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The Zero Marginal Cost economy: Is Open

Source the future economic paradigm?
Thesis · February 2015

DOI: 10.13140/2.1.2591.3124
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Silviu Necoara: The ZERO marginal cost Economy: Is Open Source the future economic paradigm?
Licence Economie et Gestion

Parcours INTERNATIONAL ECONOMICS AND MANAGEMENT
Research report
Silviu NECOARA
The ZERO marginal cost economy

Is Open Source the future economic paradigm?
Date of the viva: 05 February 2015
Supervisor: Julien PENIN

Member of the BoE: Thierry BURGER-HELMCHEN
Table of Contents
1
Introduction ….............................................................................................................................. 3
I. Current Situation
1. The Paradox of Capitalism.................................................................................. 4
2. Some side effects of the adoption of Capitalism................................................. 5
3. A new movement emerges: The Open Source economy......................................8
II. Does Open Source have what it takes to become the next paradigm?
1. Firms and markets replaced by communities, From Consumers to Prosumers...14
2. How to finance the infrastructure in an open source economy............................ 15
3. Motivation ..….....................................................................................................17
4. The Free Rider Dilemma..................................................................................... 18
III. What does it change in society

1. Environment …....................................................................................................20
2. Individuals get a chance to be the change they want to see in the world …....... 21
3. Boundaries to be established, Privacy …............................................................ 23
4. From ownership to access...........….....................................................................24
Conclusion …................................................................................................................................. 27
References …................................................................................................................................. 28
Abstract:
2
The purpose of this paper is to raise awareness of the fact that the capitalist system is built upon
contradictory hypotheses, that it is destined to fail, and that there are several open source
movements which are emerging. In this paper we put all of these facts together and try to see if the
new system which is forming has what it takes to be the next economic paradigm. Another goal of
this paper is to show what the open source movement will change for humanity and how it can
improve our lives in society. We conclude that open source can be the future economic paradigm,
after we look over the motivation, how to finance its infrastructure, and one concept which could
raise a problem for the open source society, which is the free rider dilemma. We also point out the
changes that it can bring from an environmental point of view and at an individual level.
Keywords: Open Source, Prosumers, Internet of Things, Energy Internet, Logistics Internet,
Capitalism, 3D printing, Clean Energy, Environment, Smart infrastructure, Free Rider Dilemma
Introduction
Today, humanity is witnessing the beginning of the end of a very important stage in its
evolution: the capitalist paradigm. A new phenomenon which rose in the past decades is now
coexisting with, and even replacing capitalism in many fields: the open source movement. As
Jeremy Rifkin says in his masterpiece “The ZERO Marginal Cost Society”, “the capitalist era is
passing...not quickly, but inevitably”. We could ask ourselves what will be the next paradigm, could
it be the open source society? Does it have what it takes? Is it better than the old one? What changes
does it bring in society? In this paper, which is based on Rifkin's book, we will analyze in a first
part some of the aspects of the current paradigm, starting with the paradox within the capitalist
ideology, then some consequences following the adoption of capitalism in many societies around
the globe and finally the rise of the open source movement. In a second part we will have a look at
the most important characteristics of this new movement to see if it has what it takes to be the next
paradigm. Finally in the third part, we will go over the main changes that the open source
movement can bring to society, such as environmental and social changes.
3
I. Current situation
1. The Paradox of Capitalism
The capitalist system is built on an ideology that contradicts itself even in theory: the initial
premise of capitalism is that in order to have an optimum for the society, an entrepreneurial
dynamism of competitive markets is needed to drive productivity up and marginal cost down. 1
According to classical economic literature, the social optimum is achieved when the consumers pay
only for the marginal cost of the goods they buy. Therefore, assuming that this optimum can be
achieved and maintained, the economic agents would have a zero profit. No rational shareholder
would be willing to invest in a business that is not able to provide a return on their investment. In
consequence, economic agents will always be in pursuit of market dominance in order to find
themselves in a monopoly position that would allow them to set prices that are higher than their
marginal costs, which would in turn allow them to have a profit equivalent to a return on the capital
initially invested in the business. This being the case, the famous invisible hand of Adam Smith
would be influenced by the economic agents that are attempting to gain a monopolistic position and
then the “laissez faire” would not lead to the most efficient economy of near zero marginal cost.
This consequence is contradicting the starting hypothesis of the reasoning. In mathematical
analysis, this is called absurd and it shows that there is an inherent contradiction which underlies
capitalist theory. But is it the case in practice as well?
To illustrate this, we'll have a look at the main markets of the United States of America,
which can be considered as a representative model of the capitalist society. The energy market is
very concentrated with three companies sharing the supremacy: ExxonMobil, Chevron, and Conoco
Philips, which are among the four largest companies in the US. On the telecommunication market,
AT&T and Verizon control 64% of the industry, and according to a study published by the federal
government in 2010, in most states, one electricity company controlled 25% to 50% of ownership,
and 5% of the 699 companies control 40% of the country's electricity production. On the
automobile market, four companies are leading: General Motors, Ford, Chrysler and Toyota, who
together own 60% of America's market. If we look at the media, we find that five companies control
54% of the market: News Corp., Google, Garnett, Yahoo and Viacom. 96% of the arcade, food and
entertainment industry is controlled by CEC (Chuck E. Cheese's) Entertainment, Dave and Busters,
Sega Entertainment, and Namco Bandai Holdings. Four companies: Whirlpool, AB Electrolux,
General Electric, and LG Electronics control 90% of the market in the household appliances
1 Rifkin 2014, p.6-7
4
manufacturing industry. And we can observe the same template across every other major sector of
the US economy. The oil industry is the most concentrated, followed by telecommunications and
the electrical power generation and distribution. Three of the four largest shareholding companies in
the world today are oil companies: Royal Dutch Shell, ExxonMobil, and BP. Ten banks are backing
up the huge oil corporations: JPMorgan Chase, Goldman Sachs, BOA, Barclays Capital, USB, and
Wells Fargo securities. They control around 60% of the worldwide investment banking market.
Underneath the financial investors are 500 worldwide traded companies that together sum up
revenues of $22.5 trillion, which represents one third of the world's GDP. All the above mentioned
players are completely and inseparably connected to and dependent on fossil fuel energy, global
telecommunications, and the world's electricity grid for their very existence. According to Rifkin,
“In no other period of history have so few institutions wielded so much economic power over the
lives of so many people”. 2
In practice, we can observe high concentrated markets in the capitalist society and world
wide in the main industries. So we can confirm the inherent contradiction at the foundation of the
capitalist theory through using empirical data from the US and worldwide. In conclusion, a system
that is built on a bad infrastructure is destined to fail sooner or later.
2. Some consequences following the adoption of capitalism in society today
The competitive markets in the capitalist society are characterized by an entrepreneurial

