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What economists can teach us about cloud computing

Bernard Golden | July 9, 2013
William Stanley Jevons was a Victorian-era economist who explained why Britain used more coal, not less, as the resource dropped in price. Ronald Coase wrote his seminal work on why people use firms to conduct transactions back in 1937. Both help explain why this is the era of cloud computing.

One can predict how this struggle will turn out. Users will overwhelmingly adopt cloud computing, given the overall high transaction costs of the incumbent solution. Moreover, given the lower transaction cost of the new alternative, adoption will be much greater than anyone expects, as users find new ways to apply the technology.

Trying to stave off public cloud computing by demonstrating that the raw cost of the resource is more than if it were provisioned internally is pointless if the overall transaction costs of the internal offering are higher. Far better than running meaningless economic comparisons would be to evaluate the true transaction cost of user options and developing methods to deliver lower overall costs from internal resources. Otherwise, huge amounts of labor (and money) are going to be wasted on incomplete economic analysis that users ignore based on their own estimation of overall transaction costs.

The next time you overhear (or participate) in a cloud economics discussion, keep Jevons and Coase in mind, and remember Jevons Paradox and Coase's understanding of firm and transaction costs.


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