The Economics of Open Source Software

At Cafe Hayek, Don Boudreaux writes about cheaper versus costless goods, and how costless is better than cheaper for the overall economy. His main point is about eliminating some of the fear over global trade, but I noticed it’s a nearly perfect analogy for Free/Libre Open Source Software (FLOSS — a catchy, but not sexy acronym).

His hypothetical scenario is thus:

Suppose a housewife one day accidentally discovers that a gallon of tap water combined with a dash of salt, a pinch of flour, a drop of ammonia, a splash of cooking oil, and tiny bits of several other ordinary kitchen ingredients will produce a concoction that cleans and sanitizes dishes, clothing, countertops, sinks, windows, automobile exteriors and interiors, household pets, and infant children. It also is astonishingly effective at fighting cavities, whitening teeth, and keeping gums healthy – and it keeps breath fresh for 24 hours. This remarkable all-purpose cleaner is 100% safe and totally effective. The cost of producing each gallon of this stuff is $0.02.

Further, in a fit of magnanimity, this resourceful woman publishes her finding on the Net, free of charge.

He then contrasts this against her other option, if she chooses to go public:

Now change the example just a bit. This housewife makes this discovery but, in a fit of self-interestedness, she keeps the concoction secret and starts producing it herself, selling it retail at, say, $5.00 per gallon. Its popularity is immediate and immense.

Notice that in both cases the source of innovation is not the production, but rather the recipe for production. In the first example she gives the recipe away, and production is done by anybody who finds it on Google and makes it in the kitchen. In the second example, it’s secret, and she sells the resulting product.

This is identical to FLOSS software. The recipe (code) is given away, and production (installation, sometimes compiling, and configuration) is done by the end-user. So the money that would have been spent on that software is now free to be used elsewhere. The overall economy is better, as other industries can benefit from this efficiency and the money will likely be spent there, and wealth will be created.

Note that only the cleaning products the woman obviates will be affected. Other cleaning products may see growth as people have more to spend. Similarly, programmers at Microsoft may see cutbacks from FLOSS software, but software development will likely just move up the chain. As operating systems become free, businesses may spend more on collaboration software.

Obviously, that’s what I’m betting on with my job. We provide our platform, Syntax CMS for free to anyone who wants to download it. I’m paid to:

  • Further develop the platform for use by my company for our clients’ needs
  • Provide advice on how best to use the platform to implement strategies we come up with for our clients
  • Program new, unrelated software
  • Program new applications using our platform

Our clients also pay us rather than do it themselves as it’s worth it to them to leave the configuration, programming, and hosting to us rather than manage that in-house. They’re experts at policy and other non-profit activities, generally, not software implementation, development, and maintenance. In other words, they outsource to us. And the reason they pay the premium for me to do it as opposed to a guy in Bulgaria or India is that I’m nearby, understand their organization, know the system better because I help develop it, and come up with creative solutions that push the limit of the software.

The time may come when CMSes are a dime a dozen, but then again, we’re not exactly waiting for that time to come. The reason we open-sourced our CMS is that we don’t see much benefit in keeping it secret. There are plenty of other programs out there. We wanted to remove that issue and focus on what makes us worth hiring.

Time will tell, but it’s nice to know that at least some economists think I’m doing the right thing for the economy, not just the right thing for policy-oriented non-profits.

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