dynamism that drives companies to innovate in order to gain a bigger market share than their
competitors. Innovation is most of the time translated into increased productivity, which is often
attained by automation at the expense of human labor. In his book “The End of Work”, Jeremy
Rifkin says “Fourteen percent of all the factory workers in the world have disappeared in the last 7
years. At this current projected rate, even if you don't increase the intelligent technology (in other
words let's say there is no Moore's Law here) and things just keep going as they are, then you end
mass factory labor within 30 years.” 3 This was happening in 2005, but since then, there have been
some major breakthrough discoveries in fields like bioinformatics, nanotechnologies, genetics, and
robotics. The phenomenon was anticipated by the very influential economist of the twentieth
century John Maynard Keynes in 1930 in his essay “Economic Possibilities for Our Grandchildren”.
Keynes realized that new technologies were increasing productivity and lowering the cost of goods
and services at a remarkable pace. In the same time they were greatly reducing the amount of
human labor needed to produce goods and services. He even introduced a new concept:
2 Ibid., p.54-55
3 Rifkin 2005, “The End of Work”
5
“technological unemployment”. This concept means that unemployment stems from the fact that we
can more and more easily find ways of economizing the use of labor than we can find new uses for
labor. For example, new technological innovations in the tenth and eleventh centuries in Europe
brought water power to the center of economic life. A regular water mill produced two to three
horse power, that could replace the labor of ten to twenty people. Water mills and wind mills were
used in various fields of industry: milling grains, tanning, laundering, creating pigments for paint,
crushing olives and, maybe the most important, the fulling industry. Before the introduction of the
steam power, a regular wind mill was able to produce up to 30 horsepower.4 Keynes added that
technological unemployment, although it might seem bad and not desirable on the short run, could
eventually solve mankind's economic problem. He though that “a point may soon be reached, much
sooner perhaps than we are aware of, when these [economic] needs are satisfied in the sense that we
prefer to devote our further energies to non-economic purposes”5. He saw a future where machines
will work for humanity to provide a myriad of practically free goods and services, setting the
human race free. Men wouldn't need to work to provide basic needs like food, shelter, clothes, or
electricity, and the human mind would be free to focus on evolving, art, research or on the quest of
transcendence. But is the capitalist society structure built in way that would allow the adoption of
this noble idea?
Gandhi said, “The world has enough for everyone's need, but not enough for everyone's greed.”
“When the rate of return on capital exceeds the rate of growth of output and income, as it did
in the nineteenth century (and seems quite likely to do again in the twenty-first century), capitalism
automatically generates arbitrary and unsustainable inequalities that radically undermine the
meritocratic values on which democratic societies are based”, concludes Thomas Piketty in his best
seller “Capital in the Twenty-First Century”. The book was based on empirical data gathered by
Piketty and a handful of other economists; the data gathered allowed him to depict the evolution of
inequality since the beginning of the industrial revolution. Society was very unequal in the
eighteenth and nineteenth centuries in western Europe. Private wealth hindered national income and
was concentrated in the hands of the rich families who were protected by a rather rigid class
structure. The system continued during the industrialization period until the first and second world
wars and the Great Depression disrupted the pattern. Soon after the effects of these shocks faded
away, and the wealth is once again laying claim to national income, with values that approach the
levels last seen before the world wars. One of the main conclusions of his book is that wealth grows
4 Rifkin 2014, p.34

