Since its conception as an art form in 15th century Italy, ballet has grown to encompass a prominent sector of the performance industry, while acquiring a rapidly growing presence in popular media. The New York City Ballet, one of the most elite ballet companies in the world, hosts an annual Fall Gala that is one of the most high-profile, anticipated performing arts events of the year attended by artists and celebrities alike. In the past decade, the film and video industries have capitalized on public interest in the ballerina lifestyle and portrayed (with varying accuracy) the inner workings of ballet companies in the movie “Black Swan” and in video series such as “Breaking Pointe” and “city.ballet.”
One of the most surprising and under-expressed realities of the ballet industry, however, is the fact that most ballet companies depend on donations to make performances possible. In general, ballet companies are not profitable. They operate at a loss and only recoup their costs with the help of appreciative donors. How can we justify, from an economic standpoint, the continued operation and existence of ballet companies?
First, we must realize that ballet companies are usually nonprofit organizations. The central purpose of a ballet company is not to generate profit but rather to advance its social and artistic mission, which is generally to promote arts appreciation in the community. Functioning as a nonprofit organization, however, does not itself excuse and completely justify ballet companies’ operating at a loss. Operating as a nonprofit simply means that profits (if any) will be used to promote the organization’s mission, rather than distributed to organization owners or members. This characteristic of nonprofits does not address the scenario in which the organization operates at a loss, so it is a mistake to attribute ballet companies’ unprofitability to their nonprofit status.
What is significant about ballet companies operating as nonprofit organizations is the centrality of the non-economic mission in the companies’ decisions. Christine Chen, former Executive Director of American Repertory Ballet, describes the dual economic and artistic obligations of a ballet company as “a double bottom line — how well we serve our mission, and our net income.” The implication of this “double bottom line” for ballet companies is that they are justified in pursuing various opportunities that advance one cause at the cost of the other. The monetary loss incurred by companies that advance their artistic mission but expend more resources than are recouped is accounted for by the social benefit of bringing the mission to fruition.
Chen explains this benefit as a positive economic externality, effectively conveying the abstract but very real way in which ballet improves members of society. According to the economic theory of externalities, goods with external social benefit are often under-produced due to private production based only on monetary costs and return. Producers of such goods are either unaware of the external benefit or unwilling to produce more because they have already maximized monetary profit. Without external intervention such as per unit subsidies, private producers will fall short of supplying the socially optimal quantity of output. That is to say, there will be a quantity of output that the producer does not supply even though society’s marginal benefit is greater than the producer’s marginal cost. In the case of positive externalities, external regulation is necessary to produce the socially optimal quantity of output.
Ballet performances clearly have positive externalities. Beyond the stage and the theatre, they unite audience members in appreciation of dance, foster arts and cultural awareness in society, and inspire young children to find beauty in the world. Rather than criticize ballet companies for operating at a loss, we should therefore consider the possibility that ballet companies actually produce a socially optimal quantity of performances and that donors are the crucial external agent allowing them to do so.
It is worthwhile to note that ballet companies actively seek out donors through fundraising events and proactively procure the “subsidy” they need to produce the optimal amount of performances. Even if ballet companies are not entirely successful in achieving socially optimal behavior, the ballet industry remains a fascinating example of a seemingly self-regulating market in which the firm strives to produce the socially optimal rather than privately profit-maximizing quantity of output. Ballet companies pursue donors because they are aware of the non-monetary value of art in society. They are therefore self-motivated to seek out the necessary external regulation for socially optimal output.
In this fascinating scenario where positive externality is regulated by the private interactions between donors and ballet companies, I would like to explore one possible determinant of the equilibrium level of donations. Donors, who are usually extremely involved with the ballet company they choose to support, can regularly evaluate the non-economic, social impact of the ballet company. Over time, donors will decide to increase or decrease their contributions by assessing the size of the company’s positive externality. They can measure this positive externality through the quality of performances, the frequency and success of community outreach events, and other indicators of artistic and social productivity. At the equilibrium level of donations, donors may feel that their contributions are representative of the ballet company’s social impact.
One possible mechanism for reaching equilibrium is the following. In an effort to increase donations, a ballet company will publicize and increase the frequency of outreach events, improve the quality of performances, and, as a result, actually increase the intensity of its social impact. Because it has increased the size of its positive externality, the ballet company will require a larger subsidy to produce the optimal equilibrium quantity of performances, which is now greater than before. Increased fundraising efforts and more frequent community events will, accordingly, motivate donors to increase their donations, which support further advancement of the ballet company’s social mission. There will reach a point where the amount of donations is optimally proportional to the ballet company’s external social benefit.
Ballet companies are unique in that they not only produce a good with positive externalities, but also proactively seek out subsidies in order to produce at a socially optimal level. I propose that ballet companies are not an economic paradox, but rather a valuable economic phenomenon that we need to capitalize on and promote.
Chen, Christine. “On the Economics of Art and Business”. American Repertory Ballet. 6/22/12.