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The Information and the Theory of the Firm: Do (Organizational) Boundaries Still Matter?

TEPPO FELIN Marriott School Brigham Young University 587 Tanner Building Provo, UT 84602 801 422-3478 (o), 801 422-0539 (f) [email protected]

Essay prepared for

Berle III ‘Theory of the Firm’ Conference Seattle, Washington January 13-14, 2012

Adolf A. Berle Jr. Center on Corporations, Law & Society Seattle University School of Law

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A world in which all agents can act effectively on all resources will be substantially more productive in creating information goods than a world in which firms divide the universe of agents into bounded sets.

Yochai Benkler, 2002

In the new economy, the prototypical economic enterprise is no longer a box; it is a network. Its boundaries are increasingly indistinct.

Gillian Hadfield, 2011

Introduction Coase’s (1937) genius was the delineation of a comparative theory of the firm – the conditions under which we can expect activities and transactions to be governed within firms versus within markets. Recent legal scholarship has argued that traditional forms of governance—markets and hierarchy—are not suitable for highly information-intensive and dynamic production in the “new economy” (e.g., Hadfield, 2011). More specifically, the “nonrivalrous” and “public good” nature of information necessitates alternative forms of governance and organization, such as networks and “commons-based peer production” (Benkler, 2002, 2004, 2006; Boyle, 2003; Wagner, 2003). Furthermore, these new forms—it is argued—raise questions about the very purpose and even need for organizational boundaries and rights. In this paper we first briefly review the theory of the firm, its contribution and purposes and then discuss these recent critiques and governance alternatives proposed by legal scholars. To keep our arguments focused, we largely address the arguments made in one paper (Benkler, 2002)1—though our discussion extends to a wide, related body of work in law, economics, and the social sciences more broadly. While Benkler’s critique and alternative to the theory of the firm raises important issues, it suffers from a number of fundamental problems: it radically mis-specifies the nature of

1 As Barnett notes (2010: 1806), Benkler’s 2002 article is “the leading scholarly statement” in the legal literature on governance, the commons and the theory of the firm. Many other articles also offer important contributions related to issues such as , and the anticommons (e.g., see Heller, 1999; Hetcher, 2011; Lessig, 2002; McGowan, 2001, 2011; Rose, 1986, 2003; Vaidhyanathan, 2001; Wagner, 2003).

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information (e.g., treating it as a public good and anchoring on a false premise of “perfect information”), underestimates the informational role of prices and incentives, conflates informational inputs and outputs, fails to recognize how market-hierarchy hybrids deal with many of the seeming issues in the theory of the firm, and does not address the central matter of boundaries. We discuss the etiology of information and the poverty of stimulus. While many information and allocation-gains are attributable to commons-based peer production, these in fact are central features of markets and market-hierarchy hybrids. For commons-based peer production to be taken seriously as an alternative to markets and hierarchy, we raise a number of paradoxes that need to be addressed. In conclusion we address the aggressive policy recommendations made by scholars arguing for the information commons and we discuss the need for organizational boundaries and the need to “let a thousand (organizational) forms bloom.” We might briefly note that this essay admittedly touches on an excessively wide swath of issues related to the theory of the firm and information. Each of the areas we touch on certainly deserve far more careful attention than we give them. But despite this informality and briefness, we hope the essay provokes some discussion.

Markets and Organizations: A Brief Primer The theory of the firm is focused on the boundary between markets and organizations. Coase famously raised the question of why (and when) firms exist, specifically as the market’s price mechanism already seemingly coordinates production efficiently. Indeed, the “marvel of the market” is that prices “act to coordinate the separate actions of different people” (Hayek, 1945: 526). Prices in effect embody the dispersed information of actors in aggregate form and spontaneously coordinate the actions of dispersed actors. But we clearly also observe conscious and collective coordination, or planning, in the form of hierarchy and firms. As D.H. Robertson metaphorically put it: “islands of conscious power in this ocean of unconscious cooperation like lumps of better coagulating in a pail of buttermilk” (quoted in Coase, 1937: 388). Coase articulates a theory of when and why firms emerge within markets. He specifically argues that markets and organizations are governance alternatives with comparative virtues and costs (for an overview, see Zenger et al., 2011). Markets offer high-powered incentives and implicit coordination through the price mechanism while hierarchy and organization offer increased control over resources and more explicit coordination through managerial fiat. The comparative trade-offs have to do with the transaction