5 Keynes 1930
6
faster than economic output. The idea is that the rate of return to wealth is bigger than the economic
growth rate. All other things staying the same, faster economic growth will hinder the importance of
wealth in a society, and slower economic growth will increase it. Another hypothesis is that there
are no natural forces stopping the steady concentration of wealth. The only things that can stop the
phenomenon are either a burst of rapid growth from technological progress, or government
intervention.6 While a global wealth tax seems like the good solution to counter the inequalities that
the capitalist society has created, adopting and applying it worldwide looks more difficult than
building castles in the air. Could the solution come from technological progress within capitalism?
If we look at the conclusion that Oskar Lange, a University of Chicago professor, drew
about technological innovations in a mature capitalist society, then the solution can't come from
within. The professor concluded that the pursuit of technological innovations to increase
productivity and to lower prices put the system in conflict with itself. In his book “On the Economic
Theory of Socialism: Part Two”, he researched whether the private economic agents would innovate
indefinitely or whether at some point, they have the interest to stop progress. He wrote that when an
entrepreneur innovates in order to reduce the price of goods and services, he achieves a temporary
advantage over competitors that didn't innovate. That implies a depreciation of their investments,
who forces them to react and innovate in return in order to decrease prices and increase
productivity, and so on. This is the case in new markets or maturing industries, but how about in
mature industries where we observed a handful of companies controlling the market? In these
industries, where a few companies acquired a big part of the market and imposed a monopoly or
oligopoly, there is no interest in further innovation. On the contrary, they want to block any progress
in order to protect the invested capital. “When the maintenance of the value of the capital already
invested becomes the chief concern of the entrepreneurs, further economic progress has to stop, or
at least, to slow down considerably. […] This result will be even more accentuated when a part of
the industries enjoy a monopoly position”, said Lange in his research. Within the mature industries
appears a struggle between the leaders of the market who seek to deter entry of new companies and
technological innovations. But stopping new, more efficient technologies stops capital from shifting
to new profitable investments and the economy is put off until new entrepreneurs succeed in
breaking through. Lange writes: “The stability of the capitalist system is shaken by the alternation
of attempts to stop economic progress in order to protect old investments and tremendous collapses
when those attempts fail”.
6 Piketty 2013
7
3. A new movement emerges: The Open Source Economy
Let me begin by giving a definition of paradigm, and for that I will take the one that
Thomas Kuhn gave in his book “The Structure of Scientific Revolutions”: a paradigm is a system of
beliefs and assumptions that operate together to establish an integrated and unified world view that
is so convincing and compelling that it is regarded as tantamount to reality itself.” 7 That implies
that, once accepted, it's very difficult, if even possible, to question its hypotheses, that appear to
mirror the natural way of things. Once a paradigm is accepted, any other opinion of the world or
how society should be is rejected, and, if its central assumptions are inconsistent or wrong, then this
leads to problems in the society that pile up until a peak is reached and the existing paradigm is
replaced by the next one that most probably can solve the main problems of the existing one.
“The capitalist era is passing...not quickly, but inevitably. A new economic paradigm – the
Collaborative Commons – is rising in its wake that will transform our way of life.” This is the
beginning of Jeremy Rifkin's book, “The ZERO Marginal Cost Society”. We are already living in a
hybrid economy, where capitalist markets and Collaborative Commons are sometimes competing
and sometimes coexisting. The capitalist paradigm is now threatened from two sides.
First, there is a new generation of interdisciplinary education that unites together fields that
were separate not long ago. This new phenomenon fuses ecological sciences, chemistry, biology,
engineering, architecture, urban planning and IT, and standard economic theory is being questioned
in the sense that classical and neoclassical theory considers the dynamics that govern Earth's
biosphere as mere externalities to economic activity. All economic activity is generated by taking
raw materials and energy from nature and transforming them into goods and services, which are
being used, and then recycled back into nature with an increase of entropy. “The entropic bill for the
Industrial Age has arrived”, writes Rifkin, referring to the accumulation in carbon dioxide emissions
in the atmosphere and the destruction of the Earth's biosphere.
Second, and the subject of this paper, a powerful emerging technology platform is evolving,
built on the congregation of the Communication Internet with the relatively new but revolutionary
Energy Internet and Logistics Internet. This intelligent new infrastructure is called the Internet of
Things and is giving rise to a third industrial revolution. The Internet of Things is already driving
productivity up to a point where the marginal cost of producing goods and services is next to zero.
The consequence is that corporate profits are in decline and an economy based on scarcity is slowly
being replaced by an economy of abundance. Could this be the beginning of the world that Keynes
predicted?
7 Kuhn 1962
8
As we've seen in the first part of this section, advances in productivity causes goods and
services to be produced at near zero marginal cost and at the optimum level of productivity. We've
seen that there was a contradiction at the core of the capitalist system and that leaders of the market
would try to prevent the prices to approach zero and this wouldn't allow the future which Keynes
predicted. But is it possible to have an advance in productivity that drives marginal cost near zero
without the forces that stop prices from being equal to marginal cost and to reach the optimum for
society?
The open source paradigm could make it happen. The open source movement reaches
several fields, but for a better understanding, we will take a look at the software business model
because it's the most popular. The Open Source development model radically changes the
approaches and economics of traditional software development in the sense that the software is
being developed for free by a community of programmers that voluntarily work for the
improvement of the software. All the source code is made available online and everyone is free to
participate and improve it.8
In their paper “Some simple economics of Open Source”, Josh Lerner and Jean Tirole were
writing in 2002 that in the past two years there had been an important growth of the open source
software. Significant investments have been made in open source projects; major corporations like
Hewlett Packard, IBM, and Sun have launched projects to develop open source software. Linux
adoption has a 200% annual growth and is becoming a potential challenger for Microsoft Windows.
The quality of some open source products surpassed other equivalent proprietary products of their
huge competitors, like the Apache web server for example. In the paper, Lerner and Tirole observed
that “The collaborative nature of open source software development has been hailed in the business
and technical press as an important organizational innovation.” 9 As we can see, a collaborative
movement created by a community of people that have the same interests can create a successful
new business model that can compete with the old vertically integrated capitalist model. But is it
possible in other areas or is the rise of the software open source movement a unique phenomenon?
