In this chapter I will analyse the impact of globalization on the dynamics of the audio-visual sector and art markets as representative of the cultural industries in general. In a way, globalization was the first great transformation of cultural markets in the 1980s, before the onset of digitization in the late twentieth century, and it has notably affected cultural industries in terms of both supply and demand.

Taken together, these two forces – globalization and digitization – have had such a lasting impact on economic and cultural activities because the two cross-fertilized each other, with digitization fuelling globalization. After all, the transmission of cultural goods and services, particularly the latter, was largely made possible through digital technology, as well as worldwide availability and access to information.

When we think of globalization, there are two aspects that come together in terms of the cultural industries. First, markets become more global and integrated, thus opening up opportunities for earning money with cultural products in an ever-expanding market. Second, cultural globalization might entail some convergence of tastes and preferences.

What is economic globalization?

Starting with the economics side of it, globalization is largely measured and understood as an increase of trade across the world. This entails high growth in traded goods and services as well as the mobility of capital and labour between countries. One of the key driving forces behind globalization is trade agreements, which have removed the many duties, taxes and tariffs that had previously been barriers to trade.

The European Union started from this very idea of economic integration, in its early days as the European Coal and Steel Community. In the late 1980s and early 1990s major trade deals were largely negotiated and facilitated by the World Trade Organization (WTO), which succeeded the General Agreement on Tariffs and Trade (GATT) in 1995. These supranational institutions provided the means to settle legal conflicts on trade between countries. In the later phase of globalization, many other smaller, regional trade agreements followed.

From a purely economic perspective, trade is beneficial for a country if it has a comparative advantage, in that it can produce a good or service at a lower opportunity cost than another country – that is to say, it has to give up less in terms of production than other countries to produce the good or service in question.

What characterizes the demand for culture? On the one hand, it encompasses the concept of willingness to pay, which we have introduced earlier as the key ingredient behind the demand curve. On the other, it includes preferences for the consumption of cultural goods. To this end, we will explore the economic theory of demand and other motivations for consuming art, such as investment considerations and the social factors that might make us more inclined to consume cultural products.

When thinking of consumers in economics, we almost always rely on assumptions about why we go out and spend our money on movies, plays and books the way we do. It is no secret that economists rely on the concept of homo economicus, namely that consumers make rational consumption decisions to maximize their utility with the money they have available to spend. In other words, the only decisions that rational consumers make are ones that will make them better off. Of course, we can disagree with this concept, especially when applying it to the realm of culture, where we often go way beyond the mere fulfilment of physical needs such as hunger or thirst.

In these simple, mechanical consumption decisions – I am hungry, so I buy an apple – we might go with more or less rational decision making by consumers. However, when it comes to art, it seems obvious that tastes play a much stronger role than in other product categories. By binge-watching box sets or pressing the repeat button on your favourite song, it is evident that the consumption of culture is a different animal. Nonetheless, the key features of a limited budget in terms of time and money are still applicable even to the most diehard Suits fan. Moreover, some sensitivity to price is still prevalent even if we are diehard fans.

Preferences

To start with the fact that each of our preferences are a given, we might not necessarily be able to capture them in their entirety; however, we reveal our preferences in the market by our decisions and actions.

In this chapter we shall focus again on artists and their rationale for producing art. After all, artists are behind any cultural activity, and economic theory can offer some useful tools for understanding their motivations while empirical economic work can shed light on what we know from real life.

Although Chapter 3 dealt with the many institutional factors that are relevant for artistic activity from a policy-making perspective, we shall change perspective in this chapter to focus on the artists’ viewpoint and how their individual production decision depends on income potential, the bottlenecks to recognition in their particular sector and the labour market for artists more generally.

