Cecil Bohanon and John Horowitz: Content creating not the gold rush it once was

One of the more powerful and underappreciated economic insights is that, for any market activity, excess profits tend to zero in the long run as long as there is freedom of entry. The implications for both resource allocation and income distribution are profound.

Suppose wearing red hats becomes fashionable, and the price of red hats then rises. The merchant lucky or prescient enough to have stocked up on red hats, or the factory that makes red hats will, in the short run, make more profits than usual. However, other suppliers and producers will enter the market, bringing more red hats to consumers and lowering prices until there are no more excess profits. Of course, once we read about the red-hat fashion in the newspaper, it is probably too late to cash in.

According to a Goldman Sachs report, there are 50 million income-earning, online-content creators, and that number is expected to increase. Successful content creators garner viewers and followers in the millions. Having a large captive audience attracts paying advertisers who support the content creators. The same business model has driven newspaper, magazine, radio and television publishing. The Goldman Sachs study indicates that over 68% of internet-content creators report that advertising is their largest source of revenue.

A recent Wall Street Journal article discusses the experiences of some content creators who derive income from internet sites such as YouTube and TikTok. It can take years to build an audience, and content creators are under constant pressure to create new material. This “makes the job grueling.”

So, should aspiring college students with clever ideas jump on the bandwagon? Maybe, but according to the Goldman Sachs study, only about 4% of content creators earn $100,000 or more. Forty-eight percent make less than $15,000. Most earn less than the median earnings of U.S. workers, $58,000. Also, self-employed workers do not receive fringe benefits like health insurance and pay the full 15.3% combined Social Security and Medicare tax.

Excess profits being competed away in the long run reminds us of the California Gold Rush, one of the largest movements of people in U.S. history. In 1848, the first miners could earn several times the average laborer’s earnings. As more people entered the gold fields, excess profits were competed away, which is one reason Mark Twain famously said, “During the gold rush, it’s a good time to be in the pick and shovel business.”•

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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.