jerry davis used to hate transaction cost economics, but now he kind of likes it

Last week, the amazing Jerry Davis gave a talk at IU’s Kelley School of Business. Jerry’s talk addresses a very important corporate process – the move from organizations that employ lots of people to organizations that employ few people. For example, Facebook, one of the biggest wealth creators on earth right now, employs a paltry 12,000 people.

Jerry noted that this shrinking of the organization has even influenced politics. Social movements, for example, used to rely on vast organizations to contact and mobilize people. Now, you can stage a major protest with an announcement on social media.

Theoretically, what Jerry talked about was a profound shift in transaction cost economics (a field he said he used to hate, but didn’t say why). Advances in shipping and communication allow a lot of people to be shifted outside firm boundaries. He had a great example. Giant firms like Sony used to assemble TVs in house, but now Vizio outsources all assembly and design. They simple manage and coordinate the design, assembly, and shipping process.

One comment: I think Jerry over estimates the need to dispose of organizations among activists. As long societies rely on mass voting, there will be a need for large organizations to recruit and mobilize voters. So, yes, we can see the occasional protest movement wildly succeed using only twitter. But routine politics still belongs to the old clunky political organizations.

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Written by fabiorojas

January 31, 2017 at 11:43 pm

5 Responses

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  1. If you’re curious about why many people dislike TCE, this a classic critique:

    Ghoshal, Sumantra, and Peter Moran. “Bad for practice: A critique of the transaction cost theory.” Academy of Management Review 21.1 (1996): 13-47.

    Via google scholar it’s available at:

    Liked by 1 person

  2. Thanks for the link. I have to say, this critique sounds like a lot of RCT critiques.



    February 1, 2017 at 2:08 am

  3. @ Fabio: Serendipity strikes! A colleague just sent an unusual critique of RCT by a serious economist (angus Deaton) and a serious philosopher of science (Nancy Cartwright). Perhaps you will enjoy it.



    February 1, 2017 at 5:24 pm

  4. Randy: In this case, I meant RCT= rational choice theory. but thank for the link. Food for thought.



    February 1, 2017 at 5:36 pm

  5. Ooops! I am a RAT person… Sorry for the misapprehension.



    February 1, 2017 at 9:11 pm

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