One key element of the artistic labour market is the fact that, when thinking of any cultural sector, there is typically a set of artists who come to mind. And these usually are the ones who dominate their industry, not only in terms of their content and influence but also in terms of their income. These superstars, such as Ed Sheeran or Taylor Swift, J. K. Rowling or E. L. James, Lang Lang or Anne-Sophie Mutter, are filling concert halls and captivating listeners’ as well as readers’ attention across the globe. At the same time, they are also the highest-earning artists in their genre. And the link between top earners and superstardom can also be established in history, with Beethoven, Michelangelo and Shakespeare being the superstars of their time. However, there are, of course, exceptions to this rule, such as when we think of van Gogh, who never became famous during his lifetime. Nonetheless, for most cultural superstars it is a striking regularity that those who receive most recognition also earn the most.

Moreover, we shall look at the various empirical studies, which shed light on the determinants of creativity from an economic perspective. In addition to the labour market dynamics there are various social as well as psychological aspects in artistic production that have achieved some attention in economics. One such question is when artists reach their peak performance and what their career trajectories typically look like. Do artists shoot to fame when they are young or do they need to mature their talents in order to produce their best work?

Industrial organization provides us with important insights into how the properties of the good or service in question characterize the market, its prices and quantities sold and how firms compete with each other. Building on Chapter 2, we can examine the tools with which the market structure is analysed and the role industrial organization plays in the creative process and the position of the artist in the market.

We could start by asking the simple question: why are there firms in the cultural industries at all? The famous economist Ronald Coase argued that a firm is simply a way to bundle transactions that happen in a market and thereby reduce participants’ transaction costs. A singer could negotiate publishing, copyright and pricing for each song individually and for each listener separately, but that would be inefficient in terms of allocation of his or her time and would probably involve high administrative costs.

In that sense, purchasing cultural products and services are different from buying a carton of milk, as cultural products are non-standardized and contracts over their exchange between two parties are not as simple as exchanging a carton of milk for money. Thus, the role of the firm in the cultural industry is to mediate between market participants: creators and consumers. Firms thus bundle many interests into one legal and economic entity.

On the supply side of the market, we have two parties: the producer/agent and the artist. The relationship between the firm and the artist often depends on the sector we look at and the bargaining power of the artist. For example, a more famous artist will have more weight in a negotiation for a record deal than an unknown young band. On the other hand, if we think about the big three in terms of private products and services in the cultural sector – namely books, movies and television – typically a handful of large producers dominate the market, which have a lot of power over the terms of the market, such as pricing, pay and the selection of “talent.”

Thus, in this chapter we will add a strategic dimension to our understanding of cultural industries. As these are particular to industries with more than one supplier, I will focus on the large non-public cultural markets: books, music, television, movies and art.

To appreciate the potential that blockchain technology offers, we need to explain how blockchain systems work and what their key characteristics are. We aim to keep the description simple and accessible and work our way through the various elements that make up the blockchain system step by step.

In its pure form, blockchain can be described as a data structure or database. In a broader sense, blockchain is a decentralized system or network that combines certain technologies to create an exchange environment for its participants (Kosba et al. 2016; Bonneau et al. 2016). More specifically, blockchain is a highly sophisticated construct of intersecting and interconnected elements of technology and economic incentivization. The overarching goal of such constructs is to create a trusted setting for participants of equal status to facilitate frictionless and un-intermediated interaction, exchange or messaging. The motivation for decentralizing the infrastructure of social and economic interaction comes from decreasing trust towards profit-driven, vulnerable or potentially corrupt third parties, while enhancing the security and efficiency of such interactions. The solution design emphasizes an open (accessible) network of participants (peers), whose interests are aligned through economic incentives and the responsibilities and duties of centralized authorities are distributed across many different parties. At the same time, such systems are fault-tolerant against manipulative and fraudulent behaviour.

