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My piece from today’s Fin ReView section

June 16th, 2006

Is about free sharing of information, and is rescued from behind their increasingly adamantine paywall.

HEADLINE: When co-operation trumps competition

Writeoff: John Quiggin explains how the internet is changing our ideas about innovation

The rise of the Internet has shown how a largely co-operative enterprise can have huge impact impacts. Among those trying to understand this phenomenon, Yochai Benkler, in papers like Coase’s Penguin and Sharing Nicely has been the most consistently innovative and insightful. Now he has presented these ideas in the form of a book, The Wealth of Networks: How Social Production Transforms Markets and Freedom

Perhaps the most interesting question raised by Yochai Benkler’s book is the question of why people contribute to social production. The answer to this question has important political and social implications, for states as well as for markets and freedom.

To the extent that there is a conventional wisdom about these things, it’s Eric Raymond’s idea of a gift economy, derived from his participation in the open source software movement. Raymond focuses exclusively on reputation as a motive for contributing to social production, seeking to assimilate all other motives (such as craft values) to reputation. But it is precisely this kind of totalising logic that is absent from social production.

On the contrary, a wide variety of motives might lead people to contribute to social capital, for example by participating in various aspects of blogging (making posts and comments, linking and blogrolling, improving software, various kinds of metablogging). Possible motives include altruism, self-expression, advocacy of particular political or social views, display of technical expertise or a desire for social interaction. Particularly in relation to a collective, and largely anonymous, product like Wikipedia, Raymond’s central focus on reputation does not fit the facts.

Against these various motives, there are the two standard methods that have been relied upon to deliver most information production and innovation for the past 150 years: markets and bureaucratic hierarchies. One interpretation of Benkler’s work, which may be traced back to the arguments of writers – like Walter Powell and Eric von Hippel – is that we need to consider networks as a third model.

However, this interpretation is both too broad and too narrow. Mathematically speaking, almost any social arrangement can be represented as a network. A hierarchy is, in the technical language of the field, an acyclic directed network, while the (real or hypothetical) auctioneer of market theory may be regarded as
occupying the central node in a network with a star topology. On the other hand, when used as a metaphor, the term ”network” is commonly taken to imply a degree of reciprocity that is appropriate for some kinds of interaction, such as Raymond’s gift exchanges, but not for others such as the self-expression of a personal blog or web page.

To analyse social production properly, it is necessary to consider all kinds of motives that might be relevant, rather than focusing on a few salient examples. Benkler discusses markets, and the associated profit motives, at some length, making the point that narrowly economic motives tend to crowd out alternative forms of motivation. He mentions the classic work of sociologist Richard Titmuss on blood donations and some other examples to show that monetary and altruistic motives are likely to conflict, rather than reinforce each other.

But the same conflict arises between monetary motives and other social- psychological motives such as a desire for artistic expression. By contrast, different social-psychological motives are usually complementary, or at least mutually consistent.

Why is this? At a superficial level, it’s obvious that people act differently, and are expected to act differently, in the context of relationships mediated by money than in other contexts. Behaviour that would be regarded favourably in a non-monetary context is regarded as foolish or even reprehensible in a monetary context.

One of the most important general differences relates to rationality and reciprocity. In a non-market context, careful calculation of costs and benefits and an insistence on exact reciprocity is generally deprecated. By contrast, in market contexts, the first rule is never to give more than you get.

This rule applies in market contexts but not in social contexts, where such careful calculation is, as Benkler notes, generally deprecated, because markets create opportunities for systematic arbitrage that do not apply in other contexts. In an environment where exchanges are not carefully calculated, a trader who consistently gives slightly short weight can amass substantial profits. If trading partners assume honourable behaviour, none will suffer enough to notice, but eventually arbitrageurs will drive out their less calculating trading partners.

Similar points can be made about other motives. There are a whole range of sales tricks designed to exploit altruism, friendship, desire for self- expression and so on. Hence, to prosper, or even survive, in a market context, it is necessary to adopt a view that “business is business”, and to (consciously or otherwise) play a role that is quite distinct from what might be conceived as one’s “real self”. This is a prime example of what Goffman calls an obligatory role.

The crucial feature of economic motives in a money economy is not that they are less noble or desirable than alternatives such as desire for fame, but that a money economy provides a total system of rationality, from which most of the motives linked with social production are excluded.

