Notes for Econ 295 Final

Q.16 What is market failure and how does it relate to the art sector?
Free markets fail to achieve efficiency in the allocation of resources if for example there are increasing returns to scale. Increasing returns to scale implies that the average cost of output will fall as output is increased. This will enable a larger firm to undercut a smaller one and will eventually lead to establishment of a monopoly. Extensive monopolies will result in a non competitive economy since monopolies are price setter firms and not price takers.

Markets can also fail to allocate resources efficiently if for example there are ownership externalities, technical externalities (positive or negative) and public goods externalities where free ridership is an issue.

Many art institutions do operate as monopolists within the local market in the US. It is unlikely that there is more than one symphony orchestra, opera or a ballet company in most US cities. However they are not often considered to be sources of market failure. This is because most of them are organized as not-for-profit organizations. If they happen to charge a price higher than marginal cost, it is not because they are trying to maximize profits rather it is because they are operating under conditions of decreasing cost for which marginal cost will always be less than average cost.

A stronger case of market failure for the arts can be based on the premise that arts like education generates positive externalities or collective benefits. Joy, stimulation and enlightenment are some of the private benefits associated with the consumption of the arts. Although external benefits are diffuse and unobservable, there is considerable evidence to believe that art generates a certain degree of refinement and sophistication amongst the general public leading to appreciation of art and culture and benefits to society in general. Since art generates collective benefits, the output determined by the market under allocates resources and society gets less of these goods than is socially optimal. One way to rectify this source of market failure is for the government to intervene and provide public subsidies for the arts sector.

Q.17 What are some of the positive externalities or spillovers associated with the art sector that would justify public support? Are there other ways of achieving the same ends?

Some positive externalities associated with the arts sector that would justify it receiving public subsidies for generating collective benefits are as follows:

1> Preserving art and culture would serve as a legacy for future generations- works acquired and preserved by museums will serve future generations and provide them with a certain history. A richer culture would be bequeathed to a future generation - one that would be better than the one inherited by the current generation. The question often asked in response to this line of reasoning is whether the private sector can be more efficient in subsidizing the arts than would be the public sector.

2> Collective pride in the international recognition of artists and performers from one's own country. Although this point is readily conceded, in the eyes of many this alone does not justify public support. In the current climate of supranationalism and globalist thinking some even consider national pride a sin. National prestige could be enhanced by sending a subsidized sports "dream team" abroad rather than apply a broad subsidy to the entire arts sector. Thus while nobody denies the contribution of the arts sector to enhancing national pride and prestige, people often question subsidies to the arts sector and wonder whether this is the most cost effective to achieve a valid objective.

3> Arts contribution to the local economy. This can occur in two ways. Art performances, exhibitions, and special events can attract out-of-town visitors who also spend money on lodgings, food, retail purchases and souvenirs. Thus it encourages local tourism. A second way that art affects the local economy is by attracting new firms to locate in the area due to the presence of art and cultural amenities. This has a salutary effect on the local economy as it enhances employment, earnings and taxes through the multiplier effect. Since the benefits are being captured locally, the question that arises is whether the state and the federal governments should be subsidizing art activity at the local level.

4> Arts contribution to a liberal education. Critics think it is not merely art education but also art production and distribution that bestows collective benefits. Thus subsidies do not have to be confined to educational settings. Any institutional setting that is congenial for the consumers to learn about the arts is also deserving of public support.

5> Social improvements of arts participants. Participation in the arts benefits people and makes them better human beings because people's sensibilities are exposed to the highest and the best achievements of their fellows. If an individual's behavior is improved in the process then there is satisfaction to others -i.e. external benefits. Pigou, a famous economist, referred to this as the "elevating influence" of art consumption. The question arises whether the same effect is present when there are bad plays, bad operas or bad art works. Also critics think there is snobbery involved to cloak the argument in terms of the elevating influence of art consumption when the society has so many social problems like health care, homelessness and crime where government expenditures would be better justified rather than provide subsidies to the arts sector.

6> Encouraging artistic innovation. The system of patents and copyrights provides a degree of security for advancements in the industrial arts where considerable risk is involved. This has helped increase the quality of life for society as a whole. Copyrights for paintings, musical compositions, and choreographical pieces do exist. However copyrights do not protect innovative principles such as a new technique in painting or a new dance style. This make artistic experiments costly and subject to failure. It discourages artists from being innovative. Success is shared but the full cost of failure has to be borne by the often not-for-profit firm alone. Thus the government needs to subsidize experimentation in the arts. However as a matter of practicality grant giving bodies shun experimentation and innovation that could lead to objectionable art works on political grounds.

Q.18 How does censorship relate to public support for the arts? What lessons can the artist learn?

