MIS 373 Lecture Notes Jan27 - Shirky discussion

1. LECTURE NOTES
:: 1/27/2009
:: Sharing Across Community
MIS 373 – Social Networks
:: Shirky, Chapter 2
The value of networks arises primarily from the relationships (links) between its members (nodes) rather than
the members themselves.
But the complexity of a group (represented formally as a fully connected network of relationships among the
group’s members) grows faster than its size; a fully connected network with n nodes has r = n (n-1) / 2
relationship (it grows quadratically by n). A group (of people) is more than the sum of the individuals. Groups
exhibit complex behavior. Coordinating groups gets difficult for groups of modest size and nearly impossible
for large groups.
Examples of the complexity of coordinating group effort illustrate that what might be easy for a group of 2 or 3
can get quite complicated for groups of ten and impossible for a group of a thousand (without imposing
management, rules and compromises):
 Deciding where to have dinner
 Clinking glasses with everyone during a toast
 Running a social club
The Mythical Man-Month Law (Fred Brooks, 1975): Adding another programmer to a late software projects
will delay it even more (because additional coordination costs are larger than additional gains).
The solution to managing large groups of people in modern society has been to gather people together into
organizations and introduce hierarchical levels of management to deal with the complexity of coordinating
groups. (Hence the term organization; organizations are entities that organize things). The value of hierarchical
management is simplified communication and coordination among group members (fewer connections; a
small group of staff report s only to one manager, who reports and receives instruction from a line manager
one level up the chain, and so on).
Institutions pursue two major goals. The first is explicit and according to its mission statement while the
second (and perhaps most important), self-preservation, is implicit. The latter makes it hard for institutions to
change.
Production in modern (20th century) economies is either organized by firms (hierarchies) or markets (aside
from state and government controlled production). Companies organize work inside the boundary of the firm
and manage group effort through command and control structures. But companies also outsource some work
tasks to other companies (i.e. the market). Relationships with the market are arranged through contracts.
Transaction costs determine whether a task gets produced inside the firm or by the market (outsourced).
Transaction costs are costs that are incurred for getting something done (including communication cost,
coordination cost, negotiation cost, monitoring cost, administrative costs related to organizing the transaction,
transactional risks, and time and effort spent on managing the transaction). Production cost are the direct cost
Shirky, Chapter 2 Sharing Across Community Page 1

2. of producing a certain good or service (in-house). Transaction costs occur with both in-house production (cost
of managing production within the firm) and procurement in the market (cost of transacting with the market).
Market price is the cost a firm has to pay to purchase a good or service from someone else in the marketplace.
The economist and Nobel prize laureate Ronald Coase realized the importance of transaction costs for the
organization of work and postulated that firms emerged because they reduce transaction costs for production
(through effective management of group work).
In an idealized setting, the market would comprise of independent workers who contract out specialized crafts
and services. In a completely open market for labor, complex tasks (e.g. making a product or service) would be
done as a group effort by contracting with a number of specialist who would work together to accomplish the
given task.
However, the number of options available in the market, their discovery and evaluation, the number of service
agreements (contract) that need to be negotiated, enacted, and enforced would grow quickly (complexity) and
lead to fast rising transaction costs when dealing with the market. Organizing group with labor inside the firm
(with proper management control structures) can carry much lower transaction costs (for activities the
company is good at) and make firm production the more efficient arrangement. Technology change and
innovative management practices affect the cost structure, but in general the decision whether to produce in-
house or outsource is determined by the following equation.
If production cost + transaction cost within the firm < transaction cost with the market + market price then
produce good or service in-house else outsource to the market.
Large, vertically integrated corporations arose in the 19th century and developed into efficient mass production
behemoths (like GE or GM, e.g.) that epitomized economic success in the 20th century. New information and
communication technologies (ICT or IT) has always impacted (and reduced) transaction cost. Starting in the
1980s, and still continuing now and likely for some time to come, organizations have been vertically
disintegrating business processes, taking advantage of better communication, coordination, and monitoring
capabilities afforded by the adoption of computer networking, electronic data interchange (EDI), inter-
organizational information systems, and now the Internet and the Web.
As a result large companies have downsized and increasingly rely more on (both vertical and horizontal)
partnerships and less on internal production. Outsourcing has become a (often) cheaper alternative to internal
production, and has also become, due to the advances of modern IT and the reduction of transaction costs, a
more reliable option for procuring products and services in the market. Today’s technology infrastructure
effectively supports not only the outsourcing of manufacturing processes but also, and increasingly, the
outsourcing of services.
Firms are successful (profitable) when the cost of directing employees is lower than the value the employees
create. The “org chart” represents a model for managing complexity that delineates lines of responsibility,
channels of communication, information flows, and location of decision-making (Example; Western Railroad,
1855). Good management will lower overall transaction costs and make large organizations manageable. But
the costs of management (overhead costs) limit what firms can pursue. Products/services/activities whose
total costs are higher than their potential value don’t get done, if even if they would be socially desirable. New
social tools are altering this equation by lowering the cost of organizing group effort.
Shirky, Chapter 2 Sharing Across Community Page 2

3. Some activities that were too costly for traditional firms are now possible with new forms of coordination
based on abandoning managerial oversight for providing tools to support group-forming and the self-
organization of group effort. (Example: Flickr and the organizing of pictures taken at the annual Mermaid
Parade, Coney Island)
When transaction costs fall moderately, Coasean theory predicts that large firms grow larger and small firms
become more cost-competitive. If transaction cost fall dramatically, or collapse, activities that were not worth
pursuing because of the cost of managerial oversight (e.g. recovering Ivanna’s phone, organizing the Coney
Island mermaid photos) become possible if there is a desire for them.
As long as managing large groups was expensive (in absolute terms), groups without formal organization were
limited to do simple activities. But since the cost of coordinating group effort has become cheap, many
activities that used to be below the threshold of profitability have come into reach of getting done. Social
production, that is, the organization of complex work by loosely coordinated groups, without managerial
direction and oversight, using social tools is emerging as a newly significant economic production model
outside the traditional institutions of markets and hierarchies.
The level of difficulty and demands of organizing group effort depends on the kind of undertaking. Organizing
sharing, e.g., only requires shared awareness and is easier than collaborative production, which requires
collective decisions and shared creation. Collective action is the hardest, it requires strong group commitment
and shared vision and shared responsibility (Example: The Tragedy of the Commons and the free-rider
problem).
Falling transaction costs, caused by lower communication costs and effective new social tools, is arguably the
main driver of economic transformation of the rising digital economy at the beginning of the 21st century.
Shirky, Chapter 2 Sharing Across Community Page 3