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The definition of art has been a philosophical conundrum for centuries, but there is probably a reasonable consensus on what comprises ‘the arts’. These include the performing arts (music, dance, opera and theatre), the visual and plastic arts (painting, drawing, print-making, photography, sculpture, craft, and so on), the literary arts (poetry, fiction, drama, screenplays, and some forms of non-fiction such as biography), certain types of film, and some emerging practices such as video art that derive from new information and communications technologies. The application of economic theory and analysis across these various art forms comprises the discipline that has come to be known as cultural economics, although the ambit of this field has expanded in recent years to embrace wider economic questions relating to culture in an anthropological sense, such as the role of culture in economic development. Apart from some issues relating to the definition of cultural goods, this contribution does not deal with culture in the broader sense but rather is confined to the arts as defined above, and considers the conditions of demand, supply and exchange of artistic products, and some consequent issues for policy.

Characteristics of Cultural Goods

The goods and services produced by the arts, as well as some neighbouring commodities such as television programmes, video games and heritage services, can be called cultural goods and services. A fundamental question is whether such goods have unique characteristics that distinguish them as a commodity class from other goods and services in the economy. A reasonable definition of cultural goods attributes to them three necessary features: they require some input of human creativity in their manufacture; they possess or convey some symbolic meaning or messages; and they contain, at least potentially, some form of intellectual property. This definition extends to include a wide range of goods with only minor cultural content, such as fashion design, some forms of advertising, and some architectural services. Nevertheless, while there may be some blurring of boundaries at the cultural edges, there is little doubt that goods and services produced by the arts, as a subset of cultural goods, fit this definition nicely.

An alternative (or perhaps additional) definitional approach has been to portray cultural goods as embodying or giving rise to a form of value that lies beyond the reach of conventional economic assessment, and is not expressible (or is only imperfectly expressible) in market prices or in individual willingness-to-pay judgements. In the case of art works, such ‘cultural’ value might derive from ineffable aesthetic or spiritual qualities that such works of art are known to possess. These sources of value are only partially comprehensible within standard neoclassical price theory; indeed, they can be fully understood only by extending the analytical range to wider areas of economics, and beyond economics into other disciplines such as philosophy, psychology and aesthetics.

A further distinctive characteristic of the arts as consumption goods is that they are subject to the phenomenon of path dependence or, more specifically, rational addiction; that is, they are commodities for which an individual’s present consumption depends on his or her past consumption, and patterns of demand tend to be cumulative. Although it is generally agreed that increased exposure to the arts in the past and the present will generate increased demand in the future (with consequent lessons for arts in education), this is hardly a sufficient condition for defining artistic goods, since a number of other commodities, not least addictive drugs, share a similar characteristic.

As economic commodities it is appropriate to categorize cultural goods as being capital goods, intermediate goods, or goods for final consumption. When classified as capital items (reusable goods whose services are combined with other inputs to produce further outputs), cultural goods have come to be known within economics as cultural capital, distinguished from other forms of capital by reference to either or both of the above definitions. This concept is especially relevant in the analysis of artworks and cultural heritage, where the interpretation of tangible or intangible cultural property as long-lasting assets created by the investment of resources, subject to depreciation unless properly maintained and yielding a rate of return over time, is readily understood.

It is important to note that cultural goods are generally very heterogeneous, suggesting that working in characteristics space may be a preferred way to analyse their demand and supply. For instance, demand for paintings can be thought of in Lancastrian terms as determined by the works’ colour, size, style, school, and so on, and similar collections of characteristics can readily be imagined for other types of artistic commodities. Nevertheless, such heterogeneity does not vitiate the application of the tools of demand and supply analysis to the arts, as demonstrated further below.

Demand

A demand function for any type of artistic good or service could be expected to contain the usual sorts of explanatory variables: own price, price of substitutes, product quality characteristics and socio-demographic indicators relating to consumers’ age, gender, income, education, and so forth. Within standard demand models, interest has focused on empirical questions: price and income elasticities, the relative importance of education and income, the cost of time, and the influence of quality aspects (to the extent that they can be measured). Results from a variety of art forms, time periods, geographical locations and data sources have varied widely, and even apparently plausible hypotheses, such as that the arts are a luxury good, have been by no means universally upheld. Nevertheless, the weight of evidence suggests, inter alia, that education is generally a more powerful predictor of arts demand than is income, and that output quality characteristics exert a strong influence on consumption patterns, perhaps overshadowing price as a determinant of demand behaviour in particular circumstances.

