CRA Inc

8 Jan 04 @ 3:40 pm

The Costs of Gathering and Transmitting Information

In a recent Washington Post article, Q: What will happen when a national political machine can fit on a laptop? A: See below, Everett Ehrlich pulls out one of economist Ronald Coase’s key insights to explain Howard Dean’s surprising success as “essentially a third-party candidate using modern technology to achieve a takeover of the Democratic Party”:

Back in 1937, an economist named Ronald Coase realized something that helped explain the rise of modern corporations — and which just might explain the coming decline of the American two-party political system.

Coase’s insight was this: The cost of gathering information determines the size of organizations.

It sounds abstract, but in the past it meant that complex tasks undertaken on vast scales required organizational behemoths. This was as true for the Democratic and Republican parties as it was for General Motors. Choosing and marketing candidates isn’t so different from designing, manufacturing and selling automobiles.

But the Internet has changed all that in one crucial respect that wouldn’t surprise Coase one bit. To an economist, the “trick” of the Internet is that it drives the cost of information down to virtually zero. So according to Coase’s theory, smaller information-gathering costs mean smaller organizations. And that’s why the Internet has made it easier for small folks, whether small firms or dark-horse candidates such as Howard Dean, to take on the big ones.

Not everyone agrees with Ehrlich’s assessment — Professor Bainbridge certainly doesn’t — but, if you’ve got the time, I recommend reading Coase’s original The Nature of the Firm (1937).

posted in category(s): Points of Interest