07 July 2010

Exploring Entitlement Economics

Bradley M. Kuhn has a thought-provoking post with the title "Proprietary Software Licensing Produces No New Value In Society". Here's a key section:

I've often been paid for programming, but I've been paid directly for the hours I spent programming. I never even considered it reasonable to be paid again for programming I did in the past. How is that fair, just, or quite frankly, even necessary? If I get a job building a house, I can't get paid every day someone uses that house. Indeed, even if I built the house, I shouldn't get a royalty paid every time the house is resold to a new owner. Why should software work any differently? Indeed, there's even an argument that software, since it's so much more trivial to copy than a house, should be available gratis to everyone once it's written the first time.

He then goes on to point out:

Thus, this line of reasoning gives me yet another reason to oppose proprietary software: proprietary licensing is simply a valueless transaction. It creates a burden on society and gives no benefit, other than a financial one to those granted the monopoly over that particular software program. Unfortunately, there nevertheless remain many who want that level of control, because one fact cannot be denied: the profits are larger.

For example, Mårten Mikos recently argued in favor of these sorts of large profits. He claims that to "benefit massively from Open Source" (i.e., to get really rich), business models like “Open Core” are necessary. Mårten's argument, and indeed most pro-Open-Core arguments, rely on this following fundamental assumption: for FLOSS to be legitimate, it must allow for the same level of profits as proprietary software. This assumption, in my view, is faulty. It's always true that you can make bigger profits by ignoring morality. Factories can easily make more money by completely ignoring environmental issues; strip mining is always very profitable, after all. However, as a society, we've decided that the environment is worth protecting, so we have rules that do limit profit maximization because a more important goal is served.

This analysis is cognate with my recent post about the absence of billion-dollar turnover open source companies: the fact is, as a pure-play free software outfit, you just can't make so much money as you can with proprietary software, because you generally have to sell scarce things like people's time, and that doesn't scale.

But the implications of this point are much wider, I think.

As Kuhn emphasies:

I'll just never be fully comfortable with the idea that workers should get money for work they already did. Work is only valuable if it produces something new that didn't exist in the world before the work started, or solves a problem that had yet to be solved. Proprietary licensing and financial bets on market derivatives have something troubling in common: they can make a profit for someone without requiring that someone to do any new work. Any time a business moves away from actually producing something new of value for a real human being, I'll always question whether the business remains legitimate.

This idea of getting money for work already done is precisely how copyright is regarded these days. It's not enough for a creator to be paid once for his or her work: they want to be paid every time it is performed or copies made of performances.

So ingrained is this idea that anyone suggesting the contrary - like that doughty young Eleanor - is regarded as some kind of alien from another planet, and is mocked by those whose livelihoods depend upon this kind of entitlement economics.

But just as open source has cut down the fat profits of proprietary software companies, so eventually will the exorbitant profits of the media industry be cut back to reasonable levels based on how much work people do - because, as Kuhn notes, there really is no justification for anything more.

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Crosbie Fitch said...

The market for copies has ended.

The market for intellectual work continues unabated.

stick said...

"Indeed, even if I built the house, I shouldn't get a royalty paid every time the house is resold to a new owner."

No, but you should get the comparatively large single payment when you build the house the first time. Part of the problem with software, then, might be that the payout for the first sale is woefully insufficient to cover costs and still profit. And that brings up another point - what's considered "first sale" in software? Does Microsoft get to sell one copy of Word, and then they have to give the rest away for free? And who has to buy the first $100,000,000 copy?

glyn moody said...

@stick: well, I think "the market" is probably as good as way as any of determining what that price should be...

Crosbie Fitch said...

Stick, I suspect you are assuming that there is only a single purchaser of that first copy. Have you considered that there could be a million purchasers of that copy?

This is unrelated to the 'first sale doctrine'. That simply clarifies the fact that copyright is a privilege to exclude others from making copies, but not to exclude others from selling those copies they have legitimately received. Thus if you buy a book you can sell it or give it away without infringing copyright - you simply can't copy it.

