A couple of weeks ago, I wrote up a Stanford case on the San Francisco Symphony for my Nonprofits class. The project was timely, given the recent release of the controversial Flanagan report (pdf) commissioned by the Mellon Foundation that studied the economic environment of symphony orchestras. The Flanagan report has gotten a lot of flak in the corners of the blogosphere that I regularly read, some of it unjustified in my opinion. The report makes reference to Baumol’s cost disease, an economic term that originated with William Baumol and William Bowen’s seminal 1966 book Performing Arts: The Economic Dilemma. Baumol and Bowen argued that unlike some sectors of the economy, such as manufacturing, inherently labor-intensive industries such as the performing arts do not experience significant productivity gains with the introduction of new technologies. In other words, it takes no fewer musicians no less time to perform a Mozart string quartet today than it did in 1791. Yet organizations that employ workers in those industries must compete in the overall labor market with companies that do enjoy these productivity gains and can thus pay workers more. (Indeed, a commonly heard argument for the need to pay musicians in top symphony orchestras six-figure salaries is that “that’s what highly trained professionals in other fields earn.”) As a result, over time a firm suffering from Baumol’s cost disease will have higher labor costs relative to productivity, forcing it to raise prices for essentially the same product. This is particularly an issue for the performing arts and other labor-intensive fields in which revenue generation is difficult anyway, which includes most of the kinds of services provided by government such as education (this is one reason why tuition at private colleges has risen far faster than inflation, for example). One implication of this is that as a society gets wealthier, we can’t rely on that wealth to be distributed proportionately to these labor-intensive, revenue-poor industries through market mechanisms; it can only be accomplished on a large scale through voluntary donations or increasing the tax base.
The trend in total performance plus nonperformance revenue (regression 8) is modestly higher than the trend in total expenses (regression 9), so the overall financial balance improves slightly over time, after controlling for the effect of general economic conditions.
So orchestras (or at least the 63 relatively wealthy ones that were a part of the study) have successfully compensated for their increased labor costs by a combination of raising prices and seeking more donations—exactly what Baumol and Bowen’s model predicts. Now, there is nothing inherently wrong with raised prices and more donations, assuming the market can bear it. And when combined with increased price discrimination, such as in the case of college financial aid programs, the social effects can be quite positive as access is increased rather than limited. However, an increasing reliance on contributed rather than earned income still feels scary, because contributed income just seems less stable. How can we count on people to just keep giving money away, against all rational instinct? Although orchestras have managed to stay afloat these past few decades, with some experiencing genuine financial success, I don’t see these issues going away anytime soon. The entire model is extremely dependent on the orchestra’s ability to find new donors and convince existing donors to give more and more for essentially the same experience. If the bottom were to suddenly drop out of that revenue stream, orchestras would find themselves incredibly exposed.