 One welcome, please, for Lydia Ortega. So I'm so happy to be here. Thank you, Steve and Patricia Donovan, for having me here. This is our second year, the Department of Economics at San Jose State University, as partners with the open group. And you'll be hearing a little bit more about how we're doing that at three different levels right now. We're going to be talking about how it's affecting research. And later on, you'll hear from Mike Jurvik on how it's impacting projects that we do with students. And finally, on student development and internships that we're working on. So it's a very holistic program. Before I begin this talk about one aspect of a research project that I'm starting, I want to give full disclosure. I'm an economist and an academic. The only thing I can confidently say I know about IT is the 10 digit number to the help desk. So that's my disclosure. I have a disclaimer, too. I am responsible for any possible insight that comes from this research. And my good friend and colleague, Mike Jurvik, is responsible for the errors. We specialize in this way. So last summer, after 15 years serving as the chair of the Department of Economics, I was finally let out of the ivory tower. And I found myself in Austin, Texas at my first open group conference. I was characteristically quiet at that conference, just observing everyone, listening in on the conversations as I passed, and watching the interactions that took place. Very creepy, like the NSA. It was my way of handling all the questions that were going through my mind. Questions like, why am I here? Who are these people? And what are they doing? And how are they doing it? Those questions led to this exploration on what economics has to say about the organization of standards groups. How you do what you do. So I think I can go on. I have a few answers now. It is a work in progress. I invite you all to zoom out from your very detailed perception and listen to something from a different language. Because what I heard in the last talk was a different language on that. And there's a lot of value to just immersing yourself in that. And remember, I said zoom out, not zone out on that. I really welcome all your feedback and corrections. I hope it goes on at lunch. I'll be around here through the entire day. Please let me know where I've made incorrect assumptions. When economists have missing information, and believe me, there was a lot of missing information, doesn't stop us. We just make an assumption and go ahead. I'm not sure how much you can do that with IT. But it's our bread and butter in economics. So let's go forward then. And I'll give you the game plan here. We're going to be talking about the, so did the slide change down here? Oh, I didn't use your clicker. I used mine. See, IT. So the first thing I have to do is define the product. And defining standards, talking to people from what I heard last year at the Austin conference, looking up at Wikipedia. There's not a definitive definition of what a standard is. So I had to come up with my own. We're then going to identify the four key features of the open group that most impressed me out of the Austin meeting. And I've also talked to other people about them. And I think they tend to agree that these would be the core features of the open group. And we're going to apply this to economic theory. Now, this is where I thought this part would be easy. All I need to do is look at economic theory of the firm and find the theory that fits the description of open group. But it doesn't exist. So I had to, and that's actually good news, because now that means I can contribute something to the literature. I'm happy about that. But it means I had to piece through and it took me a lot longer. And then we'll talk about next steps for this research project. So open standards in a definition is essentially, at its core, a collection of knowledge, tacit knowledge that is dispersed among many holders. It's distinguished by what it does. Again, I'm trying to get to a definition that I can work with. Some of the definitions are whether or not it's proprietary or it can be sold or it can be used without payment. I want to just focus on key essential elements. And for me, it is what it does. Because of its network effects, it is a building block for innovation. And a very unique feature that I wanted to keep in the forefront of my mind as I went through this research is that it has, as a characteristic, it's evolving. And perhaps one of the ways to think about open standards is to contrast that, economists do that all the time, with another type of standard. You all know what its shipping container looks like? A shipping container is an amazing standardization of shipping products. It has a length and a height. It has a particular material that it's defined to be. Do you know what an open shipping container is? We're talking about open standards. And open shipping containers, one that needs to be closed and locked. All right? So that has such a delimited and well-defined characterization that would be at one end of the extreme to open standards. This knowledge and very ephemeral type of concept. There's another problem. Knowledge is a public good. And all economists, whenever they say those two words, public good, they have to explain the distinction between private goods and public goods. It's in our handbook whenever possible. We need to explain this to you. You know private goods and here are the characteristics that don't it is rivalrous in consumption. If I eat it, it's not there for you to eat. You wouldn't want to. It's excludable. If I don't pay for it, I don't get to eat it. And there's no problem. Most private goods have these two characteristics. Knowledge has different characteristics. It tends to be non-rivalrous and non-excludable. If there's a great idea and it gets circulated, how are you gonna stop somebody from using it? Well, there's contracts for that. But other than contracts and non-disclosure statements, how are you gonna stop people from using the knowledge that you have? Once it's produced for one person, it's available for anybody at zero marginal cost. So this is a problem about production. And there you have the classic public goods picture of a national defense. Once national defense is produced for Texas, it's available for California at zero marginal cost. Unless California succeeds and then we're gonna have some problems there. I don't know how they're gonna handle that one. But you can think then