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May 2001
Volume 19, Number 5

The Problem of Payola
Murray N. Rothbard

Editor's Note: This piece, which Rothbard wrote in 1956, is published here for the first time. The problem of "payola"--money given by recording companies to radio stations as a quid pro quo for air time--is still in the news. Some companies have even banded together to call for federal regulation because "greed and corruption" is supposedly dominating the market (See Salon.com, April 3, 2001).

The problem of "payola" has been much in the headlines recently. And yet, little has been done to isolate and unravel the complex legal, moral, and economic issues involved. 

In the first place, a distinction should at all times be made between legal fraud and moral "fraud" or deception. It is not the purpose of the law to enforce all forms of morality on people, and it is certainly not the function of moral principles to be whittled down to what is merely legal. 

Legal fraud, in the libertarian frame of law as well as largely in our own, only takes place when theft, explicit or implicit, has occurred. In short, if I sell you a package labeled "cereal" and it turns out instead to be a package of hay, fraud has obviously been committed. 

Of course, the fraud might not have been intentional, and, therefore, the misrepresentation might be innocent; but at any rate, a form of theft (of the buyer's money) has taken place, and restitution must be offered. On the other hand, a man may pose as a master of metaphysics and lecture on the subject; if someone goes to the lecture and is disappointed in the man's real mastery of the subject, he has only himself to blame, for no express warrant has been given to the audience of what exactly metaphysics is and what kind of lecture it may be. 

Metaphysics is hardly as specifiable as cereal. There has perhaps been moral deception at work, but not legal fraud. With this distinction in mind, let us turn to the various forms of payola. Suppose that an eminent disk jockey has been found taking money from record companies to play their disks. 

What is the legal, moral, and economic nature of his act? Legally, whom has the jockey defrauded? Certainly not the record company, for it is well satisfied when he plays their record as agreed. Neither are the competing record companies defrauded, for they can certainly have no legal claim on the disk jockey, who has made no agreements to play their records and who alone has the decision on what to play. 

The only party that has possibly been defrauded is the station that pays the jockey's salary. For the jockey is the agent of the station that hires him, and the hiring is done under the presumption that the jockey will use his best judgment on the popularity or quality of the record, uninfluenced by cash considerations. However, it may well be possible that the station is familiar with the practice and doesn' t care, so long as the disk jockey continues to be popular and his ratings high. In that case, no fraud at all has been committed. 

The whole issue involved in "commercial bribery," therefore, is that the employer may be defrauded by his agent. The disk jockey may be accepting money without his employer's knowledge. The out-of-town buyer that accepts payment for placing an order with a particular garment firm is defrauding his employer by not using his best judgment in selecting the clothes--which is what the employer is paying him for. 

However, the employer may know about the practice and condone it. In that case, no one has any complaint. The "bribe" to the buyer or jockey then becomes a kind of salesman's commission or salary, paid this time directly by the customer rather than by the employer, and performing the same function as any salesman's commission: to spur incentives in making sales. 

Of course, the employer will do his best to make sure that the buyer's extra "commission" is not corrupting his judgment on which clothes to purchase, and the employer will undoubtedly keep watch on the situation. In fact, the processes of the competitive free market, especially the profit and loss test, will tend to compel the buyer to use his best judgment if his boss is to remain in business and he on the job. However, if this kind of payola system becomes generally widespread in an industry, then there will probably be no corruption of judgment in any case; for the "bribe " rate will be about the same for every selling firm, and the purchasing agent will be able to use his best judgment uninfluenced by special favors. 

Actually, the economic function of this kind of payola should not be overlooked, as it usually is. The seller--in our hypothetical case, the garment firm--is doing nothing legally or morally reprehensible. In its "kickback," it is simply reducing its price to the buying firm, and the payola is a simple form of price-reduction. 

The seller cannot be indicted legally or morally; he is simply reducing the price of his garments to the buying firm, and it is none of his business whether the employer or his buying agent receives the discount. The buyer, as we have indicated, is committing legal and moral fraud on his employer if the practice is unknown to the latter and if his judgment is corrupted; if the employer knows about the practice, he is receiving a simple sales commission. In any case, the practice becomes a part of the recognized price-and-wage system. 

But what of the general public? Has not it been "defrauded"? In the case of the garment industry, the public can have nothing to say; it is not a party in any way. In the case of the disk jockey, of course, the public is more directly involved. It trusts the disk jockey and relies on the jockey's judgment to play what he thinks are the best records. It feels cheated when it finds that the jockey's judgment was influenced by monetary considerations. 

And yet, while the disk jockey has practiced moral deception on the public, he is certainly not guilty of legal fraud. No express warrants have been given by the jockey to the public, which relies on an ineffable sense of trust in the jockey. 