A very important field that concerns us all is energy. The way energy was harnessed from
the earth during the first, and especially the second industrial revolution, has created huge
environment problems. Awareness is higher than ever and governments around the world started to
take measures to promote the adoption of clean renewable energies at individual and community
levels. Like the software movement in the last decades, the renewable energy technology is
experiencing an exponential growth. Not only are the governments subsidizing the production and
installation of clean energy but also the banks are lending money more easily and at lower interest
8 Hars, Ou 2001
9 Lerner, Tirole 2002
9
rates to people that want to invest in related projects because they know that once the initial
investment is recovered, the marginal cost of producing energy is almost zero and the extra revenue
can be used to pay back the loan. Just like in the Communication Internet, the big obstacle to
overcome is the initial investment needed to set up the infrastructure. After that, the cost of
producing solar or wind related energy is nearly zero. A new revolutionary phenomenon is surging
from the merger of Internet technology and renewable energies. According to Rifkin, Energy
Internet will allow hundreds of millions of people to produce their own renewable energy in their
homes or workplaces and share it with each other over the grid just as we now share information on
Internet.
We might ask ourselves if Moore's Law applies to solar energy like it did for processors in
the past. The answer is affirmative according to an article published in 2011 by the Scientific
American. Moore's Law is translated by the fact that processor speeds, or overall procession power
for computers, will double every two years. Gordon E. Moore, co-founder at Intel Corporation,
described this trend in his paper in 1965 10, and empirical data shows that his predictions were
accurate. If the same pattern is applying to solar photo-voltaic cells, solar energy will be as cheap as
the current average retail price of electricity today by 2020, and only one half of the price of what
we pay for coal electricity by 2030.11
Figure 1. “The evolution of the price of Solar Photo-Voltaic Cells”
10 Moore 1965
11 Naam 2011
10
Figure 2. “Surface Area Required to Power the World with Solar Panels alone”
The Germans are pioneers in the clean energy field. In 2013, Germany had 23% of its
electricity from renewable energy and it's expected to rise to 35% by 2020. They faced a very
unusual phenomenon in some periods of the day when the demand of electricity is lower: there was
an excess of electricity in their grids that implied negative prices. Negative prices for electricity has
shown up in other places around the world like Sicily or Texas. This changes everything for the
energy industry, in the sense that there is no incentive to build coal or gas powered plants and the
ones that are already built will soon lose their advantage. The result is that fossil-fuel powered
plants are starting to be replaced by clean energy.
Figure 3. “Surface Area Required to Power the World with Wind Power alone”
11
We've seen the open source software and energy models are in place and have big potential,
what about manufacturing? Is there a technology that could allow manufacturing to become open
source?
Maybe the most revolutionary technology of the past decades is 3D printing. It allows the
3D printer or industrial robot to disintegrate plastic, metal or other materials, into smaller particles,
and build up a physical object, layer by layer. The printer can produce mostly anything, from
jewelry to human prostheses or cars by using computer software to tell the printer what to create.
Surprisingly (or not) the early adopters of the 3D printing have tried to keep the software open
source. So anyone can take the source code of an object and improve it. Like in the case of energy,
the only obstacle in the way of producing nearly free goods is the initial cost of the printer and the
cost of electricity for running the printer which we'll look into in the next section.
Another important aspect to be considered in order to validate a new paradigm is education.
The system of education which we have today has a lot of problems, and it is very important to
understand how the educations system is going to look like in the new paradigm. The open source
phenomenon has deeply penetrated into the higher education system in the last couple years. In the
capitalist system, student are taught how to execute orders, to be skilled workers that excel in their
field. The open source education is teaching students how to think, because they will need to use
their creativity to tell machines what to make. Education is now becoming available to everyone in
the world for free. Classrooms around the world are connected in real time via Internet, debates are
taking place more than ever on forums or Skype.
It all started when a Standford University professor, Sebastian Thrun offered a free course
about artificial intelligence online. The content of the class was the same as the one he was teaching
at university where attendance was around 200 students. The result was that 23 000 of the 160 000
students enrolled from nearly all the countries in the world graduated the course. 12 After this
experiment, for-profit online universities like Coursera were founded, as well as non-profit online
universities like EdX, which was founded by a collaboration between Harvard and MIT. The
difference between the classical universities and the online ones is the motivation of students. A
journalist from The Guardian, Carole Cadwalladr, who enrolled in Coursera online class,
Introduction to Genetics and Evolution wrote: “The traffic is astonishing. There are thousands of
people asking – and answering – questions about dominant mutations and recombinations. And
study groups had spontaneously grown up: a Colombian one, a Brazilian one, a Russian one.
There's one on Skype, and some even in real life too. And they are so diligent! If you are a vaguely
disillusioned teacher, or know one, send them to Coursera: these are people who just want to
12 Cadwalladr 2012
12
learn”.13 Students who just want to learn will always have better results than people that are just
motivated by the degree which would allow them to get a good paid job, how we often hear among
our colleagues at university.
We've seen many open source phenomenas that coexist or compete with the capitalist
economy. But do they have what it takes to be the next economic paradigm?
13 Ibid.
13
II. Does Open Source have what it takes to become the next paradigm?
1. Firms and markets replaced by communities, From Consumers to Prosumers
If we put all the pieces together, we have the source of energy, which can be the sun or the
wind, we have the communication Internet which allows us create and distribute information almost
for free, and if we mix the two together we get Internet Energy that allows everyone on the planet to
create its own free energy that can be shared through the grid. The grid can be used to power up the
manufacturing through 3D printing. A working system needs three things in order to work: a source
of power, a communication and a distribution mechanism. In the capitalist system, this was
translated through firms and markets. A firm needs an invention, a production site, a distribution
chain, and eventually communication to reach the customers. In the open source society, once the
energy grid is set up and most of the people are equipped with 3D printers, the only thing that's
needed is the invention. The new system of education can allow people to focus more on areas they
are passionate about, and less on getting a degree that would allow them to get a well paid job even
if it's in a field that they don't really like. Once the invention is there, it can be translated into open
source software that will be uploaded online for everyone to use or improve. Then every single
person that owns a 3D printer will be able to connect to the Internet Energy grid and produce goods
almost for free.
