User talk:Chevan/Economics of Open Source Development

Introduction

As with the nature of all things, this paper started life as one thing and has quickly turned into another. This paper began life in 1996 as a series of ideas about how to rebut the famed paper “The Cathedral and the Bazaar” by Eric Ramond (1). However, it wasn’t until 2004 when I read the articles “Capitalist view of Open Source” (2) and “Open Source-onomics: Examining some pseudo-economic arguments about Open Source” (3) that I felt really inspired to try and articulate what I was thinking. I felt articles (2) and (3) were written very poorly and misrepresented the philosophical intent of the framework the author was trying to use to make his points. As a result, I felt that the conclusions that were drawn were wrong and that a more accurate interpretation and analysis needed to be told.

The intent of this essay is to clearly describe the relationships and relevance of “Open Source” software development to the individual software developer, the firm and Capital based Economics. As this paper evolved, it has turned into more than a battleground for philosophical interpretation and has turned into an economic analysis of the Open Source model. This article is broken into three parts plus this introduction. In the first part, I attempt to outline the microeconomics of the Open Source model while addressing the politico-economic issues brought up in the previously mentioned articles. The second section discusses the relevance of Open Source to firms in the economy. Finally, in the conclusion I will try and answer the questions “Why Open Source?”, “What is the point?” and “Who really cares?”

The intellectual property of software lies in the source-code which is the logical construct of how a computer program will operate. “Open Source” software refers to software development efforts wherein the creators of the software donate the rights and the rights to derivative works of their intellectual property to a public good (3). In “Closed Source” software development models, the source-code is closely guarded as the intellectual property that forms the basis of profit making in the market (either through the sale of a product or service, which is discussed in depth later). In open source, this source code is made freely available to the public enabling the contribution of professional and non-professional developers to take part in contributing enhancements and fixes to the project. Although derivative works of the project source-code must be as “open” as the original project code, add-on applications or interfaces are usually not required to have the same “openness”. An example of a very restrictive but popular open source license is the Gnu Public License (GPL). Also, it is legally impermissible for source code from a GPL covered project to be utilized in a subsequent development efforts whose source code is also not freely available to the public (according to the GNU GPL FAQ (4), “This means you can avoid the risk of having to compete with a proprietary modified version of your own work,” or more accurately stated- an open source developer is protected from others being able to create wealth directly off of their work).

Source code developed under the GPL must be made feely available to the public. The terms of the license are enforced under the authority of the Free Software Foundation (FSF). Contributors of material submitted under the GPL license sacrifice their individual/private ownership rights to the material. Legally, this ownership is transferred to the FSF. Ironically, the FSF must utilize the political (legal) mechanisms of private ownership to enforce this denial of ownership to anyone else 5. This distinction is important to distinguish open source from public domain software, because although the software is free or freely-available, it is not unowned.

Microeconomic Analysis

The microeconomic analysis for the most part are direct responses to passages in 2. In order to succinctly and consistently define some terms of Capitalist Economics, I’m going to borrow some terms as used by Karl Marx. Despite the unpopularity of Karl Marx’s prescription of Capitalism his description of Capitalism has a number of definitions that are quite useful for the discussion. To minimize controversy and to avoid having this paper be used as pro- or con- for Marxism, I want to clarify that I am only using some terms and definitions as spelled out by Marx because his definitions are very precise and clear. These definitions are purely descriptive in nature 6

In order to conduct his discussion, the author 2of used the framework of the philosophy of Ayn Rand 7. I think the framework is useful for pointing out the moral implications and relationship of free software to the authors of it: both a prescriptive and descriptive summary. In the end I will demonstrate that through a “Randian” framework (which posits individual economic transactions in terms of individual freedom), open source would be viewed as incoherent and uncapitalistic.

Wealth

"Wealth is the result of man's ability to think applied to the sphere of production and trade. Reason, ultimately, is the source of all wealth."

"Fundamentally, wealth is the product of man's mind-and belongs to each man to the extent that he created it."

"Wealth belongs to the individual who produced it."

These carefully selected passages represent Rand’s attempt to define what wealth is, where it comes from and who it belongs to. Before discussing wealth, let me back up and talk about value. Value is the substance of Capitalism. Marx defined value as the encapsulated human labor that participates in production. Said another way, value is the amount of work that someone does to make something that people sell. The value in a rock that I pick up and take with me and sell to someone is represented by the sale price to the buyer. That price, in the transaction, is the sole determinant of the value of the rock. Keeping the idea of selling in mind is the key. Because I am talking about economics, giving has no relevance. The issue at hand is a market transaction. So with that little clarification in hand, Rand is basically saying wealth the accumulation of profit made by a seller in the marketplace being able to recognize an opportunity to sell and engaging in transactions to sell. The last statements says that whoever doe sell something, morally owns the rights to the proceeds. In direct response to the article, Rand would have accepted any buying/selling endeavour as acceptable for profit making (architect, software, taking out the trash, etc.).

