How economics helped me understand the evolving music business

For artists who’ve never had any interest in picking up an economics book, now’s the time to get interested.

Guest post by Rebecca Day of the Foundation for Economic Education

On March 2, online publication MusicRadar covered a report released by the University of East Anglia detailing independent musicians’ dwindling incomes. The report stated two major factors are at play.

First, artists who belong to major labels have a distinct advantage over independent musicians when it comes to earning potential from streaming. Platforms like Spotify and Apple favor major labels for several reasons. The main reason is that major labels have a ton of money invested in streaming platforms. Naturally, companies are going to give perks to those who offer them the most capital. Hence, it’s no secret that major labels like Sony and Universal (two of the four major labels left) “own” streaming.

But there’s another reason for shrinking incomes that’s mentioned in the report. Artists receive measly earnings from streaming. Even major artists admit streaming doesn’t pay the bills.

So where does this leave independent artists sandwiched between an industry still held captive by gatekeepers, and products with earnings that don’t even begin to cover investments?

Despite the mystery and secrets of the industry, much of the confusion can be solved by understanding the sound laws of Austrian Economic Theory. For those artists who’ve never had any interest in picking up an economics book, now’s the time to get interested because free market economics is the single most important driver of your business. And whether you like it or not, whether you’re a musician, writer, or painter, you’re a business if you take in income.

Subjective Theory of Value

The Subjective Theory of Value comes from the father of Austrian Economics, Carl Menger, who stated that individuals value things at different prices at different times for all different kinds of reasons. This went directly against the Labor Theory of Value, a popular economic theory which states products should be priced according to labor put into them.

While subjective values are often talked about purely from the consumers’ point of view, it is important to understand this economic law plays just as important a role for an entrepreneur.

As business owners, musicians are constantly investing in their work. Studio time for recording, new instruments and equipment, and travel expenses are just a few goods and services musicians buy on a regular basis.

Even though these goods and services appear to be from different industries, they all have one thing in common. Their prices are directly tied to what consumers are willing to pay for them. If you are touring and need a hotel room, you will search for the cleanest one at the best price. Find one with tons of amenities but too steep a price, and you’ll move on. Find a dingy one with a killer rate, you may move on from that too. The winner will be the hotel with the price which makes the troubadour think, I value this hotel room more than the hundred dollar bill in my pocket.

This same process goes for music stores. I’ve seen time and again customers and store owners haggle over numbers until they come to a price that suits them both — a price which reflects that the store owner values the $1,000 dollars more than the guitar he’s selling, and vice versa. 

Things get confusing when you step over to the realm of music production and distribution. Artists are often so emotionally tied to their end product, they fail to make wise investment choices from the start. While it’s great for the recording studio who gets $10,000 from an independent artist for an EP recording, it’s not so great for the artist, who even after recording still has to pay for distribution, physical CDs, vinyl, and touring expenses to promote the album. With streaming services like Spotify paying an average of $0.003-$0.005 per stream, this doesn’t seem like a justifiable investment.

Because books and music are all around us now, available for our immediate consumption, the prices consumers pay for the products have been significantly reduced.

The Subjective Theory of Value came into play with my music business not too long ago when my band had new music to record but the recording studio we’d been recording at for years had gone up in prices (good for them for increased demand). When I ran the numbers against what we generally make each year from music sales, I had to make the hard decision to pass and come up with a new plan. Due to competition, I have options. I could go find a new studio to record at with better rates (and hopefully no sacrificed product quality.) Or I could even take the time to build my own studio and learn the ins and outs of music production (the most cost-effective).

Not only did I come to the conclusion that I valued keeping the money I would have to pay for the recordings more than the recordings themselves, but I also understood I could take that money and invest it in other resources that had more potential to grow my business and directly generate income.

But many musicians don’t realize taking a continued loss on investment project after project is not a sustainable way to run a business. They get caught up in the novelty of recording in Nashville. Or they think more expensive means you’ll be taken more seriously by industry professionals. 

Couple this business model with myriad artists who have operated this way for years and it’s no wonder musicians are having to take day jobs just to pay the bills.

Law of Diminishing Marginal Utility

Another economic theory Carl Menger coined is the Law of Diminishing Marginal Utility. This economic theory can be clearly seen everywhere in the entertainment industry. An article published by Electric Lit stated in 2019:

 “[Books] used to be much more difficult to obtain; you couldn’t flip through Monets or read some Robert Frost poems while standing in line at the grocery store, and as a result we did what we do with many rare things — we intellectualized them and tried to ascribe them meaning.”

Because books and music are all around us now, available for our immediate consumption, the prices consumers pay for the products have been significantly reduced. This goes in line with the example often used when explaining the Law of Diminishing Marginal Utility. People often ask why diamonds are so much more expensive than water when water is a critical need and diamonds are a luxury.

It won’t be some union that saves musicians. It definitely won’t be outdated entertainment law written during the 1920s music landscape.

The Law of Diminishing Marginal Utility states that the more units of something someone has, the less value they ascribe to it. If Farmer Bob has one apple, that apple will have the highest price compared to the second, third, fourth apple and so on as he obtains more.

This not only solves the water-diamond dilemma, but it plays a direct role in artists’ earnings as well.

The easier it is for consumers to get their hands on more books, music, and cinema, the less they will value it from an economic standpoint. Therefore, they are willing to pay less for it.

Reason vs Emotionalism

The arts industry can be predatory. Artists are a different kind of entrepreneur because their products are deeply rooted in their emotions and psyche. Industry professionals know this and have figured out many ways to take advantage of this vulnerability.

Because of this, it’s important to hold Reason at the forefront of each business decision we make. This can be the hardest lesson to learn as a creative entrepreneur and one we have to work at mastering our whole life.

If we continue approaching the issue of dwindling arts incomes from the standpoint of emotionalism, of blaming capitalism, or the industry, or streaming services, we are leading the charge for an irrational battle cry.

For if there is more tragic a fool than the businessman who doesn’t know that he’s an exponent of man’s highest creative spirit — it’s the artist who thinks that the businessman is his enemy.

Though consumers determine prices, it’s important to understand we have to say “no” when the investments we make in our products are continuously greater than our return. We say no by taking advantage of all the market has to offer. Many artists are already doing this. They’re recording their own albums. They’re taking advantage of live streaming. They’re foregoing “360” deals with record labels that result in them losing rights to their music.

These smart business decisions don’t solve the overall problem overnight. But it’s a step in the right direction.

As the great Austrian economist Ludwig von Mises once said, “All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts.”

It won’t be some union that saves us. It definitely won’t be outdated entertainment law written during the 1920s music landscape.

It will be the individual artist, the writer, the musician, who understands and champions art as business, and makes rational, economically sound decisions to reflect that philosophy.

This understanding executed via the free market will ultimately be what corrects horribly low streaming payouts, incredibly high investment prices, and artists relying on the heart instead of the head to make art profitable.

Richard Halley, a character in Ayn Rand’s monumental novel Atlas Shrugged, said it best.

“For if there is more tragic a fool than the businessman who doesn’t know that he’s an exponent of man’s highest creative spirit — it’s the artist who thinks that the businessman is his enemy.”

Rebecca Day

Rebecca Day is an independent musician and writer, and enjoys applying the principles of Austrian economics to her businesses. More information about her music and writing can be found at rebeccadaymusic.com.

This article was originally published on FEE.org. Read the original article.