Last year the Australian Bureau of Statistics did the maths — government spends about A$7 billion annually in Australia on arts and culture. The exact dollar figure varies depending on what we count, but it includes heritage, broadcasting and botanical gardens, along with all the usual suspects: performing arts, literature, film, visual arts, and so on.
For the sake of argument, let's assume A$7 billion is exactly the right amount of public funding for the arts.
To make this exercise fun, let's suppose that no political horse-trading was involved in reaching this figure. Let's assume this figure is the result of disinterested economic calculation of the size of the positive externality in the production of a public good, all wrapped in willingness-to-pay studies, and tied with a big bright cost-benefit ribbon.
So what's next?
Do we put away our box of shiny economic tools and turn to grubby political compromise to allocate the exact market-failure correcting amount of public funding?
In Australia, as in Europe, this is more or less what we do. Economics to justify an economically efficient level of spending — and politics to implement it.
Estimate market failure, then politically intervene in direct proportion. This is the standard 20th-century model of applied public goods.
Observe this in action in science (CSIRO), academic research (Australian Research Council), and sports (Australian Institute of Sport), among others.
Yet modern economics suggests that it would be better if we turned the process upside down. Let politicians determine the level of funding in a given area — and let economists determine the allocation.
Why? The political model of funding allocation is very bad at creating — or even recognising — new knowledge. In fact, political allocation mechanisms cause incentives that reward lobbying and punish experimental or innovative thinking.
Only by weakening those incentives can arts and cultural funding seek to be more than a rearguard preservation exercise or sinecure for vested interests.
There are four principles we should consider:
One: favour indirect over direct funding
Direct funding takes small amounts from many taxpayers and pools it in a few large granting bodies for dispersal to many recipients. The indirect funding model eliminates those big pools — incidentally the places where all the layers of necessary accountability, governance, expert-committees, lobbying and rent-seeking accumulate.
The indirect model offers tax credits to anyone — private citizen, corporation, foundation or NGO alike — for spending on arts and culture. This approach has at least three great strengths:
1) It does not require government approval of arts and cultural activities. Philanthropists can be great patrons. They can be far more edgy and engaging than government — just look at David Walsh's Museum Of Old and New Art in Hobart and the art collections of advertising tycoon Charles Saatchi. Tax breaks allow for public support of the arts — without the public judgment of funding criteria (which eventually, inevitably collapses into the politicisation of art and culture).
2) Indirect funding sets up a diversity of funding options: private and public, philanthropic and corporate, big and small. This is messy, and it certainly makes arts management more difficult — but such diversity promotes the spread of ideas. It also serves to protect the quirky idea from being catastrophically overlooked by one dominant funding source. A diverse funding mix will be a more robust and resilient funding ecology that is actually more likely to find the crazy genius.
3) Indirect funding weakens incentives to capture by lobbyists and bureaucrats. In other words, less time and resources need be devoted to political organisation and lobbying. This mitigates the arts and cultural grants "support industry". The cost of this support industry, as Nicholas Rothwell reported recently, can be observed in Australia's Indigenous arts sector.
Two: fund outputs, not inputs
We tend to fund inputs for political reasons, specifically as ways of tying funding to particular jobs, groups or regions. The political reasons may be good — but they always add up to bad economic reasons, otherwise known as deadweight losses.
A practical example of the difference is to fund prizes — which are awarded for achieving some specified output — rather than grants. Grants often promise some output but they only contractually fund the input.
Prizes have long been part of art and culture, just as they have in sports, science, innovation, and other fields of human endeavour. The enormous popularity of the various "So you think you can dance/sing/debate ..." franchises illustrates the creative energy and diversity that such prizes stimulate. We should probably make more use of prizes in public arts and cultural funding than we do.
Funding outputs can also depoliticise arts funding by focusing attention on what we actually want to achieve rather than how we want to achieve it. Applicants are evaluated purely on their ability to be the best at what has been sought. There tends to be a lower bullshit component to prizes than to grants.
Three: fund demand, not supply
Demand-side funding is often superior to supply-side funding because it better aligns producer incentives and it more effectively aggregates consumer preferences. In both cases you're seeking to fund those who receive the output — in this case, audiences — who therefore are in the best position to evaluate and monitor quality.
Supply-side funding involves a lot of trust and often expensive monitoring. This is why economists tend to favour demand side funding: it economises on information and the need for human perfection. Again, it's a more robust institutional solution.
A useful example is to compare vouchers, where the funding amount is gifted to the consumer, to grants, where the funding amount goes to the producer. Vouchers are used to allocate money to schools, business innovation, and numerous other public services; this is a model that could be adapted to arts and culture.
Four: be more like venture capital
Some of the lessons of venture capital — which is also in the creativity business — have not been learned by public sector arts and cultural bureaucrats. (I'm not being ironic: really — there are actual lessons to learn.)
What does this mean in practice?
Adopt a portfolio approach which explicity recognises probabilities of success and failure. This will inform a funding model that incorporates variance endogenously, rather than getting all upset when things don't work out.
This will often mean aggressively pursing difference — and supporting it not as a sop to the weird, but as a rational risk-management strategy.
Crowdfunding arts and cultural public goods should be considered.
Rather than gift, or what is these days mostly debt funding, take equity stakes in artists to fund training and development. If we must persist with direct/input/supply funding, this will enable us to at least create a more liquid public asset.
Fund experiments and demand discovery. Experiments are a public good because they provide new information to others.
Seek voluntary funding models such as lotteries. Lotteries may even be effective for allocation of funds as well as for raising them — and this would also limit the conformity and conservatism that expert panels tend to exhibit.
Let's encourage unintended consequences
Arts and cultural funding could be improved if we could just agree on a level of funding — and then use economic analysis to design the models of funding delivery. In short, give the tax system a bigger role — and the expert panels a smaller one. Make differences at the margins by funding skewed toward outputs and the demand side.
Public funding of arts and culture should concern itself with producing unintended consequences. The problem with the existing direct, input focused model is that it at best only produces intended consequences, and at worst collapses to a kind of welfare.
We really should be more ambitious than this.