Coase's penguin, or, Linux and The Nature of the Firm.

• Author: Benkler, Yochai

INTRODUCTION

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 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 2000, something like this actually happened. The President's Information Technology Advisory Committee recommended that the federal government support 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. The intuitions of the late twentieth-century American resist the idea that thousands of volunteers could 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 industry.

The emergence of free software (2) and the phenomenal success of its flagships--the GNU/Linux operating system, (3) the Apache web server, Perl, sendmail, BIND--and many other projects (4) should force us to take a second look at the dominant paradigm we hold about productivity. In the late 1930s, Ronald Coase wrote The Nature of the Firm, (5) in which he explained why firms emerge, defining firms as clusters of resources and agents that interact through managerial command systems rather than markets. In that paper, Coase introduced the concept of transaction costs, which are costs associated with defining and enforcing property and contract rights and which are a necessary incident of organizing any activity on a market model. Coase explained the emergence and limits of firms based on the differences in the transaction costs associated with organizing production through markets or through firms. 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. Any individual firm will stop growing when its organization costs exceed the organization costs of a smaller firm. This basic insight was then extended and developed in the work of Oliver Williamson and other institutional economists who studied the relationship between markets and managerial hierarchies as models of organizing production. (6)

The emergence of free software as a substantial force in the software-development world poses a puzzle for this organization theory. Free software projects do not rely either on markets or on managerial hierarchies to organize production. Programmers do not generally participate in a project because someone who is their boss instructed them, though some do. They do not generally participate in a project because someone offers them a price, though some participants do focus on long-term appropriation through money-oriented activities, like consulting or service contracts. But the critical mass of participation in projects cannot be explained by the direct presence of a command, a price, or even a future monetary return, particularly in the all-important microlevel decisions regarding selection of projects to which participants contribute. (7) In other words, programmers participate in free software projects without following the normal signals generated by market-based, firm-based, or hybrid models.

This puzzle has attracted increasing attention from economists (8) and participants in the practice (9) trying to understand their own success and its sustainability given widespread contrary intuitions. Josh Lerner and Jean Tirole present the best overarching view of the range of diverse micromotivations that drive free software developers. (10) This diversity of motivations, somewhat more formalized and generalized, plays an important role in my own analysis. Some writing by both practitioners and observers, supporters and critics, has focused on the "hacker ethic," and analogized the sociological phenomenon to gift-exchange systems. (11) Other writing has focused on the special characteristics of software as an object of production. (12)

In this Article, I approach this puzzle by departing from free software. Rather than trying to explain what is special about software or hackers, 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. (13) Hence the title of this Article--to invoke the challenge that the paunchy penguin mascot of the Linux kernel development community poses for the view of organization rooted in Coase's work.

Part I begins to tell the tale of the more general phenomenon through a number of detailed stories. Tens of thousands of individuals collaborate in five-minute increments to map Mars's craters, fulfilling tasks that would normally be performed by full-time Ph.D.s. A quarter of a million people collaborate on creating the most important news and commentary site currently available on technology issues. Twenty-five thousand people collaborate to create a peer-reviewed publication of commentary on technology and culture. Forty thousand people collaborate to create a more efficient human-edited directory for the Web than Yahoo. I offer other examples as well.

The point of Part I is simple. The phenomenon of large- and medium-scale collaborations among individuals that are organized without markets or managerial hierarchies is emerging everywhere in the information and cultural production system. The question is how we should understand these instances of socially productive behavior: What are the dynamics that make them possible and successful, and how should we think about their economic value?

My basic framework for explaining this emerging phenomenon occupies Part II of the Article. Collaborative production systems pose an information problem. The question that individual agents in such a system need to solve in order to be productive is what they should do. Markets solve this problem by attaching price signals to alternative courses of action. Firms solve this problem by assigning different signals from different agents different weights. To wit, what a manager says matters. In order to perform these functions, both markets and firms need to specify the object of the signal sufficiently so that property, contract, and managerial instructions can be used to differentiate between agents, efforts, resources, and potential combinations thereof. Where agents, efforts, or resources cannot be so specified, they cannot be accurately priced or managed. The process of specification creates two sources of inefficiency. First, it causes information loss. Perfect specification is unattainable because of transaction costs associated with specifying the characteristics of each human and material resource and each opportunity for utilization. Second, property and contract make clusters of agents and resources sticky. A firm's employees will more readily work with a firm's owned resources than with other sources and will more readily collaborate with other employees of the firm than with outsiders. It is not impossible to acquire and trade resources and collaborative efforts, but this is done only when the perceived gains outweigh the transaction costs. Nonproprietary production strategies can improve on markets and firms by correcting these two failures.

Commons-based peer production, the emerging third model of production I describe here, relies on decentralized information gathering and exchange to reduce the uncertainty of participants. It has particular advantages as an information process for identifying and allocating human creativity available to work on information and cultural resources. (14) It depends on very large aggregations of individuals independently scouting their information environment in search of opportunities to be creative in small or large increments. These individuals then self-identify for tasks and perform them for a variety of motivational reasons that I discuss at some length.

If the problems of motivation and organization can be solved, then commons-based peer production has two major advantages over firms and markets. First, it places the point of decision about assigning any given person to any given set of resources with the individual. Given the high variability among individuals and across time in terms of talent, experience, motivation, focus, availability, etc., human creativity is an especially difficult resource to specify for efficient contracting or management. Firms recognize this and attempt to solve this problem by creating various incentive compensation schemes and intangible reward schemes, like employee-of-the-month awards. These schemes work to some extent to alleviate the information loss associated with managerial production, but only insofar as a firm's agents and resources are indeed the best and only insofar as these schemes capture all the motivations and contributions accurately. Peer production provides a framework within which individuals who have the best information available about their own fit for a task can self-identify for the task. This provides an information gain over firms and...