Esko Kilpi on the power of networks and the changing nature of firms

Esko Kilpi beautifully described the power of networks in an essay on Medium, “The Future of Firms,” reflecting on economist Ronald Coase’s theory of 20th century business organization.

 He wrote:

“The existence of high transaction costs outside firms led to the emergence of the firm as we know it, and management as we know it….The reverse side of Coase’s argument is as important: If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today, the form and logic of economic and organizational entities necessarily need to change! The core firm should now be small and agile, with a large network.

The mainstream firm, as we have known it, becomes the more expensive alternative. This is something that Ronald Coase did not see coming. Accordingly, a very different kind of management is needed when coordination can be performed without intermediaries with the help of new technologies. Apps can do now what managers used to do. 

Today, we stand on the threshold of an economy where the familiar economic entities are becoming increasingly irrelevant. The Internet, and new Internet-based firms, rather than the traditional organizations, are becoming the most efficient means to create and exchange value.”