The buyers and sellers from the capitalist market are going to be replaced by prosumers 14,
property rights will give way to open source sharing, access will be more important than ownership,
markets replaced by networks, and the marginal cost of producing energy, information, teaching
students and manufacturing products is going to approach zero. In the new paradigm, firms and
markets are replaced by prosumers inside communities which will respect the environment and
collaborate in order to preserve the resources of the commons. It's hard to imagine such of society,
but it's possible and it exists already.
For example, the small village or Torbel, Switzerland which has a population of 600 people,
is one of the examples of successful commons that exists for more than 800 years. The families
farm their own plots, producing vegetables, fruits, grains and hay to feed the animals. The village
has a covenant agreement dating since 1483 that is updated and improved periodically every since.
The agreement is about how to govern the commons to maintain the forests, wastelands, irrigation
systems, lanes and roads and the grazing meadows. One of the first restrictions of the agreement
says that every citizen can send to the mountain for summer grazing the number of animals that he
14 Consumers who produce their own goods.
14
can feed during the winter. The commons association meets every year to discuss the governing,
review rules, and to elect governing officials. They can impose fines, organize and maintain roads,
repair infrastructure and collect fees for the work they've done. The fees are proportional with the
number of animals owned. The association is responsible with the marking and cutting of the trees
necessary for heating or construction. Each household is independent, but common infrastructure
like barns or granaries do exist.
Torbel is not the only example of successful collaborative communities. More than 80% of
the Alpine region of Switzerland is managed by a mixed system of private property for agriculture
and commons for the use of the wasteland forests and meadows. 15 This shows us that a society
organized in small collaborative communities has worked and can be successful. This model can be
adapted to the open source society, but the central question that arises when we are trying to find
out if the open source can be the next paradigm is money. How is the infrastructure going to be
financed?
2. How to finance the infrastructure?
We have seen that when the infrastructure is set in place the marginal cost is nearly zero, but
are the fixed costs necessary to set up the grid reasonable? Who is going to pay for them?
The infrastructure needed to build the open source society belongs to the non-rivalrous
category of goods because like roads, bridges, sewage systems, railroads lines, electricity grids,
these goods are used for conduction all other economic activity and require significant capital
investment. These types of goods favor natural monopoly because the fixed costs are very
expensive and it would be a huge waste of resources for a competitor to build them. The big risk
here is that corporations, who have a lot of money and power, seeing the huge potential in securing
control over the Internet of Things, will manipulate regulatory policies and other legislation and
gain monopoly position over the infrastructure. To find the best financing model for the
infrastructure that would enable a zero marginal cost society to exist, we have to look back in time
so we don't repeat the same mistakes again. During the first and second industrial revolutions, even
though the government has subsidized the building of the infrastructure as well as the industries that
grew up around it, private capital managed to seize control of the infrastructure and the legislative
and executive bodies that regulated it, especially when Reagan in the US and Thatcher in the UK
started privatizing all public enterprises, which continued for 30 years. This model was adopted by
many countries all around the world. Today the situation is a slightly different, the financing of the
15 Ostrom 1930
15
Internet of Things doesn't come from corporate shareholders, but from consumers and taxpayers.
The Internet has already connected 2.7 billion people that paid for the infrastructure by paying the
Internet subscription to their Internet providers.16 How about the energy grid?
The energy grid is mainly financed by consumers that choose to adopt the clean energy,
backed up by governments who stimulate research and development of new technologies and
subsidize the price of clean energy. A very important force that helped advancing the adoption of
green energy is the feed-in tariff. This means that adopters of green energy can sell for a price
higher than a market price for periods varying from 15 to 20 years. This premium price encouraged
the adoption of wind, solar, geothermal and biomass renewable energy throughout the world. In
consequence, there was an industry which was created, and entrepreneurs invested in new
technologies in order to innovate and increase the efficiency of harnessing energy. Increased
efficiency lowered the prices until they got close to fossil or nuclear energy. The feed-in tariffs are
founded either by increasing the price of everyone's monthly electricity bill, or from taxes.
Increased awareness of the public has made consumers install their own solar or wind panels. While
the initial capital required for the installation is quite important, low interest green loans from the
banks started to appear. The lenders offer loans quite easily because of the premium in selling green
energy to the greed ensures them that the loan will be paid.
For example in Germany, 40 percent of the renewable energy capacity is owned by
individuals.17 That's nearly half of the country's capacity. This shows that consumers are becoming
prosumers and are participating to finance the infrastructure. Non-profit organizations that use Web-
based crowd-funding to install solar panels on roofs are also helping build up the infrastructure.
Other non-profit organizations in underdeveloped areas like villages in India where there wasn't any
electricity at all, can install micro grids capable of generating electricity for the small villages. Once
enough areas are going to be connected to the grid, electricity won't be a concern for humanity.
Deutsche Telekom is already testing Energy Internet in six regions of the country, and other utility
companies are currently installing hydrogen and other storage technologies across the transmission
grid. Daimler is establishing a network of hydrogen fueling stations across Germany in preparation
for the company's launch of fuel-cell vehicles in 2017.18
In the US, the old electricity transmission lines are still above ground, most of them hanging
on wood decaying poles. More and more brownouts and blackouts across wide areas in America are
happening because of the winter snow storms, torrential spring storms and floods due to the climate
change in the last decades. This costs Americans at least $150 billion every year. The US
16 ICT 2013
17 De Cleercq 2013
18 Daimler 2013
16
government recently took measures to invest almost $8 billion to modernize the grid. Installing a
secure, digitalized, distributed smart grid underground would dramatically reduce electricity losses
while increasing the efficiency of electricity transmission. The communication-energy infrastructure
of the first and second industrial revolutions were financed through a combination of private and
public investment. A part of the cost will be supported by the customers under the form of higher
charges, the rest of the costs will be absorbed by the local, state and federal governments in the
form of subsidies, incentives and allowances. Fourteen other countries are currently implementing
smart grids, and in the majority of cases, the Energy Internet is being financed by raising the
electricity bill to consumers and by taxes paid by the people and firms.19
The prices of 3D printers are getting lower and lower in a exponential manner. For example
the first low-cost 3D printer was $30 000, while today's high quality 3D printers can be found for
