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?

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.

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.

That's not true.

For one, internal actors have pre-arranged deals.

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.

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

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?

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

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.

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.

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.

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

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." "

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).

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.

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.

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

Why not?

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.

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

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.

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?

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 :).

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

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.