Wealth of Networks

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Author: Yochai Benkler. The Wealth of Networks. Yale University Press, published: 2006

This is a key book introducing Commons-based Peer Production and its social and economic context, by one of the leading pioneers, Yochai Benkler.

The book is available in full online format

http://www.johncartermcknight.com/blog/wp-content/uploads/2009/12/benkler.jpg (Image gone away)

Key Thesis

Text

when costs of participation are low enough, any motivation may be sufficient to lead to a contribution.

- Michael Feldstein [1]

"It turns out (cfr. the above citation) that this is the key to understanding both Coase and Benkler, both capitalist firms and open source communities.

Despite a reputation for practicing the “dismal science,” Adam Smith and many of his intellectual progeny are fundamentally optimists. You have to be optimistic to believe, as Smith did, that the cumulative effect of individuals pursuing their self-interest in a free market would result in the collective good via the “invisible hand” of the markets. The genius of economist Ronald Coase is that he was able to articulate the force behind this invisible hand—and its limits—in a clear, sensible formula with predictive power. Think of him as the Isaac Newton of economics.

Coase claimed that, in a perfect world, the invisible hand would always prevail. For example, given a farmer and a cattle rancher who both need the same land, the two will always work out a mutually advantageous agreement. One will always offer to compensate the other in return for giving up access to the land such that they both benefit. Importantly, Coase argued that this would be true regardless of who owned the land. In that perfect world, property rights—which many of us have come to understand as a cornerstone of capitalism—are completely superfluous to a properly functioning market. People would trade to mutual benefit without the need for property or companies. Think of this as the economic equivalent of Newton’s First Law of Motion: economic transactions in motion tend to stay in motion.

The trouble, of course, is that friction exists. Friction (and gravity) are why baseballs don’t fly forever when you throw them on Planet Earth. The economic equivalent of friction, according to Coase, is something called transaction cost. Transaction costs are anything that contribute to the cost of something being purchased other than the cost of the production. If you pay your broker a commission on a stock, that’s a transaction cost. If you invest time researching and bargaining for your new car before you buy it, that investment is a transaction cost. If you have to pay a lawyer to write up a legally binding contract so that you have clear title to the house you are buying, that’s a transaction cost. When transaction costs are high enough, they make some economic deals too costly. In response to this problem, humans created property and companies. For example, nobody would start a car company by going out and buying all the car components on the open market and then going to yet somebody else (again, on the open market) to have them assemble the cars. The costs would be prohibitive. Instead, somebody hires workers to make the parts and assemble the cars. The automobile workers don’t have the transaction cost of constantly looking for somebody to buy the parts that they are making while the factory owner doesn’t have the transaction costs of searching to find every single part and negotiate for it separately on the open market. In return for providing a steady income to all the producers, the factory owner gets to own their work product.

Of course, there are costs to running a company too. Anyone who has ever worked in a large organization (or even a small one) knows that they are not exactly frictionless either. There is a cost to centralization. Managers don’t always know everything they need to know in order to make optimal decisions. According to Coase, this is the limiting factor on the size of companies. As long as the costs of a centralized organization are lower than the transaction costs on the open market, firms will grow. But as they grow, their internal inefficiencies grow with them. When the internal costs equal the market costs, the firms will reach their growth limits.

In the world that Coase imagined, the choice is binary. There are firms and there are markets. These are the only two means by which economies get things done. And that all makes sense on Planet Earth, where there are gravity and friction to counterbalance the force of inertia. But what about in space? What happens when we radically reduce the amount of friction in the system? According to Benkler, this is exactly the puzzle that the Twenty-first Century information economy poses. Today, an increasingly large percentage of our economy is dedicated to creating goods that are not automobiles and other industrial goods but ideas. They are software code and gene sequences and art. They are goods that have near-zero cost to reproduce and distribute (a characteristic that economists call non-rival). And they don’t require expensive machines and real estate to produce. I help design software for a living, but I work out of my home on a relatively cheap computer. Everything I produce can be reproduced as simply as selecting “Save As…” from a pull-down menu.

