Tag Archives: Joseph Schumpeter

06.14.2013 | Creative Destruction: How Super Star Musicians Make Money

As the old music business cycle unfolded, top performers got a substantial cash advance to make an album, they toured for several months or maybe a year and then MTV promoted their videos. At that point, they took a break before starting all over again.

No more.

At the Rock and Roll Hall of Fame, Alan Krueger, the (departing) Chair of the President’s Council of Economic Advisers, described the changes in the music industry. When he started talking about how it had become more of a super star business, I wondered where the money came from. And that took me to creative destruction.

But first, you can see the super star phenomenon:

Music Business Revenue

In addition to concerts, the top artists can earn hundreds of thousands of dollars from T-shirt and merchandise sales and movie and TV licensing. At the other extreme, iTunes, subscription services, YouTube ads, internet radio and CDs, provide much less income.

Here are some probable breakdowns for iTunes and subscription services like Spotify from the end of 2011:

From Rolling Stone Magazine, 2011.

Dr. Krueger used his super star data to comment on unequal income distribution in the US economy.

Less debatable, is how Joseph Schumpeter’s creative destruction has transformed an industry. Moving from LP records to cassettes, to CDs and now online streaming, changes in the music industry have transformed labor.

Or, as we explained in a past post…

Joseph Schumpeter characterized the unsettling process through which innovations replace established technology as creative destruction. The computer replaced typewriters. The auto eliminated the need for buggy whips. In the music industry, because of CDs, 78 and 45 rpm records became obsolete. And now, led by 13 to 35 year olds, internet based listening represents more than half of all music listening. For those of us who are older than 35, AM/FM radio is still #1 with a 41% slice of the listening pie.

As a result, industry super stars have looked beyond the record companies and the internet to earn revenue.

Sources of Music Industry Revenue

From digitalmusicnews.com

Sources and Resources: Almost all of my information and the 2 graphics are from Rolling Stone articles here, here and here. Ideally complementing the music industry story with the bigger economic pictures, the Krueger talk is here.

Posted by: adminEcon
Tags: Adele, Alan Krueger, creative destruction, Joseph Schumpeter, Lady Gaga, music industry, super stars
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05.17.2013 | Creative Destruction: The Economics of Robotics

Once there was a computer therapist named ELIZA. While her developer thought she was just a machine, the people who talked to her liked her patience and enjoyed her empathy.
In the operating room, da Vinci is a robotic surgeon whose sense of touch engineers have begun to develop.
Factories have robots that move, slice, sharpen and precisely place objects.
And what about Roomba, the vacuuming robot?

A human surgeon uses da Vinci.

Researchers predict that by 2025 computers will have caught up with the processing power of the human brain. Calculated in flops–floating-point operations per second–the processing power of the human brain is 10 petaflops. (A peta is the next level after giga and tera.) If we agree with Moore’s Law, then every 18 months, computer capacity doubles. So, going back to the first computers in 1940, with processing capacity doubling every 1 1/2 years, it will take until 2025 for computers to have the 10 petaflop capacity of the human brain.

But…what then?? What if computers can equal the human brain’s capacity (and that is a BIG if)?

With computers able to do human jobs more productively, economist Paul Krugman says we wind up with a “capital bias” that is controlled by an affluent elite. Leaving many of us behind, the income gap will increase and inequality will accelerate.

Disagreeing, a second group says “capital bias” creates jobs. Technological leadership brings production back to the US from the developing countries. Yes, it requires structural economic change but people have always worried about the deleterious impact of machines. In 18th century England, the Luddites worried that mechanized looms would create joblessness by replacing people. Instead, we got railroads and steel factories and more production, more jobs, more wealth and a rising living standard. In 1900 a typical worker put in 2300 hours a year. Now that number is down to 1800.

Deciding whether robotics will be good or bad for jobs takes us to Joseph Schumpeter and creative destruction. The transition to robotics has begun. Replacing old technology, it is another example of the disruptive impact of innovation.

Sources and resources: Radiolab tells us more about ELIZA, here, and Slate discusses Da Vince here and Haptics (the touch part) here. However, the best article I read about the economics of artificial intelligence was in Mother Jones. Meanwhile the Krugman postion is here and the oppostion is here. Finally, for the overview, here is the Schumpeter, creative destruction explanation, a TED talk on “Robots Will Steal Your Job, But That’s Okay,” a 60 Minutes segment, and a NY Times discussion.

Posted by: adminEcon
Tags: artificial intelligence, creative destruction, da Vinci, Joseph Schumpeter, robotics, unemployment
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04.09.2013 | Creative Destruction: 30 Years of the Music Industry

Does anyone remember LP records?

