The Daily Parker

Politics, Weather, Photography, and the Dog

Networks of contracts waste a lot of money

Via Bruce Schneier's recent essay on complexity, I found a blog post on the work of Ronald Coase, which really resonated:

Ronald Coase observed that an organisation could be considered as a collection of contracts, and asked why, in that case, did organisations even exist. His answer was that contractual relationships have transactions costs. When these transactions costs outweighed the expense of organisation, organisation would predominate. Also, there were limits to transaction; it might be actually impossible to specify what was wanted in a contract, or equivalently, it might cost too much to write it.

As often happens, the first half of this insight was more successful than the second. Since the 1980s, there has been a global trend towards replacing organisations with networks of contracts. The idea that a firm could be considered as a network of contracts was taken up by the management consulting industry, and strengthened from a positive observation to a normative statement that firms should become more so. In as much as anyone bothered with Coase’s corollary, it was simply to say that there was some sort of “core business” in there – presumably it was thought to be the zone in which transactions costs got high enough to demand organisation – and everything else must be contracted out.

In many ways, we’ve lived through a giant experiment in proving Ronald Coase wrong, which has now failed.

Healthcare in the United States is an especially egregious example of this. Americans, notoriously, spend much more than any other nation, have worse results, and leave lots of people uncovered. People blame, variously, insurance companies, doctors, drug companies, intermediary organisations, public policy, and patients themselves for getting ill. But none of this has ever solved anything. Everyone who has tried to nail down exactly what costs so much money has ended up concluding that the whole system is weirdly expensive and wasteful. That is, of course, the point. Its awfulness is an aspect of the system, not any one component or group of components.

I will have to read more about his work, or even (gasp!) read his work.

Add comment

Loading