In this world, Benkler argues, dramatically reduced friction makes practical certain organizational structures that we simply wouldn’t see in an industrial economy. The less resistance there is to overcome in a system, the less formal structure is required for transactions to happen. I didn’t have to lead an organized movement for my practical joke or the Wikipedia page to succeed. If I did, then neither would ever have happened. But because the costs of participation and coordination were so low, a wide range of people were able to find a wide range of reasons that were sufficient to motivate their useful participation.

And we don’t have to assume only non-financial motives such as the ones in my first two examples. To the contrary, the low transaction costs make a wide range of new business models feasible. For example, we know that that upwards of 50% of the total cost of big enterprise software systems are support and maintenance costs. If a company can invest a small fraction of the total resources required to develop a content management system by contributing to an open source project but sell support and maintenance to their customers, then they may be able to beat their proprietary competition on costs while still making a good profit. This economic model has been particularly successful for a little company called IBM. When business analysts say that IBM has transformed itself into a services company, part of what they mean is that it now makes less of its income selling licenses for its proprietary software and more of its income selling support for open source software such as linux and apache." (http://blog.worldcampus.psu.edu/index.php/2007/10/31/coases-university/)


Reviews

From: PHILIPPE AIGRAIN. On the Economic Impact and Needs of the Wealth of Networks

Excerpted from Symposium on the Wealth of Networks. Policy Futures in Education Volume 6 Number 2 2008

URL = http://dx.doi.org/10.2304/pfie.2008.6.2.152


"When I drafted Cause commune [1] in 2003-04, my main motivation was to provide a comprehensive theoretical foundation for the growing information commons [2] movement in Europe. In the background was another motivation: helping continental European readers to better relate with American commons thinking. Several factors were limiting the ability of European readers to draw inspiration from or to build critical conversations with the generation of thinkers who have put information commons on the agenda in the USA. The absence in continental Europe of an equivalent to First Amendment thinking (despite commitments to freedom of expression); a stronger focus in Europe on the opposition between markets and State, with less consideration for the importance of societal action; the difficulty to translate terms such as commons in a modern sense, even though they are of Latin origin: all this contributed to possible misunderstandings. Today, commons thinking has become global in scope, and develops in original forms in non- English speaking areas. Translations of ‘commons’ slowly percolate in various languages. In France, Members of Parliament speak about libre software in their debates and lawyers in university and official circles organize workshops on creative commons approaches. Brazil is at the forefront of commons-based creation, and despite some opposite trends, India hosts new approaches to commons-based innovation and some original commentators (sarai.net, Suman Sahai or Vandana Shiva). In North America, thinkers such as James Boyle, Lawrence Lessig or Eben Moglen have gone to great efforts to create narratives with a more universal perspective. James Love and Knowledge Ecology International [3] bootstrapped worldwide non-governmental organization (NGO) and government coalitions that push a knowledge commons agenda forward in international organizations. The revision of the GNU GPL (General Public Licence) free software license has explicitly aimed at a more universal language and validity.

Yochai Benkler’s Wealth of Networks takes a new step in this direction. Benkler’s work is deeply rooted in American liberal philosophy. However, his interest in political philosophy globally has led him to express his views in a language that can be read from a European or global perspective.

Central to this possibility is the bridge provided by Amartya Sen’s theory of capabilities. Amartya Sen has emphasized [4] how freedom is necessary to development but also how health, education, or preventing excessive inequalities are necessary for the build-up of capabilities, without which freedom remains just an idea. By linking in an inseparable manner freedom, concrete capabilities of action, human development, and social justice, Amartya Sen has provided a theory of justice that can be heard across the Atlantic and elsewhere, in particular, of course, in India, his mother country. Recognizing it calls for radical reform to our ways of thinking, for instance, about education, culture, or public health. Seeing education mostly as a transfer of existing knowledge (which is still a predominant view in many quarters of Europe) is clearly challenged by the evidence that the construction of critical individuals able to take initiatives in the world deserves more emphasis in our information era. The traditional European view of culture as the recognition of a distinguished elite by connoisseurs (also adopted in some circles in the USA) is challenged by the alternative model of a continuum of practice ranging from reception to professional creation of the highest quality. Meanwhile, approaches to health based on targeted technological medical acts and drugs and the associated economic and patent models exhibit poor performance in comparison to systems that put more emphasis on education, universal access to medical services and drugs and the non-medical conditions of public health.

