Political Entrepreneurs

The Economic Engine of Political Change

A Nice Example of Creative Destruction and the Market Process: The Decline of Newspapers

February 24th, 2017 by Edward Lopez

Initially written as “The Decline of Newspapers is a Sign of Market Success” for Info Tech & Telecom News, July 2010, by Edward J. López[1]

The decline of newspapers is real. Since 1970 the number of dailies in America has declined by 20 percent, and circulation per capita has been cut in half.[2] More recently, advertising on news print is down 50 percent since peaking in the year 2000. Even including the more recent stream of online advertising, total newspaper ads are down 35 percent since 2003.[3] Jobs for reporters and correspondents have fallen a third over the past decade, and analysts expect another thirteen percent drop in the next decade.[4]

What can be done about the decline of newspapers? This starts with a firm understanding of what’s driving that decline in the first place and what that means for the public. Economics offers two ways of understanding these issues.

First, defenders of print media have argued that news is a public good – which means that news is valuable to society but producers of news have a difficult time getting consumers of news to pay for it. In this view, the decline of newspapers is a market failure, and journalism needs government subsidies. Last month the Federal Trade Commission made this very argument in a study called “Potential Policy Recommendations to Support the Reinvention of Journalism,” which proposes over thirty policies to prop up news organizations.[5]

Economics also offers a dynamic model of competition in which goods that society values – like journalism – get produced by competing business models. Over time, certain of these models can prove to be extremely competitive and come to dominate markets. A really good example is newspapers in the 1950s and 60s.

But there are no finish lines in market competition. As the march of technology steadily advances, and as consumer tastes continually evolve, new business models are constantly emerging to challenge older forms. As with the horse-drawn carriage a century ago, or dialup Internect access more recently, dynamic market competition presses all business models to continually create more value for society than their substitutes do. Or disappear.

In this creative destruction view of markets, the economics of journalism doesn’t jump as quickly to market failure conclusions with government subsidy implications. Instead, we are drawn to focus also on the opportunities that a declining business model creates.

Where newspapers have declined, substitute models have emerged to create significant wealth for society. Despite the drought among newspapers, advertising in the economy as a whole is actually up nine percent since 2000.[6] While spending on magazines and newspapers has dropped 38 percent, consumer spending on Internet access has more than quadrupled since 1999.[7] Just since 2004, consumers are using online classifieds at more than double the rate.[8] Unheard of before 1999, Google’s market capitalization is today over $140 billion.

The dynamic model of competition also challenges us to think more deeply about success and failure in the market process. The Nobel prize-winning economist, F. A. Hayek, offers a dynamic theory of competitive markets as aggregators of valuable but dispersed bits of knowledge in society. Hayek was talking mainly about the system of money prices. But we can see his theory unfolding before our very eyes in the ways that new journalism markets are performing.

Consider the frenzied coverage of this summer’s college sports realignments – both actual and potential. When the Big Ten Conference began to deliver on its longstanding promise to expand its membership by recruiting schools from the Big XII or Big East conferences, a fast-paced domino effect was put into motion. Only no single person knew which domino was next. For two weeks, the college sports world was transfixed by the potential impact on this $4 billion industry.[9]

As the bargaining power shifted about each day, different individual schools would enter the spotlight. One day it was Nebraska, the next day Colorado. For a week no one knew whether the Texas schools would continue their century-long affiliation or split into the Pac-10 and SEC.

In this flurry of activity and near-activity, readers scurried about in search of the latest, up-to-the-minute news about which dominoes would fall next. National outlets like ESPN.com relied heavily on regional papers like the Dallas Morning News, which in turn relied heavily on local papers like the Bryan Eagle, which in turn relied heavily on sports bloggers who cover single schools full time. News consumers were able to access isolated pockets of specialized knowledge about what was going on, which major figures were saying what, which rumors were realistic and which were far-fetched.

In terms of generating valuable knowledge for society, the conference realignment story is big news. Here is the new market for journalism performing as a literal embodiment of Hayek’s knowledge-aggregating process. Here is the market for news achieving a increasing division of knowledge that is supported by technologies of instant communication.

All this would have been unthinkable even a decade ago.

Before the decline, newspapers might spread a given sports reporter across several schools and afford just a few weeks each year on a campus. Under these constraints, reporters lacked the wherewithal to cultivate channels of communication. Today, we have the benefits of full time, year-round, on-the-ground investigators with kinetic knowledge that’s ready to be instantly shared when there is demand for it.

Market process theory even promises good news for newspapers. Newspapers are increasingly freed from burdening the up-front costs of investigative work. News print remains familiar and convenient to large numbers of consumers. And news organizations still hold their economies of scale in areas like finance and politics. The specter of government-funded journalism simply isn’t necessary. But continual experimentation and specialization will be vital to newspapers if they are to continue to fulfill their role in society.

It’s easy to call the decline of newspapers a market failure. But a closer look reveals that the market process is doing exactly what it does best. The market for journalism continues to evolve through a process of trial and error and experimentation that destroys models that no longer add value and also creating newer, more value-creating models.

[1] Edward J. López is associate professor of law and economics at San José State University and currently a visiting scholar at the Social Philosophy and Policy Center at Bowling Green State University. His recent book, The Pursuit of Justice: Law and Economics of Legal Systems, has been published by Palgrave Macmillan.

[2] Statistical Abstract of the United States, Table 1098, Source: Editor & Publisher, International Yearbook. http://www.census.gov/compendia/statab/2010/tables/10s1098.pdf accessed July 5, 2010.

[3] Newspaper Association of America, Trends and Numbers, Advertising Expenditures, http://www.naa.org/TrendsandNumbers/Advertising-Expenditures.aspx accessed July 5, 2010.

[4] Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-2011 Edition, “News Analysts, Reporters, and Correspondents,” http://www.bls.gov/oco/ocos088.htm accessed July 5, 2010.

[5] FTC Staff Discussion Draft, “Potential Policy Recommendations to Support the Reinvention of Journalism,” June 15, 2010, www.ftc.gov/opp/workshops/news/jun15/docs/new-staff-discussion.pdf  accessed July 5, 2010.

[6] Statistical Abstract of the United States, Table 1243, Source: Universal McCann, http://www.census.gov/prod/2009pubs/10statab/services.pdf accessed July 5, 2010.

[7] Bureau of Labor Statistics, http://www.bls.gov/cex/newspapers.htm accessed July 5, 2010.

[8] Pew Research Center, Pew Internet & American Life Project, “Online Classifieds,” May 22, 2009, http://www.pewinternet.org/Reports/2009/7–Online-Classifieds.aspx accessed July 5, 2010.

[9] Congressional Budget Office, “Tax Preferences for Collegiate Sports,” May 2009, www.cbo.gov/ftpdocs/100xx/doc10055/05-19-CollegiateSports.pdf accessed July 5, 2010.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

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When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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