How to integrate Cultural Economics into Cultural Management

By Monika Mokre

The topic of this paper is the question how arts managers can apply the results of cultural economics to their work. The usefulness of cultural economics shall be tried on two main questions of arts management:

-How to raise money for projects, and

-how to spend it economically and reasonably.

The second question is discussed using the Rational-Choice-Theory and Baumol’s Cost-Disease-Model. To answer the first question income and price elasticities of the arts are explained.

The author comes to the result that very few results of cultural economics can directly be applied to arts management. Nevertheless, many considerations of cultural economics are worthwhile to look at for people working in arts management, as they clearly describe the conditions under which arts institutions are working.
The topic I want to tackle within this paper is the question how arts managers can make use of the results of cultural economics.

For people who are no experts in these issues it usually seems obvious that the main purpose of cultural economics is to make management easier, to help the arts in dealing with economic problems. But, of course, this is not true. On one hand, Cultural Economics sees itself as an economic science, it uses logical models to explore complex economic interrelationships. Its main goal is to understand how the economy of arts and culture works. Arts management, on the other hand, is a part of business management and deals with the very down to earth question how to manage an artistic enterprise.

But, seen from an economic angle, the arts are not such a large field. And the different scientific disciplines dealing with the arts - apart from the History of the arts - are rather young, not yet established and only represented by a small number of scientists. So, little wonder that the boundaries between, let’s say economics of the arts, arts management, arts sociology and cultural policy research are not that clear. On the whole, this is certainly an advantage, as it makes interdisciplinary work much easier.
However, the encounter of arts managers and cultural economists can often be rather frustrating for both of them. As Arjo Klamer, the first full professor for the Economics of the arts and culture put it: "Try to raise problems, as we academics are used to do, and the non-academic will just want to know your solution. The difference is that we want to keep the conversation going, and for that you need problems and issues, where as they want closure." (Klamer 1995, p. 308)

This is the gap I’d like to bridge at least provisionally on some problems examined in this paper. Of course, the result will not be completely satisfactory for both addressees, but maybe it could be a beginning for a more thorough quest for possibilities to link these two areas.

1. Main questions

Let’s begin with the main questions. I think arts management has to deal with. Basically there are two of them:

-How to raise money for the projects to carry through, and

-how to spend it appropriately.

I would like to begin with the second question as I think that the contributions of cultural economics are more obvious there. I will start with the negatives: Cultural economics can little contribute to practical questions of management, it cannot answer the question what the share of total expenditure on marketing should be or what percentage of the staff should work inthe administration. It can, however, help to understand why certain kinds of organization do not work satisfactory and, therefore, can at least indirectly help to take management decisions.

2. Expenses of arts organisations

2.1 Rational Choice Theory

In my eyes, the most useful branch of cultural economics for this type of question is Rational-Choice-Theory that examines how people react under certain circumstances and what the reasons for these reactions are. The main statement of Rational-Choice-Theory is that a person tries to maximise his/her utility and behaves in away to serve this goal. In this basic form the benefit of the theory is limited.

If we define the "profit" a person wants to maximise in a mere pecuniary way, the statement is simply not true, at least in a considerable amount of cases: Many people - may this be true especially in the field of the arts or perhaps also in general - do things that reduce their own economic profit. I know, e.g., a director who usually works for decent fees at large Viennese theatres but, once in a while, declines an offer in order to work with an independent theatre project paying him next to nothing but being more fun to work with.
So, we have to apply another definition of the paradigm of maximisation and say: The personal profit of a person cannot only be defined in economic terms. Having fun is also part of the personal profit, so a person may also bemaximising his/her profit while making economic losses.
So, the most important point Rational-Choice-Theory makes is the fact that one cannot expect people to consequently make sacrifices in order to improve society or an institution. To give you an example: the biggest and most famous Austrian theatres, the Bundestheater (which consist of the Staatsoper, the Volksoper, the Burgtheater and the Akademietheater) are organised in a way that only may understood out of their history and that is disadvantageous economically as well as artistically. However, attempts to change the organisation have up to now always been stopped by the works council, the present organisation offering many perks for the staff (E.g. people working at the Bundestheater get high fees for overtime when a rehearsal needs more time than expected. Furthermore, the whole shift of, e.g., lighting technicians must be paid overtime if only one lighting technician is needed.) Politicians, journalists and other people interested in the arts have often deplored the egoistical way in which the staff of the Bundestheater defends its privileges - but, of course, these complaints did not change anything; people cannot be expected to act against their own interests in such anobvious way. So, what will likely happen in the near future is that the opposition of the works council will simply be overruled and a new form of organisation implemented. Hopefully, the viability of the new organisation will not be so dependent on major sacrifices of self-interest.

