anderson (2009) economics of creativity

8/6/2019 Anderson (2009) Economics of Creativity

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Chapter 5

Economics of Creativity

Ake E. Andersson

5.1 Division of Labor by Comparative Advantage or Creativity

Most of us have got an education adapted to the demands for specialized laboremanating in industry or public administration. Most of the jobs have been decided

according to the basic principle of division of labour, generating productivity of

the work. According to this principle the worker should be specialized to perform

certain highly specialized tasks without any greater space for improvisation or

change of work routines. Adam Smith (1776, 1904) argued strongly in favour

of a far-going division of labor (or specialization of the workforce) as a way of

achieving growth of productivity. However, Adam Smith clearly saw the potentialconflict between creativity and productivity by division of labor and specialization

of the work force:

In the progress of the division of labor, the employment of the far greater part of those wholive by labor, that is, of the great body of the people, comes to be confined to a few very

simple operations; frequently to one or two. But the understandings of the greater part ofman are necessarily formed by their ordinary employments. The man whose whole life isspent in performing a few simple operations, of which the effects to are, perhaps, always thesame, or very nearly the same, has no occasion to exert his understanding, or to exercise hisinvention in finding out expedience for removing difficulties which never occur. Henaturally loses, therefore, the habit of such exertion and generally becomes as stupid andignorant as it is possible for a human creature to become. (Wealth of Nations, II)

The industrial society became based on a far-going division of labor and a hierar-

chical organization of the firms. Research and developmentbecame a sort of tinkering,oriented to improvement of the techniques for producing a given set of goods.

Creativity was looked upon as a social side-activity for artists, scientists and inventors.

The first stage of an upgrading of creativity was to occur during the Second

World War, when decision-makers realized that at least chemists and physicists

A.E. AnderssonJonkoping International Business School, Jonkoping Universitye-mail: [email protected]

C. Karlsson et al. (eds.), New Directions in Regional Economic Development,Advances in Spatial Science, DOI: 10.1007/978-3-642-01017-0_5,# SpringerVerlag Berlin Heidelberg 2009

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were of value in military projects. The largest example was the Manhattan

project, within which scientists were organized into secret research groups with a

mission to transform the knowledge of theoretical physics into an atom bomb

(Fermi 1954/1994). On the basis of this experiment in organized creativity Ameri-can think tanks became a way of improving the cooperation between creative

scientific research and the development and innovation of new products in the

post-war American industry.

A real integration of creative research and technological development was,

however, not realized before the end of industrialism in USA and Western Europe.

In the early 1970s Daniel Bell (1973) formulated a scenario describing a new

postindustrial society. It was based on the observation that manufacturing industry

in USA and Western Europe had already seen its employment stagnating and even

declining. It became obvious that the highly industrialized societies could no longer

expect an increasing employment in the production of material goods.

Many of the analysts of the 1970s expected service industries to become the new

guarantee of full employment. Few analysts expected creativity in science, techno-

logical research and development, design, entertainment and arts to become animportant factor explaining growth of real income, employment and general wel-

fare in the postindustrial society. Real developments in the structures of some

regions, e.g. San Francisco Bay with Silicon Valley, Route 128 around Boston,

Massachusetts and Cambridge, UK, saw a new type of interaction between creative

scientists and industry, indicating a new role for creativity in the economic system.

In recent decades the role of creativity as a factor of economic development has

been realized in somewhat surprising directions.

First, there has been a rapid increase in resources allocated to scientific research.

The number of science articles published has been increasing at approximately 7%

annually since 1975 (Andersson and Persson 1993).

Second, industrial research and development (R&D) has become a strategic

factor of growth policies among firms and governments of OECD-countries since

the 1960s. This development has triggered numerous scientific papers on theinterdependencies between R&D and economic growth (see, e.g. Uzawa 1965;

Shell 1966; Romer1986).

