introduction to open-economy macroeconomicsecon.ucsb.edu/~lowell/191ac/lecture notes/lecture...

Lecture 10 The Market for Visual Arts /

The Economics of Art Museums

Professor Julia Lowell [email protected]

Spring 2012

5/2/2012 1 Econ 191ac -- Lecture 10

Outline: Lecture 10

• About the midterm (next Monday) • Brief review of Lecture 9 • Go over Homework 9

– Homework 8 and Class Project discussion after the midterm

• The market for visual art • The economics of art museums • Homework 10 -- DUE WEDNESDAY 5/9

5/2/2012 Econ 191ac -- Lecture 10 2

Midterm FAQs

• You really don’t have to take it – If you don’t, your final will be worth 55% of your grade – Historically, people have done pretty well on the midterm – If you show up, then you must take it

• It will look a lot like the homeworks – So review them – You may bring notes but no computers, please

• Yes, please bring a blue book – Less likely to get lost than sheets of paper

• It will probably consist of 4-5 questions, with 3-5 parts each

5/2/2012 Econ 191ac -- Lecture 10 3

What the Midterm Could Cover

• Definition of cultural goods

• Measurement & characterization of arts participation in America

• Production & pricing in the performing arts

• Justification for and contraints on nonprofits

• Financial situation of performing arts firms

• Visual arts market / art museums

• Data on your chosen cities

5/2/2012 Econ 191ac -- Lecture 10 4

REVIEW OF LECTURE 9: THE “COST DISEASE” IN THE LIVE PERFORMING ARTS AND FINANCES OF NONPROFIT ARTS ORGANIZATIONS

5/2/2012 Econ 191ac -- Lecture 10 5

Why So Little Productivity Growth in the Performing Arts?

Sources of improved productivity:

1. Increased capital per worker • More or bigger stages per actor? Maybe

2. Improved technology (better capital) • Better sound systems? Yes

3. Increased labor skill • Better actors? No

4. Better management • More efficient rehearsals? No

5. Economies of scale • Longer seasons = more performances? Yes

5/2/2012 Econ 191ac -- Lecture 10 6

Why Little Productivity Growth in the Performing Arts?

What are the sources of productivity growth? 1. Increased capital per worker 2. Improved technology (better capital) 3. Increased labor skill 4. Better management 5. Economies of scale

Only (2)--and possibly (1) and (5)--have much potential to raise output in the performing arts

5/2/2012 Econ 191ac -- Lecture 10 7

Why Worry?

• If ticket prices skyrocket, poorer Americans may not have access to performing arts

• Rising costs may force nonprofit arts institutions to decrease focus on art--and shift away from mission – Increase commitment to unrelated business activities such

as gift shops and cafes – Higher proportion of popular/less expensive programming

(“artistic deficit”) – More time spent lobbying for government support,

schmoozing with potential donors

• Rising costs may force art firms out of business altogether

5/2/2012 Econ 191ac -- Lecture 10 8

Why Not To Worry

• Increased U.S. productivity means higher incomes for Americans, so can afford higher tickets

• Many service industries have productivity lag (restaurant industry, e.g.); they are doing fine

• There is at least some evidence for productivity improvements in the arts

• Number of arts nonprofits growing each year! (So new ones must be more than replacing old ones)

• Performing arts orgs can increase their income by diversifying their revenue sources (not just rely on box office)

5/2/2012 Econ 191ac -- Lecture 10 9

Nonprofit Performing Arts Companies Have More Sources of Income Than For-Profits

• Earned income (for-profits only have this) – Admission (box office) receipts – Touring, services, & IPR – Income from unrelated business activities

• Endowment income • Unearned or contributed income

– Grants & contributions • Public sector (federal, state, local government) • Corporate & foundation grants • Individual donations

– In-kind donations & volunteer labor 5/2/2012 Econ 191ac -- Lecture 10 10

Performing Arts Companies: Sources of Earned Income

• Admissions (box office receipts)

• Touring (performances produced under contract)

