The inexorable rise of work markets

The role and prominence of online markets for work have soared dramatically over the last few years, but this is just the beginning.

I have been following the rise of online markets for work since Elance was founded in 1999, writing about them in my 2002 book Living Networks and dedicating a large chunk of Getting Results From Crowds to how to effectively manage work markets.

Prominent VC Fred Wilson of Union Square Ventures has just written a post The Nature Of The Firm and Work Markets, referencing, as I did in both of these books, the seminal work of Ronald Coase. Wilson writes:

Coase argues that transaction costs that make “trading bilaterally through contracts” expensive spur the organization of firms. And if those transaction costs could be eliminated, more individuals would choose to trade with each other rather than forming partnerships, companies, and other business entities.

Enter the internet and having a computer in your pocket into this model and things change. Technology has been causing these transaction costs to drop precipitously for years now and the result is we have seen the emergence of work markets in which “individuals trade bilaterally through contracts.”

He goes on to reference one of their portfolio companies, WorkMarket, that plays at the heart of this space. He also points to a post by his colleague Christina Cacioppo who suggests in an interesting post on the biggest themes for tech entrepreneurs today that “work is shifting toward a peer-to-peer model”:

The first two decades of the modern internet broke industries built on distribution monopolies (e.g. music, news) and facilitated coordination between the consumer and the provider without the need for a middleman (e.g. hotels, car rentals.) The same will happen for a large fraction of our work, especially in cases where the work is standardized or employers “distribute” their workers to pools of customers.

One reason to create firms is the coordination and signaling problems of situations with imperfect information and transaction costs. As technology increases information flows and decreases transaction costs, individuals can leave their old employers and strike out on their own. Their livelihoods will still depend on providing valuable services in exchange for fees, but they’ll do so as freelancers – and on their own, they’ll capture more of the value generated by their work.

Just as blogs allowed talented writers to build audiences without being affiliated with large media organizations, and as Twitter and Tumblr allowed news- and tastemakers to succeed outside of established news or media properties, new web services will allow individuals to engage with customers without needing to work for a firm.

Indeed, while what I call ‘service marketplaces‘ have already significantly changed the work landscape, this is just the beginning.

Investors as well as workers, companies, and nations need to understand and shift to the heart of liquid flows of work around the world, as transactions costs move towards zero.