Open Source, it seems, is not just quantatively better than other modes of production, but qualitatively better. And Yochai Benkler, a Yale Professor of Law, has written a fascinating paper trying to prove just that. It is called Coase’s Penguin (or Linux and the Nature of the Firm).

Benkler has taken Coase’s theorem and used to it look at Open Source and its value as a means of productivity.

Ronald Coase

Coase’s Theorem

“What Coase originally proposed in 1959 in the context of the regulation of radio frequencies was that as long as property rights in these frequencies were well defined, it ultimately did not matter if adjacent radio stations would initially interfere with each other by broadcasting in the same frequency band. The station able to reap the higher economic gain of the two from broadcasting would in this case have an incentive to pay the other station not to interfere. In the absence of transaction costs, both stations would strike a mutually advantageous deal. Put differently, it would not matter whether one or the other station had the initial right to broadcast; eventually, the right to broadcast would end up with the party that was able to put it to the most profitable use.”

- Source: Wikipedia

Coase’s Penguin

Benkler extends this by looking at the way we reduce information opportunity cost. Very briefly, his argument is this:

- Actions are a combination of effort and resources
- The value of an action is a combination of the benefit of its outcome and the likelihood of its outcome coming to pass
- Any rational actor (call them Bob) will choose Act A over Act B if Act A has a greater value.
- In a world of numerous rational actors, their actions will only affect Bob’s choice if they affect the Value of his action.
- The greater the interdependence of the actions, the harder it is for Bob to choose (since there is a greater uncertainty concerning the impact of other actions on the value of his choice)
- Traditionally we’ve reduced this uncertainty either through markets or firms. Markets allow us to price effort and resources in such a way as to allow Bob to assess the probable actions of others. Firms reduce uncertainty by specifying what actions Bob and his counterparts can (and cannot) take.

Benkler then turns to the production of information. And this is where I get excited. Defining information as a reduction in uncertainty, he compares different modes of organising production as information processing systems.

- Different modes have different opportunity costs (i.e. they bring with them a certain amount of doubt to the information)
- Markets codify through price, but the codification has to be lossy because you can’t code everything. Labour markets for example, put every starting graduate in a certain role on a similar salary despite there being a huge array of different talents on offer.
- Firms are lossy - and admit it in that the role of the CIO is to mitigate that lossiness.
- Open Source Production, though still lossy, is qualitatively better than either because its distributed model better identifies the best person for any one modular component, all abilities and availabilites considered.
- Put another way:
– Assume that the Productivity of Bob and his friends increases as possible efforts and resources increases, and
– Assume that that Productivity increases at with a magnitude that is the available talent on offer.
– As the number of Bob and friends increases, then it becomes more and more likely that their group will include the optimal Actor for a given production.

In short, it seems: open access = optimal productivity = optimal quality. And that (with Benkler’s proof)

Lot’s of things to think about. For a start, can it really be that economics (the land of rational actors) is voting for Open Source (the land of selfless helpers)? Also, if you’ve got a business plan that includes anything that you can imagine a group doing in their spare time, presumably you need to be very, very wary.

UPDATE: As ever with these things, others have been having a think about it. Those that I found on a quick check were:

The Economist: “The Economics of Sharing”[via Smart Mobs via What Ralph Knows]