Making Sense of Markets: Music, Cars, and E.J. Dionne, Jr.’s Error
James Hanley on Dec 4th 2008
E. J. Dionne, Jr. makes a basic economic error in a recent column about the bailout of the Big Three automakers. He complains that “you can’t turn around without hearing someone trash autoworkers for the terrible crime of trying to earn a decent living” and concludes;
if this bailout happens, it should reflect the core reason it will pass: Long-term economic growth depends on a well-paid middle class (and that definitely includes autoworkers) with real purchasing power. If saving our auto industry means moving GM workers ever closer to Wal-Mart wages, the bailout isn’t worth doing.
But Dionne ignores the cause of those good wages. If building cars is more valuable work than clerking at Wal Mart, it will continue to pay more. If it’s not, then it should not pay more. And if it pays more than it ought to, it’s just stealing money that would be spent elsewhere, on more productive and highly valued uses, meaning pushing some other workers closer to Wal-Mart wages.
It’s odd how many intelligent people struggle to grasp these basic economic concepts. A case in point, and one that may help explain the forgoing, is the market for recorded music.
My friend PJH is a record buff. Not just a music buff, but a collector of vinyl. And occasionally he rants about CDs and all the lies that accompanied their introduction, such as, “they sound better,” and “they won’t wear out.” But the biggest lie, according to him, is, “they’ll be cheaper, because they’re so cheap to produce” I laughed, as I always do at economic neophytes, and said, “But prices are determined by demand, not production costs.”
But then it struck me, why would prices stay so high above production costs year after year? in a perfect market, competition should drive down prices to the level of production costs (including normal profit), but that hasn’t happened with CDs. Oh, sure, the material cost of the CD, something on the order of a few pennies isn’t the whole cost; you have advertising, people to pay, etc. But those costs exist for vinyl, too, and don’t explain why the cheaper-to-produce CDs never brought down the price of albums.
This is the kind of problem I love to ponder, because it’s the kind of problem that reveals how markets really work. And after a few days of such pondering the answer was revealed to me by the gods of Kobol–each album is its own little monopoly.
Albums by different artists are not like hamburgers by McDonalds and Burger King, which are close substitutes. I like Burger King better, but I wouldn’t make a left turn across traffic for it if McDonalds is on the right side of the street. But if you like the Jesus and Mary Chain’s Darklands, there’s no other album that’s a close enough substitute to really compete with it, not even their own brillint Psychocandy. Or Herbie Mann’s Stone Flute (which after years of looking, I finally found on vinyl), which is an experimental album unlike anything else he ever produced, and certainly not like anything anyone else ever did. And I’ve yet to hear anyone who could plausibly claim to be even a poor substitute for Nick Cave. Or even if your taste in music isn’t as sophisticated as mine…I mean, if you also like punk, you know that Fear: The Album and the Dead Kennedy’s Fresh Fruit for Rotting Vegetables are both great albums, but neither is remotely a substitute for the other. And nobody on earth does surf psychobilly like the Nekromatics.
Even artists whose music is, to me, indistinguishable (I recently learned that Britney Spears and Christian Aguilara are not in fact clones produced by mixing the DNA of Minnie Mouse and Goofy, as I had thought), is distinctly different to those who would actually buy their albums.
In short, the price for CDS has not come down because the uniqueness of each CD gives it a little monopoly power–the demand that is there cannot easily be siphoned off by a competitor. I think that explains, in part, the much lower price of classical music CDs. Of course there are no copyright fees on Beethoven’s work, but a recording of his 9th Sympony by the Chicago Symphony Orchestra is, for most people, a close, perhaps even perfect, substitute for a recording of his 9th Symphony by the London Symphony Orchestra.
And so, once again, even when demand didn’t at first seem an adequate answer, we find that it is the underlying explanation for a seemingly nonsensical market outcome.
The same is true for the auto industry. The Big Three were only able to keep wages above their real value and continue producing low quality cars as long as they had some degree of monopoly power. But when the Japanese firms, in response to the strict import quotas that created that monopoly power, started building cars in the U.S., the Big Three’s monopoly power disappeared and real competition came into play. Unfortunately the Big Three, and the UAW, were very slow to realize what that meant.* It took over a decade for them to begin competing seriously on quality–which they now do reasonably well on some brands–but it is only in the past three years that the UAW realized that the loss of monopoly power meant they had to begin competing seriously on wage levels.
It should be clear to all now, regardless of whether we bail out the Big Three or not, that the days of making an upper middle class wage by working on an auto assembly line are over. And we can only continue that by recreating their monopoly power, which means stealing money from consumers, because unlike the music market, this would be an artificial monopoly.
But that doesn’t necessarily mean that autoworkers won’t make middle middle class wages, if what they’re doing is still valuable. If Dionne wants to know what the Big Three employees’ wages will be in the future (assuming they survive), there’s a very easy way to find out: see what American employees of Subaru, Toyota, Honda, and Volkswagen make. I’m willing to bet it’s considerably more than what Wal-Mart greeters make.
*Wages were sometimes even more outrageous than they appear on the surface. The wonderful book Rivethead reveals some workers “doubling up,” a team of two taking on each other’s job, so that each actually only worked half a day for a full day’s wages.
Filed in The Boardroom
The biggest mistake the managers in the auto industry ever made was not tying pay over modest base wages to profit and wealth creation objectives for the corporation.
One would hope some form of restructuring provides leverage to management to move away from some sort of fixed pay scheme that is never in equilibrium and works against the interests of the Corporation.
It’s not hard to do, the tech industry has done a pretty good job of this and the results are that most of their workers have no interest in joining unions. They do expect to see windfalls during good times and pay raises if they survive lay-offs (a major reason tech sees productivity increases is lay-offs).
