Chapter 5: The Rise and Fall of the Firm, Cont.

New readers: I've been posting excerpts of the book in order to elicit critical comments. These will be published as an appendix in the hardcover version of Crowdsourcing, and may even make it into the margins of later editions. Full credit given, naturally, to the commenter. Below is the continuation of Chapter 5: Turning Community into Commerce:

What We Talk About When We Talk About Work

By one measure at least, YouTube is a very small company. Before being acquired by Google its 67 employees fit into two floors of an unremarkable San Bruno, California office building. That’s exactly one fewer employee than works at the average American nursing home. But by another measure, YouTube is a far larger company. At the time of its acquisition by Google, YouTube was valued at $1.65 billion. That number could seem unreasonable by conventional measures, but, YouTube is hardly a conventional company.

Google didn’t pay for the expertise housed within that San Bruno office, or even Youtube’s powerful brand. It paid for the millions of users who create and submit videos to Youtube, and for the traffic they drive to the site. It paid, in short, for the community—the people who use it to engage in a conversation in a language of moving images. YouTube is far from the only company whose primary asset is its community. Facebook employs roughly 700—a skeleton crew for a company that was valued, at the time of Microsoft’s investment in the social networking site, to be in the region of $15 billion. As of early 2006 Wikipedia employed only two people, one of whom worked part-time. By contrast, Britannica employed 350 in that same period. In these cases, the community is taking the place of the corporation.

The conventional corporation isn’t going away anytime soon, but its hegemony is certainly under assault. Despite its unchallenged reign throughout the 20th Century, the traditional corporate structure is an artifact of the industrial revolution. The company’s primary function, as British economist Ronald Coase observed in his 1937 essay, is to reduce transaction costs. Coase pointed out that contrary to the prevailing view, the market is not always efficient. Because a commodity is rarely immediately available in exactly the quantity he or she might want, at precisely the time they want it, there are additional costs that must be factored into its purchase. How long did the buyer search for it? Did they have to risk revealing their business strategy, or a trade secret, in acquiring it? All this and more should be factored into the transaction cost, Coase argued. And his central insight was that a firm emerges when it becomes more efficient to produce a commodity in-house than to contract an outside vendor to provide it, and that firm will continue to grow until it begins to buckle under its own weight, at which point it once again becomes cheaper to outsource the work using the marketplace . This makes intuitive sense to us today, and indeed the firm continues to be the basic unit of economic production. 

But times have changed since Coase wrote his article. To state the obvious, the advent of the Internet has changed the way business is conducted, with the result that the nature of the firm has changed as well. While advances in communications technology, as Coase predicted, have generally led to larger and larger companies, information technology is exercising a strong counterforce, as the MIT management professor Thomas Malone has documented. While “the main story about the organization of business in the twentieth century was centralization,” Malone writes in The Future of Work: How the New Order of Business Will Shape Your Organization, Your Management Style, and Your Life. “beneath the headlines we find a more complex story.” In a study conducted by Malone and his colleagues at MIT, the average size of firms in many industries was shrinking. Tellingly, Malone points out, the largest private employer in the United States today “is not General Motors or IBM or even Wal-Mart.” It’s the temp agency Manpower Incorporated, which as of 2008 employed 4.4 million people.

The dramatic increase in outsourcing is one obvious indication that the firm is no longer the discrete entity of decades past. But there is, Malone argues, a deeper dynamic at play. His central argument in The Future of Work transcends the world of business into organizational theory. Malone has identified three stages in what he calls “an amazing pattern” in the evolution of human affairs. In stage one people operate in small unconnected groups. In stage two, larger groups form and decision-making is centralized. In the third stage, “the large groups remain but decision-making becomes more decentralized.” In politics this has taken the form of democracy, and now the amazing pattern is taking hold in business. “We can expect to see more of this decentralization,” Malone writes, “wherever a) communication costs are falling and b) motivation, creativity, flexibility and the other benefits of smallness produce business gains.” Malone cites such companies as Hewlett Packard, W.L. Gore (maker of Gore-Tex fabric) and Visa International as examples of organizations that illustrate this trend toward decentralization. By this reckoning, the firm isn’t so much becoming obsolete as it is evolving into just one of many deeply interconnected species in an increasingly complex ecology. Put another way, the boundaries that once separated the firm from the other creatures in that ecology—such as suppliers, contractors, customers—have become more porous.

