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, literature and similar creative and/or cultural products. For a long time, the concept of the "arts" were confined to visual arts (e.g., painting) and performing arts (music, theatre, dance) in the Anglo-Saxon tradition. Usage has widened since the beginning of the 1980s with the study of cultural industry (cinema, television programs, book and periodical publishing 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.
Cultural economics is concerned with the arts in a broad sense. The goods considered have creative content, but that is not enough to qualify as a cultural good. Designer goods such as clothes and drapes are not considered usually 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 Studies). 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. While other economic goods, such as crude oil or wheat are generic, interchangeable commodities (given a specific grade of the product), there is only one example of a famous painting such as the Mona Lisa, and only one example of Rodin's well-known sculpture The Thinker. While copies or reproductions can be made of these works of art, and while many inexpensive posters of the Mona Lisa and small factory-made replicas of The Thinker are sold, neither full-size copies nor inexpensive reproductions are viewed as substitutes for the real artworks, in the way that a consumer views a pound of Grade A sugar from Cuba as a fully equivalent substitute for a pound of Grade A sugar from United States or Dominican Republic. As there is no equivalent item or substitute for these famous works of art, 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 academic works in cultural economics include 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.
The seminal paper by William Baumol and Bowen introduced the term cost disease 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. Artists must make a considerable investment in human capital (e.g., training), and needs to be paid accordingly. The artists' pay needs 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:
Two segments of the market in the visual arts can be distinguished: works of art that are familiar and have a history, and contemporary works that are more easily influenced by fashion and new discoveries. Both markets, however, are oligopolistic, 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?
Components of a work of art, like raw stone, tubes of paint or unpainted canvas, in general have a value much lower than the finished products, such as a sculpture or a finished painting. 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 use the first, social value. Experts like art historians and art professors use the second, artistic value. Buyers who buy works of art as an investment use the third, the price history and expectations for future price increases.
Some major financial institutions, banks and insurance companies, have had considerable return rates on investments in art works in the 1990s. These rates have not slowed down at the same time as the rates on stock exchanges, 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 auctions. 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 borne 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.
Some famous artworks such as the Mona Lisa painting are not reproducible (at least in the sense of creating another copy that would be seen as equivalent in value), but there are many cultural goods whose value does not depend on a single, individual copy. Books, recordings, movies get some of their value from the existence of many copies of the original. These are the products of major cultural industries, which are the book industry, the music industry and the film industry. These markets are characterized by:
The important cultural industries tend to have an oligopolistic market structure. The market is dominated by a few major companies, with the rest of the market consisting of many small companies. The latter may act as a filter or as "gatekeepers" for the artistic supply. A small company with a successful artist or good quality roster can be bought by one of the major companies. Big conglomerates, pooling TV and film production, have existed for decades. 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.
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 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 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.
Many countries have systems that protect historically significant buildings and structures. These are buildings or other structures that are deemed to have cultural importance or which are deemed to have heritage value. Owners get tax deductions or subsidies for restoration, in return for which they accept restrictions on modifications to the buildings or provide public access. Buildings that are often classified as heritage buildings include former or current Parliament buildings, cathedrals, courthouses, houses built in a recognized historical style, and even fairly regular houses, if the house was formerly the home of a famous politician, artist or inventor. Buildings with heritage status cannot typically be demolished. Depending on the nature of the heritage restrictions, the current owner may or may not be allowed to modify the outside or inside of the building. Such a system poses the same choice problems as museums do. There has been little study of this issue.
The labour market for artists is characterized by:
The term "star system", coined by Sherwin Rosen, is used to explain why a small number of the artists and creators in the market, such as the celebrity A-list actors and top pop singers, earn most of the 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 key role in this. The consumer does not really know how good the product is, until he or she 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 using a famous director, actor or singer affects demand, he or she 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. This randomness has been used to explain why the labor supply in the sector remains excessive: given the 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, such as waiting tables. A second argument is the possibility of intangible returns to artists' labour in terms of social status and lifestyle. For example, even a struggling DJ spends most of her time onstage on nightclubs and raves, which for some people is a desirable outcome.
A case has been made for the existence of a different structure in the production of cultural goods . (See Cultural Institutions Studies.) An artist often considers a product to be an expression of himself, while the ordinary craftsperson is only concerned with his product, as far as it affects his/her pay or salary. For example, a painter who creates artworks that are displayed in museums may view her paintings as her artistic expression. On the other hand, a scene painter for a music theatre company may see herself as a craftsperson who is paid by the hour for doing painting. The artist may thus want restrict the use of his or her product, and he/she may object if a museum uses a reproduction of his/her painting to help sell cars or liquor. On the other hand, the scene painter may not object to commercial re-uses of her set painting, as she/he may see it just as a regular job.