Third, there has been a remarkable growth of the entertainment and arts acti-

vities, called Creative Industries by Richard Caves (2000). According to recent

statistics consumption of such goods and services has risen to more than 15% of

total household consumption in Sweden.

5.2 Mechanisms of Creativity

Creativity is a process based on a capacity. As a process it is dynamic, because

creativity always means the emergence of something genuinely new. Discoveries

and inventions are outcomes of a creative process. Discovery is based on a capacity

to find patterns in a seemingly chaotic world. The real creative capacity lies in the

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ability to comprehend and explain the mechanisms generating such patterns.

The detection of a hidden pattern and its transformation into something meaningful

is often something suddenly occurring in the brain. The mathematician I. N. Stewart

and the psychologist P.L. Peregoy (1983) have, shown by a series of experiments,how the brain can discover a hidden structure. With this experiment they can support

the claim that the brain ought to be represented as a non-linear dynamical system.

Using Fig. 5.1 they were able to show that the perception of a man is suddenly

changed into a clear perception of a woman after three to six steps from left to right

and the perception of a woman is suddenly transformed into a perceived man, when

starting from the right and moving three to five steps to the left.

Inventions and discoveries are different names of the created ideas. An invention

mostly starts by perceiving a structure and later suddenly realizing that below this

Fig. 5.1 This implies that the brain has the tendency to be anchored in the original perception andneeds a certain excess supply of information before it can give up the initial interpretation in favorof a new. There is certain stabilization in the already known. Expressed differently, creativityrequires a certain degree of instability of the brain. Such instability is evidently there in all of us

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surface structure there is a more important deep structure that can be used in the

formation of a new principle of composition to be used as an instrument of

generating inventions.

Margaret Boden (1990) has proposed a subdivision of creativity into differentclasses. The first class of creativity implies the invention of a completely new

principle of construction, composition or set of concepts, providing a new structur-

ing of some problem area. This type of creativity is fundamental or infrastructural.

The other type of creativity is built on variations of themes given by a given creative

infrastructure. A few examples suffice to clarify the differences. Schoenberg was

the creator of the most important principles of composition of 12-tone music and

would consequently be seen as the creator of the infrastructure of modernist music.

In contrast Anton Webern and Alban Berg would give examples of variational

creativity in their application and further development of the original new princi-

ples of composition as created by Schoenberg.

When applied to painting, the same principle would imply that Cezanne is the

infrastructurally creative artist within modernist painting, while Braque and Picasso

would be the most important painters in terms of variational creativity on this basis.In science an example is Inequalities by Hardy et al. ( 1934). Reformulating

many mathematical equations as inequations they formed a basis for much of the

developments in mathematical programming developed and innovated in the 1940s.

In this context George Dantzig and Harold Kuhn with their formulations of linear

and non-linear programming would be examples of variational creators. It ought to

be stressed that there is no obvious qualitative distinction between infrastructural

and variational creators, except in terms of the potential of further developments on

the basis of the infrastructural creators.

5.2.1 Creative Capacity: Acquired or Inherited?

Are all people born creative? There are certain indicators that creativity is not a

genetic deviation from the normal but rather a general human capacity. One

indicator is the development of the capacity to speak. Already in small children

completely new spoken sentences are created. Even the smallest child can create

completely new linguistic constructions in their communication with other children

and adults. Sometimes they even seem surprised at their own linguistic discoveries

and inventions. The capacity of linguistic creation seems to develop by social

interaction throughout the life span.

The concentration of musical and pictorial creativity onto a minority of the

population might just be a consequence of too little of daily training during the early

years of childhood. Most of the creative musicians and other artists have had the

benefit of an education in the arts from their earliest years. Surprisingly many artists

have grown up in an environment rich in artistic activities. Simonton ( 1984) hasused extensive empirical material to show that the early exposure to scientifically or

artistically creative personalities is of importance for creativity of young people.

