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«Coase’s Penguin, or, Linux and the Nature of the Firm Yochai Benkler∗ Abstract The emergence of GNU/Linux as a viable alternative to the Windows ...»

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

Yochai Benkler∗


The emergence of GNU/Linux as a viable alternative to the Windows

operating system and of the Apache webserver software as the leading web server

have focused wide attention on the phenomenon of free or open source software.

Most of the attention to the economic aspects of the phenomenon has been focused on

the question of incentives—why, it is asked, would anyone invest effort in a

productive enterprise in whose fruits they do not claim proprietary rights of exclusion—and has been devoted to studying this phenomenon solely in the context of software development. In this paper I expand consideration of the policy implications of the apparent success of free software in two ways. First, I suggest that the phenomenon has broad implications throughout the information, knowledge, and culture economy, well beyond software development. Second, I suggest reasons to think that peer production may outperform market-based production in some information production activities.

The first part of the paper expands the observation of the phenomenon of peer production to additional layers of the communications process. In particular, I describe instances of peer production of content, relevance, accreditation, and valueadded distribution as parallels to peer production of software.

The second part suggests that the primary advantage of peer production is in acquiring and processing information about human capital available to contribute to information production projects, and that in this it is superior to both market-based or hierarchical managerial processes. In addition to the informational advantage, peer production more efficiently assigns human capital to information inputs because it does not rely on controlling bounded sets of either factor. Because of variability of talent and other idiosyncratic characteristics of human capital, there are increasing returns to the scale of the set of agents permitted to work with a set of resources in pursuit of projects, and to the set of resources agents are allowed to work with. The unbounded sets of both human capital and information inputs that are used in peer production capture these economies of scale more effectively than can firms, and to a ∗ Professor of Law, New York University School of Law. Visiting Professor, Yale Law School. Research for this paper was partly supported by a grant from the Filomen D’Agostino and Max Greenberg Fund at NYU School of Law.

COASE’S PENGUIN Oct. 2001 lesser extent markets, both of which rely on securing access to bounded sets of agents and information inputs to reduce uncertainty about the success of projects.

The primary costs of information production and exchange are physical capital costs, communication costs, human capital costs, and information input costs.

Information inputs are a pure public good, not an economic good. As rapid advances in computation lower the physical capital cost of information production, and as the cost of communications decline, human capital becomes the salient economic good involved in information production, and the relative advantage of peer production increases in importance.

Peer production is often met by two kinds of objections. The first is the question of incentives. The literature analyzing open source software has largely solved this issue by identifying a series of appropriation mechanisms—from pleasure to reputation and skills development—that serve to justify individual investment in a peer production project. Here I do not add explanations, but rather suggest that the explanations given are examples of a more general claim. That is, the incentives problem is trivial if a sufficient number of individual contributors can be networked, and their various-sized contributions (each determined by the motivation factors driving any given contributor) can be integrated into a finished product. Modularity, granularity of components, and the difficulty/cost of integration become the efficient limit on peer production, not incentives for contribution or the property rights available in the output. This leaves the other traditional wariness of distributed nonmarket, non-firm based production processes generally captured by the term “tragedy of the commons.” I explain how peer production maps on to general understandings of the limitations of commons-based production, and how coordination and integration can be achieved by one of a number of mechanisms, including the reintroduction of limited market-based or hierarchical integration, iterative peer production of integration, and technological clearance. In all events, these options are sufficiently low cost to allow their performance by actors who do not then need to appropriate the whole of the joint product in a way that, if undertaken, would undermine the peer production process ex ante.

These conclusions have policy implications for intellectual property law.

First, they attenuate the value of strong rights by identifying an important, non proprietary sector that is burdened by, but does not benefit from, strong intellectual property rights. Second, they identify a cost to strong intellectual property rights not previously identified, which is especially salient in a pervasively networked society.

This cost is the loss of the information that peer production efforts generate and the loss of potential productive resources—human capital that could be used productively and is not because market-based and hierarchical information production are poor mechanisms for identifying and pooling these resources. This framework suggests COASE’S PENGUIN Oct. 2001 avenues for further research. Peer production offers rich material for empirical studies into collaborative behavior, measurement and comparison of the relative importance of peer production in our information production system, and relative characteristics of information products produced using different organizational approaches. It also suggests room for theoretical work on organizational forms as information processing devices, under conditions where information processing technology has changed significantly.


Imagine that back in the days when what was good for GM was good for the country an advisory committee of economists had recommended to the President of the United States that the federal government should support the efforts of volunteer communities to design and build their own cars, either for sale or for free distribution to automobile drivers. The committee members would probably have been locked up in a psychiatric ward—if Senator McCarthy or the House Un-American Activities Committee did not get them first. Yet, in September of 2000, something like this in fact happened. The President’s Information Technology Advisory Committee recommended that the federal government back open source software as a strategic national choice to sustain the U.S. lead in critical software development. 1 At the heart of the economic engine of the world’s most advanced economies, and in particular that of the United States, we are beginning to take notice of a hardy, persistent, and quite amazing phenomenon—a new model of production has taken root, one that should not be there, at least according to our most widely held beliefs about economic behavior. It should not, the intuitions of the late 20th century American would say, be the case that thousands of volunteers will come together to collaborate on a complex economic project. It certainly should not be that these volunteers will beat the largest and best financed business enterprises in the world at their own game. And yet, this is precisely what is happening in the software world.

