More on capitalists versus entrepreneurs, with some thoughts about higher education

I promised a few days ago to come back to this. Jed Harris wrote (on February 26th) a long post about peer production and the distinction between entrepreneurs and capitalists.
According to Jed, and entrepreneur coordinates “social activity to create a new, self-sustaining social process”, while a capitalist “wants to get a return on something they own”; “[i]deally, as a pure capitalist you just get income on an asset without having to manage a business”.
If we stay with the idea that entrepreneurship is about creating profit, then there is no problem associated with all this, apart from the old conundrum of getting managers (here, “entrepreneurs”) to aim their efforts closer to the attainment of the goals of owners (here, “capitalists”). This has created boatloads of literature in economics. But Jed wants to talk about other things, mainly about what peer production (such as has created open source projects as diverse as GNU/Linux and Wikipedia):

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.

So far, this says that there is less demand for capital from peer production. The production technology allows output to come from a lot of work and very little (relatively speaking) capital. So capital will not get a high return from being employed in peer production. But the crux of the argument is elsewhere:

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.

Here we see something that has been bothering me a lot lately. Many, if not all, universities have been moving towards a model of operation that looks like a traditional profit-making business. This is happening even though, as Jed rightly observes, universities were some of the first hotbeds of peer production. In this sense, universities are becoming less entrepreneurial. At the extreme logical extension of this process, universities will bid up the wages of their “star” professors so high that they won’t be able to afford them. It has all happened before. Jed Harris again:

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.

We can see this effect creeping into academia. Schools have to scrounge funds for highly-paid and highly-visible professors, while continuously undermining the traditional esteem-based economy that governed professors’ activities. One of the most obvious side-effects is the rise of the research paper as an easily (but not very meaningfully) measurable index of academic productivity. Nowadays, professors try to publish as many papers as possible, and the degree of overlap among them can be large. It does not matter, because another line in one’s CV is a valuable asset. Not many people will read the papers, anyway, and most of them will not contribute appreciably to the betterment of humanity, so why not butter our bread with them instead? Gone are the days of the scholar who might spend a lifetime writing the one crucial book that many subsequent generations will have to read and respond to (Leon Walras is a perfect example from economics). So running a university like a business does not promote innovation. Funny how Jed’s post anticipates this, too:

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.

You may ask whether such an effect afflicts academia. Yes, and the most obvious place to see it is in biomedical research. But there is also the chilling effect of threatening patent lawsuits to stop computer security researchers from divulging security weaknesses of software or software/hardware combinations (see this example). The ultimate issue has to do with fragmentation and overlap of “intellectual property”. Here’s another interesting paragraph from Jed Harris:

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“.

This is an allusion to the famous “tragedy of the commons” where jointly owned property is overused and ill-cared for.
Jed’s conclusion to all this:

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.

I will continue on this topic soon; I’ve just scratched the surface, and it’s getting pretty late.

New open-access economics journal

While waiting to find time and inclination to do the previous post full justice, I just discovered this economics e-journal. Looks like it has a respectable editorial board and papers by some well-known economists already published. Worth a second look and adding to one’s bookmarks (OK, for economist readers only).
Extra bonus point: they accept PDF submissions, and have a link to directions on how to make such submissions with TeX/LaTeX in addition to MS Word, and in all three major operating systems, Mac OS X, Linux, and that other one.
More bonus points, as I keep browsing the site: all submitted paper will carry the Creative Commons 2.0 Attribution-Noncommercial license (Germany version—I have to check what exactly that means). See the site for more details.