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.In the JEL system, 'Cultural Economics' is a broader category than used in this article.
Introduction
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 T. 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.
Performing arts: Baumol and cultural economics
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:
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.
Market for artworks 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.
Price determination Price formation of artworks poses a unique economic challenge due to an inherent heterogeneity, low substitutability and scarcity of pieces of art. Hence, art prices are unanchored in production costs or reciprocal responses of supply and demand. Rather, price of art is governed by an interplay of scarcity, taste and cultural value, leading the prices to a lack of convergence toward long-term equilibrium. Thus, economists employ two distinct methods for the estimation and analysis of art prices: hedonic regression and repeated sales regression analyses.
Hedonic regression Lancaster (1966) proposed that utility derived from a given good is contingent upon its characteristics, rather than on the good per se. Hedonic regression represents an analytical implementation of Lancastrian preferences, allowing for an estimation of implicit prices of specific observable characteritics of heterogeneous goods. The functional form of a hedonic pricing models is, as follows:
Where denotes the price of an item , represents a certain characteristic of the item and is a time dummy variable controlling for exogenous factors affecting the pricing of artworks across distinct time periods, such as economic conditions and shifts in tastes.
The table below presents the characteristics frequently employed in hedonic regression models. +CategoryCharacteristicsArtworksauthenticity, color, dimensions, history of the artwork, medium, support, style, technique, topic, year of creationArtistsage, artist's name, gender, nationality, living status, reputationSaleauction house, catalogue, estimate, location, time
Repeat-sales regression Repeat-sales methods allow following a certain objects sold in at least two distinct moments in time. These models use the previous sale prices to estimate the fluctuations in value of a piece of art over a certain time period. Thus constructed price index is based solely on previously fetched prices, eliminating the need to select and quantify individual characteristics of artworks. Yet, as the index is constructed for multiple sales, it significantly limits the sample and falls prey to selection bias.
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 have not slowed down at the same time as the rates on international exchange markets, in the early 1990s. This may indicate a diversification opportunity to invest in tangible assets such as art works. Apart from this evidence of successful investment, the amount of data available has stimulated study of the market. Many works are sold at 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. 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.
Legal criticism
Throughout many art auctions, the source of the money of the bidder is often hard to identify or the works are purchased by an anonymous buyer.
Law enforcement officials say that the high amount of secrecy has become a drawback, as it leaves the process available to money launderers. According to the FBI and Interpol, “in comparison with other trade sectors, the art market faces a higher risk of exposure to dubious financial practices” because “the volume of legally questionable transactions is noticeably higher than in other global markets.”
Cultural industries 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: Uncertainty of value. The demand for a good (market success) is hard to predict. For example, with movies, even if a film's plot, themes and selection of actors has been extensively tested using focus groups and polls, and even if the movie uses popular A-list actors, this film may still be a box office bomb (e.g., Gigli, a 2003 American romantic comedy starring Ben Affleck and Jennifer Lopez). On the other hand, a low-budget film by an unknown director and an unknown cast, such as The Blair Witch Project can surprise the industry by being a major hit. This uncertainty is a characteristic of an experience good such as films, TV shows, musical theatre shows and music concerts. Infinite variety. You can differentiate between regular consumer products, e.g. cars, on basis of its characteristics. For example, a hatchback can be purchased from a number of manufacturers with a set list of options (e.g., automatic transmission, standard transmission, convertible, etc.), with the different options requiring different charges. Many general products allow classification on a relatively small number of such characteristics. Cultural goods, however, have a very high number of characteristics, which, on top of that, often are subjective. For example, an early 1990s band with loud, distorted electric guitar could be considered to be grunge, punk, heavy metal music or alternative rock by different music critics. This makes cultural products hard to compare. High concentration in the products which are traded or sold. A major part of the sales of cultural goods is concentrated in a very small number of bestsellers (e.g., with books), blockbusters (movies) or hit singles (pop music). In other words, the market for such cultural goods operates as a winner-take-all market.