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Comment by cs702 | Hacker News Reader

Great article. Anyone who has worked for a large, established corporation knows from personal experience that internally they are a lot like the Soviet Union, with a hierarchical structure of bureaucrats and their apparatchiks making decisions for everyone at the company.

Despite having grown to around 400 employees, Valve is evidently not like that. The author, Yanis Varoufakis, makes a compelling case that future companies may look more like it than like the traditional hierarchical corporations of today.

PS. As someone who regularly reads the author's economics blog at http://yanisvaroufakis.eu, finding him on Valve's corporate blog was the source of quite a bit of cognitive dissonance for me. ("What the...? Why is Varoufakis showing up on Valve's corporate blog?" was my immediate thought.) I had to do multiple double-takes before it dawned on me that, yes, he somehow works at Valve!

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One has to wonder why "large" companies even exist in the first place. Why a building full of freelancers could not do the exact same thing.

And then it dawned on me: Valve is providing a "firewall" to unfair competition, financial insecurity, brand awereness, and legal risks. And then it just gets out of the way.

Maybe, the pure existence of large corporations, is a sign of capitalism failing. Being large should not give an advantage: yet it allows for a reportaire of anti-competitive behavior.

Maybe they should do a nation wide experiment, in smaller country: what happens if you take away the legal standing of all "companies" and "employment". What if all economic relationships can only exist between individuals?

Im not suggesting its some kind of magic bullet, i just wonder how competitive it would be. Will such a system adapt (to changes in the market) and optimize (cutting out middlemans) more quickly? Will it be truly bottom-up?

Take a look at http://en.wikipedia.org/wiki/The_Nature_of_the_Firm

Given that "production could be carried on without any organization [that is, firm] at all", Coase asks, why and under what conditions should we expect firms to emerge? Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.

This is an excellent answer. Peter Thiel uses some similar ideas in his answer about why people form companies: http://blakemasters.tumblr.com/post/20400301508/cs183class1 :

If we want technological development, why look to companies to do it? It’s possible, after all, to imagine a society in which everyone works for the government. Or, conversely, one in which everyone is an independent contractor. Why have some intermediate version consisting of at least two people but less than everyone on the planet?

The answer is straightforward application of the Coase Theorem. Companies exist because they optimally address internal and external coordination costs. In general, as an entity grows, so do its internal coordination costs. But its external coordination costs fall. Totalitarian government is entity writ large; external coordination is easy, since those costs are zero. But internal coordination, as Hayek and the Austrians showed, is hard and costly; central planning doesn’t work.

The flipside is that internal coordination costs for independent contractors are zero, but external coordination costs (uniquely contracting with absolutely everybody one deals with) are very high, possibly paralyzingly so. Optimality—firm size—is a matter of finding the right combination.

This is pre information revolution thinking combined with ideas generated by the fears of an age when socialism/communism was really was competing with democracy as a form of social organization. This muddled thinking makes no sense presently, especially given Corporations are purely creations of the government monopoly of power and should be anathema to any free thinker. For those not fighting the last war led by generals like Hayek, all coordination costs follow the technological cost curve as there is no longer a difference between internal and external actors.

I almost can't tell if this comment came from some sort of Markov text generator.

I understood it just fine. Guess different people have different parsers.

> all coordination costs follow the technological cost curve as there is no longer a difference between internal and external actors.

That's not true.

For one, internal actors have pre-arranged deals.

This is great. Coase Theorem explains governments as naturally large corporations, or at least an entity similar to a for profit corporation. Brilliant. Yes, governments create laws; unlike other corporations, they have surpassed the threshold of size (not sure whether to measure that as number of employees, money, information, etc) and support to and been given one of the ultimate money makers in society. Laws exist to direct wealth, property, and rights. They produce laws and regulation for the voter population to consume.

However, the "inequality" on the Coase spectrum is slowly balanced out as we gain access to decentralized technology. I bet that pretty soon company set-ups, like Valve's, will become much more prominent. I just hope the same thing happens with governmental institutions.

It is already happening, though very slowly. Part of the city's budget here is decided online and via presential polls [1] since 1989, and the model has since spread to cities like Brussels and Barcelona.

[1] http://en.wikipedia.org/wiki/Participatory_budgeting

Would it be fair to say that "costs of transactions" are in some part due to government bureacracy and taxing?