Markets are not the only total system of rationality that operate in a modern society. Bureaucracy and the state have a logic of their own. For most of the 20th century, the central issue of politics and economics was the question of where the boundary between markets and bureaucracies (public and private) should be drawn.

Benkler largely ignores the state. As he says: “In much of [my discussion], the state plays no role or is perceived as playing a primarily negative role, in a way that is alien to the progressive branches of liberal political thought.” But this position overlooks the fact that both the internet and the world wide web were developed primarily by state agencies or state-funded institutions. Yet this outcome was not the product of rational bureaucratic planning. Rather, like Topsy, the net and the web “just growed”.

Like market rationality, bureaucratic rationality implies a complete specification of behaviour. When dealing with a representative of a bureaucracy, we (mostly) expect consistent application of rules, rather than an adherence to standard social norms such as “look after your family/mates before others”. Similarly, and more crucially, bureaucracies are supposed to allocate their resources to the achievement of specified goals, not to do things because they would be fun, or even socially beneficial. All of this seems to leave little room for social production. So how did the state come to give us the internet? More significantly for our present purposes, what kinds of public policy will facilitate the further growth of social production and the wider distribution of its benefits?

Such questions are easier to ask than to answer. But the rise of social production, and the fact that socially produced innovations are now a driving force in technological progress, has obvious implications. And these implications run directly counter to the trends that have driven public policy in the past few decades.

First, if monetary returns are weakly, or even negatively correlated with the value of social production, there’s no reason to expect capital markets to do a good job in allocating resources to supporting innovation. It follows that the policy orientation of the past 30 years, in which increasing reliance has been placed on capital markets, is going in the wrong direction. The examples considered by Benkler are illustrative. Both blogs and wikis have their roots in the late 1990s, a time when capital markets were splashing hundreds of billions of dollars around on internet-related projects. Most of these projects came to nothing, while blogs and wikis developed with little or no venture capital money to help them along.

A second implication is that the policies of “New Public Management”, which attempt to tighten bureaucratic accountability and focus on competitive disciplines and measurable outcomes may be misguided. Rather than driving people harder in the search for increased productivity, government macro- economic policy should be oriented towards making room for creativity and facilitating its expression. And, while competition has its place, public policy should be at least as concerned with promoting co-operation.

Long-held assumptions about the competitive nature of innovation are, therefore, under-supported in today’s environment. If governments want to encourage the maximum amount of innovation in social production, then they need to de-emphasise competition and emphasise co-operation.

The Wealth of Networks: How Social Production Transforms Markets and Freedom. By Yochai Benkler. Yale University Press. 528pp.

John Quiggin is an ARC federation fellow in economics and political science at the University of Queensland.

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  1. June 16th, 2006 at 22:51 | #1

    I enjoyed reading this in the print edition today, John, and agree that the issue of social networks and co-operation deserves broader analysis outside the dichotomy of markets and hierarchies.

  2. James Farrell
    June 16th, 2006 at 23:35 | #2

    I really enjoyed that, too. You should develop it into a longer piece or even a book.

    Another thing governments can do (which would require coordination between them) to promote cooperation is to resist pressure to increase the scope and longevity of intellectual property.

    When Nicholas Gruen blogged about this a year ago, I commented that Adam Smith found technical cooperation very natural:

    …farmers and country gentlemen…are generally disposed rather to promote than to obstruct the cultivation and improvement of their neighbours’ farms and estates. They have no secrets such as those of the greater part of manufacturers, but are generally rather fond of communicating to their neighbours and of extending as far as possible any new practice which they have found to be advantageous.

    As Smith Intellectual property laws fosters the kinds of institutions that operate according to market incentives and suppress

  3. James Farrell
    June 16th, 2006 at 23:40 | #3

    Premature submission. The last sentence should be:

    Intellectual property law fosters the kinds of institutions that operate according to mainly market incentives and suppress social-psychological ones (i.e. huge corporations).

  4. June 16th, 2006 at 23:50 | #4

    John, have you been following the arguments for and against Net Neutrality in the US? I think that some of the arguments above are relevant for the pro case.

