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PHD-DESIGN  September 2013

PHD-DESIGN September 2013

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Subject:

Re: special

From:

Terence Love <[log in to unmask]>

Reply-To:

PhD-Design - This list is for discussion of PhD studies and related research in Design <[log in to unmask]>

Date:

Fri, 13 Sep 2013 16:11:55 +0800

Content-Type:

text/plain

Parts/Attachments:

Parts/Attachments

text/plain (429 lines)

Hi Ken,

Thanks for an excellent description of Coase's work.  I seem to remember the
question he asked before 'why do business firms exist?' was about how and
why communist countries governance works. It is this that led to his  theory
of the firm in the late 30s (although it wasn't published till much later).
Please correct me if I'm mis-remembering.  It was of contemporary interest
for some of us in regard to understanding and  improving the management of
cooperatives, settlement houses and alternative systems of that ilk.

Yes, I understand Coase's the larger and longer version of the role
transaction costs. In response to Gunnar, however, I described a  version
derived in the field of Management Information Systems (MIS) at the end of
the 1990s. Transactions and their costs and virtualisation were the food and
drink of MIS at that time. You can see the  MIS 'short' conceptualisation of
'transaction cost' as being slightly different from, but built, on that of
Coase. The MIS version is useful because it was an effective tool to unpack
business growth and decay dynamics  at a time characterised by rapid
dis-intermediation; significant reductions  in the time and cost of
transactions via electronic processes; and, automation of routine human
tasks resulting in electronic substitution for humans. I agree with you
about Coase's versions and his theory of the firm. The  MIS version extends
into different territory  but the two stories align well.

On Watson, errm. Your description suggests you might be misunderstanding a
little  how Watson works. Your description in this post and your previous
post, and what you draw from them feel somewhat dated, like a description of
artificial intelligence machines from 30-40 years ago when AI was primarily
rules-based.  As I understand it, the only aspect of Watson that is
significantly rules-based is its parsing mechanism, which you would expect
as that process is mechanical. Everything else is via learning. There are
significant differences between learning and rules-based computer systems.
The  differences mean Watson's roles in terms of humans and human activity
differ from what you describe.

Best wishes ,
Terry

---
Dr Terence Love
PhD(UWA), BA(Hons) Engin. PGCEd, FDRS, AMIMechE, PMACM, MISI

Honorary Fellow
IEED, Management School
Lancaster University, Lancaster, UK

Director,
Love Services Pty Ltd
PO Box 226, Quinns Rocks
Western Australia 6030
Tel: +61 (0)4 3497 5848
Fax:+61 (0)8 9305 7629
[log in to unmask] 
--



-----Original Message-----
From: PhD-Design - This list is for discussion of PhD studies and related
research in Design [mailto:[log in to unmask]] On Behalf Of Ken
Friedman
Sent: Friday, 13 September 2013 3:31 PM
To: [log in to unmask]
Subject: Re: special

Dear Terry and Gunnar,

Terry's reply brought new dimensions to this thread. These comments are
useful, and one deserves further development.

Ronald Coase's theory of the firm and the concept of transaction costs adds
dimension to the thread that are not a necessary outcome of Gunnar's earlier
query.

The reason I focused on Ricardo's theory of comparative advantage is that
Gunnar's query raised questions about the possible relation between David
Ricardo's theory of comparative advantage and Clement Greenberg's theory of
modernist art. Gunnar posed both of these in terms of specialization. I see
neither as a case of specialization, and I don't see Greenberg's approach to
modernism in relation to Ricardian comparative advantage.

Terry's description of how digital information processing leads to changes
within firms and industries was very helpful in several slightly different
ways.

This shed light on the earlier thread about Watson, the computer that won
playing Jeopardy. Computers and algorithms that enable computer to take over
some human tasks have a range of things they do very well. These typically
involve activities governed by tight rules that do not require preference,
judgment, or emotional sensibility, or human engagement.

Human activities in nearly every field involve repetitious or mechanical
tasks that may not require judgment. Many such activities involve a sequence
of judgment-neutral tasks, repeated processes that are in principle always
the same. Others involve a series of repeated mechanical motions. A computer
or robots can replace human beings when the activities are essentially
mechanical and algorithmic rather than judgment-based. This includes the
activity of computing - the title "computer" was first applied to human
beings whose job it was to undertake computations for other human beings. In
general, computers worked for other people whose work required computing but
who were either focused on another main task, too busy, or too highly paid
to do their own computing. These human computers were among the first human
beings to lose their jobs at the dawn of the computing era now known as the
information age.