In 2005 Eric von Hippel, the head of the Innovation Group at MIT’s Sloan School of Management, published Democratizing Innovation, that demonstrated how customers were collaborating with firms in the design of new products. “Users that innovate can develop exactly what they want, rather than relying on manufacturers to act as their (often very imperfect) agents,” von Hippel writes. Who thought to add foot straps to windsurfing boards? Not the companies. Back in 1975 the sport’s elite athletes had begun using their windsurfers to jump waves. But as windsurfer Larry Stanley recalled, “The problem was that the riders flew off in mid-air because there was no way to keep the board with you.” Soon the riders were experimenting with foot-straps, and not long after the manufactures began installing them on the factory-issued product.

Von Hippel demonstrated that in fields as wide-ranging as scientific instruments to mountain bikes to computer chips, the task of innovation was passing from the manufacturer to the user, who had both a greater need and a greater ability to improve a product’s performance. Companies that embraced this change entered into a creative relationship with their customers, even going so far as to provide them with tools to help design the end products. The writer and technology professor Clay Shirky has termed this phenomenon “downsourcing,” in which a manufacturer simply shifts the burden of certain functions—innovation, in this case—down the supply chain to the customer. The company then institutes the innovation, and sells it back to the customer, who is, in this case, is also a supplier.

Von Hippel offers another useful observation that we see echoed in crowdsourcing: Customers don’t innovate in a vacuum. “Individual users do not have to develop everything they need on their own: they can benefit from innovations developed and freely shared by others.” They form, in von Hippel’s terminology, “user innovation communities.” They do this not so much out of a need to socialize with like minds—though that surely plays a role as well—but because the community structure offers considerable advantages to the individual innovators. “Chat rooms and email lists with public postings can be provided so that contributors can exchange ideas and provide mutual assistance. Tools to help users develop, evaluate and integrate their work can also be provided to community members—and such tools are often developed by community members themselves.” Such user communities, then, are like mutual aid societies, or cooperatives. And for such communities to operate efficiently, the individual members generally agree to abide by an accepted social norm: they “freely reveal,” which is to say, relinquish any proprietary interest in, their own innovations. The community exists to improve on each other’s creations.

Such communities offer the companies for which they “work” considerable benefits—they are more efficient at organizing and performing such labor than a firm. And not only does the firm generally not have to pay for the innovations, but the transaction costs associated with the innovations are kept to a minimum. The companies don’t have to locate the innovators, manage their productivity or evaluate their output. The community does all this for them. This strikes to the heart of many of our assumptions about how markets and capitalist economies function. What motivates people to act in such a seemingly selfless fashion?

It’s one of the many questions the scholar Yochai Benkler tackles in his 2006 book, The Wealth of Networks: How Social Production Transforms Markets and Freedom. Benkler uses case studies on Google, peer-to-peer file sharing, open source software and Wikipedia to argue that a new model of economic production—what Benkler calls “social production”—has emerged. (Benkler defines social production as “collaborations among individuals that are organized without markets or managerial hierarchies,” and without splitting hairs, it can be thought of as synonymous with crowdsourcing.) Motivations can be thought of as falling into extrinsic and intrinsic categories. We can think of extrinsic motivations as consisting of carrots (a financial reward) and sticks (a scolding from your boss). Intrinsic motivations, on the other hand, consists of such goals as creative fulfillment, a belief in the project, the sense of community obligation or the opportunity to enhance one’s reputation in that community. According to surveys , a majority of open source software programmers are motivated more by intrinsic reasons than extrinsic reasons. This is important stuff, as it helps explain why people might be willing to review books for Amazon, design T-Shirts for Threadless or devote countless hours to teaching newcomers on the iStockphoto site the basics of photography. More often than not, it’s the community.

