Coase in the age of code

I recently came across an essay I wrote in university in 2011, about Ronald Coase and the theory of the firm. It was dry, academic, and deeply curious about a question that still feels pertinent today; why do firms exist at all?

Back then, the answer felt settled. Coase had explained that firms emerge because organizing through the market is costly; contracts take time, negotiations add friction, and information is imperfect. When it becomes cheaper to manage people internally than to transact externally, a firm is born. The invisible boundary of the firm, he said, lies at the point where these two costs meet.

Reading that old paper now, after a decade spent around blockchains, DAOs, and “trustless” financial systems, I’m struck by how cyclical the question feels. Crypto’s grand promise was to eliminate the very frictions that gave birth to the firm; to replace bureaucracy with code, management with incentives, contracts with consensus.

If Coase’s firm existed to minimize transaction costs, and those costs could be automated away, then perhaps the firm itself could be dissolved.

That was the dream. But it didn’t happen.

When you replace contracts with smart contracts, you still need judgment: what counts as a valid state, what to upgrade, when to fork. When you remove hierarchy, you rediscover governance, only now it’s slower, noisier, and happening in public.

Bounded rationality didn’t vanish with blockchains. It simply migrated to Discord. The same cognitive limits that once defined the borders of the firm now define the borders of the network.

Agency problems persist too. Token holders delegate to committees, multisigs, or core teams. Power concentrates. Decision-making slows. Coordination becomes its own cost center. Every “decentralized” organization ends up rebuilding a managerial layer; sometimes reluctantly, sometimes accidentally.

The irony is that Coase’s logic still applies: a network expands until the cost of coordinating one more decision exceeds the cost of spinning up a new one.

Coase described the firm as an economic structure. But over time it became something deeper: a social technology for minimizing collective error. Firms exist not just to cut transaction costs, but to give a group of humans a shared model of the world, a rhythm, a sense of who decides what.

Even if code can settle value instantly, humans still need slower systems for context, accountability, and trust. The firm endures because it optimizes for judgment, not just execution.

This is why most DAOs still look suspiciously like companies. They may route capital through tokens, but their structure—small cores, delegated authority, decision bottlenecks—echoes the same patterns Coase was describing in 1937. It turns out coordination is a harder problem than trust.

What has changed is where the boundary lies.

The minimum viable firm used to require offices, payroll, and legal scaffolding. Now it can exist as a wallet, a few passkeys, and a group chat. The cost of coordination has collapsed — not to zero, but low enough that the firm can shrink to its essence: a system for allocating capital and attention toward a shared goal.

That collapse in cost doesn’t end the firm; it atomizes it. The future looks less like one monolithic organization and more like a mesh of smaller, temporary ones.

In that sense, blockchains didn’t abolish Coase’s world; they made his boundary dynamic.

Coase saw transaction costs as economic. What he couldn’t see from 1930s London was that information processing itself would one day be the scarce resource. The true constraint on coordination is no longer contract enforcement, but rather comprehension.

A modern firm isn’t just a bundle of contracts; it’s a bundle of cognition. Its size is limited not by the cost of managing people, but by the bandwidth of shared understanding among them.

Technology keeps lowering the cost of transaction, but it doesn’t raise the ceiling of comprehension. We can move money instantly, but aligning meaning still takes time. That’s the paradox of the digital firm: infinite speed, finite sensemaking.

When I wrote that early essay, I thought of the firm as an object, a structure bounded by cost. Now I think of it as a living organism bounded by cognition. The question is no longer why firms exist, but how fluid they can become before they stop being coherent.

Coase explained why we built firms. Crypto reminded us why we still need them.