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costs associated with markets versus organizations, thus delineating organizational boundaries.2 Comprehensively reviewing all aspects of the theory of the firm is beyond the scope of this essay. However, several issues are worth highlighting as they provide a foundation for the theory of the firm—but are antithetical to the alternatives proposed by critics. First, the focus of the theory of the firm is on comparative governance, the costs and virtues of markets versus hierarchy. In other words, the theory is explicitly about the boundaries of governance, thus offering us insights into the scope of governance under different forms. Second, the theory of the firm is “micro-analytic” in that it focuses on economic activity at the level of individual transactions and judgments. Furthermore, the theory of the firm is anchored on a quite specific view of human nature and capability – namely, that human actors are boundedly rational and make choices based on heterogeneous, local information. Third, incentives and associated costs are central to the theory of the firm. Activities are pursued within firms when the costs of the market are prohibitive, for example due to the potential of hold-up or other transaction costs. The market on the other hand provides high-powered incentives to actors and thus the trade-off between these incentives and the costs of organizing internally are central to the calculus. Fourth and finally, and property rights are important as they delineate access to and control of resources, along with aligning incentives. We will revisit these three considerations in our discussion of extant alternatives.

A New Model of Production? The Information Commons and the Theory of the Firm Recent scholarship has argued that the theory of the firm and its traditional market-hierarchy governance alternatives are not appropriate for the “new economy” (Hadfield, 2011) or for the “pervasively networked in formation economy” (Benkler, 2002). 3 Specifically, given the increasingly information-

2 The particulars of the theory of the firm were “operationalized” (cf. Coase, 1988) and further developed by Oliver Williamson. Williamson (1975) argued that three conditions lead transactions to be internalized within the firm: asset specificity, frequency and uncertainty. Williamson shifted the conversation from the overall structure of production to the specifics of managing transactions and contractual relations, the make-buy decision. If the assets associated with a particular transaction are specific, then firms internalize—“make” rather than “buy” these activities in order to protect themselves from hold-up and opportunistic behavior on the part of potential suppliers. This has led to a large empirical literature that has confirmed the prediction of transaction costs economics in many settings (Macher and Richman, 2008; Shelanski and Klein, 1995). 3 The more general social implications of an “information” or “knowledge” society have of course long been discussed (e.g., see Bell, 1973; Webster, 1995).

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intensive and networked nature of production, scholars have argued that a third form of governance needs to be theorized and accounted for. Scholars have focused on such forms as “collaborative communities” (Adler et al., 2007; Heckscher and Adler, 2006; Nahapiet et al., 2005; O’Mahony and Ferraro, 2007), “communities of practice” (Brown and Duguid, 2001; Wenger, 1999), “the commons” (O’Mahony, 2003), “commons-based social production” (Benkler, 2006) and more generally a “network society” (Castells, 2000; cf. Boisot, 1999; Powell, 1990). Benkler (2004) has even discussed “sharing” as a novel, new modality of economic production. Though there are differences in what this third form is called, the essence of these arguments is that another form of production, beyond markets and hierarchy, deserves theoretical attention. In legal scholarship, Yochai Benkler’s (2002) article “Coase’s Penguin, or, and the Theory of the Firm,” Yale Law Journal (also see Benkler, 2004, 2006) is perhaps the most thorough and ambitious discussion of the theory of the firm and the need for a third form of governance. To keep our article focused and tractable, we direct our discussion towards the arguments in this article. Though naturally we seek to also speak to a wider audience that has made similar arguments. Benkler’s article begins rather exuberantly by arguing that we are witnessing an “amazing phenomenon,” a “new model of production,” “one that should not be there” as it operates outside the bounds of the traditional, Coasean understanding of economic activity and production (2002: 371). Benkler argues that “the emergence of free as a substantial force in the software development world poses a puzzle for [Coasean] organization theory” (2002: 372). And he details many, extant examples of what he calls “commons-based peer production,” a seemingly novel form of organization with many manifestations: , NASA projects, , Project Gutenberg, and various forms of voluntary cultural production. While extant work has described these voluntary forms of production (often focusing on free software and open source), Benkler’s ambition is much broader in that he effectively challenges the theory of the firm itself. More specifically, the article seeks to “generalize from phenomenon [such as] free software to suggest characteristics that make large-scale collaborations in many information production fields sustainable and productive in the digitally networked environment without reliance on markets or managerial hierarchy” (Benkler, 2002: 374).4 Benkler’s goal is to show that “peer production has

