The Ford Motor Company’s River Rouge complex was a massive factory built in 1927 that housed more than 100 thousand workers. Presumably built take advantage of economies of scale and division of labor efficiency. If dividing labor in massive assembly lines is more efficient, why haven’t factories grow bigger and bigger? Especially since there is more complexity in modern manufactured products.
“The limited proliferation of megafactories like the Rouge implies that there must be mechanisms that limit the size of the networks we call firms and make it preferable to disaggregate production into networks of firms. This also suggests a the existence of a second qtuantization limit, which we will call the firmbyte. ”
transaction cost theory implies that at the cost of a link at a certain size threshold becomes prohibitive. Ronald Coase coinded transaction cost in his 1937 paper titled “The nature of the firm”. Coase work was in response to his feeling that economics tended to overlook transactions having costs. “the economy was not a collection of fluid friction less market transactions but a set of islands of conscious power” From this understand transaction cost theory was born.
There is a cost to internal transactions in a firm. When the cost of an external transaction becomes cheaper than an internal transaction the firm stops growing. It will then begin to buy things from other firms. This indicates that there is a relation between cost of a link and the size of a firm. This explains why factories the size of River Rouge are not the norm.
The Modern Equivalent
Now days complicated products like the computer are manufactured by multiple companies. On top of that the software created for computer is made by various firms. In many industries alleged competitors produce products for one another. Industries have developed standards to make these sort of transactions more efficient.
Knowledge and know how can be quantatized in a personbyte and firmbyt. “Both personbytes and firmbytes show that our ability to accumulate large volumes of knowledge and know how is packaged in a nested structure in which what we consider to be a network at one scale becomes a node in the next. Networks of neurons at one scale becomes a node in the next. Networks of neurons become nodes when we abstract them as people, and networks of people become nodes when we abstract them as networks firms.”
Interactions between firms and individuals have different costs associated with them. Buying a cup of coffee at Starbucks is simpler than buying a new home.
It is difficult for large networks of knowledge and knowhow to grow because of the cost limits of the structures in which they reside. These structures can be embodied in the human brain, a company or a collection of firms.