The Man Who Invented Companies:
Ronald Coase and the Origins of Operating
He didn’t build a company. He didn’t scale a startup. He didn’t even run a team.
But in 1937, a 27-year-old economist named Ronald Coase gave the world something more enduring: the reason companies exist.
He wrote one essay, “The Nature of the Firm,” that changed how we think about company structure and leadership and why some work belongs inside a firm while other work belongs outside. Before Coase, economics treated companies like black boxes. After Coase, we had a theory of shape, size, and purpose (Coase’s paper is the single most influential piece of writing that has impacted my work operating companies since I left academia).
You could say he invented the modern company, and with it, the operator's role.
This essay breaks down:
Why firms exist
How they grow (and why they stop)
What every operator should understand about Coase’s logic today
At the end, you’ll get three practical takeaways and specific steps to apply this to your company.
The Core Question: Why Do Companies Exist?
Coase asked: If markets are efficient, why build companies?
Markets let people trade freely. Prices convey information.
So why not just hire contractors for every task?
The answer: transaction costs.
Markets aren’t free to use. Every deal has hidden costs:
Finding the right partner
Negotiating terms
Writing enforceable contracts
Making sure people follow through
When those costs get too high, it becomes cheaper to bring the work inside.
A firm isn’t a place. It’s a cost management calculator.
If internal coordination is cheaper than outsourcing, you hire. You build. You operate.
Internal Friction vs. External Friction
Coase didn’t just explain why firms exist. He explained why they stop growing.
Add too many people, and new costs show up:
Bureaucracy
Delayed decisions
Communication breakdowns
These are internal coordination costs. When they outweigh the cost of outsourcing, the firm shrinks.
The firm’s boundary shifts with every change in cost.
What Belongs Inside the Firm?
Coase gave us more than a theory, he gave us a practical framework we can integrate into our weekly strategic thinking and planing as operators.
What Coase Would Say Today
Now, both sides of the cost equation are shifting fast:
AI lowers internal costs. One manager can oversee more work.
Digital platforms lower external costs. Hiring experts is instant.
GPT-4 is an operator in a box. Upwork is global talent. Smart contracts are compliance without lawyers.
New tech doesn’t just change what we can build. It changes what we should build.
If Coase were alive today, his guidance might sound like this:
Use AI to absorb complexity, not mask it. Don’t add tools unless they reduce real coordination overhead.
Outsource when standardization is possible. If the task follows a script, it probably belongs outside the firm.
Internalize ambiguity. The more specialized, high-trust, or iterative the work, the more it needs to live inside.
Re-evaluate boundaries monthly, not annually. New tech reshuffles the cost map faster than old org structures can respond.
Coase wouldn’t argue for fewer employees or more freelancers. He’d argue for clarity about what belongs inside your firm and what doesn’t.
The “Coasian Operating Mandate”
Coase didn’t give us dashboards or KPIs. He gave us a decision rule.
In an AI-first world, with teams distributed and markets liquid, his theory still guides the core question:
What’s cheaper to coordinate internally?
What’s safer to outsource?
Where does control matter more than speed?
Great operators manage friction.
The answers vary by company, but the method stays the same: map the work, measure the drag, and move the boundary. Coordination needs capital, and clarity requires strategy. The operator’s job is to keep both in check.
Operator’s Guide: 3 Takeaways
1. The firm is a cost calculator.
If outsourcing works, don’t hire. If coordination is risky, internalize it.
Put it into practice:
List every department and ask: "Could this be done externally?"
Map out friction points in your hiring or project workflows.
Measure how much time internal teams spend on coordination vs. creation.
Run a cost comparison: in-house vs. platform vs. automation.
Audit recent hires. Were they made because of friction or fear?
2. Redraw the boundary. Constantly.
Every new tool shifts the balance. Treat structure as a variable, not a given.
Put it into practice:
Schedule a quarterly boundary review: What’s inside vs. outside the firm?
Create a “boundary map” for each department.
Flag recurring tasks that could move outside the org.
Review one workflow per month to evaluate new tools.
Build a tech radar: what AI or automation is reducing external cost?
3. Operators are friction architects.
Your role isn’t to manage tasks. It’s to remove drag.
Put it into practice:
Write out your biggest coordination bottlenecks.
Diagram your most complex internal process.
Ask: Who owns each point of friction?
Design a standard: how decisions get made with fewer steps.
Build feedback loops: ask teams where friction is highest.
Closing Thought
Coase didn’t build a business. But he gave us the logic behind every one that lasts.
He showed us that every hire, every tool, every org chart is a response to one thing: friction. And the operator’s job isn’t just to reduce friction. It’s to design systems around it.
Every Operator faces the same question: Where is the friction?
The answer changes as tools evolve, teams scale, and markets shift, but the framework doesn’t.
The future won’t belong to the biggest firms, or the leanest. It will belong to those who redraw the boundary faster and smarter than anyone else.
That’s the operator’s job now. That’s the legacy of Ronald Coase.
Thank you for taking the time to read this article.
Most importantly, I hope this helped.
I look forward to the discussion in the comments.
- John Brewton -
📬 Your Move
👉 What part of your company are you managing only because it feels safer?
👉 What could you let go of if coordination costs dropped tomorrow?
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