Notes for Econ 295 Midterm

1. Why should people in the artistic profession study Economics?

To understand the impact of economic fluctuations and economic activity. For example, if there is a sudden rise in the number of people who are homeless, the government will need to increase subsidies for emergency housing. This will compete for available funds and may bid resources away from the arts sector since subsidies come from the tax revenues and politicians cannot readily raise taxes.

It enables artists to comprehend how national concerns such as the trade deficit, budget deficit and the national debt affect public spending decisions in various sectors of the economy including the arts sector.

Artists as people who live within a society gain insights into how the tax system can affect spending on the arts. The tax system raises revenues for government and through its various provisions offers incentives for private spending and support of the arts sector.

Thus it is important to know economics for good citizenship.

Economics provides artists and art professionals important knowledge which can be used to benefit them through personal applications as well.

Buying art works is an investment decision.(a good purchase will never depreciate). It is important for an art investor to understand the role of inflation.

Artists buy art materials and hire other artisans. Artists who understand economics are better equiped to make decisions about purchasing supplies.

Artists who understand economics become more capable of making sound pricing judgments.

Economics is a social science; to understand it is to get a social perspective rather than a private one.

Economics of the Arts can help an employer in the arts sector in i> hiring out of a labor market, ii> setting fair wages, iii> pricing his tickets within the constraints placed by competition, tastes of the audience, location of the theater, and income of the audience, iv> in retaining subsidies by understanding the federal, state and local governments' priorities and by understanding the tax payers' sympathies.

2. What are some of the tools and methods employed by economists?

An economist uses two basic methods: descriptive or positive economics (describes the conditions as "What is") and prescritive or normative economics (describes "what should be"). Economists derive principles from studying economic phenomena and apply them to various economic problems in order to come up with policy formulations that improve, moderate or regulate the specific economic situation.

Some tools used by economists are:

Models- which are abstractions of reality.
Graphs- makes visible the relationship between two variables (eg. price and quantity).
Math- economists commonly use calculus, statistics, and econometrics.
Assumptions- most common assumption made is ceteris paribus which means all other variables are held constant by assumption.
Logic-economists use inductive logic (an empirical analysis, take data and fact to theory, from the specific to the general) and deductive logic (an hypothetical method in which the theory is set out to be proven-from the general to the specific.

Some pitfalls economists encounter are:

Bias- economists are a product of their society, experience environment and education, it is hard to be totally objective.
They should eschew manipulating situations by using loaded terminology.
Fallacy of composition- must avoid the assumption that what works for one individual situation works for all in society.
Post hoc, ergo promptor hoc fallacy - which means after this, therefore because of this. This is the false assumption that if event b follows a then to assume b was caused by a.

3. What were some of the earliest works in the study of economics of the arts?

Interest in the Arts was stimulated by the Ford Foundation, the Rockefeller Foundation and the Twentieth Century Fund during the 1950s and the 1960s. As a result of support provided by the Twentieth Century Fund, William Baumol and William Bowen published a paper in 1966 entitled Performing Arts- An Economic Dilemma.

Since 1966 there have been 280 articles published which are part of the economic literature database.

In the 1970s William S. Hendon started up the Association of Cultural Economics and later began to publish the Journal of Cultural Economics as a way to disseminate findings researchers working in this area.

With help again from the Twentieth Century Fund, Dick Netzer published The Subsidized Muse in 1978 that looked at the problem of public funding for the arts.

During the 1970s and the 1980s interest in the economics of the arts sector has grown internationally. There have been significant works from Australian, British, Swiss and German economists. Currently interest is growing in other social sciences regarding the sociology and politics of the arts.

4. What are some of the conservative and liberal estimates regarding The size of the arts sector in the U.S.?

(Refer to table 1.1) Conservative estimates by Heilburn and Gray (1993) are roughly that the Arts sector accounted for $ 4.9 billion out of a GDP of $ 5.4 trillion. This puts the arts sector at .133% of the US GDP or less than 1/1000 of the GDP. However this estimate does not include:

Volunteer employment in the arts sector.
Value of art collections by general and historic museums and historical societies.
Manufacture of classical music recordings and art reproductions.
Value of output of painters and sculptors.
Economic contributions of art dealers and galleries.
Incomplete accounting of charitable contributions.

