The Economics of our Careers

In real life, it is very difficult to succeed by following your passion, especially if that passion is in a field like sports, music, arts, writing etc. I have tried to understand the economic underpinnings behind this. Here is why life will rarely follow a fairy-tale script if you try following your passions in real life.

Crowding out effects in labour markets: In normal industries where most of us work, the labour market accommodates all kinds of workers – exceptional, average, mediocre and below. There is definitely a thriving market for average workers. In most companies, someone who can follow orders reliably is good enough to be employed. This is why IT companies hire by the tens of thousands every year even though they keep complaining about employability. There is no shortage of mundane work that can be used to give employment to people of modest abilities. This implies that if there is a pool of money that is to be distributed to workers with different levels of proficiency, each worker will receive an amount that is more or less in proportion with his level of skill. Less skilled workers will receive less money, but they will not be denied their share of the pool altogether.

This logic breaks down when you try to apply it to the market for musicians, sportsmen, artists etc. Consumers of music, sports and art enlist themselves for these products with the expectation of enjoying a sublime and transcendental experience. Consequently, the music market is a market only for the most superlative musicians; and there is absolutely no market for less capable musicians. Nobody will waste time listening to a run-of-the-mill musician. Even the most ardent football fan is not interested in watching mediocre footballers battle it out on a football field. What this means is that if there is a pool of money to be distributed among ten musicians with different levels of proficiency, the best musician gets everything, and the other nine get absolutely nothing. If you miss the top bracket even by a narrow margin, you are consigned to a life of oblivion. This is the crowding out effect, which is especially prominent in human activities that appeal to the higher senses – music, sports, writing, etc, as against human activities that merely satisfy some basic economic need. This makes it especially difficult to succeed in such careers.

Network effects (The whimsicality of consumer tastes): This is a factor that accentuates the crowding out effect. Who really decides whether a musician is really good or bad? And is it a rational evaluation? Can the success of Gangnam Style be explained purely by logic? Can the failure of highly anticipated movies be attributed to any specific causes? Definitely no. What happens is that a good musician benefits from the publicity generated by his fans, which in turn reinforce his reputation and turn him into a great musician. The effect of fan-following is to exaggerate the actual difference between great musicians and others – great musicians begin to look way better than what they actually are, and less great, average and not-so-great musicians begin to look much worse than what they are. This is a type of network effect, peculiar to fields like music, cinema, and art and others which rely on fickle consumer tastes.

A very good illustration of this point can be found in the sales trend of the book 'The Cuckoo's Calling'. This book was apparently written by Robert Galbraith, released in April 2013. The book got good reviews, but it sold only 1500 copies and was nowhere on the Amazon Bestseller list. As soon as it was revealed that the author was actually JK Rowling, the sales shot up by more than 507,000%. The book climbed 5000 places to reach the very top of the Amazon Bestseller list within hours of the news.

Again, this problem is not found in normal labour markets. The evaluation of a worker at office is a more rational process, no matter what Dilbert and the rest have to say.

Difficulties in market segmentation: One crucial characteristic of opportunities that are exploited successfully by entrepreneurs is market segmentation. Most mature and developed markets have managed to segment their consumers into several categories. This allows companies to maximize their profits by offering products in each of the categories. A classic example is the auto industry. By selling a Lexus to a CEO and a Camry to the entry-level employee, Toyota can offer products and extract profits from all customers. This is very difficult to do in music and writing. Mukesh Ambani can afford to pay a little extra to buy your music. Your most ardent fan, irrespective of his financial status, will definitely be willing to fork out a little extra for your music. A less ardent fan might refuse to buy your music at first, but might be willing to buy it if you offered him a discount. In other words, segments exist in this market as well, but it is difficult to meaningfully exploit them. You will invariably end up offering your music/ book at a uniform price for all customers, which means you lose out on the additional revenues you could have made by pricing it higher for your eager buyers, and lower for your reluctant buyers (first degree price discrimination).

All in all, the combination of crowding out effects, network effects, and difficulties in market segmentation make it extremely difficult to make a successful career in music, sports and the arts. These are all demand-side factors. I have not focussed at all on supply-side factors that are making life difficult for musicians and writers – for example the advent of online piracy, and the impact of the internet (which has reduced the cost of publishing to zero), plus problems in scaling up - (your earnings are proportional to the number of hours of output you produce. There are only 24 hours in a day, and this is a limit on your output and your earnings. This limit would not have existed if you could've got machines to do your work - like in normal industries). So the next time someone tells you to follow your passion, and turn your hobby into your profession, take it with a pinch of salt.

Of course, you will argue that at the end of the day, it is about finding happiness and fulfillment rather than making money. I agree wholeheartedly. But how much happiness will you find, playing football in empty stadiums, and crooning in front of an audience of five people?

- Shyam Sunder Ramakrishnan

(Shyam Sunder Ramakrishnan an alumnus of IIM Indore – Class of 2011 and currently works with IiAS. He has worked with Cognizant Business Consulting and Capgemini in the past)