Coase's Penguin, or, Linux and the Nature of the Firm

Abstract

From Introduction:

"The emergence of free software and the phenomenal success of its flagships - the GNU/Linux operating system, the Apache web server, Perl, sendmail, BIND - and many other projects should force us to take a second look at the dominant paradigm we hold about productivity. In the late 1930s, Ronald Coase wrote The Nature of the Firm, in which he explained why firms emerge, defining firms as clusters of resources and agents that interact through managerial command systems rather than markets. In that paper, Coase introduced the concept of transaction costs, which are costs associated with defining and enforcing property and contract rights and which are a necessary incident of organizing any activity on a market model. Coase explained the emergence and limits of firms based on the differences in the transaction costs associated with organizing production through markets or through firms. People use markets when the gains from doing so, net of transaction costs, exceed the gains from doing the same thing in a managed firm, net of organization costs. Firms emerge when the opposite is true. Any individual firm will stop growing when its organization costs exceed the organization costs of a smaller firm.

"The emergence of free software as a substantial force in the software development world poses a puzzle for this organization theory. Free software projects do not rely either on markets or on managerial hierarchies to organize production. Programmers do not generally participate in a project because someone who is their boss instructed them, though some do. They do not generally participate in a project because someone offers them a price, though some participants do focus on long-term appropriation through money-oriented activities, like consulting or service contracts. But the critical mass of participation in projects cannot be explained by the direct presence of a command, a price, or even a future monetary return, particularly in the all-important microlevel decisions regarding selection of projects to which participants contribute. In other words, programmers participate in free software projects without following the normal signals generated by market-based, firm-based, or hybrid models.

"In this Article, I approach this puzzle by departing from free software. Rather than trying to explain what is special about software or hackers, I generalize from the phenomenon of free software to suggest characteristics that make large-scale collaborations in many information production fields sustainable and productive in the digitally networked environment without reliance either on markets or managerial hierarchy. Hence the title of this Article - to invoke the challenge that the paunchy penguin mascot of the Linux kernel development community poses for the view of organization rooted in Coase's work."