In 1993, the National Association of Local Arts Agencies published the results of a three year study of 33 communities and 789 not- for-profit organizations.

Their liberal estimate sized the arts sector of the economy at $ 36.6 billion out of a $ 6.4 trillion GDP with a labor force of 1.3 million, (roughly 1% of the labor force of the US), with 908,800 direct jobs in the arts field and the remaining jobs being in support.

5. How do economists measure growth and what has been the growth in the arts sector since 1929?

Economists measure growth by computing the Gross Domestic Product each year and comparing it to the previous years' GDP. The GDP is calculated by adding the spending of various sectors of the economy viz. consumers, businesses, the government, and the net exports(i.e. what foreigners spend in net on goods and services from the US. This is the difference between US exports and what is imported into the US from the rest of the world).

To measure the growth in the Arts sector, economists first look at the Disposable Personal Income (DPI) measure. This is what the individual in the economy receives after paying all federal, state and local taxes and over which the individual exercises discretionary power to spend. Economist then look at what portion of the disposable income is spent by consumers on the arts sector. There has been reliable consistent data concerning spending on the performing arts sector since 1929. (According to Heilbrun and Gray 1990 performing arts admissions accounted for about 68% of the more comprehensive total for spending on the arts. Thus spending on the performing arts is used as a proxy for capturing the citizen's interest in the arts). In 1929 the percentage of DPI spent on the performing arts was 0.155 i.e. $.155/$100 received in disposable income . During the depression years spending on the performing arts decreased to 0.092. After WW II spending increased to 0.111. Between 1947 and 1975 spending slowly decreased again to 0.068, or declined by 50% since 1929. Since 1975 however spending again increased to reach 0.123 by 1990 signalling renewed interest in the arts in US society.

6. What is a price index and how many different types of indices are available to measure price changes in the economy?

A price index allows economists to measure the changes in prices during different years and helps to pierce the "money veil". A price index compares the combined price of a specific market basket of goods and services in a particular year to the combined price of the same basket of goods and services in a base year.

The US has three price indices to measure price changes in the economy. They are:

The consumer price index, CPI. The CPI survey is conducted monthly by the US Department of Labor, Bureau of Labor Statistics and it studies price changes regionally for goods and services that US consumers are typically buying.
The producer price index- PPI. The PPI surveys also conducted monthly by the US Department of Labor. Bureau of Labor Statistics studies changes in prices received by producers in US manufacturing, mining and agriculture sectors.
The GDP deflator - Approximately 30% of all goods and services are being bought and sold by the government. For many of the public goods and services there are no determinations of market price. Unlike in the measurement of the CPI and the PPI, the market basket is allowed to change from year to year for the GDP deflator and the response to price changes in terms of quantitities bought is also allowed to change.

7. How many different forms of competition have evolved for the performing arts since 1929?

Over the century, the performing arts sector has been impacted by a variety of competition that have developed. In the 19th century, it was the invention of the phonograph and then the motion picture industry. The talkies developed in 1927 had a major impact.

After WW II came the development of:

Television
Long Play Records
Audio Tape Systems in the 60s
Home Video Cassette Recorders in the 70s
Compact Disc Recordings in the late 80's
Video Discs in the 90s.

All these developments are in competition with the performing arts sector for the entertainment dollar.

Motion pictures put a large crimp in industry earnings for the performing arts. Yet, since the development of television the industry's earnings have increased. This seems to suggest that the advent of television has hurt motion pictures industry more than the performing arts. Performing arts is provided a degree of insulation from the competition because:

There is no substitute for a live performance
Performing arts has a three dimensionality experience that cannot be substituted by motion pictures or television.
The aesthetics associated with the above experience make consumers less sensitive to changes in ticket prices for admissions.

