by Roger A. McCain and Ronald Lefferts, Jr.
Pasi Malmi has surveyed of some estimates of rates of return to public expenditure on the arts, and, finding some of them not clearly comparable and complete, has offered a general framework for social accounting for the arts. Malmi's work is "an effort for a practical, decision maker oriented and yet theoretically justifiable conceptualization of profitability" for cultural investment. We will address first the latter and then the former concern of his purpose for formulating his model.
Despite the unreliability of many studies of "multiplier effects" of local arts programming, there are now enough reliable ones (Vaughn, e.g.) to make it plausible that arts programming can have an effect on the economic development of local communities. Accordingly, the assessment of costs and benefits or "social profitability" of such activities is appropriately on the agenda of modern social and administrative science. Pasi Malmi's discussion has proposed a comprehensive social accounting scheme for this purpose. However, the implementation of such a scheme cannot go forward without a theory of the impacts of arts (or other public economic initiatives) on the local community. This discussion will illustrate the point by some examples, some but not all limited in their applicability to the arts.
Suppose that a successful local economic development initiative (whether arts-based or not) leads to increases demand for local resources and in gross local product. Who benefits? As a "baseline" to begin an exploration of this topic, we propose that we consider a "small community," which will be a parallel to the "small country" of international trade theory and the "small supplier" of the theory of perfect competition, from which the "small country" model is derived. For the "small supplier," all prices of inputs and outputs are given parameters, infinitely elastic in supply and demand. For the "small country," labor, land and, perhaps, capital resources are given but the world prices of tradable goods are given parameters to the country. The small community is intermediate between these two cases. From the point of view of the small community (by definition) the prices of tradable goods are givens, and labor and capital resources are also infinitely elastic in supply at national or regional wages and rates of return, which are given parameters to the small community. However, land remains an immobile factor of production, with the supply fixed to the local community and the rents of land variable depending on demand. Human capital, since it is recruited in fixed proportions with labor, is also in infinitely elastic supply.
These very classical assumptions allow a quick answer to the classical question: "cui bono?" In a small community, an increase in demand for resources will yield net benefits only to landowners. Increases in the demand for labor may well raise the wage bill of the community, but this will occur through the attraction of employees from other parts of the region at a wage that just covers their opportunity costs, leaving no surplus. Similarly, new enterprises and increases in the capital of existing ones will be attracted at rates that just cover their opportunity costs and these increased income or asset accounts will not correspond to any net benefits. The increased number of residents and enterprises, or expanded operations of existing enterprises, will increase the demand for land and thus rents, however. This is particularly problematic if the increase in demand for labor is a result of initiatives financed by taxes imposed on the longer-term local residents. Except insofar as they are offset by increases in rent, these tax costs would be a total loss to the small community. It is possible that the increase in rent might be more than the tax cost, and it is possible that rents might be recovered by a land tax and redistributed or used to finance services for a broader section of the community, but these are the only possibilities for non-landowner sections of the community to benefit from tax-financed economic development efforts under the small-community assumptions.
But the small-community assumptions are no more than a baseline. It is likely that few communities other than suburban "bedroom" communities approximate those assumptions very well. If a community is remote, however small; or if it is large relative to its near neighbors, labor and other immobilities could lead to deviations from "small community" assumptions. These immobilities should in turn provide the organizing principle for a study of social profitability.
Consider, for example, increases in the profits of businesses serving demands within the community. Such increases could result from increases in demand if the enterprises have some monopoly or monopsony power.(1) In such a case, however, long-time local residents will face increased prices, and their consumers' surpluses will decline as a result. This effect should be included as an offset against business profits in the calculation of social net gains. (Exhibit 1 analyzes the case of monopoly power in more detail). Alternatively, suppose that (for whatever reason) some potential workers are involuntarily unemployed. We then suppose that the economic development initiative increases local employment, thus increasing the wage bill. We then confront a problem that will be familiar to students of cost-benefit analysis in the context of less-developed countries: how are we to account the cost of labor that would not otherwise be (fully) employed? That will depend on one's theory of unemployment.
