Taylor Swift Offers You Economics Classes Through The Music Industry
As Alan Krueger shows in "Rockonomics", music is a microcosm of the business world
What if we used the music industry as a guide to important principles in business and economics? Introductory economics courses would certainly be more fun.
The idea is not as bizarre as it may seem: as Alan Krueger shows us in "Rockonomics", music is a microcosm of the business world and offers various insights about today's economy.
At its core, music personifies the "paradox of value." We spend a lot of time listening to music (an average of three to four hours a day) and doing so clearly makes us happier.
Krueger and Daniel Kahneman, the Nobel Prize-winning behavioral economist, have found, for example, that adding music on the way home or to work elevates the experience to the average level of happiness.
Despite this, we spend very little on music (US $ 0.10 on average).
That's just 2% of total entertainment and media spending. Overall global music spending in 2017 reached $ 50 billion, roughly equal to 0.06% of gross domestic product. That makes the music, in Krueger's words, "one of the best bargains human society has ever conceived, and it just gets better day after day."
So that's lesson number one: the value that consumers derive from a product or service cannot be differentiated from total spend. Water is an even more extreme example of this.
The music industry also clearly reflects the "superstar economy." The earnings for being a top artist, as opposed to a very good one, have only grown with digital technologies that allow songs to be heard all over the world.
In 2017, the top 0.1% of musicians accounted for more than half of album sales and an equally disproportionate share of music streamed. Regarding concerts, the top 1% earned 60% of the proceeds (a significant increase from 26% in 1982). Meanwhile, any musician made $ 20,000 in 2016.
So why do some artists finish on top? Talent obviously plays a role, but there is also luck. We are all influenced by the music that others like and that creates a positive feedback loop for lucky artists.
The result is that initial success (which may depend on a matter of chance) grows and causes a small number of musicians to become immensely popular, thereby producing a "potential law" phenomenon, a dominant feature of economics. modern.
You can see this cycle in reverse when a famous musician shows up incognito in an unexpected place and is hardly appreciated by the public.
The third lesson is that technology can change rapidly, with tremendous consequences. Two phenomena have occurred recently in music.
In the early 2000s, digitization and file sharing dramatically reduced sales of physical albums. That in turn caused musicians to raise prices for performing live, making concerts a more dominant source of income for most artists.
In 2017, concert revenue accounted for 80% of the total for the 48 most popular and successful musicians, while album sales accounted for just 15%.
The other, even more recent phenomenon is paid streaming, which has increased revenue from the sale of recorded music after years of decline. However, Krueger argues that for musicians "live concerts pay the bills" and streaming probably won't change that.
It also points to the way artists like Taylor Swift, Radiohead and Garth Brooks experiment with new models that include concert and streaming sales strategies.
In the future, fans may pay more to watch live concerts via streaming, as they do in the case of sporting events.Another crucial conclusion, which may be particularly salient for basic economics students, is that it may happen that the simple answer is not correct.
Consider how traditional economic thinking would assume that the secondary market is inefficient, as it ensures that the people who value the presentation most can attend by paying a market clearance price. However, professional ticket distributors extract most of the profit from the secondary market, and for this reason Krueger argues that efforts to restrict the secondary market do not violate basic principles of economics.
Finally, we have the interesting way in which the music market is growing rapidly in China: despite the dominance of digital payments in most Chinese markets, concert tickets are still sold almost exclusively on paper.
In fact, music is one of the few industries in which the United States can surpass China in digital deployment. Chinese consumers stream about 7 billion songs a day, but their system relies on ads rather than paid subscriptions.
So we have the paradox of value, the role of potential laws, the impact of evolving technology, the dangers of oversimplified models, and the rise of China, all wrapped up in a popular music package. I would have taken that class in college.
Unfortunately, Alan Krueger will not be teaching it. The book was published posthumously this month. Alan taught me labor economics when he was a graduate student, it was the reason I got a Marshall Scholarship, he gave good advice at crucial moments in my life and was a mentor and friend for almost 30 years. The book is in a way a last gift from him and shows what was lost after his death.