And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?

Would it be fair to say that "costs of transactions" are in some part due to government bureacracy and taxing?

Some costs of transactions are due to the need to document compliance with government regulations. The existence of regulations with compliance burdens will tend to make firms bigger than they would otherwise be, but many and probably most transaction costs aren't due to government, and there would be many additional sorts of transactions costs if there weren't a government at all.

And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?

It probably could, depending on what you mean by "optimal". Its pretty well established[1] that in the absence of transaction costs you can get a Pareto efficient[2] outcome, but Pareto efficiency is probably not the same thing you would call optimal (though what you'd call optimal is almost certainly Pareto efficient).

I would tend to expect that, given that we live in a world with transaction costs, firms are not the ideal size. But its hard to say whether firms ought to be bigger in general or smaller. Countries with relatively efficient economies (Germany) tend to have larger firms than countries with less efficient economies (Italy) but its really hard to tease out in those cases which way causality is flowing. Most countries tend to have laws that favor small businesses, and those might end up more than making up for their proportionally higher regulatory burden.

[1]http://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare... [2]http://en.wikipedia.org/wiki/Pareto_efficiency

Yes. When members of a firm create value for each other, they don't pay sales tax. It is huge unfair advantage for large firms.

There is also the huge savings where teams have an executive authority to settle disputes and prevent them from trying to rip each other off with unfair contracts and nonpaid bills.

In the US services aren't taxed. Most internal value created is in the form of services (e.g., IT). Most companies don't have their own internal computer production facility, for instance.

Your second point makes sense. There are usually much lower coordination costs for internal agreements.

And in countries where services are taxed, the tax is generally rebated for intermediate goods.

in the US, I pay sales tax to the people who do repair work on my house and who fix my dad's computer, and for the software I get from Apple engineers, all of which are not taxed within a firm.

http://dor.wa.gov/content/findtaxesandrates/retailsalestax/

"Similarly, when a business purchases a retailing service for its own use, it must pay sales tax on the purchase." "

I have always interpreted http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-155 regarding computer repair as the idea that if I am replacing a piece of faulty hardware that I must charge sales tax for the attached service, but if I am merely cleaning off viruses, that this is a professional service and therefore not subject to sales tax. I have not been able to find a clear authority for this however, and it isn't clear as to whether hooking up and configuring an external modem that the customer bought from someone else is taxable.

Repair however is a problematic term. A lawyer might be involved in sending a letter threatening action of a problem is not repaired but that service is not taxable itself.

In Washington State, professional services not directly tied to an improvement of tangible property are not generally taxable. So landsacping and lawn care is generally taxable, but open source software development is not (since it is not a sale of a license, or a one-of-a-kind development aimed at one customer only).

> Yes. When members of a firm create value for each other, they don't pay sales tax. It is huge unfair advantage for large firms.

This is very, very close to the sales pitch of a VAT. In a proper VAT system, there is effectively no difference between purchasing an intermediary good or service or producing it yourself.

And could it be, that certain structures are less optimal (profitable) for the single "firm", but more optimal for the economy as awhole. Could there even be a distinction?

Sure. The extreme example is competition vs a monopoly. It is certainly more profitable for a single firm to be a monopoly and be able to set prices. It is always less optimal to have real competition, but it is always better for the economy as a whole.

Taken to the extreme of course, the economy might be best if perfect competition ruled everywhere, which would mean largely a nation of small businesses, artisans, and shopkeepers. But this would be bad for Microsoft, as it would likely mean networks of open source developers controlling the software market.

The rise of the bureaucratic corporation and the rise of a white collar managerial class during the industrial revolution was a natural pre technology evolution of the corporation because lots of people we required to carry out all the necessary communication and managerial roles. With the information revolution that is no longer true, but old ways of thinking die hard and it will take a while for new organizations to develop and establish themselves. This will be a long a period of creative destruction.

I suggest you read this excellent piece my Cosma Shalizi. http://crookedtimber.org/2012/05/30/in-soviet-union-optimiza...

There he talks about the computational complexity and limits to planning. He also talks about markets, how non convexities leads to inefficiencies (allowing polarization of wealth) and why large firms form: difficulty in setting prices and being informed enough to make optimal decisions benefit concentration of complementing talent.