Computers can also manage processes that seem to require judgment. This
occurs when brute force computing can be used to process large numbers of
possible decision paths and outcomes at a speed that far outstrips human
capacity. This is not a substitute for human intelligence, but a series of
programmed pathways that allow a computer to replace the human judgment of
likely moves and outcomes on such a rapid time scale that no human can
manage to surpass the brute force approach in a rule-bound game. This is how
Deep Blue beat Gary Kasparov, and this is why new chess software is even
better. It is also how Watson won Jeopardy.

This explains two issues.

The first issue is that computers can replace much human labor because many
tasks that human workers perform involve repetitious or rule-bound
activities. For better - and for worse - this describes a great deal of
human work. The fact that this is so was the inspiration for Frederick W.
Taylor and his "one best way" vision of "scientific management" for planning
work tasks. While this leads to productivity gains under certain
circumstances, it also leads to problems. When human beings are required to
carry out repeated tasks on a continuous basis, they grow tired and bored,
their attention flags, performance and quality decrease. In the absence of
defects or disruptions, computers and robots carry out programmed tasks
exactly as planned without change or let-up.

The second issue is that computers cannot replace any human activity that
requires judgment, empathy, intuition, or the capacities that lead to human
preference.

Great amounts of human work involve activities that computers can replace. A
significant but lesser amount of work is of the second kind. In some cases,
the two aspects of work are closely linked, requiring an engaged human
decision-maker who takes responsibility for the full process, the mechanical
parts and the judgmental parts together. In other cases, it is possible to
disaggregate different kinds of tasks. In those cases, computers can replace
those aspects of a human job involving the first kind of activity, while
those portions of the same job involving the second kind of activity are
unbundled and aggregated with other tasks. Terry described some of the
changes to banking and design firms that flow from the ability to unbundle
parts of jobs while restructuring the remaining work so that fewer human
workers can do it.

This is how mechanization and computerization in typesetting replaced a
great many people, including typesetters, press men, and many junior
designers. Computers have replaced nearly all the designers and typographers
who were called "mechanicals" when I first worked in publishing in the
1960s. Most human mechanicals carried out the instructions of senior
designers in the same way that human computers carried out the instructions
of mathematicians, statisticians, physicists, and actuaries.

In this respect, Terry's explanation of how computing has transformed
industries such as banking is useful and elegant.

Terry's description of transaction costs requires understanding Coase's
theory of the firm, an issue that did not appear in the post.

Ronald Coase won the Nobel Prize in Economics in 1991 for "his discovery and
clarification of the significance of transaction costs and property rights
for the institutional structure and functioning of the economy" (The Royal
Swedish Academy of Sciences 1991.)

Coase's (1937) article on "The Nature of the Firm" essentially created the
field of transaction cost economics. In essence, Coase asked a simple yet
profound question: "Why do business firms exist?"

In one kind of ideal world, economic theory proposes that we should be able
to buy specialist services from one another in an open market. If this were
the case, then - in theory - we could each focus on the areas in which we
have comparative advantage or some preferential position. For anything else,
we would buy goods and services from others.

But this is an ideal world of a certain kind. This world does not exist.
Human beings create organizations and firms rather than simply trading for
services in an open market. Coase examined this issue in a profound new way.
When he asked, "why do firms exist?" he came to an answer that he labeled
transaction costs.

Transaction costs are those costs that make it expensive in one way or
another to buy goods or services in an open market as distinct from the cost
or value of the goods and services we buy. The concept of transaction costs
involves many issues - secure knowledge of the quality of goods and
services; availability at the right time; true pricing; trust; and many
other factors. This is a very short explanation lacking in detail and
nuance.

In technical terms, transaction costs are "the costs of resources utilized
for the creation, maintenance, use, and change of institutions and
organizations. They include the costs of defining and measuring resources or
claims, the costs of utilizing and enforcing the rights specified, and the
costs of information, negotiation, and enforcement" (see: Furubotn and
Richter 1997: 40). Firms exist because it is often less expensive and safer
for an organization to provide these services within the boundaries of the
organization than to buy them in an open market.

