If your job involves coding or writing, change is coming: Large Language Models (LLMs) will change the way you work, and it may happen very quickly.
The consensus opinion now is that LLMs are going to be as important as the printing press
or perhaps even the Industrial Revolution. Some are even saying it’s the end of the world as we know it.
Most of the discussion of AI today focuses on 1:1 interactions like ChatGPT, but we aren’t talking as much about how AI is going to change organizations. AI will dramatically enhance our collective communication abilities, and this will lead us to completely overhaul the structure of the corporation.
Throughout human history our technological development and scale of cooperation have been dictated by information and communication technologies
. LLMs erode many of the assumptions about information flow and coordination costs in the modern corporation. It’s a bit like dropping cell phones into a classic movie like Home Alone… Morning Alone — it doesn’t have quite the same ring to it. We predict an equally transformative evolution into what we call the AI organization. We humbly propose the following definition:
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An AI organization is an entity that primarily uses AI to manage information flow within the organization and decide on team composition and function.
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But before diving into how AI impacts organizations, we’ll first need to understand what corporations or firms are and how our pre-LLM communications technology grounds modern ones.
Look around you — almost everything you see was created by a corporation. Why? One answer is legal: governments make it possible to create legal entities that trade and sell goods & services as one unit. This creates a convenient unit for human action, especially when dealing with taxes and regulatory requirements. But the legal explanation does not tell the full story of why the market has adopted this vehicle and not another.
What prevents us from operating solely as independent contractors, or conversely, working for a single all-encompassing entity such as a giant company or the government?
The economist Ronald Coase
believed that transaction costs were the primary factor controlling the size of firms. For Coase, firms grow to the size where the cost of organizing an internal transaction in the firm (e.g. adding one extra person working to achieve a task) is higher than the same transaction on the open market (e.g. by hiring a contractor).
To understand this, Coase devotes a lot of time to understanding the following puzzle: Outside of a firm, market signals (i.e. price) seem to primarily guide decisions, while inside, human judgement (”management”) is the primary guiding force. Coase quotes economist Dennis Robertson’s description of firms in the sea that is the market: they are
“islands of conscious power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk”
Organizations incur many transaction costs when they get help from entities outside the organization: it requires time to find the right outside organization or contractor, a well-defined spec of the work required, and, of course, time to negotiate contractual details. This is simply too much to do for every task, especially in the face of rapidly changing business needs.
Within a firm, these transaction costs disappear. There is devoted talent pool with deep organizational knowledge, capable of doing iterative work with a flexible project scope and time horizon.
Of course, the catch is that when we make decisions inside a firm all the market signals are gone and we must rely solely on our judgement. Inside a firm, especially for the largest and most complex companies, it becomes very difficult for even the founders & owners to understand their own organization, and we are plagued by high coordination costs.
In the past, limited communication and distribution networks constrained corporation size. If we asked a 18th century reader to look around them, it’s much more likely their possessions and services were NOT produced by a corporation.
Prior to the invention of the telegraph, information could only travel as fast as the fastest ship or horse, constraining the scale and degree of coordination a corporation could operate at. The British East India Company, while being the largest company of its time, was structured more as a collection of regional operations. Each operated with a significant degree of autonomy due to the difficulty of communication between different divisions. Transmitting information between London and Calcutta, for example, could take several months. It’s hard to imagine a product like the iPhone being created in these conditions – communicating the centralized vision of Apple’s executive team with an international manufacturing operation would prove immensely challenging.
The telegraph made instant communication possible within a firm, and railroads ensured a distributed market to offer their services. The companies providing services like railways were among the first to rise to this unprecedented scale. The New York and Erie Railway was one of the largest railroad companies in the 1850s. However, its general superintendent, Daniel McCallum, noticed that they were much more inefficient than smaller railways. The telegraph had led to an over-reliance on centralized control. Could these companies maintain their economies of scale while also preserving some of the efficiencies of smaller railways?
To address this challenge McCallum invented the modern org chart, which organized staff in a hierarchy with fungible role types like ‘Superintendent of Road’ and ‘Brakemen’. McCallum gave more responsibility to divisional superintendents, which allowed them to focus on their divisions and effectively operate as if they were smaller and more efficient rail lines. McCallum’s invention flourished and created the modern corporation that provides so many of the goods and services we rely on today.
With the innovation of the org chart McCallum eased the tradeoff between scale and efficiency that many organizations face as they grow. This new ‘operating system’ for firms operates even more effectively in modern times by leveraging the internet, but the tradeoff between scale and efficiency has not gone away. Structures and processes that work very well at small scales are difficult to maintain at larger scales. Firms today are still plagued by problems arising from scale
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This tradeoff is not unique to organizations and is also found in natural settings. Natural beehives are much more efficient than industrial ones, but they are impossible to manage at scale. Small farms are also more efficient per unit of land because they can grow various crops side by side – unfortunately, it is infeasible to scale them into industrial operations
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Many readers will recognize how this dyna
