Saturday 2 March 2019

Taylor Pearson on the history of transaction costs and industrial organisation

One of my favourite lectures to present in my ECONS102 class is where I cover 10,000 years of economic history, with a particular focus on the development of property rights. The key driver of changes in property rights over time has been the change in the size and nature of transaction costs. So, I was interested to read this new blog post by Taylor Pearson.

In the post, Pearson talks about how the size and nature of transaction costs have changed over time (up to the present day, whereas I stop my lecture at about the end of feudalism), and especially how those changes have affected the nature of markets, firms, and industrial organisation. The post is long, but there is lots of interest in there. It is hard to excerpt, but here is one bit comparing the impact of mechanical clocks to the impact of blockchains:
Mechanical time opened up entirely new categories of economic organization. It allowed for trade to be synchronized at great distances—without mechanical time, there would have been no railroads (how would you know when to go?) and no Industrial Revolution. Mechanical time allowed for new modes of employment that lifted people out of serfdom and slavery...
In the same way, it may be that public blockchains make it possible to have ledgers that are trustworthy without requiring a centralized firm to manage them. This would shift the line further in favor of “renting” over “buying” by reducing the transaction cost of trust.
An excellent read, especially for those interested in a bit of economic history. Pearson essentially argues that key technological revolutions (neolithic, industrial) initially led to increases in the size of firms, but more recent revolutions (computing, blockchain) have had the opposite effect, reducing firm sizes. However, I wish Pearson had better considered the role of the platform providing firms, since the nature of the transaction costs means that they will get larger while other firms get smaller. Despite this caveat, I strongly recommend reading the whole post.

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