Friday, October 06, 2006

The Hybrid Economy

From the Lessig Blog:

One of the most important conclusions that can be drawn from the work of Benkler, von Hippel, Weber (my review of both is here), and many others is that the Internet has reminded us that we live not just in one economy, but at least two. One economy is the traditional “commercial economy,” an economy regulated by the quid pro quo: I’ll do this (work, write, sing, etc.) in exchange for money. Another economy is (the names are many) the (a) amateur economy, (b) sharing economy, (c) social production economy, (d) noncommercial economy, or (e) p2p economy. This second economy (however you name it, I’m just going to call it the “second economy”) is the economy of Wikipedia, most FLOSS development, the work of amateur astronomers, etc. It has a different, more complicated logic too it than the commercial economy. If you tried to translate all interactions in this second economy into the frame of the commercial economy, you’d kill it.

Having now seen the extraordinary value of this second economy, I think most would agree we need to think lots about how best to encourage it — what techniques are needed to call it into life, how is it sustained, what makes it flourish. I don’t think anyone knows exactly how to do it well. Those living in real second economy communities (such as Wikipedia) have a good intuition about it.

But a second and also extremely difficult problem is how, or whether, the economies can be linked. Is there a way to cross over from the commercial to second economy? Is there a way to manage a hybrid economy — one that tries to manage this link.

The challenge of the hybrid economy is what Mozilla, RedHat, Second Life, MySpace are struggling with all the time. How can you continue to inspire the creative work of the second economy, while also expanding the value of the commercial economy? This is, in my view, a different challenge from the challenge of how you call this second economy into being, but obviously, they are related. But this challenge too is one I don’t think anyone yet understands fully.
Interesting take to split the economy into three parts: commercial, second and hybrid. While the second economy has always existed, as we transition from an industrial economy to a knowledge economy it takes on more prominence. Volunteering is more likely to occur in areas of the economy that are growing like education, science, medicine, the arts and software. As fewer people are employed making goods (currently 22% of workforce) and more are employed providing services (78%), this becomes more important to the overall economy. Economic output in the knowledge economy is determined less by the number of hours worked and more by the amount of human creativity. In this new economic setup, countries with more human ingenuity have higher GDPs than those with more natural resources. Some of the most innovative, dynamic areas of the economy are part of the second and hybrid economies.

Lets take a look at the implications of the hybrid economy from a micro and macro economic perspective.

From a micro economic perspective, how do you make a successful hybrid company?

When you look at Digg, it is almost as if it is a non-profit organization (NPO). Volunteers find articles, write them up and submit them. Other volunteers go through the submitted articles and select the best ones. Still other volunteers add comments on the articles. Then the average user just comes to the site's "front page" and reads the articles and comments that the volunteers have generated, while viewing advertisements on the site and making money for Digg.

The vast majority of hours of work done on Digg and the majority of its value are provided by volunteers. The success of Digg is determined by the quality of the work the volunteer do and how motivated they are to do it. If the volunteers quit or move on to another site, Digg's business goes down the drain.

The paid employees at Digg just handle the core work like software, computer servers, vision and advertising. This is similar to how most of the core work at NPOs is done by paid employees and the rest of the work is done by volunteers. It is almost like Digg is a for-profit NPO. This is the very essence of the hybrid-economy.

To be a successful hybrid company, you have to answer questions that sound more like a non-profit that a business. What are the role of volunteers? Who gets paid and what doesn't? How much of a company can be volunteer-sourced? What is the best environment for them to contribute?

In the hybrid-economy, instead of outsourcing work, now you volunteer-source it. Instead of getting work done for 20 cents on the dollar, now you get it for 0 cents on the dollar.

Such work must be packaged in a way that makes it appealing and meaningful for volunteers. There are all sorts of motivations for volunteering including: learning new skills, padding the resume, displaying a talent, making new friends or gaining status. As the founder of Wikipedia put it, the success of Wikipdiea was in turning the writing of encyclopedia entries into a fun social activity.

For a couple of examples of trying to find the balance between commercial and second economy, Netscape is trying to compete with Digg and is luring Digg volunteers away by offering to pay them. Will this work? Second Life is dealing with commercialization and trying to draw the line of where to put it in order to keep a vibrant second economy going. YouTube is also trying to work through these issues. How/when do content creators get paid for their work? If content is created by other companies like Warner Music, do they get a cut of YouTube's revenue?

