Northeastern University Economics William Baumol Research Paper
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Cultural Economist Paper: Select one economist who has written substantially about the arts and summarize their writings and major contributions to the field. Please select a significant individual in the cultural economic community and discuss their contributions to the field. Select anyone you wish and write an analysis of a significant contribution they have made, why it is important and how it has worked in practice
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3 Performing arts
The ever-increasing costs of the subsidized performing arts were the trigger for Baumol and
Bowens (1966) study that provided an analytical basis for cultural economics, and at the same
time led to the subjects involvement in the political economy of arts policy. Consequently,
research on the economics of the performing arts music, theatre arts, and so on has been at
the heart of cultural economics. Not surprisingly, quite a lot has changed in both the analysis and
the policy surrounding them over the past 50 years, though to a large extent, the art forms have
remained pretty similar both in respect of the nature of performance and the support they get
from audiences and taxpayers. Of course, their repertoires and styles of productions are different
and new technologies both complement and compete with live performance, and in addition,
conditions in countries public finances have changed; nevertheless, the economic analysis of
performing arts is substantially the same now as it was in the 1960s. 3.1 Economic features of
live performance By its nature, a live performance is ephemeral: it is scheduled to take place at a
given place and time and at predetermined prices. If it does not attract a sufficient audience,
revenues may not even cover the cost of putting on the performance. On the other hand, if the
show is a huge success, it may not be possible to cash in on its success because most performing
arts organizations have to plan their repertoire well in advance, sometimes for several years, and
contracts for performers or theatre space may not be renegotiable at short notice. Some art
forms are less flexible than others in that respect; opera and ballet, for example, typically share a
stage, and its use for performances and rehearsals, which entails changing sets, requires detailed
timetabling well in advance. 263.1.1 Costs of production PERFORMING ARTS 27 On the cost
side, a production has to be designed, staged and rehearsed involving back stage personnel and
performers before any performance can take place: these are the fixed costs of the show that are
spread over the number of performances. Performances take place immediately after the initial
preparation of the production and may also be repeated in a later season as a revival, in which
case, average costs (the f ixed cost averaged over all performances) may be spread over a longer
period. Some of the fixed costs may be sunk costs if the inputs cannot be reused elsewhere once
the run of performances is over; some outlays, however, will be reusable, such as costumes or
properties (props) by a theatre company or music by an orchestra. There are also costs of putting
on each performance, the marginal costs. Marginal costs are likely to be constant for each
performance of a particular production while the more performances there are, the lower the
average cost is. Costs of the venue are another feature of the costs of the performing arts. Larger
arts organizations often own their own venue; they may put on all their performances there or
tour for part of the year. If there is part of the season when they do not perform in the venue
they may let the space out to other arts organizations, in which case they earn rent from doing so.
In Continental Europe, a common set up is that the publicly owned theatre in a city is used
throughout the performing season for multiple art forms spoken theatre, musical theatre and
opera, dance, orchestral performances and so on. On the other hand, London and New York have
many theatres that can be rented and they provide overflow facilities for hit shows that
transfer to the West End or Broadway from their original venue, thus enabling revenues to be
earned from extended runs. This seems more common for musicals and plays than for other
performing arts, however. The stock of theatres also enables touring groups, both domestic and
foreign, to find performing space. These big centres also have rehearsal space for hire. Whether
or not an arts organization owns its own performing and rehearsal space, the rental or imputed
rent is a fixed cost. Labour costs are always regarded as the main costs of performance; however,
the proportion of that labour that is actually on stage varies a lot by art form. In the case of a
symphony orchestra, payments to musicians would represent a large proportion of total costs.
Orchestras differ in their contractual arrangements: some of the big world-famous orchestras are
self-governing cooperatives, while other orchestral 28 ADVANCED INTRODUCTION TO
CULTURAL ECONOMICS musicians work on both long- and short-term contracts of employment.