It is in the field of information and its technology that capability theory is most relevant.[5] When information and tools are available as commons for all, an unprecedented ability to express oneself, reach for others, criticize or praise, cooperate on all forms of achievements develops in individuals and groups that they form. The Wealth of Networks is an enlightening tribute to this power. However, this recognition, and the ability of European and American analysts to share this common umbrella is only the start of a new conversation. This conversation is likely to have many threads, but I will just initiate one, by asking: How does the growth of information commons and related non-market activities interact with the monetary economy?


From Parallelism to Collision

Yochai Benkler, just like Lawrence Lessig [6], proposes an optimistic view of the impact of commons-based societal production of information on the economy overall. There are strong arguments in favour of such an optimistic view as a long-term perspective. If a huge sphere of nonmarket activities develops, the provision of infrastructure and support services to these activities is itself a huge domain. In addition, more demanding consumers and more knowledge and innovation (for instance, on environmental issues) open new prospects for development in the material economy. However, what about the transition from our existing economy to this longterm perspective? Here is a small narrative to illustrate why this transition risks being a difficult and chaotic one, well beyond the choices whose need Yochai Benkler rightly stresses regarding our regulatory ecology.

Once upon a time, there came the information revolution. First, from 1945 to 1975, non-market societal production of freely exchangeable and usable information developed silently. It happened as a natural way of using information technology and information-based science, in specialized circles (scientists, programmers), often without naming explicitly what was done. In this period scientists and engineers created the best part of software techniques and algorithmics, of network protocols, user interfaces and digital media concepts, of information science and how it can be applied in biology. This infrastructure set the basis for the next 30 years of human development, new markets and growth. However, very different ways of using information technology also matured during the early information age. Large organizations (both companies and public organizations) which were at the time the principal users of computers focused on process, profit and cost optimizing, with contrasted results on the latter. These early trends are now visible at full range, with the domination of finance on industry agendas and with a form of globalization where mechanisms [7] delay its positive effects on development. More recently, it was imitated by some emerging countries (mostly China) in which the lack of democracy makes it possible to exert lasting pressure against the build-up of local initiatives that serve human development. The control and surveillance aspects of information and communications technology (ICT) [8] have become more prominent: security and short-term profit optimizing have developed new synergies.

In a second phase, the two trends that earlier developed in parallel have started colliding. As first this collision was noticed only in specialized circles. Though the process preparing TRIPS (Agreement on Trade-related Aspects of Intellectual Property Rights administered by the World Trade Organization) can be traced back to the mid-1960s, who understood what was going on before its signature in 1994? Similarly, the expansion of information commons and societal production was visible only for its initiators until the mid-1990s. Today, it has become evident that there is a big battle to set the regulatory environment in favour of one or the other trend. However, this regulatory battle is only the perceptible part of deeper economic tensions. The two models are also fighting for money and for time. I mean capital and human time.


Capital and Profits


Let’s start with capital. When one compares the ratio of stock capitalization to turnover, added value or profit [9] for major world companies in many sectors, one finds huge discrepancies. The ratio of capitalization to turnover varies from 0.11 (General Motors or Ford Motor) to 17 (Google) across companies, from 0.35 (automotive) to 3.55 (pharmaceuticals) across sectors. It ranges from 0.45 to 17 across the software sector where software service companies, proprietary software semimonopolies and companies based on large network effects such as Google cohabit. Most companies that have high ratios are patent (mostly in pharmaceuticals and agro-food genetically modified organisms), copyright (in software and media) or trademarks (in food and luxury consumer goods) businesses.[10] These information capitalists [11] set the standards of desired return on capital. The effects of these standards are felt well beyond quoted (public) companies: research and development (R&D) funding or venture capital force many innovators to pose as future information capitalists rather than simply develop a sustainable and reasonably profitable activity that serves the information commons and non-market activities. In the present state of market organizations, the prospects of ROI (return on investment) for added-value intermediators in the non-market sphere are a huge question mark. In a given domain, one dominant collaborative medium can rest on advertising but serious economic works [12] have demonstrated that this model cannot scale up. Can the indirect funding by those who benefit from the non-market sphere (for instance, hardware manufacturers and telecommunications companies) and the recycling by some public interest-minded winners of financial games suffice to fuel the future wealth of networks? Can mutualizing between individuals provide enough of a complement? Is some form of government organization of mutual funds needed? All these questions deserve policy’s and society’s interest.