In 1980, the music industry was dominated by LP/EP. With LP standing for long play and EP, extended play vinyl records, both represented almost 60% of the revenue generated by different musical formats. Next? Cassettes at 19.1%. By 1992 CDs were in that 60% position and by 2002, they moved up to 95.5%. Fast forward to 2012 and all has changed.

Music Industry Revenue Sources:

From digitalmusicnews.com

Sounds like Joseph Schumpeter.

Joseph Schumpeter characterized the unsettling process through which innovations replace established technology as creative destruction. The computer replaced typewriters. The auto eliminated the need for buggy whips. In the music industry, because of CDs, 78 and 45 rpm records became obsolete. And now, led by 13 to 35 year olds, internet based listening (see below) represents more than half of all music listening. For those of us who are older than 35, AM/FM radio is still #1 with a 41% slice of the listening pie.

Looking more closely at creative destruction in the music industry, we would see massive shifts in land, labor and capital.

Sources and resources: To see 40 years of the music industry in 40 seconds, do be sure to go to this graphic. It is excellent. NDC, the source of my second graph, also had additional fascinating facts about where we listen to music. Finally, this econlife post tells more about Joseph Schumpeter (1883-1950) while a good brief biography is at econlib.

Hat tip to Ezra Klein’s wonkbook.

Posted by: adminEcon
Tags: creative destruction, factors of production, Joseph Schumpeter, music history, music industry revenue
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03.15.2013 | Creative Destruction: Purell’s Story

Blowing out candles on birthday cakes has been banned in Australian childcare centers. The reason is the germs. Also, kids are required to wash their hands before going in the sandbox. Really. The rule comes from Australia’s Health Minister.

In the US, I guess that we do have a similar germaphobe state of mind. One reason might be the alcohol-based hand cleaner, Purell.

Made by Gojo Industries, Purell was invented 1988. At first, only auto mechanics used it to remove stubborn grease stains. Next, Wegman’s supermarket chain recognized its potential when they offered Purell to employees. Gojo hit the jackpot, though, when it targeted health care workers.

As an innovation, Purell’s trajectory is typical. At first, its use was limited but then it became more popular. Recommended by hospitals, adopted by the military with a bottle designed to survive a parachute jump, place by place, Purell infiltrated our culture. And now, in wall dispensers and in our pockets, it is everywhere.

Explaining “creative destruction,” economist Joseph Schumpeter (1883-1950) said that economic growth depends on the pain of old industries dying and new ones taking their place. For Purell, we could site a ripple that initially affected soap purveyors like Proctor & Gamble. But then, the germaphobe mindset moves us to all activities and objects that might increase contact with germs, including birthday candles and cakes.

Far beyond economics, Purell is all about creative destruction.

Sources and Resources: My interest in Purell started with a New Yorker article from David Owen and continued with these Daily Mail details about the Australian birthday cake directive.

Posted by: adminEcon
Tags: creative destruction, innovation, Joseph Schumpeter, Purell
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12.14.2012 | Happy Birthday Texting!

Sometimes, you never know…

At first, it was just a “Merry Christmas” message sent from a computer terminal to a cell phone. The year was 1992, the firm was Vodafone, and the goal was just a better way for secretaries to page their managers. The managers, though, could not reply. And anyhow, they figured the service was limited because it was too much of a hassle to type a message.

Think of what had to happen between then and now.

Develop a 2-way system so the recipient could reply.
Enable texting among different networks.
Figure out what to charge and how to charge.
Redesign cell phones.
Develop “text-speak.”

And the rest is history. In the US, in 1995, the average user sent 0.4 texts a month; by 2000 it was 35 a month; now Pew Internet says the “median teen text user” sends 60 messages a day. And texting has become a $150 billion business.

Below, CNN interviews Neil Papworth, who was 22 when he sent the “Merry Christmas” text 20 years ago.

Our bottom line? While sometimes you never know where innovation will go, Joseph Schumpeter (1883-1950) would remind us that it leads to creative destruction.

A final fact: It is interesting to ponder the words that accompany innovation. For the telegraph (1844), Samuel Morse tapped: “What hath God wrought?” With his telephone, Alexander Graham Bell said (1876), “Mr. Watson, come here–I want to see you.” And, Neil Papworth, the gentleman who sent the first text message said that most engineers are happy just to say, “Testing, testing testing.”

Sources and Resources: During the The Economist’s Babbage weekly podcast, I first heard about the texting birthday and then read a bit more about it here, here and here. And here, you can read more of the Pew Internet study in “Teens and Smartphones.”

Posted by: adminEcon
Tags: communication, creative destruction, happy birthday texting, innovation, Internet, Joseph Schumpeter, Neil Papworth, pagers, Richard Jarvis, short message sending, smart phones, SMS, teens, texting, Vodafone
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