Similar problems can probably be seen in the case of museums. People concerned with the problems of museums have often stated that the distribution of resources among different museums is not appropriate: "It is a puzzling fact that our larger museums have extensive reserves holding many objects, which, though rarely displayed, may be of a higher quality than works currently on display in smaller museums. Would not the less well endowed places be delighted to have a few of the rejects in the basement of the Metropolitan? (...) This sort of misallocation of social resources is made worse by the fact that museum directors have virtually no incentive to refuse a bequest. The result (...) is that works of art often end up in places that have no need for them." (Heilbrun/ Grey, quoting Montias, ibid. p. 182 f.) However, there is (at least in Austria) also no incentive for the directors of big museums to lend works to smaller museums instead of keeping them safely stored in the basements.

Of course, an organisation cannot be designed to allow everybody to maximise his/her utility all the time and to guarantee that this consequent and overall individual maximisation leads to general maximisation. However, I think, that when shaping an organisation like, e.g., an arts business it makes sense to consider the considerations of Rational-Choice-Theory on human nature and human behaviour.

2.2 Baumols Cost Disease

Now to another theoretical framework that may be useful to understand the cost structures of some arts enterprises, especially of the performing arts. I am speaking of the so-called "Cost disease model" developed by William Baumol. According to his model costs in personal services rise more rapidly than costs in the industrial sector because of the unequal development of productivity in different economic branches. In the industrial sector, productivity has been rising considerably in our century. As a result, wages in these sectors also rise, although perhaps not as fast or not to the same level as productivity does. Productivity in the personal services, on the other hand, rises much slower but (...) "the labor markets for the personal services and in manufacturing are not isolated from one another. If wages of policemen, teachers or street cleaners fall significantly behind those in manufacturing, in a prosperous economy labor will simply move out of the former occupation and look for jobs in the latter. Scarcity of labor supply will force wages in the personal services upward, close behind those in the remainder of the economy." (Baumol/ Oates 1972, p. 47)

What does that mean? Let’s take one of Baumols own examples.. "A Schubert trio scored for a half-hour performance simply requires one and a half man-hours of labor in its public attention." (Baumol/ Oates,ibid.) Or, as Alan Peacock put it: "Removing Judge Bouck from the cast of Hedda Gabler would certainly reduce labor input to Ibsen’s masterpiece, but it would also destroy the product. Nor could one increase the productivity of the cost by performing the play at twice the speed. Anyone who doubts this proposition should try playing modern long-playing disks at 28 revolutions per minute." (Quoted from: Baumol/ Oates, ibid., p. 46f)

So, it may be stated in general that personal services are getting continuously more expensive. What does result out of this problem? "First, some services have virtually disappeared from the market, or at least their volume has fallen drastically. Handmade furniture, butlers and full-time maids are growing increasingly unusual. The doctor's house calls are also largely gone. (...) Second, some services will not disappear, but as an offset to their rising costs, their quality will be allowed to deteriorate progressively. Dirtier streets, subways with increasing accident rates, larger classes in some schools, and shorter rehearsal periods for plays are all examples of this phenomenon. (...) Third, certain other services will be transformed, in whole or in part, into unpaid amateur activities (...). Shaving is an interesting example of a successful take-over by the non-professional. (...) Finally, there are the services, notably medicine, and perhaps education, for which the public has at least so far generally resisted a curtailment in supply or in quality. For this we have had to pay the price: expenditures have simply had to keep pace with the cumulatively rising costs. (Baumol/ Oates, ibid. p. 49 f)

What did the cost disease do to the arts? Empirical studies carried through in Great Britain and in Canada in the year 1982 came to the result that incomes in the field of the performing arts did not rise to the same extent as in other economic sectors, which means that the artists supported their own economic sector and buffered society some of the effects of the cost disease.1 A possible conclusion is that the labor market for artists is not as open to other sectors than the ones of other personal services, the decision to become an actor perhaps not being as much determined by financial considerations as the decision to become a barber or a worker in the car industry. "One's instinct as an economist is to explore in detail the supply elasticity of labour in the performing arts and with little or no empirical data, one might postulate that it is likely to be in elastic in the short-run andelastic in the long. This is the economic counterpart to the dedication of the artist coupled with the strong personal satisfaction associated with performance." (Peacock 1994/1969, p.154)

However, it is true that the live performing arts are getting more and more expensive. This development cannot really be influenced by a more skilful management. That's why it is important to understand this mechanism: to know what can be changed inthe structure of artistic production and what the given circumstances are.

