http://www.business2.com/b2/web/articles/print/0,17925,1112586,00.html
The Economics of Peer Production
Could the culture of participation threaten the existence of the firm?
By Erick Schonfeld, September 30, 2005
So far in the history of capitalism, we've had two major ways to
organize economic activity: through companies and through markets.
They work in tandem, of course, but they represent two different
approaches. Companies coordinate resources (such as people, money,
and equipment) through the management hierarchy. A market does the
same thing by setting a price on the ultimate economic output that
those resources will produce. Now we're seeing the beginnings of a
third way to coordinate economic activity that, in some cases, may be
more efficient than either the company or the market. It's called
peer production.
The Web is creating new ways to coordinate economic activity by
allowing individuals to create products for themselves and others to
enjoy. Yale Law School professor Yochai Benkler coined the term peer
production to describe "the emergence of a vibrant, innovative and
productive collaboration, whose participants are not organized in
firms and do not choose their projects in response to price signals."
Peer production is part and parcel of what I call the culture of
participation -- that is, the explosion of user-generated goods
(mostly digital), including open-source software, the Wikipedia
online encyclopedia, blogs, podcasts, and photo-sharing sites like
Flickr. (I even devote a whole category to the subject on the
Business 2.0 blog.)
Just as companies and markets coordinate economic activity (through
management control and contracts, respectively), the Web allows
individual producers and consumers to swarm together with like-minded
individuals to create complex products. It also allows them to easily
find an audience to test, use, and provide feedback on the content
and products they create. Either way, peer production in some cases
threatens to decimate the information advantage of companies and
markets. In most companies, information about employees, equipment,
and capital gets communicated through the management structure --
your boss is supposed to know what you can do and how best to
motivate you. In markets it gets communicated via price signals --
"Sure, I'll design a toilet for you if you give me $20,000." In peer
production it gets communicated directly between producers and is
stored on the Web. Since peer production is not primarily driven by
the profit motive, it threatens to destroy profits in those areas
where it can effectively compete. If consumers are using peer-
produced goods and content, many times it's at the expense of company-
produced goods. So even if the peer producers are not making any
money, they are potentially taking away sales and market share from
companies. (Witness what Linux has done to Sun Microsystems (SUNW).)
At the most basic level, both firms and markets provide different
ways to coordinate economic activity. A century ago companies like
Ford had to own everything from the rubber plantations to the
factories so that they could control all the economic inputs that
went into their products. But as the flow of information between
firms dramatically improved, the market took on more of that
coordinating role. Firms began to specialize in certain activities
and contract with other firms for the parts they did not do as well.
It was no longer necessary for Ford to own the rubber plantations.
But there was still a limit beyond which it did not make sense to
specialize. (Ford (F)
might contract out the manufacturing of all of a car's components and
subsystems, for instance, but it still does the final assembly of the
vehicle itself.)
Peer production takes specialization down to the next level -- that
of the individual, rather than the business unit. Umair Haque, a
management consultant and author of the blog Bubble Generation,
explains: "You can only specialize in a firm to whatever degree it
costs to coordinate you. Now what is happening with peer production
is that it is a self-coordinating thing." Take Wikipedia as an
example. There are more than 1.8 million articles on Wikipedia. Since
it is a group blog (also known as a wiki), anyone can write a new
entry or edit an existing one. If you are an expert in, say, quantum
mechanics, you can contribute the two sentences of knowledge that you
know best to the entry. This allows people to specialize in a way
that is not economical in the real world. After all, Encyclopaedia
Britannica cannot farm out a single article to 100 people, but 100
people can contribute to a single article on Wikipedia. The same is
true for other forms of peer production. Once people can self-
coordinate over the Web, it becomes possible to atomize economic
specialization down to the individual. There are growing armies made
up of literally millions of people willing to take part in this new
form of production. And they are really good at coordinating their
activities because of the near-perfect information sharing made
possible by the Web.
But does a peer-produced good like Wikipedia really threaten a firm-
produced good like the Encyclopaedia Britannica? In other words, is
it a better product? Haque says that's the wrong question. "It's not
that it is a better product," he maintains. "It's that it is just a
little bit worse -- but it doesn't cost as much." Wikipedia is more
error-prone than the Encyclopaedia Britannica, but it is also easier
to correct. For a surprising number of subjects, that makes it good
enough for most people -- and it's free.
