Why Coase’s Penguin didn’t fly *

This is a belated response to Cory’s post on Coase, Benkler and politics, and as such a class of a coda to the Walkaway seminar. It’s also a piece that I’ve been thinking about in outline for a long, long time, in part because of disagreements with Yochai Benkler (who I’ve learned and still learn a ton from, but whom I would like to see address concrete power relations more solidly).

As I said in my own contribution to the seminar, Cory’s arguments in this book are a kind of culmination of what I’ve called BoingBoing socialism – a set of broad ideas exploiting the notion that there is some valuable crossover between the politics of the left and the politics of Silicon Valley. Hence the aim of this post: not to deride that argument, nor to embrace it, but to think more specifically about its possibility conditions.

_Yochai’s Penguin_

As Cory emphasizes in his response piece, Yochai Benkler’s article, Coase’s Penguin is one of the touchstones of his understanding of politics.

It’s been 15 years since Benkler made the connection between “commons-based peer-production” and Coase. Networked tools—wikis, source/version control, crawlers, searchbots, collaborative filters (and more advanced machine-learning cousins), containers, VMs, and others—provide a cauldron for all the stone soup the networked world cares to cook. Any of us can throw our contribution into the pot, and possibly improve the soup, and if the soup is not improved, we can always ctrl-Z revert it back to an earlier state. If we disagree about what belongs in the soup, we can fork the soup (or, I suppose, spoon it) and you can have your soup and I can have my soup and we don’t have to agree what goes in the soup.

The Coasean Internet is how we make OSes and encyclopedias with the kind of hierarchy we once deployed to oversee bake-sales or small town councils. These hierarchies aren’t nothing—indeed, they can be intense focii of bickering that can escalate to blood feuds (Kim Stanley Robinson has many special geniuses—Belle!—but the thing he does most wonderfully is elevate these fights to the same status as rayguns and other dramatic rubbish). But they’re still small potatoes compared to the palace intrigue of running an armed forces or a national government.

This is genuinely futuristic. The snarling, often dysfunctional world of Wikipedia edit wars and holy wars over free software vs open source are a much smaller hierarchical/institutional price to pay for getting projects on the scale of OSes and encylopediae than the institutions they are displacing. …

As a Coasean tale, Walkaway is one of the battleground between the technological, Promethean left—which has promised to lift peasants up to the material comfort of lords—and the de-growth green left, which promises to bring lords down to the level of the peasants in the name of saving the planet.

Also:

This isn’t a novel about 3D printing our way out of scarcity, it’s a novel about the pointy end of the abundance triangle—coordination, the least science fictional corner—stretching out into an impossible isosceles, whose other corners (manufacturing and desire) whirl in great arcs on that elongated tip. … These intermediate states are only in our grasp if we can overcome self-serving bullshit: beliefs in the venality of our fellow humans (which justify our lack of care for their plight and our lack of generosity to help them out of it). … This is (in my view) a Utopian vision. It supposes that the Bohemian projects that even the most buttoned-down societies allow at their margins can breed real discontent and nurture and sustain it into something that genuinely challenges its host.

In short, _Walkaway_ is a novel about coordination. And it borrows substantially from a particular vision of coordination – that vision set out in Yochai Benkler’s classic article (and related book, which was the subject of another Crooked Timber seminar back in the day). Benkler envisioned an Internet where the costs of decentralized production had fallen massively. This meant that new forms of decentralized “peer production” could emerge, and challenge both traditional markets and traditional firm hierarchies. Benkler championed open source software, and forms of knowledge production such as Wikipedia as the avatars of a new model.

Benkler still defends a version of this argument today. However, I think it’s fair to say that the Internet that we see today is not the Internet that Benkler envisaged. Benkler and Nick Carr quasi-famously had a wager as to whether decentralized forms of coordination would win out on the Internet over centralized sites. There was dispute over who won that wager – but if Facebook really represents a ‘win’ for decentralized coordination, then it’s fair to say that decentralized coordination didn’t turn out as attractive as advertised.

There are plenty of reasons why we see the Internet we have today, rather than one dominated by Wikipedia-style decentralized collectives. One reason is that largely-passive-participation-plus-surveillance-plus-ads turned out to be a more attractive business model than the active participation approach that Benkler favored (he worried about whether people would participate enough or not, but it turned out that participation wasn’t the problem). The second was the standard political economy problem of who got the surplus – it turned out that (a) many of the benefits from standard platforms went to the platform designers, and (b) that they had both the incentive and ability to shape their platforms so as to extract more of the surplus over time (one could still argue, as John Q. has in the past, that the consumer surplus generated by Google dwarfs its profits, but that’s an argument for another day). But I want to focus on a third reason why things went wrong – that Benkler borrows his argument from Coase, and hence is vulnerable to a basic flaw in Coase’s way of understanding the world.

