THE BRIEF

"There are only two ways to make money in business: one is to bundle; the other is unbundle.”

— Jim Barksdale, a former CEO of Netscape

The Cathedral or Bazaar was an essay by Eric S. Raymond, that turned into a book, that became a framework for top-down vs. bottom-up software development. Specifically how to manage open-source projects. Raymond credits Linus Torvalds, leader of the Linux kernel project, as the inventor of this process. Google's Android OS that services over 3.3 billion people as of 2023 famously runs on Linux. 

Our thesis is that the principles derived from managing open-source projects are now fundamental to understanding not just the logic of our digital economy, but how to create value within it. Everything from Wikipedia and YouTube to Open AI and Stability AI follows the framework of the Cathedral or Bazaar. 

For example: 

• Linus's Law is the assertion that given enough eyeballs, all bugs are shallow. The total cost of maintaining a widely used program is typically 40% or more of the cost of developing it. Surprisingly this cost is strong affected by the number of users. More users find more bugs. 
• Open source technologies eventually catch up to their proprietary counterparts. 

We observe that these laws are also applicable to not just digital technologies, but digital media and content production. 

THE IDEA

The Cathedral: 

A closed model. The source code is kept within the organization to create monetary value exclusively for themselves. They are gatekeepers to a service, product, or network. Microsoft, Apple, Meta, Google, Adobe, and Open AI fall into this camp. While each of these companies have aspects of an open-source model, the value of the “network effect” accrues mostly to the organization. 

The Bazaar: 

An open model in which the source code is available with each software release. Linux, Wikipedia, Python, Tensor Flow, Jupyter Notebook, and Stability AI. The Bazaar model develops code over the Internet in view of the public. They release early and often. In this model, sharing is what creates value. The value of open source software makes it so that it is different than any other resource. It creates a ton of value in an very efficient way. 

There are pros and cons to both models, and neither are inherently good or bad. However, while the Cathedral model centralizes power, the Bazaar openly distributes it. 

THE INSIGHT

As we transit from the industrial age, where tangible goods were the driving force, to the information age, the underpinnings of our economy have fundamentally shifted. The shift isn't merely from physical to digital, but from centralized to decentralized, from scarcity to abundance, and from hoarding to sharing. Capitalism is no longer just about capital. Data, information, and knowledge reduces the need for capital per unit of output. Information theory is at the center of our new economic order. In an information economy, companies that have mastered information science have become dominant. 

1. Centralized to Decentralized: The Cathedral represented a centralized, hierarchical mode of production where few made decisions for the many. Contrast this with the Bazaar, a decentralized marketplace of ideas, tools, and solutions where anyone can contribute. Open source software, like the Linux operating system, represents the Bazaar model, and its success challenges the traditional concept of centralized control. This pattern isn’t just confined to software. We see this in the gig economy, decentralized finance, and even in social media platforms where power dynamics are constantly in flux.

2. Scarcity to Abundance: Our past economy was built on the principles of scarcity - limited resources meant competitive advantages for those who could secure the most. But in an age where the replication of a software or an idea costs next to nothing, the rules have changed. The more an idea or software is shared and improved upon, the more valuable it becomes. This counterintuitive reality is what drives the open-source community, and increasingly, the broader economy.

3. Hoarding to Sharing: The idea of proprietary ownership is undergoing a transformation. Companies that 'hoard' or keep their innovations to themselves risk stagnation, while those that 'share' or open-source their innovations gain from collective intelligence. This open-sharing ecosystem leads to faster iteration, broader adoption, and more robust solutions. Think of Wikipedia and YouTube: it’s not the work of a few, but the collective knowledge of many, always updated, always refined. 

4. Tangible Assets to Intangible Assets: As highlighted by Thomas Piketty, in his book Capital in the 21st Century, back in 2001, capital expenditure and intangibles were about the same. $630 vs. $630 billion. In 2021 intangible expenditures was $2 trillion compared to tangibles $1 Trillion. Intangibles now form the bulk of our economic value representing more than 95% of the S&P 500 and 75% of the S&P Euro 350. This shift underscores the importance of soft assets like intellectual property, brand value, and data. 

ANALYSIS

There is a fundamental tension between the Cathedral and the Bazaar. Our way of thinking about value, allocation of resources, property rights, all come from finite games. A scarcity mindset inborn from medieval institutions. 

We now have the ability to sustainable produce what most people in the world needs to live. In a post-scarcity era, a question that naturally arises is how do we allocate these resources and reorganize society when labor and knowledge work can be automated away? Today, companies generate more revenue than ever before with fewer employees as visualized in the chart below. 

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Cover Art: Elia Pellegrini