Tuesday, September 05, 2006

(some) economics of open-source

Either fittingly or surprisingly, I came across a great blurb re: economics of open-source while reading The Long Tail.

George Gilder:
In every industrial revolution, some key factor of production is drastically reduced in cost. Relative to the previous cost to achieve that function, the new factor is virtually free. Physical force in the industrial revolution became virtually free compared to its expense when it derived from animal muscle power and human muscle power. Suddenly you could do things you could not afford to do before. You could make a factory work 24 hours a day churning out products in a way that was just incomprehensible before the industrial era. ... The whole economy had to reorganize itself to exploit this physical force. You had to "waste" the power of the steam engine and its derivatives in order to prevail...
From there, Chris picks up:
That suggests a way to put this in an economic context. If the abundant resources are just one factor in a system otherwise constrained by scarcity, they may not challenge the economic orthodoxy. They are then like learning curves and minimized transaction costs - drivers of production efficiency that serve to lower prices and increase productivity but do not invalidate the laws of economics.
So, how about open-source?

The open-source "revolution" has, among other things, made a factor of production virtually free - software programs. It costs someone somewhere maybe $0.000001 to produce another copy of ajaxMyTop and send it to another user. But, Information Technology and Information Systems (effective ones) involve more than just software programs. Open-source does not invalidate the laws of economics in IT.

In light of this, there are 2 very different lessons to take away.

For those who think open-source is economically infeasible, the analogy demonstrates that thriving markets can and do operate on virtually free goods. It merely takes some learning to understand where and how to charge money.

For those who think open-source is just a first sign of an inevitable economic reversals, the analogy shows that economic principles continue to hold. It is rather market actors and their perceptions which are upheaved.

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