Overview of Free Innovation
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 smart- watch 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. ... (Linebaugh 2014)
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” (OECD Guidelines 2013, 44). 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” (Ironmonger 2000, 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 (von Hippel 1988, 2005). 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 (Raasch and von Hippel 2013). (In chapter 11, I will compare the concepts of free innovation, user innovation, commons-based peer production, and open innovation. Each offers a lens able to bring different aspects of household sector innovation into sharp focus.)
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. See Tadelis and Williamson 2013; Baldwin 2008.) 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 (Schumpeter 1934; Machlup and Penrose 1950; Teece 1986; Gallini and Scotchmer 2002).
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 (Baldwin and von Hippel 2011). 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 use (von Hippel, de Jong, and Flowers 2012; von Hippel, Ogawa, and de Jong 2011; de Jong, von Hippel, Gault, Kuusisto, and Raasch 2015; de Jong 2013; Kim 2015). 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 (Fisher 2010; Samuelson 2015). It also, as we will see, very generally increases both social welfare and producers' profits relative to a world in which only producers innovate (Gambardella, Raasch, and von Hippel 2016). For all these reasons, free innovation is well worth understanding better.