  5. conrad
    June 17th, 2006 at 10:09 | #5

    Whilst the example of blogs and wikis are nice, it is hard to evaluate in any more global context. One could point to biotechnology and drug development (or any other areas that require high capital and high skills, e.g., power generation, IT hardware, etc. ) which often seem to show the opposite pattern (in fact, unlike James Farell’s claims above, these are areas where there needs to be longer intellectual protection, unless people don’t want antibiotics and the like). For that matter, it is hard to think of other major low-capital areas where cooperation has triumphed — many of them seem to be based on cooperation on some levels and competition on others (food production), or just competition all around (the accounting industry).

  6. jquiggin
    June 17th, 2006 at 12:11 | #6

    I have been following net neutrality and will try to work on the links in a longer piece, which is indeed on the way.

    As regards biotech, the case for strong IP is much weaker than you imply, Conrad. Patents on genes, for example, have done more harm than good, as have restrictions on the use of pharmaceuticals by poor countries (some concessions on this under TRIPS, but not enough).

  7. james
    June 17th, 2006 at 12:12 | #7

    Drug development might well benefit from more cooperation – long patents are not giving us optimal innovation in anti-biotics. The current IP model has created ridiculously high expectations of returns on capital, which in turn requires patentable differences between products to ensure maret exclusivity. Cooperation (eg sharing of data, non-market allocation of product launch dates) could give us a/ much cheaper antibiotics and b/ much lower rates of antibiotic resistance.

  8. conrad
    June 17th, 2006 at 13:09 | #8

    I’m certainly no expert, but I’ve no doubt that the effect of IP protection in biotechnology is mixed, helping in some areas but not others (I agree with the gene stuff — it stops work even in areas that are of no competition to the patent holder. Alternatively, I believe the case for restricting drugs in countries that can’t afford to pay for them is mixed). Alternatively, I haven’t heard any good alternative suggestions for drug development (which was my initial comment). If you or any one else has good ideas about how to get drugs, which cost hundreds of millions of dollars each into existence without massive multinational companies, I’d love to hear them.

  9. james
    June 17th, 2006 at 13:32 | #9

    Well, first up it’s been fairly well documented that the true cost of getting drugs ‘into existence’ is in the tens of millions at most, rather than hundreds. See for example Jamie Love’s work – or just cast a critical economist’s eye over Louis Lasagne’s publications that are the only peer-reviewed source of the ‘hundreds of millions’ figures.
    The need for ‘massive multinational companies’ is the need to protect patents and maintain prices internationally. Look at a textbook such as Tirole’s on why only IP-based companies own their international subsidiaries.

    Second, one suggestion for innovation, supported by some pharmaceutical industry voices, is to contract out the development of drugs for specific needs. The prize could be a guaranteed return for drugs for, say, malaria or similar developing-world diseases that currently don’t offer the financial returns possible in erectile dysfunction.

    As a by-product – and here’s the link back to co-operative production – a lot more data would be publicly available for use in developing and monitoring other, possibly unrelated drugs.

  10. Derick Cullen
    June 17th, 2006 at 15:24 | #10

    Cooperative Production and Community Assets

    By definition private non market production (and the assets thus created, at least until traded) does not get measured in a national accounting context.

    Is this a serious omission in economic data? Is the existence of the web, blogs, wikis etc evidence for the “dark matter” which is thought by some to prop up the US economy which otherwise looks to be unsutainable?

    By contrast, bureaucratic production and assets are in the accounts at cost. This is probably an unsatifactory basis, but better than omission. But cost would not seem to be even near satisfactory for community production….

  11. June 17th, 2006 at 16:50 | #11
  12. conrad
    June 17th, 2006 at 17:42 | #12

    James, I simply don’t believe your comment — it might be true if you exclude the vast majority of drugs that fail in development, but that is not the fair cost. The fair costs includes all of the failures and expenses that go with them — which are the majority. If drugs were so cheap and easy to create, then we wouldn’t have to worry about not having drugs that can’t make billions (malaria, anti-biotics..), since such drugs would be profitable and hence people would be trying to develop them. A good example of why you are incorrect is from Malaria — Bill Gates gave US107 million to a non-profit company just to trial a prototype vaccine that already exists that might not even work(http://www.forbes.com/personalfinance/philanthropy/2005/10/30/malaria-gates-philanthropy-cz_ec_1030malaria.html). This is already higher than your tens of millions at most figure.