What is the relationship with the GPL? The GPL removes the ability of the owner of intellectual property to profit from the property. Once code is released under the GPL it cannot be sold or modified and then sold. The ability of an individual to derive any wealth from the product of that individual’s mind has been removed. Rand would certainly not approve, although she would respect the fact that it was done willfully.

Property

"Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned."

Capitalists believe this is the central tenent of economics. Marxists believe this statement is hypocricital because they say that the few "rights" granted to the proletariat (worker) by the bourgeoisie (owner of capital/means of production) are meant as appeasement for exploiting their labor. Marxists also believe that for some laborers they have nothing to bargain with but their own labor power that has been devalued simply into an undifferentiatable commodity. Rand's response would be that labor is indeed another commodity on the market, so it's up to the owner to figure out how to differentiate that commodity to compete and build wealth in the marketplace for labor. Unlike Marx, who sees a crime of society here, Rand writes off the disparity between those who have more and those who have none as no big deal and merely the injustice of the real world. Marx thinks that the workers in society should do something about this disparity, Rand believes individual people should do something with their life and that action will have an affect on the disparity. What’s the point here?

For Rand, the ultimate source of power in the economy is the ability to own property and sell it at will. I agree with the author that Rand would have had no use for "Public Domain" software (because there is no ownership, hence no opportunity to sell anything, hence no opportunity to build wealth). However, the article fails to grasp the similarity between “Public Domain” software and GPLed software and take that comparison to the next logical step. Software written under the GPL also cannot be sold for a profit because there is no private ownership of the code.

I completely disagree with what the assertion that Rand "would have had nothing to say against programmers choosing to release their software under the GPL, of their own free will." I think Rand would have had a lot to say and a lot of laughter as well. Rand would have laughed in the face of anyone releasing a product under a clause that prohibits them from profiting from it. She would have said that you are enslaving yourself and throwing away your inalienable right to build wealth for yourself. She would have pointed a finger and shouted "FOOL". This is because Rand believes in the power of human genius and ingenuity and she also believes that it is that genius that is the source of wealth for any individual. She would be perplexed why anyone would give away the fruits of their genius without compensation and she would be angry that it was done without the coercion of an outside force (like a government).

The Rights of the Producer

"The right to dispose of one's income belongs to the producer, and if he wishes to give it to an heir, a charity, or to flush it down the toilet-that is the producer's right. It is not any of your concern, and it certainly is not the concern of the government."

Trade

"Free competition is the freedom to produce, and the freedom to trade what one has produced, for one's own self-interest, i.e., in the pursuit of one's own happiness."

At this point, either for rhetorical reasons or because of gross misunderstanding, the author makes a common mistake with regards to his discussion of “economics”. He takes the discussion out of the realm of economics and into a kind of psycho-social framework (wealth makes you feel good). To seriously discuss the GPL in the framework of economics, it is important to stay focused on economics. If that is the case, then what is economics?

In neoclassical economics is defined along the lines of “the study of the allocation of scarce resources." I think Marx has a little more descriptive definition of Capitalism, stated succinctly as the nexus of relationships and transactions that facilitate the production of goods for exchange in society. In the dictionary you'll find an even more generalized definition: "production, distribution, and consumption of goods and services with the theory and management of economies." The key ideas that underlie all of these definitions is that economics deals with capitalism and exchange. The economic structure that exists is not the barter system, it is not socialism, it is capitalism. The goods and services produced are offered for sale on the market and are not produced for one's own consumption. Wealth building only occurs in the sale (exchange) of these products. This is very important because in [2] the author makes the same mistake (the example of asking for directions) as in [1] and uses non-economic examples to justify certain economic behaviors. Unless someone is selling driving directions, their activity of giving driving directions is not an economic one.

In [2] the author uses a little game theory to justify that Open Source contributions have an economic place for their contributors. However, because of his misunderstanding regarding the discussion in the previous paragraph, he invents economic situations that do not exist. From the perspective of economics and wealth building, there are only two possibilities: 1) a “win” in which an individual sells a good or service for more than it cost to produce it or 2) a “lose” in which an individual sells a good or service for the same or less than the cost of production. Regarding the development of “Open Source” software, the authors can only be in the “lose” category because the fruit of their effort is being given away for free and the cost of production will always be greater than zero. [2] erroneously points out that the opportunity cost to a programmer is not selling the software rather than giving it away except that “for many programmers, the process of selling their software is more trouble than it is worth, so the effective opportunity cost is actually zero, and it is a win-neutral situation after all.” This is hopelessly false. The real opportunity cost to the software engineer is actually the time and effort not put into a productive purpose (one that creates wealth). Economically, open source software engineers are always in the lose category.

