Multiplier effect

Posted 6 Jun 2005 at 08:23 UTC by bolsh Share This

When you spend money, that money has a value to the economy which is more than what you spend. Money spent on imports is worth less to the local economy than money spent on local produce.

So how does this relate to free software?

If you buy a shirt for $30, the shop owner uses that money to pay wages, buy groceries. So out of your $30 maybe $20 recirculates into the economy, and then that gets respent. Typically your $30 purchase is worth about $60 to the economy.

Imports are dead money. It's money that is getting taken out of the economy. 100% of the money is going out of the economy. When you buy an imported product in the supermarket, then a lot of what you pay is going to the importer, and from there going out of the country.

That's basic economics 101.

Now what happens when you buy computer software? Almost all of the computer software for sale worldwide is US produced, and has very high margins. That means when you spend $100 on Windows, $80 of that is probably going to leave the country. There is no multiplier feedback loop, where the money you spend goes towards improving your local economy, buying local products and generating local employment. It's dead money.

One of the things you get with free software is the freedom to choose your supplier. The sources are available, which means that a company supporting the product can sprout up anywhere. You don't need to go to the GNOME Foundation to get a GNOME desktop administered or supported, chances are there's some cocky college graduate living in your town who can do it for you, cheaper.

And this is where all the TCO arguments coming out of Redmond fall flat on their face. Let's say, for arguments sake, that installing and supporting GNOME is 20% more expensive overall for the first 5 years you use it. It's cheaper afterwards, but play along with me for a sec.

So when you spend $100M on Windows, $80M of that leaves the country. You get $20M working for the local economy. When you spend $120M supporting GNOME with local companies, $120M stays in the economy.

This isn't a question of percentage points, it's multiples we're talking about. $1 invested in free software by a government is an investment worth 5 or 6 times the equivalent investment in Windows.

You're spending more, but it's an investment in local industry, the local comuter industry. It's an incentive for local graduates to stay in the country to earn a living, rather than moving to the US. It's a cheap way to kick-start your local knowledge economy.

When Jeff Waugh said we changed the rules, he's right. We've changed the way the world works. We've changed people's expectations. We've given people the freedom to choose.

..., posted 7 Jun 2005 at 11:46 UTC by Malx » (Journeyer)

You are spending money to local supporters, developers and admins to make run free software solution. And you are not sending money to foreign companies - no import of software licenses. Ok.

Still you are not exporting also. All work is distributed to all for free.

And for investments... You have no single point to invest to :) You have no local company to be local OSS representative. And investing in 1000 independent individuals is not possible ;) The only way is to invest abroad to KDE/Mozilla/etc - but it is the same - money gone from local industry.

An important niche, posted 9 Jun 2005 at 13:04 UTC by abraham » (Master)

I think there is an importance business opening in a lot of countries now.

Create local companies specializing in solutions for givernment and local autorities fully based on free software. A large initial investment is needed, since such autorities tend to be rather strong bureaucracy to handle as customers.

What bolsh says isn't exactly news to most politicians.

100% leaves the country?, posted 12 Jun 2005 at 12:15 UTC by robocoder » (Journeyer)

Ok, let's clarify this a bit.

Let's take the example of buying an imported shirt for $30. At 100% retail markup, the retailer's cost is $15. If a middleman is involved (e.g., the importer/wholesaler), the landed cost is probably $10. If we continue up the supply chain, we'd likely find only $5 made its way to the foreign factory that actually made the shirt. The other $5 went to domestic companies (e.g., freight forwarders, bonded inspection, customs brokers, and banks) and local government or government-appointed agencies (e.g., product certification, customs excise taxes, sales taxes, other levies).

IMHO, it's naive to say 100% leaves the country. We live in a global economy, where companies operate internationally, own foreign subsidiaries, etc. Consider the case where a foreign factory is manufacturing the shirt under license. If the licensor is a domestic company, don't theses licensing fees or royalties then flow back into the country? Furthermore, importation isn't necessarily bad. For example, it can fill domestic production shortfalls, lower the rate of inflation, or stimulate competition & productivity improvement.

People have a choice whether to buy foreign or domestic, that may depend on a variety of factors, including value, benefits, costs, and risks. These may be guesses (e.g., estimated risk impact), tangible (e.g., measurable cost savings), or intangible (e.g., perceived "brand" value).

So, I'm not entirely sold on your argument, but I do agree there is a challenging opportunity for building a home-grown software industry (thereby reducing the brain drain) and providing more local economic benefits.

Not economics 101, posted 14 Jun 2005 at 05:43 UTC by nelsonrn » (Master)

Imports are dead money. [....] That's basic economics 101.

Nahhhh. That's *bad* economics 101. Lots of people say "Oh, that horrible Wal*Mart sucks profits out of the community!" Actually, not that much leaves the community compared with buying something similar from somebody else. So some profits go to Wal*Mart. But if somebody in the community owns Wal*Mart, back come the profits into the community again.

It's nowhere near as simple and obvious as you claim. -russ

Horrifying misinterpretations of basic economics, posted 5 Jul 2005 at 04:46 UTC by apenwarr » (Master)

You have to watch very carefully when someone tries to convince you of something based on "basic economics", because while basic economics is almost too simple to be itself wrong, it's definitely prone to very bad misinterpretation. The best protection against this kind of misinterpretation is just common sense.

In effect, what bolsh is saying is, "Have everybody do this surprisingly inefficient thing, and it will magically actually be better for your economy, not worse!" To quote him above: "You're spending more, but it's an investment in local industry, the local computer industry." Spending more money to get the same quality of services, but somehow that's improving the economy! Wow, that's great! Who needs those silly import/export things anyway? They're just a big drain on the economy!

Not actually. In fact, the US has a big net trade deficit - they actually import far more than they export, particularly from Asia. For slightly more complex reasons you can learn a little later in your macroeconomics 101 class, increasing exports from the USA, while obviously better for the USA, is also better for everyone else. Trade imbalances hurt both sides, as China is discovering while the US dollar slowly loses value, thus making Chinese goods more expensive and less desirable.

Now, that's not to say you should buy stuff from the USA just because you feel sorry for them and you want to fix the trade imbalance. But if they really do produce stuff cheaper than you can, you're actually hurting your economy by not buying it from them in a feeble attempt to jumpstart your economy. It's called "protectionism," and it's been demonstrated to simply not work.

Which brings us back to square one. Is it really cheaper to buy proprietary software from the US than to produce it yourself or use Open Source? I'm sure we all have our opinions on that, but Econ 101 won't help us figure it out.

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