In this book I integrate new theory and new research findings into the framework of a “free innovation paradigm.” Free innovation involves innovations developed and given away by consumers as a “free good,” with resulting improvements in social welfare. It is an inherently simple, transaction-free, grassroots innovation process engaged in by tens of millions of people. As we will see, free innovation has very important economic impacts but, from the perspective of participants, it is fundamentally not about money.
I define a free innovation as a functionally novel product, service, or process that (1) was developed by consumers at private cost during their unpaid discretionary time (that is, no one paid them to do it) and (2) is not protected by its developers, and so is potentially acquirable by anyone without payment—for free. No compensated transactions take place in the development or in the diffusion of free innovations.
Consider the following example:
Jason Adams, a business-development executive by day and a molecular biologist by training, had never considered himself a hacker. That changed when he discovered an off-label way to monitor his 8-year-old daughter’s blood-sugar levels from afar.
His daughter Ella has Type 1 diabetes and wears a glucose monitor made by Dexcom Inc. The device measures her blood sugar every five minutes and displays it on a nearby receiver the size of a pager, a huge advantage in helping monitor her blood sugar for spikes and potentially fatal drops. But it can’t transmit the data to the Internet, which meant Mr. Adams never sent Ella to sleepovers for fear she could slip into a coma during the night.
Then Mr. Adams found NightScout, a system cobbled together by a constellation of software engineers, many with diabetic children, who were frustrated by the limitations of current technology. The open-source system they developed essentially hacks the Dexcom device and uploads its data to the Internet, which lets Mr. Adams see Ella’s blood-sugar levels on his Pebble smartwatch wherever she is.
NightScout got its start in the Livonia, N.Y., home of John Costik, a software engineer at the Wegmans supermarket chain. In 2012, his son Evan was diagnosed with Type 1 diabetes at the age of four. The father of two bought a Dexcom continuous glucose monitoring system, which uses a hair’s width sensor under the skin to measure blood-sugar levels. He was frustrated that he couldn’t see Evan’s numbers when he was at work. So he started fiddling around.
On May 14 last year, he tweeted a picture of his solution: a way to upload the Dexcom receiver’s data to the Internet using his software, a $4 cable and an Android phone.
That tweet caught the eye of other engineers across the country. One was Lane Desborough, an engineer with a background in control systems for oil refineries and chemical plants whose son, 15, has diabetes. Mr. Desborough had designed a home-display system for glucose-monitor data and called it NightScout. But his system couldn’t connect to the Internet, so it was merged with Mr. Costik’s software to create the system used today.
Users stay in touch with each other and the developers via a Facebook group set up by Mr. Adams. It now has more than 6,800 members. The developers are making fixes as bugs arise and adding functions such as text-message alarms and access controls via updates. … 1
Free innovation is carried out in the “household sector” of national economies. In contrast to the business or government sectors, the household sector is the consuming population of the economy, in a word all of us, all consumers, “all resident households, with each household comprising one individual or a group of individuals.”2 Household production entails the “production of goods and services by members of a household, for their own consumption, using their own capital and their own unpaid labor.”3 Free innovation, therefore, is a form of household production.
How can individual consumers justify investing in the development of free innovations when no one pays them for either their labor or for their freely revealed innovation designs? As we will see, the answer is that free innovators in the household sector are self-rewarded. When they personally use their own innovations, they are self-rewarded by benefits they derive from that use.4 When they benefit from such things as the fun and learning of developing their innovations, or the good feelings that come from altruism, they are also self-rewarded.5
The Nightscout project described above illustrates several types of self-reward. From the account given, we can see that many participants gain direct self-rewards from personal or family use of the innovation they helped develop. Probably many also gain other forms of highly motivating self-rewards, such as enjoyment and learning, and perhaps also strong altruistic satisfactions from freely giving away their project designs to help many diabetic children.
Due to its self-rewarding nature, free innovation does not require compensated transactions to reward consumers for the time and money they invest to develop their innovations. (Compensated transactions involve explicit, compensated exchanges of property—that is, giving someone specifically this in exchange for specifically that.6) Free innovation therefore differs fundamentally from producer innovation, which has compensated transactions at its very core. Producers cannot profit from their private investments in innovation development unless they can protect their innovations from rivals and can sell copies at a profit via compensated transactions.7
Enabled by individuals’ access to increasingly powerful design and communication tools, free innovation is steadily becoming both a stronger rival to and a stronger complement to producer innovation.8 Even today, it is very significant in both scale and scope. In just six countries surveyed to date, tens of millions of individuals in the household sector have been found to collectively spend tens of billions of dollars in time and materials per year developing products for their own use9 (Table 1). Over 90 percent of these individuals met both of the criteria defining free innovation: (1) they developed their innovations during unpaid, discretionary time, and (2) they did not protect the designs they developed from adoption by others for free. The remainder were aspiring entrepreneurs within the household sector, motivated at least in part by the goal of selling their innovations.