In big centres of music there are scratch orchestras and ensembles drawn from a pool of players
that do a range of work and by the same token, orchestras that need to hire particular
instrumentalists for performances that require unusual instrumentation or a large number of one
kind of instrument can find freelance players (or ones borrowed from other orchestras) to satisfy
those needs. These arrangements influence the cost of a performance. For theatrical
performances, though, there may well be more off-stage workers, such as stage managers,
lighting, sound and scenery operators and so on than there are personnel on stage for each
performance, not counting the directors, designers, costumiers and so on who are needed to get
the show ready. 3.2 Demand for the performing arts Demand for a good or service depends on
the price that is charged and the revenue from sales to consumers is revenue to the producer.
Thus pricing and revenues are two sides of the same coin. Audience profiles and consumer
spending are outcomes of the demand decision by individuals and demonstrate the uptake of the
performing arts. If revenues are below costs of production, some form of intervention is required
to ensure the supply and the traditional performing arts are usually subsidised by the state for
that purpose. 3.2.1 Pricing and revenues Many performing arts venues adopt a policy of price
discrimination, charging different prices according to the seating area and often also by offering
reduced prices for children, seniors and other categories. Price discrimination is a way of
obtaining the maximum revenue from the sale of tickets for a performance. In some situations, a
season subscription is sold for entry to a given number of performances; that rarely seems to
work in the UK, though it is standard elsewhere in Europe, with price discrimination built into the
subscription. Several conditions must be met for price discrimination to be feasible: in practical
terms it must be possible to keep low and high price audiences apart, which is done by allocating
seat numbers in the venue and it must be possible to identify the different groups of people, for
example by age. Price discrimination can only be done by a monopoly supplier, which the arts
organization is for its particular performances. PERFORMING ARTS 29 In economic terms,
audiences must in addition consist of people with different willingness to pay (WTP) and
responsiveness to price differentials, or elasticity of demand. The elasticity of demand
measures the percentage change in the number of tickets purchased as a ratio of the percentage
change in price: if those percentages were equal, elasticity of demand would be ?1 (minus
because there is an inverse relation between price and quantity demanded) and there would be
no change in the revenue resulting from the changes in price and quantity purchased. Those
people who are very keen to see the show are willing to pay a higher price. As the price is
increased, fewer tickets may be sold but proportionately less than the increase in the price (so a
10 per cent rise in price might cause a 5 per cent fall in the number sold, elasticity of ?½): this is
known as inelastic demand and when it is present, raising prices can raise revenue. The opposite
case is elastic demand, whereby the response of consumers to a price rise is greater than 1 (a 10
per cent rise in price might result in a 15 per cent drop in sales, elasticity of ?1½) and revenues
would fall as a result. Measures of the elasticity of demand for performing arts have shown that
they are typically relatively inelastic, so performing arts organizations could raise prices if they
wish to increase revenues. Going back to price discrimination, the condition for its success in
maximizing revenues is that audiences have different elasticities of demand at different prices. T
hese features can be summarized in the demand schedule for the arts organizations
performances and managements need to estimate the response to demand at different prices to
get the greatest revenue. Price discrimination is not only about getting the most revenue from
the audience, however: it also enables the offer of lower price tickets that make it possible for
less well-off arts lovers to go to performances, effectively cross-subsidized by the better-off ones.