4 We might note that there is a rather long history of organizational and sociological research on alternative forms to markets and hierarchy as the sole modes of production and governance. Sociologists have launched a more direct critique at the theory of the firm’s conception and understanding of organizations and markets. In what is considered one of the founding articles

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much wider application then free software” and that the form, commons-based peer production, is “distinct from the other two” forms (markets and hierarchy) and to highlight how peer production has “systematic advantages over the other two in identifying and allocating human capital/creativity” (2002: 381). The recent challenges to the theory of the firm are built around the notion that information belongs in the “commons” and information has unique as both an input to and output of production, requiring distinct forms of governance. The information commons argument builds on several assumptions – which we discuss next, along with providing reactions. First, it is important to start by noting that the underlying ethos behind the notion of “information commons” is the idea that “information wants to be free” (originally attributed to Stewart Brand, but also featured prominently in legal scholarship: see Boyle, 1997: 6-7; Wagner, 2003: 999). The premise here is that information is a cultural product, itself built on information that seemingly is freely available, and thus ascribing property rights to it is not appropriate (Lessig, 2002).5 Creativity, it is argued, seemingly always builds on free resources, particularly in cultural production. This has given rise to calls for “free content” and “.” Intellectually the information commons notion is rooted in a broader social movement (the “free software” movement). Central citations here are the work of free software advocates such as (2010) and Eben Moglen (1999). The argument that “information wants to be free” is also tied up in the inherent difficulties of protecting the rights to information-related, cultural products that are bit-based and thus easy to copy and redistribute. In other words, the argument that information has a “free” nature is due to the

of “economic sociology,” Mark Granovetter (1985) explicitly reacts to and critiques transaction cost economics for its atomistic view of markets and the lack of consideration for the “embeddedness” of economic activity. Granovetter argues that markets are constituted by social relations and structures, matters that receive little if any attention in transaction cost economics. Woody Powell “[contrasts networks] with market and hierarchical governance structures, and [highlights] distinctive features of networks” (1990: 295). In fact, Powell outlines the many differences between networks vis-à-vis markets and hierarchy quite carefully (see 1990: 300). Furthermore, there is also a large literature on “network governance” (Jones et al., 1997). And a broader literature of the relational advantages of alliances is also worth noting (Dyer and Singh, 1998; Kogut, 2002). Furthermore, Uzzi (1997) delineates the advantages of network forms: fine-grained information transfer, trust, and joint problem-solving. In short, the call for addressing questions of collaboration and networks as new forms of production (beyond markets and hierarchy) is scarcely new. This literature indeed has already discussed many of the issues raised by Benkler: reciprocity, trust, informational advantages and so forth. 5 This notion of information as inherently non-exclusionary is reinforced by Brand: "You own your own words, unless they contain information. In which case they belong to no one."

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difficulties of protecting it, copying is inevitable.6 And, as all new information builds on informational element of the past (on the proverbial “shoulders of giants”) thus imputing ownership and delineating property rights is hard (cf. Barnett, 2011)—or even morally wrong (Merrill and Smith, 2007). (We link to this discussion when we discuss the “Etiology of Information, the Poverty of Stimulus and Personhood.”) Our interest here is not so much in debating whether formal intellectual property rights are advisable or reasonable for information-intensive and cultural products (e.g., software and music), though inevitably we touch on these matters as well. In this literature some have already persuasively argued that the information commons are an “illusion” (see Barnett, 2011). But our focus is more explicitly on the theory of the firm as Benkler (2002) has specifically extended the notion of information commons into the domain of comparative governance and organizational boundaries. The “information wants to be free” idea is translated into Benkler’s arguments in several ways. Benkler argues that information has two essential properties: 1) it is “nonrival” and 2) it is a “public good.” He argues that “information is quirky as an object of economic analysis, in that it is purely nonrival, and its primary nonhuman input is the same public good as its output—information” (2002: 404). He further clarifies that a good, such as information, is “nonrival to the extent that its consumption by one person does not diminish its availability for use by any other person” (2002: 404). One of the central problems with the notion of information as nonrival and a public good is that no distinctions are made between different types of information. For Benkler, “information” includes not only information- intensive products but also even information about opportunities. The full range of software and various bit-based products to information associated with a decision (beliefs and knowledge) is included in “information.” Clearly these are highly varied notions of information and treating them equally is, as we will show, highly problematic for the theory of the firm. From the outset, “free use” advocacy is mistakenly extended into theorizing about governance, given the all-encompassing notion of information. From a theoretical perspective, the focus on extant cultural products as information misses a more important point about the type of information that is actually relevant for governance and production. To keep our arguments simple, we will here simply cite two key pieces related to the firm-market boundary (Coase, 1937) and information in markets (Hayek, 1945). What is informationally most central for understanding production has less to do with

