Decomposing the economics behind orchestras
Growing up playing classical music and having dabbled in amateur orchestras, it became clear to me that the deepening financial strain on these institutions is concerning for the music and culture that I love. Many orchestras around the world are forced to rely on public funding. Australian orchestras are no exception, although the funding arrangement here is also includes philanthropy and sponsorship alongside state and federal level funding[1]. Regardless, the fact of the matter is that many orchestras operate on a deficit where concert revenue is a fair distance away from being able to cover their expenses.
Why is this? The root of the problem lies in a unique feature of the ‘goods’ that orchestras provide. The problematic fact is that orchestral music is characterised by constant productivity that is largely immune to technological advancements.
The Cost Disease
The concept of the ‘cost disease’, first coined by Baumol and Bowen,[2] is commonly used to explain the financial obstacle course that orchestras face. The cost disease describes the gap in labour productivity between the performing arts sector and other goods-producing industries such as mining or manufacturing. Compared to the arts, cutting back on labour or improving technical efficiency in these areas to stimulate productivity growth is rather straightforward. As productivity in these other sectors rise, it causes wages across all industries to rise. This means that orchestras face increasing wage costs even though they are not able to achieve similar cost-cutting productivity growth. Clearly, the financial dilemma faced by orchestras is exacerbated.
Indeed, it is a significant challenge, if not impossible, to follow other industries and increase the productivity of orchestras through technological adjustments. Automate the musicians? Speed up the music? Just the words themselves would ignite the wrath of classical music enthusiasts and have composers rolling in their graves.
As Robert Flanagan explains in his book ‘The Perilous Life of Symphony Orchestras,’ the productivity and labour requirements of orchestras are more or less suspended by the composers of classical music.[3] For every symphony or piece, the requirements for the type of instruments and the number of players are relatively fixed, and therefore, it becomes difficult to reduce labour costs or improve efficiency in the same manner as other industries tackling similar problems. Combine an inelastic supply, growing wages and low productivity with the fixed costs of hiring venues and management staff, and we can paint a dire picture of the financial burden tugging at the classical music scene.
Beyond the supply side, there is also softening demand for the live orchestra experience.[4] Flanagan suggests three equally important strategies to aid the financial strain of symphony orchestras:[5]
- Enhancing performance revenue through price discrimination
- Reducing the growth of expenses by paying musicians less or by forming coalitions with other performing arts groups.
- Raising non-performance income
Although straightforward and perhaps a bit self-explanatory, actioning such strategies is less so. The former two aim to minimise the growth of deficits that are implicated by the cost disease. Proposed solutions such as soliciting greater private donations, cutting or freezing the pay of musicians or trying to sell more seats is merely a one-time solution. Such ‘fixes’ may work where budget deficits are constant, but the reality is that these deficits continue to increase in magnitude.[6] Instead, Flanagan advocates for an intricate balance of the three broad strategies.
What is Australia doing?
What has become prominent in recent years is the effort to reach into the realm of popular culture. Do a quick browse through the upcoming MSO program you will find that sprinkled amongst the Tchaikovsky, Brahms and Mozart are events showcasing music from the Ghibli films, Home Alone, Harry Potter and Star Wars franchises. There is also a conscious effort to cross cultures with concerts celebrating the Chinese New Year and roping in big names in the international landscape of classical music. In 2017, such initiatives showed a 2% growth in revenue and 8% growth in attendance from the previous year.[7] Given the reappearance of such endeavours, one can assume that these concerts have brought with them much popularity and success in reviving demand and generating greater revenue.
At the end of the day, the purpose of the orchestras and the experience goods they provide is to cultivate artistic and cultural value. Although some may argue that this trumps all, the sustainability of such ideals cannot ignore the increasingly unstable financial and economic foundations.
References
Photo by Andrey Konstantinov on Unsplash
[1] Know the score: The economics of orchestras. Retrieved from https://www.abc.net.au/radionational/programs/themoney/know-the-score:-the-economics-of-orchestras/8400846
[2] Gregor, A. (2012, Feb 8). No Easy Remedy for Symphony Orchestra “Cost Disease”. Retrieved from https://www.gsb.stanford.edu/insights/no-easy-remedy-symphony-orchestra-cost-disease
[3] Flanagan, R. J. (2012). The perilous life of symphony orchestras. Yale University Press.
[4] Bowen, C. (n.d). Trends ins classical music attendances. Retrieved from http://musicinaustralia.org.au/index.php?title=Trends_in_classical_music_attendances
[5] Flanagan, R. J. (2012). The perilous life of symphony orchestras. Yale University Press.
[6] Ibid.
[7] Live Performance Australia (2017). Classical Music. Retrieved from https://reports.liveperformance.com.au/pdf/2017/category-data-classical-music.pdf