In addition to price elasticity, economists also identify income elasticity the responsiveness of
demand (the number of tickets bought) to changes in income. In general, it has been observed
that demand for the performing arts is income elastic and rising incomes in the economy result in
greater ability and willingness to pay more for tickets. Of course, as cost disease theory argues,
rising incomes also mean wages have risen, so production costs will also rise, which pushes prices
up the overall effect is complex. 3.2.2 Taste and demand Underlying anyones demand for the
arts is the taste they have for them. Taste formation is a difficult topic for economists, who are 30
ADVANCED INTRODUCTION TO CULTURAL ECONOMICS aware of its influence on WTP and
attendance but operate with theoretical models that assume tastes are given. This makes for
difficulties in cultural economics and there has not been a lot of research on the topic, leaving it
rather to psychologists and marketing experts. That said, some aspects of tastes are understood
in economic terms: first of all, arts, especially the more esoteric (high) arts are experience
goods, meaning that people come to understand and obtain greater pleasure through
experiencing them and so tastes are formed; second, it takes investment of time and experience,
which is costly, to develop tastes. People with highly developed tastes are more likely to have a
higher WTP and a lower elasticity of demand. In practice, it is difficult to distinguish which of the
combination of price elasticity, income elasticity and the strength of tastes are actually manifest
in audience demand schedules. Other ways of looking at this are audience profiles that provide
information on the socio-economic characteristics of audiences. 3.2.3 Audience profiles
Audience surveys are done by arts organizations for marketing purposes, and increasingly, Arts
Councils and government bodies, especially but not only those connected to the Ministry of
Culture, undertake periodic participation studies in the arts, asking about attendance by art form,
among other questions. Participation studies ask a sample of the population (rather than
audiences) if they have attended a performance, visited a museum and so on over the last year,
and also ask how frequent their visits are. These surveys show that audiences for the subsidized
performing arts tend to be older, have higher incomes and levels of education than the average
for the population; opera and ballet have the lowest participation rates, followed by classical
music performances, plays, musicals and jazz. Cinema is counted as a performing art in some
countries, and it often attracts the highest audiences. 3.2.4 Consumer spending Another aspect
of participation in the arts is how much consumers (audiences) spend. Consumer expenditures
on a wide range of goods and services in the national economy are measured in official statistics,
though they are not usually broken down into so specific a category as the performing arts (they
are often in a category such as the arts and culture, entertainment and sport). Arts councils
sometimes publish a PERFORMING ARTS 31 breakdown of these categories: the National
Endowment for the Arts, for example, publishes data on US consumer spending on the
performing arts. Consumer spending is an economic measure of the value that audiences place
on the arts. 3.2.5 Subsidy and prices One of the stated purposes of subsidy to the performed
arts is to form tastes and to encourage participation by keeping prices lower than they would
otherwise be. Research by cultural economists has long tried to persuade arts funding bodies
that unless subsidy is targeted towards new audiences, the money simply reduces prices for the
better-off who are already attending. Cultural policy now places more stress on reaching new
audiences and funding bodies offer special subsidies for attracting them (or withdraw a
percentage of subsidy to those who do not meet targets). 3.3 Subsidy and the performing arts
Most of the work in cultural economics on the performing arts has been on those organizations
in receipt of public subsidy. Grants to an independent arts organization by an arms length
grant-giving body, such as the ACE or NEA, are decided on the basis of its business plan and
projected costs and revenues for future seasons. Some organizations receive revenue funding for
a set period of time, for example, three years, to enable them to plan ahead, hire artistic staff
and performers, and so on; others receive project funding for a specific event or production. As is
well known, large national flagship arts organizations the national orchestra, opera, ballet or
theatre are regularly funded and though the amount they receive may vary from time to time
depending on the state of public finances in general, there is little doubt that they will continue
to be subsidized. They typically take a large proportion of the subsidy budget, and as these
companies operate mostly in capital cities, they receive the lions share of funding. Inevitably,
funds for projects are what is left over and it is often argued that public subsidy does not
sufficiently support new arts groups or those in the regions. 1 It is also argued that
concentration on well-established companies fails to encourage innovation and performances of
new work. Performances of new works, however, often leads to lower audience sizes, and
without subsidy to support them, arts organizations cannot 32 ADVANCED INTRODUCTION TO
CULTURAL ECONOMICS always take that risk. Research on German theatres, on the other hand,
has shown that they are often able to obtain extra funding by making a loss on their planned
budget due to outré productions and performances of new works that are not popular with
audiences, but that promote the reputation of the artistic director. 3.3.1 Supply of new works
Encouraging innovation in the arts and forming taste for new work is usually one of the objectives
of policy for the arts and culture and besides grants to arts organizations, subsidies also exist to
support the creation of new works by composers, playwrights, choreographers, mime artists and
the like, either independently or in conjunction with an arts organization that intends to perform
the work. The grant must cover both the fee to the creator, who is also likely to be involved in
preparing and/or performing the work, and the costs of the production to the arts organization,
since new works often require more rehearsals; moreover, lower revenues from ticket sales raise
the economic cost of new work. 3.3.2 The economics of a lump sum grant Subsidy is mostly
given in the form of a lump sum, that is, an amount of money that is granted to the arts
organization for a specific period for use in accordance with its business plan. It is not tied to the
success of the plan and the granting body is unlikely to interfere with its artistic aspects. In
economic terms the grant covers the fixed costs of the operations of the organization, thereby
enabling it to set its prices according to the marginal costs of the performance. Given the
relatively high f ixed costs of the performing arts, average costs are likely to be greater than
marginal costs, so setting price according to marginal cost would result in losses: that is what the
lump sum grant averts. The impact of the grant depends on the price elasticity of demand; if
demand is elastic, lower price(s) would encourage higher attendance than if demand is inelastic.
