(As transaction costs (search costs, costs to contract, costs to outsource, etc.) go down, optimal firm size goes down. In an efficient market for contracting, like IT, tiny startups turn into long-term profitable small-headcount companies (dropbox has, what, 70 people?). In inefficient markets, you end up with huge or state-owned companies, like in natural resource exploitation or the third world.)
In all seriousness though, while the technology factors certainly enable some 'shrinkage' of the firm, human factors change less, which to me indicates that YC like agglomerations will not replace the corporation in many circumstances. In other words, it's easier to find people these days, but as contractors, are they really still going to slog it out for a company day in and day out for years? Most people out there are not like YC founders, would be my bet, and are reasonably happy with their 9/5 jobs, and with not having to hustle to find the next gig. On the positive side, these people will also retain the tacit knowledge inherent in many human activities, and provide a sense of continuity that a shifting network might have trouble fostering outside a small core. Apple, for instance, has 60,000+ employees, according to the web page - that's not what I'd consider a small core + network, even though they certainly outsource a lot. So... trend, yes, but fairly slow once the low-hanging fruit that tech can provide has been integrated.
The other big question I have in this vein is whether it will remain so cheap to create a company, or if it's an anomaly, and in the future more capital will be required for anything serious. My guess is that the long term is towards cheaper, but who knows what may happen.
BTW, Wikipedia says it's just an article, and here's the summary for those interested:
There's an argument for internal communications costs vs. external communications costs (Coase's thing) -- if it's more efficient to communicate within a trusted firm vs. between firms, you end up with huge firms. Things like tight-knit social networks outside of the firm (college alumni, things like YC, sites like hn, various ethnic diaspora in history, ...) would create some kind of hybrid, too, where a lot of interconnected small firms would work, so each firm could be smaller than otherwise. This would actually be interesting research for someone in economics or sociology -- I'd look at formal networks like YC and informal networks like casual coworking and web forums.)
To have some predictive value, what other industries besides web companies that are super cheap and easy to start, might morph towards this kind of structure? Or, here's another one: this industry has long been dominated by giants: IBM, Microsoft, Google, and so on. Will we see the end of that?
(And just to be clear, I think what pg has done is fantastic, and he/them are quite praiseworthy, etc... I'm just pushing back a bit on the idea. I can't foresee doing business with PG or YC, so I have no interest in not calling it like I see it)
I agree with Coase's reasoning and I'd like to agree with his prediction, but there are some empirical problems with it as of now.
Note that for any particular technology area, at first it makes sense to have a single integrated company which can redesign everything. But once the market knows roughly how to achieve the result and has standardized pieces, cooperation is much easier to achieve, and you naturally get a fragmentation into smaller, specialized, companies.
I've seen nice illustrations of the exact mechanics using examples from the computer industry. I think it was in Clayton Christensen's The Innovator's Solution, but I can't swear to that. (However that's a good book regardless.)
Optimal size will still depend on the industry.
Seventy guys can operate a dropbox.
You'll need a few thousand guys, minimum, to run a shipyard, assemble tractors, extract oil.
Doesn't mean they are inefficient - just that some tasks require a lot of capitol and manpower.
There is one problem with a y-combinator approach to capital intensive work: someone has to be in charge. There is 'a' party responsible for delivering the product to the customer, and that drives everything else.
Put ycombinator in charge of a shipyard and a lot of cool stuff will happen, but delivering a finished boat on time and on-cost is not one of them.
The past 100 years are a great example of how a lot of change can happen in a short amount of time.
There are some things that you can automate -- but a lot of things in the oil & gas industry cannot be automated. Specifically, the leg work required to get things started & keep them maintained. Automating those sorts of things requires a pretty advanced AI and I don't see that coming around the corner anytime soon.
Automation can get us close. Already has, but this just moves the labor out of the field and into a cube.
But (I think others have pointed out downthread by now) capital intensive projects are always going to need someone to go out and kick the tires, work a nut loose, apply some ingenuity.
If you don't have those guys hanging around to kick the tires and whack a lug nut things will stop until you send a guy out to do that.
The probes we have on Mars .. you can wait a few months for the guys at mission control to work out a problem. You can't do that with an oil well.
The third world has tiny average firm size, and the theory correctly predicts that in the developing world firms will get larger rather than smaller.
Consider the small proprietor in a third world who spends tons of time bargaining with vendors and customers. As people's time becomes more valuable and more products become available, the cost of bargaining increases, and larger stores replace vendors because it reduces total negotiation costs.
Third world isn't really the right term; it's more like "mostly undeveloped" vs. "developing" -- China (at least the urbanized parts) has more in common in firm size with the US, Japan, and Europe than it does with Nigeria.
The developing world has an extreme power law distribution curve. Almost all the large businesses are capital intensive. Things are probably more skewed in Brazil than in other countries due to a risk-free rate of ~11%, meaning that any business with high working capital can't rely on outside capital if it doesn't want to end up handing over all its revenue to the banks.
Firm size in Brazil is probably more related to capital costs than transaction costs. High capital costs "hollows out" the middle. Capital is often used to reduce rising transaction costs within a firm once the firm size surpasses approximately Dunbar's number. However those businesses at that are mid-sized instead of large don't have enough scale to justify the investment of capital to reduce transaction costs. Many smaller mid-sized companies will hobble along with high internal transaction costs as a result, much higher than would be tolerated in the US.
Because of this, SaaS products are likely to have a transformative effect on Brazilian businesses. There is a lot of unmet demand because traditional transaction cost reducing solutions have required too much capital to implement.
I wonder why we don't see more Brazilian startups targeting international markets.
Is there a Brazilian HN, or otherwise a forum or mailing list?
My suggestion is to stick to HN and intl technology channels on IRC and Github and keep an eye out for telltale signs of a Brazilian by the name or other identifying info and reach out to them one by one. You may want to try out HackerNewsers to seed the network initially. http://hackernewsers.com/
Also, get in contact with Diego Remus of Startupi and Diego Gomes of EverWrite.