Actually, even that is too theoretical. There is only one reason anyone ever writes software: to scratch her own itch. Whether that itch is based on personal taste or employer mandate matters not. If I’d like to change how a program works, and the source code is available to me, I make the change. If I’d like to create a new project, I do. The only weighing involved in this decision is that of my time and effort vs. the value of the result TO ME. Programming qua programming is only altruistic when it is explicitly so, such as in work done for charities (even then, one is acting to further the charity’s interests, not those of the world in general).

After deciding to create or modify software, the subsequent decision to release one’s work to the rest of the world as open source is another, much smaller decision. It costs very little to share computer code (nothing in terms of money, on the order of minutes in terms of time), which investment pales next to even minimal programming effort. Even so, most “improvements” that people make to OS/FS are never shared with the rest of the world. That is due to a combination of factors. It is somewhat inconvenient to contribute modifications back to most projects, especially if you haven’t already contributed other patches. Many improvements are local optimizations only, wouldn’t really be useful to the rest of the people using a particular project, and so even if contributed wouldn’t be merged into trunk. Some code violates (or might be construed to violate) patents, and is thus safe to use but not safe to distribute. Also, some programmers (or their employers) do have the myopic pennywise outlook that some common caricatures of neoclassicism would expect them to have, and won’t release their code for that reason. (We know this outlook exists, as exemplified by the cretins who complain when programmers release their work under a free license like the GPL rather than a mere open source license.) It is also remotely possible that a commercial enterprise might benefit in keeping its code private for competitive reasons, but those cases are vastly rarer than is commonly thought. Most businesses should pay more attention to customer service than to DB table normalization. (Some companies I’ve been at probably hide their code out of shame, though. b^)

However, open source doesn’t rely on the joint efforts of all programmers in the world. It can thrive when only a tiny minority do “the right thing”. Each successful open source project (and in some sense these are probably outnumbered by the failures) is a ratchet, like Maxwell’s Demon come to life. Improvements are kept; regressions are obliterated without mercy. The quality of the software might change quickly or slowly, but it only goes in one direction. There are network effects, in that a successful project rewards those who contribute back to it: programmer A fixes bug 1, programmer B fixes bug 2, and both of them can use software that has both bugs fixed. The network effects act at a higher level, as well. The existence of Linux, gcc, perl, python, apache, etc. makes it easier to start new projects.

I’ve blathered on long enough. RTFM!

“If we economists were given less to wishful thinking and more to observation of facts, doubts would immediately arise as to the realistic virtues of a theory.”

It is too bad that those who cite his theories on business cycles have not bothered to contemplate the insights expressed in that quote.

SB

Completely agreed!

Sure. Attributing it all to a black-box utility function is a bit of a cop-out — although the alternative signaling explanation is very powerful and doesn’t involve tinkering around with the definition of utility, and for many open source projects you can also rationalize some participation through the personal benefits from bug-fixing, customization, and simply building a better product. I just wanted to point out that there’s no inherent inconsistency between the broad set of modeling principles underlying “neoclassical economics” and the existence of open-source software.

I also still think that the neoclassical approach can be a good starting point for analyzing the issues you mention. One decent initial stab at this is here, where there are several good points like:

“As to the tasks that may appeal to the open source community, one would expect that tasks such as those related to the operating systems and programming languages, whose natural audience is the community of programmers, would give rise to strong signaling incentives. (For instance, the use of Perl is largely restricted to system administrators.) By way of contrast, tasks aiming at helping the much-less-sophisticated end user–e.g., design of easy-to-use interfaces, technical support, and ensuring backward compatibility–usually provide lower signaling incentives.”

Neoclassical economics can explain other varieties of open-source software as well. For instance, if you have corporations releasing parts of their software as open-source, you can interpret their behavior as a way to overcome the commitment problems inherent in selling technology with high switching costs. An open-source core helps to ensure that a future version of the company won’t screw over its customers by arbitrarily jacking up prices or doing something similarly malevolent, which makes customers more willing to buy today. Alternatively, if you’re in a business with substantial network effects, it can make sense to release one version of your software for free to make your ecosystem the standard, and then sell a higher-powered version of the software for a nonzero price to the most demanding users.

All this doesn’t mean, of course, that people who deem themselves bearers of neoclassical wisdom will actually get these issues right. This is particularly true for a lot of “Law and Economics” gurus whose understanding of micro theory is very, very far from the research frontier. As you say, knowledge of a theory is never a substitute for study of the real world; all models abstract away from countless features of real markets, and empirical experience is necessary to determine which features are the essential ones to include. People who always base their decisions on a single kind of intuition will eventually be wrong. But neoclassical economics is still a really useful way to analyze these issues, despite the indiscretions of some of its cruder advocates.

Again, I’m not criticizing neoclassical theory as such. I’m criticizing the attitude that knowledge of a theory is a substitute for careful study of the real world. If you study the real world carefully, you can probably find a way to adjust your theory to fit your observations.

It’s easy to imagine the rewarding feeling from being part of a vibrant and supportive programming community entering directly into a utility function, or the signal from writing particularly good software helping someone to get a good job later on, and hence providing a clear monetary reward.

I think there’s a lot of post-hoc reasoning going on here. Obviously, if the domain of possible utility functions is flexible enough, you’re going to be able to model any human behavior. But sticking “the rewarding feeling from being part of a vibrant and supportive programming community” into your utility function doesn’t really explain anything. You can’t use it to predict which other circumstances might give rise to phenomena like peer production, for example.

If you’d asked an economist in 1990 to speculate on the viability of the Linux development model, I’ll bet you that the overwhelming majority of neoclassical theorists would have gotten it wrong. That’s not really their fault–most people, period, would have gotten it wrong–but it does suggest that economists should show some humility in trying to model social systems they don’t understand well.

If you really wanted to teach your kid about business you would require them to take out a loan from you to buy they necessary items. They would have to write out a business plan showing that their lemonade stand would make money to pay you back. They would also have to give up a favorite toy for collateral. “Welcome to the REAL world kid.” you’d say as you peered over your Wall Street Journal.

I think that the neoclassical way of thinking gives us some good insights about the nature of open source software. Forgive me if this sounds too banal, but economically speaking, open source software should be common where the enjoyment or signaling value of writing software is relatively high compared with the cost of writing it. This tends to happen when a piece of software will have very wide use relative to the amount of time taken to write it, or when it’s important to a niche with a good sense of community. And indeed, as far as I can tell, this is where we see the most open source software being written. Meanwhile, we don’t see competitive open source attempts at implementing the tedious details of corporate accounting.

I know virtually nothing about the economics of patents, but it still seems like even a basic neoclassical model would produce a result where patentability isn’t necessarily optimal. Suppose that inventors have a range of possible projects they can undertake, each with different returns. Patents increase the individual returns to each project, inducing inventors to pursue more projects, but decrease the externalities from the diffusion of ideas and techniques from each successful invention.

From the perspective of social optimality, this could go either way. The ideal policy would allow patents only for the marginal projects that wouldn’t be completed without them, but since this is impossible in practice, the benefits from denying patents to the inframarginal cases could easily overwhelm the losses from a weakened incentive to innovate. And this result pops out of an extraordinarily simple neoclassical model! Considering the drawbacks of legal uncertainty, legal costs, patent hoarding, and so on only strengthens the case against software patents.

I think the real story here is that many of the “Law and Economics” types who are inclined to comment on these issues just aren’t very good economists, relying mainly on half-assed price theory intuition that hasn’t moved a day beyond 1960. Epstein is a prime example.