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The formal schooling of children does not generally compensate for the lack of

artistic and other creative inspiration in the homes of children. In contrast most

educational systems in the old and new industrialized countries have been oriented

on diffusion of already well established knowledge later to become useful inmanufacturing firms or bureaucracies. This implies that schools have primarily

been oriented to the development of discipline and adaptation and to the need for

cooperation in groups with specified problems to be solved as rapidly as possible.

The education before the university level is rarely oriented to formulation of

problems independently and to the generation of different ways of solving such

problems. Rather, most education is oriented to learning techniques of how to

solve already formulated problems in a way, pleasing to the teacher. The learning

of already developed techniques has been favored at the expense of a loss of

creativity already during the elementary school years.

Gudmund Smith (1990) has in his studies of the psychology of creativity found

that the development of creativity during the years of childhood and adolescence

follows a typically cyclical pattern. During some of these cyclical periods learning

is favored and absorption of education is easy, while in other periods creativitydevelops rapidly. The ages of development of creativity seem to be between 5 and

7 years, 1012 years and 1719 years of age. In most industrial countries the latter

two creativity peaks seem to be used by the schools for intensive teaching and

examinations, curbing the development of creativity. Smith has even claimed that a

school where development of creativity has a priority might need to be free of fixed

curricula.

5.3 Creative Personalities

The transformation from an industrial society towards a society based on the

exploitation of knowledge, creativity in the arts, design, and entertainment andwith an increasing complexity of products will need a better development of as well

as use of human creativity.

Finding and supporting people, suitable for creative work has become much

more important than during the industrial era. Gudmund Smith (1990, 1995) has

oriented some of the research of his team towards investigations of creative

personality traits. Some of the results can be summarized.

First, a typical characteristic of a creative personality is a capacity to formulate

and energetically work on the solution to the formulated problem. Sometimes the

problem is not conceived as especially interesting by anyone else and is oftenlooked upon as somewhat strange or even bizarre by others.

Second, a part of a creative personality is a subjective and quite an emotional

relation to the problem which is developed during the period of problem solving.

The solution to such an independently formulated problem is often not obviouslyprofitable for anyone.

Third, another personality trait is an orientation towards aesthetic solutions to

the generated problem.



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Fourth, a general characteristic of creative personalities, according to Smith, is

the oceanic capacity. This is a capacity to get a feeling of almost infinite possibi-

lities, when a new creative solution turns out to be correct. This implies an instant

and yet sustainable reward of greater importance than external rewards in the formof money or fame.

Fifth, creative persons tend to be victims of angst, which according to Smith

is the natural companion of creative activities.

Sixth, creative persons tend to have in comparison with the non-creative

a strong interest of their childhood. They often think about it and it is prevalent in

their dreams which are more frequent than among non-creative persons. One of the

surprising properties of these dreams is that they are described in the interviews of

creative persons as dreams in intensive colors.

For these and possibly other reasons there is a tendency among creative persons

to combine childish behavioral traits with a capacity to concentrate and be quite

serious in the process of formulating and solving problems.

It does not seem to be the case that very goal-oriented, wealthy homes are the

best breeding grounds for the development of creativity among children. Remark-ably often creative persons seem to have come from disadvantaged homes.

5.4 Different Capacities of the Creative Mind

In his book How to Solve It, the mathematician George Polya (1945) claims that the

most important approach to creative problem formulation and solving is by heur-

istics or the use of proper analogies: Analogy pervades all our thinking, our

everyday speech and our trivial conclusions as well as our ways of expression

and the highest scientific achievements (Polya 1945, p.37). This is obvious in

mathematics but seems to be of relevance also in creative writing and composing.

Belonging to some style or genre of literature essentially means that a certaindegree of similarity of composition exists. Such formulations are often analogousat least in terms of deep structure.

Production requires predictability and structural stability of the process in order to

be efficient. Creation is an almost contrary process. The creator has to accept funda-

mental uncertainty and its companion, structural instability. This implies that creativi-

ty can only be achieved by individuals, who have accepted a career with an embedded

uncertainty of production and the corresponding uncertainties of income and wealth.

