WayFinding in a world of Evolving Strange Attractors

Attractors, Boundary Conditions and Change

In this post I want to explore more deeply the concept of boundary conditions that shape attractors and include intensive properties.

An interesting example of boundary conditions relevant to economic thinking arises from the work of Ronald Coase. Coase won a Noble in economics for 1937 paper “The Nature of the Firm”. The central question Coase was exploring was "Why and under what conditions should we expect firms to emerge?" This question aimed to explain an apparent contradiction of the market economy which is lauded to be the most efficient way to get things done.The modern firms emerge due to the needs of an entrepreneur who begins to hire people, Coase's analyzed the conditions that the entrepreneur would find it less expensive to hire people than contracting out particular tasks. Why is it less costly and more efficient to have people gathered under one ‘umbrella’ to get things done”.Coase’s answer was that despite the alleged efficiency of the market economy, firms provided a competitive advantage because they reduced transaction costs. 

These costs involve material (and related issues), effort, attention, energy, time (conveniences) and information flows embedded in the production systems (including search, negotiating terms, coordination, enforcement and communication). By sharing purpose; dividing labor; and providing control through establishing roles, responsibilities and methods of communication – it is both less expensive and easier to get things done.

By reducing these costs (boundary conditions) it made the hierarchic organizational structure efficient. For example, it is costly for everyone (in time, effort, money and resources) to search for employees or work opportunities, to constantly negotiate enforceable terms and compensation, and to coordinate collective effort toward common purposes (principal-agent problem). Longer-term contracts, divisions of labor, and other structures of the organization enabled significant savings in costs as well as higher productivity.

But it is not only efficiency, according to Douglas Allen, there is another important dimension of transaction costs. In Allen’s reading of Coase, transaction costs are the costs (time, effort, money, opportunity) necessary to establish and maintain any system of rules and rights, which in turn defines what institutions are – systems of rules. The implication of this is that transaction costs also include the costs of mitigating bad behaviors. According to Allen, institutions emerge to maximize wealth and minimize the costs of establishing and maintaining themselves.

The effective upper limit on the size which a traditional organization can reach and continue to be efficient is the threshold where the internalization of transaction costs begins to exceed the transaction costs of a market situation. As the organization gets bigger there will be diminishing returns to efforts to create more efficient management regimes.Coase also noted other ‘human’ reasons for a hierarchical organization in a market system, such as:

  • Some people prefer to work under direction (to follow) and are prepared to accept the corresponding conditions & restrictions;
  • Some people prefer to direct others (to lead or manage) and are willing to accept the responsibilities and costs related to this role; and
  • Some people prefer goods produced by firms.

Throughout human civilization (after humans had become agriculturalist and before the advent of the digital environment), there have been environmental and other constraints that have produced various forms of transaction costs.  These transaction costs determined boundary conditions shaping hierarchy as the attractor of efficient organizational structures – an attractor of efficiency and governance.

We know that for most of human history we have lived in small group of hunter-gatherer what have always been relatively egalitarian – and thus the tendency to hierarchic structure is much less a result of human traits and much more the result of the boundary conditions of transactional constraints shaping an attractor of organizational efficiency.

Among the numerous changes in the conditions of change that the evolving digital environment is enabling, is the fundamental collapse of traditional transaction costs and the emergence of new platforms of productivity and ways to get things done. We are in the midst of transitioning a fundamental threshold enabling new types and varieties of exchange through an exponential decrease in transaction costs – including those related to patterns and rates of interactive exchange, as well as those associated with search, negotiation, enforcement, coordination and communication. In this way, different types of intensity thresholds (density, connectedness, etc.) are instigating a massive societal phase transition.

I believe that the digital environment is a change in the conditions of change which will entail new constraints. As these new constraints become more established and widespread (e.g. approaching near zero marginal costs) they will determine a different attractor of organizational efficiency, which I will begin to elaborate in later posts. Others refer to this change in the conditions of change with different terms. For example, Jeremy Rifkin in his book “Zero Marginal Cost Society” refers to the emerging ‘collaborative commons’ as the inevitable form of organizational efficiency and attractor of governance.

I will elaborate these concept in greater detail as I progress in later posts.

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