8. What has been the impact of the development of the motion picture industry and TV on the arts sector?

Performing arts, motion pictures and spectator sports compete for consumer expenditures under the category of spectator entertainment dollars. Prior to the development of the motion pictures industry there were hundreds and hundreds of performing arts events throughout the country. The share of spectator entertainment as percentage of all recreation dollars has decreased from 21.1 percent in 1929 to 4.77 percent in 1990. Motion pictures accounted for 78-80% of spending in the entertainment market between 1929 and 1947. During the same period the performing arts shrunk from 13.9% of the market in 1929 to 9.3 % in 1947.

Between 1947 and 1975 there was tremendous growth in the TV broadcast industry. Rather than hurting the performing arts, TV seems to have impacted primarily the motion pictures industry. Motion pictures share in the declining spectator industry decreased from 79.6 % in 1947 to 50.9 % in 1975 (by which time every household owned a TV) to 28.2 % in 1990. On the other hand the share of the performing arts in the spectator entertainment industry increased from 9.3% in 1947 to 18.2% in 1975 and to 35.5% in 1990. Thus development of TV seems to have had a primary negative impact on the motions picture industry. There is little evidence to show that TV has hurt the performing arts industry. To the contrary, seeing a live performance on TV may induce spending on a related good such as a CD of The Three Tenors thereby increasing overall revenues in the arts industry.

9. What factors have contributed to the boom in the arts sector since 1960? How do we judge there has been a boom in the industry?

The factors contributing to the boom in the arts sector are:

In 1957 the Ford Foundation offered support to the arts followed by the Rockefeller Foundation and the Twentieth Century Fund in the mid 60s. These organizations offered support by the way of grants to the performing arts sector.

After WW II, Americans began to get a broader view of the world and to compare themselves to the European community. It was apparent that european societies had a greater appreciation for the arts. This stimulated their thinking regarding self-esteem, economic prosperity as well as ways to improve their quality of life. This increased their desire and ability to attend live performances as well as art events.

With the establishment of the National Endowment for the Arts and the New York Council of the Arts, the arts sector began to receive public subsidies both from federal and state sources. These developments impacted the supply side of the arts sector positively.

The increase in the availability of television and the influence of mass media helped to inform the people of up and coming events in the performing arts and with public television the masses could get access to previews of performances as well as televised performances.

More people have been exposed to and acquired a taste for the performing arts with attendance at a college or university where appreciation of the arts has found a place in the general education curriculum. Since 1960 more people are attending institutions of higher learning.

We can judge the boom by studying the changes in the percentage of disposable personal income spent on the performing arts. During the late 60s through the mid 80s, there has been an increase in the rate of spending on the performing arts sector which is 1.8 times that of the rate of growth of income in the economy. This implies that people were spending more on the performing arts sectors.

10. Spending in the arts sector has slowed down since 1986. what has been the influence on the supply side?

An important aspect of the economics of the performing arts is that production and consumption activities are simultaneous at a specific location where the event takes place. Unlike the market for other goods and services, where production can occur at one location, then be distributed and consumed at some other point performing art events have to be consumed at the point of production. This implies that the local market should be large enough to support a minimum size producer before it is feasible to stage a performing art event. During the seventies and eighties in keeping with the principle of consumer sovereignty it is discernible that the quantity supplied of these events expanded to changes in demand. A closer examination might suggest that the high growth rate in performing arts activity during the seventies and the eighties may not have been solely due to rising consumer demand. Instead public and private financial support through subsidies and donations allowed for an increase in the number of performing arts companies and thus extend supply through touring companies into hitherto untapped markets. In this manner the touring companies were able to capitalize on the latent demand for performing art events. However, more recent data shows that there has been a reduction in the number of production agencies since 1986 as the growth of of the available market has been "tapped out" due to the localized nature of the performing arts events..

Also public and private funding has decreased.

And costs of production have increased.

Some economists believe that supply creates its own demand. With the supply of productions down, the number of unserved markets will diminish in relative importance in the near future.