James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Institute at Hartford Hartford, Connecticut, USA 1

2 “The Nature of the Firm,” Economica, Firms exist to minimize “transaction costs” “The Problem of Social Cost,” Journal of Law and Economics, Property Rights evolve to allocate property when transaction costs are too high

Ronald Coase, Journal of Law & Economics, “The Problem of Social Cost” (1960) 3 Smoke: Total Value to B Marginal Value to B Total Value to N Marginal Value to N

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5 Smoke TotalVal-B MargVal-B TotalVal_N MargDam-N

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Non-Convexity & Reversibility 7

In this case, if Transactions Costs High – better to give Property Right to Sender than to Receiver 8

Total, not just Marginal Conditions 9

10 The Common Law is “an attempt to increase the value of the resource by assigning property rights to those parties … in whose hands the rights are most valuable.” - Richard Posner, The Economic Analysis of the Law, 1972 Without flexible property rights, “the only way we thought we could test out the value of the pollution was by the only liability law we thought we had.” - Guido Calabresi and Douglas Melamed, “Property Rules, Liability Rules, and Inalienability”, Harvard Law Review, 1992

Wikipedia Apache WebServer MIT Open CourseWare Google EBay Apple Firefox Linux Amazon MySQL (Sun) Travelocity 11

“Coase’s Penguin, or, Linux and The Nature of the Firm” by Yochai Benkler 12

The Economist, “The Next Society,” November Agriculture => Manor, Plantation Feudalism Feudalism Industry => Family Firm, Corporation Capitalism Capitalism Research => Scientific Circles, Universities, Firms New System? New System?

The Economist, March 8, 2008: “America's patent system: Methods and madness” 14

15 My Firm Externalities are Multi- Dimensional

16 US v. Europe Google v. Yahoo Linux v. Microsoft Apple v. Microsoft Guerilla Bands v. Centralized Army

17 As the flow of water is determined by the earth … changing and adapting to the opponent consummation of forming arrive at formlessness - Sun-Tzu, The Art of War, 500 BCE “As the flow of water is determined by the earth, so the victory of military force is determined by the opponent. … To gain victory by changing and adapting to the opponent is called genius. Therefore the consummation of forming … is to arrive at formlessness. When you have no form, undercover espionage cannot find out anything, intelligence cannot form a strategy.” - Sun-Tzu, The Art of War, 500 BCE great uncertainty of all data in war planned in a mere twilight, “… the great uncertainty of all data in war is a peculiar difficulty, because all action must …be planned in a mere twilight, like the effect of a fog or moonshine — talent must discover which … like the effect of a fog or moonshine — gives to things exaggerated dimensions and an unnatural appearance. What this feeble light leaves indistinct to the sight, talent must discover…” - Von Clausewitz, On War, 1874