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Alan Krueger on how the music industry explains inequality

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It is exceedingly rare for a White House chief economist to give a speech on rock-and-roll. But Alan Krueger is scheduled to do just that Wednesday evening at the Rock & Roll Hall of Fame in Cleveland. His talk there (a text was made available in advance) is a terrific window into how the music business explains the forces shaping our collective economic fortunes.

"The music industry is a microcosm of what is happening in the U.S. economy at large," Krueger, chairman of the White House Council of Economic Advisers, says. "We are increasingly becoming a 'winner-take-all economy,' a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up."

So how does this show up in the music industry?

More and more of the revenue from concerts, Krueger shows, is going to bands at the tippy-top of the scale of popularity. Since 1982, the top 1 percent of performers have gone from earning 26 percent of concert revenue to 56 percent!

But how does technology drive that? Krueger works through the process. A century ago, a musical performer could only reach as many people as his or her vocal range and travel schedule would allow. Now, high-quality recordings can be distributed to billions with the flip of a switch. The result: Everybody has access to the very best music, or at least the music that most precisely suits their tastes. The megastars who create that music are wildly popular and can make a fortune. But it means things are pretty hard out there for a mid-tier band just trying to build a loyal fanbase.

That's too bad if you're an aspiring musician – it means only the most appealing bands in the world will be able to make a good living performing. But might it at least mean  that we as consumers are getting the music that brings us the most joy possible? The music industry is a meritocracy where the very best songs, and artists, rise to the top, right?

Well, not so much. Luck plays a shockingly important role in which songs and artists become mega-successes, Krueger shows. He points to research by sociologists Matt Salganik and Duncan Watts. Participants in their study were able to log in to listen to songs and download those that they liked. The researchers played a little trick on them: Some of the participants saw an actual ranking of which songs had been downloaded the most previously. Others saw a random ranking.

It turns out that just the appearance that something was popular drove more people to download the song. Rather than a pure meritocracy where the best songs rise to the top, music seems to have strange effects in which popularity breeds greater popularity. The researchers even showed some people a popularity charts that was the exact reverse of the reality of the different songs' popularity. Here's what happened:

The unpopular song falsely reported as being popular did great. And the popular song falsely reported as being unpopular did poorly. In other words, our perceptions of popularity shape what music we enjoy.

"In addition to talent, arbitrary factors can lead to success or failure, like whether another band happens to release a more popular song than your band at the same time," said Krueger. "The difference between a Sugar Man, a Dylan and a Post Break Tragedy depends a lot more on luck than is commonly acknowledged."

Read the full, interesting speech here.