6 There are some important epistemological issues that relate to the notion that “information wants to be free,” issues that we will briefly touch on in our discussion of the “etiology” of information.

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the products themselves and more to do with the subjective beliefs, expectations and knowledge about the potential uses of cultural products (or whatever resources) rather than their availability for free use (Hayek, 1945) – a separate argument. Benkler conflates these two types of information and readily toggles between the two throughout his article without making distinctions. The information that is central to production has precisely the opposite qualities of those listed by Benkler. This type of information is inherently rivalrous and scarcely a “public good.” This informational heterogeneity was central to Hayek’s conception of markets (and more generally central to understanding organizations in markets: Barney, 1986). For example, he argues that “practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decision depending on it are left to him or are made with his active cooperation” (Hayek, 1945: 521-522). In short, information is embodied in the subjective beliefs and local knowledge of individuals. Benkler on the other hand sees information as “objective”—again, rather than pointing to its subjective nature. Benkler specifically anchors on an informational ideal of “perfect information”—“the condition where uncertainty regarding an action could not be further reduced in principle” (2002: 408). This type of ideal (and assumption)—while central in some corners of economics—is meaningless in the context of economic activity. Perfect information assumes that there is some ideal state where information actually coheres and somehow can meaningfully be aggregated and processed. But economic activity in markets and organizations is fundamentally about heterogeneity in ideas, beliefs, and expectations about the future. Somehow attaining “perfect information” is not possible, specifically as “knowledge…of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess” (Hayek, 1945: 519). Perfect knowledge is not possible due to the incomputable, conflicting and constantly changing nature of economic activity—a problem, as we will discuss, that is partly solved by the market’s price system and the dispersed nature of decision-making based on local information. With the notion of “perfect information” as background, Benkler comparatively assesses markets, hierarchy and peer production as “information processing systems” (2002: 406-422). He compares the informational loss, or “information opportunity cost,” of each of these three different forms—and argues for the primacy of peer production due to its “informational gains.” It is

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in this section that the misunderstandings about markets and hierarchy are most evident, particularly vis-à-vis the question of organizational boundaries. Benkler first argues that information in markets is “lossy” as “aspects of performance that are harder fully to specify in advance or monitor—like creativity over time given the occurrence of new opportunities to be creative— become more important” (2002: 409). The problem with this argument is that the adaptability and responsiveness to emergent opportunities is the precise advantage and exact nature of markets (Hayek, 1945, Williamson, 1985, 1991). That is, prices act as signals to guide the activities of economic agents, who respond to local information, knowledge, opportunities and high-powered incentives. As noted by Hayek, price is a powerful “mechanism for communicating information” (Hayek, 1945: 526). But Benkler argues that prices (somehow) lead to “information-compression,” but no arguments are made for how or why this might be the case. Prices in fact embody information in the strongest sense possible: no overt coordination is necessary in markets as individuals spontaneously adapt to price changes and their local information. Information, at no point, meaningfully is static or computable as disequilibrium rather than equilibrium prevails. Where prices perhaps appear misaligned, economic actors then in turn utilize their idiosyncratic information and take actions – and the information associated with these actions then, in turn, is embedded in future prices. The argument that there are information gains to peer production is simply based on the assumption that “ubiquitously networked environments” provide access to more people and thus more information. Peer production thus relies on “decentralized information gathering” (Benkler, 2002: 375). But again, this is precisely how markets solve the problem of “integrating knowledge” – through “decentralization” (Hayek, 1945: 524). The decentralization of markets is also more carefully specified through the price mechanism, while peer production has no such coordinating mechanism. The precise mechanisms and aggregation processes of peer production do not get attention. For example, how are disparate interests or ideas reconciled? Benkler suggests that “large-scale peer review” provides one mechanism for resolving these problems, but absent incentives and absent objective criteria and evaluators – this simply is not possible and inevitably leads to some forms of emergent organization – though the structure of this organization is not discussed. In comparatively assessing markets, hierarchy and peer production, the second postulated advantage of peer production is “allocation gains.” These gains, Benkler argues, result from the fact that individuals “self-identify” for projects. Specifically, “peer production provides a framework within which individuals who have the best information available about their own fit for a

