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blog: Don Marti

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The third connection in Benkler's Tripod

31 May 2017

Here's a classic article by Yochai Benkler: Coase's Penguin, or Linux and the Nature of the Firm.

Benkler builds on the work of Ronald Coase, whose The Nature of the Firm explains how transaction costs affect when companies can be more efficient ways to organize work than markets. Benkler adds a third organizational model, peer production. Peer production, commonly seen in open source projects, is good at matching creative people to rewarding problems.

As peer production relies on opening up access to resources for a relatively unbounded set of agents, freeing them to define and pursue an unbounded set of projects that are the best outcome of combining a particular individual or set of individuals with a particular set of resources, this open set of agents is likely to be more productive than the same set could have been if divided into bounded sets in firms.

Firms, markets, and peer production all have their advantages, and in the real world, most productive activity is mixed.

  • Managers in firms manage some production directly and trade in markets for other production. This connection in the firms/markets/peer production tripod is as old as firms.

  • The open source software business is the second connection. Managers in firms both manage software production directly and sponsor peer production projects, or manage employees who participate in projects.

But what about the third possible connection between legs of the tripod? Is it possible to make a direct connection between peer production and markets, one that doesn't go through firms? And why would you want to connect peer production directly to markets in the first place? Not just because that's where the money is, but because markets are a good tool for getting information out of people, and projects need information. Stefan Kooths, Markus Langenfurth, and Nadine Kalwey wrote, in "Open-Source Software: An Economic Assessment" (PDF),

Developers lack key information due to the absence of pricing in open-source software. They do not have information concerning customers’ willingness to pay (= actual preferences), based on which production decisions would be made in the market process. Because of the absence of this information, supply does not automatically develop in line with the needs of the users, which may manifest itself as oversupply (excessive supply) or undersupply (excessive demand). Furthermore, the functional deficits in the software market also work their way up to the upstream factor markets (in particular, the labor market for developers) and–depending on the financing model of the open-source software development–to the downstream or parallel complementary markets (e.g., service markets) as well.

Because the open-source model at its core deliberately rejects the use of the market as a coordination mechanism and prevents the formation of price information, the above market functions cannot be satisfied by the open-source model. This results in a systematic disadvantage in the provision of software in the open-source model as compared to the proprietary production process.

The workaround is to connect peer production to markets by way of firms. But the more that connections between markets and peer production projects have to go through firms, the more chances to lose information. That's not because firms are necessarily dysfunctional (although most are, in different ways). A firm might rationally choose to pay for the implementation of a feature that they predict will get 100 new users, paying $5000 each, instead of a feature that adds $1000 of value for 1000 existing users, but whose absence won't stop them from renewing.

Some ways to connect peer production to markets are already working. Crowdfunding for software projects and Patreon are furthest along, both offering support for developers who have already built a reputation.

A decentralized form of connection is Tokens, which Balaji S. Srinivasan describes as a tradeable version of API keys. If I believe that your network service will be useful to me in the future, I can pre-buy access to it. If I think your service will really catch on, I can buy a bunch of extra tokens and sell them later, without needing to involve you. (and if your service needs network effects, now I have an incentive to promote it, so that there will be a seller's market for the tokens I hold.)

Dominant assurance contracts, by Alexander Tabarrok, build on the crowdfunding model, with the extra twist that the person proposing the project has to put up some seed money that is divided among backers if the project fails to secure funding. This is supposed to bring in extra investment early on, before a project looks likely to meet its goal.

Tom W. Bell's "SPEX", in Prediction Markets for Promoting the Progress of Sciences and the Useful Arts, is a proposed market to facilitate transactions in a variety of prediction certificates, each one of which promises to pay its bearer in the event that an associated claim about science, technology, or public policy comes true. The SPEX looks promising as a way for investors to hedge their exposure to lack of innovation. If you own data centers and need energy, take a short position in SPEX contracts on cold fusion. (Or, more likely, buy into a SPEX fund that invests for your industry.) The SPEX looks like a way to connect the market to more difficult problems than the kinds of incremental innovation that tend to be funded through the VC system.

What happens when the software industry is forced to grow up?

I'm starting to think that finishing the tripod, with better links from markets to peer production, is going to matter a lot more soon, because of the software quality problem.

Today's software, both proprietary and open source, is distributed under ¯\_(ツ)_/¯ terms. "Disclaimer of implied warranty of merchantability" is lawyer-speak for "we reserve the right to half-ass our jobs lol." As Zeynep Tufekci wrote in the New York Times, "The World Is Getting Hacked. Why Don’t We Do More to Stop It?" At some point the users are going to get fed up, and we're going to have to. An industry as large and wealthy as software, still sticking to Homebrew Computer Club-era disclaimers, is like a 40-something-year-old startup bro doing crimes and claiming that they're just boyish hijinks. This whole disclaimer of implied warranty thing is making us look stupid, people. (No, I'm not for warranties on software that counts as a scientific or technical communication, or on bona fide collaborative development, but on a product product? Come on.)

Grown-up software liability policy is coming, but we're not ready for it. Quality software is not just a technically hard problem. Today, we're set up to move fast, break things, and ship dancing pigs—with incentives more powerful than incentives to build secure software. Yes, you get the occasional DARPA initiative or tool to facilitate incremental cleanup, but most software is incentivized through too many layers of principal-agent problems. Everything is broken.

If governments try to fix software liability before the software scene can fix the incentives problem, then we will end up with a stifled, slowed-down software scene, a few incumbent software companies living on regulatory capture, and probably not much real security benefit for users. But what if users (directly or through their insurance companies) are willing to pay to avoid the costs of broken software, in markets, and open source developers are willing to participate in peer production to make quality software, but software firms are not set up to connect them?

What if there is another way to connect the "I would rather pay a little more and not get h@x0r3d!" demand to the "I would code that right and release it in open source, if someone would pay for it" supply?