23.1 Wealth and Poverty

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George Gilder laid out the gap between wealth and money in his influential book Wealth and Poverty. The book emerged in 1981 just before Ronald Reagan took office, and it became one of the philosophical touchstones for the early years of the administration. At the time, Gilder's words were aimed at a world where socialist economies had largely failed but capitalists had never declared victory. The Soviet Union was sliding deeper into poverty. Sweden was heading for some of the highest interest rates imaginable. Yet the newspapers and colleges of the United States refused to acknowledge the failure. Gilder wanted to dispel the notion that capitalism and socialism were locked into some eternal yin/yang battle. In his mind, efficient markets and decentralized capital allocation were a smashing success compared to the plodding bureaucracy that was strangling the Soviet Union.

Although Gilder spoke generally about the nature of wealth, his insights are particularly good at explaining just why things went so right for the open software world. "Capitalism begins with giving," he says, and explains that societies flourish when people are free to put their money where they hope it will do the best. The investments are scattered like seeds and only some find a good place to grow. Those capitalists who are a mixture of smart and lucky gain the most and then plow their gains back into the society, repeating the process. No one knows what will succeed, so encouraging the bold risk-takers makes sense.
Gilder's chapter on gift-giving is especially good at explaining the success of the free software world. Capitalism, he explains, is not about greed. It's about giving to people with the implicit knowledge that they'll return the favor severalfold. He draws heavily on anthropology and the writings of academics like Claude L vi-Strauss to explain how the best societies create capital through gifts that come with the implicit debt that people give something back. The competition between people to give better and better gifts drives society to develop new things that improve everyone's life.

Gilder and others have seen the roots of capital formation and wealth creation in this gift-giving. "The unending offerings of entrepreneurs, investing capital, creating products, building businesses, inventing jobs,

accumulating inventories--all long before any return is received, all without assurance that the enterprise will not fail--constitute a pattern of giving that dwarfs in extent and in essential generosity any primitive rite of exchange. Giving is the vital impulse and moral center of capitalism," he writes.
The socialists who've railed against the injustices and brutalities of market capitalism at work would disagree with the strength of his statement, but there are plenty of good examples. The American Civil War was the battle between the northern states where workers were occasionally chained to looms during their shifts and the southern states where the workers were always slaves. In the end, the least cruel society won, in part because of the strength of its industry and its ability to innovate. Companies that discovered this fact flourished and those that didn't eventually failed. By the end of the 20th century, the demand for labor in the United States was so high that companies were actively competing in offering plush treatment for their workers.

The free software world, of course, is a perfect example of the altruistic nature of the potlatch. Software is given away with no guarantee of any return. People are free to use the software and change it in any way. The GNU Public License is not much different from the social glue that forces tribe members to have a larger party the next year and give back even more. If someone ends up creating something new or interesting after using GPL code as a foundation, then they become required to give the code back to the tribe.

Of course, it's hard to get much guidance from Gilder over whether the GPL is better than the BSD license. He constantly frames investment as a "gift" to try to deemphasize the greed of capitalism. Of course, anyone who has been through a mortgage foreclosure or a debt refinancing knows that the banks don't act as if they've given away a gift. There are legal solutions for strong-arming the folks who don't give back enough. He was trying to get readers to forget these tactics a bit and get them to realize that after all of the arms are broken, the bank is still left with whatever the loan produced. There were no ultimate guarantees that all of the money would come back.

Gilder smooths over this with a sharply drawn analogy. Everyone, he says, has experienced the uncomfortable feeling that comes from getting a gift that is the wrong size, the wrong style, or just wrong altogether. "Indeed, it is the very genius of capitalism that it recognizes the difficulty of successful giving, understands the hard work and sacrifice entailed in the mandate to help one's fellow men, and offers a practical way of living a life of effective charity," he writes. It's not enough to give a man a fish, because teaching him to fish is a much better gift. A fish farm that hires a man and gives him stock options may be offering the highest form of giving around.

