Capitalists vs. Entrepreneurs

This post was catalyzed by a post at The Technology Liberation Front. Thanks to those who debated me in those comments, you helped to clarify my points.

I was responding to this key point:

[P]eer production isn’t an assault on the principles of a free society, but an extension of those principles to aspects of human life that don’t directly involve money. ….

[A] lot of the intellectual tools that libertarians use to analyze markets apply equally well to other, non-monetary forms of decentralized coordination. It’s a shame that some libertarians see open source software, Wikipedia, and other peer-produced wealth as a threat to the free market rather than a natural complement.

Since peer production is an entirely voluntary activity it seems strange to view it as a threat to the free market. (My interlocutors in the comments demonstrated that this view of peer production is alive and well, at least in some minds.) So how could this opinion arise? And does it indicate some deeper issue?

I think viewing peer production as a threat is a symptom of an underlying issue with huge long-term consequences: In peer production, the interests of capitalists and entrepreneurs are no longer aligned.

I want to explore this in considerably more detail, but first let’s get rid of a distracting side issue.

It’s not about whether people can make money

The discussion in the original post got dragged into a debate about whether people contribute to open source software (and presumably peer production in general) because it “is a business” for them. This belief is easy to rebut with data.

But this is a side issue. I’m not arguing that people can’t increase their incomes directly or indirectly by participating in peer production. Sometimes of course they can. My point is that the incentives of entrepreneurs (whether they work for free, get consulting fees, or go public and become billionaires) and capitalists (who want to get a return on something they own) diverge in situations that are mainly coordinated through non-monetary incentives.

Examples and definitions

Let’s try to follow out this distinction between entrepreneurs and capitalists.

For example, Linus Torvalds is a great entrepreneur, and his management of the Linux community has been a key factor in the success of Linux. Success to an entrepreneur is coordinating social activity to create a new, self-sustaining social process. Entrepreneurship is essential to peer production, and successful entrepreneurs become “rock stars” in the peer production world.

A capitalist, by contrast, wants to get a return on something they own, such as money, a domain name, a patent, or a catalog of copyrighted works. A pure capitalist wants to maximize their return while minimizing the complexity of their actual business; in a pure capitalist scenario, coordination, production and thus entrepreneurship is overhead. Ideally, as a pure capitalist you just get income on an asset without having to manage a business.

The problem for capitalists in peer production is that typically there is no way to get a return on ownership. Linus Torvalds doesn’t own the Linux source code, Jimmy Wales doesn’t own the text of Wikipedia, etc. These are not just an incidental facts, they are at the core of the social phenomenon of peer production. A capitalist may benefit indirectly, for a while, from peer production, but the whole trend of the process is against returns on ownership per se.

Profit

Historically, entrepreneurship is associated with creating a profitable enterprise. In peer production, the idea of profit also splits into two concepts that are fairly independent, and are sometimes opposed to each other.

The classical idea of profit is monetary and is closely associated with the rate of (monetary) return on assets. This is obviously very much aligned with capitalist incentives. Entrepreneurs operating within this scenario create something valuable (typically a new business), own at least a large share of it, and profit from their return on the business as an asset.

The peer production equivalent of profit is creating a self-sustaining social entity that delivers value to participants. Typically the means are the same as those used by any classical entrepreneur: creating a product, publicizing the product, recruiting contributors, acquiring resources, generating support from larger organizations (legal, political, and sometimes financial), etc.

Before widespread peer production, the entrepreneur’s and capitalist’s definitions of success were typically congruent, because growing a business required capital, and gaining access to capital required providing a competitive return. So classical profit was usually required to build a self-sustaining business entity.

The change that enables widespread peer production is that today, an entity can become self-sustaining, and even grow explosively, with very small amounts of capital. As a result it doesn’t need to trade ownership for capital, and so it doesn’t need to provide any return on investment.

As others have noted, peer production is not new. The people who created educational institutions, social movements, scientific societies, etc. in the past were often entrepreneurs in the sense that I’m using here, and in their case as well, the definition of success was to create a self-sustaining entity, even though it often had no owners, and usually produced no “profit” in the classical sense.

These concepts of “profitability” can become opposed when obligations to provide classical profits to investors prevent an entity from becoming self-sustaining. In my experience, many startups die because of the barriers to participation that they create while trying to generate revenue. Of course if they are venture funded, they typically are compelled to do this by their investors. Unfortunately I don’t know of any way to get hard numbers on this phenomenon.