Benkler, Coase and efficiency

Ronald Coase (whom I met once – he was terrifyingly sharp, even in his 90s) was one of the founders of the new institutional economics. Accordingly, he viewed the world like an economist – in terms of efficiencies (generated by private actors) and the inefficiencies generated by government regulations. While he often complained about the way that his famous Theorem was taken up (he thought that the transaction costs were the interesting thing, rather than the solutions that could be generated if they were absent), the starting proposition of his philosophy was that market actors can by and large reach efficient outcomes if only they are left alone to do so.

This is one of the features of his theory of the firm. Coase wanted to explain why we saw firms at all, given the benefits of market exchange. Why did we need miniature hierarchies with bosses and subordinates, if we could just buy and sell our services on markets instead?

His answer was transaction costs. Some transactions are too messy or awkward to be easily handled by putting out to the marketplace. Those are the transactions that are handled in-house through hierarchy. Other transactions, which are more straightforward, can be contracted for with outside providers, through market processes. Finally (although he doesn’t really discuss this) the balance can change over time, as new technologies emerge that make transactions more or less easy to carry out through hierarchy or markets.

This is a powerful insight, which provided a platform for the work of Oliver Williamson and many other organizational economists, as well as Benkler. Yet it has buried within it a crucial assumption – that change is driven by efficiencies. An entrepreneur is going to expand her firm exactly up to that point (given a variety of external parameters) where it is barely efficient to work through hierarchy rather than market processes. Past that, the entrepreneur will just rely on markets instead.

Benkler buys into this argument, suggesting that his new mode of decentralized organization too will expand or contract in given areas of activity, depending on its relative efficiency to markets or hierarchy. Where markets are more efficient than Wikipedia style systems, people will turn to markets. Where hierarchy is more efficient they will turn to hierarchy. Nonetheless, Benkler argues that a variety of factors (including the burgeoning of the Internet) might lead us to believe that decentralized production is rapidly becoming more efficient than competing modes such as markets and hierarchies, across a significant spectrum of activities. Thus, we may expect to see a lot more decentralized production happening as the technology continues to develop.

if we posit the existence of such a third option it is relatively easy to adapt the transactions cost theory of the firm and the comparative institutional cost theory of property to include it. We would say that when the cost of organizing an activity on a peered basis is lower than the cost of using the market, and the cost of peering is lower than the cost of hierarchical organization, then peer production will emerge.

Efficiency and production

As already discussed, this didn’t happen. But it also highlights an important problem which isn’t really discussed by Coase, and hence is not discussed by Benkler – power. Power relationships often explain who gets what, and which forms of organization are taken up, and which fall by the wayside. In general, forms of production that are (a) more efficient, but (b) inconvenient or unprofitable for powerful actors, are probably not going to be taken up, since those powerful actors will block them. Yet if one starts from an efficiency perspective, it is very hard to build power relations in, since one believes that change in practices and institutions is not driven by power relations but by efficiency.

Here – as a few readers will recognize, I’m riffing on Jack Knight’s (in my view fundamentally unanswerable) objection to Coase-style ways of thinking about the world. Jack points out that if you are an economist, as Coase is, you really ought start from the assumption that individuals are self interested. If self interested actors have the power to block changes that would hurt their self interest, they are going to do so. Therefore, the kinds of efficiency driven processes of change that Coase (and Benkler) talk about are only going to happen under very unusual conditions.

Knight (in a 1995 chapter in _Explaining Social Institutions_ which I assign every time I teach graduate students about institutions) provides a nice account of how this works. He proposes that we can think of institutional change (such as, perhaps, the growth of decentralized forms of production) as a so-called ‘mixed motive coordination’ or ‘battle of the sexes’ game (below is a very heavily simplified version of his arguments).

In such games, two actors face mixed incentives. On the one hand, they want to coordinate on an equilibrium. On the other, each would prefer that they both coordinate on a particular equilibrium rather than the other. Take as an example, two (deliberately non-gender specific) individuals in a relationship, Pat and Alex. They are deciding whether they should both go to the movies, or take a walk through the woods. Pat would prefer to go to the movies. Alex would prefer to walk through the woods. But both would prefer to be together doing a shared activity, rather than being on their own.