What remains to be understood, Benkler asks, “is under what conditions these many and diverse social actions can turn into an important modality of economic production.” What makes the online community a more efficient workforce, in those cases examined by these scholars and myself, than one managed by a firm? The short answer is that communities are both better at identifying talented people and evaluating their output. These operations increasingly lie at the heart of the information economy, the raw material of which isn’t iron or steel but, in Benkler’s words, “human creative labor.”

That’s a resource that’s notoriously difficult to measure, organize and direct. This is where the community comes in. Imagine the logjam that would have formed if Larry Sanger and Jimmy Wales had had to identify the ideal person to write each one of Wikipedia’s 2.2 million entries? Or if The Enquirer had to identify which Mom should decide who the best pediatrician in Cincinnati is? Who should write about the entry on Uzbekistan? Wales doesn’t know, but he doesn’t have to. The person with the right combination of talent, willingness and a few spare hours will, in what can seem like a magic trick, find himself matched up with the task at hand. And, writes Benkler, “once an individual self-identifies for a task, he or she can then undertake it without permission, contract or instruction.” Transaction cost to Wikipedia? Zero.

But what if our contributor has overestimated his ability? People often—usually—overestimate their own abilities. The community’s got that covered too. At a firm, entire levels of management are devoted to quality control: evaluating the output and productivity of the company’s employees. By contrast, online communities are largely self-policing. In practice, Wikipedia entries are rarely written by one person, but by a small sub-community within the larger group of contributors. This is why errors are quickly corrected. This step provides the glue that holds the community together. It’s Wikipedia’s dirty little secret that a manner of bureaucracy has evolved to maintain the site’s editorial standards of truth and neutrality. Every Wikipedia page is monitored by a “Wikipedian,” who tends that particular garden . But the organizational forms more closely mimic that of a community, again, then a firm. Linux was put together by a free-wheeling group of coders, few of whom had ever met each other in person. But Linus Torvalds was able to direct their efforts. But only because his “authority is persuasive, not legal or technical, and certainly not determinative,” writes Benkler. “He can do nothing except persuade others to prevent them from developing anything they want and add it to [the project.]” Wikipedia works the same way.

How pervasive will social production—crowdsourcing, for all intents and purposes—be? Remember The Billion? “They may have between two and six billion spare hours among them, every day.” The onus, then, isn’t on the crowd; it’s on companies, entrepreneurs and anyone else with a good idea to figure out how to put them to work.

Comments

[Venkat]

I think this chapter could use a more careful historical take on the evolution of concerns in economics. Too many authors have mentioned Coase in passing, and not enough have dived deeper. Some starter thoughts I had about how to tell the story right (and related relevant comments by my readers):

http://www.ribbonfarm.com/2008/04/23/ronald-coase-and-salvation-from-anthropological-economics/

Another general critique I have of all books that touch on this stuff, from Surowiecki on, is that they don't take on the most robust models of why crowdsourcing type approaches work, and how things like quality control fit in. This is the line of mathematical thinking that started with Monte Carlo simulations and evolved today to what are known as randomized algorithms, probably-approximately-correct (PAC) models and certain classes of genetic algorithms. There is also particle swarm optimization (PSO) and the swarm intelligence work of Eric Bonabeau. The material is pretty highly mathematical and not easy to process or condense to a pop-sci level, but it does help ground folk doctrine in solid probabilistic models, so somebody writing in this space should take a brave stab :)

Probably out-of-scope for you, given your intents as revealed in the excerpts, but maybe a little boxed note at least, to acknowledge that the deep theory exists, that it is not all hush-puppy-fad analysis a la Gladwell...

Venkat

[MiaProudstarauco]

I think this chapter could use a more careful historical take on the evolution of concerns in economics.

...........................

MiaProudstarauco

Wow, check out this site called http://www.fluc.com
Free SMS and free mobile ads!! Its fantastic

[Alan]

Yet another fascinating excerpt Jeff.

The examples that you use appear to focus mostly upon the element of labor and output. This might be because this is where there is a coalescing point of a new impulse and it’s the easiest point to read. In my mind CS, as a new phenomena has much more to do, at its root cause, with a changing society and culture.

