Open Source And Recession – An Economic Outlook

Initially, I dropped an idea of writing this blog by reckoning the amount of time and energy required to perform research. However, my mentor Ramona Gerum motivated me and provided inputs to write this blog. This would not have been possible without her help. Thank you very much Ramona.

Introduction

In October 2022, the term recession gained popularity on Google trends. This happened as many economists already predicted a slowdown, and it started flashing on news channels world-wide. In the following year, many giant corporations, such as Google, Microsoft, Amazon and others, announced massive layoffs; this was followed by other chain of events from stock market crashes to high inflation rates across the globe. This development reinforced people’s belief about recession.

Majority of organisations who ran several rounds of layoffs claimed to have overstaffing issues as the hiring was done to anticipate the upcoming tide of work that never came, and they did not fire any technical/software experts. In such cases, open source products often rise as an alternative to proprietary ones. This blog will focus on the effects of a recession on open source products.

Some important related to economics

As this blog focuses on recession, it is important to understand some economic terms to understand this blog properly.

GDP(Gross Domestic Product):

This is the gross monetary value of goods and services produced within a country. Every country produces various products, such as food, heavy machinery, oil and others. Those commodities would give some value upon selling them in the market. The gross total of the values of all such goods is GDP.

Generally, it is calculated on an annual basis.

GDP Growth:

The change in GDP compared to the previous GDP figure is GDP growth. In general, economists calculate them on a quarterly and yearly basis as they represent the economic position of a country and predict its growth in the near and distant future.

Developed countries:

This one is a little complex as there are more than one key factors that are decision-makers. For a country to become a developed one, all the factors from GDP to standard of living and HDI(Human Development Index) should be taken into consideration. In terms of economics, countries with a GDP of 12,000 USD(some experts put it at 24,000 USD) per capita(person) are considered a part of the emerged world.

Boom:

A period of good economic growth: rising number jobs, increasing wages, increased profitability. This is characterized as a short stint of wealth creation and accumulation.

Recession:

A period when economic growth is very low or nil. In this period, higher unemployment, lower demand in the job market, higher inflation and layoffs are commonly observed in such a period.

In economics, negative GDP growth for 2 consecutive quarters is perceived as a recession, and if the condition of recession persists for 3 years, it is called an economic depression. However, economists analyze other indicators as well to decide if the recession prevails or not.

Inflation rate:

An average increase in percentage in the gross price of various commodities from the previously obtained number. For example, if the milk was being sold at 1.5 USD in 2018, and in 2019, it is being sold at 1.55 USD, the price rise is nearly 3.33% that is the inflation rate of milk for a year. Usually, the gross percentage is considered to determine the condition of a nation. It is one of the important indicators.

• Ideally, 3-4% inflation rate is considered to be a healthy one.
• Higher than 5% affects the livelihood of people and many people would be pushed below the poverty line.
• While it is lower than 2%, it should be considered that the economy is in a reverse gear, which is not good for the growth of any country.

Third-world countries:

This term is often used in a pejorative manner; it was originally used for those countries who did not prefer to align themselves with either the USSR(socialist) or the USA(capitalist) in the era of the cold war that surfaced after the second world war. However, as they did not choose any side, they failed to grow like developed countries, hence the term “third-world countries” became synonymous with underdeveloped or developing countries.

Causes of a recession

A recession is caused by any disruption in an existing established economic flow. As a country grows, various channels are established through which money flows from sources to sources, and that is how money keeps flowing through the system. Whenever the rotation of money is affected, it gradually affects the economy of a country.

For instance, consider the below existing channel.

1. Farmers grow crop
2. During crop harvesting seasons, farmers employ additional people
3. Farmers sell goods to wholesalers
4. Wholesalers sell it further to retail stores and business houses
5. Retail stores sell it consumers, and business houses produce goods for consumer

Here, if a country is affected by a drought and there is no other method of farming available, people in the above hierarchy from farmers to employees of retail stores and business houses will become jobless for that year and the flow of money gets disrupted. This is to note that food is an essential commodity, and due to crop failure, the demand for food items exponentially rises and the prices of food items also skyrocket.

