The Wealth of Networks:
How Social Production Transforms Markets and Freedom
by Yochai Benkler, Yale University Press

© Copyright 2006, Yochai Benkler.

Chapter 4
The Economics of Social Production

This online version has been created under a Creative Commons Attribution Noncommercial ShareAlike license - see - and has been reformatted and designated as recommended reading - with an accompanying Moodle course - for the NGO Committee on Education of CONGO - the Conference Of Non-Governmental Organizations in Consultative Relationship with the United Nations - in conjunction with the Committee's commitment to the United Nations Decade of Education for Sustainable Development, the International Decade for a Culture of Peace and Non-violence for the Children of the World and related international Decades, agreements, conventions and treaties.


"Human nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides, according to the tendency of the inward forces which make it a living thing."

"Such are the differences among human beings in their sources of pleasure, their susceptibilities of pain, and the operation on them of different physical and moral agencies, that unless there is a corresponding diversity in their modes of life, they neither obtain their fair share of happiness, nor grow up to the mental, moral, and aesthetic stature of which their nature is capable."

John Stuart Mill, On Liberty (1859)

Chapter 4
The Economics of Social Production

The increasing salience of nonmarket production in general, and peer production in particular, raises three puzzles from an economics perspective.


Much of economics achieves analytic tractability by adopting a very simple model of human motivation.

Of course, this simple model underlying much of contemporary economics is wrong.

A number of scholars, primarily in psychology and economics, have attempted to resolve this question both empirically and theoretically.

More powerful than the theoretical literature is the substantial empirical literature - including field and laboratory experiments, econometrics, and surveys - that has developed since the mid-1990s to test the hypotheses of this model of human motivation.

The psychology-based alternative to the "more money for an activity will mean more of the activity" assumption implicit in most of these new economic models is complemented by a sociology-based alternative.

It is not necessary to pin down precisely the correct or most complete theory of motivation, or the full extent and dimensions of crowding out nonmarket rewards by the introduction or use of market rewards.

The relative relationships of money and social-psychological rewards are, then, dependent on culture and context.

Moreover, individuals are not monolithic agents.

For all of us, there comes a time on any given day, week, and month, every year and in different degrees over our lifetimes, when we choose to act in some way that is oriented toward fulfilling our social and psychological needs, not our market-exchangeable needs.

Social Production: Feasibility Conditions and Organizational Form

The core technologically contingent fact that enables social relations to become a salient modality of production in the networked information economy is that all the inputs necessary to effective productive activity are under the control of individual users.

There is nothing about computation or communication that naturally or necessarily enables this fact.

Now, having the core inputs of information production ubiquitously distributed in society is a core enabling fact, but it alone cannot assure that social production will become economically significant.

For this excess capacity to be harnessed and become effective, the information production process must effectively integrate widely dispersed contributions, from many individual human beings and machines.

"Modularity" is a property of a project that describes the extent to which it can be broken down into smaller components, or modules, that can be independently produced before they are assembled into a whole.

"Granularity" refers to the size of the modules, in terms of the time and effort that an individual must invest in producing them.

Perhaps the clearest example of how large-grained modules can make projects falter is the condition, as of the middle of 2005, of efforts to peer produce open textbooks.

It is not necessary, however, that each and every chunk or module be fine grained.

The characteristics of planned modularization of a problem are highly visible and explicit in some peer-production projects - the distributed computing projects like SETI@home are particularly good examples of this.

The independence of Web sites is what marks their major difference from more organized peer-production processes, where contributions are marked not by their independence but by their interdependence.

Cooperation in peer-production processes is usually maintained by some combination of technical architecture, social norms, legal rules, and a technically backed hierarchy that is validated by social norms.

In combination then, three characteristics make possible the emergence of information production that is not based on exclusive proprietary claims, not aimed toward sales in a market for either motivation or information, and not organized around property and contract claims to form firms or market exchanges.

Together, these three characteristics suggest that the patterns of social production of information that we are observing in the digitally networked environment are not a fad.