This can be represented as a 2×2 bargaining game (the left number is the payoff for Pat, and the right number the payoff for Alex). As one can see, Pat is very happy if they choose the movie, while Alex is only moderately so. The converse is true for the walk in the woods. But both really hate the situation in which they fail to coordinate.

This very simple model captures a wide variety of social relationships in which (a) we want to coordinate (it sucks being in one of the non-coordination cells), but (b) we have differing preferences over what we should coordinate on.

Knight’s argument is that we can introduce power into this relationship by thinking about the breakdown values – the payoffs in the cells where coordination breaks down. Look at this slightly modified version of the first game.

In the first game, the breakdown values were symmetric (both Pat and Alex suffered equally). In this game, the breakdown values are asymmetric. Pat suffers a lot less than Alex when they fail to coordinate. Knight argues that differences in breakdown values are a good index of the options that actors have in the case of failure, and hence a good index of power. If Pat cares a lot less about being with Alex than Alex does about Pat (say, Pat has other options for a date) then Pat isn’t going to be nearly as badly hurt if they can’t coordinate. Furthermore, Pat is in a great bargaining position, and can tell Alex credibly that they are going to the movies or else not spending time together, since both of them know that Alex will be a lot more hurt if they end up apart than Pat will.

This is a very simple model, but it arguably represents many social relationships. One business can extract much better terms from another if it is the only customer (or supplier) for a service. Peasants reportedly did much better in relations with lords after the Black Death since there were fewer of them, and lords had less opportunity to play them off each other. Very often, breakdown values depend on exit options. The more exit options you have, the less likely you are to be badly hurt if coordination fails. And the more exit options you have, the better able you are to bargain, so that you end up at the outcome that you prefer, rather than the outcome that the other party prefers.

What this means, if you take it seriously, is that Coaseian coordination is a _special case_ of bargaining. Broadly speaking, Coaseian processes will lead to efficient outcomes only under very specific circumstances – when the actors have symmetrical breakdown values, as in the first game, so that neither of them is able to prevail over the other. More simply put, the Coase transaction cost account of how efficient institutions emerge will only work when all actors are more or less equally powerful. Under these conditions, it is perfectly alright to assume as Coase (and Benkler by extension) do, that efficiency considerations rather than power relations will drive change. In contrast, where there _are_ significant differences of power, actors will converge on the institutions that reflect the preferences of powerful actors, even if those institutions are not the most efficient possible.

Imagine, say, that Pat and Alex aren’t lovers – they are boss and employee in a city where jobs are scarce. Here, as in the second game, Pat will have more bargaining power than Alex, since Pat can always find another employee, while Alex will have a hard time finding another job. Finally, imagine that they are bargaining over workplace processes, where one process would be relatively inefficient, but provide Pat as boss with high profits, and the other would be relatively efficient, while providing Pat with less profits. Pat – as boss in a hard labor market – is likely to be able to push successfully for the less efficient process that provides more benefits.

Now imagine that there are multitudes of Pats and multitudes of Alexes – multitudes of bosses with many exit options and workers with few – within a given economy. Over time, we may expect that Alexes will learn that it is best to take whatever deal the Pats are offering, since they will otherwise lose their job. A set of mutually reinforcing expectations will arise about how the workplace will be organized, which may not be the most _efficient_ way to organize the workplace, but which will be self-reinforcing, since it suits the Pats pretty nicely, and the Alexes know that they will be fired if they object. This set of mutually reinforcing expectations is an _informal institution_ – a rule that everyone adheres to. To take another example – imagine that Pat is white and Alex is African-American in the pre-Civil Rights Deep South. There are a multitude of informal rules (say that Alex has to step off the sidewalk when Pat approaches), some of which are trivial, some serious, but which in general profoundly disadvantage Alex. These informal rules can be very sticky, even when they are economically inefficient, because they reflect a set of heavily asymmetric power relations.

This has notable implications for Benkler’s bet with Carr. It helps explain some (but not all) of what has happened over the last fifteen years. Some actors have developed market power, because, for example, it is hard for customers or users to do without their platforms (say: Facebook, or Google), and their platforms are self-sustaining because of returns to scale, network effects or similar. They have been able to take advantage of that power to make deals with their customers, users and others that wring enormous advantage from them. If you don’t want to use Facebook (I don’t), you have to cut yourself off from a swathe of social relations. Nor can you really bargain as an individual with Facebook over the conditions of your relationship – you accept their Terms of Service, or you don’t use their service. Thus, we see business models that have some aspects of decentralization, but where the actual control is not decentralized, but instead focused on the owners of the platform, who can effectively set the rules under which others operate.