But, there is a problem to be aware of: One specific product of performing arts, like the above mentioned performance of "Hedda Gabler" in a given theatre under given conditions can not be made considerably cheaper. However, it is, of course, possible to find new, cheaper things to do for the performing arts. E.g., there has been much economic literature treating the impact of festivals on the situation of performing arts and on the existence of Baumols disease.2 In the language of the economists, one would say that process innovations increasing productivity are very rare in the live performing arts while product innovations, i.e. the development of new products are, of course, possible.
An arts manager has to accept that the costs for a specific product of his portfolio, like the repertoire performances of certain plays with a certain cast, décor and costumes, are inevitably rising, but, on the other hand, he can balance his budget by introducing new products. Some years ago, the Viennese Burgtheater, for example., began, to perform readings or one-person-performances in front of the curtain. Critics call these events "hidden closing days" and, from an artistic perspective, they are probably right. But from the economic point of view, they most certainly are wrong, these performances being very cheap and usually very well attended. Orchestras in the United States chose a similar way and diversified their services. "This means offering more summer concerts, engaging in more touring, and/ or offering additional concerts by smaller ensembles of orchestra players." (Felton 1994, p. 311)

A last remark to Baumols disease: According to Baumols disease the costs of live performing arts are getting continuously rising. But it does not imply that because of this tendency society is less and less able to afford the live performing arts. Quite on the contrary: What Baumol says, is "that manufactures are becoming progressively cheaper to produce (in terms of labor), while productivity in the personal services remains unchanged orrises relatively slowly. Since in this process productivity does not decline in any sector of the economy, it follows as a truism that society’s command over goods and services must be increasing."(Baumol/ Oates, ibid, p. 52)

But the consequence of this mainly positive development could be that public expenses dedicated to personal services rise dramatically. In a long-term perspective and generally spoken it should be possible to balance the rising expenses by incomes (e.g. rising taxes); but in a short-term perspective and for certain cities, provinces or nations the cost disease can certainly provoke budgetary crises that are fought by cost-cutting. "The real danger is that, unless the nature of the process is made clear, public misunderstanding orneglect may lead to the deterioration (or even extinction) of certainservices, some of which may well be in our interest to perpetuate." (Baumol/ Oates, ibid, p. 45)

3. Incomes of the arts

Now, I’d like to change the focus and come to the question: "How do we get money for thearts?" Generally spoken, there are three potential sources of money for the arts:

the audience and buyers of the arts;

sponsors and private donators;

Within this paper I will concentrate on audiences as I think that results of Cultural Economics in this field are the most useful for arts management.

Who goes to a theatre or a concert, for which reasons does he/she do so and how much is he/she willing to pay for it? These are the main economic questions in relation to audiences.

The willingness to pay can be described by the concept of price elasticity, which deals with the question what happens when prices increase or fall, that may be of more practical use for arts management. If the prices forseats in a certain performance are reduced by 10% and as a consequence 10% more tickets are sold, price elasticity is 1. If lessthan 10% additionaltickets are sold, price elasticity is inferior to 1 and the price is inelastic. If more than 10% additional tickets are sold, price elasticity is superior to 1 and the demand is called elastic.

Of course, this indicator is of eminent practical value, as it tells us which changes in prices make economic sense: If my theatre is never booked out and the demand is sensitive to price, i.e. elastic, it seems to make sense to reduce prices in order to get higher revenues. If, on the contrary, the demand is inelastic, there will not be a much higher purchase of tickets because of the price reduction, but the revenues will decrease. In this case, a price reduction is not an appropriate strategy.

