How AI and blockchain will change business organization

03/17/2017 03:19 pm ET

There are good reasons why work is organized around closed, self-contained organizations called “companies” and “corporations”. Nobel prize-winning economist Ronald Coase showed in his theory of the firm that there are three costs in the economy: the cost of finding talent, resources and information to create value (cost of search); the cost of getting people to work together in an efficient way (cost of coordination); and the cost of ensuring fair play and the execution of agreements (cost of contracting). These three costs tend to be much lower when something is created inside a company rather than outside.

This cost asymmetry has held true for centuries. The advent of digital talent platforms – such as Upwork, Topcoder, etc. - has lowered some of the costs of search and contracting talent; so companies are increasingly assigning work outside the organization using these new digital tools. Cognitive automation in the guise of intelligent process automation is further lowering the cost of work, by automating certain routine cognitive tasks; although companies that implement this new technology do so inside their firewalls. We are currently witnessing an evolution of the firm towards a more “agile” organization where labour costs are rationalized; and yet the essentials in Coase’s cost asymmetry remain. And so do all the other characteristics of the firm; its governance, relations with shareholders, customers and suppliers, with regulators and the society at large, etc.

George Zarkadakis
The fully automated organization: technology stack

All this is about to change in a most profound way. The real “revolution” – the “fourth industrial revolution” – will result in the reinvention of economic organization, away from self-contained companies and towards more distributed, leaderless, and permeable systems of human collaboration. The cause for this revolutionary transformation would be that - for the first time in human history - the three costs that Coase identified could become much lower outside the firm. Blockhain technology in combination with Artificial Intelligence will make sure of that, and here’s how:

Distributed databases capable of recording every transaction between participants (“blockchains”) set the foundations for a new economic model for creating value. Most obviously, the cost of contracting is minimized in a blockchain, since there is no longer need for a trusted third party. In addition the level of cybersecurity is increased multifold for a number of reasons, and not only because there is no longer a “single point of failure” that can be easily attacked. The cost of search is also minimized: think distributed applications running on various blockchains and returning values ranging from reputation scores all the way to digital artefacts, data, and knowledge. Using these applications one can find whatever one needs to put together whatever value chain her imagination permits. The only remaining cost to lower is the cost of coordination: and this is where AI comes into play.

Intelligent agents could travel across networks of blockchains and coordinate resources, execute smart contracts, and return value to the owners of those agents. Imagine for example a driverless car run by its AI. The car may be owned by a number of humans, thousands even, through ownership contracts recorded on a blockchain. The car, or rather its AI, once called to execute a ride via a distributed application, searches a blockchain to ensure that the call is legitimate, executes the ride, and returns the income it collects almost instantaneously to its owners for immediate distribution. Or think of a swarm of agricultural robots collaborating with intelligent sensors and managing efficiently, and with minimum environmental impact, farmland to produce the highest possible yields. In such a scenario ownership of the farmland, the harvest, the seeds, the robots, the sensors, the applications, and so on, could also be distributed to many thousands of humans who would be the shareholders in this new fully automated business by investing any amount of money however small.

Big corporations will not go extinct with a bang; but will probably do so with a whimper as they cease to become relevant in the emerging world of machine intelligence, distributed fully-automated businesses, and democratic human collaboration.

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