Free innovation provides great value to household sector innovators in the form of the specific forms of self-rewards described earlier and also in the form of a general “human flourishing” associated with personal participation in innovation activities.10 It also, as we will see, very generally increases both social welfare and producers’ profits relative to a world in which only producers innovate.11 For all these reasons, free innovation is well worth understanding better.
The Free Innovation and Producer Innovation Paradigms
Free innovation differs so fundamentally from producer innovation that the two cannot be incorporated in a single paradigm. In this section I therefore propose and describe a new free innovation paradigm and contrast it with the traditional Schumpeterian producer innovation paradigm. Figure 1 schematically depicts these two paradigms and the interactions between them. Each describes a portion of the innovation activity in national economies.
Generally, development activity in the free innovation paradigm is devoted to types of innovative products and services consumed by householders, not businesses. These represent a large fraction of Gross Domestic Product (GDP): In the United States and many other OECD countries, 60–70 percent of GDP is devoted to products and services intended for final consumption in the household sector.12 In contrast, innovation development activity in the producer innovation paradigm is devoted to addressing both consumer and industrial product and service needs.
As we will see, outputs from the two paradigms are complementary in some ways and competitive in others.13
The Free Innovation Paradigm
The free innovation paradigm is represented by the broad arrow shown in the top half of figure 1. At the left side of the arrow, we see consumers in the household sector spending their unpaid discretionary time developing new products and services. Discretionary time can be seen as “time spent free of obligation and necessity,”14 time devoted to activities that “we do not really have to do at all if we do not wish to.”15 Scholars have noted the potential value obtainable by producers and society when consumers increase the portion of discretionary time devoted to a range of productive uses.16 Innovation is clearly among such productive uses, as we will see in detail later.
As is implied by the position of the free innovation arrow in figure 1, which starts further to the left than the producer arrow, individuals or groups of innovators who have a personal use for an innovation with a novel function generally begin development work earlier than producers do—they are pioneers. This is because the extent of general demand for really novel products and services is initially often quite unclear. General demand is irrelevant to individual free innovators, who care only about their own needs and other forms of private self-reward that they understand firsthand. Producers, in contrast, care greatly about the extent and nature of potential markets and, as the rightward positioning of the producer arrow indicates, often wait for market information to emerge before beginning their own development efforts.17
If there is interest in an innovation beyond the initial developer, some or many other individuals may contribute improvements to the initial design, as is shown at the center of the free innovation paradigm arrow. This pattern is visible in the Nightscout example presented earlier and is familiar in open source software development projects as well (Raymond 1999). Thus, in the Nightscout case, many individuals with an interest in helping children with Type 1 diabetes came forward to join the efforts of the project’s initiators.18
Finally, free diffusion of unprotected design information via peer-to-peer transfer to free riders may occur, as is shown at the right end of the free innovation paradigm arrow. (Free riders are those who benefit from an innovation but do not contribute to developing it. In that sense they get a “free ride.”) Again, a pattern of diffusion to free riders is clearly visible in the Nightscout project.