• Technical, artistic, & representation services, and instruction

• Licensing or sale of intellectual property rights

• Rental of goods, equipment, and non-residential space

• Income from unrelated business activities (sale of food, merchandise, fine arts)

5/2/2012 Econ 191ac -- Lecture 10 11

For Nonprofits, Contributed Income Is Used to Cover the Earnings Gap

(1) Expenditures – (Earned + Endowment Income) = Earnings Gap

is equivalent to

(2) Expenditures – (Earned + Endowment Income) = Contributed Income

An earnings gap may be a sign of financial strength OR weakness

5/2/2012 Econ 191ac -- Lecture 10 12

Sources of Revenue as Percent of Total in the Nonprofit Performing Arts, 2007

5/2/2012 Econ 191ac -- Lecture 10 13

Source: Economic Census, 2007

Earned income, 51.0

Endowment, 8.3

NEA, 0.3 Other govt, 3.9

Individuals, 20.7

Foundations, 8.0

Businesses, 5.6 Other , 2.3

DISCUSSION OF HOMEWORK 9

5/2/2012 Econ 191ac -- Lecture 10 14

HW9 for Wednesday 5/2

Advocates for the arts sometimes argue that public subsidies are required to compensate for the growing productivity gap between the arts and many other sectors of the economy.

a. Explain their logic. Why might low productivity in the arts translate to a need for public subsidies?

b. Is this logic equally applicable to all art forms (ballet, painting, popular music, graphic design, classical music, etc.) and all phases of production (creation, presentation, distribution, etc.)? Why or why not?

c. Is government intervention in the form of public subsidy appropriate for all industries that experience relatively slow productivity growth? Explain your answer.

5/2/2012 Econ 191ac -- Lecture 10 15

A Great Answer: Thanks, Andrew!

A) There are a couple ways to explain this. (1) If wages directly reflect a workers marginal revenue product, then the growing productivity gap between arts and other sectors would result in lower wages in the arts sector. This would mean some sort of subsidy would be needed to help arts companies pay competitive wages. (2) Arts goods/services are essentially becoming relatively less efficient and therefore relatively more expensive to produce. This means the cost of arts products must be subsidized to keep the consumer consuming and the producer producing at the same level as before, compared to other sectors. B) No. This logic applies differently to all forms and phases. It applies most to live music performances, ballet, and traditional painting and sculpting; in these different forms and phases, technological advances do little to increase productivity. In other areas, like graphic design, music production/recording, and distribution, advancements in technology do have an impact on productivity and the logic does not apply as well and maybe not at all. All forms and phases are on a spectrum in regards to the developing productivity gap compared to other sectors. C) No. If the tobacco industry experiences relatively slow productivity growth, the government should not subsidize the purchase of cigarettes because the cigarette market does not provide positive externalities. The government should only subsidize markets with positive externalities. Some positive externalities of the arts sector are the songs and images that enter the public domain after a certain number of years. 5/2/2012 Econ 191ac -- Lecture 10 16

A Great Answer: From A Previous Class

a. Low productivity in the arts leads to a need for public subsidies because productivity does not increase at a rate comparable to increasing wages. As the gap between productivity and wages increases, producers in the arts have a harder time covering those additional costs. But with public subsidies, arts producers can continue to produce their art form without raising prices to a point where they would meet their costs but lose patrons.

b. The logic of public subsidies due to the productivity gap does not apply to all forms of art. For many forms, such as popular music, graphic design and film, there are innovations in technology, skill, management and economies of scale that allow those arts industries to meet the rising costs of production. Those same improvements in technology also apply to several phases of production, such as distribution and presentation, which would make them more productive and thus not need subsidies. On the other hand, areas where productivity in production is relatively stable, such as creation, may need the help of public subsidies because an author cannot write a piece faster.

c. No, public subsidies are not appropriate for all industries that experience relatively slow productivity growth because there are industries where that is the norm and where successful producers in those industries are able to overcome the productivity issue. For example, the restaurant industry experiences the same gap as the arts industries do but successful restaurants are able to overcome that gap through various means. Public subsidies would be more appropriate for arts industries that legitimately cannot overcome the increasing costs. 5/2/2012 Econ 191ac -- Lecture 10 17

Productivity Gap in the Live Performing Arts: Comments Based on Homeworks

• Use of cost/pricing diagram to explain implications of productivity gap (1a)

• Applicability of logic to nonprofits vs for-profits

• Should low-productivity industries get subsidies?

