Economics of the arts and literature
Encyclopedia
Economics of the arts and literature or cultural economics (used below for convenience) is a branch of economics
that studies the economics of creation, distribution, and the consumption of works of art
and literature. For a long time the arts were confined to visual and performing arts in the Anglo-Saxon tradition. Usage has widened since the beginning of the 1980s with the study of cultural industry
(cinema and music publishing), and the economy of cultural institutions (museums, libraries, historic buildings). The field is coded as JEL: Z11 in the Journal of Economic Literature
classification system
used for article searches.
).
Economic thinking has been applied in ever more areas in the last decennia, including pollution,
corruption and education. Works of art and culture have a specific quality, which is their uniqueness.
There just aren't two Nighthawks
es.
As there is no equivalent item for each, classical economist Adam Smith
held it was impossible to
value them. Alfred Marshall
noted that the demand for a certain kind of cultural good can depend on its consumption: The more you have listened to a particular kind of music, the more you appreciate. In his
economic framework, these goods do not have the usual decreasing marginal utility
.
Key works in the cultural economics as such were those of Baumol
and Bowen
(Performing Arts, The Economic Dilemma, 1966), of Gary Becker
on addictive goods, and of Alan Peacock
(Public Choice).
This summary has been divided into sections on the economic study of the performing arts, on the market of individual pieces of art, the art market in cultural industries, the economics of cultural heritage and the labour market in the art sector.
for a relative cost growth of live performances. This cost growth explains the increasing dependency of this kind of art on state subsidies. It occurs when the consumable good is labour itself. To understand this phenomenon, compare the change in the cost of performing the Molière
play "Tartuffe
" in 1664 and in 2007 with the change in cost of calculating a large number of sums from an accounting ledger. In 1664, you needed two hours and twelve actors to perform Molière's play, and it would take, say, twelve accountants working for two hours to add up all the sums in an accounting ledger. In 2007, a single accountant with a $10 calculator can add the sums in 20 minutes, but you still need two hours and twelve actors for the Molière play.
Now, the artist trade needs a considerable investment in human capital
, and needs to be paid accordingly. The artists' pay need to rise along with that of the population in general. As the latter is following the general productivity in the economy, the cost of a play will rise with general productivity, while the actors' productivity does not rise.
There are two lines of thought in subsequent literature on the economics of the performing arts:
, i.e., there are limited numbers of sellers and buyers (oligopsony
).
Two central questions on the working of the markets are: How are prices determined, and what is the return
on artworks, compared to the return on financial assets ?
Three kinds of economic agents determine these values. Specific experts like gallery owners or museum directors, the first. Experts like art historians, the second. Buyers who buy works of art as an investment, the third.
s, in the early 90's. This may indicate a diversification
opportunity. Apart from this evidence of successful investment, the amount of data available has stimulated study of the market. Many works are sold on auction
s. These transactions are thus very transparent. This has made it possible to establish price databases, with prices of some items going back to 1652.
Empirical studies have shown that, on average, the return
on works of art has been lower than that on equity
, with a volatility
that is at least as high. An intangible
gain in terms of pleasure of having a work of art could explain this partly. However, before interpreting the figures, it should be born in mind that art is often exempt of many kinds of taxes.
In 1986, Baumol made an estimate of an average yearly rate of return of 0.55 percent for works of art, against a rate of return of 2.5 percent for financial assets, over a 20-year period.
. The market is dominated by a few major companies, the rest of the market consisting of a big number of small companies. The latter may act as a filter for the artistic supply: A small company with a successful artist can be bought by one of the majors.
Big conglomerates, pooling TV and film production, have existed since the 1920s. The 1990s have seen some mergers extending beyond the industry as such, and mergers of hardware producers with content providers. Anticipated gains from synergy
and market power
have not been realised, and from the early 2000s there has been a trend towards organisation along sector lines.
is reflected in goods and real estate. Management and regulation
of museums has come under study in this area.
, they pose the problems related to these goods: should they be self-financing, or be subsidized ? One of the specific issues is the imbalance between the huge value of the collections in museums, and their budgets. Also, they are often located in places (city centres) where the cost of land is high, which limits their expansion possibilities. American museums exhibit only about half of their collection. Some museums in Europe, like the Pompidou Centre in France, show less than 5 percent of their collection. Apart from providing exhibitions, museums get proceeds from derived products, like catalogues and reproductions. They also produce at a more intangible level: They make collections. Out of so many pieces in the public domain, they make a selection based on their expertise, thus adding value to the mere existence of the items.
