Abstract

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete modules - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. Such ideas are not new in the literature of technological design (Simon 1962, Alexander 1964), even if, as some claim (Baldwin and Clark 1997), modularity is becoming more important today because of the increased complexity of modern technology. What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to - modularity in the design of the organizations that produce such products. From another angle, however, the principles of modularity have arguably long been at work in the literature of social science. F. A. Hayek (1967) tells us that the subject matter of social science - unlike that of some physical sciences - is "organized complexity." And we can think of Adam Smith's "obvious and simple system of natural liberty" as one of the first of a tradition of proposals for how a complex modern society might be made more productive through a modular design of social and economic institutions. The classic defense of Smith's system is that, in separating mine from thine, property rights modularize social interaction, which is then mediated through the interface of voluntary exchange, all under the governance of the systems architecture of common law. A Venn diagram would reveal only the thinnest of overlaps between these two literatures. The management literature on modularity and organizational design asks how (given) firms should organize themselves internally to cope with modular products. The literature on (what is implicitly) modularity in social institutions asks how the interactions among (given) organizational units should be structured to increase wealth and productivity (and perhaps yield other good things as well). The overlapping question, of course, is Coase's question: what determines the boundaries of firms? Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? It is not perhaps surprising that scholars have looked to the notion of property rights to answer Coase's question, yielding an older theory of property rights spun directly from Coase (De Alessi 1983) as well as a newer version emerging from the tradition of formal modeling (Hart 1989). The paper I propose will revisit from the perspective of the theory of modular systems the various literatures of property rights in the economics of organization. It will ask the question: how far can the principles of modularity take us in understanding the boundaries of the firm? How far have existing theories of property rights already taken us?

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