Friday, March 15, 2013

Economics of Song: We Built This City

Someone's always playing corporation games

Who cares they're always changing corporation names

When a corporation is comprised of assets of a certain value (say, $5 million), but can be sold on the market for more (say, $10 million), what exactly is all that extra money buying? Well, in accounting it's said to be "goodwill." The existing company has built up a reputation and a clientele, and if I were to buy identical assets and open up shop, my new company would not be as valuable as the existing one, because I bring none of this earned goodwill.

When a company changes its name, it loses a certain amount of its goodwill, and the amount it retains is not costless; it has to engage in a public education campaign to let people know that Company Y should be associated with the long track-record of Company X.

In Starship's world, there is some sort of gain that offsets these losses associated with changing your corporation name. What can it be? Perhaps the goodwill valuation is negative; if my company gives all its customers cancer, I'd want to change its name somewhat frequently. Less nefariously, if the public has a taste for "new" things, stodgy old corporations will want to get in on the act (think about The Simpsons's Super Bowl commercial for the Catholic Church). Or even more basically, it could be a principle/agent problem where management wants to self-aggrandize at the expense of ownership. I take over JCPenney and rename it something not associated with its long history so the image of the company is more closely tied to me, the current director.

I take it that Starship has this last explanation in mind, based on my reading of "corporation games" from the previous line. It seems the lyric is meant to say, "business activity seems important to its participants but is essentially meaningless." After all, the song argues that the standard building blocks of a modern metropolis pale in importance when compared to Starship's preferred foundation, rock and roll. Go ahead and engage in pointless corporate wrangling while Starship is over here building a city with their guitars and Bernie Taupin's brain. Suckers.

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