It only a CD myth if you don’t have the hearing range. There are differences in the overtones especially at higher frequencies, the sampling simply misses many of them. When I was younger, my hearing better, the highs would irritate me, sounded very tinny. I would imagine the sound to be better with DVD.
Do people actually buy CDs any more? I don’t and my older son doesn’t. Contra McLuhan, the message is the message; the medium is irrelevant.
BTW, the introductory slogan for CDs was “Perfect Sound Forever.” Hah! Even so, I suspect that Hathor’s earlier dissatisfaction with CDs and digital recording in general was the result of the generally crappy D/A converters in the early days of digital more than inadequate sampling rates. Yeah, harmonics can play a factor in how rich and timbrous the music sounds, but you’ve pretty much got to have not only good (and therefore young) ears to hear much above 18khz or below 40hz, you’ve also got to have s.o.t.a. equipment. If you’re listening to a human voice and it sounds recorded, the fidelity ain’t that high, anyway.
D.A. Ridgely,
I was also a musician.
It always seemed strange to me that anybody after the 80s would expect factory jobs to provide a middle class lifestyle. A factory worker who claims to be middle class is either overpaid, deluded or both.
He could really be middle class, in which case he is being paid way more than his labour is worth. Alternatively, he could be playing hard and fast with the words middle class. I remember reading a survey done some years ago where a lot of people who should properly be called upper class or working class (I couldnt bring myself to say lower) people self identified as middle class, when the reality was much lower
53% of americans self identify as middle class, according to census data on the other hand, abouit 46% of americans are middle class, 15% upper middle, 31% lower middle.
Re: DAR and Hathor on CDs. Amazingly, there still are music stores in the shopping malls selling CDs. I haven’t bought one in several years now. But, as regards sound quality, the new alternative is even worse acoustically because much of the information in the digital recording is compressed or stripped to keep files a manageable size for downloading. Fortunately for me, I’m no longer an audiophile. In fact as my musical tastes have changed in recent years I’ve come to prefer more minimalist music (e.g., Lucinda Williams), and I’m now listening for what isn’t there almost as much as for what is there.
Murali, Indeed there’s a well-known phenomenon of both poor and well-off people believing they are middle class. (Of course the “official” designation of middle class is a bit artificial as well.) But a UAW autoworker with a high school education and 20 years experience can make $65,000+ per year. That’s more than I make with my Ph.D. and 8 years experience. Of course, as my colleagues are sick of hearing from me, that’s because of the market forces at work in my field–there’s so damn many extra Ph.D.s floating around that there’s a serious labor surplus, which always drives down wages. (Just Wednesday I had to suffer through a harangue from a colleague about how having earned a Ph.D. means she deserves to be paid a whole lot more; of course that person’s not an economist.) But the comparison of wages does put the autoworkers wages into some perspective.
But I would argue that workers at the U.S. Subaru, Toyota, and Honda plants are still middle class, just not as high up in the middle class. So Dionne’s argument that we’re pushing the autoworkers toward Wal Mart–i.e., lower class–wages doesn’t ring true to me.
Hathor, I wasn’t disagreeing with the fact that you thought CDs sounded tinny. I believe I recall that you are female, in which case your ears, especially when you were young, were probably more sensitive to higher frequencies than men’s ears, generally speaking.
But unless you were an audiophile with really high end ($$$) stereo equipment in the 80s, you wouldn’t have been able to hear the timbres produced by harmonics and overtones on your stereo, and even then there was a wide range in quality of analog recordings. No signal is better than its weakest link, in any case, and transducers have historically been the major problem in reproducing high fidelity. But the weak links in the early days of CDs, I continue to contend, was not so much sampling rates as lousy studio engineering / mixing and even worse Digital / Analog converters.
Mr. Hanley:
Actually, newer “lossless” digital formats really do fix the problems you mention. Yeah, they have higher bit rates and thus take up more bandwidth to upload or download and more memory to store, but memory is dirt cheap and the legal distributors are catching on that there is a demand for the higher quality of the better formats. (The pirates caught on years ago!)
What amazes me about academics, btw, is how well paid the “stars” at the big schools are now. In my callow youth, deciding on an academic career was, like deciding to become a minister, a decision to lead a life of genteel poverty. Now with even philosophers, fergawdsakes, making comfortably over $100k at the bigger research universities, it seems to me the question really does occur why this is so. I mean, I’m all for philosophers earning a decent buck, but since academics generally work for either directly or indirectly state supported schools (the distinction is hardly worth making any more) and since the work product inside much of the humanities is, as one wag said, hermaneutically sealed, it’s hard to figure out why salaries aren’t lower than they are.
I believe that CDs have a sampling frequency of 44,000 times per second, and that normal humans ears are only sensitive up to about 20,000 Hz. It seems to me that any higher frequency sounds that were not captured and encoded onto the CD would be inaudible to human ears anyway.
DAR,
New info to me on digital formats. But I’m a bit of a luddite, so I’m always behind the curve on those things.
I haven’t really thought about what’s going on with the star academic salaries. It’s a puzzle, but I’m sure there’s an answer.
Isn’t there an argument to be made that CDs did lower the price? By digitizing the music they provided an easy interface with computers. Not long after their introduction file sharing sites popped up, both legal and extralegal, and the average price per unit that any consumer pays these days is likely much lower than the golden age of vinyl.
D.A. Ridgely,
I sort of cut my teeth on hifi. My dad was a radio engineer. At the time CD’s were introduced, A/D and D/A converters had higher resolution, they were used in a lot of electronic test equipment. Sampling rates could have been much higher into the tens of megahertz. Using the same level of technology would have driven the cost of the players up. I do agree that sound production of much music is poor, but most of the music I buy on CD had good production value when it was made(reissue) or is suppose to have (classical music).