Trend Spotting: What are the arts worth? Charles M. Gray, Ph.D. November 15, 2006 Many years ago, while serving on the governing board of a small dance company located in St. Paul, I was intrigued to learn that the company members – all of whom spent countless hours creating and rehearsing dances while constantly facing the risk of career-ending injury – received a very low level of compensation. In fact, every one of them held a second job – bartender, masseuse, teacher, even an exotic dancer – to make ends meet.While some (especially their parents?) may regard these "starving artists" as having made an irrational choice, economists must presume that any free choice makes sense at the time, and that the rewards of dancing must justify the costs in a dancer’s mind. This became the foundation of my first research effort in arts economics.It turns out that dancers derive substantial value from being able to pursue their art form, above and beyond the monetary compensation. Economists – and economics students – will recognize this as a type of "compensating differential," the varying monetary rewards that accompany career choices that yield varying degrees of inherent satisfaction.Nonprofit arts, in particular, have two strikes against them. The first strike is their nonprofit status, which means that no "residual claimant," or owner, imposes expectations of efficiency in pursuit of profitability. As a result, these organizations do not fit the standard economic model. The second strike is the small size of the sector. By any measure, the arts constitute a tiny portion of the national and local economies.In 2002 – the date of the last Census of Business – all for-profit and nonprofit museums and performing arts companies in the United States realized just under $17 billion in revenues, and generated payroll outlays of $5.3 billion. The manufacturing sector, by comparison, generated almost $4 trillion in revenues with a payroll of $576 billion. For Minnesota, the corresponding figures are $343 million in revenues with a $128 million payroll for the arts, and $80 billion in revenues and a $14 billion payroll for manufacturing. Given their relatively minuscule size, why do the arts get so much attention?Arts organizations have been all over the local news lately: the Guthrie Theater, Walker Art Center, Children’s Theater and Minneapolis Institute of Art have all completed major construction projects. With the completion of these projects we also hear claims of higher incomes, employment and quality of life. Unfortunately, unbiased research has generated precious little support for those claims, and much of the news from the arts world is grim – including the failure or near failure of a number of symphony orchestras.It seems that although the arts and artists have laid claim to an exalted place in our society, this does not necessarily translate into high incomes for any but the most successful star performers and artists. For the most part, the arts need continued government and donor subsidies, a controversial matter at the very least.The pursuit of subsidy and the heat of controversy may have diverted scholarly and policy attention from something far more basic. According to Adrian Ellis, a London-based arts consultant, "(O)ur thinking about cultural policy and the management of cultural institutions appears still to treat ‘the arts’ as a black box, measuring – or at least asserting – its impacts without lifting the lid off the box and working out how the machine itself works. This represents a major omission and a disservice by the academic community to the practitioner."In other words, what is true of the arts is what is true of any industrial sector – they use resources in pursuit of organizational or individual goals, and they must interact in markets and in hierarchical organizations to put those resources to their highest and best use.Economists can shine a light into that black box by using their analytical tools to address questions such as these:Why did the Minnesota Orchestra build and subsequently manage its own performing space, while the St. Paul Chamber orchestra continues to be an itinerant ensemble, performing in several widely spaced venues?Why do many opera companies – especially in Europe – operate their own ballet companies, while the Minnesota Opera and the Minnesota Orchestra (in its Sommerfest "semistaged" version of Carmen) "outsource" dancers?How do arts organizations resolve the inevitable internal conflicts between the artistic talent in pursuit of the highest quality and broadest exposure, and the administrative staff who must keep the enterprise on time and on budget?When arts organizations cooperate or even merge, to what extent will artistic visions be sacrificed to scale and scope economies?There is a career’s worth of research here. And while it is important to consider the cultural value of the arts in our communities, it is of equal importance to add value by conducting organization-based research that can enhance effectiveness in the sector.