Gilder does note that the cycle of gifts alone is not enough to build a strong economy. He suggests that the bigger and bigger piles of coconuts and whale blubber were all that emerged from the endless rounds of potlatching. They were great for feasting, but the piles would rot and go stale before they were consumed. The successful society reinterpreted the cycle of gifts as investment and dividends, and the introduction of money made it possible for people to easily move the returns from one investment to the start of another. This liquidity lets the cycles be more and more efficient and gives people a place to store their wealth.

Of course, Gilder admits that money is only a temporary storage device. It's just a tool for translating the wealth of one sector of the economy into the wealth of another. It's just a wheelbarrow or an ox cart. If society doesn't value the contributions of the capitalists, the transfer will fail. If the roads are too rocky or blocked by too many toll collectors, the carts won't make the trip.

At first glance, none of this matters to the free software world. The authors give away their products, and as long as someone pays a minimal amount for storage the software will not decay. The web is filled with source code repositories and strongholds that let people store away their software and let others download it at will. These cost a minimal amount to keep up and the cost is dropping every day. There's no reason to believe that the original work of Stallman will be lost to the disease, pestilence, wear, and decay that have cursed physical objects like houses, clothes, and food.

But despite the beautiful permanence of software, everyone knows that it goes bad. Programmers don't use the term "bit rot" for fun. As operating systems mature and other programs change, the old interfaces start to slowly break down. One program may depend upon the operating system to print out a file in response to a command. Then a new version of the printing code is revved up to add fancier fonts and more colors. Suddenly the interface doesn't work exactly right. Over time, these thousands of little changes can ruin the heart of a good program in much the same way worms can eat the hull of a wooden ship.

The good news is that free source software is well positioned to fix these problems. Distributing the source code with the software lets others do their best to keep the software running in a changing environment. John Gilmore, for instance, says that he now embraces the GPL because earlier experiments with totally free software created versions without accompanying source code.

The bad news is that Gilder has a point about capital formation. Richard Stallman did a great job writing Emacs and GCC, but the accolades weren't as easy to spend as cash. Stallman was like the guy with a pile of whale meat in his front yard. He could feast for a bit, but you can only eat so much whale meat. Stallman could edit all day and night with Emacs. He could revel in the neat features and cool Emacs LISP hacks that friends and disciples would contribute back to the project. But he couldn't translate that pile of whale meat into a free OS that would let him throw away UNIX and Windows.

While Stallman didn't have monetary capital, he did have plenty of intellectual capital. By 1991, his GNU project had built many well respected tools that were among the best in their class. Torvalds had a great example of what the GPL could do before he chose to protect his Linux kernel with the license. He also had a great set of tools that the GNU project created.

The GNU project and the Free Software Foundation were able to raise money just on the strength of their software. Emacs and GCC opened doors. People gave money that flowed through to the programmers. While there was no cash flow from software sales, the project found that it could still function quite well.
Stallman's reputation also can be worth more than money when it opens the right doors. He continues to be blessed by the implicit support of MIT, and many young programmers are proud to contribute their work to his projects. It's a badge of honor to be associated with either Linux or the Free Software Foundation. Programmers often list these details on their r sum s, and the facts have weight.

The reputation also helps him start new projects. I could write the skeleton of a new double-rotating, buzzword-enhanced editor, label it "PeteMACS," and post it to the Net hoping everyone would love it, fix it, and extend it. It could happen. But I'm sure that Stallman would find it much easier to grab the hearts, minds, and spare cycles of programmers because he's got a great reputation. That may not be as liquid as money, but it can be better.

The way to transfer wealth from project to project is something that the free software world doesn't understand well, but it has a good start. Microsoft struck it rich with DOS and used that money to build Windows. Now it has been frantically trying to use this cash cow to create other new businesses. They push MSN, the Microsoft Network, and hope it will stomp AOL. They've built many content-delivery vehicles like Slate and MSNBC. They've created data-manipulation businesses like Travelocity. Bill Gates can simply dream a dream and put 10,000 programmers to work creating it. He has serious intellectual liquidity.

