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The hacking community developed at MIT and some other universities in the 1960s and 1970s. Hacking included a wide range of activities, from writing software, to practical jokes, to exploring the roofs and tunnels of the MIT campus. Other activities, performed far from MIT and far from computers, also fit hackers' idea of what hacking means: for instance, I think the controversial 1950s "musical piece" by John Cage, 4'33", is more of a hack than a musical composition. The palindromic three-part piece written by Guillaume de Machaut in the 1300s, "Ma Fin Est Mon Commencement", was also a good hack, even better because it also sounds good as music.
It is hard to write a simple definition of something as varied as hacking, but I think what these activities have in common is playfulness, cleverness, and exploration. Thus, hacking means exploring the limits of what is possible, in a spirit of playful cleverness. Activities that display playful cleverness have "hack value".
Hackers typically had little respect for the silly rules that administrators like to impose, so they looked for ways around. For instance, when computers at MIT started to have "security" (that is, restrictions on what users could do), some hackers found clever ways to bypass the security, partly so they could use the computers freely, and partly just for the sake of cleverness (hacking does not need to be useful). However, only some hackers did this—many were occupied with other kinds of cleverness, such as placing some amusing object on top of MIT's great dome, finding a way to do a certain computation with only 5 instructions when the shortest known program required 6, writing a program to print numbers in roman numerals, or writing a program to understand questions in English.
Meanwhile, another group of hackers at MIT found a different solution to the problem of computer security: they designed the Incompatible Timesharing System without security "features". In the hacker's paradise, the glory days of the Artificial Intelligence Lab, there was no security breaking, because there was no security to break. It was there, in that environment, that I learned to be a hacker, though I had shown the inclination previously. We had plenty of other domains in which to be playfully clever, without building artificial security obstacles which then had to be overcome.
Yet when I say I am a hacker, people often think I am making a naughty admission, presenting myself specifically as a security breaker. How did this confusion develop?
Around 1980, when the news media took notice of hackers, they fixated on one narrow aspect of real hacking: the security breaking which some hackers occasionally did. They ignored all the rest of hacking, and took the term to mean breaking security, no more and no less. The media have since spread that definition, disregarding our attempts to correct them. As a result, most people have a mistaken idea of what we hackers actually do and what we think.
You can help correct the misunderstanding simply by making a distinction between security breaking and hacking—by using the term "cracking" for security breaking. The people who do it are "crackers". Some of them may also be hackers, just as some of them may be chess players or golfers; most of them are not.