  13. June 18th, 2006 at 17:57 | #13

    Lawrence Lessig’s views in The Future of Ideas, and in Free Culture are interesting as well. While the internet grew out of government funded organisations, he says private companies are taking control and that “short-sighted interests blind to the long-term damage they’re inflicting are poisoning the ecosystem that fosters innovation”.

  14. Mike Pepperday
    June 21st, 2006 at 15:21 | #14

    I agree with much of your article but some things I don’t quite follow and maybe you’ve overstated your argument.
    You say both the internet and the web were state initiated but not the product of rational bureaucratic planning. I thought they (or one of them, I don’t know what the difference is) were begun by the US military so there would be no central server to knock out. That’s very rational.
    That they just growed seems to me to be like anything else that’s popular – services expand to meet demand. The state does fund fun things – sport, for example. You say the state gives us the internet. Which govt dept? Isn’t it rather from telecom companies and equipment and service suppliers? I read the other day that Google has 450 000 servers running. (I think Microsoft had a mere 200 000.)
    Blogs and wikis have flourished but so have some highly capitalised ventures. I don’t see that anything is demonstrated by this. Soccer has flourished too – so what? No doubt some blogs and wikis have failed though we’d hardly know since there wouldn’t be the publicity. Plenty of ventures not related to the net have failed… Even if there was something special about the dotcom failure, wasn’t it just a bit of a South Seas Bubble? (And a demo of the irrationality of the market.)
    I understand Wikipedia was started by one man. He’d made his pile (as a rather extreme free marketeer) and was bored. He now travels the world addressing adulatory audiences. It’s basically one man’s innovation. You can’t really extrapolate a social phenomenon from the act of a single person. Also, though innovation may occur for the various kinds of motives you mentioned early in the article, the free market thrives on innovation, welcomes it, insists on it. The market, and the mindset of those deeply engaged in it, is essentially restless. Other social structures are not driven like that: the rational bureaucracy is more likely to prefer tradition and the progressive mindset is suspicious of technology.

  15. melanie
    June 28th, 2006 at 19:58 | #15

    Since I teach history of economic thought, a lot of this gave me a strong sense of deja vu.
    Eric Raymond’s idea of a gift economy. I doubt that he has a patent on this one. Perhaps he read Marcel Mauss (1925) or Lévi-Strauss (1949) or even Chris Gregory’s 1982 book Gifts and Commodities. Which only goes to show that social production, for motives other than utility maximisation is as old as the hills. All academics are engaged in social production – sheesh! look at all my footnotes (and yours).
    what Goffman calls an obligatory role applies not only to markets, but to gifts as well. “Mauss did not ask, what is the exchange value of this Kula armshell for that Kula necklace?—a question that reduces the Kula gift exchange system to a system of commodity exchange—but rather, what is the obligation to give, to receive, and to repay?” (Gregory in HOPE 32:4, 2000). Obligation to receive is one of the reciprocities involved in gift exchange – as any birthday girl knows.
    the central issue of politics and economics was the question of where the boundary between markets and bureaucracies (public and private) should be drawn. In any society, the most fundamental question is how to produce and reproduce people (society). If the production of things is a means to this end, it follows that how we organise production of things is precisely all about how we organise the production of people. Looked at from a Veblenesque point of view, markets can be seen as an attempt to create a boundary between the public and private – that is to privatise parts of what Veblen called the fund of “social knowledge”. How much, for example, does the intellectual property of pharmaceutical companies (themselves social organisations with deliberately created boundaries) rely ultimately on research carried out in, say, publicly funded universities? If I interpret Polanyi (1944)correctly, the only reason for the different rationality of the state is the need to limit this boundary creation in order to preserve society.

  16. jquiggin
    June 28th, 2006 at 22:34 | #16

    Melanie,

    I agree with most of what you say.

    I certainly didn’t mean to say that Raymond invented the idea of a gift economy, and you’re right of course that academics have been engaged in forms of social production foever. However, I still think there’s something new going on here.

  17. melanie
    June 29th, 2006 at 10:38 | #17

    Well it’s a new type of social production enabled by the internet, but what else is new? That said, I’m very pleased to see economists starting to discuss these issues again after a long period of trying to pretend to be physicists!

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