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task can self-identify for the task” (2002: 376). Benkler further discusses the role of “modularity” (the extent to which it can be broken into smaller components) in allowing different individuals to work on different problems efficiently, as individuals self-identify to work on projects. More specifically he argues that “peer production is limited not by the total cost or complexity of a project, but by its modularity, granularity, and cost of integration” (Benkler, 2002: 435). Here again, these aspects in fact are precisely the domain of markets: spontaneous order and self-selection, the presence of discrete tasks that have boundaries and interfaces (for example, via prices), and little need for more in-depth coordination (which is the domain of traditional organization). Markets are constituted by self-identification and selection (for an overview, see Felin and Zenger, 2011). For example, sorting and selection are the ones operating, for example, in labor markets (e.g., Autor, 2001). Finally, Benkler frequently cites the arguments of Eric Raymond, a prominent open source advocate, in support of his discussion of peer production. But Raymond explicitly highlights the market-like nature of peer production: “the [open source] world behaves in many respects like a free market or an ecology, a collection of selfish agents attempting to maximize utility which in the process produces a self-correcting spontaneous order more elaborate and efficient than any amount of central planning could have achieved” (2001: 52). Another central point of emphasis in the commons-based peer production literature is the emphasis on the distinctly unique motives attributed to individuals. Market and hierarchy rely on incentives, while peer production is said to rely other forms of motivation. The emphasis is placed on reciprocity and how monetary incentives “crowd out” other motives (cf. Frey and Jegen, 2001). We by no means want to question the motivations of individuals in contributing their time and skills to various volunteer efforts. For example, in the United States, voluntary efforts and associations have been a central part of the societal fabric for centuries (Tocqueville, 1840). And thankfully technologies are providing new, exciting ways of organizing joint activity and social interaction, including worthy (and indeed amazing) causes such as Project Gutenberg and Wikipedia. But the productivity of market-based, advanced economies is precisely what allows for additional time to volunteer for worthwhile causes. Thus we don’t meaningfully see them as alternatives, as suggested by Benkler, but rather these forms of association capitalize on the efficiencies of production in markets and firms. While the commons-based literature frequently seeks to generalize its arguments to production more broadly (which indeed is Benkler’s specific aim) by appealing to “gift economies” of the past (e.g.,

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Mauss, 1925), these past economies and societies suffered from various problems that scarcely produced the types of technological innovations witnessed over the past century. There is a certain “longing for the past” in this work – but modern property rights and the institutional structure of production provides the enabling framework for generating unprecedented amounts of information, value and wealth (Clarke, 2007; for further discussion, see Felin and Foss, 2009) – as well as free time. In short, thus we cannot envision the types of advances in production, even knowledge-based such, without the role played of markets and firms. Furthermore, even the seemingly self-less motivations of the individuals working in domains of commons-based peer production have clearly evolved various market-based mechanisms where, for example, efforts are in effect appropriated through reputational and human capital gains and associated opportunities (for a full discussion, see Lerner and Tirole, 2002, 2005). That said, we do think that there are very novel form-related elements to peer production, and thus we later discuss these factors as market-hierarchy hybrids.

