Economics of Open

Coase’s Penguin, or, Linux and The Nature of the Firm

Historical Significance

Key Points

  1. Introduction
    1. “People use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of organization costs. Firms emerge when the opposite is true.”
    2. Programmers work on free software outside of the normal reasons the motivate people to work on projects within the market or firm models.
    3. Purpose: “I generalize from the phenomenon of free software to suggest characteristics that make large-scale collaborations in many information production fields sustainable and productive in the digitally networked environment without reliance either on markets or managerial hierarchy.” A new model is emerging that is 1. Distinct 2. has certain advantages.
      1. Part I: People are collaborating on medium/large-scale products to build knowledge and culture.
        1. How should we understand this?
          1. what are the dynamics that make them work?
          2. What is their economic value
      2. Part II – framework for explaining this phenomenon
        1. many individuals independently search the available information and opportunities to participate. They self identify their tasks for various reasons.
          1. individuals choose their own tasks, which makes them more viable. – requires a review system so that people don’t take on something they can’d do.
      3. Part III – tragedy of the commons
        1. objections
          1. nobody will invest if they can’t benefit from it – motivation
            1. there are diverse types of motivation
            2. social-psychological rewards and monetary rewards attract different people to different work
          2. nobody will be able to organize the project – organization
            1. Projects should be:
              1. modular – divided into components that can be produced by an independent individual
              2. size – the modules should be small – many people can help, even if they have small amounts of motivation to contribute. It is good to have many levels of granularity to match levels of motivation.
              3. low-cost integration that includes quality control and a mechanism for putting the modules into the final product. A project needs to defend against bad contributions or be cheaply assembled.
  2. Peer Production All Around – how each component of the information-production chain is covered using a peer-based model online.
    1. Content
      1. Clickworkers – crowdsourcing mapping craters on Mars
        1. Projects that would take months of time for a few professionals can be done with a few minutes of effort each contributed by a different volunteers.
        2. the budget goes to coordination, people contribute for fun.
        3. This is similar to the way the LDS church does indexing. People contribute whatever time they have, and work is looked over by at least 3 people.
      2. The internet is another example
      3. Wikipedia – users adapt to the norms that wikipedia has set up.
      4. MUD (MMRPG?) – games that allow “players” to build on to them
    2. Relevance/Accreditation – can this be done by a peer production model?
      1. Amazon – other people liked what you liked and X – so yes, with enough people/ data points
      2. Google – using links to other sites in the ranking algorithms
      3. slashdot (/reddit) – upvoting and downvoting systems
    3. Value-added Distribution
      1. not as big of an issue with the internet
        1. there are value adding activities that should be done at the distribution stage (e.g. proofreading)
        2. there are some things that the internet providers can do (caching, mirroring) to make things easier to access.
        3. Can peer production do these things too?
      2. Napster – thousands of individuals share their harddrive space instead of one central server
      3. Project Gutenberg/Distributed Proofreaders – people proofread books so they can be available digitally. Books are read multiple times to look for errors.
    4. Summary – Peer production is a plausible in wider circumstances than free software.
  3. Why would peer production emerge in a networked environment?
    1. Location the theoretical space for peer production – different systems will emerge based on a balance of costs. peer production system is sensitive to
      1.  changes in resources needed for information production
      2. the cost and efficiency of communication
    2. peer production of information in a pervasively networked environment
      1. Four attributes of the pervasively networked information economy?
        1. information is non-viral and it’s input and output are both information
        2. the costs have lowered dramatically
        3. human talent, the primary human input, is highly variable
        4. communication is much cheaper and faster than it was in the past which makes distributed coordination possible.
    3. markets, hierarchies and peer production as information-processing systems.
      1. information gains
      2. allocation gains
      3. Cons of peer production
        1. adding people adds people who will undermine productivity
        2. sometimes standardized effort is more important than variation
        3. duplication in effort is more likely with more people and projects that are self-selected.
  4. Of motivation and organization the commons problem
    1. the “incentives” problem: of diverse motivations and small contributions
      1. abstracting the effect of diverse motivations
        1. reward types – the combination of which shapes motivation.
          1. monetary (fee)
          2. hedonic (pleasure of cooking)
          3. social-psychological (company)
          4. p (prostitution or professional sports) – the extent to which a fee would be positive or negative.
        2. Rewards = money + hedonic + social-psycological(p)
      2. diverse motivations and large-scale collaboration
        1. Corollary to “Linus’ Law”: “Given a sufficiently large number of contributions, direct monetary incentives necessary to bring about contributions are trivial.”
        2. “Peer production is limited not by the total cost or complexity of a
          project, but by its modularity, granularity, and the cost of

          1. modularity is the extent to which a project can be broken down to parts that can be done independently by individuals.
          2. granularity is the size of the modules. More people will be attracted to the project the smaller the modules are.
    2. integration: problem and opportunity
      1. Components
        1.  quality control
        2. a mechanism for combining contributions
      2. threats to motivation
        1. failure of integration – so that the effort is or seems wasted.
        2. appropriating
          1. turning something into a commercial venture
          2. redirecting the effort and alienating other participants (presenting opinion as fact on Wikipedia)
          3. This doesn’t always work out logically. E.g. we publish in journals and then our institutions buy our work back.
        3. provisioning integration – needs quality assurance
          1. higherarchy – Linux kernal
          2. peer review – slashdot
          3. norms-based – wikipedia
          4. aggregation – clickworkers
  5. Conclusion – we don’t fully understand the phenomenon, but know that it exists to some extent and that I could have strong possibilities.

Questions for Discussion

  1. How can we make educational resources more modular, granular and easy to integrate?

Supplemental Materials

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