The strange economics of open-source software

Why is this? Your average software company runs their R&D department on about 10% of their earnings. Yes, I pulled that number out of my nether regions, but in my experience that's about right. If you do a google search for R&D as a percentage of earnings, you will see lists for large companies that range anywhere from 2%-30%, but they tend to be on the lower side in my experience.

This means that for a software company to produce, package, market and sell a software product, they have to charge about 9x what it cost to produce it. If we factor in profit, then we're pretty close to an order of magnitude difference.

With open source software virtually all of that overhead disappears. If you are writing software that you already needed anyway, then the cost is very low -- even if nobody contributes to the project from the outside.

With a traditional software sales model, you divide the cost over many customers. So it might cost you $10 million to create and sell, but if you have 100,000 customers, you can charge $100 each and break even. With an open source model, each actor builds pieces that they want and care about and uses other pieces for free.

The advantage to working with the open source model is that the overall cost is an order of magnitude lower because you cut out all the sales, marketing, support and associated management. Not only that, but the pieces you pay for, you get to dictate exactly what they look like (within reason ;-) ). So essentially, you are getting your software at a tenth the price and the bits you care about, you are getting custom made.

Of course, you usually have to spend time packaging and documenting, but this cost is quite low. The reputation you get for doing it is often more than worth it (especially if you look at the cost of hiring recruiters). It would be interesting to see a study to see if sponsoring popular open source projects leads to lower attrition for companies. I suspect this is true, but have no data.

Of course, this sucks if you are in the business of selling software. If you are in the business of selling services enabled by software, then open source is absolutely king.

Individuals still contribute quite a bit to open source projects and have their own internal drivers for doing so. More and more I've seen advice that in order to show your worth to an employer it is best to work on open source projects and to have a portfolio (I admit to giving this advice myself, from time to time). Lately, though, I have found that the majority of important open source projects are funded through commercial entities. The last time I looked, the Linux kernel was about 75% funded through commercial entities. On the web side of things, it's actually getting difficult to find popular projects that aren't mostly funded by one or more organizations. I think the era of running large software projects as a hobby is coming to an end.

Sadly he seemed to have managed to talk himself into circles trying to argue that labor was the source of value, and therefore capitalists were labor exploiters.

Because of this he ended up mixing use and exchange value when talking about production machines, to try to show that said machines didn't provide any more value output than was initially put into making it.

I suspect that once one correct for that, by for example making machines into labor amplifiers, Marx's writings have, given the circumstances and time it was written, some serious insights into the workings, and pitfalls, of capitalism (most people barely touch volume 1, but volume 3, published by Engels after Marx death, holds a stern warning about the effects of finance capital).

Using that as a springboard to bootstrap some other kind of society may well be futile however.

Well, of course they're different.

It does seem that Neoclassical economics is fundamentally structured upon a series of misdirections that benefit capitalists:

* Blurring use and exchange value. * The non-existence of money in neoclassical models. * The non-existence of banks or other credit intermediaries in neoclassical models. * Even the non-existence of profit in neoclassical models ("perfect competition")

Pretty much any kind of element of an economic model that could be used to analyze the source of profit, in fact, is just handwaved away under the heading "assumptions".