The dual goal of conservation and providing exhibitions obviously presents a choice. On the one hand the museum has, for conservation reasons, an interest in exhibiting as few items as possible, and it would select lesser known works and a specialized audience, to promote knowledge and research. On the other hand, the exhibition argument requires showing the major pieces from different cultures, to satisfy the demands from the public and to attract a large audience. When a government has made a choice about this, application of economic contract theory
will help to implement this choice by showing how to use incentives to different managers (on the financial, conservatory side) to obtain the required result.
, is used for the phenomenon that a handful of the artists in the market, earn a major part of total earnings in a sector. Rosen's 1981 paper examined the economics of superstars to determine why “relatively small numbers of people earn enormous amounts of money and seem to dominate the fields in which they engage.” Rosen argues that in superstar markets, "small differences in talent at the top of the distribution will translate into large differences in revenue." Rosen points out that "...sellers of higher talent charge only slightly higher prices than those of lower talent, but sell much larger quantities; their greater earnings come overwhelmingly from selling larger quantities than from charging higher prices"
In cultural industries, the uncertainty about the quality of a product plays a role in this. The consumer does not really know how good the product is, until he has consumed it (think of a movie), and the producer is confronted with the typical uncertainty in a cultural industry. The consumer looks for guidance in the price, reputation, or a famous name on the cover or poster. As the producer understands this affects demand, he is prepared to pay a lot for a name considered a sign of quality (a star). Indeed, authors like Adler and Ginsburgh have given evidence that star status is determined by chance: in a musical contest, results were highly correlated with the order of performance.c
This randomness has been used to explain why the labor supply in the sector remains excessive: given extreme gains of a star, and an irrational behaviour, or particular preferences, with respect to chance, unsuccessful artists keep trying, even when they are earning their money mostly in a different trade. A second argument is the possibility of intangible returns to artists' labour in terms of social status.
.) An artist often considers a product to be an expression of himself, while the ordinary craftsman is only concerned with his product, as far as it has an impact on his pay or salary. The artist may thus want restrict the use of his product.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
that studies the economics of creation, distribution, and the consumption of works of art
Work of art
A work of art, artwork, art piece, or art object is an aesthetic item or artistic creation.The term "a work of art" can apply to:*an example of fine art, such as a painting or sculpture*a fine work of architecture or landscape design...
and literature. For a long time the arts were confined to visual and performing arts in the Anglo-Saxon tradition. Usage has widened since the beginning of the 1980s with the study of cultural industry
Cultural industry
According to international organizations such as UNESCO and the General Agreement on Tariffs and Trade , cultural industries combine the creation, production, and distribution of goods and services that are cultural in nature and usually protected by intellectual property rights.-The concept:The...
(cinema and music publishing), and the economy of cultural institutions (museums, libraries, historic buildings). The field is coded as JEL: Z11 in the Journal of Economic Literature
Journal of Economic Literature
The Journal of Economic Literature is a peer-reviewed academic journal on economy published by the American Economic Association. It was established in 1963 as the Journal of Economic Abstracts. As a review journal, it mainly features essays and reviews of recent economic theories...
classification system
JEL classification codes
Articles in economics journals are usually classified according to the JEL classification codes, a system originated by the Journal of Economic Literature. The JEL is published quarterly by the American Economic Association and contains survey articles and information on recently published books...
used for article searches.
Introduction
Cultural economics is concerned with arts in a broad sense. The goods considered have creative content, but that is not enough to qualify as a cultural good. Designer goods are not considered to be works of art or culture. Cultural goods are those with a value determined by symbolic content rather than physical characteristics. (For further considerations, see also Cultural Institutions StudiesCultural Institutions Studies
Cultural institutions studies is an academic approach "which investigates activities in the cultural sector, conceived as historically evolved societal forms of organising the conception, production, distribution, propagation, interpretation, reception, conservation and maintenance of specific...
).
Economic thinking has been applied in ever more areas in the last decennia, including pollution,
corruption and education. Works of art and culture have a specific quality, which is their uniqueness.
