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cultural goods rise at the rate of technical progress in the rest of the economy, but absolute levels of
employment and output in the cultural sector remain constant. Jobs in the cultural sector are not
destroyed, since technological progress elsewhere boosts purchasing power just enough to maintain
spending on culture despite rising prices of culture. There are two unrealistic assumptions in this
discussion of Baumol's cost disease. First, Cobb-Douglas preferences are homothetic and yield linear
Engel curves and unit income elasticities. However, food, drink, shelter and health may be necessary
goods while culture is a luxury good. With Stone-Geary preferences the budget share of the arts rises
over time, since people give priority to basic needs if they are poor and spend more on culture, as they
grow richer. Second, the elasticity of substitution between culture and other consumption goods is
probably less than unity. A CES utility function with an elasticity of substitution less than unity generates
a budget share of culture that rises over time as well. If demand is inelastic, culture thus generates
sufficient revenues to compensate for rising costs. Hence, despite rising relative prices of the arts, there
are good reasons to believe that the budget share of culture rises over time and that arts will flourish. In
any case, Baumol's cost disease leads to offsetting trends.
The rise in the relative price of labour-intensive cultural expressions causes a shift towards less
labour-intensive culture. A vocal artist may not be accompanied by a symphony orchestra, but by a
chamber orchestra or even a musical computer whiz kid. Technology may induce new economies of scale
and substitution in consumption, think of the popularity of the CD, video, DVD and poster as a substitute
for the concert, film or theatre play and the painting. Opera and theatre producers experience more
difficulties in keeping up and adjusting than the musical sector. In addition, rising prices induce a shift
from small-scale to large-scale productions and from unique to reproducible art. The possibilities for an
artist of operating on a world market have grown enormously with the advent of globalisation and the
Internet. These developments have led to super incomes for only a few stars - see Rosen (1981) and Frey
(2000, chapter 4). This applies, for example, to the trio of super-tenors (Pavarotti, Domingo, Carreras). It
also applies to the museums with the world's most famous paintings on display. Think of the Van Gogh
Museum in Amsterdam, the Rijksmuseum Amsterdam with Rembrandt's Nightwatch, the Louvre with its
Mona Lisa or the Prado in Madrid showing the magnificent work of Vélasquez. These museums
sometimes also enjoy world famous architecture. Think of Frank Lloyd Wright's Guggenheim Museum
in New York, Frank Gehry's Guggenheim Museum in Bilbao or Richard Meier's Centre in Los Angeles.
The economics of superstars suggests that the big stars can raise their incomes substantially, while many
others loose out. Baumol's cost disease causes a shift from art for the elite to art for the masses. This may
induce dumbing down at the expense of diversity and experiment. If so, there may be a case for
subsidising innovation, experiment and diversity in the arts.