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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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from these stories some general observations about peer production, what makes it work, and what makes it better under certain circumstances than market- or hierarchy-based production. But at this point it is important that the stories have established the plausibility of, or piqued your interest in, the claim that peer production is a phenomenon of much wider application than free software, and that it is something that actually exists, and is not the figment of someone’s over-zealous imagination.

What remains is the very interesting and difficult task of explaining it in terms that will be comprehensible to those who make economic policy, and that will allow us to begin to think about what, if any, policy implications the emergence of this strange breed in the middle of our information economy has. I will by no stretch of the imagination claim to have completed this task in the following pages. But I hope to identify some basic regularities and organizing conceptions that will be useful to anyone interested in pursuing the answer. Even if you do not buy a single additional word of my initial efforts to theorize the phenomenon, however, seeing these disparate phenomena as in fact instances of a more general phenomenon of uncharacteristic organization of information production should present a rich and fascinating topic of study for organization theorists, anthropologists, institutional economists, and COASE’S PENGUIN Oct. 2001 business people interested in understanding production models in a ubiquitously networked environment.

II. Why Would Peer Production Emerge in a Networked Environment?

1. Locating the theoretical space for peer production There are many places to locate an attempt to provide a theoretical explanation of peer production. One option would be to focus on the literature regarding trust-based modes of organizing production25 or on literature that focuses on internal motivation and its role in knowledge production. 26 My effort here will be within the more general economics literature that followed Ronald Coase’s The Nature of the Firm in focusing on the comparative costs of institutional alternatives as an explanation for their emergence and relative prevalence.

At the most general intuitive level, we can begin by looking at Coase’s explanation of the firm and Harold Demsetz’s explanation of property rights.27 Coase’s basic explanation of why firms emerge—in other words, why clusters of individuals operate under the direction of an entrepreneur, a giver of commands, rather than interacting purely under the guidance of prices—is that using the price system is costly. Where the cost of achieving a certain outcome in the world that requires human behavior through organizational means is lower than the cost of achieving that same result through implementation of the price system, organizations will emerge to attain that result. An organization will cease to grow when (a) another organization can achieve the marginal result that they seek to obtain at lower cost; or (b) the price system can obtain that result at lower cost than can an organization. If the cost of organization increases with size, we have a “natural”—i.e., tractable within welfare economic theory—limit on the size and number of organizations.

Demsetz’s basic explanation of why property emerges with regard to resources that previously were managed without property rights—as commons—can be resolved to a very similar rationale. As long as the cost of implementing and enforcing property rights in a given resource is larger than the value of the total increase in the efficiency of the utilization of the resource that would be gained by the introduction of a property regime where none existed before, the resource will operate See Paul S. Market, Hierarchy, and Trust: The Knowledge Economy and the Future of Capitalism, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=186930 See Margit Osterloh and Bruno S. Frey, Motivation, Knowledge Transfer, and Organizational Form, Motivation, Knowledge Stransfer, and Organizational Form (1999) Institute for Empirical Research in Economics, University of Zurich, Working Paper No. 27.

Harold Demsetz, Toward a Theory of Property Rights, 57 Am. Econ. Rev. 347-357 (1967).

COASE’S PENGUIN Oct. 2001 as a commons. Once the value of the resource increases due to an exogenous circumstance—a technological development or an encounter with another civilization—so that intensification of its utilization through property-based appropriation is worth the cost of implementing property rights, property rights emerge. More generally, this can be stated as: property in a given resource emerges if the social cost of having no property in that resource exceeds the social cost of implementing a property system in it. This restatement can include within it common property regimes, managed commons, and other non-property approaches to managing sustainable commons.28

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Before going in to why peer production may be less costly than property/market based production, or organizational production, it is important to recognize that if we posit the existence of such a third option it is relatively easy to adapt the transactions cost theory of the firm to include it. If we can sustain that under certain circumstances non proprietary or commons-based peer production may be less costly in some dimension than either markets or managerial hierarchies, we could say that when the cost of organizing an activity on a peered basis is lower than the cost of using the market, and the cost of peering is lower than the cost of hierarchical organization, then peer production will emerge.30 For discussions of commons see, Carol Rose, The Comedy of the Commons: Custom, Commerce, and Inherently Public Property, 53 U. Chi. L. Rev. 711 (1986); Elinor Ostrom, Governing the Commons (1992).

“Valuable” as compared to the option, and opportunity costs, of not having property rights in place.

In the context of land, Ellickson extends Demsetz’s analysis in precisely this fashion, suggesting that there may be a variety of reasons supporting group ownership of larger tracks, including the definition of efficient boundaries (efficient for the resource and its use), coping with significant shocks to the resource pool, risk spreading, “the viability of group ownership might be enhanced by the advent of inexpensive video cameras or other technologies for monitoring behavior within a group setting.” Robert Ellickson, Property in Land, 102 Yale L.J. 1315, 1330 (1993).


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Understanding that in principle the same framework that explains the emergence of property and firms could explain the emergence of peering focuses our effort on trying to understand why it is that peering could under certain circumstances be more cost effective than either markets or hierarchical organizations. To fit the reality of the emergence of peer production in the context of a pervasively networked information economy, that explanation must be (1) in some sense sensitive to changes in the nature of the human and material resources used in production, and (2) affected by the cost and efficiency of communication among human participants in the productive enterprise.