There just aren't two Nighthawks
Nighthawks
Nighthawks is a 1942 painting by Edward Hopper that portrays people sitting in a downtown diner late at night. It is considered Hopper's most famous painting, as well as one of the most recognizable in American art...
es.
As there is no equivalent item for each, classical economist Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
held it was impossible to
value them. Alfred Marshall
Alfred Marshall
Alfred Marshall was an Englishman and one of the most influential economists of his time. His book, Principles of Economics , was the dominant economic textbook in England for many years...
noted that the demand for a certain kind of cultural good can depend on its consumption: The more you have listened to a particular kind of music, the more you appreciate. In his
economic framework, these goods do not have the usual decreasing marginal utility
Marginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
.
Key works in the cultural economics as such were those of Baumol
William Baumol
William Jack Baumol is an American economist. He is a professor of economics at New York University and is also affiliated with Princeton University. Baumol has written extensively about labor market and other economic factors that affect the economy. He also made valuable contributions to the...
and Bowen
William G. Bowen
William G. Bowen is President Emeritus of The Andrew W. Mellon Foundation where he served as President from 1988 to 2006. He was the president of Princeton University from 1972 to 1988....
(Performing Arts, The Economic Dilemma, 1966), of Gary Becker
Gary Becker
Gary Stanley Becker is an American economist. He is a professor of economics, sociology at the University of Chicago and a professor at the Booth School of Business. He was awarded the Nobel Memorial Prize in Economic Sciences in 1992, and received the United States' Presidential Medal of Freedom...
on addictive goods, and of Alan Peacock
Alan Peacock
Alan Peacock is a former English footballer.He spent the majority of his career at Middlesbrough, also playing for Leeds United and Plymouth Argyle. He joined Middlesbrough in 1954 and became a regular in the side in 1958 alongside Brian Clough. Clough scored the majority of the goals, partly due...
(Public Choice).
This summary has been divided into sections on the economic study of the performing arts, on the market of individual pieces of art, the art market in cultural industries, the economics of cultural heritage and the labour market in the art sector.
Performing arts: Baumol and cultural economics
The seminal paper by William Baumol and Bowen introduced the term cost diseaseBaumol's cost disease
Baumol's cost disease is a phenomenon described by William J. Baumol and William G. Bowen in the 1960s. It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth...
for a relative cost growth of live performances. This cost growth explains the increasing dependency of this kind of art on state subsidies. It occurs when the consumable good is labour itself. To understand this phenomenon, compare the change in the cost of performing the Molière
Molière
Jean-Baptiste Poquelin, known by his stage name Molière, was a French playwright and actor who is considered to be one of the greatest masters of comedy in Western literature...
play "Tartuffe
Tartuffe
Tartuffe is a comedy by Molière. It is one of his most famous plays.-History:Molière wrote Tartuffe in 1664...
" in 1664 and in 2007 with the change in cost of calculating a large number of sums from an accounting ledger. In 1664, you needed two hours and twelve actors to perform Molière's play, and it would take, say, twelve accountants working for two hours to add up all the sums in an accounting ledger. In 2007, a single accountant with a $10 calculator can add the sums in 20 minutes, but you still need two hours and twelve actors for the Molière play.
Now, the artist trade needs a considerable investment in human capital
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...
, and needs to be paid accordingly. The artists' pay need to rise along with that of the population in general. As the latter is following the general productivity in the economy, the cost of a play will rise with general productivity, while the actors' productivity does not rise.
There are two lines of thought in subsequent literature on the economics of the performing arts:
- The first concentrates on the existence of productivity growth in some areas of production, thus contradicting the relevance of cost disease. Staying with the "Tartuffe" example, the same performance can be viewed by an ever larger audience by improvements in the design of theatres, and by the introduction of microphones, television and recording.
- The second is concerned with the allocation of subsidies to the cultural sector. While these should be in the general public interest, they may have an income distribution effect, e.g. if they reduce cost to the relatively well-off part of society. This is the case when the well-off are overrepresented in the audiences of subsidized plays, or when subsidies go to a small elitist group of artists.
The market for artworks
Two segments of the market in the visual arts can be distinguished: works of art that hare familiar and have a history, and contemporary works that are more easily influenced by fashion and new discoveries. Both markets, however, are oligopolisticOligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
, i.e., there are limited numbers of sellers and buyers (oligopsony
Oligopsony
An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of buyers...
).
