Friday, May 6, 2011

The Coming Micro-Ownership Revolution

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In the more than two centuries since the beginning of the radical transformation of economic life that accompanied the rise of industrial capitalism, one of the most interesting trends has been the changing nature of the forms through which people have engaged in economic activities. Before the industrial revolution, an artisanal mode of production predominated, with many small work-shops producing the goods required by the largely agrarian economy. At first glance, such the existence of many small firms would suggest a highly competitive economy; however this was not the case. Rather, the high cost of transporting goods created by primitive transportation networks, the risk of brigands, etc., meant that, rather than a single integrated economy, there existed many small economies between which only low-bulk, high-value goods (such as spices) were exchanged. In this situation, workshops were almost universally owned locally, since the cost of monitoring an agent in a distant city would be prohibitively high (the exception being those in the aforementioned low-bulk, high-value businesses, but they also helped ensure the loyalty of distant agents by using family members).

However, the advent of the 19th century transportation and communication revolutions, which brought better roads, canals, steamships, railroads, and telegraphs into widespread use, changed the game. The many local markets became increasingly integrated, and the prices of commodities converged over the course of the century. These changes also led to radical shifts in how firms were both run and owned. With huge, growing markets at their disposal, firms could, as Chandler describes in his brilliant book Scale and Scope: The Dynamics of Industrial Capitalism, drastically reduce the unit cost of many products by engaging in capital-intensive mass production. However, in order to fully take advantage of such available efficiencies, firms needed to mobilize amounts of capital beyond the resources of almost any individual or family. As a result of this problem, the "managerial firm" emerged as the dominant model in many industries by the end of the 19th century. Where, previously, the owner of a business was generally involved with its operations, managerial firms were characterized by a separation of ownership and management (which began to be undertaken by salaried professionals).

The practical result of this change was that it meant that the ownership of a firm could be divided between a far greater number of individuals than had been previously possible when owners were responsible for directly monitoring a firm's performance. Such a division would not have been cost effective at the beginning of the 19th century, but the drastically reduced cost of information brought about by the aforementioned revolutions meant that, by the 1920s, a small but respectable percentage of the American population held some ownership stake in a corporation through the stock market.

I believe that this historical dynamic has a very interesting implication for our contemporary situation. If the cost of information, in fact, influences the optimal structure of a firm in the economy, then the growth of the Internet over the last decade should be understood as a signal that the traditional corporate model is heading the way of the dinosaur. Indeed, there is plenty of evidence to suggest that small to mid-size firms can use their flexibility to outmaneuver the existing behemoths in many ways; however, there are certain industries in which economies of scale will remain extremely important. However, some very recent developments have to potential to radically alter the ownership structures of such firms.

Of paramount importance is the emergence of peer-to-peer online monetary systems such as Bitcoin. By enormously reducing transaction costs and allowing for true micro-payments (on the order of hundred-thousandths of a cent), such systems have the potential to drastically reduce the minimum barrier to entry to obtaining an ownership stake in a firm. As a result, I believe we might begin to witness the organic transformation of many large firms to co-operative ownership.

The logic of such a transition is as follows. In a perfectly competitive market, the margin of profit trends towards zero, with consumers obtaining products at cost. In such a situation, the motivation for shareholders who do not use the firm's products to retain ownership is fairly low, while the only tool left for a firm to attract customers away from its competitors would be to offer them an ownership stake in the business, which would guarantee that they would continue to receive the firms products at cost in the future. As such, it would be reasonable to expect the gradual transition of the ownership of many companies in the coming years from absentee shareholders to consumers.

A possible objection to this scenario would be to inquire as to why such a transition has not already occurred? The answer, I believe, lies in the relative cost of ownership. In 1800, owning a share of a London blacksmith's shop while living in New York would have been prohibitively expensive, due to the fact that the transaction costs necessary to receive the benefits of ownership would eat up most, if not all, of the profits. However, once the underseas telegraph cable was in place, such costs were reduced to the point that such ownership became possible. It seems there is a similar dynamic at play with co-operatives.

In the past, co-operatives have only been successful in economic sectors in which the size of the economic relationship they have with their members is sufficiently large to offset the transaction costs of ownership (i.e., groceries, insurance, feed for livestock), and they have often further defrayed such costs through the use of volunteer labor. However, with such technologies as Bitcoin sending transaction costs plummeting towards zero, the range of firms that could be economically owned by their users/consumers is drastically expanding. The logic is simple - why patronize a for-profit firm when you can be assured you're receiving goods and services at cost from your co-op store/auto repair shop/social networking website. Just as the first communications revolution gave birth to the age of the corporation, the rapid changes that our contemporary world is experiencing could be paving the way towards the age of the co-operative.

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4 comments:

  1. "The logic of such a transition is as follows. In a perfectly competitive market..."

    LOL "perfectly competitive market". ROFL.

    Back here in the real world, the market is dominated by unbreakable oligopolies, backed up by state violence. Perfectly competitive markets are a fantasy, like unicorns. Real markets are characterized by stratification, not competition.

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  2. @Anon
    The assumption you're making is that oligopolies will always have access to state power. What makes Bitcoin and a host of related developments interesting is that they allow for people to avoid such impediments, allowing for markets to tend increasingly towards perfect competition. The "real world" to which you refer does, I agree, accurately describe the state of affairs of the industrial order. What I'm arguing is that technology is actively bringing into existence a radically "new world" according to the dynamics laid out above.

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  3. It's odd since your thesis here is that everything about our economy will completely transform, but I somehow feel that you've yet understated the case. Similarly to how an analogy of more people being involved and contributing capital tells the broad story of corporations yet misses the real weirdnesses of what it's like to relate to them, I think it misses some of the most essential parts of the story to just think of these future economic agents as if they were just like corporations or cooperatives with a slightly broader ownership model. Instead-- though I can't claim to comprehend any details-- it feels to me like the models themselves will be altered in their most basic character in the process of their expansion.

    As an example consider with me for a second the Bitcoin network. Not what it's used for, but just the structure and process of the network itself. Bitcoin itself can be considered as a sort of business: It charges everyone in the system for mining, in the form of both mining fees and a very slight inflation of the currency, and distributes those fees to the miners by a provably fair lottery in exchange for their help securing the network. Look at the strange shape of this thing: It is a business but it does not just have a slightly broader ownership model by which decisions are made about its processes-- its processes are entirely 100% transparent, owned and controlled by no one!! It's simply a brilliant glittering gem of a business process, floating ethereally in the inner space of the internet, equally regarded by everyone.

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