One topic of considerable interest in the demand for the performing arts is the emergence of so-called superstars, performers such as rock musicians and film actors whose incomes are greater than those of their competitors by a much larger differential than marginal productivity theory would suggest. Rosen (1981) attributed this phenomenon to two features of the demand for superstars’ services. First, since consumers rationally prefer one good performance to two mediocre ones, particular types of services (such as rock music) are imperfect substitutes on the demand side, leading to convexity in sellers’ returns and to a skewness in the distribution of earnings. Second, scale economies in joint consumption allow relatively few sellers to supply the entire market. Add to this the possible ‘herding’ behaviour of consumers, who follow the lead of others in making their demand decisions, and a plausible explanation as to why some performers command excessively high rents is obtained. Paradoxically, however, having broken away from the pack, superstars may finish up receiving less than their full earnings potential because some of their incremental contribution may have to be shared with employers, agents, managers and other beneficiaries of their superstardom.

Compared with the performing arts, the demand for art objects such as paintings – occurring in what is generally known as ‘the art market’ – raises some quite different questions. Durable works of art are sought by buyers not just for their aesthetic qualities but also because they are financial assets whose value may appreciate over time. Demand for paintings, prints, drawings, movable sculptures and other collectables such as silverware and rare books is readily separable into demand for art as a source of aesthetic gratification and demand for art as financial instrument. Both demands are affected by some of the same sorts of considerations – the reputation of the artist, the opinion of critics and market analysts, fashions in taste, past prices, and so on. At the same time other influences affect one or other aspect of demand specifically; for instance, demand for art as asset is constrained by some unattractive features of works of art as investments compared with alternative instruments, in particular their indivisibility, their illiquidity and their riskiness. In freely functioning markets, prices are expected to reflect all these influences, providing in equilibrium a means of balancing their respective importance. Since quite extensive and detailed data on prices in various art markets are available, a substantial econometric effort has been devoted to analysing price patterns across time and space for a wide range of types and styles of works of art. While much of this research yields results of interest only to art market specialists and connoisseurs – for example, do prices for paintings and prints by the same artist follow similar trends? – some of it addresses the more general issue of rates of return to art investment over time. Although contrary examples can be found, the general conclusion is that a collection of works of art will yield a lower return over the long term than a corresponding portfolio of stocks and bonds, the differential being attributable in part to the consumption services provided by the art for the period for which it is held.

Finally on the demand side, we can point to the demand for museum and heritage services. This demand includes attendances at art museums and heritage sites which provide private consumption experiences to the visitor, the specialist demand for conservation and restoration services provided by curators, art historians, and so on who staff the institutions concerned, and the demand for the public-good output of these cultural facilities, seen in the form of non-participant benefits accruing to the local and wider communities. With regard to direct visits to museums and sites, empirical experience suggests some price sensitivity, leading to arguments for free admission to publicly funded or operated facilities on the grounds that their educational and access benefits outweigh their potential for revenue raising. Nevertheless, in some instances, especially in the heritage field, revenue from visitors such as tourists is the only reliable source of ongoing funds for restoring or maintaining the facility concerned. However, regardless of the income-earning prospects of museum and heritage assets, the demand for their public-good output may well prove more decisive than the private-use demand for their services in rationalizing their existence in economic terms. In this respect demand estimation methods using stated preference techniques such as contingent valuation methods have proved useful in evaluating option, existence and bequest demands for these items of cultural capital and in quantifying willingness to pay for their services.

Supply

Artistic goods and services for final consumption are produced by a variety of types of enterprises ranging from single-person firms through small for-profit and not-for-profit companies to large corporate organizations in both private and public sectors. At the simplest end of this spectrum is the individual artist who produces goods or services for direct sale to the public – the visual artist selling paintings from her home, or the busker playing his saxophone in the shopping mall. From an economic viewpoint these artists can be seen as single-proprietor firms, probably unincorporated and subject to more than the usual vagaries of production, cost and market uncertainties that attend such producers elsewhere in the economy. Their labour time and their talent are likely to be their principal inputs, and their production functions are likely to relate as much to the quality as to the quantity of their output. We return to the economic circumstances of individual artists below.