5.5 The Pecuniary Rewards of Creativity

In the scientific world, income is normally secured for the creators by a combination

of subsidies and payment for other work than creation of scientific research. In

universities much of the salaried time is used for elementary teaching, administration

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and other non-creative activities. The financial rewards for creativity are primarily

determined by decisions in public or private funds based on earlier research records

and an estimate of the likelihood of success as evaluated by some more or less

credible peer group.In the R&D world the financial rewards are calculated with methods similar to

the ones used in the evaluation of the returns to material investments, i.e. an

estimate is made of the expected net present value and risk. Because of the public

nature of knowledge the risk is very large and different procedures to protect the

inventions are necessary. The common procedure of protecting a new material

product is patenting that exists in all countries prone to imitate new knowledge.

Patent rights are regulated by international treaties and give the property right to the

proceeds from the new product for a time period of 20 years. However, in reality the

rights can normally be executed for approximately 15 years. Because of the delays

in production, rights are executed after the patenting has been granted.

In the arts world there is a situation somewhat similar to the scientific world.

Composers and other creative musicians are often hired to do non-creative work

such as teachers, administrators or regular employees of subsidized orchestras.Painters and authors can rarely live from their creative work and have to live

from incomes as teachers, postmen and other non-creative jobs.

Economies of scale are of great importance in the entertainment world. Making a

film normally requires 200400 man-years and large amounts of studio equipment

and other material capital with large fixed costs as a consequence. This has led to a

number of organizational responses, such as conflicts about quality and economic

rewards among composers and script writers, reliance on performance stars, spatial

concentration of production and syndication of the outputs.

5.6 Variable Probabilities and the Importance of Stars

In industrial R&D the probability of success of a particular project has beenestimated to be in the range of 712%. This means that the majority of projects

will be financial fiascoes. To compensate for the losses, most of the industrial

research and development costs are borne by large firms in a limited number

of manufacturing sectors. These firms are large enough to run a substantial number

of parallel R&D projects to compensate for the low success probabilities of most of

these projects. The substantial returns of a few of these projects must then compen-

sate for the losses of most of the projects. This is partially true for entertainment

firms, such as Disney, Sony or MTG.

While most painters and authors are struggling in the first hand market to achieve

a reputation a few, often dead colleagues, have become important suppliers in the

second hand market of originals and reproductions.

Many art and entertainment goods books, magazines, movies or amusement

games are only sold to final users as copies and the markets for these repro-

ductions are quite different from the markets for originals. Most reproduction



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processes apart from forgery and other hand-copying are multi-stage processes

with complicated rules of interaction between stages. One example is the music

industry (see Table 5.1).

There are distinct probabilities of success in the interaction between agentswithin and between the different stages of such a production and reproduction

process and associated problems of negotiating the reward structure. Assuming the

probability of success to be the same everywhere and equal to 50%, the probability

of success for the whole 4 by 2 process is (1/2)8, which is approximately equal to

0.4%. In this case, the popular music publisher would accordingly need to judge

thousands of music proposals from unknown creative music composers to be

reasonably sure of a success in the market.

Raising the probability of success within and between stages to 90% would lead

to a probability of success of the whole fourstage process to 43%. There have

consequently been efforts to design individual and institutionalized procedures to

increase these probabilities within and between all stages. It is for example often the

case that artists compose music and write lyrics themselves. Publishing and record-

ing can be vertically integrated and the owners of record companies can also owntelevision stations, and so on.

In film production, these problems are further reinforced by the complexity of

production of film negatives (Vogel 1998).

Composers and directors often have their contract income based on revenues and

therefore they tend to be oriented to the maximization of quality and quantity with

potentially detrimental consequences for the profitability of the whole process.