The same applies for price increases: If most of the people who attend my theatre are willing to pay higher prices than they do, i.e. if the demand is inelastic to price, it will make sense to increase ticket prices. If the demand is price elastic, this strategy is only recommendable, if demand constantly exceeds supply, i.e. if there are always more people who want to buy tickets than tickets to sell.
Empirical studies and econometric estimations in different countries and at different times have mostly shown that the demand for tickets is price inelastic, which means that changes in ticket prices have no big influence on the number of tickets bought. The estimates range from 0.05 to 0.9, but stay inferior to 1. (Heilbrun/ Gray 1993, p.90f) This means that we cannot expect much more income by reducing prices. The reason for this fact is mainly seen in the phenomenon of an acquired taste for special disciplines of the arts, "meaning one that grows stronger with exposure, and the effect of that is surely to make substitutes less acceptable. Those who acquire a taste for ballet, opera, or the theatre become "hooked" on the live performances. Versions on film, tape, or television may be pleasant, but they are no substitute for the real thing. As the passion of such devotees grows stronger, they become less concerned about the price of admission. (...) The same argument works in reverse for those who are outside the established audience. The arts are an acquired taste that they have not acquired. Few experiences can be more boring than an evening spent at a symphony concert, opera or ballet by someone who has no understanding or appreciation of these art forms. Such people will not be easily drawn into the audience simply by lower ticket prices." (Heilbrun/ Gray,ibid., p. 93 f)

There is also another factor underlying the overall observed demand inelasticity: As most performing arts institutions are in the non-profit-sector, prices are usually low and at low prices demand is very likely to be inelastic.
So, from the above said, one could conclude that it makes economic sense to raise prices for the performing arts, as it can be supposed that people continue to buy as many tickets as before. However, there are important cautions to take into consideration: One of them is, that, unfortunately, general economic statements rarely stand uncontradicted. Consistently, a recent microeconomic study of theatre demand using a very differentiated demand-model of "learning by consuming" comes to quite opposite results, that is "that demand for the theatre is price-elastic and that the substitution effects of televised theatre broadcasts, cinema and reading are important." (Lévy-Garbova, Montmarquette 1996,p. 50)

An even more important problem is that elasticity was not stated for an individual firm, but for an entire industry. The demand curves of individual firms are usually more elastic, so that if one theatre rises its ticket prices, while all its competitors hold their prices stable, it is probable that the cheaper theatres will take over a part of the audience of the more expensive one and sales of tickets will decrease at the more expensive theatre. So, to management, the practical conclusions of price inelasticity are rather questionable.

The overall results of price inelasticity do also apply to museums: In Rotterdam, a ticket price (of $1.35) was introduced in four museums that had been free of charge up to then and, simultaneously, a "before-and-afterstudy" was carried through. Visits to the arts museum decreased by 18 percent "but the smaller number of visits was offset by an increase in average duration. Apparently, the fee tended to filter out short visits. (...) Policy makers interested inencouraging the cultivation of a taste for art might have feared that imposing a fee would create a barrier to first-time attendance, but such was not the case: the relative frequency of first visits was not affected significantly." The most surprising result of the study was that "(...) the proportion of low-income families in the audience rose significantly instead of falling! The authors could suggest no explanation for this counterintuitive outcome. (Heilbrun/ Gray, ibid, p.179)

A study dealing with the entrance fees for the Long Room in the Trinity College in Dublin (where the Book of Kells is exhibited) came to similar results. Entrance fees were introduced in 1984 and constantly risen till 1993: "The overall pattern is clear, with large increases in both entry charges and numbers attending over the period as a whole. Thus at the very minimum it can safely be asserted that the introduction of admission charges had no apparent negative effect on attendance, quite the contrary in fact." (O'Hagan 1995, p. 42) As reasons for this result the author proposed that the quality of the exhibition was improved which was partly made possible because of the introduction of charges, that the number of overseas tourists in Ireland increased at that time and, the admission charge having a very small proportion of the total vacation expenditure, tourists continued to visit the Long Room. Besides, price elasticity is low because there are no close substitutes for the Book of Kells.

In addition, Cultural Economics shows ways to get more information about the willingness of visitors to pay. One possibility to do so is to ask visitors after visiting a museum, if they had received "value for money". The answer to this question can be most helpful for pricing considerations. "For example, it may be argued that visitors who are on the borderline of receiving value for money are likely to be more sensitive to a price increase than those giving 'Definitely Yes' responses. (Ashworth/Johnson 1996, p. 78)

This was the last point I wanted to make here - and perhaps the one with most practical use. To sum up, I think that this discussion showed that very few results of cultural economics can directly be applied to arts management. Nevertheless, many considerations of cultural economics are worthwhile to look at for people working in arts management, as they clearly describe the conditions under which arts institutions are working.


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Management Topic: Education & Development
Cultural Area: General
Submitted by editor-in-chief on Aug 22, 2002