Amusingly, this shows how silly CC-NC is. You can make a copy of a CC-NC work and give it to someone (non-commercially), and that someone can then sell that copy (commercially).

Of course, the copyright cartel are still lobbying for compulsory license fees upon resale of copyright protected works, e.g. second hand computer games, books, etc.

Anonymous said...

First, there are many things that are not useful enough to any single individual for a developer to be able to build them. For example, the brooklyn bridge. No single trip is worth the price of the bridge. As a society, we must be able to monetize multiple trips, by multiple users, to fund the building of the bridge. The way we do something like that? Tolls. The only other option is to have the gov't of NYC produce the bridge and then pay for it with taxes. Governments don't write very good software, though.

The second piece: externalities can lead to high profits in an immoral/amoral environment. However, that doesn't make every large profit an externality. Accounting is a strange thing; those large profits are often just a bowtie in a system of many providers producing a commodity and many users consuming it. An excessive 'degree of friction' introduced in the bowtie is where 'profits' are really made that are externalities; but certainly there is some work in keeping the system running. If you simply capture all the 'profits' of each employee as 'excessive' then you may be doing good accounting, but you are counting the wrong things.

Fact is, there are bad licenses and license restrictions; people continue to 'agree' or 'consent' in ignorance or because examining the terms is too time consuming, too much friction for the exchange, and because there are monopolies in effect. The systems are all broken, yes, but simply making everything 'open' is not a reasonable answer the same way eliminating tolls, rental, and every other recurrent payment is not sane.

Anonymous said...

Shouldn't the creator of a work that a large number of people want make more money than the creator of a work that very few people want?

The mechanism of paying for each copy handles that nicely. In the long run, the creator makes money that grows linearly with the popularity of his creation.

Do you have a mechanism that doesn't depend on per copy costs that will still pay creators based on the popularity of their creations?

Julius Beezer said...

Kuhn's clear exposition of the "entitlement" implicit in the economics of software production is highly interesting.

It is analogous the sense of entitlement felt by the professions who form the "software" of our society: the teachers, doctors, lawyers, policemen, civil servants etc who, in return for initial sacrifice, wield power over others in return for a secure career structure with many social privileges, including a pension.

Lifelong conformity to the existing hierarchy is ensured by the threat of expulsion from these professions with loss of status and pension.

Software engineers have adopted the mores of these groups, but as Kuhn points out, with easy, non-rivalrous copying of their output, there is no economic reason why this should be so.

Teachers have to show up in class, doctors have to keep doing clinics, and any entitlement they may have relates to privileged pay rates and pension plans they have negotiated collectively.

Widespread use of the internet undermines these groups' monopoly claim to carry social and cultural knowledge forward through the generations, and makes it clear that they are--from a neoliberal point of view anyway--a tax.

This might be a tax worth paying--it's comforting to see a doctor when you're ill--but the difficulty is the rate. How does one value the personal development of a cadre of skilled professionals against the use that society puts them to? It's not at all an easy question to answer.

glyn moody said...

There is a mechanism whereby more popular artists get paid more, based on reputation.

When more people read my articles, for example, I am able to ask for more money for *future* commissions, because my work is in some sense more "desirable".

Similarly, for the artist: becoming more popular means that they can ask for more money in terms of advances, or commissions.

glyn moody said...

On the bridge-building analogy, this rather depends. Remember that GNU/Linux was created by a distributed group of people working together freely across the Internet: there was no company in charge, just a self-organising hierarchy of people selected largely by enthusiasm and ability.

Bridges are obviously harder to build, but then they are analogue and require scarce resources, and I don't claim that this is the same as for abundant digital ones.

glyn moody said...

@Julius: yes, that's an interesting angle.

I think at least doctors et al. should be paid for those things that cannot be obtained from the Internet say - personal attention, implicit guarantees of skill etc.

