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The Economics of Open Source

Posted on: 16-Oct-2007

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More than a technology and IP exchange model, Open Source is an entirely new economic system for the virtual world.
Open source is a new economic model that tears down the restrictions of money, currency, and international borders. It is a rapidly growing, yet unmeasured part of the global economy. It’s origins start with Linus Torvalds when he became the first to throw his work into the open world for free in the hopes that others would improve on it.
From an economic perspective, Open Source replaces the monetary based global economy with something more similar to a barter system. This is a rare shift. We know that as the Roman Empire wound down, they replaced their gold based monetary system with a barter based system. We don’t know why, but it was one of the rare reversals where people willingly abandoned money for bartered goods.
There are two systems of exchange that form the basis of any economy: barter and monetary. Monetary has always been considered the most advanced because money is a labor storage device: when I receive money for my labor, it solves the problem of who I trade my labor to may not have anything I want to buy. For example, the rural doctor that barters medical services for chickens. He may not need chickens, but if that is all the farmer has it’s the only payment the doctor will get. Monetary systems allow the farmer to trade the chickens to those who need them for money, which can be saved to pay the doctor later.
So what about Open Source?
Open Source is a well established way for IT professionals to exchange code and circumvent the purchasing structures. Closed Source code has to be paid for and licensed. It breaks the monetary barrier of an organization, which brings purchasing, sales, and marketing into both sides of the exchange. This raises the cost of IT, already considered a cost center, and it hinders their progress. Open Source is a way for them to efficiently circumvent the corporate monetary system.
If you think about it, corporations are dictatorial socialist systems. They are run by managers who are not elected; people are compensated based on their value to the organization, there is no market for their output; and as much as possible is planned (they may even provide for employee healthcare and retirement benefits). This is as socialist as it gets. Corporations do tend to be benevolent systems, because market based economies with customers drives benevolence (take away a properly functioning market, and corporations can become real ugly, but that’s not the point here).
Because they are planned and money is the most precious commodity in a corporation, purchasing organizations are architected to be as efficient as possible at holding on to it. Ironically, maximum efficiency is achieved in purchasing when they are least efficient. Money is held by putting up as many barriers to spending it as possible and by taking as long as possible to pay it out. The military is the classic example of this, where supply officers set-up their own barter based black markets to deal with localized issues (the military is socialized as well).
Open Source is a barter system similar to the black market systems seen in military organizations. But it differs in that no true barter market exists. Open Source is a global pool of code. Anyone can contribute to it and anyone can pull from it. It has enormous value and no value all at once. Open Source breaks economic theories of value because there is no specific thing that is being exchanged.
So how does Open Source work?
One has to wonder why anyone would do work for someone they don’t know for free? It’s easy to understand that it is hard to push spending for unfinished chunks of code through purchasing or getting sales and marketing interesting in bringing it to market. What is the incentive system behind this activity?
The value of an IT professional is largely determined by their ability to solve problems for low cost. They get all the problems of knowledge worker efficiency, they have become a big chunk of most budgets, and yet they bring in no direct revenues. Thus, the incentive to participate in the open source economy is to increase their value by having access to an outside cost transparent system of exchange.
So the Open Source economic model works by IT professionals exchanging code for free to enhance their value to their own organization. Participating in the Open Source economy improves the IT professionals pay. It is self-regulating like any market because a large part of the Open Source model is the support forums that exist. It you don’t give, you won’t get. Hence, by not participating you limit your future pay growth.
The importance of Open Source it that it is arguably the first instance of a virtual world exchange based economy spilling over into the real world’s economy. More importantly, its nature is such that it will ultimately erode today’s closed source software markets as IT professionals on the buy side find more and develop more powerful applications for Open Source. Much like the Romans, it may well be a sign that the era of Closed Source software companies is coming to a close.


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About weQuest:
weQuest's are written by G Dan Hutcheson, his career spans more than thirty years, in which he became a well-known as a visionary for helping companies make businesses out of technology. This includes hundreds of successful programs involving product development, positioning, and launch in Semiconductor, Technology, Medicine, Energy, Business, High Tech, Enviorntment, Electronics, healthcare and Business devisions.

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