One idea that has found favour with who argue for the new economy comes from the world of old economics. Back in 1937 Ronald Coase argue that firms exist because for some transaction it is more effective to carry out those transactions within firms than it is via markets. That is, in some circumstances firms minimise transaction costs.
For some new economy advocates this is a compelling idea. One consequence of the information revolution is surely that it is now cheaper to communicate. This should affect firms and their boundaries since it will lower transaction costs and thus make market transaction more likely. More market transaction mean fewer within firm transactions and thus firms should downsize and rely on outsourcing to a greater degree.
However, if it is cheaper to communicate via the market is it not also true that it would be cheaper to communicate within the firm as well? In fact anything that reduces internal communication costs will lead to an increase in the size of firms.
Thus firm size could go either way. The nature of the reduction in transaction costs is all important. There are three groupings of transaction costs: information and search costs, haggling and decision costs, and policing and enforcing costs. Hal Varian has considered each of these groups:
The Internet certainly reduces search and information costs, but, as we have seen, this cuts both ways. Bargaining and decisions still require a team of managers and lawyers sitting around a table. What makes contracts easier is codification and standardization, trends that are important, but are not greatly affected by the Internet, at least so far.Two important addition factors need to be considered. One is the more general application of opportunistic behaviour. People can act opportunistically in many settings and ways. The incentive for such behaviour hasn’t been much affected, at least not yet, by the Internet and computers. The second factor is the increased importance of human capital to the production process. What we see is that human capital is now a bigger part of the value added of firms. This gives people more power within the firm and it has been argued that firms boundaries are changing because of this. Many firms are now developing structures that are looking more like partnerships than the more traditional command-and-control organisations.
Policing and enforcing costs are the most relevant category. The reason the assembly-line worker doesn't negotiate with the person next to him is that it's too easy for him to say, ''Give me a good deal or I'll stop the line.'' Putting all the assembly-line workers under command-and-control reduces this sort of opportunistic behavior, at least as long as it can be easily observed.
But none of this however requires a new economics. In fact, as noted above, it is all based on old economics. No only in terms of years, but also in terms of method. Coase set out to apply the marginal analysis of Marshall to his theory of the firm. So the new economy seems to work just fine within an old economics framework.