But you're right that many of the assumptions about entitlement are called into question here as well.

FleaStiff said...

Our concept of private property is not based on that property being of benefit to society or even of its being of any benefit to the owner.
Ownership does not impose any duty to recover costs or turn a profit. A land owner can exclude trespassers from fields that bring him great profit just as rightfully as he may exclude trespassers from fallow fields that bring neither the owner nor society in general any benefit.

glyn moody said...

@FleaStiff: the key thing here is that we are dealing with *magic* fields: ones that can be replicated endlessly without taking away anything from the original owner.

And yet we give that original owner the "right" to stop other people growing food on all those other fields, even though it has nothing to do with his or her...

Crosbie Fitch said...

Anonymous 1:07,

If you have something a large number of people would each pay $100 for, it may well obtain greater revenue than something a few number of people would each pay $1,000 for - then again, it might not. Only the market can answer this question.

The 'mechanism of paying for each copy' is more a matter of being able to charge well above market prices for each copy when you have been granted a monopoly (an unethical 18th century privilege of excluding others from making copies). When you remove that monopoly you end up paying far closer to the manufacturing cost of each copy.

The monopoly of copyright certainly makes things more lucrative for publishers (when they have a law against competition), but it also has the side effect of suspending the public's cultural liberty to share and build upon published works.

We've been copying and improving our folktales, folksongs, and folklore for aeons. So it was a tragic error for Queen Anne in 1710 to enact legislation that would steadily grow to erode, not just England's, but the entire world's cultural liberty.

Thus the people who assert their primordial cultural liberty today are considered outlaws, and known as pirates.

There is a legal mechanism that restores people's cultural liberty, and restores a free market in copies and intellectual work. It's known as a copyleft license, e.g. the GPL. This enables anyone to make and sell copies of published software, and given the manufacturing cost is negligible copies are often given away, but the license has no prohibition against selling copies at any price a market will bear. A copyleft license also has no prohibition against coders selling their intellectual work, whether original code or improvements to someone else's - and again, for any price they can obtain. This is why copyleft software is free as in free speech, but not free as in free beer. The law against making copies or improvements is neutralised.

As to revenue mechanisms that operate without copyright (and can operate with copyleft) that is what I've been doing R&D on for some time. Just as a pop group can sell tickets to thousands of people for a concert performance, a similar mechanism can be used to sell the 'performance' of any intellectual work, e.g. "If a thousand people pay me $10 each, I will produce and publish a particular intellectual work". A large number of people pay a small amount for something to be published, but there is no law against them making copies or improvements of what they receive. This is such an obvious idea that it is being independently invented and arrived at all the time - and is already being used (increasingly).

Whether you think people deserve their cultural liberty or not, copyright is ineffective, so the producers of intellectual work are having to migrate to revenue mechanisms that don't depend upon the sale of copies at monopoly inflated prices.

Crosbie Fitch said...

FleaStiff, the concept of private property derives from the natural right to privacy - an individual's natural right (ability/interest/power) to exclude others from the spaces they occupy/enclose/inhabit/secure and objects within those spaces. Property is naturally property because we are naturally able to exclude others from it. The law doesn't grant us this right, it underlines and protects the right we already have by nature.

So, when a law does grant a pseudo property right (properly termed a privilege and recognised as an instrument of injustice) it can only do so by derogating from another right, i.e. liberty. People were once traditionally at liberty to sing each others' songs, but copyright suspended that liberty in order that the holder of the privilege could then exchange (license) it for money.

So copyright is a most unnatural concept and it is an insult to the concept of property to even term copyright as a form of property. However, it is a fait accompli. The unethical privilege has been legislated. And in the three centuries since, people have become indoctrinated to consider works of art the quasi-property of their copyright holders (not necessarily the authors or creators). It takes a lot of deprogramming to understand that people should be at liberty to share and build upon their own culture, that copyright should be abolished.