Fundamental to blockchain networks is the concept of a shared ledger, which constitutes the verifiably one and only database of all state changes between all participants. The idea of a transparent shared ledger enables all participants to verify which transactions have been processed in the past and led to the current state of distribution. This high level of transparency is necessary for distributing the coordination tasks, formerly performed by intermediaries, onto the shoulders of many. In contrast to siloed and inaccessible databases that are separately maintained by each participant, a shared ledger reduces the need for costly database reconciliations. Instead, agreeing on the current state of a database in a blockchain network is designed as a collaborative process by all participants based on consensus mechanisms. A key innovation of blockchain technology is the scalability of such consensus mechanisms, which means that a potentially unlimited number of participants can become part of a blockchain network without decelerating its functionality.

Data in qualitative and quantitative forms serve as a necessary foundation for social, political and economic life. Data can only unfold its true power if it is structured and put into a context to provide users with useful information for decision-making processes. By giving order to data, ledgers like blockchains, centralized databases or analogue registers allow ownership to be tracked – a function that is fundamental to the idea of property and modern society. Ledgers provide a record that coincides with the collective belief of a current state of affairs among members in a society. By introducing the idea of credit, ledgers became even more powerful by tracking who owes what to whom. Essentially, ledgers provide evidence for any change in the status quo and can be referred to during any dispute. Ledgers are fundamental to the organization of human affairs (Berg et al. 2018).

The oldest forms of ledgers date back to Babylonian temples. Ledger technologies have constantly evolved with double-entry bookkeeping and digital databases being the most notable breakthroughs of the modern era. Without them, modern economic and social infrastructure such as complex corporations, markets, administrations and governments could not exist. Not only do all organizations and institutions rely on storing and updating data in trustworthy ledgers, from the registration of births and deaths to home ownership, mortgages, credit cards and mobile phone contracts, our entire modern society is based on records and ledgers.

The maintenance of today's ledgers is regularly provided by the state and large corporations and all share one important characteristic: centralization. There is one master ledger or database that is considered to hold the absolute truth. This provides enormous efficiency, since updates to the ledger only need to be conducted once in the central ledger by just one bookkeeper. At the same time, this bestows the central bookkeeper with enormous power, and it took centuries to develop political systems of checks and balances that prevent the wildest forms of misuse of this power. But even in modern democracies, the risk of exclusion is a constant threat to minorities. Apart from the risks that come with such power of central authority, centralized ledgers are inherently fragile, and the record can still be lost.

The best way to explain blockchain is to break it down into its basic components. We define components as the applied technologies and concepts which are either standalone technologies or concepts in computer science, which have been researched for decades in contexts other than blockchain. We identify technical and mathematical components as well as economic, political and social concepts, which are intertwined to facilitate blockchains’ functionalities. The aim of this chapter is to provide an overview of the applied technologies and concepts and an understanding of how they are combined.

First, we will explain the technical components, including P2P networks, virtual machines and smart contracts. Depending on the perspective, many blockchain systems can indeed be categorized as specific types of P2P systems, because P2P technology is the technical foundation of blockchain systems whose purpose is the exchange of verifiably unique assets. Whether P2P systems are considered forerunners of blockchain systems or a component of blockchain systems, understanding its concept, structure and differentiation from centralized architectures is crucial for understanding the innovation of blockchain technology.

While P2P networks are the technical foundation of blockchain systems, virtual machines greatly increase the functionality of blockchain systems as they allow non-censorable and autonomous programs (in the form of smart contracts) to be uploaded onto a blockchain. This is the basis of what some refer to as the Web 3.0. Blockchain is said to complement the current state of the internet by an increased connectivity through direct connections between users, new concepts of ownership, the uniqueness of digital assets and un-intermediated exchange. It adds another layer for payments, decentralized applications, automated and autonomous organizations, which need no central coordinator. By covering the topics of virtual machines and the smart contracts they enable we account for the technical evolution which the technology has experienced in the last years. Numerous applications (Chapter 4) and social impacts (Chapter 3), which we will focus on in the course of this book, rely on the increased functionality of blockchains through virtual machines. This is why we provide a detailed description of how they work and of the smart contracts they enable.