Perhaps there are economic elements specific to the arts that would lead to a different interpretation of measurement. In several papers, (McCain 1979, 1981, 1986) one of us has stressed the possibility that demands for art work would depend on the degree of cultivation of taste. If people are perfectly rational (as, e.g., Becker and Murphy) then we have little reason to think that government subsidy to the arts will make them better off in any subjective sense. (McCain 1981) However, this is not true in the absence of perfect rationality. In computer simulations (McCain 1993) an evolutionary mechanism denoted "teleological conservatism" gave utility-maximizing decisions in equilibrium in the absence of cultivation of taste. However, when cultivation of taste is required to fully appreciate the consumers' good, only some -- often a small fraction -- of the population become cultivated. The rest would be better off (in "utility" terms) if they became cultivated. It is possible that subsidies to art might contribute to this. This is especially likely if the subsidy maintains an arts institution that would otherwise disappear (McCain 1986). These "subjective consumer effects" would presumably be included in Malmi's accounting framework. In practice, however, we have no paradigm on which to base a measurement of them, and it seems unlikely that political authorities would be much impressed by subjective benefits of this sort, even if we had.
Non-neoclassical ideas on the supply side might also be important. In particular, increasing returns to scale might provide some justification for government subsidy, as Pigou argued at the dawn of welfare economics. But have we any reason to expect increasing returns to scale in the arts? It may be that we have.
Recent work in economic growth, for example, has suggested that when products are differentiated and to some extent complementary, we obtain a condition rather like increased returns to scale, that is, a condition in which increased demand can lead (through increased diversity of production) to lower costs. (Grossman and Helpman, 1991, esp. Ch. 3). Now, artistic products are differentiated. Indeed, when one considers original graphic arts and plastic, each item is unique. The case is less clear with respect to performing arts -- but a performance of "Le Nozze di Figaro" featuring Bryn Terfel is hardly a perfect substitute for one featuring Thomas Allen.(2) Moreover, a preference for variety implies that differentiated cultural goods are to some extent complements. Artistic goods and services may also be complements for such local, nontradable services as restaurants, hotels and transportation services. To be quite concrete, what this seems to mean is that a public subsidy to arts, which would permit a more varied and thus exciting arts scene, could attract arts tourism at a lower total outlay per tourist than would an unsubsidized arts sector, with some of the benefits from this could be seen in increased returns to immobile resources employed in the hotel, restaurant and taxicab industries. These returns would be fairly readily captured in Malmi's accounting scheme.
Let us consider one more possibility: creativity. Certainly creativity is associated with the arts, and is the basis for the uniqueness or highly differentiated nature of the artistic goods and services. Moreover, creativity is a creation of new resources, and thus could clearly provide exceptions to the discussion of the small community above, which is based on the fixity of resources available to the national or international community.
Creativity, however, is a somewhat neglected topic in economics. My own discussion of it in the economic context (McCain 1992, Ch. 18-19) is in fact the only one of which we are aware. Accordingly, these comments must be considered very tentative. In my model, creativity rests on a balance between unguided, exploratory "impulses" and rationalistic "filtering" of those impulses.(3) In effect, creative activity is an evolutionary process, but one which is most productive with the right balance between the flow of "mutations" and the efficiency of the selective "filters" in retaining the best "mutations" and eliminating the rest. a) Other things equal, a larger population at work in the arts will generate more impulses or mutations. b) More effective filtering of these variants may reflect greater experience, which in turn could be a consequence of more extensive division of labor and specialization in a larger active arts community. Thus, these considerations suggest that a bigger arts community will, ceteris paribus, tend to be a more creative one. Conversely, the creative activities show increasing returns to scale. Here again, the benefits from increasing returns to scale could be captured in Malmi's incremental income accounts.
All in all, then, Malmi's accounting scheme seems broad enough to capture a wide range of benefits of public support of the arts. But the difficulty of doing so in practice may be considerable, especially when the mechanisms underlying the beneficial effects are only tentatively understood, if at all.
While there are a range of views on the social profitability of the arts, no one school of though has a monopoly of practical concerns. We begin by commenting on the practicality of some of the assumptions that Malmi makes when he evaluates "improvements" suggested by market economists for the profitability of cultural investments by using his two dimensional conceptualization of profitability.