Transaction Costs and Efficiency

For purposes of analyzing the political values that are the concern of most of this book, all that is necessary is that we accept that peer production in particular, and nonmarket information production and exchange in general, are sustainable in the networked information economy.

The efficient allocation of two scarce resources and one public good are at stake in the choice between social production - whether it is peer production or independent nonmarket production- and market-based production.

The two scarce resources are: first, human creativity, time, and attention; and second, the computation and communications resources used in information production and exchange.

The first thing to recognize is that markets, firms, and social relations are three distinct transactional frameworks.

The point is not, of course, to reduce all social relations and human decency to a transaction-costs theory.

A market transaction, in order to be efficient, must be clearly demarcated as to what it includes, so that it can be priced efficiently.

Social exchange, on the other hand, does not require the same degree of crispness at the margin.

Both social and market exchange systems require large fixed costs - the setting up of legal institutions and enforcement systems for markets, and creating social networks, norms, and institutions for the social exchange.

This difference between markets and hierarchical organizations, on the one hand, and peer-production processes based on social relations, on the other, is particularly acute in the context of human creative labor - one of the central scarce resources that these systems must allocate in the networked information economy.

People have different innate capabilities; personal, social, and educational histories; emotional frameworks; and ongoing lived experiences, which make for immensely diverse associations with, idiosyncratic insights into, and divergent utilization of existing information and cultural inputs at different times and in different contexts.

The lack of crisp specification of who is giving what to whom, and in exchange for what, also bears on the comparative transaction costs associated with the allocation of the second major type of scarce resource in the networked information economy: the physical resources that make up the networked information environment - communications, computation, and storage capacity.

Personal computers, wireless transceivers, and Internet connections are "shareable goods."

Lumpy goods can, in turn, be fine-, medium-, or large-grained.

Because social sharing requires less precise specification of the transactional details with each transaction, it has a distinct advantage over market-based mechanisms for reallocating the excess capacity of shareable goods, particularly when they have small quanta of excess capacity relative to the amount necessary to achieve the desired outcome.

The transaction-cost effect is reinforced by the motivation crowding out theory.

From an efficiency perspective, then, there are clear reasons to think that social production systems - both peer production of information, knowledge, and culture and sharing of material resources - can be more efficient than market-based systems to motivate and allocate both human creative effort and the excess computation, storage, and communications capacity that typify the networked information economy.

The Emergence of Social Production in the Digitally Networked Environment

There is a curious congruence between the anthropologists of the gift and mainstream economists today.

These lines of literature point to an emerging understanding of social production and exchange as an alternative to markets and firms.

Consider the way in which the following sentences are intuitively familiar, yet as a practical matter, describe the provisioning of goods or services that have well-defined NAICS categories (the categories used by the Economic Census to categorize economic sectors) whose provisioning through the markets is accounted for in the Economic Census, but that are commonly provisioned in a form consistent with the definition of sharing - on a radically distributed model, without price or command.

NAICS 624410624410 [Babysitting services, child day care]
    "John, could you pick up Bobby today when you take Lauren to soccer?

    I have a conference call I have to make."

    "Are you doing homework with Zoe today, or shall I?"

NAICS 484210 [Trucking used household, office, or institutional furniture and equipment]
    "Jane, could you lend a hand moving this table to the dining room?"

    "Here, let me hold the elevator door for you, this looks heavy."

NAICS 484122 [Trucking, general freight, long-distance, less-than-truckload]
    "Jack, do you mind if I load my box of books in your trunk so you can drop it off at my brother's on your way to Boston?"
NAICS 514110 [Traffic reporting services]
    "Oh, don't take I-95, it's got horrible construction traffic to exit 39."
NAICS 711510 [Newspaper columnists, independent (freelance)]
    "I don't know about Kerry, he doesn't move me, I think he should be more aggressive in criticizing Bush on Iraq."
NAICS 621610 [Home health-care services]
    "Can you please get me my medicine? I'm too wiped to get up."

    "Would you like a cup of tea?"

