Welcome to VPS – the President's Suite. Have you noticed an increasing number of independent developers around you using Cursor and Claude Code? Projects that once required a small team can now be completed by a single person—AI writes code, automatically generates API documentation, and even handles product marketing copy. This reminds me of a question posed by a young economist over 80 years ago, a question seemingly simple yet profoundly impactful:
Why do firms exist?
In 1937, 27-year-old Ronald Coase, in his paper “The Nature of the Firm,” put forth a revolutionary idea: In a market economy coordinated by the price mechanism, why do firms—these “islands of central planning”—exist? And, when does a firm's size reach its limit? Today, as AI agents begin to take on tasks, algorithms make business decisions, and a single programmer with an AI assistant can accomplish what an entire development team once did, Coase's question has become urgent and profound once more.
A New Interpretation of Coase's Theory in the AI Era
Traditional economics depicts the market as a perfect coordinating mechanism—automatically adjusting supply and demand through price signals to achieve optimal resource allocation. By this logic, all economic activities should be completed through market transactions, and there would be no need for firms, these internal “planned economies.” But reality is clearly different. At a company, your boss directly assigns tasks, and departments coordinate through internal processes, rather than negotiating prices for every collaboration. Coase keenly observed that within a firm, resource allocation doesn't rely on the price mechanism but is achieved through the entrepreneur's direct commands.
So, if the market mechanism is so efficient, why do we still need firms? Coase's answer is concise and profound: Using the price mechanism comes with costs! These costs include: the cost of discovering prices (time and effort to understand market prices), negotiation and contracting costs (bargaining and signing contracts for every transaction), and enforcement and monitoring costs (ensuring compliance). Firms emerge precisely to economize on these “transaction costs.” Within a firm, workers enter into a long-term employment contract, agreeing to obey the entrepreneur's directives within the scope of the contract. The entrepreneur can flexibly allocate resources as needed, without having to renegotiate every time. This is the essence of the firm: Replacing market transactions with authority relationships.
Thus, Coase's core finding is: Firms exist to economize on transaction costs. When the cost of completing a transaction in the market is higher than the cost of organizing that activity within the firm, the firm emerges. And the optimal boundary of a firm is reached when the marginal cost of organizing an additional activity equals the marginal cost of completing that activity through market transactions.
The Cost Revolution in the AI Era: Asymmetric Impact
Standing in the present, we must ask: Does Coase's theory still hold true in the age of AI? The answer is: AI is fundamentally altering the transaction cost structure Coase described, but this change is “asymmetric.”
Consider those independent developers who can complete projects that once required a team. Behind this is AI significantly reducing the cost of accessing various professional services: designing logos, writing product documentation, market research… For highly standardized tasks, AI indeed makes market transactions extremely cheap and efficient. You no longer need to maintain a fixed team; instead, you can obtain services from the “market” (AI services or experts connected through AI) as needed.
However, what if we're not building a standard e-commerce website, but a groundbreaking AI algorithm? The situation is entirely different. Innovative work requires deep collaboration, iterative discussions, and extensive trial and error. Team members need to build deep trust, be willing to share half-baked ideas, and collectively bear the risk of failure. This kind of collaboration is difficult to achieve through market transactions because it involves too many details that cannot be pre-specified. More importantly, true innovation often relies on an unspoken rapport among team members—an understanding with just a glance, new inspiration sparked by a single phrase. The transmission and creation of this tacit knowledge still require long-term, close cooperative relationships.
So we see an interesting divergence: On one hand, independent developers are increasing, leveraging AI and various online services to obtain standardized professional services at extremely low costs; on the other hand, companies genuinely engaged in cutting-edge innovation are strengthening internal team building, investing heavily in cultivating their core teams' deep collaborative capabilities.
Redrawing Firm Boundaries: Lean and Focused
This asymmetric cost change is redrawing the boundaries of firms. Future AI startups might have core teams of only a few people, but they know each other well and collaborate deeply. Other operations, such as website development, customer service, finance, and data processing, are almost entirely outsourced. AI allows them to easily find suitable service providers, quickly compare prices and quality, and automatically monitor work progress.
This is the new firm boundary: core innovative activities are highly internalized, while standardized support activities are highly marketized. Firms become “leaner” but also more “focused.” The firm's boundary is no longer a fixed line but a dynamic, adjustable membrane. AI enables firms to more accurately assess the costs of different arrangements and implement organizational changes more quickly.
What Does This Mean for Individuals?
This change has profound implications for everyone. Future careers will no longer be about climbing a corporate ladder; your professional value will no longer primarily depend on the skills you possess, but on **what kind of collaborative relationships you can create value for.**
If your work involves standardized tasks, you need to learn to compete in a more fluid market. This means building a personal brand, accumulating verifiable reputation, and improving efficiency in collaborating with AI. Your income might be more unstable, but you could also gain more freedom and opportunities.
If your work involves innovation and deep collaboration, you need to cultivate the ability to build and maintain long-term cooperative relationships. This includes professional competence, but more importantly, communication skills, trust-building abilities, and teamwork skills. Your value lies not only in what you can do personally but also in what you can enable the team to do.
In either case, one ability becomes increasingly important: the ability to reduce transaction costs. Clear communication, a reliable reputation, professional skills, and good interpersonal relationships can all effectively reduce transaction costs.
The New Life of Coase's Theory: Insights for the AI Era
Back in 1937, Coase might not have imagined that the question he posed would gain new vitality in the AI era over 80 years later. Today, as we witness AI reshaping the fundamental structure of transaction costs, Coase's insights are not outdated; instead, they have become even sharper. The essence of the firm is still to economize on transaction costs, but AI is redefining what “cost” is and what “economizing” means.
We stand at a historical turning point. Traditional firm boundaries are dissolving, and new organizational forms are emerging. Independent developers complete entire projects with AI, innovative teams change the world from coffee shops, and global collaborative networks spontaneously form in the cloud.
But remember, technology is just a tool; true change comes from how we use these tools. AI can reduce transaction costs, but it is still humans who create value; algorithms can optimize processes, but it is still humans who define goals; machines can execute tasks, but it is still humans who imbue meaning. In this new era, the most successful are those who can find a dynamic balance between humans and machines, market and organization, efficiency and innovation.
Coase changed how we understand firms with a simple question. Today, as AI rewrites the fundamental logic of business, we need not only new answers but also new questions: When AI can handle most standardized work, where does human unique value lie? When transaction costs approach zero, what “costs” will become the new organizational boundaries? When collaboration can transcend time and space, what kind of relationships are worth maintaining long-term?
These questions have no standard answers, but the process of exploration itself is part of the answer. Just as Coase did over 80 years ago, we need the courage to face reality, the wisdom to ask the right questions, and the perseverance to find certainty amidst uncertainty. Future firms may not look like they do today, but the reason for their existence—to better collaborate and create value—will remain unchanged. This, perhaps, is the most profound insight of Coase's theory in the AI era.
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