Economic efficiency in music and film making would gain from contracts based

on profit-sharing for the creators. However, there are several problems associated

with profit-sharing that are especially relevant in the complex structures of modern

music and film-making. Substantial parts of the fixed costs are unknown to the

creators and can easily be redistributed between different products (and their

creators).

The heterogeneity of arts and entertainment products associated with the depen-dency of consumer taste on the individual characteristics of a few star performers

is especially important in this context. Certain consumers may have a strong

preference for individual performers, such as the pianist Glenn Gould, the singer

Ella Fitzgerald or the actor Julia Roberts. Such stars do in fact have an almost

monopolistic negotiating position at each first recording of a piece of music or a film

Table 5.1 The music industry as a multi-stage production process

Stage 1 Composition of music(including lyrics):creation

Artists first performance: innovation

Stage 2 Music publisher: production Diffusion to reproducersStage 3 Recording on CDs and

DVDs: production

Diffusion to radio and TV stations,

and record distributorsStage 4 Purchases by consumers:diffusion

Collection of royalty incomes by ASCAP, BMI,SESAC, etc., for distribution betweenupstream agents

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manuscript. In a way the appearance of such an artist increases all the probabilities of

success discussed above and all of the agents have to yield to this fact.

The complex production technology of most reproductive art and entertainment

goods leads to high fixed costs of production and globally concentrated industries.The film industry is one such globally concentrated industry. Most countries rely on

imports of films from the global centers of production and especially from Holly-

wood. This is a consequence of the complexity of production, which causes high

fixed and irreversible costs for each film. These scale economies are further

reinforced by the low probability of success of each individual film. The organiza-

tional result has been an increase in the size of firms, which makes it possible to

diversify production in order to reduce the risk of bankruptcy. Table 5.2 gives the

size of film production in a number of countries, measured as the number of film

negatives produced from 1991 to 1995.

The rank size distribution of film production in different nations is as follow

Film production e7:22Rank1:3; R2 0:95:

An alternative approximation form of the distribution is

Film production e5:90:12Rank; R2 0:95:

These equations imply that the distribution is highly skewed, which is also

indicated by the fact that the mean of the number of films produced is more than

twice as large as the median production.

Vogel (1998) collected financial data for the production of films in the United

States from 1976 to 1996. While some of these films were profitable, others suffered

disastrous losses. The mean cost of production was US $34 million with a standard

deviation of US $23 million, while the mean revenue was US $91 million with very

large standard deviation of US $81 million. There was no correlation betweenrevenues and costs.

Table 5.2 Production of film negatives in the top ten countries in the period19911995

Rank Country Number of film negatives

1 India 8382 United States 4203 Hong Kong 3154 Japan 2515 Thailand 1946 China 1547 France 141

8 Italy 969 Brazil 8610 United Kingdom 78

Source: UNESCO (1998), World Culture Report



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Using regression analysis, we estimated the effect of top-ranking directors or

actors on assessed revenue. The result is as follows:

ln Revenue 2:

88 1:

41T; n 23;

in which T=1 if a top-ranked director or actor is involved in the making of the film

(otherwise T=0). The t-value of the slope parameter estimate is 2.3, indicating that

the estimated value is significantly different from zero at the 5% significance level.

The regression equation implies that a Hollywood-produced film without a top-

ranking director or actor can be expected to generate US $18 million in revenue,

while the revenue figure for a film with a top-ranking director or actor is US $73

million. For production costs, there is no corresponding statistically significant

celebrity impact. This impact gives these artists a strong bargaining position,

which should enable them to obtain substantial shares of revenues or profits. The

contract variations are almost endless, but it is not unusual that the leading actor,

actress, and the director together obtain more than 10% of the total revenue when

the total exceeds US $150 million.

5.6.1 Lining up Behind Giants

Most labor markets are similar to markets for standardized goods. The price of the

good itself and the prices of substitutes and complements determine the supply.