If marginal costs of a performance are high (say a large cast for a play or a large orchestra), the
lump sum grant would not alter that or affect ticket prices. T here has been little research on
internal decisions as to how arts organizations use their grants, for example, whether to reduce
all prices or just some in the venue or to put on new or less popular works. As mentioned earlier,
some proportion of subsidy may be earmarked PERFORMING ARTS 33 for a specific outcome,
such as attendance by new audiences, and withheld if it is not achieved, but on the whole, there
seems to be little control by the grant-awarding body over the detail of the use of a grant once it
has been awarded. 3.4 Measures of the effectiveness of subsidy In the early days of state
subsidy to the arts (post-war and up to the 1980s roughly speaking), funding bodies believed
they knew the outcomes of their subsidy policy. Economists and other social scientists began to
question that stance and researched the distribution of subsidy to the various art forms and its
geographical distribution. Those, however, were relatively crude measures of the effectiveness of
subsidy and more sophisticated performance indicators have been developed or adopted from
other areas of public expenditure. 3.4.1 Performance indicators Performance indicator is a
general term for ways of evaluating the outcome of an action or activity in terms of the desired
outcome. It is a means of assessing efficiency or effectiveness of an organization in terms of what
it seeks to achieve. It may involve cost comparisons, but cost is not the only target: for instance,
in relation to health expenditure, indicators are the quality of life. The objectives of the funding
body and that of the subsidized organization have to be considered in the process of drawing up
indicators. Performance indicators enable the funding body to make comparisons between
similar organizations and provide an indication of their relative efficiency. A sophisticated version
looks for the best practice or most cost effective organization and compares others to it. In the
performing arts, a simple performance indicator could be the number of seats sold or the
percentage utilization of capacity. The number of seats sold provides little information about
effectiveness, whereas utilization of capacity indicates the ability to fill the house: 100 seats sold
in a 100 seat concert hall indicates more has been achieved than if it seated 200. However, it is
important not to make the mistake that is all too often made by equating seats sold over, say, a
year, with the number of individuals attending, since it is known from audience surveys that
multiple attendance by individuals is common. Another indicator could be the number of new
works or new 34 ADVANCED INTRODUCTION TO CULTURAL ECONOMICS productions
performed which would demonstrate the creativity of the organization. A measure relating to
financial data is the ratio of earned to unearned revenue, which would tell the funding body what
its contribution is to the overall revenue and how successful the organization has been in
marketing its output. That could be a two-edged sword, though: the funding body may reward it
for making that effort, or it might take it as an indication that it does not need so big a grant. It
has often been said in relation to subsidy in state-owned and operated arts organizations in
Europe that there is no incentive to increase sales as the revenues are simply transferred to the
public budget. There is enormous variation across countries in the ratio of earned income to
grants paid out of the public purse: in 2000, Dutch performing arts organizations received on
average 85 per cent of their budgets from subsidy, in contrast to less than half in performing arts
organizations in the UK. One way that the Arts Council England (ACE) measures the performance
is in terms of the subsidy per attendee in its regularly funded arts organizations, with subsidy
being the total of ACE grants plus local authority and other public funding: the ratio in each one is
published by art form, enabling comparison to be made between, say, dance and theatre. 3.4.2
Quality T he question of quality arose in cultural economics because one of the implications of
the cost disease was that without financial support in one form or another, an artistic deficit
would be inevitable as performing arts organizations struggled to stay alive. Producing high
quality is also an objective of cultural policy and it is one of the reasons for which grants are
made. It is very difficult for a funding body to assess quality, however. Arts councils usually have
expert boards to advise them on artistic quality but it is not easy for them to enter a debate with
an arts organization on quality without some objective criteria. It is an information problem that
is difficult to crack: a few cultural economists have suggested several measurable characteristics
of quality such as the number and type of works performed, title and name of author, the
technical expertise of the production and success of the performances as judged by critics. The