Here, just to understand, effects of recession will not be visible immediately after the drought; it takes time to surface. Although the above one is just taken as an example, this is not a completely hypothetical scenario.

As we saw a classical example of drought, there are various phenomena that can drive the economy to recession. It completely depends on the economical condition of a country.

In the third-world countries:

This group is already facing a number of internal problems and depends on prosperous countries. They may or may not have adequate resources, however if they have, they do not know how to utilise them efficiently. Also, due to internal clashes, poverty and economic instability, they witness recessions very frequently. Some evident factors for recession in such countries are

• Drought
• Heavy rainfall
• Wars
• Epidemic
• International sanctions
• Political instability
• Uncontrollable inflation
• Corruption and scams
• Strikes

In the developed countries:

The developed world is often perceived as the utopia as processes are well-established there. The scope of recession appears limited, however this is just one side of the coin. There is a dialogue in the movie Wall Street: “Greed is good! Greed is progress!….”. Why I quoted this here is because greed is hardwired in the human gene, which propels humans to earn more money and exploit the system’s loopholes. Over the period, it causes an economic slowdown. Some of the driving factors for recession in such countries are

• Policy loopholes
• Stock market crash
• Bad loans
• Wars
• Epidemic

Also, any economic slowdowns in influential countries resonate world-wide. Considering the classical case of the great recession of 2008, it started due to the housing bubble that resulted in the subprime mortgage crisis. In other words, due to sudden hikes in the prices of houses, banks started approving loan amounts with cheaper mortgage assets/commodities. For example, the loan amount is 100K USD, while the mortgaged item is worth 10K USD only. Also, people with poor credit rating got loans. This resulted into a burst of a bubble, which was an impetus to economic turmoil, millions of job losses and closure of businesses.

Repetitions And Durations Of Recessions

As described in the last paragraph, reasons for recessions may vary from country-to-country, also recessions in various countries may not necessarily coincide. Hence, the stint and repetition pattern for every recession are different.

Earlier, it was believed that recessions and booms are followed by each other. However, over the period, the political structure and law system in developed countries have evolved in such a way that their economies may stay resilient against recession.

Taking the case of the US, before the 1980s, the period of economic slowdowns were too frequent, nearly 3-5 years. However, since the 80s, the gap between the 2 recessions has significantly widened.

The snippet below taken from Investopedia shows the period of recession(“NBER Recessions” and “Length of Recession(Months)”) in the USA.

The condition of recession may not prevail across multiple countries at the same time, having said that, the great recession of 2008 was the first case of global recession, which cannot be considered as an exceptional one as it was the beginning of the era of globalisation. New waves of recessions will have global impact.

Performance of open source during and after recessions

During every recession, it has been observed that organisations lean towards less costly products, so that they can cut down the cost and maintain their profitability. Open source software emerges as a boon for them because they can save licensing cost for the product cost.

The amount required to acquire the license is very high. During a recession period, it is not at all an affordable option for companies, having said that, companies may run without new development work for a certain period and may eliminate some staff members, however platforms and databases are very crucial; hence, they cannot be eliminated as it is tantamount to shutting down a company.

Deploying open source products in an environment is the most viable option in such cases as they may continue running their businesses.

A survey was conducted by Linux foundations on OSS(Open Source Software) in which nearly 431 people, who were from “Fortune 500 group of companies”, working from middle-level to top-level management participated. They were asked various questions about open source and its benefits. When they were asked about adopting open source products, their answers are as mentioned in the chart below.

Source – Page 10

By analysing the chart, we can see surges in demand for open source in both the dot-com bubble burst(2001) and the great recession (2008). Besides, a sharp rise from 2016 can be noticed as well. However, it can be seen that the demand for open source has always been moderate.