Similarly, different prices determine the demand and the supply and demand

simultaneously determine the equilibrium price and quantity. In the labor markets

there are deviations from this simple competitive principle. Some occupations

require many years of education and training and the movement toward equilibrium

is consequently slow. Institutional safety constraints regulate other types of labor,as for instance airline pilots or medical doctors, which therefore constrain the

supply. For some occupations, unionization works as a barrier to entry, which

prevents the attainment of a competitive equilibrium. These factors to some extent

are also relevant for artists.

However, more important are the combined effects of the number of gate-

keepers that block entry and advancement and the uncertain success of the final,

creative product. Market success depends on the impact of the most visible artist

who is involved in production. Because of the intangibility of created ideas, when

innovated as a piece of music or a new film, expectations are of great importance for

the demand on the day of the premiere. Expectations of a rewarding experience

derive from the probabilities of success, as the potential audience perceives them.

These perceptions in turn depend on the rank of the artist among the group of

comparable artists. There is in most artistic and entertainment occupations acontinuous inflow of new entrants, owing to the attractiveness of many artistic

careers to young people. Most of these new entrants fail when attempting to get on

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the first rung of the career ladder (i.e. through the first gate), and the probability

of failure becomes greater at each further step on the career ladder to stardom.

Let us assume that the probability of advancing from one rung of the ladder to

the next is 5%. The probability of succeeding to the nth

level is then 0.05n

. If thereare five rungs, the probability of reaching the fifth level is 3 in 10 million. If we

instead assume that a person has talent enough to have a probability of 20% to climb

each rung of the ladder, the probability will equal 0.32 in 1,000 attempts to reach

the top.

If we assume that there are one million aspiring young entertainers and there is a

probability of 10% (i.e. probability is 0.1) to reach local recognition, there will be

100,000 local successes. If there is an additional 10% probability to reach regional

recognition, it means that 10,000 will continue to that level in their career. Let us

assume that the probability is 20% that they will reach national recognition, given

that they are already regionally recognized, then that would imply that 2,000 will

reach that stage of their career. To reach recognition on a continental scale might

have a very low probability of, say, 1%, so that only 20 will reach that level of

recognition and finally maybe only five will have a substantial global impact.There are many ways to measure the impact of an artist. In science, it is common

to use global citations in scientific journals to measure the impact of a scientist on

the public (in this case, other scientists). To an artist, recognition by other artists is

often pleasing, but of little importance in the markets for artistic products. We

therefore need some other, a more general measure of impact. We have chosen to

use the number of Google (an internet search engine) hits as such a general measure

of the impact of various kinds of artists. Tables 5.3, 5.4 and 5.5 reveal the impact of

different creative artists, as measured by Google hits in early 2005.

The average year of birth of the top ten composers is 1789. This implies that the

average age of the top ten compositions is almost two centuries. This is also

reflected in the current programming strategies among concert houses and symphony

orchestras.

The importance of the English language for global success is clear from theserankings. Six out of the top ten Nobel laureates have English as their mother tongue.

No such language effect is discernible for the other art forms (except for films).

Table 5.3 Top ten composers of classical music

Rank Composer Year of birth

1 J.S. Bach 16852 L. van Beethoven 17703 W.A. Mozart 17564 G. Verdi 18135 F. Schubert 17976 P. Tchaikovsky 18407 J. Brahms 1833

8 D. Shostakovich 19069 F. Chopin 1810

10 A. Vivaldi 1678

Sources: Larousse Encyclopedia of Music and Google, January 2005



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The average year of birth of the top ten jazz musicians is 1910. All except one

have passed away and can only be heard on recordings.

One way of analyzing the citation rates of the ranking lists of artists is by using

the following equation:

Citations eabRank:

We have used least-squares regression analysis to estimate the parameters a and b.

