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Middlemen Are Crucial: Open-Source Software & Economic Growth

Disclaimer: I’m open to disagreement that is expressed respectfully. If you have an argument against my interpretation, please share it. (Of course, I can’t guarantee that I’ll agree with your critique.)

I want to elaborate on a conversation about the economics of code from Hacker News. User wrong_variable said:

“Programmers get no respect — and its our own fault.
The computing industry is directly responsible for 1/3 of global GDP in 2016.
Its time that this is reflected in our paycheck.”

Leaving aside the assertion that programmers aren’t paid well, I responded:

“Keep in mind that code is not useful or economically impactful without business and community management surrounding it.”

User overgard chimed in:

“I think that’s demonstrably untrue — open source and free software has had a massive economic and cultural impact with precious little of that originating from the involvement of business people or community leaders. (For instance, the GNU project or the linux kernel — not to mention how many commercial products must use zlib). Business support almost always comes after the value has been created.”

I disagree. There are two threads here that I want to tease out:

  1. Writing and testing code on the scale of a project like Linux or Ruby requires a community. Some people in the community, even if they are adept programmers, will be needed to support the project in other ways.
  2. Once a program / framework / whatever is ready, it can’t promote economic growth unless it’s deployed by a business. In other words, software for its own sake is economically pointless. (By the same principle, outside of the open-source world, managers, salespeople, and marketers exist for a reason.)

People who make things tend to underestimate the importance of middlemen. I mean “middlemen” broadly — anyone in between production and consumption. In this case, programmers are production and regular end-users are consumption. However, before any product can be consumed, you need distribution.

Photo by Florian Pircher.
Photo by Florian Pircher.

Prior to the internet, distribution was limited by physical location and thus geographically specific. Particular companies controlled particular regions; they maintained relationships with individual stores. On the internet this dynamic is fundamentally different because the cost of distribution is negligible. Digital goods are effectively free to replicate, meaning there is no marginal cost. (Ben Thompson’s “Aggregation Theory” describes the consequences: value comes from being the layer that users interact with, which compels suppliers or advertisers to use your platform.)

When it comes to software, distribution is simple but difficult. It consists of two crucial functions:

  1. Making people aware of the software’s existence.
  2. Convincing them to use it by providing a compelling value proposition.

For the most part, those things don’t happen spontaneously. You need evangelists (as much as I hate that word). And those evangelists need incentives. The creators and proponents of open-source software are usually not paid directly for their labor (there are exceptions) but they are rewarded with social capital that can be leveraged into professional remuneration. You need people to write documentation and blog posts, organize / host meetups, and generally nurture the project’s ecosystem. This is the “community” part of the “business and community management” that I cited as being vital.

Even more saliently, free and open-source software projects only have an economic impact when businesses exploit comparative advantage by using them. For example, Super Body Fuel’s online store was made with WooCommerce, which sits on top of WordPress. The owners didn’t have to hire a developer to build a site for them. Using PayPal [1] as their payment processor also lowered the up-front cost and hassle.

Because of this, businesses like Super Body Fuel need less capital to get started. The owners can spend more time focusing on factors that differentiate their business (in SBF’s case, formulating a healthier and less expensive competitor to Soylent). In terms of investment and payoff, growing their business is a higher-return activity than setting it up in the first place. Efficiency increases, which result from technological innovation, are the only impetus of non-zero-sum economic activity. In a word, growth.

Of course, none of this could happen if the Super Body Fuel owners didn’t know about WordPress and WooCommerce, or if they didn’t have access to the intermediary tools necessarily to deploy them. Some amount of information seeps around without anyone making an effort, but awareness and resources that will reach thousands of people almost always require intentional promotion. Thus, coding is not enough to propel the open-source world. Other types of labor are needed to keep attracting more contributors and users.

[1] Like every large software company, PayPal both uses and develops OSS. For example: OpenStack and Linux.

7 thoughts on “Middlemen Are Crucial: Open-Source Software & Economic Growth

  1. I don’t see how “useful” and “economically impactful” are related. If a hacker creates a program that is useful to other hackers and only hackers then it would be useful without having an economic impact. Most hackers will sooner write the program themselves than buy it from some corporation.

