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Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!

they are the last remaining vestiges of pre-capitalist organisation within… capitalism

The miracle of the market, according to Hayek, was that it managed to signal to each what activity is best for herself and for society as a whole without first aggregating all the disparate and local pieces of knowledge that lived in the minds and subconscious of each consumer, each designer, each producer. How does this signalling happen? Hayek’s answer (borrowed from Smith) was devastatingly simple: through the movement of prices

The idea of spontaneous order comes from the Scottish Enlightenment, and in particular David Hume who, famously, argued against Thomas Hobbes’ assumption that, without some Leviathan ruling over us (keeping us “all in awe”), we would end up in a hideous State of Nature in which life would be “nasty, brutish and short”

Hume’s counter-argument was that, in the absence of a system of centralised command, conventions emerge that minimise conflict and organise social activities (including production) in a manner that is most conducive to the Good Life

Hayek’s argument was predicated upon the premise that knowledge is always ‘local’ and all attempts to aggregate it are bound to fail. The world, in his eyes, is too complex for its essence to be distilled in some central node; e.g. the state.

The idea here is that, through this ever-evolving process, people’s capacities, talents and ideas are given the best chance possible to develop and produce synergies that promote the Common Good. It is as if an invisible hand guides Valve’s individual members to decisions that both unleash each person’s potential and serve the company’s collective interest (which does not necessarily coincide with profit maximisation).

Valve differs in that it insists that its employees allocate 100% of their time on projects of their choosing

In contrast, Smith and Hayek concentrate their analysis on a single passion: the passion for profit-making

Hume also believed in a variety of signals, as opposed to Hayek’s exclusive reliance on price signalling

One which, instead of price signals, is based on the signals Valve employees emit to one another by selecting how to allocate their labour time, a decision that is bound up with where to wheel their tables to (i.e. whom to work with and on what)

He pointed out simply and convincingly that the cost of subcontracting a good or service, through some market, may be much larger than the cost of producing that good or service internally. He attributed this difference to transactions costs and explained that they were due to the costs of bargaining (with contractors), of enforcing incomplete contracts (whose incompleteness is due to the fact that some activities and qualities cannot be fully described in a written contract), of imperfect monitoring and asymmetrically distributed information, of keeping trade secrets… secret, etc. In short, contractual obligations can never be perfectly stipulated or enforced, especially when information is scarce and unequally distributed, and this gives rise to transaction costs which can become debilitating unless joint production takes place within the hierarchically structured firm. Optimal corporation size corresponds, in Coase’s scheme of things, to a ‘point’ where the net marginal cost of contracting out a service or good (including transaction costs) tends to zero 

As Coase et al explained in the previous section, the whole point about a corporation is that its internal organisation cannot turn on price signals (for if it could, it would not exist as a corporation but would, instead, contract out all the goods and services internally produced)

Each employee chooses (a) her partners (or team with which she wants to work) and (b) how much time she wants to devote to various competing projects. In making this decision, each Valve employee takes into account not only the attractiveness of projects and teams competing for their time but, also, the decisions of others.

Hume thought that humans are prone to all sorts of incommensurable passions (e.g. the passion for a video game, the passion for chocolate, the passion for social justice) the pursuit of which leads to many different types of conventions that, eventually, make up our jointly produced spontaneous order

Valve is, at least in one way, more radical than a traditional co-operative firm. Co-ops are companies whose ownership is shared equally among its members. Nonetheless, co-ops are usually hierarchical organisations. Democratic perhaps, but hierarchical nonetheless. Managers may be selected through some democratic or consultative process involving members but, once selected, they delegate and command their ‘underlings’ in a manner not at all dissimilar to a standard corporation. At Valve, by contrast, each person manages herself while teams operate on the basis of voluntarism, with collective activities regulated and coordinated spontaneously via the operations of the time allocation-based spontaneous order mechanism described above.

In contrast, co-ops and Valve feature peer-based systems for determining the distribution of a firm’s surplus among employees.

There is one important aspect of Valve that I did not focus on: the link between its horizontal management structure and its ‘vertical’ ownership structure. Valve is a private company owned mostly by few individuals. In that sense, it is an enlightened oligarchy: an oligarchy in that it is owned by a few and enlightened in that those few are not using their property rights to boss people around. The question arises: what happens to the alternative spontaneous order within Valve if some or all of the owners decide to sell up?

under certain structural conditions non-price-based production is extraordinarily robust

There is, in fact, a massive amount of research that supports the idea that when you pay people to do something for you, they stop enjoying it, and distrust their own motivations. The mysterious something that goes away, and that “Factor X” even has a name: intrinsic motivation.

giving rewards to customers can actually undermine a company’s relationship with them

It just is not so easy to assume that because people behave productively in one framework (the social process of peer production that is Wikipedia, free and open source software, or Digg), that you can take the same exact behavior, with the same exact set of people, and harness them to your goals by attaching a price to what previously they were doing in a social process.