Two central questions on the working of the markets are: How are prices determined, and what is the return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
on artworks, compared to the return on financial assets ?
Price determination
Components of a work of art, like stone or paint, in general have a value much lower than the finished product. Also, the amount of labour needed to produce an item does not explain the big price differences between works of art. It seems that the value is much more dependent on potential buyers', and experts' perception of it. This perception has three elements: First, social value, which is the social status the buyer has by owning it. The artist thus has an "artistic capital". Second, the artistic value, compared to contemporary works, or as importance to later generations. Third, the price history of the item, if a buyer uses this for his expectation of a future price at which he might sell the item again (given the oligopolistic market structure).Three kinds of economic agents determine these values. Specific experts like gallery owners or museum directors, the first. Experts like art historians, the second. Buyers who buy works of art as an investment, the third.
Art market and investment
Some major financial institutions, banks and insurance companies, have had considerable return rates on investments in art works in the 1990s. These rates haven't slowed down at the same time as the rates on stock exchangeStock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
s, in the early 90's. This may indicate a diversification
Diversification (finance)
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of...
opportunity. Apart from this evidence of successful investment, the amount of data available has stimulated study of the market. Many works are sold on auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
s. These transactions are thus very transparent. This has made it possible to establish price databases, with prices of some items going back to 1652.
Empirical studies have shown that, on average, the return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
on works of art has been lower than that on equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, with a volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
that is at least as high. An intangible
Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset...
gain in terms of pleasure of having a work of art could explain this partly. However, before interpreting the figures, it should be born in mind that art is often exempt of many kinds of taxes.
In 1986, Baumol made an estimate of an average yearly rate of return of 0.55 percent for works of art, against a rate of return of 2.5 percent for financial assets, over a 20-year period.
Cultural industries
Some artwork is not reproducible, but there are many cultural goods whose value does not depend on the individual copy. Books, recordings, movies get some of their value from the existence of many copies of the original. These are the products of cultural industries. These markets are characterized by:- Uncertainty on value. The demand for a good (success) is hard to predict. This is a characteristic of an experience goodExperience goodIn economics, an experience good is a product or service where product characteristics such as quality or price are difficult to observe in advance, but these characteristics can be ascertained upon consumption...
. - Infinite variety. You can differentiate between products, e.g. a car, on basis of its characteristics. Many products allow classification on a relatively small number of such characteristics. Cultural goods, however, have a very high number of them, which, on top of that, often are subjective. This makes them hard to compare.
- High concentration in traded products. A major part of sales is in best-sellers or block-busters.
- Short life cycleProduct life cycle managementProduct life-cycle management is the succession of strategies used by business management as a product goes through its life-cycle. The conditions in which a product is sold changes over time and must be managed as it moves through its succession of stages.Product life-cycle Like human beings,...
. Most items are sold shortly after introduction. - High fixed costFixed costIn economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs...
. There is high cost before introduction. Making a movie is much more expensive than producing another copy.
Market structure
The important cultural industries have an oligopolistic market structureMarket structure
In economics, market structure .* Monopolistic competition, also called competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products.* Oligopoly, in which a market is dominated by a small number of firms that...
. The market is dominated by a few major companies, the rest of the market consisting of a big number of small companies. The latter may act as a filter for the artistic supply: A small company with a successful artist can be bought by one of the majors.
Big conglomerates, pooling TV and film production, have existed since the 1920s. The 1990s have seen some mergers extending beyond the industry as such, and mergers of hardware producers with content providers. Anticipated gains from synergy
Synergy
Synergy may be defined as two or more things functioning together to produce a result not independently obtainable.The term synergy comes from the Greek word from , , meaning "working together".-Definitions and usages:...
and market power
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
have not been realised, and from the early 2000s there has been a trend towards organisation along sector lines.
Economics of cultural heritage
Cultural heritageCultural heritage
Cultural heritage is the legacy of physical artifacts and intangible attributes of a group or society that are inherited from past generations, maintained in the present and bestowed for the benefit of future generations...
is reflected in goods and real estate. Management and regulation
Regulatory economics
Regulatory economics is the economics of regulation, in the sense of the application of law by government that is used for various purposes, such as centrally-planning an economy, remedying market failure, enriching well-connected firms, or benefiting politicians...
of museums has come under study in this area.
