Monday, 2 May 2011

The public good of software

Or public goods, to be more precise. Every economics student can promptly skip three paragraphs.

The subject of economics likes to classify and simplify things; some of these classifications and simplifications are useful, some not. Several in classical economics are downright dangerous, but I digress. One classification that more or less all economists would agree on is the concept of the public good. A public good is one that is collectively paid for because it makes no sense to pay for it any other way; the majority of services provided by the public sector are, or should be, public goods per se.

A classical example of a public good is streetlights. Streetlights have been around since 800AD or so; the first streetlights as we recognise them today were gas powered and switched on in Pall Mall in 1807; the first streets to be lit by electric light were in 1881 (Cleveland, Ohio and Newcastle-upon-Tyne appear to share this honour). All these streetlights share one distinctive feature; it is effectively impossible to have streetlights and charge individually for benefiting from them.

Early streetlights were either installed for public benefit or as a marketing ploy; modern day streetlights are more or less universally funded from local taxation. No one has ever managed to charge directly the user of the streetlight; creating and managing a use-based charging model would be several orders of magnitude more expensive than the provision of the light itself. Light being tricky stuff would provide much of the complication. How much light is enough before you get charged? So how close to the light can you get for free? Do you get charged different amounts depending on the how dark it would be if the light was turned off? How foggy it is? Do people who get the light spilling into their houses get charged? Anyhow, it's far too complex a question and to my knowledge it has never even been attempted. Residents in the town/region pay, everyone who passes by at night benefits.

Recently I argued against open source software being a cartel market. I closed that post by pointing out that software could not actually be seen as a normal economic good; can software be best seen as a public good? Interesting question...

The formal definition of a public good is that it is non-rivalrous and non-excludable. A good is seen to be excludable if you can easily and cheaply prevent those who have not paid for the good from consuming it, while a rivalrous good is one where your consumption of it prevents another from having it.

So here I am with my computer, using LibreOffice to write this post. If software is a normal good then my using it should be preventing you using it. Which clearly it does not as even if you don't yet have it you could just follow the download link to get it, I could give you a copy of the one I'm using and, on a thin client setup, we could all be using the same installed copy, so software (all software) is non-rivalrous; one tick in the box. Interestingly the common example of a non-rivalrous good is broadcast media - yet software is utterly non-rivalrous while broadcast media has a number of restrictions (no simultaneous use of wavelengths, requirement of near line of sight to transmitter, limited range). An alternative definition of a non-rivalrous good is one that could be provided at a very low additional (marginal) cost for each additional customer. Software clearly satisfies this definition and then some as the marginal cost for each additional customer/user is effectively zero.

So is software excludable? Well, companies whose business model is the production of software for sale have historically gone to great lengths to prevent people from using software without paying for it; and yet even with significant public monies being spent in helping prevent this illicit use, people continue to make use of all sorts of software they are not supposed to, entirely free. Arguably even the reasonably effective methods that have been used to prevent software being used illicitly, like dongles, are so expensive relative to the cost of the copy of the software that they would automatically fail the excludability test.

So software is non-rivalrous and non-excludable. A pure public good by normal economic definition. Yet it is not how many people currently view it, and much software is sold at high prices to individuals as if it was a normal good. Actually much software is sold prices so high relative to the cost of the copy of the software that it's priced at what economics would view as monopoly prices.

Why isn't software provided as a public good? Why isn't it something we collectively provide? Surely this would be to the greatest benefit of all, economically speaking, and be far more in keeping with the nature of software. Oddly, it is not uncommon for companies who produce software for sale to spend more money on selling, marketing and protecting the sales of the software than they do on making the software better. Economically speaking this makes no sense - it is the attempt to create artificial exclusions that costs so much money, rather than improvements to the product.

So software could be, should be a public good. Come to think of it, wouldn't it be even better, something more than a public good, if software was not only provided collectively but in a way that made it easy for others to improve? Like if the underlying programming code was available and people could fix stuff and add new features and then make the resulting improved, added value version available to everyone else allowing the virtuous cycle to start again. Wouldn't that be a truly amazing thing? Ever more added value for all, the economics are just brilliant; just need a name for the approach and then surely this "available code" software will spread like wildfire...

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