It might be much more difficult to define the elements that originate the many emerging symptoms that are recognizable in part as intrinsic motivation. Intrinsic motivation is a clue that arises and is birthed by the intersection of a new generation, recent technology, changing work roles and the many elements that shape and form a particular generations attitudes and behaviors.

It appears that a segment of this new generation is shifting away from a willingness to take the path that ends at a treadmill experience and the economic security that comes with it.

“They may have between two and six billion spare hours among them, every day.” The onus, then, isn’t on the crowd; it’s on companies, entrepreneurs and anyone else with a good idea to figure out how to put them to work.”

I would venture to suggest that there might be an anti-materialistic impulse afoot and that, paradoxically, it might indeed prove to be the greater temptation to look at harnessing it for economic gain. The real point of interest should be the new forms that are going to arise to accommodate this impulse from the inside out!

Rather than attempting to apply business forms “to” the emerging new market, I believe that it will be the organically created forms, like YouTube, that will rock the world and ultimately provide the economic and societal shifts to meet a future generations needs.

Much of available commentary seems to be rationalization rather than an in-depth look at the root causes.

Where are the social anthropologists, sociologists and psychologists?

Cheers, Alan

[Gregory]

I'm intrigued by your suggestion that the advent of crowdsourcing could signal the decline of the corporation -- at least as the main organizing unit for mass dissemination of news and information. Oh, the implications.

Reminds me of something Ambrose Bierce wrote In his Devil's Dictionary, defining "corporation" as "an ingenious device for obtaining individual profit without individual responsibility."

Frankly, I worry that -- if taken to a decentralized extreme -- the journalism of the future will be neither profitable nor responsible. Whatever the faults of corporate journalism, there is a sort of collective responsibility in a newspaper or television network. There are checks and balances, reporters and editors, labor and management. Certainly, those built-in safeguards haven't always worked. But I can't imagine that a fully amateurized press would bring about more responsible journalism.

But I don't think that will happen. My hope is that there will always be a role for professional journalists to report, write, synthesize and package the news. And, most importantly, edit. I'm overwhelmed by the amount of content online. Ninety percent of my time in the Internet is spent looking for something worth reading. With The New Yorker, 90 percent of my time is spent reading something worthwhile. As Pliney the Elder wrote, "True glory consists in doing what deserves to be written; in writing what deserves to be read." *

Even in the media, there are still transaction costs that are difficult for amateurs to overcome: Travel, training and even access to sources.

C. Trent Rosecrans, a former Cincinnati Post Reds beat writer, makes a this point in a blog post this week about the recent initiative by Ohio newspapers to share content, especially sports coverage. (http://snurl.com/27i99)

Sure, there are bloggers galore who write about sports. But only the professional journalists have the time, the travel budges and the access to interview players, managers, and front office people about what's going on.

* I suppose I should fess up and admit that both of these quotes (Bierce and Pliney) entered my consciousness through playing way too many hours of Sid Meier's Civilization IV.

[Alan]

Ditto on the New Yorker Gregory, if only one had more leisure time to get lost in the articles. I will push back on the general thrust of your comments though.

“Frankly, I worry that -- if taken to a decentralized extreme -- the journalism of the future will be neither profitable nor responsible.”

One could hardly say the overall quality, in truth and unbiased reporting is even close to acceptable standards. I would say that the big picture, those news stories that form and shape general attitudes and consciousness’, particularly political reporting, is shockingly controlled and edited according to multiple and deep reaching interests.

Regards, Alan

[Alan]

Ditto on the New Yorker Gregory, if only one had more leisure time to get lost in the articles. I will push back on the general thrust of your comments though.

“Frankly, I worry that -- if taken to a decentralized extreme -- the journalism of the future will be neither profitable nor responsible.”

One could hardly say the overall quality, in truth and unbiased reporting is even close to acceptable standards. I would say that the big picture, those news stories that form and shape general attitudes and consciousness’, particularly political reporting, is shockingly controlled and edited according to multiple and deep reaching interests.

Regards, Alan

[M.Farouk]

Nice post keep the good working