Etiology of Information, the Poverty of Stimulus and Personhood There is a certain etiology (nature and origins) of information that provides the foundation for the communitarian “information as commons” argument and thus deserves brief attention. It is, in part, that there is “nothing new under the sun”—and that all innovation is simply some form of borrowing or recombination, remix or even inevitable result of existing stimuli, knowledge or cultural elements. In short, invention is inherently social and always builds on someone else’s work, or even is inevitable. This argument links with a broader sociology of knowledge that heavily emphasizes the cultural, historical and social construction of inventions, information and knowledge.7 But this focus on exogenous factors comes at the expense of persons and gives to downplay the human component of information generation and invention. The external focus, while obviously featuring some truth, however strips the uniquely human element away from the process of generating and processing information. And it has also allowed scholars to question the very notion of individual attribution and ownership. The exogenous focus builds on a quite specific, empiricist notion of knowledge, with radical implications for identity and personhood. Namely, the central premise is that separating any one person from their environment

7 There is a longstanding body of work making these arguments. For example, the literature on the “social construction of technology” (Bijker, Hughes and Pinch, 1987), sociology of knowledge (Kuhn, 1962), along with more specific areas such as the social construction of genius (DeNora, 1997), or the social construction of finance (MacKenzie and Millo, 2003).

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and social context is not impossible as individuals are inherently products of their environment. To quote Hume, persons are “nothing but a bundle or collection of different perceptions.” From this perspective, “perceptions constitute the mind” and “all ideas are borrowed from preceding perceptions” (Hume, 1817: 365). This indeed has been the basis of empiricism for decades and also provides the underlying ethos for questioning personhood, as well as notions of choice and will (see Skinner, 1989).8 To provide one example of this empiricist approach and it’s assumptions about individuals, we can take the most generic form of information, that is, language. Language indeed is perhaps the cultural product, certainly in the commons and thus has been a central focus of economic and social anthropologists (e.g., Levi-Strauss, 1962; Sapir, 1911; Whorf, 1956). Language is freely available and is part of the cultural heritage of any individual. Thus language is an “external” and “social fact” – and thus individual nature seemingly does not matter. The nature and origins of linguistic capability, in fact, were studied in precisely this fashion: by looking at the behavioral inputs, cultural products and environmental stimuli that seemingly originate language capability. Models of language acquisition and capability focused on stimulus-response (Skinner, 1957), behavioral inputs, and socialization (Sapir, 1911). In short, language was studied as an exogenous and social fact – the human contribution was minimal. Language equals, and determines, thought. But the problem with this argument is that it does not account for 1) the nature of the actors involved nor 2) the readily evident, daily creativity that persons manifest when speaking—far beyond extant informational (or in this case, linguistic) inputs. Thus, first, human nature provides the underlying capability not only for acquiring language but also for generating novel sentences and language. And more important for our arguments: there is a unique and highly relevant human component to language, beyond exogenous inputs. Even with “impoverished” inputs, humans can take these elements and create novel sentences—the poverty of stimulus argument. As put by philosopher Ned Block, “people are capable of thinking vast numbers of thoughts that they have not thought before – and indeed that no one may have ever thought before” (1995: 3). Thus, ideas indeed can be new. In other words, language provides an example of the “infinite use of finite means.” As argued

8 The idea that knowledge is the network thus embodies an assumption of a strong form of social construction (Kuhn, 1962). But somehow the “social” cannot be so strongly coupled with knowledge that it inherently generates it, without consideration for individuals and “truth” (cf. Goldman, 1999). For further discussion of how these issues relate to economic production, see Felin and Foss, 2009.

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by Chomsky (2003; along with a long list of philosophical rationalists going back to Descartes), linguistic capability is endogenous rather than exogenous.9 Now, this argument certainly is not to be misinterpreted as a call for disregarding environmental factors and history, or somehow arguing that language itself ought to be copyrighted. Both would be ludicrous. Rather, our more simple point is that the human component in information acquisition and generation is absolutely central. Using language as the most generic form of informational input (and cultural product), we can show that informational outputs are scarcely inevitable and certainly demand human contribution to explain novel and creative outcomes. To completely mystify the process of creativity, by layering levels of history and context onto it, is to miss the nature and capability of the actual actors who engage in these activities. Language of course is but one example where creative outputs are radically underdetermined by the inputs. The argument also has far-reaching economic implications as well, for example, in terms of what we attribute creativity and capability to (for an overview, see Felin and Foss, 2011). Firms also Our more general point about human nature can also be linked to ideas of “personhood.” Namely, the information commons notion inherently has a de-individuating effect that discounts human authorship and claims to one’s outputs, specifically as both the informational inputs and outputs are said to belong to the commons. Empiricist models indeed provide justification for this. But the very notion of personhood is entangled with ownership. As discussed by Margaret Jane Radin, “to be a person—an individual needs some control over resources in the external environment. The necessary assurances of control take the form of property rights” (1982: 957).10 While some might argue that even the notion of property is socially constructed (thus, in some sense, how we ascribe property is arbitrary), our point is that there are also inherent links between property and personhood – given that there is a clear contribution made by individuals to informational outputs. There is of course a much wider discussion to be had here, about the links between persons and property.11 But for now our central point simply is that extant work has overly socialized and “environmentalized” the process of

