Machines, Platforms, and Crowds

Andrew McAfee and Erik Brynjolfsson – Authors of The Second Machine Age – wrote a new book which they launched in the middle of this year. Machine, Platform, Crowd: Harnessing Our Digital Future builds upon their first book, exploring three big trends that are reshaping the business world:

  1. The rapidly increasing and expanding capabilities of machines
  1. The large and influential young companies (Platforms) that bear little resemblance to the established incumbents in their industries, yet are deeply disrupting them
  1. The emergence of the crowd: the large amount of human knowledge, expertise, and enthusiasm distributed all over the world and now available

The book digs deep into an analysis of these trends, and the rebalancing required between minds and machines, products and platforms, and the core and the crowd. The authors identify the core as the counterpart for the crowd: the knowledge, processes, expertise, and capabilities that companies have built up internally and across their supply chains. The explosion in technology innovation drives the need to rethink the balance between each of these pairs.

Given my focus on emerging Ecosystems, I really appreciated the section on decentralization and the role of companies in the future. Their focus on what technology enables versus the economics of the firm serves as a reality check as we consider the role of decentralized autonomous organizations in the future. The example provided is very effective in this regard. The organization involved was the first truly decentralized autonomous organization ever created (The DAO), which was built on the Ethereum Blockchain and operated solely via software. It was akin to a venture capital fund that followed the principle of decentralizing all things. The DAO existed only as open-source, distributed software for executing smart contracts.

It existed to approve and invest in projects that would be picked not by a core group of partners or evaluators, but instead by the entire crowd that funded The DAO, with voting power in proportion to their initial investment. There was no human or institutional layer outside of the software – no CEO, board of directors, employees, or steering committee. The new decentralized organization raised $162 million within a twenty-eight-day period in May of 2016. Because of a software vulnerability, someone hacked The DAO and siphoned off one third of the money, raising important questions about the vulnerabilities of cryptocurrencies and smart contracts revealed by the exploit.

With this as a backdrop, the authors analyze the role of companies in this emerging future. A fascinating look at markets and their lower production costs, versus companies and their lower coordination costs. I believe in their assertion that digital technologies lower the cost of coordination, thereby eroding the advantage of the firm and their ability to dominate markets. However, the authors use research to dispute this notion – at least for now. The numbers would tell us that the demise of big companies is simply not evident. The Economist researched 893 different US industries and found that the weighted-average market share of the top four firms’ revenues had risen from 26% to 32% of the total between 1997 and 2012.

The key reason provided for the unlikely transition away from the firm is the complexity of our world. With a largely unknowable future and limited human intelligence, writing a complete contract becomes prohibitively difficult, and most likely impossible. This phenomenon undermines the movement away from ownership. The authors are pessimistic that totally decentralized, purely crowd-based entities like The DAO will ever be economically dominant, no matter how technologically solid they become. They simply can’t solve the problems of incomplete contracting and residual rights of control that a company solves by letting management make all the decisions not explicitly assigned to other parties. They do leave open the possibility that future technologies may eventually make it possible to write complete contracts – but as fast as computers enable one party to anticipate outcomes, they enable other parties to consider more complex possibilities.

There is so much more to explore in this outstanding look at three significant transformative pieces of our future: machines, platforms, and crowds.

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