Capitalists, Entrepreneurs, and Peer Production

by on February 27, 2007

Jed Harris has a fantastic post about how peer production introduces a fissure between capitalists and entrepreneurs:

Before widespread peer production, the entrepreneur’s and capitalist’s definitions of success were typically congruent, because growing a business required capital, and gaining access to capital required providing a competitive return. So classical profit was usually required to build a self-sustaining business entity.

The change that enables widespread peer production is that today, an entity can become self-sustaining, and even grow explosively, with very small amounts of capital. As a result it doesn’t need to trade ownership for capital, and so it doesn’t need to provide any return on investment.

As others have noted, peer production is not new. The people who created educational institutions, social movements, scientific societies, etc. in the past were often entrepreneurs in the sense that I’m using here, and in their case as well, the definition of success was to create a self-sustaining entity, even though it often had no owners, and usually produced no “profit” in the classical sense.

These concepts of “profitability” can become opposed when obligations to provide classical profits to investors prevent an entity from becoming self-sustaining. In my experience, many startups die because of the barriers to participation that they create while trying to generate revenue. Of course if they are venture funded, they typically are compelled to do this by their investors. Unfortunately I don’t know of any way to get hard numbers on this phenomenon.

Conversely, there are examples where a dying business becomes a successful peer-production entity. The transformation of Netscape’s dying browser business into the successful Mozilla open source project is perhaps the clearest case. Note that while Netscape could not make enough profit from its browser to satisfy its owners, the Mozilla foundation is able to generate more than enough income to sustain its work and even fund other projects. However this income could not make Mozilla a (classically) profitable business, because wouldn’t come close to paying for all the contributions made by volunteers and other companies.

I think this is one of the big reasons why divisions among libertarians are so common with respect to these issues. Libertarianism tends to be a pro-entrepreneur, pro-capitalist political philosophy. Before peer production came along, being “pro-entrepreneur” was usually equivalent to being “pro-capitalist.” But with peer production, libertarians are, in a sense, asked to choose sides. Those who view economic progress primarily in financial terms–that is, who perceive the investor as the key player in the creation of new wealth, and the entrepreneur as merely his agent–will tend to regard peer production with suspicion, because peer production tends not to produce very much wealth that’s in a form that can easily be transferred to investors. And they also tend to be the copyright hawks, because they view the creative process primarily in financial terms: if record label aren’t able to turn a profit, there will be a lot less music (or a lot less high-quality music) produced.

On the other hand, those who have a more entrepreneur-centric view of innovation–who view investment as merely one input in the process of entrepreneurship–will find peer production as highly congenial, because peer production is simply a form of entrepreneurship that requires little or no capital as an input. These people tend to think that people have diverse motivations for engaging in craetivity, and so the lack of a direct financial return does not necessarily mean that no creative works will be produced. As you might guess, I tend to fall in this second camp.

The best example of the first camp of libertarian is libertarians political theorist Richard Epstein (one of my favorite libertarian thinkers on most other issues) who wrote the following back in 2004:

The difficulties with the open source movement , moreover, go deeper than the problems with a single provision of the GPL. The open source movement shares many features with a workers’ commune, and is likely to fail for the same reason: it cannot scale up to meet its own successes. To see the long-term difficulty, imagine a commune entirely owned by its original workers who share pro rata in its increases in value. The system might work well in the early days when the workforce remains fixed. But what happens when a given worker wants to quit? Does that worker receive in cash or kind his share of the gain in value during the period of his employment? If not, then the run-up in value during his period of employment will be gobbled up by his successor – a recipe for immense resentment. Yet that danger can be ducked only by creating a capital structure that gives present employees separable interests in either debt or equity in exchange for their contributions to the company. But once that is done, then the worker commune is converted into a traditional company whose shareholders and creditors contain a large fraction of its present and former employers.

Here Epstein seems literally incapable of imagining entrepreneurship without capital, despite the fact that it’s staring him in the face. He’s so used to thinking about entrepreneurship in financial terms that when you take financial considerations out of the picture, he’s completely lost.

Of course no libertarian should be anti-capitalist. Capitalists are extremely important to a free-market economy, and they’re indispensable for many kinds of entrepreneurship. But at the same time, there are other types of entrepreneurship in which capital is not especially crucial, and so libertarians should take care to avoid the trap of assuming that every economic transaction must be conducted on financial terms, or that every entrepreneurial activity must yield a financial profit. Both capital-intensive and peer-produced innovation are important to the economy, and as libertarians we should celebrate them both.

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