Extrinsic rewards suggest that there is actually an instrumental relationship at work, that you do the activity in order to get something else

If you pay me for it, it must be work

It’s what we would call a robust effect. It shows up in many contexts. And there’s been considerable testing to try to find out exactly why it works. A major school of thought is that there is an “Overjustification Effect.” (http://kozinets.net/archives/133)

interesting examples of an effect called crowding

Offering financial rewards for contributions to online communities basically means mixing external and intrinsic motivation.

A good example is children who are paid by their parents for mowing the family lawn. Once they expect to receive money for that task, they are only willing to do it again if they indeed receive monetary compensation. The induced unwillingness to do anything for free may also extend to other household chores.

Once ‘gold-stars’ were introduced as a symbolic reward for a certain amount of time spent practicing the instrument, the girl lost all interest in trying new, difficult pieces. Instead of aiming at improving her skills, her goal shifted towards spending time playing well-learned, easy pieces in order to receive the award (Deci with Flaste 1995)

Suddenly, she managed to follow the prescription, as her own (intrinsic) motivation was recognized and thereby reinforced.

The introduction of a monetary fine transforms the relationship between parents and teachers from a non-monetary into a monetary one

"The effects of external interventions on intrinsic motivation have been attributed to two psychological processes: (a) Impaired self-determination. When individuals perceive an external intervention to reduce their self-determination, they substitute intrinsic motivation by extrinsic control. Following Rotter (1966), the locus of control shifts from the inside to the outside of the person affected. Individuals who are forced to behave in a specific way by outside intervention, feel overjustified if they maintained their intrinsic motivation. (b) Impaired self-esteem. When an intervention from outside carries the notion that the actor's motivation is not acknowledged, his or her intrinsic motivation is effectively rejected. The person affected feels that his or her involvement and competence is not appreciated which debases its value. An intrinsically motivated person is taken away the chance to display his or her own interest and involvement in an activity when someone else offers a reward, or commands, to undertake it. As a result of impaired self-esteem, individuals reduce effort.

External interventions crowd-out intrinsic motivation if the individuals affected perceive them to be controlling

External interventions crowd-in intrinsic motivation if the individuals concerned perceive it as supportive

In that case, self-esteem is fostered, and individuals feel that they are given more freedom to act, thus enlarging self-determination

cultural categories that oppose marketplace modes of behavior (or “market logics”) with the more family-like modes of behavior of caring and sharing that we observe in close-knit communities (”community logics”)

this is labor, this is work, just do it.

When communal logics are in effect, all sorts of norms of reciprocity, sacrifice, and gift-giving come into play: this is cool, this is right, this is fun

So think about paying a kid to clean up their room, paying parishioners to go to church, paying people in a neighborhood to attend a town hall meeting, paying people to come out and vote. All these examples seem a little strange or forced. Why? Because they mix and match the communal with the market-oriented.

Payment as disincentive. In his interesting book Freakonomics, economist Steven Levitt describes some counterintuitive facts about payment. One of the most interesting is that charging people who do the wrong thing often causes them to do it more, and paying people to do the right thing causes them to do it less.

You direct people _away_ from any noble purpose you have, and instead towards grubbing for dollars

When people work for a noble purpose, they are told that their work is highly valued. When people work for $0.75/hour, they are told that their work is very low-valued

you're going to have to fight your way through labour laws and tax issues all the way to bankruptcy

Market economics. If you have open content, I can copy your content to another wiki, not pay people, and still make money. So by paying contributors, you're pricing yourself out of the market.

You don't have to pay people to do what they want to do anyways. The labour cost for leisure activities is $0. And nobody is going to work on a wiki doing things they don't want to do.

No fair system. There's simply no fair, automated and auditable way to divvy up the money

too complicated to do automatically. But if you have a subjective system -- have a human being evaluate contributions to an article and portion out payments -- it will be subject to constant challenges, endless debates, and a lot of community frustration.

Gaming the system. People are really smart. If there's money to be made, they'll figure out how to game your payment system to get more money than they actually deserve

They'll be trying to get as much money out of you as possible, and you'll be trying to give as little as you can to them

If you can't convince people that working on your project is worth their unpaid time, then there's probably something wrong with your project.

People are going to be able to sense that -- it's going to look like a cover-up, something sleazy

Donate.

Thank-you gifts

Pay bounties

personality conflicts

begin to steer direction

more interested and dedicated personalities emerge

work most valued by the rest of the user group

As more members are added, more will experience frustration at limited usefulness or autonomy

stigmergy encourages splintering

as communication is easier and there is more autonomy in smaller groups, splintering is the more likely outcome of growth.

Transparency allows information to travel freely between the various nodes

Information sharing is driven by the information, not personal relationships

it is inefficient to have the same task performed twice

It is neither reasonable nor desirable for individual thought and action to be subjugated to group consensus in matters which do not affect the group

it is frankly impossible to accomplish complex tasks if every decision must be presented for approval