$1500. 3D printers can print their own spare parts, they are using recycled, non polluting materials
and they can be plugged in anywhere where there is a third industrial revolution and Internet Energy
in place.
We've seen that financing the open source infrastructure is possible, but how about the
motivation of the prosumers? Why would they want to participate?
3. Motivation
What motivates individuals has been a topic of interest for many researchers. They found
many classifications of what motivates people but the ones that apply to the open source context are
best classified as intrinsic and external factors. Programmers are being motivated by the feeling of
competence, satisfaction and fulfillment that arises from writing programs. Another aspect of
intrinsic motivation is altruism. Open source programmers provide something for the community at
the expense of their time and energy. Altruism is an important drive that motivates the open source
programmers to participate in projects. Altruism can be extended into community identification, the
need of belonging and being loved, as Maslow put it. The prosumers may identify themselves as
part of the open source community, and work for a common goal. They would put their time and
skills to service of the community by participating in open source projects. Open source prosumers
may be motivated by external factors as well. The majority of open source programmers are not
getting paid for their contributions directly. But they may be rewarded indirectly by increasing their
skills or portfolio, or by selling related products or services. Participating in an open source project
that has a good potential of success can be viewed as an investment for future returns. For example,
19 Rifkin 2014
17
a programmer may choose to participate so he can demonstrate how good he is in order to get a
good job afterwards. Another source of motivation can be recognition, open source programmers
receive feedback about the quality of their work, this shows them that the community is using their
contribution. Programmers have personal needs for software and that can be an important
motivation for teams to form and work together for projects that suit their needs. That's how the
famous Apache server was born.20
In the empirical study made by Alexander Hars and Shaosong Ou in their paper “Working
for free? Motivations of Participating in Open Source Projects”, 16.5% of the participants rate high
on altruism, almost 30% of them identify strongly with the open source community, 70.9% of the
participants said that they are doing it to improve their programing skills and only 13.9% do it to
sell related products and services.
Motivations for participation in open source projects are very complex. Internal factors like
the joy of programing and the identification with a community play an important role, but external
factors are more important according to this study. A key factor which did not receive enough
attention is the need for specific software, and important factors that make programmers participate
in open source projects are self-improving and self-marketing for future monetary rewards.
How about the free rider problem? Why would everyone have an incentive to contribute to
open source projects if they can just benefit for free?
4. The Free Rider problem
Non-excludability of goods leads directly to perhaps the most important dilemma for the
collaborative paradigm: The Free Rider problem. The question that arises is how to motivate users
to contribute rather than free ride?
One possible answer to the question is simple: there's no need to motivate users, open source
software projects seem to develop without any effort to encourage contributing over free riding. The
simple fact of posting a goal on a website like Sourceforge.net is enough as an incentive to get the
contribution of other users interested in the same project. For example, when Linus Torvalds, a
student in Finland, wanted to create his own operating system that could run on his PC that had a
386 processor, he just posted a message to the USENET newsgroup comp.os.minix 21the following
message: “Hello netlanders, Due to a project I'm working on (in minix), I'm interested in the posix
standard definition. Could somebody please point me to a (preferably) machine-readable format to
the latest posix-rules? Ftp-sites would be nice.” In return he got messages with Posix rules and
20 Hars, Ou 2001
21 Wayner, 2000, pg 55
18
people expressing interest in his project. The project was to create a free operating system that
replaced the expensive “minix”, at that time $150. The project transformed into Linux one year later
in 1992, and today it has an important number of users and developers. For similar examples see the
website www.freecode.com.
The Game Theory approach of the Free Rider dilemma says that for an unlimited multi-
round Prisoner's Dilemma game there can be another Subgame Perfect Nash Equilibrium in which
players have an interest to collaborate as they get a higher reward than in the case where they
deviate.22 In fact, the sum of the payoffs for collaborating is bigger than the sum of the payoffs for
deviating in each game. In this case, players have an incentive to collaborate and therefore the total
social welfare is bigger. Applied to open source, it means that it would be better to convince
participants in a collective action project based on long-term cooperative relationships. In order to
apply game theory in this case, the reward for collaborating needs to be higher than the reward for
free riding. Is it the case?
As we've seen in the section about the motivations of open source contributors, there are a
series of intrinsic and exterior reasons why they choose to collaborate. When programmers accept
to participate in a project, they have to use their problem solving skills to create new code. Once the
code is freely revealed online, it becomes a public good. Besides learning and enjoyment, a sense of
“ownership” and control over their work product is developed.23 We already mentioned the future
rewards, recognition and the feeling of belonging. Even though all these rewards are difficult to
quantify and translate into numbers needed for game theory models, it's clear that the value of these
rewards is positive. The free rider has no reward of this kind, he just uses what others create.
Therefore we can assume that the hypothesis mentioned above is true and game theory can be
applied to draw a conclusion.
Both game theory and empirical examples show us that the free rider problem doesn't apply
in the case of open source software. We cannot conclude about the the other aspects of the open
source paradigm for the moment.
22 Axelrod 1984
23 Hippel, von Krogh 2002
19
III. What does it change in society
1. Environment
Maybe the most important aspect of conventional economy that needs review is the
environmental issue. What classical economy fails to comprehend is that in the universe, the total
amount of energy is constant and that it is just changing form: from available to unavailable. The
laws of thermodynamics state that “the total energy content of the universe is constant and the total
entropy is continually increasing”.24 The first law means that since the beginning of time, the
amount of energy has remained constant, the second law implies that energy is continuously
changing form, from available to unavailable. It means that it's changing form from hot to cold,
concentrated to dispersed, ordered to disordered. For example, when you burn a piece of coal, the
amount of energy stays the same but it disperses into the atmosphere in the form of different gases,
that can't be used in a useful way. Economic activity uses available energy from nature and
transforms it into goods and services, that we use and discard back into the nature with an increase
in entropy. Whatever kind of energy needed to do that is used and then lost. Scientists showed that
there is never a net gain of energy related to economic activity, but always a loss. Today we live to
see the effects of this related to the Industrial Age. The accumulation in carbon dioxide emissions in
the atmosphere from burning huge amounts of carbon energy has caused climate change and the
