Thursday, March 26, 2009

Markets and Hierarchies, and Software

I originally wrote this entry on September 16, 2004, and published it on

Some in the open source community, who may have had a chance to glance through The Cathedral and the Bazaar, will most probably miss that the contrast between "Markets" and "Hierarchies" is nothing new, at least to the institutional and transaction-cost economists. (To be fair, Eric Raymond does briefly mention some papers based on Ronald Coase's work, including some by Harold Demsetz.)

My own understanding of the topic is based on Oliver Williamson's works on Markets and Hierarchies. [I can only say that I was extremely lucky to have a chance to learn more about his ideas in the course of an independent study with Williamson while I was at Berkeley earlier this year. It was a very rewarding experience.]

In fact, I'd very much like to see more applications of Williamson's ideas to Open Source economics and to software economics in general.

In short, there's a place for hierachies and there's a place for markets. As the economy evolves, relations of exchange could be brought into the market or into hierarchies. What matters is transaction costs. Whichever exhange relationship (market, hybrid or hierarchy) reduces transaction costs will be taken up. These ideas are also echoed by Douglass C. North in his investigation of how economic structures evolve.

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