NAICS 561591 [Tourist information bureaus]
    "Excuse me, how do I get to Carnegie Hall?"
NAICS 561321 [Temporary help services]
    "I've got a real crunch on the farm, can you come over on Saturday and lend a hand?"

    "This is crazy, I've got to get this document out tonight, could you lend me a hand with proofing and pulling it all together tonight?"

NAICS 71 [Arts, entertainment, and recreation]
    "Did you hear the one about the Buddhist monk, the Rabbi, and the Catholic priest . . . ?"

    "Roger, bring out your guitar. . . . "

    "Anybody up for a game of . . . ?"

The litany of examples generalizes through a combination of four dimensions that require an expansion from the current focus of the literatures related to social production.

Why do we, despite the ubiquity of social production, generally ignore it as an economic phenomenon, and why might we now reconsider its importance?

To say that sharing is technology dependent is not to deny that it is a ubiquitous human phenomenon.

Because of changes in the technology of the industrial base of the most advanced economies, social sharing and exchange is becoming a common modality of production at their very core - in the information, culture, education, computation, and communications sectors.

My claim is not, of course, that we live in a unique moment of humanistic sharing.

Most practices of production - social or market-based - are already embedded in a given technological context.

The Interface of Social Production and Market-Based Businesses

The rise of social production does not entail a decline in market-based production.

The competitive threat from social production, however, is merely a surface phenomenon.

Consider the example I presented in chapter 2 of IBM's relationship to the free and open source software development community.

As firms have begun to experience these newly ambiguous relationships with individuals and social groups, they have come to wrestle with questions of leadership and coexistence.

The other quite basic change wrought by the emergence of social production, from the perspective of businesses, is a change in taste.

The overarching point is that social production is reshaping the market conditions under which businesses operate.


1. Richard M. Titmuss, The Gift Relationship: From Human Blood to Social Policy (New York: Vintage Books, 1971), 94.

2. Kenneth J. Arrow, "Gifts and Exchanges," Philosophy & Public Affairs 1 (1972): 343.

3. Bruno S. Frey, Not Just for Money: An Economic Theory of Personal Motivation (Brookfield, VT: Edward Elgar, 1997); Bruno S. Frey, Inspiring Economics: Human Motivation in Political Economy (Northampton, MA: Edward Elgar, 2001), 52-72.

4. Roland Bénabou and Jean Tirole, "Self-Confidence and Social Interactions" (working paper no. 7585, National Bureau of Economic Research, Cambridge, MA, March 2000).

5. Truman F. Bewley, "A Depressed Labor Market as Explained by Participants," American Economic Review (Papers and Proceedings) 85 (1995): 250, provides survey data about managers' beliefs about the effects of incentive contracts;

6. James S. Coleman, "Social Capital in the Creation of Human Capital," American Journal of Sociology 94, supplement (1988): S95, S108.

7. Nan Lin, Social Capital: A Theory of Social Structure and Action (New York: Cambridge University Press, 2001), 150-151.

8. Steve Weber, The Success of Open Source (Cambridge, MA: Harvard University Press, 2004).

9. Maurice Godelier, The Enigma of the Gift, trans. Nora Scott (Chicago: University of Chicago Press, 1999), 5.

10. Godelier, The Enigma, 106.

11. In the legal literature, Robert Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge, MA: Harvard University Press, 1991), is the locus classicus for showing how social norms can substitute for law.

12. On policing, see Robert C. Ellickson, "Controlling Chronic Misconduct in City Spaces: Of Panhandlers, Skid Rows, and Public-Space Zoning," Yale Law Journal 105 (1996): 1165, 1194-1202; and Dan M. Kahan, "Between Economics and Sociology: The New Path of Deterrence," Michigan Law Review 95 (1997): 2477.

13. An early and broad claim in the name of commons in resources for communication and transportation, as well as human community building - like roads, canals, or social-gathering places - is Carol Rose, "The Comedy of the Commons: Custom, Commerce, and Inherently Public Property," University Chicago Law Review 53 (1986): 711.