The emergence of free software, and the phenomenal success of its flagships—the GNU/Linux operating system, the Apache web server, Perl, sendmail, BIND—and many others,2 should force us to take a second look at the dominant paradigm we hold about productivity. That paradigm is that production is organized President’s Information Technology Advisory Committee, Developing Open Source Software to Advance High End Computing, October, 2000. http://www.ccic.gov/pubs/pitac/pres-oss-11sep00.pdf For an excellent history of the free software movement and of the open source development methodology see Glyn Moody, Rebel Code (2001).

COASE’S PENGUIN Oct. 2001 in only one of two forms—market-based exchanges or firm-based hierarchies.3 Both these traditional forms of production depend on clear property rights to control resources and outputs. This has led information policy in the past decade to focus on strengthening property rights and facilitating contractual exchange—the building blocks of an information economy built on the same model as the economy of coal and steel. While there are many other critiques of the idea that strong property is appropriate for information and cultural production, the success of open source software offers an additional set of considerations regarding this trend. This success suggests that in the information economy, the economy that is increasingly occupying center stage in the developed economies, property-based markets and hierarchically managed firms are no longer the only games in town. Indeed, they might not be the best option. And the presence of a potentially important mode of production that is harmed, not helped, by property rights should give us more reasons to pause on the way to ever-stronger rights. But my purpose in this paper is not normative, but positive. I am trying to outline the parameters of the phenomenon to be studied, and to suggest an initial framework for thinking about it. More detailed descriptions, and normative conclusions, I leave for future work.

Some explanations of free software focus on what is special about software,4 or about the community ethics of hackers.5 Part I of this article will describe a series of similar distributed models of non proprietary production by peers who do not interact either through a firm or through a market. Indeed, once one begins to look for them, such projects are ubiquitous, robust, and extend to all types of information production and exchange. They exist in highbrow or lowbrow form. They cover communicative functions ranging from the authoring of materials to identifying relevance or providing accreditation to materials authored by others, as well as to providing the mundane tasks of the distribution chain, like proofreading. The phenomenon is, I suggest, generally applicable to information production once you connect everyone to everyone else—an insight encapsulated in Moglen’s Metaphorical Corollary to Faraday’s Law,6 —and is explored in Boyle’s work on the The initial framing in these terms is Ronald H. Coase, The Nature of the Firm, 4 Economica 386 (1937).

The problem of organization and its forms relative to the un-organized market is central to the new institutional economics. See Oliver Williamson, The Economic Institutions Of Capitalism (1985). State hierarchies are also an option, and while the extreme version—socialist production—is largely discredited, some state production of some goods, like power, is still very much in play. Here I focus only on market production, however, whether decentralized and price-driven, or firm-based and managed. Any arguments about the importance of governmental investment in science, research, and the arts are independent of the potential conclusions for intellectual property that this paper suggests.

James Bessen, Open Source Software: Free Provision of Complex Public Goods http://www.researchoninnovation.org/opensrc.pdf (2001).

Eric Raymond, Homesteading the Noosphere, (1998) http://www.firstmonday.dk/issues/issue3_10/raymond/ Eben Moglen, Anarchism Triumphant (1999) http://emoglen.law.columbia.edu/publications/anarchism.html.

COASE’S PENGUIN Oct. 2001 second enclosure movement7 and plays a central role in Lessig’s argument for embedding the openness of commons in the architecture of the Net.8 Part II considers whether from a social welfare perspective peer production is “better” in some measure than market or hierarchical production. The primary answer, following Raymond, 9 given by others who have tried to explain why open source software development is superior, is that it allows development projects to draw on much larger pools of developers—primarily testers who test for bugs, but also programmers who then fix them. Another, more recent explanation, has been that introducing users as part developers and opening the source code permits better information about the eventual end uses desired by consumers, and that such detailed information about specific customization needs is too costly to express in the market, and is therefore lost to commercial manufacturers.10 I offer a related but somewhat different explanation, that focuses on the different characteristics of firms, markets, and distributed peer production processes as means of (1) processing information about human capital available to work on projects, and (2) combining human effort and resources to produce outcomes.

My basic claim as to (1) is that different modes of organizing production are better or worse at processing different types of information. Markets and hierarchies are both relatively lossy media when applied to questions of human capital, primarily in terms of creativity and ability, motivation, and focus (efficiency relative to ideal ability at a given time for a given project). This is information that is uniquely in the knowledge of individuals and is immensely difficult to measure and specify in contracts for market clearance or for managerial allocation. A distributed peer production model allows individuals to self-identify for tasks for which they are likely to be the best contributor. This makes peer production particularly well suited to organize activities in which human capital is the dominant input, as long as the coordination problems can be solved and that some mechanism to adjust for individuals’ errors regarding their own suitability for a job is implemented.

My basic claim as to (2) is that there are increasing returns to scale when one increases the number of agents who can act on any given resource set, and to the James Boyle, The Second Enclosure Movement and the Construction of the Public Domain, (paper for the “Conference on the Public Domain,” Duke Law School, Durham, North Carolina, November 9-11, 2001).

Lawrence Lessig, The Future of Ideas: The Fate of the Commons in a Connected World (forthcoming Random House 2001).

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