last named, however, may not agree or be entirely objective. Judging quality is unlikely to be fully
amenable to objective criteria but at the same time, it has to be recognized that arts councils
have to take quality into account in PERFORMING ARTS 35 distributing public funds to arts
organizations. Of course, one measure of quality is the response of audiences voting with their
feet. 3.4.3 Supply-side subsidy versus vouchers Some cultural economists have argued that the
problem of evaluating the performance of arts organizations is created by the policy of
distributing public funding via arts councils to the suppliers of the arts. If instead subsidy were
given to those who wish to attend but cannot afford to do so it would solve the information
problems associated with measuring the outcome of grants to arts organizations. Increasing the
spread of the arts to new audiences could also be achieved by giving vouchers to potential
audience members who can be identified as having low incomes, for instance, being in receipt of
unemployment compensation. The voucher can then be spent at the recipients discretion in a
number of arts venues and it can be assumed the person would inform themselves about what is
on offer and thereby form tastes. The voucher can then be redeemed by the arts organization
from the funding body. There are problems with this type of scheme such as identifying those
eligible for it without incurring considerable transaction costs and preventing the resale of
vouchers to existing patrons. T he Netherlands has had a successful scheme whereby school
children are given vouchers for a set number of visits in conjunction with classes in arts education;
inevitably, some children would anyway have been taken by parents to performances and other
events but nevertheless, the scheme encourages them to think about their choices and take-up
has been high. 3.5 Economic features of individual performing arts Although the various art
forms within the performing arts share many economic features in common, there are
differences in their pricing, revenues and costs as well as in different amounts of grants they
receive from the public purse, a topic that is frequently debated. The following offers some
explanations. 3.5.1 Opera and ballet Opera and ballet are frequently symbiotically linked by
sharing the same stage and orchestra and often the same management; this reflects 36
ADVANCED INTRODUCTION TO CULTURAL ECONOMICS the historical connection between the
two art forms, from which ballet gradually emerged as an independent performing art. Though
there are differences, they nevertheless display very similar economic characteristics. Each
requires a large stage, a theatre with an orchestra pit, significant numbers of backstage personnel
and a substantial number of performers, the chorus in opera and the corps de ballet for
performing the classic repertoire. If leading roles are to be taken by international soloists (more
so in opera than ballet), they have to be booked sometimes years in advance and that requires
long-term planning of the repertoire and assured finance. Though new works are created and
performed, by and large the season consists of the established and popular works. Some opera
houses (theatres) operate on a repertory system with different works of opera and ballet running
alternately throughout the season; others, notably in Italy, have the stagione system, with one
work being rehearsed then performed for a certain number of times and then another work
begins; thus the theatre is dark periodically. The two systems are often combined, thus requiring
extra rehearsal space. These practices and the artistic demands of the works performed dictate
the higher costs per performance of opera and ballet than those in other art forms and they
receive the highest subsidies per attendee of any performing art (ballet less than opera). The
limited seating capacity of many traditional opera houses rules out the possibility of raising
sufficient earned revenue, even with very high prices. Participation data show that these are the
least popular art forms with the public, however, and they require large subsidies that frequently
attract controversy. Latterly, opera and ballet have had the possibility to free themselves from the
confines of their theatres with the introduction of digital transmission in real time of live
performances delivered to cinemas around the world. This was led by the Metropolitan Operas
The MetLive in HD (high definition) programme which began in 2006 with support from several
foundations, and is now reported to be self-financing and profitable. Several other international
opera houses have followed suit for both opera and ballet. 2 These performances have proved
popular and have considerably increased participation in opera and ballet. 3.5.2 Modern dance
Modern dance is also an art form in receipt of public subsidy; it shares some of the economic
features of ballet, though it is often not tied to one venue, anyway not to the opera theatre. The
bigger companies may PERFORMING ARTS 37 work with live music, the smaller ones with
recorded tapes. Companies vary a lot as to the number of dancers they employ, and wages are
