jwilzewske: Performing Arts, Free-Market Failure, and New Institutional Economics

Market w/ externalities, social and private ‘goods’ and ‘bads’

W alt Whitman was democracy’s poet—who understood that democracy is not just a form of government but a way of life rooted in culture. Bill Ivey is culture’s eloquent advocate who knows that, as democracy needs the arts, the arts need the advocacy of government. His manifesto [Arts, Inc.] is a passionate attack on the commercialization of culture and a plea for a cultural ‘Bill of Rights’ that will restore to all Americans their right to a heritage, to creative expression and to a creative life. This is not just a vital book about the arts, but a vital book about democracy.”
— Benjamin Barber, author of ‘Jihad vs. McWorld’ and ‘Consumed’.

A rts, Inc.’ is the first comprehensive effort to explore the role and potential of a coordinated vision for art, culture, and expression in American public life. Through strands of personal and professional memoir, policy analysis, for-profit and nonprofit industry insights, and personal conviction, Bill Ivey defines a new canvas for more productive and inclusive conversations on the expressive life of our nation and its citizens.”
— Andrew Taylor, Bolz Center for Arts Administration, University of Wisconsin-Madison.

T he boom in music festivals poses a challenge to economists because of the glaring contrast to the financial distress that standing orchestras and opera companies and other performing arts entities find themselves in. Unit costs of production in the performing arts are still steadily increasing while labor productivity in the art is constant. This is the essence of [Baumol’s & Bowen’s] so-called ‘Cost Disease’. As a result, the performing arts ... are faced with a secular threat of survival because of [their] continually increasing cost relative to other consumer goods and services. The relevance of the Cost Disease has been challenged for various reasons. In particular, if demand [for concerts] rises more quickly than that for other goods (income elasticity > 1) and the price elasticity of demand is larger than –1, then prices and revenues can possibly be raised sufficiently to keep pace with the rising costs... The basic idea [of the validity of Cost Disease in the performing arts] has, however, been accepted and [today] provides one of the major building blocks for economic analysis of the arts.”
— Bruno Frey, Arts & Economics, p. 73.

Should we change our ticket prices or booking fees this year? How much discounting or comping should we do to get more attendee butts in seats and, if we do more than we’ve done in the past, will that help or hurt sales of regular tickets or subscriptions? If our ensemble does pro bono or deeply-discounted performances in some cities, will that help or hurt our bookings for bigger-margin gigs elsewhere?

These questions are perennial ones, for artists, agents, presenters, governmental and NGO policy makers, and others. For all of these stakeholders, the questions are even more salient during the present economic downturn.

There are several new books that elucidate how to go about making these decisions—both the microeconomic/operational ones, and the macroeconomic/policy ones. The books by Bruno Frey and by Bill Ivey are especially notable.

Frey maintains that people are genetically, evolutionarily disposed to seek status and strive for experiences—it is part of the psychology and ‘economy of happiness’, which is the subject of his new book. The analysis and its logic are, I think, particularly germane to chamber music and other of the performing arts. Frey focuses on ‘taxes on positional externalities’ [not necessarily the ordinary types of taxes; ‘taxes’ can equally well be embodied by specific, differentiated price structures such that not everybody pays the same price]. Economists who advocate ‘taxes on positional externalities’ underestimate the consequence of the innate human drive for status: when one outlet is blocked, individuals aggressively and reflexively seek alternatives to differentiate themselves. All economically-active individuals do this, able-bodied and non-able-bodied alike. Even if taxation of consumption were successful in countering negative positional externalities, people would still try to distinguish themselves. (The only ones who do not are those who are institutionalized or otherwise economically inactive.)

The positional externalities in those other dimensions might be weak, in which case the taxation of consumption differences may be warranted and effective, according to Frey’s theory. But if the negative external effects created by differences in the other dimensions are strong—as they are with performing arts—then taxation of consumption differences will be ineffective and counterproductive. Frey’s highly-readable chapters assess in detail the consequences of substituting other dimensions when positional externalities due to income or consumption are effectively blocked by taxation.

