The price of goods, according to Smith, was the only mechanism needed to coordinate economic activity. If you want something badly enough, its price would go up to the point where it would make good sense for someone else to produce it.

Smith believed that since price was such a good mechanism for coordinating economic activity, governments shouldn’t interfere with the way markets are run. Instead, they should let the “invisible hand” do its job. But if Smith was right and the “invisible hand” was so good at bringing together buyers and sellers, if price is the only mechanism needed to help a manufacturer decide when and how much it should produce, than why build companies like Ford and General Motors in the first place?

After all, running a company as big as Ford required employing and coordinating a complex hierarchy of managers and administrators to oversee the research, development and manufacturing of cars. Why not let the “invisible hand” take care of all economic activity?

The answer, Coase discovered, had to do with costs. Markets weren’t as efficient as Smith had made them to be. Yes, they were great mechanisms for organizing economic activity but they weren’t frictionless.

Markets weren’t frictionless because there were various costs associated with producing goods in the market. These “transaction” costs included finding the right producer, agreeing on what would be produced, in what quality and quantity and so on and so on. Once made, these agreements required management and monitoring – are the goods being manufactured or are we still waiting for raw material to arrive to the manufacturer? Will the products be delivered on time or will the illness of the plant manager spell delays?

The trade-off between the transaction costs of the market and the managerial costs of running a company is what gave birth to the modern company.

“Modern business enterprise” explains the economic historian Alfred Chandler, was born “only when the visible hand of management proved to be more efficient than the invisible hand of market forces.”

THE DIGITAL HAND
What’s common to managerial costs and transaction costs is that they both involve information. Information about the goods that someone has to offer, their price, quality and location. Information about the manufacturer’s reputation, his financial stability and so on and so on.

In a world where information is kept behind walls, these transaction costs tend to increase. And as Coase taught us, when the market’s transaction costs are higher than letting a company do the same work, a corporation is brought to life. But what happens when transaction costs fall?

deliver by horse, could now be relayed over a wire in a matter of seconds. Transaction costs fell dramatically, and within 30 years, information was everywhere within the organization. But for many years, this digital information remained confined behind corporate walls.

But in the early 70s, a branch of the US defense department created a network that enabled individual computers to talk to each other and share information and the Internet was born. Fast forward 20 years and a researcher by the name of Tim Berner’s Lee invented the World Wide Web – a system for linking information from disparate computers.

With the World Wide Web, knowledge was finally released from its containers. Suddenly, knowledge could be transported instantly, anywhere in the world, for hardly anything. And if knowledge, which is the critical factor in pretty much any type of industry you can think of, if knowledge can be easily transported anywhere, and if technology is so good at organizing it, then will we still need companies in the future?