Museums
Museums, which have a conservatory role, and provide exhibitions to the general public, can be commercial, or on a non-profit base. In the second case, as they provide a public goodPublic good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
, they pose the problems related to these goods: should they be self-financing, or be subsidized ? One of the specific issues is the imbalance between the huge value of the collections in museums, and their budgets. Also, they are often located in places (city centres) where the cost of land is high, which limits their expansion possibilities. American museums exhibit only about half of their collection. Some museums in Europe, like the Pompidou Centre in France, show less than 5 percent of their collection. Apart from providing exhibitions, museums get proceeds from derived products, like catalogues and reproductions. They also produce at a more intangible level: They make collections. Out of so many pieces in the public domain, they make a selection based on their expertise, thus adding value to the mere existence of the items.
The dual goal of conservation and providing exhibitions obviously presents a choice. On the one hand the museum has, for conservation reasons, an interest in exhibiting as few items as possible, and it would select lesser known works and a specialized audience, to promote knowledge and research. On the other hand, the exhibition argument requires showing the major pieces from different cultures, to satisfy the demands from the public and to attract a large audience. When a government has made a choice about this, application of economic contract theory
Contract theory
In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics...
will help to implement this choice by showing how to use incentives to different managers (on the financial, conservatory side) to obtain the required result.
Real estate
Many countries have systems that protect buildings and structures they consider to be of cultural interest. Owners get tax deductions or subsidies for restoration, in return for which they accept restrictions on modifications to the buildings or provide public access. Such a system poses the same choice problems as museums do. There has been little study of this issue.The artists' labour market
The labour market for artists is characterized by four things in particular:- There is an extremely unequal income distributionIncome distributionIn economics, income distribution is how a nation’s total economy is distributed amongst its population.Income distribution has always been a central concern of economic theory and economic policy...
within the market segment. A very small group of people earn a high proportion of the total income. - There is a structural excess supply of labour. There are always more people who like to earn their income as an artist than there is demand for them.
- There are intangible returns to labour, so that people accept lower wages than their qualifications would earn in a different market.
- Non-separation of artist and work. The image their product gives them, is important to artists.
The star system
The term "star system", coined by S. RosenSherwin Rosen
Sherwin Rosen was an American labor economist. He had ties with many American universities and academic institutions including the University of Chicago, the University of Rochester, Stanford University and its Hoover Institution. At the time of his death, Rosen was Edwin A. and Betty L...
, is used for the phenomenon that a handful of the artists in the market, earn a major part of total earnings in a sector. Rosen's 1981 paper examined the economics of superstars to determine why “relatively small numbers of people earn enormous amounts of money and seem to dominate the fields in which they engage.” Rosen argues that in superstar markets, "small differences in talent at the top of the distribution will translate into large differences in revenue." Rosen points out that "...sellers of higher talent charge only slightly higher prices than those of lower talent, but sell much larger quantities; their greater earnings come overwhelmingly from selling larger quantities than from charging higher prices"
In cultural industries, the uncertainty about the quality of a product plays a role in this. The consumer does not really know how good the product is, until he has consumed it (think of a movie), and the producer is confronted with the typical uncertainty in a cultural industry. The consumer looks for guidance in the price, reputation, or a famous name on the cover or poster. As the producer understands this affects demand, he is prepared to pay a lot for a name considered a sign of quality (a star). Indeed, authors like Adler and Ginsburgh have given evidence that star status is determined by chance: in a musical contest, results were highly correlated with the order of performance.c
This randomness has been used to explain why the labor supply in the sector remains excessive: given extreme gains of a star, and an irrational behaviour, or particular preferences, with respect to chance, unsuccessful artists keep trying, even when they are earning their money mostly in a different trade. A second argument is the possibility of intangible returns to artists' labour in terms of social status.
Production structure
A case has been made for the existence of a different structure in the production of cultural goods . (See Cultural Institutions StudiesCultural Institutions Studies
Cultural institutions studies is an academic approach "which investigates activities in the cultural sector, conceived as historically evolved societal forms of organising the conception, production, distribution, propagation, interpretation, reception, conservation and maintenance of specific...
.) An artist often considers a product to be an expression of himself, while the ordinary craftsman is only concerned with his product, as far as it has an impact on his pay or salary. The artist may thus want restrict the use of his product.
Journals
- Journal of Cultural Economics and first-page article links from 1977 on.