>Linux works, but who's to say it's 'optimal'? Given the huge amount of value it creates, I think relatively little filters back into the development of the system.
And that's the crux of the problem. You seem to think that it's optimal if it puts money in to developers pocket. I'm saying it's optimal it provides more value for less cost to the consumer. Market is about consumers not about producers.
>If no one pays for it, the consumer will not get the value because the developer will have to do something else to make money, and will therefore not produce the code.
Where did I say nobody pays for it ?
If you want to develop software and charge for it you're still left with different options, you can deploy with contracts/NDA style to the Oracle type market, you can sell software as a service and keep the source private (you can do this even with games by streaming them), or you can do ad-based apps like Zynga and mobile guys, you have major copying in that space and very little copyright enforcement - it sucks for the developers but it works for the consumers. And there's doing on demand stuff, where the customers pay in advanced, and can subsequently opensource it to distribute costs of maintenance or even split the costs by forming alliances (I've seen this in energy sector where three big companies decided to standardize and share some data exchange software), regular consulting/maintenance approach, etc. And there are probably many other ways to make money without IP.
Demand still exists, you just need to find a way to profit from that demand without IP.
All I'm trying to say is that intellectual property is a legal monopoly on non-rivalrous non-excludable good, it violates the nature of innovation (incremental improvement and copying are essential) and copying as creating new value for free instead of stealing.