Across many fields in the arts – including opera, theatre, dance, classical music, jazz, independent film-making, small-scale literary publishing, contemporary visual art and craft, and so on – the predominant firm types, in terms of numbers of firms, are small and medium-sized enterprises, constituted on either a for-profit or a not-for-profit basis. Microeconomic theory offers straightforward means for characterizing the production and cost conditions under which all these firms operate, with differences according to specific features of the various industries. For example, in the performing arts the unit of output in both production and cost function estimations is generally taken as paid attendances, in a manner similar to the way output is measured in other service-providing firms such as hospitals and universities. Standard functional forms can be used to investigate elasticities of output with respect to various inputs, economies of scale and scope, technical and allocative efficiencies, and productivity growth.

While production and cost conditions may be expected to be similar for these firms whether they are profit-oriented or otherwise, the structure and behaviour of for-profit and not-for-profit firms will differ markedly. Much attention in the economics of the arts has been focused on the latter because of the prevalence of not-for-profit firms at the ‘serious’ end of the artistic spectrum, producing innovative output or work which, though judged artistically worthy, does not appeal to a mass audience. Not only is there insufficient demand to sustain commercial production of this sort of work, but also the motives of the firms producing it are artistic rather than pecuniary. They can therefore be modelled as constrained maximizers of output quality (and possibly of the quantity of output as well if they wish to spread their art to as wide an audience as possible); the constraint is a break-even restriction whereby earned plus unearned revenue must at least cover costs over some specified period. Other model specifications have also been investigated, for example incorporating an objective of maximizing revenues from sponsorship and donations.

An issue of continuing interest in the economics of the performing arts is that of productivity lag, first identified by Baumol and Bowen (1966) and subsequently labelled ‘Baumol’s disease’ or ‘the cost disease’. Essentially the hypothesis states that labour productivity in the live arts remains static over time – it still takes the same number of workers the same amount of time to perform Hamlet today as it did in Shakespeare’s day. In a two-sector model in which one sector suffers from this technological disadvantage, wage rises in the productive sector are transmitted to the stagnant sector, causing a widening gap in the latter between revenues and costs, since firms in the stagnant sector cannot cover wage rises with improved labour productivity. Applying this to the live arts, Baumol and Bowen predicted that performing firms would have to access increasing levels of non-box-office revenue over time in order to stay in business. Empirical studies of this phenomenon have confirmed that costs of live performances have indeed risen as the model implies, but that the impact of these cost increases on firms has been somewhat muted; most performing companies have been able to mitigate the effects of slow productivity growth through a variety of strategies, including tapping new sources of unearned revenue, exploiting the potential of new recording and distribution technologies, expanded ancillary activities such as merchandising, and so on.

Finally in this section we turn to large-scale production in the arts. There are certainly some not-for-profit firms in the arts with multi-million dollar budgets, including major art museums, the world’s principal opera companies and symphony orchestras, national theatre companies in several countries, and so on. In almost all cases some level of public funding is involved, together with significant levels of private-sector support from foundations, corporations and individual donors to supplement box-office revenue. In some countries these large-scale enterprises are government business undertakings, subject to varying degrees of independence or control in their governance and their operational decision-making. However, the majority of large-scale producers of artistic goods are profit-seeking firms operating in commercial markets where complex production processes are required and/or where substantial scale economies exist. These firms include theatre companies staging popular shows, commercial and independent film producers, music publishers, record companies, major book publishers, art auction houses and so on. Taken together, these firms form a significant component (measured in terms of value of output) of the so-called creative or copyright industries, terms reflecting two of the necessary characteristics of cultural goods discussed earlier. From an economic point of view, these industries are notable for their peculiar contractual arrangements that reflect, among other things, the inherent uncertainties that attend every stage of artistic production processes whereby ‘nobody knows’ what the quality or market potential of the final product will be (Caves 2000).