Moreover, the audience is in even worse straits than the people who went to hear the master metaphysician, for they have not even paid money to hear or watch the program. The system of free TV and free radio means that the public can have no legal complaint whatever. If the FCC removed its compulsory roadblock on a system of pay-TV, then perhaps the viewing public would have a stronger case. 

At any rate, the cries that the disk jockey has been tyrannizing over and dictating to the public are clearly nonsense. The disk jockey may propose, but only the public can dispose. It may be comforting to the older composers of "good" popular songs to believe that it is only the corrupted disk jockeys that have put "rock and roll" over on the public, and that without payola, the public would return to the older type of song. But it is clear that the public has clasped rock and roll to its bosom and has rewarded those disk jockeys that have gone along with the trend. We may not approve aesthetically of rock and roll, but that is a very different matter. 

Some cases of payola involve no possible taint of legal or moral corruption, and yet they are indiscriminately lumped with those that do. For example, it has long been the practice in the music business for eminent singers to demand shares in either the music publishing firm or the song itself before recording a song. This is simply a legitimate economic payment by the publisher to the singer for making the record and is in no way legally or morally reprehensible. 

A great deal of commotion has also been made about the "plug," but here again issues are tangled. There is obviously no harm whatever, legal or moral, committed upon the public when a comedian mentions the name of a commercial product on the air. The only party defrauded is the official sponsor, who pays a certain high fee for radio or TV time and then finds that his time is being infringed upon by others who have been paying a much lower fee. In this case, the performers are the employees and, therefore, agents of the sponsor, and they have been defrauding him, legally and morally. 

However, if the sponsor should happen to be "in on" or condone the practice, then there is nothing wrong with it whatever; for then the sponsor is simply subletting his time, and/or is paying the performer the equivalent of a higher salary. 

If the program has no sponsor, then the same applies to the station, which is then owner of the time, and we are back in a case similar to the disk jockey who works for the station (except that here no moral fraud is committed on the public). 

The antiplug campaign has even extended to the practice of motion picture companies including certain brands of products in their movies in return for compensation. 

Surely, the public can have no legal or moral complaint whatever about this practice. The only one with a right to complain is the head of the motion picture company, if his employees have taken the payment, and if he does not condone or know about the practice. If the employer is indifferent to what brand of car or whiskey is shown on the screen, then he may overlook the practice, and it becomes another form of pay increase to the employee, and, of course, a legitimate form of advertising expense to the manufacturer of the product. 

In short, problems of payola are generally matters of concern only to the buyers and sellers, rather than to the general public. Only in certain exceptional cases is the general public morally defrauded, and almost never is the public legally defrauded. 

The system of payola may be divided into two categories: (a) where the buyer of a good or service pays the seller or his agent; and (b) where the seller of a good or service pays the buyer or his agent. An example of case (a) is the manufacturer paying payola for showing his product in a movie, or paying for a plug on the air. Here the buyer is paying for advertising space or time. There is certainly no wrong committed by the buyer. 

The only problem is whether the seller's agent is taking money without his employer's knowledge or against his wishes, in which case the agent is legally and morally defrauding his employer. If, on the other hand, the employer is a participant in, or condones, the practice, then there is nothing wrong in any way; the employer is simply selling the advertising space or time, as is his right, and granting a commission to the sales agent. 

An example of case (b) is the hypothetical garment firm that pays the buying firm or its agent for purchasing its product. Here again, the garment firm is committing no wrong; it is simply reducing the price of its product. The possible wrong occurs when the buyer-agent goes against the wishes of his employer and thereby defrauds him. If the buyer-employer participates in or condones the arrangement, he is simply accepting a price cut and granting the commission to his employee, and no wrong has been committed. 

If an employer, either as seller or buyer, is opposed to the payola practice in his organization and wants to stamp it out, but police enforcement is difficult or impossible, there is in many cases a simple remedy that he can put into effect. If he is a seller, as in case (a), he can charge the true market price for his service and thus leave nothing left over for any crooked propensities on the part of his employee. 

In short, if a movie company is going to put a certain brand of automobile in a movie, let the movie entrepreneur himself charge such a high price for this service that it will not pay the auto firm to give any extra money to the lesser movie employee. Or let the sponsor himself go into the business of subletting plugs and thus leave insufficient money for extra gratuities to the performers. 

If the employer is a firm buying a product, as in case (b), let him insist on the official price being so much lower than at present that the garment firm could not afford to give an extra present to the buyer's purchasing agent. In short, the payola, whether offered by the seller or buyer of a good or service, is part and parcel of the price-and-wage system, and if an employer wishes to end the practice, he need only insist on converting the payments into official, open prices and wages. 

_________________________________________

Murray N. Rothbard (1926-1995) taught economics at the University of Nevada, Las Vegas, and served as vice president for academic affairs of the Mises Institute. 

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