Dr. Art Jones, Professor and Chair of the Art Department at Radford University, gave a lecture on public sponsorship of the arts. He indicated that controversy generally surrounds contemporary works of art. He provided specific instances when such controversial works were supported by the taxpayers' dollars. Among the controversial works that he cited included Robert Mapplethorpe's exhibits at the Contemporary Arts Center in Cincinnati, Ohio in 1990. The exhibits contained instances of child nudity, gay lifestyles and explicit sexual acts. Some people were enraged by the event and Dennis Barrie the museum director was arrested for mounting an indecent show. Likewise Andreas Serrano's exhibit of "Piss Christ" in 1988 offended people of the Christian faith. Richard Serra's public sculpture called the Tilted Arc displayed in the open courtyard in front of the Jacob Javit's Federal Building in New York served to divide it and was loathed by the employees who signed a petition to have it removed at an expense of $ 50,000. Karen Finley's performance art works were viewed as diatribes against white men in particular and having political rather than artistic content. Alice Aycock's depiction of a satellite dish on top of a police building in Queens failed to merit public appreciation. Maya Lin's Vietnam Veteran's Memorial in the shape of a black granite wall in Washington DC did not appease the vets and Frederick Hart was commissioned to do a new Vietnam memorial sculpture which currently faces the old one.

Throsby and Withers believe based on public pronouncements of politicians that merit good considerations have probably been a strong and significant consideration for the government's involvement in the arts. Merit goods they explain are goods that society has decided would be desirable to provide in quantities greater than consumers would wish to purchase at market prices. Thus numerous forms of subsidies and grants exist for the arts sector. However people like Van den Haag point out that subsidies actually do more harm than good in the creation of genuine art. Since the government cannot be judgmental it therefore cannot tell good art from bad art and thus subsidies are handed out indiscriminately. This causes pseudoartists to be attracted to the field who waste the government's subsidies producing "fool's gold." Even true artists may find it difficult to gain success because public subsidies have helped create a world of "false art."

Although government has had an "arm's length" policy in the disbursement of grants usually done through a peer evaluation process, controversial shows and events such as the ones cited by Dr. Art Jones in the class have raised the politicians' ire who have criticized the NEA and other governmental agencies of supporting art works that are pornographic, blasphemous or simply lacking in artistic merit. The US Senate even voted to bar the NEA from supporting "obscene or indecent" art work, this legislation becoming tantamount to a public censorship of the arts. Antipathy towards the art world resulting from a public perception of wasted dollars reduces public support for the arts in general and thus reduces opportunities and affects living conditions for many of the "starving artists."

It is thus important for the artist to figure out how he/she can "live upto the image" of an eccentric artist and yet meet the public's expectation of producing genuine artwork. There is no doubt that name recognition can be achieved through display of sensational art as can also be achieved with art works of genuine merit over time. However, the artist could be failing others in his profession through displays of controversial art. As a member of a polyglot multicultural society the artist may need to be sensitive to the multiple value systems existing where he/she lives and works if he/she esteems public displays of his/her art work and public appreciation of them. But then questions will abound regarding artistic freedom and creativity. Thus the public too needs to consider whether a controversy free society is a fit and healthy society in which to live.

Q.19 What are some of the assumptions regarding the functioning of a free labor market for artists? How does the presence of labor unions affect the working of the labor market for artists?

The assumptions that underlie the demand side of a free labor market for artists would include the following:
1. employers have complete and accurate information regarding labor availability and labor productivity.

2. employers are rational profit maximizers who would hire labor in a manner consistent with the attainment of highest profit.

3. no single employer has the ability to influence wages in the market.

4. employers do not collude to fix wages and employment.

5. artists in a market are homogenous i.e. they are substitutable for each other.

On the supply side of the market, the following assumptions are made:
1. artists have perfect knowledge of employment opportunities and wages.

2. artists respond to non pecuniary and pecuniary incentives - wage differentials.

3. artists are perfectly mobile between geographic regions and jobs.

4. artists do not belong to unions that would restrict supply.

Many of the above assumptions underlying both demand and supply of artistic talent are unrealistic. Many actors, for example belong to the Actor's Equity union and many musicians belong to the American Federation of Musicians. Historical data reveal that wages in unionized art sectors have been generally higher accompanied by a higher unemployment rate in the profession. This is because unions are organized to improve working conditions and renumerations of its members. Unions are successful in achieving their objectives through the following ways:
1> By restricting labor supply which would have the effect of raising wages.

2> By specifying the minimum number of workers for a performance or a play eg. the American Federation of Musicians specifies the minimum number in a symphony concert. This is a demand raising activity.

3> By requiring apprenticeships and training programs for people licensed to work.

4> By supporting minimum wage legislation.

5> By negotiating on royalties, health benefits and safety conditions for its workers.