Market Structures

It is perhaps surprising that there is little in the industrial organization literature dealing with structure, conduct and performance in the arts. There are many interesting questions concerning competition, market efficiency and pricing behaviour in the arts that await the attention of economists. As may be evidenced from the preceding section, the range of market structures in the arts is quite wide, providing considerable scope for empirical investigation.

At one extreme can be found instances of almost atomistic competition, as in the so-called primary market for visual art. Here there are many small producers, mostly individual artists selling on their own or through small local galleries, art fairs, and so on. Although the product is not exactly homogeneous, buyers tend to be not very discriminating, and prices may well be competed down to little more than cost of production plus some modest return to labour. Moving further across the market structure spectrum, we can suggest that the live performing arts in medium-to-large towns and cities show some evidence of monopolistic competition: a relatively large number of small firms competing through product differentiation and other non-price strategies for customers drawn from a single pool. Higher levels of concentration appear in other areas of the arts, especially in local markets for live performance characterized by one or two dominant firms when close substitutes are not available; the markets for opera or orchestral music in a given city may be examples. In all of the above cases, market conditions affect the pricing and output decisions of participating firms. Given that non-pecuniary motives play an important role in influencing the behaviour of economic agents in the arts, the competitive outcomes in the markets discussed might be expected to diverge somewhat from those predicted under more conventional conditions.

Factor Markets

The input into artistic production processes that provides the unique qualities of artistic goods and services is, of course, the creative labour of artists themselves. Labour markets in the arts have been widely studied in both theoretical and empirical terms in an effort to understand whether and in what ways they differ from conventional labour markets. A principal finding relates again to the non-pecuniary motives for artistic production. Artists in general do not regard work as a chore whose only purpose is to earn an income. Rather, their commitment to making art means that they have a positive preference for working at their chosen profession, and empirical evidence indicates that they often forgo lucrative alternative employment in order to spend more time pursuing their creative work. This can be modelled as a time allocation problem where the worker has to choose between preferred but less remunerative work in the arts on the one hand and better-paid but less desired non-arts work on the other. The choice is subject to a minimum-income constraint, necessary to prevent starvation, a condition often romantically associated with artists but rarely observed in practice. Such a ‘work preference’ model of labour supply yields predictions of behaviour at variance with the usual textbook construct – for example, a wage rise in the non-arts occupation may induce less work in that occupation because it enables more time to be devoted to the arts, a phenomenon akin to the backward-bending supply curve of labour in the conventional model.

The generally low levels of average earnings available from artistic practice mean that arts labour markets are characterized by ubiquitous multiple job-holding and much fluidity in career paths. The distribution of earnings across any population of arts workers is almost always skewed towards the lower end. Some attention has been paid to the role of risk in affecting entry and exit decisions in arts labour markets. Given the superstar phenomenon noted above, where extremely high incomes are earned by very few, some writers have portrayed these labour markets as winner-take-all lotteries to which artists submit themselves willingly. An alternative explanation of persistent labour market participation when expected monetary returns are low lies in the supposition that artists earn a sufficient level of psychic income to offset the meagre levels of their pecuniary rewards.

Turning to capital markets, we note simply that a similar psychic component may be present in rewarding suppliers of capital to the arts. For example, investors willing to back a theatre company putting on a new show may perhaps do so in expectation that the show will be a hit and they will earn a handsome return on their investment; however, a more plausible explanation for such a risky decision may be that these donors are motivated by a love of the theatre and hence that their satisfaction will derive largely if not entirely from the psychic rewards from helping to make it happen. Indeed, much private capital flows to the arts not as investments or loans but as untied donations with no strings attached, as discussed further below.

Policy Issues

Government provision of financial assistance to the arts is widespread across the developed world, though the extent of intervention varies substantially between countries and between jurisdictions within countries. It is not clear whether such assistance is in accord with the wishes of voters or whether it is a case of imposed preferences whereby the arts are seen by governments as a merit good. It is also entirely possible that public subsidies to the arts are consistent with the restoration of Pareto optimality in an economy subject to market failure, if it is indeed the case that the arts give rise to public goods or positive externalities. Some economists remain sceptical of the latter proposition on empirical rather than theoretical grounds, and there is as yet not a great deal of evidence to resolve the issue one way or the other. In these circumstances more attention has been focused on the appropriate means for intervention once a normative rationale is accepted. The instruments governments have at their disposal include public-sector provision of artistic services (for example, through public art galleries); direct subsidies to cultural production or consumption; indirect support through the tax system; regulation; provision of information; assistance through the education system; and so on. An issue of considerable interest is the specification of optimal decision rules for allocation of public financing among competing avenues of artistic activity, a process apparently driven as much by rent-seeking or political expediency as by the pursuit of economic efficiency.