Conversely, there are examples where a dying business becomes a successful peer-production entity. The transformation of Netscape’s dying browser business into the successful Mozilla open source project is perhaps the clearest case. Note that while Netscape could not make enough profit from its browser to satisfy its owners, the Mozilla foundation is able to generate more than enough income to sustain its work and even fund other projects. However this income could not make Mozilla a (classically) profitable business, because wouldn’t come close to paying for all the contributions made by volunteers and other companies.

Current pathologies of capitalism

The conflicting incentives of entrepreneurs and capitalists come into sharp focus around questions of “intellectual property”. One commenter complained about open source advocates’ attacks on “software patents, … the DMCA and … IP firms”. These are all great examples of the divergence between ownership and entrepreneurship.

The DMCA was drafted and lobbied into existence by companies who wanted the government to help them extract money from consumers, with essentially no innovation on their part, and probably negative net social value. In almost every case, the DMCA advocates are not the people who created the copyrighted works that generate the revenue; instead they own the distribution systems that got those works to consumers, and they want to control any future distribution networks.

The DMCA hurts people who want to create new, more efficient modes of distribution, new artistic genres, new delivery devices, etc. In general it hurts entrepreneurs. However it helps some copyright owners get a return on their assets.

The consequences of patents and other IP protection are more mixed, but in many cases they inhibit innovation and entrepreneurship. Certainly patent trolls are an extremely clear example of the conflict — they buy patents not to produce anything, but to sue others who do produce something. Submarine patents (like the claimed patents on MP3 that just surfaced) are another example—a patent owner waits until a technology has been widely adopted (due to the work of others) and then asserts the right to skim revenue from ongoing use.

Intellectual property fragmentation is also a big problem. In many domains, especially biomedical, valuable innovations potentially require the right to practice dozens or even hundreds of patents, held by many different entities. Entrepreneurs often can’t get a new idea to market because the owners of these patents can’t all be brought to an agreement. Each owner has a perverse incentive to be the last to agree, so they can get any “excess” value. Owners also often overestimate the potential returns, and demand a higher “rent” than can actually be sustained. This phenomenon is called the “tragedy of the anti-commons“.

All of these issues, and other similar ones, make it harder for small companies, individuals and peer production projects to contribute innovation and entrepreneurship. Large companies with lawyers, lobbyists, and defensive patent portfolios can fight their way through the thickets of “intellectual property”. Small entrepreneurs are limited to clearings where they can hope to avoid IP problems.

Conclusion

Historically many benefits of entrepreneurship have been used to justify capitalism. However, we are beginning to see that in some cases we can have the benefits of a free market and entrepreneurship, while avoiding the social costs imposed by ensuring returns to property owners. The current battles over intellectual property rights are just the beginning of a much larger conflict about how to handle a broad shift from centralized, high capital production to decentralized, low capital production.

14 Responses to “Capitalists vs. Entrepreneurs”

  1. February 28th, 2007 | 7:08 pm

    [...] misaligned capitalists and entrepreneurs. It’s based on a blog post by Jed Harris trying to explain the same concept. The two posts suggest that traditionally the view of capitalists (those with money to invest, [...]

  2. March 1st, 2007 | 7:41 pm

    Wonderful post! I’m glad I found your blog.

    I doubt there are many libertarians who see OS or Wikipedia as threats to the market–just look at Eric Raymond and Jimmy Wales. Aside from a handful of Galambosians and patent-worshipping Randroids, I think they’re pretty much the choir for this sermon.

    Where I think they might be less likely to come on board is the extent to which peer-production in the information field will have an effect on the larger meta-system that includes physical manufacturing.

    Most of the the old Tom Peters rhetoric about “oursourcing everything,” “self-managed teams,” etc., to the extent that it was actually put into practice, has occurred within corporate frameworks where the HQ retains ownership of intellectual property, branding, and finance. A good example is Nike, where the actual production facilities are outsourced to idependently owned sweatshops, but Nike’s ownership of the trademark enables it to charge tribute in the form of a brand-name markup.

