Here Comes Everybody: Organisations and Transaction Costs [en]

In an effort to be a better reader, here are some notes and related thoughts to my reading of Clay Shirky‘s book Here Comes Everybody (chapter 2).

Making a decision inside a large unstructured group is hopeless, as you’ve most certainly experienced if you’ve found yourself caught up in a spontaneous “dinner party group” of 15 people or so at the end of a conference (a larger group is more complex). What ends up happening is that somebody steps up and seizes power, either by dictating a venue and giving marching orders, or proposing a decision-making process for the group. If that doesn’t happen, you can bet that some group members will get tired of the situation and head off in their own separate sub-groups, in which it was possible to reach an agreement for action more easily. (I personally usually end up playing “friendly dictator”.)

“More is different” (Philip Anderson, 1972). Aggregates exhibit novel properties which their components did not have. Scale changes the nature of things. This is super important.

At some point of group size, it becomes very costly to maintain connection between each member of the group, and so the “everybody interacting with everybody” dynamic of a small group breaks down. Add more employees to a late project and it will make it even later, because more people involved means higher cost of coordination for the group (Fred Brooks in The Mythical Man-Month). But it’s an inevitable problem: large groups have to be managed in some way, and that’s why people gather together into organisations.

A hierarchical structure simplifies communication between organisation members, but also requires resources to maintain itself. This means that job number one of any organisation is self-preservation, as if it breaks down there is no way in which it can fulfil its stated mission.

Preserving the organisation requires work, and comes at a cost. It’s worth it as long as this cost is lower than the gain from having an organisation (i.e., the organisation allows us to do stuff that would not be possible in an open market of individuals, who would all have to independently agree on how to work together: higher transaction costs).

The Coasean ceiling (Ronald Coase, 1937, The Nature of the Firm): when the organisation grows so much that the cost of managing the business destroys any profit margin. There is a cost whether your hierarchy is flat or deep: if it’s flat, each manager has more subordinates, and so has to spend more time communicating with other people; if it’s deep, there are more layers, and information has to transit through more people.

The first org chart, probably: Western Railroad (McCallum, 1855 or so). It’s a management system designed, amongst other things, to produce “such information, to be obtained through a system of daily reports and checks, that will not embarrass principal officers nor lessen their influence with their subordinates.” No wonder the head so often seems disconnected from the hands and feet in the organisation!