Chapter 12: AI agents and the future of the firm

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?

Uh, I don't think there is a limit. If you take the Argentinian model, you could have agents running the firm. Now, the concern — you still need an entity. Okay? So Ted Shelton and I wrote this paper on what does the organization look like if you take the coordination and so — and we coined a term called a fiduciary wedge. The reason you still need an entity is for liability, for fiduciary, for proprietary data ownership, for learning loops inside that entity, for brand, as a purpose container, as an MTP container, etc.

But the primary reason for a firm has been coordination and execution, and that kind of disappears. So you still have entities in the same way like in investing you have SPVs, and you can have multiple people be part of an SPV that then invests in something. Essentially you still need the legal container, but the primary reason, which Coase identified and all organizational thinking does come from that — that there's no reason why a company or firm or legal entity can't be owned by other agents, which will eventually happen in Argentina and other places, uh, and then have a completely virtual organization operating in its own domain for the purpose that it was set up for.

I want to push on that though, because there's a countervailing force that one might perceive, which is — we talked earlier in this episode — which is frontier capabilities potentially getting walled off from the rest of the economy. If OpenAI, for example, hypothetically, is using internal unreleased models to solve grand challenges in math and the rest of the economy doesn't yet have access to them, as a friend of mine at OpenAI and others have pointed out, wouldn't that agitate in favor of the exact opposite Coasean economics, of firms growing larger and larger so everyone has access to those internal capabilities within the frontier labs?

You could, but I think that's an edge case. Uh, for the most part, as open models allow people to have general intelligence and agents across the board — and so you could already have a frontier lab running its own hedge fund strategy, and I'm sure they're doing that now, that outperforms the market and just running that model. But it's a very niche thing applying for a certain temporal period of time.

Uh, over time, I think the big question in my head right now is, if we are achieving RSI, what the hell does that mean? I think when we get to that point, the concept of an economy starts to erode and dissolve itself. So you have to think about it in a totally different model.

Not — not as obvious. I mean, this seems to me a lot — what's the aphorism, like, what happens when an irresistible force meets an immovable object, or something like — what happens when a Coasean large frontier lab with superhuman superintelligent capabilities meets an agentic economy that wants to distribute transaction costs out to the edge, and combined with Argentina wants to create non-human corporations? Not obvious where that ends.

Alex, you remember when Sam Altman said, yes, in the future I think an AI should be running OpenAI?

I remember that. And Sam, just in the past 24 hours, also on social media expressed surprise — shocked, shocked — that OpenAI was able to solve uh Navier-Stokes. So maybe an AI would have predicted this.

Yeah. I mean, look, if you take your commentary to the end point, then you end up with what Dario was talking about, where one company like Anthropic will be all private enterprise, right? Um, and that's unlikely to happen. It'll take a while, and at that point the concept of what does it mean to have an economy essentially evolved. I think the bigger picture question is, where do we even have value creation and value storage and all of this, because we come down to the money layer at some point.

And we should have Jeff Booth on — we were talking about guests earlier. We should have Jeff on talking about what the future of that —

Those are old tokens.

Emad, I see you — I see you ready to burst forward.

Yeah. No, I think that the economy is like 1% inspiration, 99% perspiration. Like, you don't need a polymath doing your taxes or selling widgets or things like that. Like, we've seen that obviously the Navier-Stokes model can sell widgets very well, but once it comes up with a recipe, it's actually about following through.

And most transaction costs are actually about friction. Like the economy needs a bit of friction. It's the relationships you build, it's the other things. It's not an instant thing whereby there are no barriers to spreading. Again, Sam talked about this, the frictions in a scarcity-oriented economy. It's not a case that the best product always wins, or we'd all be on Betamax, you know, like — that's something for the old kind of kids. That's Betamax for Americans.

What's that, Emad? Never heard of it.

Young kids anyway. So, you know, like there are lots of frictions in the economy. So I don't think it will be that case. It's just that the companies and organizations become more efficient and then they become more optimized, because it's really annoying when you go past 12 people and then past 150 people. This is where you kind of have that Carthaginian demon of disorder [unclear] coming into organizations and they get misaligned. So I don't think you'll see the one-person company. I think you'll see the 10-person company, and I think you will see more collectives of companies operating with digital and physical humans solving problems that deliver value. But economics fundamentally does need to flip from being scarcity-based to being abundance-based, because we can rearrange bits and soon atoms in any way that we want.

All right, Dave, do you want to close us out? Any thoughts?

Well, I think, to step back from the academic, you know, our company's getting bigger, our company's getting smaller — clearly, Mercor now has what, 50 to 100,000 individual actors that are effectively little companies in India and around Brazil now too. Uh, and you can take what Salim is saying and build a marketplace around it to deal with just the lingering artifacts, like, you know, employment law in different countries, and make a fortune by taking advantage of the trend that Salim is describing.

And concurrently with that, Elon is building the single biggest integrated vertical company that the world has ever seen, with complete supply chain control all the way down to raw sand turning into chips. And so those are both happening in the real world concurrently. So I think maybe the real observation here is things are changing very, very rapidly in both directions for very good reasons, and, you know, the academic paper can wax poetic for years, but this is happening in the real world in those two flavors and it's brilliant.

I agree — agree with you.