Art Works Blog

Taking Note: Lifting the Lid on New Growth Theory and its Application to Cultural Policy

Afternoon Coffee by flickr user psd

I’ve wandered into many a coffee shop where the slogan was “Good things happen over coffee,” or some variation of the theme. But take away caffeine, conversation, and service with or without a smile, and what’s left? Coffee lids.

For Paul Romer, legendary economist at New York University’s Stern School of Business, the coffee shop of the 1990s helped to clarify his central thesis about the nature of economic growth. Romer has noted that as late as 1995, coffee shops “used to have different-size lids for the different cups.” Then someone experienced the everyday phenomenon that Romer flags as the basis for sustainable economic returns: he or she had an idea. What if coffee shops were to design differently sized cups that all used the same lid size? “That small change in the geometry of the cups means that a coffee shop can serve customers at lower cost,” Romer writes in a chapter for The Concise Encyclopedia of Economics (2007).

Store owners need to manage the inventory for only one type of lid. Employees can replenish supplies more quickly throughout the day. Customers can get their coffee just a bit faster. Such big discoveries as the transistor, antibiotics, and the electric motor attract most of the attention, but it takes millions of little discoveries like the new design for the cup and lid to double the average income in a nation.

By now you’ll have divined that the coffee lid is a metaphor for the kind of growth model that can emerge when an economy is powered by ideas (e.g., innovative design) instead of things. Nor is the metaphor ideal: as Romer himself admits, “The critical difference is that only one person can use a given amount of paper. Ideas can be used by many people at the same time.”

This distinction underlies the economic theory of “new growth” or “endogenous growth” that Romer has been so effective in promoting. The stock of ideas, according to Romer and his colleagues, is virtually boundless. Other resources such as capital, labor, and raw materials are, by comparison, finite and, hence, may be termed “rivalrous.” Growth in one of these stocks is unsustainable; it implies a depletion of resources for somebody else. Ideas, meanwhile, are instructions or recipes for rearranging finite materials in myriad ways: good ideas generate new value, which can multiply as more and more people benefit from them, possibly leading to even more and better ideas.

Academic researchers often cite new growth theory when accounting for the economic value of technological advances. But in a brief intellectual history of the concept, Stanford economics professor Charles I. Jones links new growth to artistic creation and other categories of life-altering ideas. He quotes William Petty, an early economist who may have heralded the theory (in 1682!) by observing that creativity thrives on large groups of people:

As for the Arts of Delight and Ornament, they are best promoted by the greatest number of emulators. And it is more likely that one ingenious curious man may rather be found among four million than 400 persons.

Elsewhere, Jones quotes Nobel Prize-winning economist Edmund S. Phelps from the 1960s---“If I could re-do the history of the world, halving population size each year from the beginning of time on some random basis, I would not do it for fear of losing Mozart in the process”---thus anticipating the “strength in numbers” philosophy behind new growth. As Jones himself writes:

A larger population means more Mozarts and Newtons, and more Wright brothers, Sam Waltons, and William Shockleys…. The nonrivalry of knowledge means that per capita output depends on the total stock of ideas, not on ideas per person. Each person in the economy benefits from the new ideas created by the Isaac Newtons and William Shockleys of the world, and this benefit is not degraded by the presence of a larger population.

Which brings us to the NEA’s research agenda. After two or more decades of receiving, browsing, and dutifully filing studies about the economic impact of the arts---studies frequently commissioned by local, regional, or national arts organizations or policy-makers---one might be excused for wondering if the only compelling story about the arts’ monetary value is to be told through “multipliers.”

By multipliers, I mean the methods used to compute economic value derived from direct (consumer) spending and indirect (intra-industry) spending on the arts, as well as what are often termed “induced” effects—those related to household spending. Such studies have contributed much to our understanding of how the arts prove value in economic terms. But surely there must be other approaches to the question?

To locate some of these approaches, the NEA’s Office of Research & Analysis joined Michael Rushton, associate professor at Indiana University and co-editor of the Journal of Cultural Economics in commissioning papers on “The Arts, New Growth Theory, and Economic Development.” Those papers will be presented on May 10 at a Washington, DC symposium hosted by the Endowment and the Brookings Institution.

As the event’s title suggests, we wanted to know not only about the potential application of new growth theory to the arts, but also about new attempts to measure economic activity resulting from “the creation of arts districts, the construction of performing arts centers and museums, and arts-favorable tax policies and other incentives for productivity and innovation in fields such as architecture and design, visual and performing arts, and literary and media arts.”

The symposium aims to bring leading researchers in the field of cultural economics to a policy-relevant forum. A partial list of respondents to the research includes: Bruce Katz, vice-president and director of Brookings’ Metropolitan Policy Program; Valerie Piper, deputy assistant secretary for Economic Development, U.S. Department of Housing and Urban Development; and Alan Marco, deputy chief economist of the U.S. Patent and Trademark Office. Harvard economist Ed Glaeser---whose work in agglomeration economics, emphasizing cities as vital to the exchange of goods and ideas, is a species of new growth theory---will be delivering a keynote, and Brookings’ own Carol Graham (author of Happiness Around the World) will comment on the role of subjective well-being in cultural valuation.

Romer’s words are again appropriate. Here he is, musing about the unlimited power of ideas to effect real-world transformations:

Only a failure of imagination---the same one that leads the man on the street to suppose that everything has already been invented---leads us to believe that all of the relevant institutions have been designed and that all of the policy levers have been found. For social scientists, every bit as much as for physical scientists, there are vast regions to explore and wonderful surprises to discover.

The May 10 event will be successful if it uncovers even one of these “wonderful surprises” for the benefit of future cultural research.

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