The Sustainable Economics of Open Source and Open Spectrum

A big shout out to Mark Cooper — probably the most prolific and proficient writer on matters economic in the consumer and media reform movements — for putting together two new papers. One explains an economic theory of open spectrum, the other is a brief overview of the basic principles as applied to open source as well.

I shall attempt to translate from the econ speak for the unitiated, as well as explain why Cooper’s discovery/description of a phenomena called a “collaborative good” has such huge implications for public policy.

Open source software and open spectrum have created multibillion dollar industries, so it will probably come as a surprise to folks that it shouldn’t work. Why? Because under the current dominant analysis in econmic theory, the open source and open spetcrum models should eventually collapse under their own success. When the community is small, goes current thinking, collaborative models can work well. But as the potential value of the product grows, as the number of participants makes it harder for the commnity to self-police conduct, as free riders are able to capture benefit without contributing, the system should collapse and require reversion to the classic private property model. Which is why open source and open spectrum have suffered a classic “tragedy of the commons” and died.

Except they haven’t. New open source products continue to get made, as do new open spectrum products and technologies. Despite increasing congestion and a concomitant increase in the number of bad actors seting up networks without coordination with neighbors (technically known in economics as “a-holes”), wireless networks continue to deploy and provide solid, reliable service.

The natural conclusion is to laugh at ecnomists and keep using linux and 2.4 GHz equipment. But it is rather dangerous to laugh at economists for a variety of reasons. Most important from my perspective is the impact on public policy. I go to the FCC and elswhere to promote the open spectrum model and push for rules to make it happen. I point to how well this model is working and how expansion of these policies will continue to promote billions of dollars in economic activity (oh yes, and the First Amendment too). Inevitably, I get push back with “sure, it has worked so far, but to get real investment in equipment and new services, we need exclusive licenses. Otherwise, big companies like Motorola and Qualcom won’t invest and the spectrum will go to waste.” Similarly, when folks push open source solutions for government applications, one push back is “sure, this stuff works for some applications and it’s nice when it happens, but you can’t rely on people developing what you need unless they can capture all the value. For that you need proprietary solutions.”

The other thing is, frankly, it would be a lot more reassuring to understand why this stuff works when theory says it shouldn’t it. After all, neoclassical economics didn’t enjoy a resurgence merely because big corporations and conservative foundations funded it. It has a good track record in reality. If nothing else, a new theory that explains how things like open source and open spectrum work economically could tell us how to create policies that make them happen more often, where appropriate.

Enter Mark Cooper. Unless you’re a policy wonk, you’ve probably never heard of Mark Cooper. Cooper is Director of Research at Consumer Federation of America and has bascially been the “go to” guy for hard-core economc analysis in energy and telecom for the public interest side since I can remember. He’s one of the sharpest thinkers and prolific writers I know. And Cooper has finally developed a theoretical basis for the sustainability of open source, open spectrum, and other collaborative models.

Others have tackled piecesof this issue before, and at varying levels of complexity, from Eric Raymond’s classic “The Cathedral and the Bazzar” to Yochai Benkler’s “Some Economics of Open Spectrum.” But Cooper is the first to take open source, open spectrum (and, in an upcoming work, peer-to-peer) and explain that these are neither transient anomolies or one-time flukes of circumstance. Rather, they represent rational economic decisionmaking that takes advantage of how new technologies have altered traditional cost and incentive calculi.

To try to squeeze this down to basics.

Neo-classical economics focuses primarily on two types of goods (recognizing that ‘goods’ can apply to any set of services or rights of action). The first is “private goods.” Private goods are marked by their scarcity (which gives them value), excludability (the owner of the good can exclude others from their use) and consumability (when I use them up, they are gone). Public goods are marked by their lack of excludability and the fact that they are not consumed. There is also no incremental cost in adding a new user (which is derived in part from their lack of consumability).

To provide an example of a “public good,” consider broadcast television signals. It costs as much to produce the signal (not the receiver equipment, mind) if only one person receives it as if a million people receive it.

Neo-classical economics argues that public goods will not be produced unless we can find some way to give exlusive private rights to the producer. Otherwise, I, the producer, have no incentive to produce the good, since I can’t derive profit from them. In the case of a broadcast television signal, law gives me excludability of the content via copyright.

In addition, there is something called a “network effect.” This holds that the more people are plugged into the network, the more valuable the network is. Thus, the ability to exclude people/content becomes much more important as the network gets larger.

This is broadcast television. Initially, the networks paid the local broadcasters to carry their content. Once that content became popular, the programming networks could exercise greater control because access to the programming had become so valuable.

Cooper identifies a new kind of good called a “collaborative good.” A collaborative good exhibits properties like a public good in that it is not consumed, and exhibits networks effects in that it grows more valuable the more people use it. As a result, there is no such thing as a “free rider” problem. Everone who uses the good enhances its power (and therefore the value I receive as the producer of the good/service). In addition, the collaborative nature of the project allows me to distribute costs of production and receive benefits from others, giving me further incentive to participate under a set of collaborative rules rather than under a set of competitive rules. My value increases through collaboration, and actually decreases if I try to enforce exclusivity.

This is a function of changes in technology, not changes in human nature. We haven’t all suddenly become cooperative altruists. But technology has changed the cost and nature of production and distribution, creating a rational incentive to collaborate rather than compete. Such changes have happend before. In the turn of the last century, economist tried to understand why corporations had become the dominant form for economic activity. This created a puzzle for economists because it separated ownership (dispersed among shareholders) from control (held by corporate officers), a hitherto unthinkable thing. Why would you own something if you couldn’t control it. The answer- because this lets me have a potentially signifcant reward while risking only modest capital — may seem intuitively obvious now, but it was not then. Similarly, people wondered how corporations could continue to grow in the face of increased costs of size and coordination. Ronald Coase, supplied an answer in 1937 that firms will grow as long as they reduce costs by reducing transactional costs and this gain overcomes any other costs or inefficiencies.

So we know that economic incentives and costs are not static and can change over time. To propose that new technologies have further reduced transaction costs is not, as some critics argue, to suggest that human nature has changed or that the laws of profit and loss have suddenly been reversed. This is not some new economy version of “from each according to his ability to each according to his need.” Rather, it is an evolution in looking to how a technology that radically changes the economics of production and distribution is reflected in the new incentives for production and distribution. Just as technology made mass production feesible and changed how people did business, so have changes in the information technology.

This does not eliminate the need for rules, but it does suggest different rules than under the neo-classical economic model. Rather than emphasizing private rights and enhancing the ability of those with private rights to exclude others, rules for collaborative goods should facilitate collaboration and prohibit (or at least make more difficult) excludability. This will prevent the cooption of the total collaborative value by a single bad actor.

Also, it is important to note that not all goods are colaborative goods. Indeed, not even all goods in information services or spetrum use are necessarily collaborative goods. Cooper does not claim we have come to the end of private property, and new rules should allow people to share your lawn or even your computer when you are not using it. But he does argue that we should (a) recognize the existence of collaborative goods, and (b) create rules that allow for the development of collaborative goods, rather than continue to mindless expand the ability to exclude and privatize under the neo-classic tautology that private rights are invairably the best way to encourage economic efficiencies and production of goods.

And that’s the simple version. And I’ve probably gotten half of it wrong. So follow the links to an economic theory of open spectrum, and to the brief overview of the basic principles as applied to open source
and read it youself. Its worth it.

Stay tuned . . . .