• Which art forms and which phases of production face the biggest productivity gaps?

• How do subsidies arts nonprofits compare to subsidies for auto companies (GM)?

5/2/2012 Econ 191ac -- Lecture 10 18


• Use of cost/pricing diagram to explain implications of productivity gap (1a) – Can use it to describe how subsidy offsets shift in AC

due to wage cost increases, but it doesn’t fully answer the question. Questions asks how relatively low productivity in arts industries affect their costs.

5/2/2012 Econ 191ac -- Lecture 10 19



• Applicability of logic to nonprofits vs for-profits – Productivity gap problem affects both nonprofits and for-

profits (Broadway theater, for example, is for-profit). – But only nonprofits are eligible for most government

subsidies (charitable grants)

5/2/2012 Econ 191ac -- Lecture 10 20




• Should low-productivity industries get subsidies? – Not for that reason alone. If an industry is experiencing

wage pressure due to a productivity gap *and* it provides something very valuable to society, then it might deserve a subsidy.

5/2/2012 Econ 191ac -- Lecture 10 21




• Should low-productivity industries get subsidies?

• Which art forms and which phases of production face the biggest productivity gaps? – Which ones can not take advantage of technological

improvements to expand output? Those are the ones with the biggest productivity gaps.

5/2/2012 Econ 191ac -- Lecture 10 22



• Applicability of logic to nonprofits vs for-profits • Should low-productivity industries get subsidies? • Which art forms and which phases of production

face the biggest productivity gaps?

• How do subsidies to arts companies compare to subsidies for auto companies (GM, e.g.)? – GM did get a “bail out”—but it involved loans, not grants

(GM has to pay them back), and it was because of low demand (recession), not low productivity

5/2/2012 Econ 191ac -- Lecture 10 23

THE MARKET FOR VISUAL ART

5/2/2012 Econ 191ac -- Lecture 10 24

What Are the Visual Arts?

5/2/2012 Econ 191ac -- Lecture 10 25

“Visual arts”: Art works that appeal primarily to the visual sense and typically exist in permanent form (that is, are tangible), such as:

– painting, sculpture, and mixed media, plus (sometimes) photography, video art, environmental art, and various arts involving clay, glass, metal, fabric, wood, etc.

Sometimes called the “fine arts” (or even just “art”) but “fine art” is also used to mean any art created for aesthetic as opposed to functional reasons

– fine arts distinguished from decorative arts like ceramics, glass art, and interior design; or applied arts like architecture, photography, and fashion design.

Similarities and Differences Between the Visual and Live Performing Arts

• Both exhibit the properties of cultural goods – Embody creativity and intellectual capital,

transmit symbolic messages, are valued for non-monetary reasons, etc.

• Two key differences: – Attendance at visual arts events (exhibitions,

e.g.) is not as constrained by schedule – Visual art can be resold, and some works have

become more valuable with age

5/2/2012 Econ 191ac -- Lecture 10 26

Two Attributes of Visual Art

• Decorativeness – size & weight – medium (oil on canvas, carved marble,

videotape, e.g.) – physical condition – subject matter

• Intellectual appeal – art-historical significance – quality of work – reputation of the artist

5/2/2012 Econ 191ac -- Lecture 10 27

Characteristics of the Primary Market for Visual Art

• Where original works are bought and sold for the first time in galleries, art fairs, festivals, and artists’ studios

• Transaction costs and information costs are typically high – Products are highly differentiated, so finding

the ‘right’ work can be time-consuming – Buyers lack information about product quality

and resale value Decorative attributes of art works more

apparent than intellectual attributes

5/2/2012 Econ 191ac -- Lecture 10 28

How the Primary Market Works (Gallery)