about what happens, maybe a classic public good that you're very familiar with is software. It doesn't mean it doesn't get produced. It means that you have to be ingenious about how you tie it to a private good. And Apple solved that very well. Their knowledge product, their software, was tied to hardware. So hardware is rivalrous in consumption and excludable. Microsoft did it a little bit differently. And if you remember back in the earlier days, the Microsoft software was tied to the Microsoft users manual, which had to be on your desk if you had Microsoft on your computer. Okay, so you guys have to remember that. Do you remember that some of it was also color ink coated so that you couldn't run off copies of it on that? So I'm sure that you guys have figured out how to fix that problem a little bit better than having it tied to manuals. How is standards a public good produced effectively? This was actually the first question I had at the Texas meeting. This is a public good, why are you guys doing this? How are you doing this? You tie it to certification. So that process of having to get trained in it, to be certified, to be able to demonstrate your usage of it is that little bit of a private good that makes it possible to produce a lot of this public good. I wanna ask you if there's any questions because that's what we do in class, but I'll hold that till the end. So let's begin with the nature of the firm, the very first article that was by Ronald Coase in 1937. And up until 1937, the economist had actually no concept of the firm. It was literally a black box where inputs went in one end and widgets came out the other end. And we had no model for what was going on and the organization of the production mechanism within that black box. And Ronald Coase began this development by looking at how resources are allocated. That's the ultimate question that economists will always come back to. How are you allocating resources? And he looked at this picture of workers, day workers. And that's typically not a firm. If you want to contract and get a day worker, you do it on a day by day basis. And that's costly. There's transaction cost. So the firm, according to Ronald Coase, arose to mitigate these transaction costs by having managerial discretion over the day-to-day activities of employees. And the only limit to the size of the firm was the manager's ability to direct labor. So you had ever increasing hierarchical firms until it got to be too complex, too many different types of decision-making, and then you ended up starting off with another firm. The transaction cost of managing were much higher, internally were much higher than the transaction cost of going back into the market and hiring on a subcontracted basis. That's our first theory of the firm. This is how economists think about the question. Has nothing to do with you guys. I said, okay, well, this doesn't fit at all. The open group is not hierarchical. There's not that manager, as far as I can tell, directing it. Let's see for a second. So at the same time that Ronald Coase was working on the nature of the firm, Frederick von Hayek was winning the Nobel Prize on the economics of knowledge in society. And this actually has more relevance to the structure of what you're doing because I've defined the standards as a knowledge-based product. And not just knowledge-based, but the knowledge is dispersed among many people. So this is a picture of a tribesman in Kenya. Do you know how many different languages they speak? There's about 42 main languages. If you count dialects, it's over 60. Swahili and English are the two main languages called the trade languages on that, but 60-plus languages. This tribesman is carrying a cell phone. I can predict, as an economist wants to do, that over time the languages will coalesce to English and Swahili. It will become the standard for these people. But it's being done, as Hayek would point out, spontaneously, without directed control. So Hayek's contribution about dispersed knowledge is that you have a lot of challenges to get people to reveal it and often their own self-interest will allow it to emerge spontaneously. So let's contrast that for a moment. Let's say the open group wanted to go to Kenya and immediately tell people how effective it would be, how much more efficient, how much more innovation would occur if they would only all learn English. Couldn't do it. It would be a futile task. So this is something that has to evolve. Now that's not to say that you can't do directed coordinated activity. One of my favorite quotes from Hayek is this. Order without design can far outstrip the plans that men consciously contrive. Let me switch one of his words. Standards, like speaking English, without design can far outstrip the plans that men consciously contrive. So think about the difficulties of trying to design English as a standard for the Kenyan tribes. Part of it is, are they ready for it? The timing for it, the want for it. These are the same problems that you have with the standards, the IT standards that you're trying to design. Some of it is way ahead of its time. So Hayek advocates and spoke highly about another standard, the market price. What is the market price? A standard for revealing your information about your values and your financial ability to bid for things. It's a great system for conveying a lot of information quickly in a standardized form. When you tell me you want something, I don't understand that degree of want. But if you tell me you're willing to pay $10 for it, okay, anybody willing to pay 12, I can then make a choice and an allocation decision. So price mechanisms have for a long time operated in a marketplace to be a standard for information about wants. All right, everybody? It's an amazing system. And there are management books out there that try to incorporate as much as possible that information nexus like price within the organization of the firm. Hayek says you have to go from management in the firm to rules. And I'm gonna talk about rules a little bit later. Rules of the game, not how to do something. Let people have the rules and see how they will play the game and that will reveal more information than trying to manage the decision-making. So we're gonna talk then about some other, I gotta talk about the four essential organizational features of the open group. These are the ones, again, just by observing you. It was very clear. We're using, very clear. We're using expert knowledge and that