What’s Old Is New Again

  • Posted by on October 31st, 2014 at 8:36 am

Benedict Evans has a great blog when it comes to analyzing mobile trends and developments.  Recently, he analyzed Apple ($AAPL) and the new iPhone release.  One of the big news items was ApplePay.  One of the points he made is,

Apple is distinguished as much by what it doesn’t integrate as by what it does. It didn’t buy or build a record label and it didn’t hire A&R guys. It didn’t buy a mobile operator or create an MVNO. It never bought movie or TV rights, and it hasn’t created a new payment platform. It is partnering with Chase and Visa, not competing with them.

Immediately, I thought of this seminal academic paper by Ronald Coase.  It’s called The Nature of the Firm, written in 1937.  If you haven’t read and intellectually processed it, you should.  Coase understood many of Adam Smith’s theories on division of labor and cooperation and incorporated them into his paper.  Coase writes,

This distinction between the allocation of resources in a firm and the allocation in the economic system has been very vividly described by Mr. Maurice Dobb when discussing Adam Smith’s conception of the capitalist: “It began to be seen that there was something more important than the relations inside each factory or unit captained by an undertaker; there were the relations of the undertaker with the rest of the economic world outside his immediate sphere… the undertaker busies himself with the division of labour inside each firm and he plans and organises consciously,” but “he is related to the much larger economic specialisation, of which he himself is merely one specialised unit. Here, he plays his part as a single ceIl in a larger organism, mainly unconscious of the wider rôle he fills.”

Because of mobile, and the way the web has developed, strong macro trends have revealed themselves.  It’s no secret anymore that everyone is a node on a network.  It’s not surprising to anyone that networks beat hierarchy.

That is essentially what Coase was writing about.  It’s one of the business school concepts that Apple has applied with rigor in practice.  Apple with ApplePay is extending Coaseian concepts to the payments ecosystem.

There are other examples of Coase in many startups.  Nothing is free and when analyzing opportunity costs it often makes economic sense and strategic sense to partner rather than build it yourself.  Especially if you can generate network effects and reap the producer surplus from them.  When we think about Coase Theorem, it opens up a massive universe of startups.  Bitcoin is Coase Theorem on steroids.

On the surface, startups solve problems.  But, the successful ones are rooted in old freshwater economic theories of the past.  They apply and execute them correctly.

 



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