KEN HUNT

Globe and Mail Update

February 27, 2009 at 7:00 AM EDT

ONE OF THE FUNDAMENTAL questions that economists have wrestled with in the past century is this: If markets are so efficient, then why do we have firms? Theoretically, entrepreneurs should be able to buy and sell labour and expertise in the marketplace wherever and whenever they need it, just as they do with goods. Instead, large companies, even with all their incumbent levels of bureaucracy and inefficiency, have flourished. In the 1937 paper “The Nature of the Firm,” Ronald Coase (who would later win the Nobel Prize in economics) argued that firms thrive in our system because transaction costs in the marketplace are so high. It takes time and money to find the right people, negotiate with them, and organize them to do a job. So, cost-wise, having an established organization at the ready is almost always superior to setting one up ad hoc every time you need one.

Almost always superior.

According to Coase, if a firm gets too big or tries to do too many things, management costs spiral out of control and the firm loses its advantage over smaller competitors. The corollary is also true: If it suddenly becomes cheaper to find and organize people on the fly, firms would become largely irrelevant.

In Here Comes Everybody: The Power of Organizing Without Organizations, author Clay Shirky argues that we are now living in the age of “ridiculously easy group-forming” (a phrase he credits to Canadian social software expert Seb Paquet). Thanks to the increasingly social nature of Internet technologies, it has never been easier to bring people together for a common purpose. If Coase’s theory holds, this shift will have profound implications for companies of every size. In fact, Shirky, a well-known technology consultant and NYU professor, believes we are on the verge of an epochal shift, when the economic repercussions of new social technologies will start to reshape the world and the way we do business.

As an example of this, consider Firefox, the upstart web browser that has been steadily eating into the market share of Microsoft’s Internet Explorer. In 2003, Microsoft won what appeared to be a decisive victory in the web browser war when AOL announced that it would be indefinitely suspending development on the Netscape browser. The browser had been Microsoft’s only serious competition. Even so, by 2002, Internet Explorer held an estimated 95% share of the web browser market. No company in its right mind would invest serious money to compete against that.

Mozilla, the creators of Firefox, might have been in its right mind, but you couldn’t really call it a company. The Mozilla Foundation is a non-profit organization. AOL helped launch it as a way of ridding itself of Netscape, along with the community of developers who had donated their time in the fanciful hope of creating an alternative to Internet Explorer. AOL contributed a couple of million dollars to the project, along with some hardware, mostly as a token gesture. Mitchell Baker, the former Netscape legal counsel, was so dedicated to the project that she decided to join Mozilla as a volunteer.

And look at the browser wars today: Mozilla’s Firefox now has more than 100 million users worldwide and recently held more than 20% of the market share; it regularly bests Internet Explorer in independent reviews of speed, security and features; the organization even generated revenues of more than $75 million (U.S.) in 2007. What Mozilla really needed to succeed, it turns out, was to be free of traditional corporate hierarchies and inefficiencies, and to really empower the loosely knit community of developers who contributed to the project.

Baker is collecting a salary again. But as the CEO of Mozilla Corp. (the title she prefers is “Chief Lizard Wrangler”), she describes her role not as head of a company but as the co-ordinator and motivator of a group effort. “Mozilla builds software,” she recently told a group at Stanford University, “but we also build communities of people who build software and share a particular vision for what the future of the Internet should look like.” The development of Firefox is an open-source effort, with Mozilla’s staff working in co-ordination with a community of passionate volunteers. In this structure, talented developers contribute to the project in any way they wish—they don’t have to wait to be assigned to a particular problem by some manager. Even if a developer has only one good idea, he or she can still contribute to the project. By comparison, it would make little sense for Microsoft to hire a developer who has only one decent idea. For Mozilla, this ability is a real economic advantage.

Mozilla is not unique. Groups of like-minded volunteers gather on the Internet every day to tackle large projects outside of traditional corporate structures. Wikipedia (the online encyclopedia) and Linux (an open-source operating system) are common examples of this.

Given the flexibility, passion and pure economic advantages of these projects, it’s hard to see them failing any time soon, but nor are they likely to appear among the Fortune 500. Their revenue models tend to be haphazard: Linux companies sell support, Wikipedia solicits donations, and the fact that Mozilla makes money at all is almost accidental. (One feature of Firefox is a box in the top right corner of the screen that makes searching the Internet easier. Google pays Mozilla to direct people to its search engine, and this accounts for nearly 90% of the foundation’s revenue.) The real story, however, is not how much money these projects make; it’s how much of a loss they represent to traditional firms they are competing against. In Ronald Reagan’s first inaugural address, he famously stated that “government is not the solution to our problem; government is the problem.” Substitute “traditional corporations” for “government” in that phrase and you start to get a handle on what the world could look like in the age of ridiculously easy group-forming.