The parameter estimate b refers to the percentage decline in the number of citations of

the artists when their ranking is increased by one unit. The estimated equation for the

40 highest-ranked composers is

Citations (composers e7:50:07Rank; R2 0:98:

Increasing the number of observations does not influence the equation to any

considerable degree. The estimated equations for the other groups of artists are as

follows:

Citations Nobel laureates e5:570:10Rank; R2 0:98;

Table 5.4 Top ten laureates in literature

Rank Nobel laureate

1 J.P. Sartre

2 T.S. Eliot3 B. Russell4 W.B. Yeats5 G.B. Shaw6 T. Mann7 S. Beckett8 A. Camus9 W. Faulkner

10 A. Gide

Source: Google, January, 2005

Table 5.5 Top ten jazz musicians

Rank Musician Year of birth

1 M. Davis 19262 C. Parker 1920

3 L. Armstrong 19004 B.B. King 19255 B. Webster 19096 L. Young 19097 King Oliver 18858 E. Fitzgerald 19199 D. Ellington 1899

10 B. Holiday 1915

Source: Larousse Encyclopedia of Music and Google, January 2005

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Citations Jazz musicians e8:040:10Rank; R2 0:96:

These equations indicate exponential decline of rank-ordered citation rates and

are remarkably good at accounting for the variability in the number of citations.

A conversion of these citation rates into probabilities of recognition gives a similar

rapid decline of recognition as we move down the rankings of the artists. The

estimates also show that jazz musicians and Nobel laureates have greater estimated

b coefficients in absolute values, which possibly reflect the lower age of their works.

The average birth year of the top ten creative artists varies considerably among the

different categories, as shown in the above tables.

In literature and music there are incredible numbers of giants who implicitly

compete with new entrants aspiring for positions of global fame. A young painter,

poet or composer therefore has to compete for recognition with artists who died a

long time ago. This competition with the dead generates incentives for creative

artists to develop new styles, niches or even completely new rules of composition.

The extreme durability of great art is an advantage to the general public but anobstacle to recognition among all aspiring artists.

The skewed distribution of recognition among creative artists leads to a corre-

spondingly skewed distribution of revenues, which inevitably leads to a skewed

distribution of artists material assets and incomes. By way of example, assume

that the price of a painting by the highest-ranked artist is $100 million. If the price

distribution corresponds to an estimated citation function, this would imply that an

artist at global rank 100 would receive $33,000 per painting, while the painter who is

ranked as number 150 in our global ranking would receive only $614 for a painting.

The top ten would generate most of the total wealth derived from the sale of paintings

in these circumstances, as long as the supplied quantities do not increase dramatically

with increasing rank number (i.e. decreasing number of citations).

Our example conforms in its general pattern to the markets for paintings and

compositions in classical music, but it does not conform to the markets for films andpopular music, where the rankings change rapidly. However, even in these more

changeable markets a similar pattern persists at each short period of time. During

their much shorter stable ranking periods, the rent and income distribution should

be expected to be extremely skewed in favour of only the top-ranking segment or

sometimes even just one giant.

5.7 Syndication

A special form of vertical and horizontal integration syndication is typical of

arts and entertainment industries (Werbach 2000). The basic preconditions for

economic advantage of syndication are the following:

1. The product must have the property of a public good, i.e. it should be possible to

be used by many at the same time or consecutively, i.e. the same unit of



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a product can generate utility to many users. This is typical of information and

knowledge. A concert by the Vienna Philharmonics on n radio and television

stations does not decrease the quantity or quality to the listeners of the concert,

even if n goes towards infinity. However, aggregate utility and thus aggregatewillingness to pay increases with an increasing n and thus the potential revenue

is an increasing function of the number of radio and TV stations allowed to relay

the concert.

2. The product must be based on information only so that Internet can be used for

transmission of the product.

3. The product must be modular, i.e. capable of being cut into pieces modules

and reassembled together with other modules.

4. The product must be easily adaptable to different consumer groups. For exam-

ple, the puns and jokes of an entertainment program should be capable of

translation. Language free jokes as in the old Chaplin or Mr Bean movies are

ideal from this point of view.