likely to represent a high proportion of the costs of a performance. Dance is relatively popular,
according to participation studies. 3.5.3 Theatre Spoken theatre shares some of the same
features as opera and ballet but without the huge number of artistic employees and with more
modest venue requirements. Large national theatres are likely to have a roster of actors in the
company, with some additional star performers in lead roles; in the UK those companies run
several productions in repertoire and perform on more than one stage simultaneously, offering
eight performances of a production in a week. Regional theatre companies are known as reps
because they operate a repertory system of plays. Attending plays is relatively popular in the UK,
though less so in other countries; as a result, spoken theatre in England receives considerably less
public subsidy than opera and ballet. Spoken theatre in the UK has a relatively high ratio of
earned income to subsidy, of which around half is from local authorities. Live transmission of
theatrical performances to cinemas is now well established and popular. 3.5.4 Live musical
performance Possibly the most research on the performing arts has been on orchestras. In some
respects, symphony orchestras are the archetypal case of the cost disease: they are highly labour
intensive with artistic personnel costs as the largest item. As with the stars of opera and ballet,
there is an international labour market for top players and some, including conductors, belong to
the superstar category. There are many smaller orchestras and ensembles specialist orchestras,
such as those performing the Baroque repertoire, and ensembles that offer a wide range of styles
and repertoire from jazz to string quartets. Ensembles that form for specific projects or series of
performances often operate on a freelance basis whereas the larger symphony orchestras
employ their players regularly. Live classical concerts have experienced falling audiences in
several countries of late, which has meant they look for more grants and sponsorship as well as
sources of earned income; many orchestras now have their own record label enabling them to
appropriate the value of their sound recordings. New groups also sell their own recordings as a
source of income and advertisement.38 ADVANCED INTRODUCTION TO CULTURAL ECONOMICS
3.6 Conclusion T his chapter deals with those subsidized performing arts forms that have been
researched in cultural economics. There has been sporadic work on commercial performing arts,
such as circus, musicals and pop concerts: in fact, each of those receives some public subsidy in
one or another country. Commercially promoted musicals on Broadway and the West End of
London, as elsewhere, exhibit all the economic characteristics of opera and probably more
besides, as productions are often very elaborate and very expensive to create. Performing arts
are very evident in festivals, and as such are discussed in Chapter 9. Subsidized performing arts
companies are non-profit organizations, which instead of aiming for maximum profit, pursue
objectives such as making the arts accessible, and any excess of revenue over costs would be
ploughed back. The fact that they receive subsidy, and many could not exist without it,
demonstrates that earned income does not cover their costs. Some economists believe that
subsidy crowds out the incentive to reduce costs and/or to increase earned income, suggesting
that increased subsidy just leads to greater expenditure. The cost disease provides an explanation
of the relatively high costs of producing the performing arts though it does not in and of itself
make the case for subsidy; it explains why it is required to raise quality and maintain the spread
of the arts. The amount and distribution of subsidy is significant for several reasons: it shows the
pecking order in the subsidy line and the priority that the granting body gives to its clients in
the amount and geographical spread of its funds; and it can be used as an indication of efficiency
in conjunction with other data. New technologies provide a window of opportunity for the larger
and more prestigious performing arts organizations to earn revenues from transmissions to
audiences far beyond the confines of their theatres and concert halls, though there are
significant additional sunk costs associated with preparation of the performance and moreover,
international competition could be stiff. The Internet also enables arts organizations to provide
more information about themselves and that helps to form tastes; it also offers the opportunity
for crowd-funding which is proving its worth for small arts groups.Further reading PERFORMING
ARTS 39 Baumol and Bowens (1966) book is still worth reading for its breadth of coverage: the
empirical data are out of date but are indicative of how they interwove theory and evidence.
James Heilbrun (2011) offers a straightforward treatment of Baumols cost disease. Mervi Taalas
(2011) on costs of production follows in Baumol and Bowens footsteps. Michael Rushton (2011)
explains the complexities of pricing in