In this chapter, we will explore the provision of culture – that is, who produces culture and under what conditions. The most important distinction is between the private and public sector roles, both of which engage in the production of culture but do so under very different conditions and often with very different agendas. To be precise, if we start from a market model, set out in the previous chapter, we are thinking of culture as a private good or service that underlies the production logic, as is the case with any other commodity, and is produced by privately owned companies, such as Warner Brothers or Sony Films. Although we have some European film and television networks that are largely public, such as the BBC, the general market mechanisms apply for the music and film industry to a large extent.

However, in some respects this might not capture the whole picture. Consider museums, for example, or theatres and heritage sites; in many countries the state plays an important role in providing these services. Therefore, we are going to have a closer look at what economics offers for the analysis of the public provision of cultural goods. This chapter establishes the difference between private and public entities involved in cultural sectors and the different incentives and agendas that the various stakeholders have in these industries, as well as looking at some practical examples to illustrate the issue.

Culture as a public good

If we think of culture as having positive externalities, meaning culture produces a value above and beyond private consumption, an economist would classify that good or service as a public good. The classic example is that of a well-maintained garden, which makes its owner happy but also affords benefits to the neighbours and the community at large. Thus, it creates benefits beyond the owner's own willingness to pay for plants. Of course, goods can also carry negative externalities, such as noise pollution when neighbours might not be keen on Ed Sheeran blasting through their neighbourhood during an open-air concert.

Digitization has changed the way we work, conduct our business, trade, communicate, advertise, listen, watch, shop, plan our vacations and so on. When it comes to culture, the key change can be summarized as a massive shift in ownership structures. Such changes can be found on both the supply and demand side: proud owners of record collections have become smartphone owners and Spotify clients; shelves of books have turned into files on an electronic reading device; and a back catalogue of movies and television series can now be streamed on the internet and stored on the cloud, earning their licence holders money as and when a file is downloaded.

Through all these many spheres, the internet has had a massive impact on the ways that a lot of culture is produced and sold across the globe, and also on the way we consume it. Production processes on the supply side and the technological know-how necessary in the industry as well as for the consumer have both changed tremendously over time.

The music industry was hit first, and in many ways the hardest, simply because its content was the easiest to digitize and files could be readily shared on the web. Two main forces impacted the music industry at the same time. First, technological progress gave rise to piracy, with the arrival of peer-topeer (P2P) platforms such as Napster and Piratebay promoting free and illegal access to music across the globe. Meanwhile, the music industry was still grappling with new technologies and developing new business models with which to transition into the digital era. Second, the decreased costs in production and publishing arising from digitization made production much cheaper, lowering the barriers to entry into the market and therefore increasing production.

Moreover, digitization also impacted ownership structures, which in turn changed the consumption patterns and their complementarities on the demand side, as well as opening new avenues for artists to make it in the market and to earn money. An example of such a “complementarity” is the extensive live tours that many artists now undertake to generate additional income.

As indicated in the previous chapters, there are broad application potentials for blockchain technology. It is a comparably young technology, which is developing and constantly progressing, and which could be deployed in almost every sector. It is quite possible that some of the most exciting and innovative applications of the technology have not yet been considered. Smart contracts in combination with micro-transactions will enable futuristic smart applications. For example, hotel rooms or parking spaces that are autonomously billed and paid for in real time, or media articles that are billed per single-word read. However, one must always be aware that while the blockchain itself is a theoretically error-free system, such applications always require data transmissions from external sources (known as oracles). There is a danger that information could be manipulated here. Depending on the case, the blockchain solution is only as good as the level of trust in the oracle that provides data. In turn, this creates new business potential for insurance companies to insure such risks.

In the hunt for new ideas and applications, there are some simple questions that should always be asked initially: is there an existing intermediary that could be eliminated by using blockchain or cryptocurrency? Are certain applications required to document or collateralize processes because participants in a market or transaction are reluctant to do so?

