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

by Yochai Benkler

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.

The paper also explains why this mode has systematic advantages over markets and managerial hierarchies when the object of production is information or culture, and where the capital investment necessary for production-computers and communications capabilities-is widely distributed instead of concentrated. In particular, this mode of production is better than firms and markets for two reasons. First, it is better at identifying and assigning human capital to information and cultural production processes. In this regard, peer-production has an advantage in what I call "information opportunity cost." That is, it loses less information about who the best person for a given job might be than do either of the other two organizational modes. Second, there are substantial increasing returns to allow very larger clusters of potential contributors to interact with very large clusters of information resources in search of new projects and collaboration enterprises. Removing property and contract as the organizing principles of collaboration substantially reduces transaction costs involved in allowing these large clusters of potential contributors to review and select which resources to work on, for which projects, and with which collaborators. This results in allocation gains, that increase more than proportionately with the increase in the number of individuals and resources that are part of the system. The article concludes with an overview of how these models use a variety of technological and social strategies to overcome the collective action problems usually solved in managerial and market-based systems by property and contract.

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Open-source economics

Yochai Benkler explains how collaborative projects like Wikipedia and Linux represent the next stage of human organization.

Larry Lessig calls law professor Yochai Benkler "the leading intellectual of the information age." He studies the commons -- including such shareable spaces as the radio spectrum, as well as our shared bodies of knowledge and how we access and change them.

His most recent writings (such as his 2006 book The Wealth of Networks) discuss the effects of net-based information production on our lives and minds and laws. He has gained admirers far beyond the academy, so much so that when he released his book online with a Creative Commons license, it was mixed and remixed online by fans. (Texts can be found at benkler.org; and check out this web-based seminar on The Wealth of Networks.) He was awarded EFF's Pioneer Award in 2007.

He's the Berkman Professor of Entrepreneurial Legal Studies at Harvard, and faculty co-director of the Berkman Center for Internet and Society (home to many of TED's favorite people).