    As for economic impact, it is largely a one-way street – business gets a far greater share of benefits than the creators of the open-source programs. For example, Facebook is worth $45B (or whatever) but how much of that value have they shared with Richard Stallman (GNU) or Linus Torvalds (Linux) or the hundreds of volunteers who contributed to those projects? There are hundreds of companies who are similarly profiting and giving effectively nothing back.

    1. Your first point that “useful” and “economically impactful” are not the same is fair — I shouldn’t have conflated the two concepts. My bad.

      I also agree with your second point, but I don’t see that it’s a refutation of my thesis?

  2. >> businesses … need less capital to get started

    The amount of physical capital required to produce software is extremely low. Try to find plant and equipment in the financials of a successful software firm and, if you find it, compare that to the firm’s market valuation.

    >> coding is not enough to propel the open-source world. Other types of labor are needed to keep attracting more contributors and users.

    Yes, other types of labor are needed, but why is the share given to the so-called capitalists so high?

    >> intentional promotion

    Also known as advertising, persuasion, psycho-babble, hype, bubbles, irrational exuberance, …

    >> awareness and resources that will reach thousands of people

    We have the technology to make this both widely available and widely affordable, and we should stop paying for all the unproductive things that we do not need.

    1. I wasn’t talking about the startup capital needed by software companies, but by other types of businesses. In a world without open source, they’d be contracting developers to build their websites at much greater expense.

      Advertising and PR both continue to exist because they are effective. Capitalists — those who own the means of production, you mean? — make most of the money because they have the leverage to make most of the money. Markets work like that.

    2. I think the reference to capital was in relation to start-up funding, not to physical capital. Even software companies with minimal physical assets still need funding to get off the ground. This funding is usually referred to as capital due to accounting treatments, even though it could end up partly or entirely as an expense as it is used.

      I agree that it seems like the providers of capital are over-compensated. It’s not clear how to fix this or what the “right” amount of compensation would be. Globalization creates additional challenges since capital can move between countries. A single country has a limited ability to change the return on capital for an internationally-traded currency.

  3. Reminders:
    (1) People are not paid based on the value that they create in some absolute sense. If that were the case, being a mother might well be the most highly paid “job” available. The labor market, although imperfect, is based roughly on supply and demand, and definitely not on value creation.
    (2) Each of us has a tendency to view their role as the most central, important, and irreplaceable in any endeavor. In the production of a play, for example, who would you say is the most important in this list: the author, the director, the lead actors, or the business manager? In fact, without all of them doing their job, there won’t be a play. This topic is discussed in First Corinthians 12:12-26, and there is a wonderful Nasrudin story about this as well.

  4. >> Capitalists — those who own the means of production, you mean? — make most of the money because they have the leverage to make most of the money.

    I suppose that by leverage, you mean capitalists have the skill to arrange things so that market imperfections work in their favor. I’ll agree. But that calls into question our worship of markets as inherently optimal or even benign.

    30 years ago, Central Point Software got its product to number 1 on the PC magazine rankings, and it did not need a website, a website designer, analytics or SEO. It used a classified ad paid for out of the earnings of a dishwasher. When today one cannot get off the ground without millions and millions of venture capital, we can only imagine how much more inefficient our on-line markets are than whatever it was we had back then, and how many great products have about no chance of going anywhere nowadays.

    So much of our technological ability is spent on marketing and promotion of technology, our high-tech sector is akin to the mining firms of centuries ago that used much of their coal to pump water out of their mines. The reason that creation of free (as-in-beer) software to the advantage of firms is becoming a pre-requisite of employment is the ‘leverage’ you mentioned, which appears to be holding up a very inefficient system.

    In the 18th century, we learned to question the divine right of kings to be kings. In the 21st, it appears that reality will force us to question the divine right of the rich to be rich. Given that your leverage preserves that right, other forms of leverage will be found to oppose it. Democracy is the biggest lever, and I surely hope that it will win.

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