    Such forms of legal privilege operate, more broadly, as a sort of toll-gate enabling the old corporate economy to charge tribute in most areas of cultural and knowledge production. As Benkler pointed out, a majority of Americans own the basic capital equipment for knowledge production–the personal computer–and can obtain capital equipment for high quality desktop publishing, music editing, etc., for at most a few thousand $$ more. The entry barriers are virtually non-existent, and the marginal reproduction cost is zero. The only thing stopping knowledge and entertainment workers from becoming self-employed peer-group syndicates is the legal privileges upheld by the copyright Nazis.

    But I suspect we’ve reached a singularity where the cost of detecting and punishing transgressions against the IP gatekeepers is greater than the benefit; and from here on out the costs of enforcement will rise at the same time as the costs of evasion will fall.

    The same is true, to a lesser extent, in physical production with low overhead and capitalization costs. A good example is temp employment, where the temp agency typically charges the employer three times what it pays the worker, even though administrative costs per unit of labor are very low. Temp employment is ripe for cooperative ownership on the pattern of the longshoremen’s hiring hall. Probably the biggest barrier is non-competition agreements and other contractual restrictions.

  3. March 8th, 2007 | 12:33 am

    [...] Lots of people came to see Capitalists vs. Entrepreneurs, via great responses by Tim Lee, Jesse Walker, Tech and Science News Updates, and Logan Ferree [...]

  4. March 29th, 2007 | 11:01 pm

    [...] misaligned capitalists and entrepreneurs. It’s based on a blog post by Jed Harris trying to explain the same concept. The two posts suggest that traditionally the view of capitalists (those with money to invest, [...]

  5. September 20th, 2007 | 11:26 am

    [...] missed this great post by the Anomalous Presumptions blog, which also focuses on peer [...]

  6. May 29th, 2008 | 7:58 pm

    [...] a great post from a bit more than a year ago at Anomalous Presumptions (2007-02-26), which I just got around to [...]

  7. June 20th, 2008 | 7:08 pm

    [...] are against the open source movement, and how it illustrates the pathologies of capitalism: Capitalists vs Entrepreneurs. Before widespread peer production, the entrepreneur’s and capitalist’s definitions of success [...]

  8. September 3rd, 2009 | 9:24 pm

    [...] Harris has a fantastic post about how peer production introduces a fissure between capitalists and entrepreneurs: Before [...]

  9. August 13th, 2011 | 10:51 pm

    Excellent article. Helped me to understand that I’m more a social entrpreneur than capitalist and that am going to have to resolve some roi issues while we grow. Also interesting perspective on innovation and patents. Might open source some of our creations since we can’t protect them anyway.

  10. yonemoto
    August 28th, 2011 | 4:55 pm

    It’s a shame that some libertarians see open source software, Wikipedia, and other peer-produced wealth as a threat to the free market rather than a natural complement.

    Especially since Jimmy Wales is a libertarian.

  11. September 8th, 2011 | 12:17 am

    Can you defend your claim that

    The DMCA was drafted and lobbied into existence by companies who wanted the government to help them extract money from consumers, with essentially no innovation on their part, and probably negative net social value.

    ? Keeping in mind that the perpetuation of incentives to produce goods of the highest value and keep marginal returns on capital near zero are both net social positives.

  12. Jed
    September 19th, 2011 | 9:19 pm

    Reasonable request, but it has been a very long time since I wrote this and I don’t recall the original sources. Regarding who drafted and lobbied for the DMCA, if you really want to know, it wouldn’t be hard to find the history of the bill. A question for you: If the DMCA wasn’t created by companies that wanted to use it to defend their revenue models, who was motivated to write it?

    Regarding negative net social value, there has been more research since I wrote this. Tim Lee has written some interesting posts on that. However it is hard to come up with a definitive proof this is true because we don’t have a good metric for social value. Note that price isn’t a useful metric of social value, since it doesn’t measure social value, but rather helps to allocate scarce tradeable things. Valuable things (like air and love) that aren’t scarce or aren’t tradeable don’t even show up in the price system.

  13. October 20th, 2011 | 10:01 am

    [...] 0 commentsin IP Law, Mimi & Eunice on IP, Victimless CrimesHere’s a terrific article on Capitalists vs. Entrepreneurs.~*~This is a syndicated post, which originally appeared at Mimi and Eunice » IP. View original [...]

  14. September 15th, 2012 | 12:01 pm

    [...] capital aggregation The Rad Geek People’s Daily has an interesting comment on my post Capitalists vs. Entrepreneurs: The only thing that I would want to add here is that it’s not just a matter of projects being [...]

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