Can you imagine publishing a book at the age of 101? Ronald Coase, the economist who received the Nobel Prize for Economics, wrote about the firm and its decisions around transaction costs. However, at 101 years old he published a book on how China became capitalist. His career was long and fruitful. He recently passed away leaving a legacy of thoughtful analysis that has impacted how we look at organizations and their decisions around outsourcing or producing internally.
Mr. Coase asked the question “why do firms exist,” and spent years exploring this idea. He summed up his conclusions to the question in a 1937 essay, “The Nature of the Firm.” The Economist described Coase’s argument as how “the firm makes economic sense because they can reduce or eliminate the transaction cost of going to the market by doing things in-house.” The reason being it is easier to make decisions when you control the factors involved.
The idea of transaction cost economics is a valid way of making decisions. If something can be produced less expensively by a supplier; then it make sense to outsource. If the transaction costs are less producing something in-house; then it make sense to in-source. Pretty straight forward, and as the Economist states this “suggests that firms ought to be in retreat at the moment, because technology is lowering transaction costs: why go to the bother of organizing things under one roof when the Internet lowers the cost of going to the market?” This is not the case as we see by companies like Google and Amazon.com.
However, Mr. Coase did not address the human side of business. Organizations have formal and informal elements, as well as the task being done, but people make up an important part of the equation. Thus, as we focus just on transaction costs we miss the qualitative elements associated with valuing people. This may by why self-employment is rising.
The WSJ reported this morning that “US employers have been adding jobs since October, 2010, but a growing segment of the workforce is not interested in applying.” It appears this growing segment wants to be self-employed. Over 17 million people have identified themselves as “self-employed consultants, freelancers, temps and other independent workers as of May, 2013, up 10% from 2011.” The first thing that came into my mind as I was reading this is that it must be the millennials. They are very independent so maybe as they are entering the workforce it is changing the data; however, I was surprised by the numbers.
It appears that Gen-Xers, from the ages 34 to 49, make up about 36% of the self-employed phenomenon. 33% of this population are Baby-Boomers, ages 50-67, millennials , ages 21-34, represent 20% of the 17 million, and matures, 68 and older, make up 11% of the number. Gene Zaino, stated, “because the economy has improved, I expected that many people doing independent work would’ve gone back to traditional work.” This is not happening, therefore the question is why?
I think there are a couple of reasons. People like freedom. When they are self-employed they can choose when to work or not work. That is a big draw. However, I think the other reason is more compelling. It is a reason tied to Mr. Coase’s work. Large firms see human beings as transaction costs. I don’t think people like that. I know I want my company to know my name, and what I am like, and not just as number 135467. I think all of us are like that, we want to be known and feel valued.
Business is about relationships. This may be more evident within the self-employed arena. If one is going to be self-employed, then for their business to thrive they must develop good relationships with the players in their market. Business is a human process.
However, Coase’s transaction costs view people as just another cost, and large companies are looking at the data as just that. Human beings then are nothing but a number, and being a number in a large company negates our species being. This may be why more people want to be self-employed.
And that is my thought for the day!