expert knowledge is not in any single person. So right away you see the problem with managers. Your managers are trying to get people to reveal their knowledge and the manager doesn't even know the knowledge that can be revealed because it's not in any single person. And knowledge is a public good. How do you get people to give it up, so to speak? I know that the open group is characterized by teamwork and I've actually have a theory of the firm to discuss your team production. Community is the first thing I saw when I was at the open group. People didn't say hello. They said, John, how's your dad doing? What's going on with your health? I mean, it was community from the moment I walked into the door and then consensus and consensus is critical to the success of any standard. And we're gonna talk about these and find the economic theory that helps support them or explain them a little bit differently. The first one is team production. This is a paper by Alchin and Demsetz. It's a seminal work in the American Economic Review. And what they basically said is that the firm arises. The reason we see that black box is because it allows for a different production process that otherwise wouldn't take place and that production process is very efficient. Team production, but only when you have a manager who can monitor the marginal product, make sure not one of those slaves is shirking in the pool and allocate rewards as much as possible because it's very inseparable production processes. So you have to have somebody to monitor the production process. What's the number one problem with teams? Shirking, free riders on that. The guy with the whip, he's supposed to watch out for that and make sure it doesn't happen. I didn't see any whippings in the sessions. They may take place offline, I don't know, but I don't think you guys have this kind of team production. And as I learned, please let me know if I'm wrong here. As I learned that most of the standards have a champion, it's not really a team. It's somebody who takes the lead. It's somebody who drives the process. So where does the team production come in? It comes in in the vetting of the standards. When everybody comes in and pulls it apart and puts it through the ringer, it's a crucible by fire before a standard is born. And it called to mind an image that I couldn't find a picture of. You all know what Ozzie No Rule's football looks like. So when there's a bunch of football players and they all jump in mass on the ball, that kind of scene, layer and layer of humanity on top of the ball, if one player can come out with that ball, I'll call it the standard, that standard has survived. Okay, so I think that before I gave up on team production as a description of the organization of the open group, I realized it was in one part of your activity. It is essential to the vetting process. And we'll talk a little bit more about this when we get to consensus. This is my shipping container picture. Isn't that amazing? Look at how standard they all are. George Stigler contributed to our understanding of the firm. And he says the firms grow and shrink depending on the extent of the market. And you're already living that. The standards that come about are prompted by the opportunities to collaborate the extent of the market. Large markets, widespread use of some level of IT might benefit most from a standardization of how that IT is communicating with each other again. So I like the extent of the market as a prompt for the initiative to do a particular standard. It might say something about the creation of the open group, but for right now I'm not applying this theory to the open group because it's more of a specific action that you do, a specific standard. It doesn't really get to the heart of it, but I think that the idea of being responsive to the market is part of what you are all doing. Let's see if I have any more. This is the contribution of Harold Demsitz. He says that the firm is best thought of as a nexus of contracts. He didn't say the word community, I put that in there. A nexus of contracts. Contracts between the managers and their subordinates, between the labor inputs, between the supply chain. Think of it not as a organizational flowchart, but a chart of contracts between these agents. And so now you get a much more fuzzy definition of what the firm, the boundaries, are not as specified. But if you put in the word social, a nexus of social contracts, then I think you're getting at the heart of what is community and the role that community plays in as an essential element of the production process called the open group and standards. Community is an essential element of the production process in standards. So what does community mean? You know. Shared experiences in work, shared experiences in education. Communities involve trust. The exchange of knowledge really hinges on having this trusting relationship. Community involves convivial exchanges. It can be fun to work hard. And you get people to enjoy the process, even the very strong vetting that takes place. What we'd like to have is rules that everybody knows in the community. And then as little interference as possible when people begin to play. Think of it that way. Think of it as a sports community where what you're producing is play. To some of you, it's a lot of play. And so we really want to give you that permission to play in a safe environment. So the picture I picked is one that reminded me of a very nice evening we had yesterday. A lot of fun talking, exchanging ideas. And that kind of convivial nature really, I don't know how to emphasize it more. I don't think Gig Hub would work because it doesn't have that connection to one another. There's not a lot of ideas here. A lot of rewards that you're getting for all of this effort. And community is a significant reward. And if the convivial nature doesn't work, then I think a few, I don't know, incriminating pictures might be useful to get people to play nicely. Did we have some of those, Steve? From last night? Consensus, this is me. I hate consensus. If they would only make me dictator of the Department of Economics, I would have stayed another five years, but I couldn't. Consensus takes so much time, it's so hard. It's that dog pile on top of the person who did all of the work to get the standard up and running and all of a sudden people say, no, no, no, this is wrong. This won't work. That vetting process is essential because the voluntary adoption of standards