Frey is, in the end, open-minded as regards taxing positional externalities; he takes a pragmatic view, and makes his determinations on the goodness or badness of the consequences of the policies on a context-sensitive, case-by-case basis. For Frey, the answer to the public agency’s or presenter’s or manager’s or ensemble’s question of whether positional externalities due to differences in income and consumption should be taxed depends on the effects of taxation on incentives, on consumer’s buying decisions, and on the resulting net public welfare. If the nonprofit presenter (or government or other agency) tries to reduce prevailing inequalities by setting a ticket price-structure (or discount or comp ticket policies that back-handedly ‘tax’ those who are more able to bear a larger expense) and that price-structure only weakly affects the buying decisions of those market segments who are affected by the top-tier prices, then the taxation is effective and justified in terms of the net public welfare or public good. If, on the other hand, the ‘progressive tax’ on positional externalities in income and consumption causes the top-tier market segments to transfer their drive for status to other consumables or other dimensions, then the pricing/taxation scheme is ineffective and unjustified, on the grounds that it harms the public good.

Under Frey’s rubric, the same could be said of performing artists or ensembles. If an ensemble establishes a ‘progressive taxation’ structure in which engagements have booking fees priced according to the ‘ability-to-pay’ and/or incremental kickers (‘base-plus-percent-of-boxoffice’) and this policy does not deter presenters from booking the ensemble, then the scheme can be said, post facto, to have been effective and justified. By contrast, if many presenters will not accept the price structure and terms, then in hindsight it can be said to have been a failure and unjustified in terms of the net public good, insofar as the pricing will have deprived the public of valuable cultural experiences or in some way diminished the cultural diversity.

Ivey’s book analyzes the consequences of relentless corporatization of the arts and of performing arts outputs in particular. Bill Ivey had served as NEA Chairman from 1998 to mid-2001. While he had prior to that time had a long career as head of the Country Music Foundation and as an advocate for the arts, it was that 3-year term of service that appears to have galvanized his concept of the arts as a collection of public goods—a set of resources as vital as clean air and water and endangered species and wilderness—to which everyone has a basic human right, and to which government and other institutions owe a duty of stewardship. Prior to 2002 he would merely preach; but today in this book his ‘hair is on fire’ as he expounds prophet-like words of alarm and proposes essential elements of public arts policy in his call-to-arms.

V ery few observers of the contemporary U.S. and global arts worlds have Bill Ivey’s capacity for first-hand examples of how trade representatives, artists, music executives, corporate attorneys, elected officials, non-profit executives and many other participants influence the course of the arts, and in particular, the public’s access to the arts. ‘Arts, Inc.’ is an important work because it asserts, in an urgent manner, that people have a right to a better expressive life.”
— John Kreidler, formerly Executive Director, Cultural Initiatives-Silicon Valley.

These recent books are each, in their own ways, emblematic of New Institutional Economics (NIE), an interdisciplinary field that has emerged since about 1995, combining economics, law, organization theory, systems engineering, neuroscience, philosophy, political science, sociology, and anthropology—to understand the institutions of social, political, and commercial life, and to help set policy and perform quantitative program evaluations. The objective is a set of rational frameworks for future developments of regional politics, regulations and protection, infrastructure amenities, finances and taxes so that the public goods are sustainable and can have durable popular support. NIE inevitably entails intensive political re-evaluation. NIE draws upon various social-science disciplines, but its primary language is economics. Its broader goal is to characterize what our societies’ institutions are, what purposes they serve, and how they change and how they might best be improved and changed—all institutions, not just arts organizations. Have a look at the International Society for New Institutional Economics (ISNIE) and other of the links below to find out more about this.

It’s these days inconceivable that politicians or government agency officials will choose well or support a sufficient diversity of programs or foster robust innovation and creativity. The politics of divisiveness and fear and recrimination is too extensive, and CoverYourAss ‘cartels’ are too strong.

But it’s also lately inconceivable that the illustrious so-called free market will sustainably support diversity in the arts either. The free market has done so well, after all, in messing up such ordinary things like banking. Leaving things to the free market, we end up with ‘McWorld’ lowest-common-denominator populism and commodification of the arts.

So NIE-style approaches and deep re-evaluations of the sort that Bill Ivey and Bruno Frey are advancing are therefore timely. I strongly recommend that you pick up copies of their books. And, imagining that some of you CMT readers may like to contact Bill or Bruno regarding speaking to your group or collaborating on research or other activities, I’ve put their contact coordinates in the links below.

jwilzewske

Tuesday, October 21, 2008

Performing Arts, Free-Market Failure, and New Institutional Economics

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