# Why Is Open Source Beneficial for Economic Growth in the Long Run

Last updated on September 20, 2016

Disclaimer: I’m no authority on economics. This post is just my 2 cents.

While many people see open source as an ideology, in this post, I would argue that it also contributes to the economic growth in the long run.

## A Bit Background Knowledge in Economics

Reference: Macroeconomics: Policy and Practice 2nd edition by Frederic S. Mishkin, chapter 3

In macroeconomics, the production function describes how the economic output, aka real gross domestic product (real GDP), is related to the capital stock and labor in the economy in the long run. Specifically, the Cobb-Douglas production function says

\begin{equation*} Y = F(K, L) = A K^{0.3} L^{0.7} \end{equation*}

where

• $$Y$$: the total economic output,
• $$K$$: the quantity of capital in the economy,
• $$L$$: the quantity of labor in the economy,
• $$A$$: total factor productivity, which describes how productive capital and labor are.

As you can see here, given the same amount of capital and labor, a larger total factor productivity leads to a larger economic output.

(It is irrelevant here, but if you are curious, the numbers 0.3 and 0.7 come from the observation that the shares of labor and capital income in the US are about 70% and 30% respectively.)

## Open Source and Total Factor Productivity

The variable we are interested here is $$A$$, total factor productivity. It describes how productive the economy is, and can be increased by many factors, such as the advancement of technology. For example, since the end of the 19th century, the use of electricity spread out and changed the way people used to work and live, which increased total factor productivity.

How does this relate open source? One thing to notice is that in order to improve total factor productivity, the new technology must spread out. Imagine the technology of electricity was only accessible to a small group of people, then the productivity of the whole economy would not have increased so much, since not too many people can reuse the technology of electricity. This applies to software as well. If a software is proprietary, in which the technology is only accessible to the owners of the software, we actually would lose the productivity boost it may contribute to the economy—no one else can reuse the technology in their own software products. On the contrary, open source software does not hide their technology and contributes to the total factor productivity. (More accurately, open source software here should be called “free software”, which users have the freedom to run, copy, distribute, study, change and improve. Don’t confuse it with gratis software, which only offers zero money cost.)

However, one may argue that if no proprietary software is allowed, who would invent these new technologies in the first place? Well, I have two arguments against this.

First, “open source” does not necessarily lead to “non-profit”. Many companies do make money over their open source products, such as Android, RedHat Enterprise Linux, Docker. What they really need to do is to build an open source business model that makes their open source software generate revenue.

Secondly, even if no open source business model is available for a specific type of software, we can do something similar to the medical world—patents are granted when new medicine is first developed for some years and then the technology becomes accessible to the rest of the world. This mechanism makes a great compromise: on one hand, it promises the profit to the developers; on the other hand, it contributes to the productivity of the whole economy after some years. The software industry can do something similar, which I would call “lagged open source”.