According to the New York Times, one of the sectors hardest-hit by austerity is the arts sector. In the Netherlands, for instance, financing for arts programmes has been reduced by 25 percent. The article states that the larger institutions, such as the van Gogh museum, are able to stay afloat thanks to the sheer demand for their offering. On the other hand, smaller companies – particularly those engaged in more avant-garde and experimental projects – are bearing the brunt of austerity and are at best struggling to remain active.
So why are these smaller groups so helpless in the face of declining state aid? And why is the state subsidising things that are not sufficiently demanded in the first place?
Part of the story behind why these acts are struggling is explained by the costs inherent to producing cultural goods. Baumol’s cost disease theory suggests that the arts – particularly the performing arts – face rising relative prices of output because their productivity rises at a lower rate than the increase in prices.
To explain this, Baumol uses a stylized economy where there are two sectors with equal weight: one where technological advances yield increases in productivity, and another where productivity is stable. If the former sector increases its productivity per man-hour by 4 percent, the aggregate increase of output per man-hour is 2 percent. Assuming that the real wage increases hand-in-hand with aggregate rate of change of productivity, and that money supply and level of aggregate demand are controlled in such a way that price level is kept stable, money wages will also increase at 2 percent per year. In the sector with rising productivity, labour costs decline because the increase in money wages is inferior to the increase in productivity. Conversely, the sector where productivity is stable is subjected to a 2 percent rise in labour costs because the increase in money wages is not accompanied by an increase in productivity.
To illustrate the fact that the performing arts sector is stable in terms of productivity, Baumol uses the following example: while all other sectors of the economy manage to produce more using the same level of output thanks to technological advances, the output per man-hour of a violinist playing Schubert in a quartet is fixed, in the same way that it is difficult to reduce the number of actors necessary for a performance of Henry IV.
Still, blockbuster musicals and films profit despite these higher costs. Why, then, are the aforementioned avant-garde groups struggling to sell tickets? The answer is that demand for art is unlike the demand for other goods.
In order to describe this demand, we must first take on the onerous task of, at least loosely, defining “art”. Here, “art” is taken to mean what is implied by “high culture”. Somewhat contentiously, high culture is regarded as “aesthetically superior” in that it “reveals and changes one’s experience of reality and possibility”. Popular culture, on the other hand, is conceived as a form of pure entertainment that is intended to divert consumers from reality. The main difference, however, is that high culture requires a priori knowledge and aesthetic sensitivity (which is in turn honed through repeated exposure) in order for the consumer to derive utility from its consumption, while popular culture has no such requirements for its enjoyment.
Consequently, the demand for art depends largely on one’s level of education and exposure to art. This point is illustrated by the relatively low income-elasticity of the performing arts – according to a collation of data by Heilbrun and Gray, it ranges from 0.35 to 1.08. (It is worth noting that these numbers do not take into account the price of leisure, which is a key determinant in whether people consume the arts or not.) This means consumption of the arts is not only – at least directly – for those with large amounts of disposable income.
Rather, there are other factors at stake – namely, as the very definition of high culture suggests, exposure to the arts in the first place. In fact, art is an acquired taste for which the utility of the consumer rises as more of it is consumed (thus challenging the economic notion of decreasing marginal utility). Intuitively, we all know that this is true – the opera and modern art museums are chiefly the domain of the erudite. And, as we also know, erudition is a consequence of education – high socioeconomic status.
This means that those with more socioeconomic power tend to consume more of the arts, not because of their income, but because of their educational background. Nonetheless, some authors argue that a taste for high culture is not merely a symptom of high socioeconomic status, but actually a cause of high socioeconomic status. It is posited that class distinctions are made not solely on the basis of monetary income, but also on what is dubbed “cultural capital”. In this vein, the utility derived from high culture is not based entirely on the benefits of its supposedly higher aesthetic qualities, but on the cultural, and social, capital gained from its consumption. The utility of art thus hinges on its power to confirm one’s identity within a certain social group in the larger social hierarchy.
It can be held, then, that art is in part a snob (or Veblen) good; the higher its cost, the higher demand for it. Here, level of education and aesthetic sensibility are used as a proxy for monetary cost, and it is in the interest of the culturally “superior” minority to keep these goods as unobtainable as possible. You don’t have to be a philistine to believe the aforementioned proposition – the art world is awash with examples of pieces that have little to no superior aesthetic or intellectual value but are regarded as high culture anyway. For example, Gonzalez-Torres, a famous artist from the 1980s, sold a “sculpture” that was simply a leather jacket in the corner of a room topped with a pile of candy for $456,000.
In short, the arts are expensive to supply and demanded only by a privileged elite. It is therefore no surprise that niche acts are struggling in Europe. So why would the state spend public money on art in the first place? It is, effectively, the same thing as channeling income from everyone towards the richest few. (Although the point can be made that private philanthropy complements public funding in art museums, meaning that it is largely a redistribution from the extremely wealthy to the well off.)
The answer is that if the arts were left to pure market mechanisms, high culture would become a de facto pastime of the upper classes (for they would be too expensive), thus stifling the upward mobility afforded by cultural capital. Furthermore, art provides positive externalities, meaning that there are spillover benefits to its consumption that do not necessarily accrue to the individual consuming it. Some of these positive externalities include the fact that the arts are a source of national pride, as well as the fact that innovation in the art sector inspires other artists to produce work. More importantly, art is an educating force that encourages lateral and abstract thinking, in effect stimulating creativity.
In addition to the educational background necessary for the appreciation of art, consumers are deterred from consuming it because many of the benefits of arts consumption do not accrue to the individual. Moreover, the educational benefits of consuming art are longer-term, and since most consumers are myopic in their tastes, they will not demand enough of it. In this sense, art can be considered a merit good whose shortfall in demand should be buffered by state subsidies.
To conclude, the avant-garde groups are in bad shape because they are providing an expensive product that not many people want because of educational constraints and the fact that the benefits of its consumption are long-term and do not necessarily accrue to the individual. However, the state doesn’t let arts institutions simply fail because it is believed that the consumption of art makes society better. Consequently, the state wants to make art accessible to all by lowering prices in the hope that this fuels demand. However, because demand for art hinges mostly on education and exposure, in order to increase demand for art in a way that allows most of society to benefit from arts subsidies, policy-makers should consider expanding arts education (given budgetary constraints this may be difficult, of course) to shape preferences so as to make the arts self-sufficient in the same way that blockbuster movies are.
Margarida Madaleno, 671
 Baumol, W., and W. Bowen. “On the Performing Arts: The Anatomy of Their Economic Problems.” The American Economic Review 55 (1965): 495-502. Print.
 van den Haag, Ernest. “Should We Subsidize Popular Art? No – An Elitist View,” New York Times, February 9, 1975.
 Heilbrun, James, and Charles Gray. The Economics of Art and Culture. 2001. Reprint. Cambridge: Cambridge University Press, 2004. Print.
 McCain, Roger. “Reflections on the cultivation of taste.” Journal of Cultural Economics 3.1 (1979): 30-52.
 DiMaggio, Paul, and Michael Useem. “Social Class and Arts Consumption: The Origins and Consequences of Class Differences in Exposure to the Arts in America.” Theory and Society 5.2 (1978): 141-161. Print.
 Akerloff, George, and Rachel Kranton. “Economics and Identity.” The Quarterly Journal of Economics 115.3 (2000): 715-753. Print.