One way to look at the hybridization of companies/economies is to determine what percentage of the total hours of work done are done by volunteers. On the high end you have second economy NPOs like Wikipedia and Linux (but even these have paid employees). Then you have the Diggs, YouTubes and MySpaces where most of the effort comes from volunteers, but they are for profit companies. They you have the Amazons and Netflixs where volunteers contribute ratings and reviews that add more value to their products, but most work is done by paid workers. Finally you have the Microsofts and Oracles where little is done by volunteers and almost all is done by paid professionals.

From a macro-economic standpoint, how does the hybrid economy change things?

What is work, what is play? What is production and what is consumption? The framework of having these in separate quadrants that worked well during the industrial economy no longer works for the knowledge economy. If you are adding content to your MySpace page, are you consuming MySpace's product, or are you producing content that will cause others to spend their time on your site and allow MySpace to make money off of advertising? In the hybrid economy lines are no longer so clear.

How do you measure this new economy? What laws and policies do you need in place to make this economy work the best? What is the best balance between the commercial and second economy to maximize the output of the hybrid economy?

GDP as a measurement of the hybrid economy is undervalued as it does not capture the value of volunteer work. There is no value given to Wikipedia. GDP does well at capturing the gains when we have more goods and services, but not so well when the gains come from better goods and services. It misses the increased quality of products purchased due to Amazon ranking and reviews. If you are reading blogs that have no advertising or funding, there is value here but it is not captured in GDP.

I am not sure what the best way to try and capture the value of the second economy is. Maybe you try and figure out what the value the free stuff would be if it was in the commercial economy. Value Wikipedia by comparing it with the value Britancia gives to the economy.

When music files are shared/stolen should their value be added to GDP? This content is actually being consumed by the end user. It has the exact same value as if they had purchased it legally from iTunes, so why not add its value to all other goods and services?

If government is just trying to maximize GDP it misses the value of the economy given by the second economy. As the non-physical economy grows, the value of this missing component grows along with it. GDP and GDP per capita become less accurate as a gauge of total output and well-being.

From an employment standpoint, now that volunteers add value to the hybrid economy, shouldn't their input be counted? There are 150 million people in the civilian work force and they average 6.6 hours of work a day for 990 million hours of work each weekday. There are 300 million Americans. If each person spent 3 hours a day of their free time creating content in the second economy: writing blogs, reviewing books, finding articles, uploading videos to YouTube, or creating music, that would come out to 900 million hours a day. That would almost be a doubling of the workforce. If they just spent 1 hour a day, that would be a 30% increase.

The other key thing from the macro side is figuring out what laws and policies we need to pursue to allow the second economy and hybrid economy to flourish. We need to look at intellectual property laws (IP) not from a perspective of how we can maximize the commercial economy, but how we can maximize the hybrid economy. This will require looking at the length of time copyright, patents and trademarks are issued for. It could mean increasing fair use so people can use other's work without being subjected to IP. It will mean more use of the Creative Commons.

The hybrid economy has different rules from the commercial economy. Businesses get a competitive advantage as they volunteer-source more of their work, but in order to do so they must act more like NPO to attract and motivate their volunteers. Current economic metrics don't accurately reflect the hybrid economy. GDP misses the value of volunteer work. The employment figures don't show volunteer work. The second economy will be growing in importance as the US economy becomes more of a service/knowledge economy. We need to look at how to get our economic metrics to capture the value of the second economy, and look at laws and policies in order to maximize the output of the hybrid economy.


crush41 said...

Economic output in the knowledge economy is determined less by the number of hours worked and more by the amount of human creativity. In this new economic setup, countries with more human ingenuity have higher GDPs than those with more natural resources.

Having both helps.PPP of a few countries that enjoy the best of both worlds:

US - $41,800
Norway - $42,300
UAE - $43,400

Principally you're right. The correlation between IQ and PPP (~ .60 contemporarily) is stronger than the relationship between PPP and any natural resource base (that I'm aware of).

mping said...


Good point. I would argue that GDP per capita becomes a less reliable proxy for standard of living in this knowledge based hybrid economy. So even if GDP is higher in countries with more natural resources it might not actually be a better place to live. Equatorial Guinea at $50,200 would be a good example of this.

I hope to write up more of my ideas on this topic soon.

Anonymous said...

what's the size of the hybrid economy? do we even have guesses? i think the second economy always existed but because of internet's long tail, it's now adding up. 65.4 million people volunteered (in a non-internet way, i presume) last year (and it's value was $18.04/hour).


mping said...


Good question. I don't know the answer to that. Do you value the effort the workers put in? Or do you value the output as people use it? I am not even sure how you would go about calculating such a number. But, it is definitely something I should look into.

Post a Comment

Note: Only a member of this blog may post a comment.