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

Summary of: Coase's Penguin, or, Linux and The Nature of the Firm

Author(s) / Editor(s)

Commons based peer production (e.g., free software) has emerged in the pervasively networked digital information economy as a third method of production which for some projects, has productivity gains, in the form of information and allocation gains, over market and firm-based production.

Disciplines

Publication Reference

Published in/by
forthcoming 112 Yale L. J. (Winter 2002-03) v.04.3
Date
August 2002

Findings

  • The emerging pervasively networked information economy has four characteristics that have enabled the emergence of peer production. These are (1) information is non-rival and "the social cost of using existing information as input to new information production is zero", (2) the "decline in the capital cost of information production", (3) information production relies on human talent and creativity which is highly variable, (4) the "dramatic decline in communication costs".
  • Benkler hypothesizes, in short, that peer-based cooperation scales. More specifically that "rich information exchange among large sets of agents free to communicate and use existing information resources cheaply will create sufficiently substantial information gains". And that peer production has "potential allocation gains enabled by the differences in how peer production, firms, and markets reduce uncertainty" of production outcome. And finally that these information gains together with allocation gains "overcome the added information exchange costs necessary to overcome the absence of pricing and managerial direction, and the added coordination costs created by the lack of property and contract as institutional bases for structuring coordination".
  • From (2) above he concludes that "where the physical capital costs of information production are low, and where existing information resources are freely or cheaply available, the low cost of cost of communication of very large sets of agents allows agents to collect information through extensive communication and feedback instead of by using information compression mechanisms like prices or managerial instructions." This will result in efficient information production and is a basis to argue in favor of common or freely available information over the current system that favors property.
  • Benkler claims that human intellectual effort is highly variable. As a result, "human creativity is very difficult to standardize and specify in the contracts and necessary for either market-cleared or hierarchically organized production." That is, there is an information loss. Some companies try to compensate for this with incentive compensation and other methods however, "it is unclear how well they can overcome the core difficulty."
  • "Peer production relies on making an unbounded set of resources available to an unbounded set of agents." Whereas market and firm based production rely on bounded sets of agents and resources secured through property and contract. "The permeability of the boundaries of these sets is limited by the cost of making decisions in a firm." This, coupled with the variability of human talent, leads to allocation gains for peer production over the other modes of production.
  • Benkler notices that not all projects are suited for peer production, including ones that don't require highly variable talent or that cannot be adequately partitioned.
  • This is all well and good, but it doesn't explain how peer production actually works or more importantly how to design a successful peer production project. There are obvious questions about (1) potential substantial duplication of effort placing a drag on production, (2) motivation and threats to motivation, and (3) the integration of contributions. For (1), redundancy provides a better product and a successful project may simply be taking production time from unproductive activities (e.g., watching TV) and not result in an overall loss of productivity. For (2) Benkler notes that "given a sufficiently large number of contribution, direct monetary incentives necessary to bring about contributions are trivial" and that an important part of a successful project is its ability to be decomposed into small contributions. In addition, there are two forms of demotivational activities: failure to integrate a contribution, and taking over a project or portion of a project, both of which a successful project must design to avoid. And finally for (3), a method for successful integration and quality control is critical for any successful project.

The traditional framework of the organization of economic production includes two modes of production: individuals order their productive activities either under the direction of managers at firms, or as individuals in markets following price signals. Free Software is one example of a broader social-economic phenomenon that Benkler calls 'commons-based peer production', a new, third mode of production in digitally networked environments. In order to explain the emergence of this third mode of production Benkler augments the traditional production framework. Because of the highly variable nature of human expertise, and given a pervasively networked information economy, commons-based peer production has advantages over the two traditional forms of organization. The paper concludes with a discussion of the problems of motivation, loss of motivation, and integration in peer production enterprises. Benkler concludes that (1) "Given a sufficiently large number of contributions, direct monetary incentives necessary to bring about contributions are trivial." and (2) "Peer production is limited not by the total cost or complexity of a project, but by its modularity, granularity, and the cost of integration."

The paper concludes with a discussion of the problems of collective action and how they are solved in the absence of property and the presence of high transaction costs of monetary compensation. Relevant factors include the fact that the resource being produced (information) is non-rival, that problems are divisible into a fine level of granularity, the ability to provide integration (quality control and handling of contributions) in a socially acceptable manner, that the pervasively networked information economy provides access to a large number of potential contributors, and the willingness of contributors to accept non-monetary rewards.

Benkler posits that understanding peer production in the same framework as the mainstream economic theory of organizations could explain the emergence of commons-based peer production. The mainstream economic theory of organizations says that individuals organize into firms whenever the cost of achieving an outcome is greater using a price system. Peer production emerge whenever the cost of peer-based production is lower than either market-based or firm-based production. Property rights emerge whenever the value of a resource is such that its utilization through a property-based appropriation offsets the cost of implementing and enforcing the property rights regime. Commons emerge when the cost of implementing a property regime is higher than the opportunity cost of the property. Market and firm based production can be divided into property based production and commons-based production. Peer-based production fits well into the framework with plenty of examples of both property based production (e.g., Xerox's Eureka) and commons-based peer production (e.g., free software, academic science, Wikipedia).

The emergence of peer production is tied to a pervasively networked information economy. Commons-based peer production has systematic advantages over market and firm based production when (1) the object of production is information or culture, and (2) the physical capital necessary for production is widely distributed. Both of the advantages of peer production are a function of the variability of human capital. First, commons-based peer production has an advantage of having a lowest cost of determining who is the best person for a given task (Benkler calls this 'information opportunity cost'). Second, it has an advantage of allocation efficiency where large groups of potential contributors interact with large groups of resources in the search for new tasks. That is, the practice of firms -- and to a lesser extent markets -- of securing access to limited sets of contributors and resources through contracts and property entails a systematic loss of productivity.

Benkler addresses the problems of motivation, loss of motivation, and integration in peer production enterprises. Benkler concludes the following:

  • "Given a sufficiently large number of contributions, direct monetary incentives necessary to bring about contributions are trivial."
  • "Peer production is limited not by the total cost or complexity of a project, but by its modularity, granularity, and the cost of integration."

Two kinds of actions represent threats to motivation (1) (the most important) unilateral appropriation by an individual or group of the project and (2) some behavior affecting the intrinsic value of participation for contributors (e.g., failure to integrate a contribution). Free-riding is a common demotivating action in commons. Since information is non-rival, free-riding is a non-issue so long as the pool of contributors is sufficiently large and the act of free-riding does not undermine production. In this sense, 'Absence of exclusion' is the organizing feature of commons-based peer production. Finally, integration requires (1) a quality control or integrity assurance mechanism, and (2) a method for combining individual contributions into the whole.