Transactions in open markets - and within the closed boundaries of the firm
- can be described in the same way in economic theory. A transaction "occurs
when a good or service is transferred across a technologically separable
interface" (see: Williamson 1996: 379). In other words, what happens when
organizations can provide their own services and goods across
intra-organizational boundaries in the form of a transaction within the
organization. But the key insight in Coase's (1937) article is that firms
exist to reduce all the many kinds of transaction costs that may exist.

Terry's description seems to me a bit confusing for two reasons. One is that
some organizations provide services and information as their direct product.
The description in Terry's post placed material and wages under direct costs
and information services and decision-making under transaction costs. This
is not entirely the case in some organizations. The other confusion involves
the fact that many of the transaction costs that exist in open markets
diminish or possibly disappear within the boundaries of some firms. The
description did not mention these or note that one reason that transaction
costs are described as transaction costs arises from the fact that these
costs were costs incurred when individuals or group bought goods or services
outside the group in a trade transaction. Indeed, the notion of trade
transactions under the theory of comparative advantage would be one reason
to think of Coase's theory of the firm as an advance against Ricardian
economics. While in one sense this is the case, it is useful to remember
that David Ricardo was born in 1772, dying in 1823, nearly 90 years before
the birth of Ronald Coase. Like Newton before him, Coase saw farther because
he stood on the shoulders of giants.

In a short and not very detailed explanation, the major reason for creating
firms is to ensure that human beings can manage the goods and services vital
to a business. If market failures can impede business activities, it is best
to internalize them within the firm. It therefore makes sense to create
organizations that can take on and allow human beings to control the
processes, goods, and services central to the core business even though they
might otherwise purchase them in an open market.

To drill down into the details of Terry's explanation of transaction costs
would require a careful and nuanced post that would be far longer. I'm up to
nearly 1,600 words now, and I don't have time to write at the length of a
journal article to explain more.

Since I don't have time to develop this issue properly, I have posted a copy
of the Coase (1937) article, "The Nature of the Firm" to my Academia page. I
will leave it up until September 27. It is accessible under teaching
documents at URL:

http://swinburne.academia.edu/KenFriedman

Those who wish to learn more about Ronald Coase and the work that won the
Nobel Prize will find useful information and linked resources at the Nobel
Prize web site:

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1991/coas
e-facts.html

The 1991 press release is especially helpful.

There is also a wealth of materials at the web site of the Ronald Coase
Institute:

http://www.coase.org/index.htm

The obituary on this web site provides a nice summary of Coase's work and
its influence.

Yours,

Ken

Ken Friedman, PhD, DSc (hc), FDRS | University Distinguished Professor |
Swinburne University of Technology | Melbourne, Australia |
[log in to unmask]<mailto:[log in to unmask]> | Mobile +61 404 830
462 | Home Page
http://www.swinburne.edu.au/design/people/Professor-Ken-Friedman-ID22.html<h
ttp://www.swinburne.edu.au/design> Academia Page
http://swinburne.academia.edu/KenFriedman About Me Page
http://about.me/ken_friedman

Guest Professor | College of Design and Innovation | Tongji University |
Shanghai, China

--

References

Coase, R.H. 1937. The Nature of the Firm. Economica, New Series, Vol. 4, No.
16 (November 1937), pp. 386-405.

Stable URL:
http://links.jstor.org/sici?sici=OO13-0427%28193711%292%3A4%3A16%3C386%3ATNO
TF%3E2.0.C0%3B2

Furubotn, Eirik G., and Rudolf Richter. 1997. Institutions and Economic
Theory: The Contribution of the New Institutional Economics. Ann Arbor: The
University of Michigan Press.

The Royal Swedish Academy of Sciences. 1991. "The Prize in Economics 1991 -
Press Release." Nobelprize.org. Nobel Media AB 2013. URL:
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1991/pres
s.html
Accessed 2013 September 12.

Williamson, Oliver E. 1996. The Mechanisms of Governance. Oxford: Oxford
University Press.

--

Terry Love wrote:

-snip-

After reading your post, I wondered about the benefit of looking beyond
Ricardo. The advent of electronic data processing has changed many of the
assumptions on which Ricardo's analyses and theories were based. Perhaps
more importantly, currently we are in a transition situation between the
before and after effects of electronic data exchange and knowledge
automation.

In what follows, the focus is on the effects of electronic data exchange,
the transitional effects of knowledge automation are even more significant
but left to another time.

There are radical changes afoot due to electronic data processing practices
that have been obvious since around 2000 and are now in play and these
radically (as in 'by its roots') change the 'specialization picture' and
appear to turn some of Ricardo's theories on their head, although you might
regard what the issues that follow in terms of a redefinition of Ricardo's
'rent'.