As computational power increases and communication friction decreases I expect we will start to see company size decrease and lifetimes to within an order of magnitude of the sceanrio in alluded to in Rainbows End where companies are old at 5 years and large ones have 3 people.

I think the ultimate anti-Valve is a military and everything else falls in-between.

Some businesses are required by nature to be military-like - logistics for example.

And the military itself, of course :P.

This actually reminds me of an interesting observation in Homage to Catalonia by Orwell. The book is about Orwell's personal experiences in the Spanish Civil War. The particularly interesting bit was about the organization of some of the anarchist forces fighting against Franco. Essentially, they did not have any centralized organization at all. Even a military force can be organized like Valve and not in an authoritarian manner.

Unfortunately I don't have the book handy to find the pertinent passage, but it really stood out. It makes me wonder how much of the military-style management is due to necessity and how much is due to tradition. Of course, the fascists won in Spain, so this is hardly a great example, but there were too many other factors at play (e.g. support from Germany) to make it conclusive.

Arguably, Anonymous acts like a military with Valve-style management as well.

I don't buy that the military is required to work that way.

Take a look at Iraq and Afghanistan to see how many losses are inflicted on the superior military by groups who are not organized in any traditional military sense.

Do you think they would be more effective if they wore uniforms and had a formal command structure?

I think it's pretty clear from the pro-market critiques of Capitalism (from the Distributists, like Chesterton or Belloc) that pure, unadulterated Capitalism inherently unstable and prone to failure. Large corporations paradoxically need to pay their workers only what the market requires but also enough they have discretionary money to go out and buy the products they are manufacturing.

Socialists recognize this inherent paradox too, but their answer to it is different --- more government intervention to counter corporate control. To a Distributist, however it seems insane to try to address issues of centralized economic control by adding additional centralization.

The existence of large corporations introduces inherent instability into our system. We'd all be better off if there were more self-employed and more small corporations out there.

Large corporations paradoxically need to pay their workers only what the market requires but also enough they have discretionary money to go out and buy the products they are manufacturing.

This fails the test of basic arithmetic.

Suppose you increase your workers pay by $X and they spend the entire $X on your products. Suppose your profit margin is Y. Then for every $(1+Y) your workers spent, you earned $Y. I.e., you get back $XY/(1+Y) < $X.

So no, it's always better for the bottom line (holding all else equal) to pay your workers less. You might be able to attract better quality workers by paying more, or perhaps you can cook up incentive plans to get workers to work harder (both of these are what Henry Ford did, for example). But that has nothing whatsoever to do with workers buying your products.

But the point is that if everyone pays workers less there is no market for anything non-essential you can make. This works if you are making plastic stuff to export to the US and you are in China. It doesn't work so well if you are in the US.

In essence corporations individually do better if they pay their workers less, but collectively they die.

But the point is that if everyone pays workers less there is no market for anything non-essential you can make.

Why not?

Regarding your PS: Valve hired him as "cheif economist". This article explains it all:

http://blogs.valvesoftware.com/economics/it-all-began-with-a...

I seem to recall an HN discussion about it, but am too lazy to track it down :).

Thanks. Also a great post.

This part is particularly enlightening:

The idea of spontaneous order comes from the Scottish Enlightenment, and in particular David Hume who, famously, argued against Thomas Hobbes’ assumption that, without some Leviathan ruling over us (keeping us “all in awe”), we would end up in a hideous State of Nature in which life would be “nasty, brutish and short

you can read the story about how he started working with valve on this post: http://blogs.valvesoftware.com/economics/it-all-began-with-a...

I'd like to see if Valve's model scales to a much larger number of employees.

It may not need to; they could take the approach of splitting the company into several smaller companies that are each an ideal size for this management style. I don't recall the name, but there is a manufacturing company (clothing, I think) that does this. Collectively the company has thousands, maybe tens of thousands of employees, but they're organized into independently run shops with around 500 people each.

Gore dOes this

Making the parallelism of firms as federations (not sure if is a correct assumption), this can surely relate with Proudhon's ideas about federations and confederations: http://www.ditext.com/proudhon/federation/federation.html#7

Morningstar Farms does this as well.

How big is much larger? 9k employee businesses exist on this model.

The scale issue is NOT number of employees. It is breadth of focus. You could have an operating system company, or an office productivity business, or a video game console company, but it is hard to see people organizing Microsoft in a bossless company without breaking it up first.

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