2. Peer production of information in a pervasively networked environment

Peer production is emerging as an important mode of information production because of four attributes of the pervasively networked information economy. First, the object of production—information—is quirky, in that (a) it is purely non-rival and (b) its primary non-human input is the same public good as its output—information.

Second, the physical capital costs of information production have declined dramatically with the introduction of cheap-processor-based computer networks.

Third, the primary human input—creative talent—is highly variable, more so than traditional labor, and the individuals who are the “input” possess better information than anyone else about the variability and suitability of their talents and level of motivation and focus at a given moment to given production tasks. Fourth and finally, communication and information exchange across space and time are much cheaper and more efficient than ever before, which permits the coordination of widely “Cost” here would include the negative effects of intellectual property on dissemination and downstream productive use.

COASE’S PENGUIN Oct. 2001 distributed potential sources of creative effort and the aggregation of actual distributed effort into usable end products.

The first attribute affects the cost of one major input into production— existing information. It means that the social cost of using existing information as input into new information production is zero. This, on the one hand, lowers the actual social cost of peering by potentially making information input available to human agents without limit, and on the other hand marks a pervasive social cost of market and hierarchy, because of the losses in both static and dynamic efficiency entailed by the property rights in a nonrival public good, usually thought necessary (and hence justifiable) to sustain market and hierarchy-based production. The second attribute similarly lowers the cost of another major capital cost of information production. It was this high cost of physical capital—large circulation automated presses, record and later CD manufacturing and distribution facilities, movie studios and distribution systems, etc.—that formed the basis for the industrial organization of information production that typified commercial cultural production in the 20th century. Together, these two attributes make information production a potentially sustainable low-cost, low returns endeavor for many individuals relying on indirect appropriation. 32 The public goods attribute also limits the applicability of my observations about peer production, so that I make no claim about the applicability of these observations to traditional economic goods. The third characteristic, as I will explain below, is the primary source of efficiency gains from moving from either market or hierarchical organization to peering. Peer production better produces information about available human capital, and increases the size of the sets of agents and resources capable of being combined in projects—where there are increasing returns to scale for these sets. The fourth attribute radically reduces the cost of peering—or coordination of the efforts of many widely distributed participants in a production effort.

What, however, makes contributors to peer production enterprises tick? Why do they contribute? Current explanations of the economics of free software have, I believe, largely resolved the incentives question. The answers fall into two baskets.

First, less commonly made, is that people are creative beings. They will play at creation if given an opportunity, and this opportunity to be creative has in fact been seized upon by many. 33 This thesis does not take the question of how to keep body “Indirect appropriation” is appropriation of the value of one’s effort by means other than reliance on the excludability of the product of the effort. So, someone who is paid as a teacher, but gets the position in reliance on his scholarship, is indirectly appropriating the benefit of his scholarship. An IBM engineer who gains human capital by working on Linux from home in the evening is indirectly appropriating the benefits of her efforts in participating in the production of Linux.

Moglen makes this central to his explanation. Raymond, and Lerner & Tirole also offer hedonic gains as one component of their respective explanations.

COASE’S PENGUIN Oct. 2001 and soul together from this activity as central, but rather explains why people who have a day job will nonetheless devote their time for creative play in this immensely productive manner. This explanation clearly is at work in explaining phenomena like clickworkers or the Slashdot moderators, not only free software. More general explanations are less ambitious for humanity (though possibly less accurate about what motivates people in general) and more ambitious for the stand-alone sustainability of open source software within standard assumptions regarding incentives, because they seek an explanation that relies on the activity itself to keep body and soul together. The primary answers here are that there are a variety of indirect appropriation mechanisms for those who engage in free software development. These range from the amorphous category of reputation gains, through much more mundane benefits such as consulting contracts, customization services, and increases in human capital that are paid for by employers who can use the skills gained from participation in free software development in proprietary projects.34 The reality of phenomena like academic research, free software, the World Wide Web, NASA’s clickworkers or Slashdot supports these explanations with robust, if not quantified, empirical grounding. All one need do is look at the Red Hat millionaires and IBM’s billion-dollar commitments to supporting Linux and Apache on the one hand, and the tens of thousands of volunteer clickworkers, thousands of Linux developers, and hundreds of distributed proofreaders, on the other hand, to accept intuitively that some combination of hedonic gain and indirect appropriation can resolve the incentives problem.

But noting that the incentives problem is resolved in this manner does not suggest the limits or characteristics that make some things more amenable to this solution than others. The point to see is that the incentives problem is simple to resolve if the collaboration problem can be solved on a large scale. If a project can draw on the talents of 30,000 or 15,000 individuals instead of a few dozen or a few hundred, then the contribution of each, and hence the personal cost of participation that needs to be covered by indirect benefits, is quite low. In a corollary to “Linus’s Law,”35 one might say Given a sufficiently large number of contributions, incentives necessary to bring about contributions are trivial.

Which implies a general statement about where peer production can work:

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Peer production is limited not by the total cost or complexity of a project, but by its modularity, the granularity of its components, and the cost of integration.

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