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The Best Bargain I Ever Made

Ronald Coase, 1910-2013.

Sep 30, 2013, Vol. 19, No. 04 • By ANDREW B. WILSON
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Though I never met the man, I feel a debt of gratitude to Ronald Coase, the Nobel Prize-winning economist who died on Labor Day at age 102. Reading his “Nature of the Firm,” one of the most cited essays in all of economics literature, encouraged me to start my own business.

Ronald Coase

Ronald Coase

Landov / U. Chicago

Two decades ago, I persuaded John McDonnell, the CEO of McDonnell Douglas, then the nation’s twenty-third-largest industrial company, to outsource the biggest part of my job—writing his speeches—back to me as an independ-ent writer. I left the company with an annual contract that paid me no less money than I had been making before and that allowed me to pursue other clients. But as I told McDonnell, I knew that I had to perform at a high level, being painfully aware that the company could cancel my contract at any time if I did less well as an independent contractor than I had as a “salary-man” (to use the Japanese expression), or employee. 

Anyone familiar with Ronald Coase’s work will recognize that I had struck a classic “Coasian” bargain—finding an efficient free-market solution to a problem (my unhappiness with the corporate environment and desire for independence) that worked for both parties: The CEO accepted the notion that I would be a hyper-motivated non-employee, and I became my own boss.

Coase was the first to ask, and provide a plausible answer to, the question of why companies exist, and why a critical part of their success comes from getting large numbers of people to submit to a form of voluntary servitude—punching a time clock and giving employers the right to direct their performance in exchange for predetermined wages or salaries and protection from sudden or arbitrary dismissal.

His answer was that companies exist for the purpose of reducing “transaction costs,” meaning all the costs of trying to order economic activity through voluntary exchange. That includes the costs of searching out and evaluating other parties; negotiating contracts; maintaining communication; and policing and enforcing the terms of those contracts. 

Imagine the extraordinary difficulty that a Henry Ford or a William Boeing would have faced in trying to contract out for every part and every task going into the manufacturing and assembly of a car or airplane. Hence the need for the visible hand of management in coordinating the allocation of resources.

At the same time, Coase fully appreciated the disciplines and rewards of free enterprise, and he was acutely aware of the tendency of corporate (and government) bureaucracies to stifle individual initiative and kill any sense of real ownership that people have over the quality of their own work. Within a large, publicly owned corporation, no one, including the CEO, is spending his own money.

Citing the picturesque words of another economist (D. H. Robertson), the British-born Coase, who spent most of his working life in the United States, described companies as “islands of conscious power”—or central planning—in an “ocean of unconscious (i.e., spontaneous free-market) cooperation .  .  . like lumps of butter in a pail of coagulating buttermilk.” 

The “lump of butter” of which I was a part in the early 1990s was a shrinking rather than a growing mass: In just three years, the company shed more than 50,000 jobs, or 42 percent of the workforce. In the midst of all the downsizing, people were angry and confused, not knowing where the axe would fall next and bitterly resenting a sudden loss of the personal security that they had gained (and felt entitled to) through years of fealty to the same company. What they didn’t see was that a whole way of life was disappearing.

And now it is gone. Today, no one—not even someone graduating from a top business school—expects to spend his or her entire adult life with a single company. Everyone accepts that big companies really aren’t built to last. More like lumps of butter than castles of perpetual growth and stability, they may dissolve at any moment and disappear into the surrounding liquid.

One may think of the quarter-century from 1955 (the first year of the Fortune 500) to 1980 as a golden age for big business in America. During that time, Fortune 500 companies ruled the roost, growing at about twice the rate of GDP growth and enjoying robust profitability from one year to the next, even during recessions. In 1975, the last year of the virulent recession touched off by the Arab oil embargo, only 15 Fortune 500 companies, or 3 percent of the total, reported losses, and all of the top 50 companies were solidly in the black.

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