Profile Of Ronald Coase, And His Penguin … ?

Lynne Kiesling

Thanks to the invaluable Will Wilkinson for his link to this U. of C. Chronicle article profiling Ronald Coase:

Coase said that its 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.

5 thoughts on “Profile Of Ronald Coase, And His Penguin … ?

  1. Open-Source strikes me as epiphenomenal. None of those developers would have the leisure time to donate to these projects were it not for their employment at real software firms. Further, the actual utility of the fruit of their labor is highly suspect. Ever tried to install a linux build?

  2. You’re almost certainly wrong about the economics of open-source. There are two very strong incentives for it to take over.

    First, it lets customers avoid vendor lock-in, and prevent their vendor from engaging in price discrimination against them. This lets them capture a lot more of the surplus that better software creates.

    Second, software vendors have a strong incentive to produce open-source software in markets that are complementary to their main business. If the price for a complement falls, then the demand for their own product will go up — and for a relatively small fixed expenditure they can drive the price of the complement very close to zero (because the marginal cost of producing software is the bandwidth to transmit it over the Net). And nearly every program you can think of is a complement to something.

  3. The article is interesting … as one abstracts up one runs into non-for-profits of all kinds. Their production of social goods in real. Open source software has all the problems of vendor solutions contrary to what is being said … lock-in is just as real … as is pricing … let’s be clear software is cheap … customizing it is expensive … the app is always a fraction of the ongoing expense … theonly thing that is changing here we are dring a marginal expense up or down marginally.

  4. malaclypse,

    It still remains that substantial economically valuable labor is poored into voluntary projects that deliver free software of indeterminant value.

    But there is payback. A developer on a well-known project can command a premium in the job market. Ie, developing open source does demonstrate a sort of fitness much as a fancy car might announce to a potential date that the guy driving it has money.

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