Bargaining, Coase and politics

So what does this mean for BoingBoing socialism? It suggests that it has to go radical if it is to work. When Cory (or others) argue that the “Bohemian projects that even the most buttoned-down societies allow at their margins can breed real discontent and nurture and sustain it into something that genuinely challenges its host,” they may be right. But the challenge will only occur under quite particular conditions. Specifically, they will only work when power relations are such that new institutional forms cannot readily be squashed by powerful actors who don’t see them as being in their interest. They will only be attractive from a left-utopian perspective when the inequalities that they themselves represent and perpetuate are better than the inequalities they are replacing.

That’s why, in my own essay on Walkaway, I focused so much on exit. Exit has two valuable components. First, it can sometimes provide a solution in itself. If you want to make something different than what others are doing, and can simply walk away from existing practices to roll your own, then you will obviously have a much easier time in experimenting. Second, it can enhance voice. If you have the _possibility_ of exit (a la Hirschman – but also Knight’s games set out above), and people care about you staying, then you have a credible threat that you can use to get people to pay attention to what you say, and perhaps make the changes that you want them to make.

There are, of course, other forms of power that can be exercised than exit – but it is the one that Doctorow’s novel emphasizes, as its title indicates. The crucial point is that if one is to build a quasi-utopian society along the lines that Doctorow suggests (or, at a pinch, a better society than the one we have now), it (a) has to rest on far more egalitarian power relations, and (b) has to be built in contention with a body of actors who have quite a lot of power and mostly like things the way they are already.

This isn’t a claim that I think that Cory would at all object to, although I’d still push him to talk more explicitly about how we need boring everyday politics as well as technology to fix inequality. It does, however, suggest that there’s a sharp political difference between people who are genuinely committed to baseline egalitarianism (and are prepared to push politically for this) and people who think that some kind of better world will emerge from technology if we just leave it alone. This distinction is muted (or even buried) by arguments such as Benkler’s, which focus on efficiency rather than power relations as the major factor explaining why new institutional forms emerge. But (as per my arguments above), I think it’s central. Over a decade ago, Doug Henwood talked (in another book that we ran a seminar on – this is a theme) about the relationship between technological rhetoric and actual power:

while this book has been rather unfriendly to New Economy dogma, it’s still worth examining its utopian bits. Arising in the midst of what looked like a period of unrestrained capitalist triumphalism, New Economy discourse expressed hopes for something rather different from our predominant economic reality. In a time of massive wealth polarization, it talked about the democratization of ownership. In a time of mass overwork, it dreamt of meaningful, enjoyable work, self-management and flattened hierarchies. In what seemed like a profoundly conservative time, it appropriated language of revolution … Amidst a vast speedup of the social factory’s assembly line, it evoked fantasies of abundance. And amidst aggressive attempts to privatize information, tighten up intellectual property restrictions, and put a meter on almost everything but the air, it stoked hopes for global linkages. ‘Information wants to be free,’ the saying goes, but not as long as AOL Time Warner has its say.

But why did The System’s publicists need the utopian story? If all challenges to capitalism were dead, why did we hear so much about democratization and the overturning of hierarchy? Evidently, the message has appeal, even in conservative times.

Fine. If a little hierarchy-overturning economic democratization is such a good thing, then why not more? As Jack Kemp once said in a very different context, if you’re going to go for it, you should really go for it.

In short – we need to distinguish between the rhetorical claims that technological change will bring openness along with it, and the (far more sustainable) claim that technology will probably only have openness enhancing benefits in a world where we are already dealing with the underlying power relations. The best recent account of this perspective that I’ve seen comes from Astra Taylor in _The People’s Platform._

openness alone does not provide the blueprint for a more equitable social order, in part because the ‘freedom’ promoted by the tech community almost always turns out to be of the Darwinian variety. Openness in this context is ultimately about promoting competition, not protecting equality in any traditional sense; it has little to say about entrenched systems of economic privilege, labor rights, fairness, or economic redistribution. Despite enthusiastic commentators and their hosannas to democratization, inequality is not exclusive to closed systems. Networks reflect and exacerbate imbalances of power as much as they improve them.

If BoingBoing socialism is ever going to approximate actual socialism (by which I mean egalitarian social democracy), these are the problems it has to deal with.

* Yes – I know that penguins don’t fly. That’s part of the joke.