9 Furthermore, empiricist models that ignore human nature build on what Popper called a “bucket theory” of human capability which presumes the type of “tabula rasa” that allows us to question the role of persons in acquiring and generating information. Empiricist models build on a materialist, perception-heavy model of the human mind, not recognizing the “how such non-physical things as purposes, deliberations, plans, decisions, theories, intentions, and values play in bringing about physical changes in the physical world” (Popper, 1972: 229). 10 Radin (1982) links this argument with a Hegelian, constitutive notion of objects as property – but links can also be drawn to information. 11 Related discussion can be found in Sudgen, 1986 and Merrill and Smith, 2007.

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generating information and innovation, thus allowing scholars to question individual contribution, and implicitly personhood. More generally, stepping back, there is a tendency to mystify the processes of generating new information and invention even a more straightforward, individualist attribution might work. Jewkes et al, in their study of numerous inventions and innovation, indeed touch on this matter: “it is the practice of some writers to present a fuzzy picture of invention as a ‘social process’; to suggest that, if one inventor had not done what he did when he did, someone else would have done it. . . . this attitude— that nothing can be understood unless all is understood, that by piling one unresolved enigma upon another some all- comprehending solution is made the more likely—involves the error of ‘seeing depth in mere darkness’, as Sir Isaiah Berlin once put it” (1969: 26–27).

Boundaries and Market-Hierarchy Hybrids Perhaps the greatest failing in the peer production literature, particularly in Benkler’s extension of these arguments into the domain of the theory of the firm, is that the theory actually never addresses the question of boundaries. In fact, at the very foundations of the peer production argument is that boundaries only constrain, delimiting access to valuable information that could more productively be used if it was “ubiquitiously” available and free. More specifically, Benkler argues that “a world in which all agents can act effectively on all resources will be substantially more productive in creating information goods than a world in which firms divide the universe of agents into bounded sets” (2002: 415). But this is a bold argument and raises the question: given the virtues of peer production, why not then organize everything under one large firm (Coase, 1937) or network? Given the emphasis on ubiquity, this seems to be one prescription and utopian end-state. Perhaps we exaggerate here as Benkler also does delimit the contexts of peer production to settings where there is modularity and tasks can be broken up into smaller parts. The problem is that the extant characterizations of production are highly vague and non- operational. That is, the theory of the firm is specifically about the micro- analytics of particular transactions and the associated boundaries, but Benkler’s alternative provides no guidance on the specifics. Boundaries of course do matter and serve a central purpose, even a liberating one. For one, there are very few states of global unanimity or homogeneity in human activity, particularly when it comes to economic matters. Rather, economic activities are always characterized by different beliefs and visions about how to approach tasks or the value of particular resources. Thus structure and boundaries necessarily emerge as people self- select to join some projects and organizations and not others, or as they, for

