What do we talk about when we talk about the economic impact of the arts?

In the news from Britain in the past week has been a speech by Culture Minister Maria Miller on the arts and the economy in the UK – the full text is here. Commentary has ranged from the concern about putting too much emphasis on the economic, to how we ought to define cultural industries in the contemporary world. I would like to focus on what linkages the Minister sees between culture and the economy. As Tim Harford notes, the speech is a bit of a jumble, so let us try to untangle some of the knots.

I see three kinds of ways to think about the arts in the economy.

The first is exemplified by this part of the Minister’s speech:

Just last week I hosted a reception to launch the Buxton Opera Festival. Their audiences have tripled in a decade. They have won national and regional tourism awards. They have diversified their income streams, and as a result they have generated more than a million in turnover. The other side of the Peak District, the Yorkshire Sculpture Park supports around 100 full time jobs, and is delivering close to £5 million of economic impact to its local community. These are unqualified local success stories.

This is what is most commonly thought of in the United States when we hear the words “economic impact.” The arts is an economic sector with consumer spending and employment and can be fitted into input-output tables of demand, whereby spending in the sector is factored up by a “multiplier” to find the total economic impact. Americans for the Arts have built a small cottage industry from persuading local and regional governments and arts advocates to construct such studies. And the numbers contained within the studies are of no worth whatsoever. First of all, every sector – hair stylists, dry cleaners, furniture makers, taxi drivers – has an “economic impact” that could be calculated by similar means. It is surely odd for arts advocates to think impact studies help their case for public subsidy, when they are reducing the arts to simply some amount of spending, as we could do for any humdrum industry. Second, it is never made clear what “economic impact” actually means in these studies. Is it the loss in income a region would suffer if all cultural workers were suddenly vaporized? That’s not a very interesting thought experiment, since on this planet the workforce shifts from sector to sector according to changes in demand; employees don’t simply disappear. Third, the estimate of impact – say £5 million for the Yorkshire Sculpture Park – doesn’t really suggest a call for any sort of action. Is £5 million a big number or a small number? I have no idea. What are we supposed to do with that estimate? These studies are a waste of resources.

The second sort of economic impact could be captured by this part of the speech:

The close relationship, and mutual dependence, between culture and the creative industries is not lost on me, I spent over 20 years in the advertising industry and, as a former advertising executive, I know how fluid talent has become between the creative industry sub-sectors. These points are backed up by BAFTA’s research which shows most people migrate into film and television from theatre; and Skillset’s research which suggests more than three quarters of film workers cross over into other audio-visual productions.

Given that the global appeal of our creative industries is worth some £36 billion to our economy, is it essential that the underpinning role that culture plays is properly understood. It is also to be welcomed that the Arts Council sit on our Creative Industries Council, helping ensure our work is properly coordinated, so that we can ensure that work is really understood and co-ordinated.

In this case, the economic effect is not simply that money is spent on the arts and related hospitality firms, but rather that it generates returns to other industries through creativity and innovation. Given that innovation is indeed the key to economic growth, the notion that the fine arts generate positive effects in other creative sectors is an important one. It must be said the evidence on these effects is still being gathered, but, unlike the old style “economic impact” study, at least this idea has some coherence.

The third way to think about economics and the arts takes us back into the mid-twentieth century. Based upon the branch of mainstream economic theory known as welfare economics, the notion here is that there is market failure in the private sector provision of the arts: access will be unequally distributed across the citizenry, and there are aspects of the arts that benefit the whole of society beyond just those who happen to attend plays and concerts and museums – culture is being conserved for future generations, and provides a shared sense of identity. The Minister says:

Arts and culture underpin what it means to be British; how we see ourselves.

Without going into high microeconomic theory: when there is a good, in this case culture, that provides benefits beyond the direct attendees, the private sector will tend to underprovide the good – producers take into account only the demand by the market and not the wider social impact. This represents the classic economic case for public subsidy of the arts: the “economic impact” is through the art itself, and its direct benefits to the society as art. No boosts to new media, no increase in demand for hotels and restaurants, just the value of the art itself. I like that.