Peer production seems to work best with information-based goods,
especially those that can be assembled in a modular fashion (like
software or an encyclopedia). Companies and markets still rule as
organizing entities when capital-intensive equipment or other assets
are required. (Oil companies, airplane manufacturers, and investment
banks need not worry just yet.) But information goods, especially
digital media, are ripe for disruption because the capital equipment
needed to produce such media (computers and Internet connections,
basically) is widely distributed. For this reason we are already
seeing the rise of peer-produced publishing (blogs) and radio
(podcasts). Video is not far off. And as the cost of fabrication
comes down, light manufacturing and one-off physical goods are
beginning to lend themselves to peer production as well. (How hard
would it be for engineers or product designers to find each other on
the Web, collaborate to design a product using shared computer-aided
design software, and then have it manufactured at a custom fab like
eMachineShop ?)
Benkler identifies two advantages of peer production, both of which
are related to information. First, peer production is better than
either companies or markets at "identifying and assigning" the best
people to do a job. "That is," Benkler explains, "it loses less
information about who the best person for a given job might be than
do either of the other two organizational modes." Peer production can
come into play whenever there is a low barrier to participation and
individual producers can choose to join projects based on their
skills and preferences. This ensures that only the most motivated
workers take part.
The second advantage is one of increasing returns as more and more
contributors seamlessly search through growing knowledge pools to
find work that suits them. These knowledge pools take many forms,
including online tutorials, software documentation, product reviews,
reputation systems, product rankings, user-generated tags, archived
playlists, and even Web links. Since there are virtually no
transaction costs in peer production (anyone can contribute or
consume), it is suddenly viable for millions of potential
contributors to review and select the resources, projects, and
collaborators they want to work with. Haque maintains that these
knowledge pools are the key information-sharing resources for peer-
production communities. They act as a collective memory for such
communities and make them more productive by storing the most
efficient way to transform economic inputs (like those two sentences
on quantum mechanics) into finished goods (the collectively written
article on quantum mechanics). In the Wikipedia example, every time a
peer producer has new knowledge to add, he or she can type in a few
more sentences, and it gets stored for everyone else to see. Or with
Flickr, every time someone tags a photo with keywords (like "Italy,"
"pool," or "bubbles"), Flickr's knowledge pool increases. The
economic inputs are the photo and the tag. The output is Flickr's
growing database of searchable photos, which becomes more valuable as
more photos are uploaded to it with related tags so that others can
more easily find them.
Unlike at companies, where decisions about things like software
coding and product design are kept private, in peer production all
such knowledge is made explicitly public. This creates a feedback
loop that can help the community learn to build, design, or code more
efficiently and, thus, create better output. Not only is new
knowledge produced every time we collaborate, but the fact that
everything is on the table potentially gets rid of information
bottlenecks that occur in firms or markets and leads to greater
productivity. ("My productivity increases when you join the network,"
as Haque puts it.) Peer production promises to turbocharge economic
network effects because instead of being limited by how many things
you can find on the network, it is limited only by how many things
you can do on the network. Haque further argues that this may presage
a shift from the exponential growth we've seen so far in web business
to a different, even faster-growing combinatorial trend.
All of this theory is well and good. But why do people participate in
peer production in the first place? Why do they donate so much time
and effort to write their blogs, upload their photos to Flickr, or
tag their webpages on del.icio.us? It's certainly not for the money
(as nearly any blogger can attest to). Some say it's for the sheer
enjoyment of contributing to something you're really interested in.
Others point to the ego boost that comes with burnishing your
reputation online. I find all of these explanations unsatisfactory.
(After all, nobody knows you on Wikipedia. There are no bylines.)
Rather, the strongest explanation is also the simplest: It is in
people's self-interest to contribute. People participate in peer
production because a) it's cheaper than buying the product outright,
or b) the product would not be available otherwise. At its best, the
final good is the result of a collective intelligence and could never
be produced any other way. The peer producers are their own
consumers. They get a better product by tapping into the knowledge
pool. And they get a product that exactly fits their needs because
they help design it (often with minimal effort). How do you compete
with that?
Erick Schonfeld [EMAIL PROTECTED] is an editor-at-large for
Business 2.0.
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0,17863,1112586,00.html.
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