1. Presentation to EEA Law & Economics Workshop, NYC, Feb 28, 2009 James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Institute at Hartford Hartford, Connecticut, USA 1

2. “Coase’s Penguin, or, Linux and The Nature of the Firm” by Yochai Benkler 2

3. The Economist, “The Next Society,” November 2001 3 Agriculture => Manor, Plantation Feudalism Feudalism Industry => Family Firm, Corporation Capitalism Capitalism Research => Scientific Circles, Universities, Firms New System? New System?

4. 4 “The Nature of the Firm,” Economica, 1937 - Firms exist to minimize “transaction costs” “The Problem of Social Cost,” Journal of Law and Economics, 1960 - Property Rights evolve to allocate property when transaction costs are too high

5. 5 The Common Law is “an attempt to increase the value of the resource by assigning property rights to those parties … in whose hands the rights are most valuable.” - Richard Posner, The Economic Analysis of the Law, 1972 Without flexible property rights, “the only way we thought we could test out the value of the pollution was by the only liability law we thought we had.” - Guido Calabresi and Douglas Melamed, “Property Rules, Liability Rules, and Inalienability”, Harvard Law Review, 1992

6. Paul Rubin on “Why is the Common Law Efficient”: 6 (1-R)(T A – T B ) > 2C (5) (1-R)(T A – T B ) > 2C (5) “… the evolution toward efficiency… would be faster as current rules are more inefficient [ (T A – T B ) ↑ ]…current rules are more inefficient [ (T A – T B ) ↑ ]… net court costs … are lower [C ↓ ], and asnet court costs … are lower [C ↓ ], and as inefficient rules are less soundly entrenched [R ↓ ].”inefficient rules are less soundly entrenched [R ↓ ].” http://business.baylor.edu/Charles_North/4318Files/4318Rubin1977.pdf

7. The Economist, Sep. 20, 2007: “A Matter of Sovereignty” 7

8. The Economist, March 8, 2008: “America's patent system: Methods and madness” 8

9. “Josh Lerner of Harvard Business School found that patents on financial innovations were 27 times more likely than average to result in litigation. …. The most frequent plaintiffs … are patent-holding companies whose only line of business is the litigation of patent suits.” 9

10. Wikipedia Apache WebServer MIT Open CourseWare Google EBay Apple Firefox Linux Amazon MySQL (Sun) Travelocity 10

11. http://en.wikipedia.org/wiki/Copyleft 11

12. http://creativecommons.org/ Copyright Creative Commons Public Domain 12

13. Dual Licensing (MySQL) Attribution (96% of licenses) Attribution + No-Derivatives CC 13

14. 14 Table 1: Ideal Organizational Forms as a Function of Transaction and System Costs Function of Transaction and System Costs

15. Information Problems in Pervasively Networked Environments (PNEs): 15 1.Accounting – Multiplicity of information, many kinds and sources. 2. Cooperation / Coordination – ‘Publicness’ of Consumption and Production. Important externalities (+/-) are public (Coase). 3. Complexity – Fundamental Non-Convexity of Externalities (Starrett).

16. Table 2: Ideal Forms as function of Major Informational and Organizational Problems 16 ORGANIZATION INCENTIVIZECOORDINATECOOPERATE INFOR- PROBLEM Money >Power >Status > MATION PROBLEM Power or StatusStatus or MoneyPower or Money ACCOUNTING >MarketsPublic GoodCommons Cooperation or Non-Convexity (Stock, Commodity, Books) (Roads, Environment)(Public Radio, Ideas) COOPERATION >FirmsTeamsClub Goods Non-Convexity or Accounting (Automobiles, Shoes) (Police, Military, Research) (Swiss Pastures, Students) NON-CONVEXITY >Patents‘Open Source’Peering Accounting or Cooperation (Drugs, Microsoft, Biz Methods) (Google, Faculty, Artist) ( Clickworkers, Wikis) Clickworkers

17. Ronald Coase, Journal of Law & Economics, “The Problem of Social Cost” (1960) 17 Smoke0.00.51.01.52.02.53.0 Total Value to B0 30 50 60 Marginal Value to B 30 20 10 Total Value to N35 30 20 0 Marginal Value to N 5 10 20

18. 18

19. 19 Smoke00.511.522.53 TotalVal-B0 30 50 60 MargVal-B 30 20 10 TotalVal_N80 30 20 0 MargDam-N 50 10 20

21. Non-Convexity & Reversibility 21

22. Total, not just Marginal Conditions 22

23. 23 My Firm

24. 24 US v. Europe Google v. Yahoo Linux v. Microsoft Apple v. Microsoft Guerilla Bands v. Centralized Army

25. 25 As the flow of water is determined by the earth Military force has no constant formation, as water has no constant shape.changing and adapting to the opponent consummation of forming arrive at formlessness - Sun-Tzu, The Art of War, 500 B.C. “As the flow of water is determined by the earth, so the victory of military force is determined by the opponent. Military force has no constant formation, as water has no constant shape. To gain victory by changing and adapting to the opponent is called genius. Therefore the consummation of forming … is to arrive at formlessness. When you have no form, undercover espionage cannot find out anything, intelligence cannot form a strategy.” - Sun-Tzu, The Art of War, 500 B.C. great uncertainty of all data in war planned in a mere twilight, like the effect of a fog or moonshine — talent must discover “… the great uncertainty of all data in war is a peculiar difficulty, because all action must …be planned in a mere twilight, which … like the effect of a fog or moonshine — gives to things exaggerated dimensions and an unnatural appearance. What this feeble light leaves indistinct to the sight, talent must discover, or must be left to chance.” - Von Clausewitz, On War, 1874 The Law of Requisite Variety “The Law of Requisite Variety [relates] the number of control states.. to the number … necessary for effective response. This allows us to formalize … the limitations of hierarchical control …, e.g., the military, healthcare, and education systems.” - Yaneer Bar-Yam, www.necsi.org, 2004 www.necsi.org