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example, exert “exit, voice and loyalty” within organizations (Hirschman, 1970). Structure and boundaries, then, are an emergent property of individuals interacting with different information and beliefs about possible future states. Hayek (1945) of course emphasized the markets ability to solve this heterogeneity, via the price mechanism. But, as noted by Coleman, “matters are not so straightforward as Hayek would have one believe: a social optimum is not to be achieved by eschewing all temptations toward constructed order and instead limiting ourselves to spontaneous order” (1991: 9). Thus firms play a central role in more efficiently organizing activities that require more intensive coordination and collective action vis-à-vis specific assets. Admittedly Coase’s emphasis is on hierarchy as an idealized form where a singular, atomistic “entrepreneur-co-ordinator” directs activities via fiat. Benkler largely captures this intuition correctly. The informational burden in firms appears to be on hierarchy. But the caricature of firms as strict hierarchies (based on fiat) does not recognize the many forms that firms in fact can take. Firms can be organized in various different ways. There indeed is a large literature that in fact studies the information-related aspects of different structures, including highly decentralized ones (e.g., Knudsen and Levinthal, 2007; Radner, 1992; Sah and Stiglitz, 1984; Stinchcombe, 1990). Perhaps a more central omission in Benkler’s arguments is the possibilities associated with disaggregated market-hierarchy forms of organization (for an overview, see Zenger and Hesterly, 1997). Namely, there is much about peer production that in fact capitalizes on central aspects of both markets and hierarchy (Felin and Zenger, 2011). Market-hierarchy forms attempt to infuse the benefits of markets into hierarchy. For example, markets naturally are decentralized, allow for individual autonomy through self- selection and sorting, are adaptable and are characterized by high-powered incentives. While the literature on market-hierarchy hybrids is not large, nonetheless there are examples in the literature. For example, Nicolai Foss (2003) discusses Oticon, a Danish company, which infused various market elements into the organization. Individuals were allowed to select projects to work on, an internal job market was created, decision-rights and resource allocation were dispersed, incentives were tied to projects, and so forth. This market-hierarchy hybrid led to powerful results for Oticon. Market-hierarchy hybrids are a form that is seeing increased usage and novel applications (for an overview, see Felin and Zenger, 2011). For example, organizations are using practices such as internal prediction markets (e.g., Google), thus infusing the market’s price signal into hierarchy. Other

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practices such as crowdsourcing also highlight modes of aggregating information in decentralized fashion. Peer production effectively, then, features many aspects of a market- hierarchy hybrid: decentralization, various peer review mechanisms, modularity and decoupling of decision-rights, opportunities for self-selection, and so forth. Furthermore, market-hierarchy forms also can easily accommodate various motivations – and certainly heterogeneous information. There are of course questions about the ultimate legal boundaries and decision- rights associated with this form, requiring additional work.

Conclusion and Speculations: Letting a Thousand Forms Bloom Our goal in this paper, by no means, is to somehow question the importance or motives of individuals and communities involved with ambitious forms of collective action associated with peer production (such as Wikipedia etc). But we feel that their mere existence does not somehow invalidate central Coasean and Hayekian insights about the structure of production in society. Rather, forms such as peer production, as we have discussed, indeed embody many aspects of both markets and hierarchy and can also be discussed as instantiations of market-hiearchy hybrids. As Benkler and others are also making aggressive policy recommendations related to the commons and their implications for innovation and the structure of production, we thus make a few concluding points related to this. Specifically, there is an aggressive campaign to increase the bounds of the commons, from free software to any information-intensive or cultural product that presently is copyrighted or patented. There is no question that, for example, the patent system suffers from problems (e.g., the anticommons, Heller, 1999). But the broad-based call to include all information under “free culture,” freely share-able, strips the rights of actors (both individual and collective) who generate these products in the first place – to protect them as they will and as regimes of exclusion allow. The increased availability of products of course has many beneficial outcomes, but the ease of copying a production is scarcely an argument that the product then should be free. Naturally there are significant consequences to freeness, as it removes the the incentives for more in-depth development of products. Firms, in fact, precisely are the emergent outcome of certain transactions needing significant coordination and asset-specific investment. Free use, in most cases, does not encourage this type of organization. Perhaps peer production and the associated commons will indeed significantly encroach and begin to compete with products that are developed within firms through more proprietary regimes. But the strong policy prescriptions for the “free use” of information remove the opportunity for

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different regimes of protection and boundaries to compete, which in practice is the current state of affairs. Free software presently competes with proprietary software, both have their users. Free culture competes with proprietary culture—some music is free, other music is not, some books are open source and others are not. This is healthy. Thus we think there is room to “let a thousand forms bloom,” and to let both the consumers and creators of information choose the governance forms and associated products best suited for their needs. Overall, our focus has been on pointing out that the current extensions of the information commons notion into the domain of the theory of the firm are based on mistaken assumptions about the nature of information (e.g., conflating information-intensive products with beliefs or knowledge). Simply put, boundaries still matter—both individual and collective ones. Boundaries provide opportunities for more effective coordination, for the coalescing of individuals, and regimes of appropriation based on contributions. The arguments for boundary-less, ubiquitous and networked production are excessively vague and do not offer a meaningful alternative to the theory of the firm.

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