The use of the tax system as a means of providing assistance has been of particular significance to the arts, especially via the tax deductibility allowed to philanthropic donors who give money to not-for-profit performing companies, museums, galleries, and so on. Such giving is likely to be motivated by a desire to secure the sorts of public-good benefits of the arts mentioned earlier, in circumstances where direct government support is regarded as inadequate. In some countries, most notably the United States, the cost of indirect support for the arts, measured in terms of tax revenue forgone, greatly exceeds the amount of direct financing by the public sector. Given that governments can manipulate the incentives facing donors by changing marginal tax rates, by raising or lowering thresholds and ceilings on allowable donations, and so on, much interest has focused on elasticities of giving with respect to variables such as the tax price. The critical issue from a policy viewpoint is whether the price elasticity is greater or less than unity in absolute terms, since a price elastic response would imply that lowering the tax price would increase recipients’ revenue by more than the tax receipts forgone. However, despite many empirical studies, no clear consensus as to the size of these elasticities has emerged. Other policy issues of concern in this field include whether increased government support for the arts crowds out or crowds in private donations, and whether it is good or bad policy to use an instrument that allows private individuals to direct the allocation of public resources via their charitable-giving decisions.

One way in which public policy can assist the functioning of markets in the arts is via the creation and enforcement of property rights in artistic goods and services. Efficient copyright regimes aim to facilitate public access to information, at the same time as allowing creators to regulate the use of their work and to capture remuneration that would otherwise be lost to piracy, free-riding, unauthorized commercial exploitation, and the like. While often seen as a purely legal matter, copyright has a number of economic implications for the arts. In particular, artistic output in the form of literary works, paintings, photographs, musical compositions, and so forth can generally be reproduced at low or negligible cost, and in the absence of copyright protection their price would be driven down to marginal cost, so reducing or eliminating the incentive to the artist to create further output. Nevertheless, some exceptions to universal copyright coverage exist, for example in the ‘fair use’ provisions of copyright law, which allow free access for certain scholarly or public-interest purposes, or where high transactions costs of enforcement outweigh the potential gains to the rights holder. Other intellectual property issues of interest to economists include the market effects of moral rights (the rights that artists have over attribution and integrity of their works) and, in the visual arts, the phenomenon of droit de suite (the payment of a royalty to the artist or his or her heirs each time a given work is resold).

An area of growing importance in policy terms in recent years has been the role of the arts in urban and regional development. This role may be evident in a specific sense, for example in the impact of an arts festival on the local economic base, or in the use of community arts projects to engage and motivate disaffected youth in areas of high unemployment. In a wider context, the creative industries may be seen as a source of new enterprise, income growth and employment creation in depressed industrial regions. Empirical studies have looked at the impact of arts events, facilities, and so forth on a local or regional economy, and at the more general contribution that the arts industries make to economic activity, as a basis for policy formulation in a field increasingly engaging the attention of governments at both national and local levels.

Public policy towards the arts, heritage, the creative industries, cultural trade, and so forth can be gathered together under the somewhat fuzzy heading of ‘cultural policy’. Given the significant economic content of all of these areas, it can be expected that economic theory and analysis will continue to make an important contribution to policy-making in this field in the future.

Further Reading

Recent surveys of the economics of the arts include Throsby (1994), Blaug (2001) and Ginsburgh (2001). Major contributions to the literature on the economics of the arts from the mid-1960s to the mid-1990s are collected together in Towse (1997). A broader view of cultural economics is contained in Throsby (2001). An accessible account of the principal topics in contemporary cultural economics is provided in Towse (2003), while a comprehensive research-oriented coverage of the economics of art and culture is contained in Ginsburgh and Throsby (2006).

See Also