Allchin flunks economics

According to Michael Smith (APC May, p.48), Microsoft's Jim Allchin has described open source software (OSS) as a “destroyer of intellectual property.” The only things that OSS can destroy are monopolies, and only to the extent that the said monopolies destroy the economy.

The economic purpose of wages is to reward work, so that work is done which would not otherwise be done. The purpose of profit is to reward investment in capital equipment that multiplies the power of labour, so that wealth is created which would not otherwise be created. The purpose of interest is to reward saving, so that funds which would not otherwise be available are made available for investment. In summary, wages, profit and interest are justified because they are incentives to do desirable things that would not otherwise be done.

An economic reward that cannot be justified as an incentive is called an economic rent. Taxes on economic rents, unlike taxes on wages, profit or interest, do not discourage any form of industry. For example, the rental value of land (excluding buildings and other improvements) is pure economic rent because the land, not being a product of human effort, would exist regardless of who gets the rent. That is why the great classical economists from Adam Smith onward have said that the best kind of tax is a tax on the rent of land, and why municipal rates in my state of Queensland are calculated on land values alone.

What has this to do with Allchin and OSS? To the extent that commercial software vendors (CSVs) merely replicate the functionality that would otherwise be provided by OSS, they serve no economic purpose and need no economic reward. If OSS were hobbled by legislation, as Allchin seems to be suggesting, then the resulting benefit to CSVs would be pure economic rent, and the legislators would be well advised to recover some of that economic rent by imposing a special tax on commercial software vendors!

How about that, Mr Allchin?

[Email by Gavin R. Putland dated May 1, 2001. Posted here Jan.8, 2010.]