• A dealer (often a gallery owner) agrees to be an artist’s exclusive representative – Artist provides creative work – Dealer provides market knowledge, promotion, arranges

for exhibition space

• Dealer receives commission on all sales (typically 50%)

• Artist chooses reserve price (price floor), dealer chooses markup

• Prices may or may not be posted

5/2/2012 Econ 191ac -- Lecture 10 29

Characteristics of the Secondary Market for Visual Art

• Where well-known works are bought and sold in galleries and auction houses

• Transactions costs still high • Information costs are typically much

lower than in primary market

Intellectual attributes of art works play key role in price determination

5/2/2012 Econ 191ac -- Lecture 10 30

How the Secondary Market Works (Auction House)

• Works may be sold in galleries or at auction • Auction house commissions are typically

lower, but dealers provide artists with more services

• Typically, auctions used when prices hard to determine because – markets are very small – products are highly unique

• Art markets use “English” auction system: Prices are raised until single bidder remains

5/2/2012 Econ 191ac -- Lecture 10 31

Financing Visual Art: Speculative vs Commissioned Works

• Speculative works: produced by the artist with no guarantee of a sale – Sold on the primary market – Less likely to be produced if productions costs are high

• Commissioned works: produced by the artist for a particular client or patron – Very common before the 20th century – Still prevalent for public art, corporate art – Can be very specific as to materials, subject matter,

dimensions

5/2/2012 Econ 191ac -- Lecture 10 32

Visual Art as Investment (1)

• Art has long been recognized as an investment vehicle – French art lovers established investment club in early

1900s (bought Impressionists, Picassos)

• British Rail Pension Fund diversified portfolio by investing in art 1974-1989, had good returns (but investment strategy still controversial)

• 1980s saw amazing art boom driven by Japanese investors

• 2000s saw another art boom, with emergence of art funds or art investment vehicles (AIVs)

5/2/2012 Econ 191ac -- Lecture 10 33

Visual Art as Investment (2)

• Academic studies find that – Demand for art is increasingly global – Returns on art below stocks, but above bonds – Art has low correlation with stocks and negative

correlation with bonds

• However, market is also – non-transparent – highly prone to taste and fashions – extremely illiquid

5/2/2012 Econ 191ac -- Lecture 10 34

The Four Most Expensive Paintings of All Time (1)

5/2/2012 Econ 191ac -- Lecture 10 35

$140m, 2006 $137.5m, 2006


5/2/2012 Econ 191ac -- Lecture 10 36

$135m, 2006 $82.5m, 1990


5/2/2012 Econ 191ac -- Lecture 10 37

Artist Painting Price Year

Jackson Pollock (US) No. 5, 1948 $140m 2006

Willem de Kooning (Netherlands)

Woman III $137.5m 2006

Gustav Klimt (Austria)

Portrait of Adele Bloch-Bauer

$135m

2006

Vincent Van Gogh (Netherlands)

Portrait of Dr. Gachet $82.5m

1990

Price Inflation in Art Market Has Hurt Art Museums

• Booming art market driven by individual investors

• Many museums priced out of market for great works of art (Getty has been exception)

• Van Gogh’s Portrait of Dr. Gachet ($82.5 million) now sitting in climate-controlled crate in Tokyo warehouse

• Museums must now schmooze with collectors for donations of art as well as money

5/2/2012 Econ 191ac -- Lecture 10 38

THE ECONOMICS OF ART MUSEUMS

5/2/2012 Econ 191ac -- Lecture 10 39

The Vast Majority of Organizations That Display (Not Sell) Original Art Objects Are Nonprofit

5/2/2012 Econ 191ac -- Lecture 10 40

Nonprofit 91%

For-profit 9%

Source: 2002 Economic Census

But Most Organizations That Both Display and Sell Art Are For-Profit

5/2/2012 Econ 191ac -- Lecture 10 41

Nonprofit 38%

For-profit 62%

Source: 2002 Economic Census

Governance Structure of U.S. Museums, 2008

5/2/2012 Econ 191ac -- Lecture 10 42

What Do Art Museums Do?

