The music industry can tell us a lot about our winner-take-all economy.
The hit song “The Winner Takes It All” was released by the Swedish pop group Abba in 1980. That year also happened to be a turning point for economic inequality. Since 1980, more than 100 percent of the total growth in income in the United States has gone to the top 10 percent of families. A whopping two-thirds of all income gains have gone to the top 1 percent. The bottom 90 percent saw their combined income actually shrink.
Why has the economy become more of a winner-take-all affair?
Studying the music industry helps shed light on one key factor: the role of superstar markets.
Serious study of the economics of superstars began with the great English economist Alfred Marshall in the late 19th century. Marshall’s explanation for the growing income gap between superstar businessmen and everyone else rested on new developments in communications technology — namely, the telegraph. It connected Britain with America, India and places as far away as Australia. As a result, top entrepreneurs were able “to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before.” In other words, technology increased the scale of the market, an essential ingredient for a superstar to be able to earn a supersize income.
Ironically, he used music as a counterexample, a profession where superstar effects were limited. He pointed to the example of Elizabeth Billington, who was widely regarded as the greatest soprano of her era. But, Marshall observed, “so long as the number of persons who can be reached by a human voice is strictly limited, it is not very likely that any singer will make an advance on the £10,000 said to have been earned in a season by Mrs. Billington at the beginning of the last century.” Because even outstanding singers could not reach a large audience, they lacked the scale required to become superstars.
A second essential ingredient is that contenders for the top of the market have to be imperfect substitutes, meaning that each superstar has his or her own unique style and skills.
In other words, both scale and uniqueness have to be present to create a superstar market. Mrs. Billington’s voice was unique, but she lacked scale. Scale magnifies the effect of small, often imperceptible differences in talent. With the ability to scale, the rewards at the top can be much greater for someone who is slightly more talented than his or her next-best competitor, because the most talented person’s genius can reach a much greater audience or market, in turn generating much greater revenue and profit.
What changed since Mrs. Billington’s concerts? First, physical records, and the ability to record and replay musical performances, have enabled today’s top artists, those most in demand, to dominate the music business.