Currency and remittances are obvious applications that fulfil these criteria. It is no surprise that the inventor of the blockchain introduced a cryptocurrency as the first application, when the effects of the Great Financial Crisis were taking hold. A classic bank account is just centrally deposited with a bank and when money is transferred, various intermediaries (the initiator's bank and the target bank) are always involved. With cryptocurrency the degree of private autonomy increases, but this also leads to an increased risk. Banks have deposit protection and users are insured against theft. This is not the case with cryptocurrency. So there is a trade-off between independence and security, which comes with fees and external monitoring. For cross-border transfers, the use of blockchain-based value transfers is immediately clear.

When thinking about the market for cultural goods and services it is important to understand the types of goods and services to be analysed, their properties and the key features of the industry in which they are produced and the demand for them. Together, these ingredients constitute the market, which brings about the quantity as well as price at which the market clears.

By and large we can divide the cultural sector into the following main areas: (a) performing and visual arts, which encompasses theatre, dance, music and opera; (b) the audio-visual sector, which includes film, games and photography, literature and design of all types; and (c) architecture and heritage sites. Each of these sectors incorporates individuals, private firms and public organizations that engage in the market to offer and consume art experiences of various types.

Types of goods and services

Many of these cultural goods and services are in fact what we call experience goods, which means that it is hard to assess their quality and the enjoyment they will bestow before purchasing and “experiencing” them. In other words, the exact value the good offers to the consumer can be ascertained only after its consumption. In addition, we learn to appreciate these types of goods the more often we consume them. In essence, this means we develop a taste for sculptures or splatter movies over time with every item consumed. The main preventive hurdle is experiencing them in the first place, as the pleasure or utility they will give us is uncertain.

This uncertainty derives from what economists call information asymmetry. In the case of the cultural sector, this means that consumers do not know the quality of the good before purchasing it, whereas the producers do know the quality of their product. For producers, the asymmetry is reversed: they know the quality but they do not know the preferences of consumers. Therefore, information is distributed unequally between market participants. Moreover, for experience goods we can gain knowledge from others through their reviews or word-of-mouth comments. This is different from a typical consumption good, such as an apple, in that you usually know what you get before you buy and would not spend a lot of time scouring the web for information on it.

The cultural industries, with their many different books, films, songs and artworks, contribute in large part to identity formation, enjoyment and personal development. As such, they largely shape our lives and identities, as individuals as well as entire nations. At the same time, they are products and services like any other commodity; they are, perhaps, of more sentimental value, but they are still traded and sold in markets like anything else.

As a result of the special function that culture has for the public in general, it is all the more important to understand the economics of its production and consumption – in short: the market for culture. This is where the economic toolbox helps to unlock some of the key dynamics of the sector, helping us to understand why we observe the prices, quantities, policies and consumption patterns that we do.

Of course, economists by their very profession focus only on those aspects of the cultural industries that can be captured with their theoretical and empirical tools. These are by no means exhaustive, and always need to be contextualised in the specific academic discipline associated with a particular cultural sector. An economist cannot explain the beauty of a Hemingway or a Picasso in terms of its composition or its innovative value in terms of the craft. However, when it comes to analysing the masterminds behind creative production, as well as the patterns that help explain why some cultural pieces have a lasting impact while others do not, economists most certainly can add to the discussion.

Especially in light of the major changes we have seen in recent decades and the impact they have had on the cultural industries, economics makes a valuable contribution to practitioners as well as academics by offering insight. If we want to understand why a single artwork can sell for US$450 million, the artistic valuation alone will certainly not tell the whole story. Neither will globalization or financial markets. However, if art market and art historian expertise go hand in hand with economic knowledge, such price records might seem less beyond our grasp. The same is certainly true for other cultural markets, such as the music industry, or others that we have covered in this book.