The Economics of Working Together

October 24, 2025

The Economics of Working Together

We could all be freelancers. The technology exists. Upwork, Fiverr, Toptal. Payment systems. Contract templates. Remote collaboration tools.

We don't.

In 1937, a British economist named Ronald Coase asked why. His question was so fundamental it won him a Nobel Prize five decades later: If markets are so efficient, why do companies exist at all?

A 27-Year-Old's Question

Coase was 27 years old when he wrote "The Nature of the Firm." A recent graduate teaching at the London School of Economics. The paper--just 16 pages in Economica--emerged from a year he'd spent in America on a traveling scholarship, visiting factories and businesses, trying to understand how they actually worked.

What puzzled him was simple: economic theory said markets coordinate everything efficiently through prices. Supply and demand. The invisible hand. Yet everywhere he looked, he saw firms--islands of planning in an ocean of market forces. Inside General Motors or Ford, no markets existed. Managers simply told workers what to do.

His insight was mathematical elegance itself: A firm expands until the marginal cost of organizing one more transaction internally equals the marginal cost of executing that transaction in the market. When it's cheaper to hire than to contract, firms emerge.

But here's what made Coase revolutionary--he identified the specific costs that markets impose:

First, discovering relevant prices. You can't just know instantly who does good design work and what they charge. Search takes time. Evaluation takes effort. Comparison requires expertise you might not have.

Second, negotiating and concluding separate contracts. Every transaction needs terms. Payment schedules. Deliverables. Dispute resolution. Each negotiation is its own project.

Third, long-term uncertainties. Markets can't easily handle complex, evolving relationships. What if requirements change? What if quality varies? What if your contractor gets a better offer mid-project?

When these three costs exceed the cost of bringing someone in-house, the firm is born.

The paper was ignored for decades. Too simple, perhaps. Or too obvious once stated. Economists preferred mathematical models to Coase's plain English observations. It wasn't until the 1960s, when Oliver Williamson formalized transaction cost economics--adding concepts like asset specificity, frequency, and uncertainty--that people realized what Coase had done.

He hadn't just explained firms. He'd explained the boundary between markets and organizations. Why some things get done inside companies and others get outsourced. Why firms grow and shrink. Why entire industries restructure.

The 1991 Nobel Committee called it "a breakthrough in understanding the institutional structure of the economy." Coase himself, then 81, seemed bemused by the late recognition. He'd spent the intervening decades watching his simple idea slowly transform economics.

Which is, as you might expect, understating it. He explained why we have jobs instead of daily auctions for our labor.

The Price of Not Using Prices

Our companies exist to reduce transaction costs. But here's what Coase also recognized--creating a firm to avoid market transaction costs creates different transaction costs inside the firm.

Now we have:

The solution creates new dynamics. Hours pass... days... quarters... spent in coordination that wouldn't exist if we were all just contractors.

But that's the trade-off Coase identified. We trade market transaction costs for organizational transaction costs.

The Dunbar Multiplier

At 5 people, internal coordination is seamless. Everyone knows what everyone's doing. Direct observation replaces formal process. The firm vastly outperforms the market--exactly as Coase predicted.

At 50 people, coordination structures emerge. We need some framework, some meetings, some process. Still more efficient than market transactions, but the dynamics are changing.

At 500 people, internal coordination becomes complex. The meeting about the meeting about the decision takes real time. Some companies start selective outsourcing.

At 5000 people, internal costs can exceed market costs for non-core functions. Which is why large companies outsource what they can. They're acknowledging their internal coordination costs for certain functions exceed market rates.

That's fascinating when you think about it. Scale changes Coase's equation.

What Williamson Added

Oliver Williamson (who shared the 2009 Nobel for extending Coase's work) added something crucial: humans are complex actors with multiple motivations. Not just the simple profit-maximizers of economic theory.

In markets, people can exit after each transaction. Don't like the deal? Find another partner. In firms, we build ongoing relationships. This creates both opportunities and challenges. Shared knowledge. Team dynamics. Resource allocation. Information flows.

The very thing that makes firms efficient--ongoing relationships--makes them complex social systems.

Our managers share context because aligned understanding creates value. Our product teams coordinate because integration produces results. The structure isn't arbitrary. It's the framework for collaboration that Coase's simple equation predicted.

Google's 180,000 Contradictions

Technology was supposed to eliminate transaction costs. Uber connects drivers and riders instantly. Upwork matches freelancers globally. Stripe handles payments in three lines of code.

The very platforms that make freelancing effortless are built by massive companies. Uber has 32,000 employees. Upwork has 700. Stripe has 8,000.

Why do the companies eliminating transaction costs have so many transaction costs themselves?

Here's the thing about tech companies--they're not selling products, they're building platforms. And platforms have different economics.

When Ford builds a car, each car requires steel, labor, assembly. When Google answers a search query, the millionth search costs nothing extra. The infrastructure's already there. The code's already written. One server can handle millions of requests.

Economists call this "zero marginal cost." The first Gmail user cost billions to serve. The billionth user? Pennies.

So why does Google need 180,000 people?

Because they're not in the search business. They're in the winner-take-all business. Google gets better with every search--more data, better results, more users, more data. It's a loop that compounds. The company that gets ahead stays ahead. The company in second place often disappears.

This dynamic--network effects--means speed matters more than efficiency. You need thousands of engineers not to build the product, but to build it faster than Amazon, Apple, Meta. You need teams in every country not to serve those markets, but to own them before someone else does.

The irony is perfect: The biggest firms in history exist because they're racing to eliminate the need for firms.

Google's 180,000 employees maintain the platform that makes millions of people freelanceable. Amazon's 1.5 million workers build the infrastructure that eliminates traditional retail jobs. Meta's 87,000 staff create the network that replaces traditional businesses with solo creators.

These companies need massive scale to win the race to make scale unnecessary.

Remote work, AI, blockchain, the gig economy--they're all pushing Coase's equation toward markets and away from firms. Yet the companies building these technologies are the largest firms ever created.

Coase's framework still applies. But we're living through its most interesting test. Which is, as you might expect, producing exactly the outcomes the framework would predict.

The Meetings About Meetings

The coordination costs that justified creating firms now manifest as the very structures we navigate daily.

The meetings about meetings. The processes about processes. The systems about systems.

These aren't bugs in our organizations. They're not failures of leadership. They're the coordination costs of working together at scale--exactly what Coase would have predicted.

A thought experiment: Imagine if tomorrow morning, instead of logging into Slack, we all had to find each other on the open market. Every task, a negotiation. Every collaboration, a contract. Every decision, a price.

The day would end before we'd even started working.

That's why we have companies. That's why we have jobs. That's why, despite all the inefficiencies we experience, the firm persists.

We trade the chaos of constant negotiation for the frustration of coordination. We swap market uncertainty for organizational complexity. We exchange the freedom of freelancing for the stability of employment.

Is it worth it? Coase would say: check the math. When internal coordination costs less than market transaction, the firm survives. When it doesn't, it dies.

Our workplaces exist to enable collaboration that markets can't efficiently provide. For now.