Six issues relating to the effects of electronic data processing on the
future benefits or otherwise of specialisation are:

1. Dis-Economy of Scale (the opposite of 'economy of scale') 2. Role of
Coasian Transaction costs in defining the dis-Economies of Scale and
'economies of Scale'
3. Effects of electronic systems and improved algorithmic/neural net
systems) (Computers, Software, wide and local area networks, Internet,
Artificial Intelligence, computers such as Watson, etc.) in reducing the
transaction costs that result in dis-economies of scale.
4. Consequenct significant increases in economic efficiency (profits) of
organisations from operating at massively higher levels of scale than
currently found.
5. Subsequent pressures towards acquisitions and mergers and extinction of
ecosystem niches for very small specialist organisations.
6. Consequent tendency towards reduced system stability and increased
possibility of global system collapse due to reduced number of stabilisaiton
loops in the systems and high positive feedback.

The cost of producing an item or providing a service can be separated into
two components: a) the direct costs including materials, wages etc; and, b)
the transaction costs (taken more broadly as the costs of providing the
organisations infrastructure, documentation, decision making etc. associated
with and providing support for the activities that generate the direct
costs). Note: this is an extension of the concept of Coase's theories about
transaction costs that emerged in the MIS field around 2000.

As organisations increase in size, the direct costs reduce (what is often
called the economies of scale). Problematically, however, the transaction
costs increase as organisations increase in size because there is more
internal communication and the like (this is called in MIS, the 'dis-economy
of scale'). The maximum size of organisations occurs when the effects of the
dis-economies of scale due to transaction costs mean that there is no more
advantage in increasing size to gain economies of scale.

Electronic systems significantly reduce transaction costs. For example,
around 2001, to process a cheque cost a bank around $20 per cheque using
conventional banking methods. To processes the same money as an electronic
payment via internet banking cost around 1/10 of a cent. The transaction
cost reduced enormously. Banks had been limited in scale by the increases in
internal transaction costs of managing a larger banking organisations. The
reduction in transaction costs offered by electronic banking enabled banks
to jettison their previous transaction processes (e.g staff, and branches)
and offered scale benefits leading to mergers and transition to a much
smaller number of larger banks. Incidentally, as transaction cost reductions
were uneven, there were increased advantages in banks moving towards retail
banking (where transaction cost reductions were highest) and with a tendency
to specialise (as a retail bank, or commercial bank etc) at a much higher
organisational size and then gain the benefits of market segmentation by
offering boutique services under different brands as if they were smaller
organisations. This is pseudo-specialization.

The same is found in any organisational ecosystem. When I interviewed CEOs
of large design companies around 2003-2005, the above process was playing
out with them laying staff off because ot the reduction in 'transaction
costs' (and improved productivity) offered by Apple computers. Typically, it
seemed that they moved to laying off 3 staff in 4. Profitability of the
larger firms increased. Smaller firms operated in the eco-system niches.
Many designers moved into design education. One of the aspects of
'transaction costs' in design activity is the cost of the 'transactions'
with the body of knowledge and expertise (fonts, research, best practices,
etc). These aspects of the transaction can now be accessed directly using
computer software and hardware(Adobe and Apple spring to mind again) at much
lower 'transaction costs' than training and using individual human
designers. In essence, you can see the scale and profit changes of the
design industry being split between 'design businesses' and 'automated
design service software businesses' (Adobe and Apple) . The benefits have
almost exclusively gone to the latter, who have specialised, reduced
transaction costs, and massively incr4ased in size and profit via
transaction cost reduction. In contrast, small design firms are on a much
slower track caught between specialisation, reducing prices, and merger and
acquisition to reduce transaction costs. Worse, the reduction in transaction
costs offered via Adobe, Apple and the like, have resulted in a large body
of competitors as diy desktop publishing. The latter resucing the scale of
the market and creating its own pressure on prices. In theory, this leaves
design businesses caught between multiple profit reducing factors, some
pressuring towards specialisation to increase profit by cost reduction and
some pressurising towards 'generalisation' to have sufficient work at
smaller organisational scale. All are shaped by the effects of changes in
transaction costs due to electronic systems.

Similar developments are obvious in university systems.

Mostly, this goes a bit beyond Ricardo. Which is I guess part of the reason
Ronald Coase got a Nobel prize for it.

-snip-



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