takes time. And there's no way to know what is the right time except to tap into all of the tacit knowledge of the people on the team. So if your gut tells you it's not ready yet, that's the only reliability factor that we have about whether or not this is ready for prime time, whether or not it will be accepted and adapted. So the ones that make it out of the dog pile, the ones that make it through the crucible of vetting, the standards that make it, those are the ones that will have the best chance of succeeding and give the most gain. This is a very important part for economists. You all know through the vetting process by having to get to consensus about the marginal gain of each rule. So some regulator that says, oh, there's gotta be a rule for this or a standard for that, they're gonna put too much in it and probably the wrong things too. You guys working together through a consensus process will whittle that down to those changes that have the highest marginal product or marginal benefit to people. That's essential. So I'm really sorry that you have to do it by consensus. There's no manager, there's no hierarchy. There's a community of people who are willing to play hard and work hard to get something done, to produce knowledge. And there's no economic theory that describes all of this, just pieces of theory. My next steps are to talk with some of you about the early evolution of the open group. This has been going on since the 70s, I believe. And I wanna know which came first, the chicken or the egg? Was it the time right when corporations said we can go farther now if we get more standardization? Or was it the customers telling the corporations that we wanted? And then the corporations deciding, there had to be a corporate decision to say that this needs to be outsourced. We need to take our labor and put it into a different structure. I don't know and I have to find out. There are lots of different standard organizations and I wanna find out if these four features are robust across those different standards organizations. I've seen them online, but I would really like to go personally to their conferences, especially standards Australia would be a nice one to go to. I understand there's a standards in Greece organization. So I'm gonna be doing some grant writing to enhance my research. And I wanna consider the impact of competition from other standards groups on the organizational structure. These are what matter to me and I made it under the 30 minutes that you asked for. So I have time for, there's a little bit of references. This is actually the wrong slide I realized at the last minute, but these are some of the references that I've used. So I'll take your questions now. Thank you very much, Lydia. You can invite you to have a seat if it doesn't interfere with the microphone too much. So we do have a few questions, but I wanna back up your point about it would be futile for the open group to go to Kenya and say, everything would work if you only all spoke English. Because several hundred years on it hasn't worked in this country, has it? No, it hasn't. Well the incentives are not aligned for that either. There's the proof, there's the proof. So the other thing I've got to mention, new words for the open group. We've got some work ongoing about a sort of dictionary of open group terms and whippings crucible by fire and Aussie rules football have to go in there somehow. I love those. So question we have, what strategies do you recommend for driving adoption of existing standards? And as an example, how should we allocate resources between demonstrating the value of a standard and adapting it to meet the needs of influential groups or common situations? I'm gonna have to sell you the answer to that question. A research project. Yes, definitely because it is a question about whether or not there's a recognized need for it. So that's kind of self generated by the end user of it. And what you're telling me is that you assume they don't know that they need it. So how is it that people figure out that they need a different type of car or that they need a different type of lawn mower? They observe what their neighbors have. And if their neighbor is doing well, you're saying, well, what are you driving? And maybe I should be driving that. Is that the key to your success? And your lawn looks so good. What are you using for the lawn mower? What fertilizer are you? We mimic our people. I mean, that's the old, the Joneses follow what the Joneses do. So I don't wanna assume that people don't know that this standard or this language called English would be better for them. I assume that they are looking to their peers and that peer group might be very narrow as in the Kenya example of tribes. And that they're making the best decision they can with the information they have about their own interest. So if they do see another tribes person really prospering, there'll be questions asked and people will try to mimic and adapt to that behavior. Human behavior. And you touched on this a bit. I know, but the other question is if community, you stress the, if community is an essential factor and with a lot of the activities inside the open group and other standards organizations occurring virtually nowadays, partly for geographic spread, partly for cost reasons. Do we lose something from that sense of community by that, the nature of the fact that the face-to-face opportunities for face-to-face interactions are limited to events like these every three months? I really think you do. I have to say you do because as far as I know what Gig Hub does, people put up software and they try to build a reputation for themselves personally by being very well liked on the software then they end up selling it. That's a very specific type of knowledge and it's not the knowledge that you need to come up with standards. So you're gonna get very idiosyncratic software types of knowledge. The discussion format, the interaction format and the just the chatting, I can use the chatting word about problems is what is still the next idea about a standard. Whenever we periodically ask people what they get from the event, what's the value of coming here, so much, yes it's the sessions and listening to people like you but it's the networking. It's the opportunity to share problems, experiences, ask experts, et cetera, it's great. Well, we'll leave it there for now. Thank you very much, Leo. I know you'll be back on a panel shortly. Take a breather. Thank you.