• Collect and display art

• Educate the public

• Conserve art

• Conduct research

Unit of “output”: number of visitors per day. This relates to display function only.

5/2/2012 Econ 191ac -- Lecture 10 43

Top 8 Art Museums in America by Total Revenue in 2000

5/2/2012 Econ 191ac -- Lecture 10 44

Met 31%

National Gallery 16%

Art Institute

14%

MOMA 13%

MFA 11%

Winterthur 6%

PMA 5%

LACMA 4%

($ millions)

Metropolitan Museum of Art 464.3

National Gallery of Art 240.5

Art Institute of Chicago 209.6

Museum of Modern Art 191.9

Museum of Fine Arts 162.3

HFdP Winterthur Museum 88.1

Philadelphia Museum of Art 76.5

LACMA 71.0 Source: IRS 990s via NCCS

Cities with the Largest Art Museums Also Have the Most Art Museums

5/2/2012 Econ 191ac -- Lecture 10 45

0

5

10

15

20

25

30

35

40

ArtMuseums

Population

per

cen

tag

e of

tot

al

Art Museum Expenditures by Type, 1997

5/2/2012 Econ 191ac -- Lecture 10 46

Curators 15%

Education 6%

Conservation 2%

Research 2%

Administration 18%

Development 8%

Capital improvement

21%

Maintenance 14%

Security 9%

Utilities 5%

Overhead

Administration

Programs

Source: AAMD 1998 Survey

Production Costs for an Art Museum: Displaying Art

• Fixed costs (basic operations) – heating, lighting, maintenance – insurance – office staff – security

• Variable costs – admissions & information – additional security – clean-up

5/2/2012 Econ 191ac -- Lecture 10 47

The Fixed Costs of Art Museums Are Very High

• Collection, display, conservation, education, and research account for less than 25% of art museum expenditures

• Overhead costs represent ~50% of art museum expenditures – Costs are invariant to the number of museum

visitors

• Art museums depend on unrelated business activities and contributions to cover their costs

5/2/2012 Econ 191ac -- Lecture 10 48

So Where Will the Art Museum Produce? -- Simple Model Doesn’t Answer Question Very Well

5/2/2012 Econ 191ac -- Lecture 10 49

D MC

AC

MR

P1

ATC1

P2

cost per visitor per day

daily number of visitors Q2 Q1

E

H

G

F

I P3

Issues In Setting Admission Fees

• Blockbuster exhibits – Crowding at popular exhibitions raises

marginal costs, justifying higher entrance fees

• Equity – No evidence that lowering admission fees

increases proportion of lower-income visitors

• Fiscal health – Revenues from stores & cafes sometimes equal

or surpass admissions revenues – Lowering the ticket price may boost revenues

from these unrelated business activities 5/2/2012 Econ 191ac -- Lecture 10 50

Sources of Revenue by Museum Type, 2006

5/2/2012 Econ 191ac -- Lecture 10 51

Sources of Government Revenue by Museum Type, 2006

5/2/2012 Econ 191ac -- Lecture 10 52

HOMEWORK 10 FOR WEDNESDAY, 5/9 (AFTER THE MIDTERM)

5/2/2012 Econ 191ac -- Lecture 10 53

Class Project (HW10) Homework for Wednesday 5/9

DROP ONE CITY – YOU SHOULD NOW HAVE 3 Source: Bureau of Labor Statistics, Occupational

Employment Statistics, http://www.bls.gov/oes/data.htm#

(1) For each of your 3 remaining cities, find – 2010 population (you should have this already) – Number & median hourly wage of architects; graphic

designers; musicians and singers; authors; and photographers

– (3) Write down a brief definition of each occupation

(2) For each city, calculate the number of artists in each category per 10,000 people

Check website for more instructions. 5/2/2012 Econ 191ac -- Lecture 10 54

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