17th level Hacker

Creative Destruction and Open Source

I’ve been reading Creative Destruction recently, and I just wanted to share some thoughts related to the points in the book, particularly with relation to open source. The title of the book is a reference to a concept which apparently seems to stem from Joseph Schumpeter. The idea is that capitalism works not so much because a set of firms competes against each other, but because radically new firms are allowed to enter and force the old ones into extinction. The new firms create a new order, but destroy the old. Critiquing the view held by economists, Schumpeter says:

[Economists hold a view of] competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance) - competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

The book lays down the implications of this view of capitalism, saying that all companies underperform the market in general because they look to preserve the status quo rather than adapt with the times and adopt discontiguous changes. It makes an argument for running innovation within companies more like the way in which venture capital firms manage their money. An excellent point overall, the book makes me do the Happy Dance.

The points raised explain in particular how the open source movement has worked. I think that the Schumpeter theory of creative destruction explains quite succinctly why it is that projects made up of “a bunch of unpaid college students hacking in their free time” could beat the projects carried out by multimillion dollar corporations. The open source projects are allowed to follow “the market” (which in this case is the market of user need, not user money) while projects run by traditional corporations suffer from all the setbacks laid down in the Creative Destruction book. I highly recommend Creative Destruction (Amazon) as a general business book, but I particularly think it will be informative for business people trying to understand open source software. Once the groundwork is laid for why companies underperform the market, it is only a short step to understanding how open source projects with minimal resources can compete with corporate projects allocated orders of magnitude more funding and personnel.