How does all of this relate to trade and Rand? Open source engineers engage in production of software willingly. They freely produce a good. However, they refuse to engage in trade (or exchange). Instead, they shield their creation from becoming property (something privately owned) by protecting it under legal mechanisms that only exist in a system that enables the existence of private property: Capitalism. By denying the creation of property (intellectual property) the opportunity for trade is impossible. Rand would be perplexed because this behavior is not consistent: on the one hand it is not in one’s own self-interest to give up the product of their labor, however, open source practice seems to be giving the person happiness (which Rand believes is the ultimate justification for whatever you are doing). To summarize, although the open source authors are economically in the “lose” category, they are apparently happy and satisfied.

Statism - the enemy of Capitalism

"How does capitalism differ from statism?”

“Capitalism is the opposite of Statism (fascism, socialism, theocracy, communism, democracy, tribalism).”

”Only capitalism declares that each and every man, may live his own life for his own happiness, as an end to himself, not by permission of others, but by right, and that government's sole responsibility is to protect those rights, and never violate them, because they are inalienable."

A section dealing with statism can be tricky because it is easy to start confusing concepts that are economic in nature versus those that are political in nature. Rand believes that in an ideal world, no external force (political) should interfere with an individual’s ability to prosper (economic) and be happy. She believes that social interactions mitigated by free exchange (being lawless or not restricted by the will of the state) in the economy will guide society to a wholly beneficial and productive outcome. But we don’t live in a stateless society. We do have laws, and those laws provide the basis of Capitalism ad that basis is “property”. Knowing this it is easy to see how the analysis in [1] is dead wrong and miserably fails to understand the significance of what Rand is trying to say. Rand’s view on statism has nothing to do with activities that facilitate “progress” (whatever that is) and the GPL hardly facilitates the fulfillment of “individual happiness” because it bans the ability of an individual to prosper from their work. What the GPL does do is facilitate the creation of non-economic happiness, or esteem. This is precisely because it filters out the economic aspect from the labor spent participating in an open source project. Neither you nor anyone else can derive any “property right” to something that is produced under the protection of open source: it is economically “free” (cost is zero) and it is politically “free” (freely available).

I believe that Rand would be very upset by this situation because it appears to be a form of self-imposed statism. Rand believes all things are to facilitate the prosperity and happiness of the individual human. However, open source seems to turn that relationship around because suddenly property itself has more freedom than people. The creation of open source software simultaneously bans forever the creator’s ability to prosper from it. Rand would understand the psychological esteem or creative fulfillment aspect (such as painting a picture) of open source. However, economically and politically she would ask “what is the point?” especially in-lieu of the ability of others to prosper and gain power from the distribution of open source software.

Conclusion

The existence of a GPLed property bans the creator of that property the ability to prosper from it. Creating open source softwareStrangely, this appears to be a form of

happiness of being in that situation

and goes against the pursuit of happiness (personal

wealth creation). by would never say the GPL is socialist. Why? Because there is no coersive force requiring anyone relinquish the fruits of their labor. People who produce and release material under the GPL do so completely voluntarily. But I also think Rand would say the GPL is anti-capitalistic. This is because it takes away the OPPORTUNITY FOR EXCHANGE of property (intellectual property in this case) which is the basis of the creation of INDIVIDUAL WEALTH. Rand would laugh but in a sad way asking, "why would you give up your freedom to prosper so willingly?"

This is a tricky area because it is easy to start mixing two conceptual frameworks here: economic rights and political rights. Although the two overlap, it is important to stay focused on economics for this discussion. "Freedom" here does NOT refer to being able to say what you want, or being able to elect a government leader without coercion, or being able to go where you want. Freedom means being able to engage in EXCHANGE for wealth building whenever you feel like it- whether you are the buyer or the seller. I feel like the previous article was mushing "Democracy" and "Capitalism" together. The statism that Rand was most likely referring to was either socialism or capitalism: some means whereby an authority above the individual takes some of the individual wealth away and reallocates it in society. These systems effectively rob the individual of being "free" because they are not able to engage in trade completely at-will because some of their property (whether it is money or something else that can be exchanged) has been forcibly removed from them. Of course in the real world nobody lives in any of these idealized models, but it is important to understand that this is the kind of freedom Rand is talking about.

Rand would definitely not think that the GPL is statist. Again, there is no external coercion. But I think she would definitely not think that the GPL is capitalistic, again because it takes away the opportunity for the owner of the "property" to profit from it. This idea is the sole ethic of Rand and the previous article does not address it at all- in fact I think the author did not understand fundamentally what Rand was getting at.