5. Transaction costs (other than transport costs) should be limited to allow for

syndication. A radio or TV program that only contains music could easily besyndicated, even globally, as there are small language and culture barriers to be

overcome in the transfer of the program from country of origin to a country of

destination. Syndicating a movie is more costly. It might require dubbing and

cutting to suit a specific public. Sometimes a syndicated TV program needs to

become a part of some coherent programming strategy, which gives rise to to

adaptation costs.

6. Distributors must be independent of each other. If distributors can organize

themselves in some cartel or resale network, advantages of syndication would

drop. Either the number of paying distributors would drop or the revenue from

each distributor would be constrained to be below the resale price within the

cartel or resale network. With Internet distribution these resale prices could

approach zero if there are inefficient copyright rules and regulations.

Essentially syndication contains the following agents:

ExampleAgents

Creator Author

Producer Scriptwriter and innovation team

Syndicator TV program syndicator

Distributors TV stations

Consumers TV audiences

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5.7.1 Integration by Syndication

Examples of syndicated entertainment products are Robinson, Jeopardy, the Oprah

Winfrey and Jerry Springer shows, sports arrangements like Olympic Games andother global championships. Examples of syndicated arts products are films by

independent filmmakers (e.g. Wim Wenders or Ingmar Bergman), classical music

programs on radio and TV, novels suitable for conversion into film and photographic

art. With the development of the size and quality of internet, syndication advantages

will determine productiondistribution system for entertainment and arts.

5.7.2 Global Creative Networks or Big Is Interactive

With the growing efficiency of communication of new ideas, there is an obvious

increase in the economic advantages of interaction among creators of arts, enter-tainment and science.

Assuming the value of a creation to a creator living in region, i.e. to be dependent

on the interact ion with other creators, living in regions j (=1,. . .,n), we have the

following optimal interaction problem:

max vi SpIi;jQi Scdi;jIi;j;

where v(i) is the profits (or recognition) accruing to the creator of region i, p(I(i, j) is

price (unit value) of interaction with creators of region j, Q(i) is the predetermined

level of creative activity in region i, and c(d(i, j) is unit cost of interacting from

region i with region j.

The p-functions are assumed to be concave and differentiable everywhere (at

least twice), while the unit cost of interaction is a given to be constant for any pair ofregions.

The conditions of optimal interactions are thus:

dp/dI(i, j) c(d(i, j)/Q(i); for all interacting pairs of regions.The implications are the following:

l Interactions would increase with increasing impact of synergies upon creativity.l Interactions would increase with decreases in the transactions, transport and

communication costs.l Interactions would be larger for creative activities operating at a large scale.

In an earlier paper by Andersson and Persson (1993) it was shown that under an

assumption of a CobbDouglas production function, the interactions would follow

a gravity equation.



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5.8 Conclusions

There has been a slow and steady transformation of the advanced market economies

from a focus on productivity towards a focus on creativity and innovation. Thisrefocusing means a greater importance of economic organization based on synergy

and interactions than on division of labor and occupational specialization.

A creative focus implies a change in the working of the labor market. Because of

the great uncertainties in creative multi-stage production systems, there are great

advantages of employing internationally renowned creators. These can often demand

substantial celebrity rents, leading to highly skewed income and wealth distributions.

The large uncertainties also cause an increase in the optimal scale of production.

This is further reinforced by the increasing possibilities of syndication of the

created products.

Syndication essentially means that the same idea can be sold to many users in

separated markets after adaptation to the specific user preferences. This has been

used since long in the news media and among consultants, who have developed

production processes, repackaging and users adapting the creative ideas of scien-

tists. Syndication advantages have increased by orders of magnitude with theincreasing efficiency of Internet.

The advantages of creative synergy will increase the tendency to interact

globally among scientists and artists. Optimal global interaction conditions are

deduced. They indicate that interactions should be driven to the point where the

unit cost of interaction divided by the scale of operations equals the marginal

increase in the value of the created idea (eventually innovated as a product).

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