destruction of the Earth's biosphere. The existing economical model is questioned by Jeremy Rifkin
in his book “The Third Industrial Revolution”, in the chapter “Retiring Adam Smith”. A new model
that uses energy more efficiently is needed. The Open Source Society has exactly what it takes for
that purpose. The Energy Internet uses free solar, wind or biomass energy to power up its needs.
Smart sensors can be installed in every household to redirect and distribute the energy efficiently.
The 3D printing uses free energy from the grid and recycled raw materials to build things. The
human race has the chance to live in harmony with the environment and an obligation to reverse the
harm done by using fossil energy to power up the first and second industrial revolutions.
24 Kuhn 1962
20
2. Individuals get a chance to be the change they want to see in the world
The Athenian civilization that is seen as the Golden Age of the Greeks is widely believed to
be the ideal for most western cultures. 25 In their society, providing basic needs for all its members
was a necessary condition and prerequisite for humanity before focusing on more meaningful
purposes. They thought that while there is still hunger or poverty in the world they can't evolve and
dedicate their lives to higher purposes. In Plato's Republic, the richest citizen of the society couldn't
possess five times more than the poorest citizen. Once poverty and inequalities eliminated, the
members of society were free to grow and to evolve. The open source society is getting us closer to
this ideal by first feeding, sheltering and schooling everyone on the planet. Once this step is
acquired, everything will be a lot easier and humanity will be free to grow into a better civilization.
In the same way that someone that is part of an orchestra that plays a beautiful play achieves
a bigger satisfaction if the play is shared with many people, than if that person listens to the play
alone, the member of the open source community will achieve a higher satisfaction and a sense of
recognition when he puts his skills at the service of the community.
Man in the ancient Greek society dedicated his energy to creating beautiful things. The idea
is that men can dedicate themselves to art after the basic needs of everyone, like food and shelter,
are satisfied. Why art? Because art resolves disharmonies and inspires the consumers of art to do
the same. In the same way that Shakespeare's Hamlet resolves injustice, that Picasso resolves the
social disequilibrium in his cubic painting by organizing disharmony in a harmonious way, mankind
can resolve the ugly disharmony in the world, the inequalities, the hunger, the pollution, the
deforestations. The open source community has the power to do that, first by providing basic needs
for everyone like free energy, shelter and food, and then focus on the meaning of life, creation, or
gradually resolving the remaining disharmonies in society to tend to a perfect world. Both in the
capitalist and in the open source economy the goal is to invent and produce beneficial goods and
services for human beings and especially for those who are disadvantaged. The capitalist
entrepreneur is concerned too much about surviving the merciless competition, and the consequence
is that its purpose shifts into the mere creation of a successful business regardless of what he
produces. The open source community will produce what's needed for society since profit, or return
on capital, are not an issue.
“What was the good of industrial development, what was the good of all the technological
innovations, toil, and population movements if, after half a century of industrial growth, the
condition of the masses was still just as miserable as before, and all lawmakers could do was
25 Allinson
21
prohibit factory labor by children under the age of eight?”, says Thomas Piketty in his “Capital in
the Twenty-First Century”. On a global scale, capitalism didn't improve the way of life of a big part
of the world, which lives in poverty and hunger. Aristotle considers profit making wrong because in
order to make profit, one man has to take it from another man. One man's gain is another man's loss.
According to him, pursuing profit misdirects man away from true human happiness. Even though
western civilizations value the Athenian society, they all adopted a system based on profit
maximization where individuals are alienated and in competition with each other, a system based on
fear and greed. Kofi Anan said that “ Cooperation and partnership are the only routes that offer any
hope for a better future for all humanity.”
All these ideas can be found in the open source society. Gandhi's ideal economy starts in the
local village and then extends onto the world. Take the Republic of Plato, apply it to the model
village of Torbel, give it Energy Internet and 3D printers and what you get is a small, but complete
and self sufficient republic, independent of its neighbors for its vital needs but still interdependent
for other needs. Gandhi says that “independence must begin at the bottom...every village has to be
self-sustained and capable of managing its affairs even to the extent of defending itself against the
whole world.... This does not exclude dependence on and willing help from neighbors or from the
world. It will be a free and voluntary play of mutual forces.... In this structure composed of
innumerable villages, there will be ever widening, never ascending circles. Life will not be a
pyramid with the apex sustained by the bottom. But it will be an oceanic circle whose center will be
the individual.... Therefore the outermost circumference will not wield power to crush the inner
circle but will give strength to all within and derive its own strength form it.” 26 In this society each
individual is important, just as in Adam Smith's classical economic theory, but the difference is that
instead of pursuing his or her own self-interest the individual pursues the interest of the whole
human race.
Open source can bring the paradigmatic change where the economics of private goods built
on scarcity of resources are replaced by the economics of abundance and efficient use of Earth's
resources where every individual contributes something.
26 Gandhi
22
3. Boundaries to be established, Privacy
A smart planet comes with a great sense of responsibility. If humanity will create smart
cities all around the world, it has to create the first smart-infrastructure revolution in history. The
infrastructure will connect every machine, business, residence, vehicle in an intelligent network
composed of a Communication Internet, Energy Internet, and Logistics Internet, all encapsulated in
a single operating system. To make this system efficient, smart sensors at every level of this
infrastructure are needed. In the United States alone, 43 million digital smart meters that provide
real time information of electricity use are now installed. It's estimated that within 10 years every
building in the United States and Europe will be equipped with such a device. In 2007, there were
10 million sensor connection devices owned by humans which were connected to the Internet of
Things. By 2013, the number of these sensors was around 3.5 billion, covering almost every device
that we use: TVs, washing machines, computers, thermostats, assembly lines, warehouse
equipment, aerial sensory technologies, software logs, radio frequency identification readers,
wireless sensor networks.27 All these sensors are feeding data continuously to the smart
infrastructure, and by using prediction algorithms and automated systems, this will improve their
thermodynamic efficiency, increase their productivity and reduce their marginal cost to near zero.
Predictions say that in the next ten years, 2 trillion devices will be connected to the Internet. These
numbers are a bit scary, and privacy issues are already a concern for a big number of people while
more and more companies are paying a lot of money to get information about consumers. When
every human being will be connected to the smart infrastructure, what boundaries will need to
established to ensure that an individual's right to privacy will be protected? In the Internet age, third
