000 workers. At The Rouge, in came coal and out came finished automobiles, because whenever a problem occurred in production the only way to fix it in real time was to have everyone located in one place.

Today, I re-run Coase’s original equations with today’s data and come to exactly the opposite conclusion: Many if not most large organizations should no longer exist because with the Internet, PDAs, and inexpensive telephone service, the “transaction costs” of individuals doing business together are now relatively insignificant.

In fact, much of the unemployment we are experiencing today is actually the permanent dismantling of many of our large corporations as they are out-competed by smaller companies and individual entrepreneurs.

Individuals have debated leaving their jobs and becoming entrepreneurs since the first large employers emerged in the 19th century. But, until now, this debate has always focused on the opportunity and risk of going out on their own. Today, the real risk of staying with a large organization is that your job will be permanently dismantled within the next few years. Moreover, this is more likely to occur in good times without warning vs in bad times when you see it coming.