In the late 19th and early 20th century, the music industry engaged in a type of risk control that, in principle, is not very different from the type that many companies engage in today. The modern theory of risk control divides companies or individuals into two groups: those who wish to earn returns with lower variability, and those of a more speculative bent who are willing to endure high variability and risk of loss for the chance of earning higher returns. The two groups meet in the marketplace.
Irving Berlin’s life is illustrative of the fact that those companies or individuals who take the speculative approach do not necessarily undertake the risks willingly, but rather by force of circumstance. Since the terms of trade are usually set by the more financially powerful party, the less financially powerful party is often compelled to assume risk that it would otherwise not choose to accept. That power asymmetry can result in certain intriguing unintended consequences, as Berlin’s success illustrates.
Berlin was born in late 19th century Russia and his family emigrated from there to the U.S. when he was a child. He was raised on Cherry Street in the Lower East Side of New York City. In the last years of the 19th century, Cherry Street was one of the most notorious streets on the Lower East Side. In Jacob Riis’s classic book How the Other Half Lives, Cherry Street is mentioned very frequently as a crime ridden, dismal area.
Naturally, Berlin sought a way to escape those hardships, and it was music that eventually provided the path. It’s worth noting that he had no professional musical training at all. He could not read music, nor could he play a musical instrument. But he could sing. As a newspaper boy, when he sang to attract attention, he sold more papers.