Note that what is generally being revealed free for the taking by free innovators is design information, not free copies of physical products. In the case of products or services that themselves consist of information, such as software, a design for an innovation can be identical to the usable product itself. In the case of a physical product, such as a wrench or a car, what is being revealed is a design “recipe” that must be converted into a physical form before it can be used. In free peer-to-peer diffusion, this conversion is generally done by individual adopters—each adopter creates a physical implementation of a free design at private expense in order to use it. However, this is not a firm rule. Sometimes free innovators, motivated by altruism or other forms of self-reward, do create free physical copies of free designs to give to free riders. As an example, consider the worldwide e-Nable network. Founders of this network developed open source designs for inexpensive, 3D-printed artificial hands for children and adults who lack hands. Network members who own 3D printers donate their time to tailor the freely available hand designs to individual needs, and also donate the use of their personal printers to produce copies for free.19
The Producer Innovation Paradigm
The long-established producer innovation paradigm centers on development and diffusion activities carried out by producers. The basic sequence of activities in that paradigm is shown on the lower arrow of figure 1. Moving from left to right on that arrow, we see profit-seeking firms first identifying a potentially profitable market opportunity by acquiring information on unfilled needs. They then invest in research and development to design a novel product or service responsive to that opportunity. Next, they produce the innovation and sell it on the market. In sharp contrast to household sector innovators, producers’ innovation activities are not self-rewarding: the producer is rewarded by profit obtained via compensated transactions with others. (Of course, employees within firms may find their work personally self-rewarding. This can sometimes be reflected in their wages. In labor economics it has long been argued that firms can pay a lower wage as compensation for work that employees find more desirable in other ways.)20
The producer innovation paradigm can be traced back to Joseph Schumpeter, who between 1912 and 1945 put forth a theory of innovation in which profit-seeking entrepreneurs and corporations played the central role. Schumpeter argued that “it is … the producer who as a rule initiates economic change, and consumers are educated by him if necessary.”21 The economic logic underlying this argument is that producers generally expect to distribute their costs of developing innovations over many consumers, each of whom purchases one or a few copies. Individual or collaborating free innovators, in contrast, depend only on their own in-house use of their innovation and other types of self-reward to justify their investments in innovation development. On the face of it, therefore, a producer serving many consumers can afford to invest more in developing an innovation than can any single free innovator, and so presumably can do a better job. By this logic, individuals in the household sector must simply be “consumers” who simply select among and purchase innovations that producers elect to create. After all, why would consumers innovate for themselves if producers can do it for them?
Schumpeter’s views and the producer innovation paradigm came to be widely accepted by economists, business people, and policymakers, and that is still the case today. Sixty years later, Teece22 echoed Schumpeter: “In market economies, the business firm is clearly the leading player in the development and commercialization of new products and processes.” Similarly, Romer23 viewed producer innovation as the norm in his model of endogenous growth: “The vast majority of designs result from the research and development activities of private, profit-maximizing firms.” And Baumol24 placed producer innovation at the center of his theory of oligopolistic competition: “In major sectors of US industry, innovation has increasingly grown in relative importance as an instrument used by firms to battle their competitors.”
Details of the producer paradigm have changed over time. Significant producer innovations once were viewed as starting from advances in basic research.25 Later, studies of innovation histories showed that there often was not a clearly demarked research event initiating important innovations—although “technology first” innovations do exist and can be important.26
Still later, it was argued that research findings fed into all phases of innovation in what was called a “chain link” model of innovation.27 Today, many would argue that, while research inputs are indeed important, producers’ innovation projects are more frequently triggered by discovery of unfilled needs. Hence the marketing mantra: “Find a need and fill it.” In line with this view, current prescriptions for the management of innovation by producers generally follow the market-demand-initiated version of the producer paradigm.28
Finally, when contrasting the two paradigms, I note that the definition of free innovation differs from the “official” definition of producer innovation with respect to mode of diffusion. A free innovation is defined as one that diffuses for free, as I said at the start of this chapter. Within the OECD, in contrast, the definition for an innovation includable in government statistics requires that it be introduced onto the market: “A common feature of an innovation is that it must have been implemented. A new or improved product is implemented when it is introduced on the market.”29 (Note that the focus of both definitions is on availability for diffusion. There is no requirement that anyone actually adopt a free innovation that is available outside of the market or actually buy a producer innovation that has been introduced onto the market.)
In the Internet era, the OECD’s producer-centric, definitional restriction that innovations must be “introduced on the market”—that is, made available for sale—is obsolete, I believe. Today it is also possible to make free innovations available for widespread diffusion independent of markets, often via the Internet. For example, the Nightscout innovations are widely diffused outside of markets via Internet-based free transfer. Open source software and open source hardware very generally are diffused in that same way. Excluding free innovations from government statistics via the present market-focused definition distorts our understanding of the innovation process. It will be important to update the OECD’s definition, and there are calls to do this.30
Interactions Between the Paradigms
There are four important interactions between the free innovation paradigm and the producer innovation paradigm.31
First, identical or closely substituting innovation designs can be made available to potential adopters via both paradigms at the same time. For example, Apache open source Web server software is offered free peer to peer by the Apache development community and at the same time a close substitute is offered commercially by Microsoft. In such cases, peer-to-peer diffusion via the free innovation paradigm can compete with products and services that producers are selling on the market. The level of competition can be substantial. In the specific case just mentioned, 38 percent of Internet websites used Apache free Web server software in 2015. Microsoft was second, serving 28 percent of sites with its commercial server software.32 Competition from substitutes diffused for free via peer-to-peer transfers can increase social welfare by forcing producers to lower prices. It can also drive producers to other forms of competitive responses with social value, such as improving quality or increasing investments in innovation development.
