A Preface to My Future Work on the Economics of Open Source

“Economics is basically about incentives and interaction — or, as Schelling put it, micromotives and macrobehavior. You try to think about what people will do in certain circumstances, and you try to understand how individual behavior adds up to an overall result.” – Paul Krugman

The economics of open source software has generally been approached from the perspective of “why would people do this thing?”  This makes some sense; classical economic models leave non-monetary considerations to the realm of game theory and sociology and the question of micromotives initially looks exceptionally opaque.  The result, however, has been a skeptical approach to applying an economic lens to open source and a general failure to explain the macrobehavior involved.  Most papers I’ve found attempt to explain away open source as human irrationality, rather than demonstrate the way it fits with, and indeed validates, our existing models.  I'm one of those people who think that if reality clashes with a model, the problem is probably not reality.


On a personal note, I like Classical Economics.  Not because it is correct (much like Newtonian physics it is an excellent approximate model of gross interactions in an emergent system), but because it is a consistent, logical and disprovable model of the world.  I am a programmer, and classical economics is a language I understand.  These similarities may be in part because both  Computer Science and Economics are young fields dealing with the emergent behavior of systems.  Ada Lovelace began writing programs only about 70 years after The Wealth of Nations was published. 

For those who are interested in a basic introduction, I’d recommend The Cartoon Introduction to Economics.  Learning the basic model is helpful, in much the same way understanding HTML is helpful on a day-to-day basis.  That is, it is probably not useful at all unless you are employed in the field, but when you see something funky on a web page or in the economy it offers the satisfaction of possibly knowing why something went wrong.  Economies have smells too, and microeconomics can suggest what is rotting.

Classical microeconomics is particularly useful when describing market failures.  Externalities are exogenous to these models, but monopolies, barriers to entry, market power and economic rents all stand out like neon signs.  It is relatively easy to work through how individuaPublishl behavior under less-than-perfect competition would lead to inefficient outcomes, misallocated resources and excess profits.  I think the moment I fell in love with microeconomics was when I first heard “economic profits are a sign of lack of competition”.  As a model, classical economics offers math and citations for economic intuition.


Since Open Source Software is a direct reaction to market failures, I believe classical microeconomics is a natural fit to explain its emergence.  This talk I gave at Boston Barcamp 6 is the first time I’ve put some of this thinking to paper.  Clearly there is a great deal of future work to be done.  The nature of software as monopolistically competitive firms deserves at least a paper or two all on its own, especially since the usual problem faced under monopolistic competition, excess capacity, is significantly less of an issue in low marginal cost environments.  In particular, the iPhone AppStore could make an excellent case study of this form of imperfect competition.  The availability of advertising on the market for low marginal cost goods is also potentially interesting, and something that came up during the Q&A at Barcamp.  Price discrimination (dual licensing), related-good economies, patronage and own-use development are also on my radar.  My hope is that these discussions will inform future attempts to move other low marginal cost goods towards an open source model, efforts to improve and diversify existing open source projects and future political responses to open source.  Understanding that the OSS movement is not a threat to traditional economics may disappoint some proponents, but may also reassure and encourage corporate participation.

All that said, I’m not sure where this will fit in current discussions.  One of the advantages of Barcamp was simply that my talk didn’t have to apply practically to anyone’s day-to-day work or address any particularly field.  If any of my readers know of conferences where this topic would neatly fit, I would appreciate suggestions.