Human Time


The fight for access to capital is only a skirmish compared to the war that rages for human time. In a few decades, television has captured half of human free time in the developed world (3½ hours per day in most countries). Time recently liberated from television in favor of ICT-mediated activities has unfortunately gone for a significant part to immersive activities, such as games and advertising-dominated digital media. What is less known is the degree to which the present economy has come to depend upon the capture of human attention. We are not speaking here of media alone. The demand for many consumer goods is sustained only through what one of the French television chief executive officers described as ‘available brain time’ being provided by media to the providers of these goods. As brain time becomes less available, as more valuable endeavours compete for it, our present economy will go into a crisis. This crisis is also an opportunity, just as the environment and climate change challenges are an opportunity. People becoming more independent, more critical, more able to choose how they use their time, becoming producers as well as consumers, members of the public in John Dewey’s sense [13], is an exciting perspective. It is infinitely valuable, whether or not it is good for the economy, but there is all reason to believe that it will lead to new forms of economic growth. However, we will go through chaotic paths before we are there. What will be apparently taken away from today’s economy is actually fake; it is monetary face value that stands only on arbitrary monopolies, conventional beliefs or what will look retrospectively to be a strange consent to hypnotic consumption. We had better get our measures right as soon as possible, so they start showing what is being built during this process, with indicators that capture the many facets of the wealth of networks." (http://dx.doi.org/10.2304/pfie.2008.6.2.152)


Notes


[1] Cause commune: l’information entre bien commun et propriété [Common cause: information between commons and property]. Paris: Fayard, 2005.

[2] In this article, information commons refers to productions that can be represented as information (creative works in all media, software, biological or other scientific information, information processing tools such as software, etc.) when they are given a commons status (are freely usable to relevant degrees). By extension, it also covers the collaborative activities that produce and value these productions.

[3] Formerly the Consumer Project on Technology.

[4] In particular in Development as Freedom. New York: Anchor, 2000.

[5] See The Wealth of Networks, pp. 308-311, or my paper, ‘Capabilities in the Information Era’, TransAtlantic Consumer Dialogue (TACD) Workshop on the Politics and Rhetorics of Intellectual Property, Brussels, March 2006. http://paigrain.debatpublic.net/docs/TACD-200306.pdf

[6] This section is the product of a conversation with Lawrence Lessig initiated in Berlin after his Read/Write Society talk during the Wizard of OS 4 Conference and pursued through later exchanges by email.

[7] Globalization of uniform patent and copyright rules, division of production in small modules with no visibility of local workers – including technicians and engineers – on the overall strategies.

[8] The aspects were always present, from World War II to the Cold War. The difference is the degree of confusion between domains: non-commercial exchange of information covered by copyright can be depicted as a form of terrorist cybercrime by copyright stock holders who successfully lobby for making it the object of criminal sanctions, while the creation of data retention for security purposes can be included in a European directive on privacy.

[9] Cf. Economic Impact of Open Source Software on Innovation and the Competitiveness of the ICT Sector in the EU, study conducted by a consortium led by MERIT for the European Commission Enterprise and Industry General Directorate, pp. 118-121. http://ec.europa.eu/enterprise/ict/policy/doc/2006-11-20-flossimpact.pdf (2004-05 data).

[10] A small number are network effects companies, Google being the prototype of this category. They would deserve a specific treatment, as their activity is much more compatible with the development of commons-based non-market activities, though in a limited (in number of possible winners) and very unstable manner.

[11] I use the word for all companies whose added value lies predominantly in the costless reproduction of an intangible entity, that can be information per se or some informational entity included or attached to their products.

[12] See, for instance, Douglas A. Galbi, Some Economics of Personal Activity and Implications for the Digital Economy, First Monday, 6(7). http://www.firstmonday.org/issues/issue6_7/galbi/index.html

[13] Informed by their awareness of the interest of a greater community


More Information

Yochai Benkler

Reviews at http://www.benkler.org/wealth_of_networks/index.php?title=Main_Page

Franz Nahrada is doing a very good summary of the book [2]