Second, innovations available for free via the free innovation paradigm can complement innovations diffused via the producer innovation paradigm. Free complements are very valuable to consumers as well as to producers. They enable producers to focus on selling commercially viable products, while free innovators fill in with designs for valuable or even essential complements. For example, a specialized mountain bike is of little value to a biker who has not learned specialized mountain biking techniques. Producers find it viable to produce and sell the specialized mountain bikes as commercial products, but largely rely on expert bikers innovating within the free paradigm to create and diffuse riding techniques as a free complement. That is, adopters generally learn new mountain biking techniques by a combination of self-practice and informal instruction freely given by more expert peers.
Third, we see from the vertical, downward-pointing arrow toward the right in figure 1 that a design developed by a free innovator may spill over to a producer and become the basis for a valuable commercial product. For example, the design of the mountain bike itself and many further improvements to it were developed by free innovator bikers. These designs were not protected by the free innovator developers, and were adopted for free by bike producing firms.33 As we will see, adoption of free innovators’ designs can greatly lower producers’ in-house development costs.34
Fourth and finally, we see from the vertical, upward-pointing arrow at the left of figure 1 that producers also supply valuable information and support to free innovators. For example, Valve Corporation, a video game development firm, offers Steam Workshop, a company-sponsored website designed to support innovation by gamers.35 The site contains tools that make it easier for these individuals to develop their own game modifications and improvements and to share them with other players. Investments to support free design, such as the investment in Steam Workshop by Valve, can benefit producers by increasing the supply of commercially valuable designs that free innovators create.36
The Need for a Free Innovation Paradigm
Thomas Kuhn defined scientific paradigms as “universally recognized scientific achievements that, for a time, provide model problems and solutions for a community of researchers.”37 Having a paradigm in place that is widely accepted, as in the case of the producer innovation paradigm, can be very helpful to scientific advancement. Once a paradigm is in place, as Kuhn writes, researchers can engage in very productive “normal science,” testing and more precisely filling in pieces of a paradigm now assumed to be correct in broad outline. However, as Kuhn also explains, a paradigm never adequately explains “everything” within a field. In fact, observations that do not fit the reigning paradigm commonly emerge during the work of normal science, but are often ignored in favor of pursuing productive advance within the paradigm.
In the case of innovation research, empirical evidence related to free innovation in the household sector has been increasing during recent years. However, innovations developed and diffused without compensated transactions are entirely outside the Schumpeterian producer innovation paradigm—and, indeed, entirely outside the transaction-based framework of economics in general. Ignoring this evidence has allowed researchers to do productive work within the Schumpeterian paradigm, while deferring the work of incorporating free innovation into our paradigmatic understanding of innovation processes.
Eventually, Kuhn writes, conflicts between the predictions of a reigning paradigm and real-world observations may become so pervasive or so important that they can no longer be ignored, and at that point, the reigning paradigm may be challenged by a new one.38 I propose that this situation has been reached in the case of transaction-free innovation processes developed and utilized by free innovators in the household sector. I therefore frame the free innovation paradigm both as a challenge to the Schumpeterian innovation paradigm, and also as a useful complement. Both paradigms describe important innovation processes, with the free paradigm codifying important phenomena in the household sector that the producer innovation paradigm does not incorporate.
With respect to my proposal of complementary innovation paradigms functioning in parallel, it is important to note that Kuhn developed his concept of paradigms to explain how revolutions in understanding occur in the natural sciences. Central to his argument was that a new paradigm replaces an existing one in a “scientific revolution.” However, today the idea of paradigms has expanded beyond the study of natural sciences to the study of social sciences as well. In the social sciences, Kuhn’s observation that new paradigms replace earlier ones is not always followed. Multiple paradigms may co-exist as complementary or competing perspectives.39 It is with that view in mind that I propose the free innovation paradigm as a complement to the producer innovation paradigm rather than as a replacement. I am proposing that each usefully frames a portion of extant innovation activity.
Note that by proposing and describing the free innovation paradigm, I by no means claim that research needed to support it is complete. Indeed, I wish to claim precisely the opposite. A new paradigm is most useful when understandings of newly observed phenomena are emergent and when ideas regarding a possible underlying unifying structure are needed to help guide the new research.40 This is the role I hope the free innovation paradigm described in this book will play. If it is successful, it will usefully frame and support important research questions and findings not encompassed by the existing Schumpeterian producer-centered paradigm, and so provide an improved platform for further advances in innovation research, policymaking, and practice.
Note: Readers can download the full eBook at https://evhippel.mit.edu/.
Excerpted from Free Innovation by Eric von Hippel. Copyright 2017 Eric von Hippel. All rights reserved.