In this section, it can be seen that open source software is resilient against recessions and keeps on flourishing during and after odd times as well.

Can Open Source Keeps Recessions At Bay?

This is a really interesting question that requires further research. Since the last few years, companies have become more optimistic about open source software products, such as MySQL, PostgreSQL, Kubernetes and so on. This is because these products provide all those features that meet industry standards and requirements. Over the period, open source databases, OS and web/app servers have evolved by working with various industries, and now, they meet all the requirements that companies give. Due to which, open source successfully carved a niche in the market.

The noticeable thing is that organisations do not need to pay a penny to use these products. Also, if one can afford to hire a small team of developers, the company comes up with its own version of the product. In case this is not the viable option, there are communities and a number of small-scale to medium-scale companies that provide support of open source.

If we can focus on the cost of products, it would give a more clear view on open source’s ability to stem recession.

The case of 2008’s great recession:

We all have heard tales of 2008 recessions: heavy pay cuts, job losses, suicides, loss of property and so on and on and on. As I mentioned in this blog earlier with an example, a disruption in the flow of money causes recession, and in the case of 2008, banks sanctioned loans that cannot be repaid. Due to which, banks were defaulted and it had badly hit the economy of the USA, which affected the whole world.

The most peculiar thing the Washington Post highlighted about its impact and losses.

• Loss in the global economy – nearly 2 trillion USD

• The US stock market loss – around 8 trillion USD

• Gross individual losses – around 9.8 trillion USD

A hypothetical scenario with an open source in 2008:

Had it changed anything if organisations had placed open source products instead of proprietary software products back in 2008? As we can understand, the stock market loss and individual losses cannot be recovered due to this, because it has no relation with the product in the backend or frontend.

To understand this part, we have to check out some revenues. The revenue of Microsoft was nearly 52 billion USD in 2008, and if we start looking into revenues of other proprietary software producing organisations, their collective revenue may hardly reach half of the global economy loss(2 trillion USD). If we consider all the losses incurred due to proprietary products only, even in that case, open source could not have staved off the recession as the number itself is very huge.

As per Statitsa, the gross revenue of open source services was 32 billion USD in 2022. Considering this figure, it could have definitely helped mitigate the situation up to certain extent in 2008, and many of jobs could have been saved and many organisations might have avoided closures.

Open source’s role after 2008:

Due to loopholes in policy, the situation of economic turbulence arose, hence the US government took corrective actions and introduced a number of overhauls in economic policies, which made the economy more stable and immune to unwanted slowdowns.

Along with these things, open source gained popularity and percolated into different industries. Many companies have moved away from proprietary products and adopted open source products as they found them cost-effective with all the required features available. Of course, a penny saved is a penny earned. However, it seems no proper analysis was made to notice the economical impact of open source’s entry in the market. Also upon looking at the potential of open source a number of giant corporations, such as Google, Microsoft and others, have started contributing to the open source community.

But, if those people who contribute to open source are actually getting benefited? The answer lies in the below survey result.

Source – Page 13

Many economists predicted recession in the US between 2015-2018, which did not actually happen. Also, while I am writing this blog, experts have already announced a recession in 2023-24, which is yet to come true. Though I firmly believe that open source is pushing the recession back, it is difficult to prove it in absence of surveys and data. I hope some experts may pick this topic and make a detailed analysis on this part; I am sure it will give a great push to the open source community.

Conclusion

Booms and recessions were repeating on regular intervals earlier, however over the period, due to economic advancements, recessions became infrequent and started repeating after several years. It is not necessary that all countries may face economic slowdown at the same time, also reasons for slowdowns may differ as well. During such a period, organizations have to bear loss and fall in revenues, however open source becomes more adoptive during recessions. Also, it is possible that open source is keeping recessions away, but there is no data to back this claim. ∎