Many More Rivers to Cross

Sherwin Rosen and the effects of Scale

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Posted in Contemporary economics Tagged with: ,

Dedicated as it is to “commentary on the production and distribution of economic ideas,” Economic Principals paused at the news last week that Leonard Riggio, founder and chairman of Barnes & Noble, Inc., plans to retire this autumn.  He is 75.

I wrote an article about Riggio in 1974, three years after he bought the hundred-year-old old Barnes & Noble Book Store a few blocks down the street from the Greenwich Village magazine offices where I worked.  He had maxed-out credit card and finance company borrowings sufficient to swing a $1.2 million bank loan (those were the days before credit bureaus consolidated their reporting of such things).

He had turned the store into a bustling marketplace for, among other things, second-hand college texts. By the time I wrote, Riggio had rented a huge space across Fifth Avenue and was dealing in remainders of all sorts, especially university press books. Already he was planning a public offering. Here was something new under the sun.

Over the years I watched as Riggio built the company into the country’s largest bookselling chain. At first he acquired small chains here and there; in 1986, he took over B. Dalton, with its 800 stores.  In the 1990s Riggio expanded nationally, situating enormous bookstores in downtown shopping districts and suburban malls, equipping them with coffee bars and comfortable chairs in which customers could simply read, rather than necessarily buy the merchandise.

Purchasing power enabled him to negotiate favorable deals with publishers and so to offer substantial discounts to customers on many books. Market power permitted him to carry far larger inventories than even the largest independent booksellers – as many as 100,000 titles in his Barnes & Noble “superstores.”  Cherished old independent bookshops closed in droves in the ’90s.

Then came Amazon, with its even steeper discounts, ever greater inventories, and speedy delivery of new and used books. Digital books made their appearance. Amazon and Apple, with their superior technologies, easily defeated Barnes &  Noble’s Nook e-reader.

Independent bookstores in many cities have made a comeback, turning book-selling into something of a performance art, with author readings, coffee shops of their own, frequent buyer discounts and increasingly sophisticated customer outreach.

Meanwhile, publishers themselves consolidated, the better to oppose the market power of the big buyers.

Barnes & Noble fell back.  The company replaced Riggio as chief executive in 2002.  Since the financial crisis its managers have closed 80 stores; 640 remain, with no very certain future. From a high of more than $45 in 2006, Alexandra Alter noted in The New York Times, Barnes & Noble shares were selling at a little more than $12 last week.

Together these trends gave rise to the inequalities that journalist Thomas Whiteside identified as long ago as 1981 in The Blockbuster Complex: Conglomerates, Show Business and Book-Publishing:  a relative handful of best-sellers among movies, recordings, plays, books, and magazines severely affecting the livelihoods of the  array of workers in these various fields, their numbers steadily increasing along with the technologies dedicated to their distribution, creating what in due course would come to be known as “product” or “content.”

In The Long Tail: Why the Future of Business is Selling Less of More (Hyperion, 2006), journalist Chris Anderson identified a countervailing tendency, thanks to new computer and communications technologies: the rise of huge number of relatively profitable niches in the tail of a distribution to the relative handful of hugely profitable hits in the head. Amazon founder Jeff Bezos was on to that, too, with the purchase and consolidation of online second-hand book-seller networks.

Meanwhile, with the introduction of new technologies, the phenomenon has become astounding: in Lunch with Susan Wojcicki, Hannah Kuchler, of the Financial Times, reported last week that 400 hours of video are uploaded every minute to the YouTube site that Wojcicki oversees for Google, which paid $1.65 billion for the business a decade ago at her urging. (Google was first headquartered in the Wojcicki family garage.) YouTube has become a formidable competitor to traditional television, with its own hit shows, books, music recordings and clothing lines, all supported by advertising.

At the root of all these new technologically-based businesses are what University of Chicago economist Sherwin Rosen described in a landmark article, in 1981, as “the economics of superstars.” That was the same year as Whiteside’s The Blockbuster Complex. Sadly, Rosen died at 62, in 2001, before he could so much as enter the Nobel Prize nomination league (itself a prime example of the phenomenon in which he was interested). And much work remains to be done on Rosen’s central insight:  that in certain circumstances, “small numbers of people can earn enormous amounts of money and dominate the activities in which they engage” – surely one of the keys to understanding the present age.

Yet on the larger topic of economic growth and development, of which Len Riggio’s Barnes & Noble expansion is such a good example, serious work has barely begun. Times reporter Alter reports that Riggio got his idea for a new kind of bookstore while working as an undergraduate, in the early ’60s, in the college bookstore of New York University.  He dropped out to open a rival, SBX, for Student Book Exchange; began managing other area college book stores’ and, in 1971, acquired what would become his flagship store.  Then all these new things under the sun. Riggio was among the progenitors of all that the book business soon would become, a vastly expanded and variegated version of what in 1971 was still a relatively simple and orderly world.

Much the same thing has happened to the economics profession during those years: more students, more graduates, more departments, more fields, more journals, and, especially, more applications.  More inequality, too. But perhaps less clarity than before.  Economics has many more rivers to cross.