parties, with high and sophisticated skills can penetrate the network in search of information that
can be used for marketing. The problem translates into how to ensure an open, transparent flow of
data that can benefit the community while guaranteeing that the information is not used without
permission and against the will of its members. The European Commission has established a wide
principle to guide all future developments of the Internet of Things. For them privacy and data
protection are complementary requirements for Internet of Things services and they proposed that
mechanisms be put in place to ensure that no unwanted processing of data takes place and that
individuals are informed of who and for what purposes is using the data. I am aware of the
difficulty of turning theory into practice when it comes to information over the Internet, but I'm
confident that the European Commission together with the best experts, members of business
associations, civil society organizations and academia will find the way.
27 Rifkin 2014 pg 73
23
4. From ownership to access
Private property is one of the main characteristics of the capitalist paradigm. The classical
economic belief is that human nature is driven by autonomy and mobility and that every person
wants to be sovereign over a domain. Americans have associated the idea of freedom with
autonomy and mobility and its associated symbol is the automobile. In many regions of the world,
more people own more automobiles than they own homes. The automobile gives us the possibility
to travel freely anywhere and represents physical freedom for any automobile owner. But that's only
an illusion. As we can see in “The Spirit Level”, Wilkinson and Pickett have shown that in countries
that are very liberal like UK and USA, social mobility is very low, while in more social countries
where inequalities are lower mobility is much higher. In the capitalist era, humans came to define
freedom in negative terms as the right to exclude. 28
Figure 4 . Social mobility is lower in more unequal countries
However, the Internet generation came to define freedom in a positive sense, as the right to
share or include others. Freedom means the capability to optimize one's life. Freedom is measured
more by access to others in free networks than ownership in property markets. Having access to
social spaces like Facebook and sharing beliefs with the community or with groups that share the
same interests give one's life meaning. For example, in a survey of drivers aged between 18 and 24,
28 Ibid. chap 13
24
46% said that they would choose access to the Internet over owning a car. 29 There is a whole
generation of young people that prefer access over ownership when it comes to automobiles. Car
sharing has become a very popular phenomenon throughout the world. People have founded non-
profit organizations and auto-clubs in which they pay a small membership fee that allows them to
have access to automobiles when they need them. Members reserve the cars in advance over the
Web or with a smart phone app. Car sharing not only reduces the number of cars in circulation but it
reduces the carbon dioxide emissions in the sense that people are only going to use a car if they
really need it. Other currents like bike sharing, flat sharing and coach sharing are more and more
popular. For example, Airbnb and HomeAway are among the many start-ups that are connecting
millions of people who have homes to rent. Airbnb went online in 2008 with 110 000 available
rooms listed and after only three years they have 1000 rooms every day.30 The growth is exponential
like for many other open source businesses.
Toy rentals have enjoyed success in the last period. Parents know that children usually get
tired of their toys pretty fast and they choose to pay a small subscription to a company that ships
them four to ten toys per month after sanitizing them according to the appropriate health safeguards.
A positive outcome is that the children learn that a toy is not a possession to own but a pleasant
experience to enjoy.
ThredUp is another popular redistribution organization. They point out that in average
children change more than 1360 articles of clothing before they are 17. The principle is that, when
the child outgrows his clothes, his parents takes a bag and sends it to ThredUp that finds another
home for the cloths. When that happens, the family received a credit that they can use to get other
clothes for the child. These sharing based economic models are benefiting society in so many ways.
29 Ibid. p.226
30 Upbin 2011
25
Conclusion
To see if Open Source can be the future economic paradigm, we analyzed in a first part the
current paradigm and some of its biggest issues. We saw that at its optimum, the capitalist economy
contradicts its starting hypotheses, and in mature markets we always observe a high concentration
of firms controlling the markets instead of competitive market that would bring maximum social
welfare. We saw market failures such as huge inequalities caused by differences between the return
on capital and the growth of output and income. Another market failure is shown when market
leaders in mature sectors stop innovation to protect their capital. From the problems of a dying
capitalist society, the foundation of a new paradigm is born under the form of separate
phenomenons like: Energy Internet, 3D printing, Online Education and Open Source Software. In a
second part we put to the test some of the key hypotheses that lie at the core of the open source
paradigm's foundation and we underline major improvements that it can bring to humanity if
adopted. The new paradigm looks good when analyzing the finance of its infrastructure and
motivation. There is a lot of work to do when it comes to privacy and security of information. We
saw that it can fix the planet and that it can give power back to the people by letting them
participate in the world they want to live in. Open source can definitely be the next economic
paradigm but it all depends on us.
This paper would have been more exhaustive if I had access to more data. I found a lot of
papers that seemed relevant to my research but I could not access them. The effects of open source
on the marketing and advertising sector were not discussed here because of this reason. Another
limitation of the paper was the limited time available to complete the research. I would have liked to
talk about the good features of the Capitalist system that maybe need to be kept but adopted to the
new paradigm and about the organization of society under the new paradigm. More research should
be done in Internet security and how to make the transition to the new paradigm as there will be a
period where a lot of people will be unemployed and maybe won't have the means to satisfy their
most basic needs.
26
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28
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Licence Economie et Gestion

The ZERO marginal cost economy

Date of the viva: 05 February 2015

Supervisor: Julien PENIN

III. What does it change in society

1. The Paradox of Capitalism

1 Rifkin 2014, p.6-7

2. Some consequences following the adoption of capitalism in society today

The competitive markets in the capitalist society are characterized by an entrepreneurial

4 Rifkin 2014, p.34

3. A new movement emerges: The Open Source Economy

Figure 1. “The evolution of the price of Solar Photo-Voltaic Cells”

1. Firms and markets replaced by communities, From Consumers to Prosumers

14 Consumers who produce their own goods.

2. How to finance the infrastructure?

4. The Free Rider problem

III. What does it change in society

3. Boundaries to be established, Privacy

4. From ownership to access

Figure 4 . Social mobility is lower in more unequal countries

Rifkin Jeremy (2005), “ The End of Work”, Tarcher

Keynes John Maynard (1930), “Economic Possibilities for Our Grandchildren”

Moore E. Gordon (1965), “Cramming More Components onto Integrated Circuits”

ICT Facts and Figures: The world in 2013

“The difference Engine: Chattering Objects”, Economist August 2013

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