"The raise of service fees. . . " Any theory relating to fees is very difficult to put into practice. Three phenomena are noteworthy. Hansmann (1981) observes that nonprofit cultural organizations practice voluntary price discrimination in their ticket pricing, where ticket prices are deliberately set at less than "the market will bear" in order to increase demand and to elicit donations (out of the consumer surplus) above the actual price paid. If people are willing to donate this money anyway, then raising entry fees may be socially unprofitable. Another phenomenon having to do with services fees is the crowding out effect (see Eckel and Steinberg, 1993). This phenomenon occurs when the amount of resources donated (grants from government, corporations, philanthropies, and individuals) by a particular donor increases. Other consumers or donors perceive this as supplying the needed resources for an organization, and therefore reduce their own outlay on the good or service. Finally, there is the phenomenon of leveraging, where increased revenue from one source leads to increased revenue from other sources because this increased support is a "stamp of approval" of the organization to supporters of the organization. In practice, managers of arts organizations take into account all three of these phenomena in evaluating their revenue-generating schemes.
"The popularization of cultural services . . . " This is nearly unanimously one of the primary missions of any cultural organization. It has been recognized, especially in the 1980's and 90's, that expanding accessibility to a art form or institution is the most socially and economically profitable undertaking that an organization can attempt. In America, almost all organizations and events have some type of outreach/educational instrument, which is used not only to increase current demand but also to create future demand by creating future consumers.
Malmi differentiates between social and economic profitability when viewing cultural investments by a government agency; he also differentiates between investment in cultural institutions (which he found were unanimously economically unprofitable) and investment in cultural events (which he found were sometimes economically profitable). We interpret the former as a long term investment and the latter as a short term investment in the local cultural community.
A short term municipal investment in a cultural event for a community is a risky investment (in terms of economic profitability) at best. The variables that determine the success of a particular event are specific to each particular locality, to each performer or art form, to each audience. For example, a jazz festival may be economically and socially profitable in a particular community which has a local jazz station, or was once the home of a famous jazz musician--a "draw" in marketing terms. On the other hand, an ethnic festival of African tribal dances will not have a large appeal in a homogeneously caucasian community in a rural area, and would be both economically and socially unprofitable.(4) The point is that investing in "a cultural event" is not a policy recommendation. The profitability of the event necessarily depends on which event a particular community chooses.
Conversely, ill-conceived events may fail, even when supported by "The use of targeted discounts . . . " This is usually socially profitable. However, once the audience attends the event or institution, will it continue to use the service after the target event is over with? Here is an example: Just outside of Philadelphia, there is a theater company that has been in operation for just over twenty years. The audience is mainly white suburban residents. Beginning in the late 1980's, there began a movement in the arts called "cultural diversity" which is aimed at making the arts more accessible to "non-traditional" audiences--which meant minority audiences. This theater company received an $800,000 grant from a national philanthropy in order to make their performances "more accessible" to Philadelphia's African-American community. The theater solution? The put on a production of "Our Town," a classic American play which is set in a small midwestern town in the early twentieth century where every citizen is a WASP. (White, Anglo-Saxon Protestant) and the play recalls the nostalgia of "the good old days." The theater approached the "non-traditional" audiences by casting a few black performers in some of the white roles. Tickets to the event were free, and inner-city residents were bused out to the theater. From who's perspective is this socially profitable? According to black community leaders, this event was a complete waste of resources and socially unprofitable, pointing out that the ethnic composition of the audience for this theater has not changed since the discounted event. The managers of the theater and leaders of the white community viewed the event as socially and economically profitable, because of the increase in revenue and the perceived social benefits of having a (temporarily) diverse audience.
The key point is that the distinction between "supporting events" and "supporting institutions" is unclear, and is least clear when the events are most successful. The implication of investing in a short-run cultural event is that it is deemed "successful" if the event turns into a long run tradition: a cultural institution. For example, a music festival may be held for any number of reasons, whether they are economically or socially profitable. In the short run, the perceived or realized success of the event will determine whether or not the investor decides to continue investing in the event, i.e. making it a permanent institution. Permanent institutions and structures that will support cultural events are a prerequisite for a socially profitable event. A community that seeks to improve its marketing image, attract labor, increase its tax revenues, and spark the local service economy, is looking for a continuous source of revenue by establishing the event as an annual event.