In this sense, the battle between free and proprietary software development is one between pure giving and strong liquidity. The GPL world gives with no expectation of return and finds that it often gets a return of a thousand times back from a grateful world of programmers. The proprietary world, on the other hand, can take its profits and redirect them quickly to take on another project. It's a battle of the speed of easy, unfettered, open source cooperation versus the lightning speed of money flowing to make things work.
Of course, companies like Red Hat lie in a middle ground. The company charges money for support and plows this money back into improving the product. It pays several engineers to devote their time to improving the entire Linux product. It markets its work well and is able to charge a premium for what people are able to get for free.

No one knows if the way chosen by companies like Red Hat and Caldera and groups like the Free Software Foundation is going to be successful in the long run. Competition can be a very effective way of driving down the price of a product. Some worry that Red Hat will eventually be driven out of business by cheap $2 CDs that rip off the latest distribution. For now, though, the success of these companies shows that people are willing to pay for hand-holding that works well.

A deeper question is whether the open or proprietary model does a better job of creating a world where we want to live. Satisfying our wants is the ultimate measure of a wealthy society. Computers, cyberspace, and the Internet are rapidly taking up a larger and larger part of people's time. Television viewership is dropping, often dramatically, as people turn to life online. The time spent in cyberspace is going to be important. 1 Stallman wrote in BYTE magazine in 1986, I'm trying to change the way people approach knowledge and information in general. I think that to try to own knowledge, to try to control whether people are allowed to use it, or to try to stop other people from sharing it, is sabotage. It is an activity that benefits the person that does it at the cost of impoverishing all of society. One person gains one dollar by destroying two dollars' worth of wealth.

No one knows what life online will look like in 5 or 10 years. It will certainly include web pages and e-mail, but no one knows who will pay how much. The cost structures and the willingness to pay haven't been sorted out. Some companies are giving away some products so they can make money with others. Many are frantically giving away everything in the hope of attracting enough eyeballs to eventually make some money.

The proprietary model rewards risk-takers and gives the smartest, fastest programmers a pile of capital they can use to play the game again. It rewards the ones who satisfy our needs and gives them cash they can use to build newer and bigger models. The distribution of power is pretty meritocratic, although it can break down when monopolies are involved.

But the open source solution certainly provides good software to everyone who wants to bother to try to use it. The free price goes a long way to spreading its bounty to a wide variety of people. No one is excluded and no one is locked out of contributing to the commonweal because they don't have the right pedigree, education, racial heritage, or hair color. Openness is a powerful tool.

Richard Stallman told me, "Why do you keep talking about 'capital'? None of this has anything to do with capital. Linus didn't need capital to develop a kernel, he just wrote it. We used money to hire hackers to work on the kernel, but describing that as capital is misleading.

"The reason why free software is such a good idea is that developing software does not really need a lot of money. If we cannot 'raise capital' the way the proprietary software companies do, that is not really a problem.

"We do develop a lot of free software. If a theory says we can't, you have to look for the flaws in the theory."

One of the best ways to illustrate this conundrum is to look at the experiences of the workers at Hotmail after they were acquired by Microsoft. Sure, many of them were overjoyed to receive so much for their share in an organization. Many might even do the same thing again if they had the choice. Many, though, are frustrated by their new position as corporate citizens whose main job is augmenting Microsoft's bottom line.

One Hotmail founder told the PBS Online columnist Robert Cringely, "All we got was money. There was no recognition, no fun. Microsoft got more from the deal than we did. They knew nothing about the Internet. MSN was a failure. We had 10 million users, yet we got no respect at all from Redmond. Bill Gates specifically said, 'Don't screw-up Hotmail,' yet that's what they did."