Coase, transaction costs, and the "Coasean singularity" paper

All right, I'm going to move us to our last story in economics. And this is a paper, Salim — I know you're going to love and/or have lots of comments on.

So, quick context. As Salim has educated us on past episodes, in 1937, the economist Ronald Coase asked why companies exist at all. He won the Nobel Prize for this. His answer: transactions are expensive — finding people, negotiating, and enforcing contracts. It's cheaper to hire employees and have them on the inside of your company rather than negotiating every task on the open market. Companies are a workaround for transaction costs.

Now, MIT and Harvard researchers — finally catching up with Salim — have asked what happens when AI agents make transactions nearly free. Agents that search, compare prices, negotiate, and transact for you at enormous scale. They're calling it the Coasean singularity. Salim, you wrote the book on this. Uh, your thoughts on this paper?

Uh, absolutely dead on. A little late, but uh totally dead on. You know, Peter, in our 2023 book, um, Exo 2.0, we said then that Coase's law was breaking. We didn't understand the full implications of it. What we noticed then was that, take the mission critical function in Uber, which is to match driver and passenger — it doesn't happen inside the organizational boundary of Uber. It happens out in the wild. And by enabling that with technology, you can scale. So we observed the companies were reaching outside themselves to get things done. XPRIZE goes to teams all over the world to do innovation. TED is using its community to scale.

But now with AI, it completely changes the game. And now the transaction and coordination costs go to near zero when you can have a thousand agents or 100,000 agents doing kind of crazy amounts of capability uh outside the organization. I think the bigger point here is that AI doesn't just automate the firm. It attacks the economic reason for which firms exist and the shape of the firm. And what we've been exploring is, what does that shape of the firm look like? And we've got kind of that definition going, because now essentially a firm becomes a protocol, right? And a community of agents and human beings is going and attacking various economic opportunities or marketplaces or solving specific problems. So the organization dissolves from being a human hierarchical centered model to a totally different world. And so this is a huge shift, the biggest, I sense, we've had since the industrial revolution, and we have to kind of look at what this new model means. And we're looking a lot at the governance, for example, of these agents and so on.

So I have to ask the question then — I think this is — correct me if I'm wrong, this is research from last year, not from this year, the Coasean singularity. If that's the case, in my mental model — so the whole point of Coasean economics is transaction costs determine the size of the firm, and if transaction costs are high, that agitates in favor of a larger firm, and if transaction costs are low, that agitates for a smaller firm. So if transaction costs are going to zero, that agitates in favor of the size of the firm going to zero. So if my reasoning is sound, do we think the size of the firm is going to be one person or less than a person? What is that? What's the limit?