From the perspective of an arts manager here in the U. S. A., there is nothing in this model that has not been argued by arts managers in their pleas for more funding, or by arts advocates who would like their community to invest more public money in the arts. The social profitability argument is one of the oldest tactics in the arts managers' survival handbook: indeed, it is (in the current funding environment in the U.S.) the strongest argument that you could make as a manager. The municipal policy maker may take these factors into account or not, depending on the particular policy maker. If one is favorable to the arts and culture, one will agree with the argument; if one is less favorable to the arts and culture, one may or may not be persuaded by the arguments and view the subjective social benefits in a different light; if one is unfavorable towards the arts (in terms of public expenditure), then one will draw completely different conclusions from any analysis of benefits and costs, and will look to alternate schemes for the available funds.
An example here in the U. S. A. begins at the federal level with our national arts funding program, the National Endowment for the Arts (NEA). The current appropriation for the program is ~ $170 million per year, or about $0.65 per capita at the federal level. The $170 million was recently (1994) appropriated amid much debate. When the NEA was founded in 1965, it was initially endowed for five years, with re-appropriation hearings at the end of each five year term. In the late 1980's, a small number of well-publicized "controversial" grants--the controversy of which was centered on artistic content--almost caused the NEA to be disbanded. These controversial grants were administered at the local level, going to individual artists through indirect regranting programs. Under much political attack from constituents opposed to public arts support, Congress froze any increases in the budget of the NEA and shortened the time between re-appropriation hearings to every three years. Because Congress perceived the social costs of supporting local artists to be greater than the social benefits of supporting them, the NEA budget was slashed by $10 million in the recent re-appropriation hearings--the majority of which were in the category of grants to individual artists--to its current level of $170 million.
State funding of the arts in U. S. A. was largely fueled by the founding of the NEA. In its initial legislation, the NEA was committed to distributing 20% of its federal funds directly in the form of "block" grants to states, so that they would form their own state arts councils (in recent years, the proportion for the block grants has increased to 30%). The idea was that states would have more localized control of the funds, in order to avoid the controversies of questionable grants mentioned above and so that states could allocate funds more directly to "under-served" areas. State arts councils have come under the same attack as our federal program, with similar arguments. In Pennsylvania, for example, the state arts budget--once at nearly $12 million per year--is currently at $9 million. The trend has been the same in nearly all other states. Malmi's assertion that in times of "difficult economic situations municipal leaders tend to concentrate on economic measures" has been proven true here in U. S. A. at the federal and state levels.
At the national and state level, the public provision of art is simply that: the provision of cultural services mainly for social reasons. At the local municipal level, things are a bit different. Here we use the example of Philadelphia, which is convenient, current, and interesting. The municipal government of Philadelphia had in the 1970's and 1980's a fairly strong financial commitment to the arts, and had what was known as the "Philadelphia 500 Class Grants" program, which were direct transfers to local arts organizations. When fiscal problems made the city budget tight, the program was eliminated in 1990. Under a new administration in 1992, the city government displayed a strong commitment to the arts and culture as a way to improve the economy of the city. Philadelphia was just completing a new multi-million dollar convention center, which was intended to revitalize the city by bringing in tourist and corporate meeting business to the city. With the convention center nearing completion, the city realized that it needed to fill the center with people, and that in order to fill it the city needed to entertain them as well. This meant that in an historic city with national landmarks and a lively arts community, the city's economic health depended on the health of its cultural institutions. The city revived an old plan to create an "Avenue of the Arts," a massive capital campaign which would relocate many of the major arts institutions in the city into one area (conveniently located near the new convention center). Supplemented with a new hotel, new restaurants, and extra policing in the district, Philadelphia is prepared to reap the economic benefits that the tourism industry--with the arts as a main attraction--can bring to a city.
