Foundations, Market Failures and the Funding of New Music

Abstract

In 1965, a short article entitled ‘On the Performing Arts: An Anatomy of their Economic Problems’ appeared in the American Economic Review, the flagship journal of the American Economic Association.1 Written by two Princeton-affiliated economists, William J. Baumol and William G. Bowen, the article laid out in eight short pages a powerful explanation for why the operating costs of so many performing arts organizations consistently overran their earnings, and why this tendency had become more pronounced over time. The problem was not that lavish budgets were being spent on productions, nor that musicians’ unions had wrung too many concessions from management. Rather, the problem was more prosaic, having to do with ‘differential rates of growth in the economy’.2 To illustrate the argument, Baumol and Bowen asked readers to perform a thought experiment: ‘Think of an economy divided into two sectors: one in which productivity is rising and another where productivity is stable.’3 For the sake of simplicity, they explicitly assumed a number of useful fictions: that labour can easily and frictionlessly move between the two sectors; that wage increases across the board will keep pace with productivity growth (a standard if problematic assumption in modern economic theory);4 and that the monetary supply is sufficiently controlled to maintain overall price stability. What, given these assumptions, is the outcome of such a stark split in the economy? In the productive sector, the increase in wages that workers receive will be offset by increased productivity. In the stagnant sector, wages will rise but output will not. And if an organization is to avoid bankruptcy, the only way to do so is by raising prices to cover the rise in labour costs. (Remember, one of Baumol and Bowen’s working assumptions is that wage increases will keep pace with productivity growth, in both productive and stagnant sectors.) Yet this solution to the problem creates another one, since over time prices in the unproductive sector will increase at a much faster rate than those in the productive one, making the products of the former unaffordable to an increasing number of workers.