In the final paragraph of the previous essay, the author states that some, "will argue that Open Source may use capitalistic mechanisms, but it does so in order to undermine Capitalism and achieve socialistic objectives. This argument is meaningless, because any system that obeys all the principles of Capitalism is, by definition, Capitalism." Unfortunately the author did not either 1) outline how the GPL and Open Source projects conform to the principles of Capitalism or 2) address the central crux of Ayn Rand: the morality of individual wealth building. Rand is not concerned with the activity of the Firm. Rand is solely and utterly obsessed with the "rights" of the individual to prosper.

Furthermore, the previous article goes on to state that "Supporters of Open Source need not be embarrassed if no corporation makes money from Open Source." Actually, here is the reality: Corporations who are trying to break into technology markets LOVE open source because it enables profit-making like crazy. Corporations who are trying to hold-on to their existing claims in technology markets HATE open source because it devalues that firms existing HUGE investment (in R&D and development) by enabling smaller firms to compete in a market with a fractional investment. Let me explain.

Macroeconomic Analysis

The inherent risk in starting a software venture is acquiring the capital in order to buy the intellectual property (outright or through engineers) to develop, market test and debug a product to maturity. Open source enables these processes to happen with no cost to a corporation because the cost is absorbed by the individual members of the open source project- a cost that is uncompensated (no salary). "Free" software enables rapid time to market of relatively stable new technology. However, it encourages hyper-competitive behavior because everyone has the same access to the same stuff. However, don't think the "savings" to the firm in R&D ends up going right to the bank. Because of the competitive market, firms must put more resources into sales and marketing to differentiate themselves in the marketplace.

Because the intellectual property is essentially free, does this mean that open source “products” themselves have no value in the marketplace? Not necessarily, there are a few profitable outcomes to open source products. A firm can derive some marginal profit from the product itself in the form of bundling (what other software or products you sell with the open source product). This is because bundling is the only way to differentiate an open source product from one company from that of another company (since they all have access to the same source code). Also, depending on the depth of your sales channel (how much of the market you have access to) will enable a firm to fiddle around with margins (either through the economy of volume or catering to a niche in the market)

However, more than the product the real money maker with open source seems to lie in service: technical support, integration with legacy systems, integration with other applications, etc. The best case I can think of right now is Novell, Inc.'s marketing strategy of the Linux operating system. Novell has a widely-recognized brand name, a very deep world-wide channel, revenue supported engineering staff dedicated to network operating systems, a revenue supported technical support operation, and industry relationships that facilitate integration efforts vertically and horizontally. There is money to be made helping others use this free software.

So returning to the idea of Open Source and Capitalism, what is the bottom line? If we continue in Rand’s framework, I fear the conclusion is a sad one. Although there are profit making opportunities for open source, ultimately those profits are reserved for those people WHO ARE NOT the owners of the intellectual property of the product. Rand would feel that this is against everything she believes. However, she would also note, in amazement, that this behavior is done completely voluntarily. Because the owners of the intellectual property (Linux engineers or Wikipedians for instance) give away their rights to ownership of the property in exchange for the esteem of contributing to the project, ultimately it is others who will profit and derive wealth from their work. Unlike the exploitation of labor in the 19th century, the exploitation of intellectual property today does not physically hurt and it can be done in addition to someone's day job, making the “pain” invisible. Another interesting observation is that open source efforts could be compared slavery in its economic structure, although differing markedly in it’s political form because the "laborers" engage in the work with their own free will.

Open source is very curious. It is UN-capitalistic (because it robs the individual of the ability to engage in free exchange and profit making) and it is exploitative (because others profit from the work of the owners of the intellectual property) and it is unsocialistic but it is free. However, the popularity of open source has flourished which seems to imply that the owners of the intellectual property are receiving adequate compensation for their labor, although this compensation is outside the realm of capitalist economics. My interpretation is that Open Source represents a new stage in human economic activity and standard of living. An age where individuals freely contribute their time an energy to the profit making of others because the contribution, in some way, fundamentally taps into the desire of people to contribute their knowledge and expertise to something greater and perceived of as good. -- Chevan 05:08, Apr 11, 2004 (UTC)

Finale

References

The Cathedral and the Bazaar, Eric S. Raymond: http://www.catb.org/~esr/writings/cathedral-bazaar/
http://www.firstmonday.dk/issues/issue3_3/ghosh/index.html
http://www.opensource.org/docs/definition_plain.html
papers.nber.org/papers/w7600
http://cyber.law.harvard.edu/is99/Copyleft.htm
http://www.firstmonday.dk/issues/issue3_3/torvalds/index.html

Feedback and comments are welcome. Please feel free to edit this page and add your views below.