Here, artistic enterprises are viewed as fueling the local economy, as another means of economic development. In this example, the most effective way that a municipality can spend its dollars on culture is to support the institutions that are already in existence, rather than creating new institutions. If there already exists an active arts community, then the government can supplement these organizations by supplying additional marketing funds and technical assistance, direct operating funds, capital grants, and tax breaks. The positive effects of cultural investment on a local economy are well documented in the case of large municipalities. New York City, for example, reports that 60 percent of tourists list culture and art as a primary reason for their visit. Baltimore is another example of municipal investment in tourism boosting the local economy, with its revitalization of the Inner Harbor district and the building of a new sports stadium. These examples, however, are not relevant in the small community model. A small community will not, in general, have the supporting institutions (such as art schools, restaurants, parking garages) in place which are prerequisite for a socially or economically profitable event--institutions which these large metropolitan areas have. It is a much greater risk for a municipality to invest in culture when none of the supporting institutions necessary for profitability are in place before the fact. This is not to say that a small community cannot have a socially or economically profitable event or institution; this argument is that a cultural investment should only be undertaken if these necessary supporting institutions are existent and can be utilized. If the prerequisite institutions are not intact before the event, then the investor must take into account the costs of creating the necessary institutions (whether by enticing private enterprise, directly investing themselves, or a combination of the two).
Where does this leave us in terms of viewing Malmi's model? While the model is a comprehensive assertion of the arguments that arts managers and public funding advocates use to justify support for the arts, it leaves much open to conjecture about which benefits will be realized as opposed to actual economic costs which can be verified. This model could be used to evaluate investments after they have already occurred, but may not be used to predict performance because there is simply no way to determine demand for the cultural good across the board or in different communities. Malmi's model does capture most of the benefits and costs that are associated with a cultural investment. However, it is the specific outcomes of the interaction of these variables that determine the outcome (profitability) of these investments, which can never be fully anticipated. Maybe an inclusion of a model that examines the reasons why an event is successful should be determined before any type of profitability estimate of an investment is projected.
We draw the conclusion that both theoretical and practical considerations point toward the importance of economies of scale in the impacts of the arts. Larger communities with established institutions and festivals, complementary economic activities and tourist assets will be better able to use artistic activities in the service of economic development than will smaller communities with smaller and less established arts sectors. Moreover, the impacts or successful events are cumulative over time, so that successful events reinforce existing institutions or even grow into permanent institutions. For smaller and more remote communities, the arts seem less likely to provide favorable impacts, net of cost.
These are considerations we would stress if we were to construct a theory of arts impacts. Perhaps other scholars would propose better theories, founded on more sound analysis and better understanding of practical and administrative issues in the arts. In any case, the theory on which we ultimately settle will determine the way in which we would apply Pasi Malmi's social accounting schema, and thus determine the estimates of benefits and costs.
This diagram displays a profit-maximizing monopoly subject to constant costs. The horizontal line LRC is the long run average and marginal cost, and D1 is the initial demand. Then the monopoly produces Q for a price of E and a profit indicated by the area ABCE. Now, thanks to a government economic development initiative, demand increases to D2. Monopoly output increases to R, price to K, and profit to AGHK. An incremental profit measure would this indicate benefits of AGHK-ABCE = BGHMC+KMCE. But KMCE. is a loss of consumers' surplus to local consumers and so should not be counted. The net benefit instead is indicated by the irregular area BGHMC. For practical purposes, it would be better approximated by the profit on incremental sales: (R-Q)*(K-A)
(1)This is contingent, not certain. Profit rates depend on the elasticity of demand as well as its other parameters; so an increase in elasticity accompanying the increase in demand could lead to lower profits. In that case, lower prices would also imply increased consumer surpluses for community residents, which should be included among the gross benefits of the policy initiative. But there seems to be little reason to expect that an increase in demand for local service enterprises would be correlated with an increase in the elasticity of demand. The discussion in the text also assumes that capital is mobile from the point of view of the community. Since it is widely accepted that capital is now mobile from a global point of view, this assumption should cause little or no hesitation.
2 Or -- if that comparison is too abstruse -- the performance of Steven Foster's "Hard Times, Come Again No More" by Emmy Lou Harris could not be "traded off" against the same song done by the Bluegrass Cardinals.
3 This can be illustrated by one of the classical cases in the study of creativity, Wolfgang Amadeus Mozart. Mozart's ability to improvise new tunes and retain them in memory was famous, but this torrent of exploratory impulses was balanced by an exquisite taste formed by a lifelong education in music. Mozart tells us that he simply forgot the tunes he did not like.
4 This type of event could be extremely popular in this homogeneous community. For example, a director of a theater in an African American community observes that whenever the theater puts on a production that should appeal to African-Americans, the majority of the audience is caucasian. The point is that the determinants of a successful event (and of the audience that it will attract) do not always have the expected outcome.