Coase said that “it’s very difficult to imagine a system that would work better than one with private property rights and a market: mechanisms that have proved themselves repeatedly against regimes where central authority is the dominant economic force. A private enterprise system with vigorous, competitive markets seems to function best because central authority cannot have all the diffused knowledge that is captured effectively by the workings of the market,” he said.
Channeling Hayek a little there … and offering a pretty fair representation of the results in my freshman seminar today when we created a pollution permit market and ran it under a bunch of different rules. One of the almost surprising insights to my students (mostly because they’ve never thought about it before) is that in the course of trading, they learn how high or low their abatement costs are relative to others operating in the market. And this happens even though cost information is private knowledge, and traders are placing bids and offers that do not precisely reveal their abatement costs. Yet they each figure out how relatively high or low their costs are, based on the willingness to pay and willingness to accept that they observe in the market, and the ensuing market prices.
While we’re on the subject of Coase, I recently ran across an intriguing paper entitled “Coase’s Penguin, or Linux and the Nature of the Firm”:
For decades our understanding of economic production has been that individuals order their productive activities in one of two ways: either as employees in firms, following the directions of managers, or as individuals in markets, following price signals. This dichotomy was first identified in the early work of Nobel laureate Ronald Coase, and was developed most explicitly in the work of neo-institutional economist Oliver Williamson. In the past three or four years, public attention has focused on a fifteen-year-old social-economic phenomenon in the software development world. This phenomenon, called free software or open source software, involves thousands or even tens of thousands of programmers contributing to large and small scale project, where the central organizing principle is that the software remains free of most constraints on copying and use common to proprietary materials. No one “owns” the software in the traditional sense of being able to command how it is used or developed, or to control its disposition. The result is the emergence of a vibrant, innovative and productive collaboration, whose participants are not organized in firms and do not choose their projects in response to price signals.
In this paper I explain that while free software is highly visible, it is in fact only one example of a much broader social-economic phenomenon. I suggest that we are seeing is the broad and deep emergence of a new, third mode of production in the digitally networked environment. I call this mode “commons-based peer-production,” to distinguish it from the property- and contract-based models of firms and markets. Its central characteristic is that groups of individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals, rather than either market prices or managerial commands.
I’d modify it to say “rather than simply market prices or managerial commands.” Looks like an interesting read.