The Contribution of Art to National Income

Harry Hillman Chartrand

in Cultural Economics '88: A Canadian Perspective

Harry Hillman Chartrand, William Hendon, Claire McCaughey (eds)

Association for Cultural Economics

University of Akron, 1989, 31-42.


Through history, the goods and services that we buy, in which we invest and on which we pay taxes have changed.  The total of these final demands on our pocketbook is called National Expenditure.  In symbolic logic, National Expenditure (Ye) can be expressed as:

Ye = f (C, I, G) where

C Consumption

I = Investment

G = Government.

Similarly, through time, the means by which we earn the income to consume, invest or pay taxes has come from a changing set of factors of production including capital, labour and technology.  Taken together, these income flows are called National Income.  In symbolic logic (using the conventional expression) National Income (Yi) can be expressed as:

Yi = f (K, L,T) where

K = Capital

L = Labour

T = Technology.

Changes in the nature and mix of these factors of production have generally involved crises in confidence concerning previously accepted systems of economic thought (Keynes 1937).  As will be demonstrated, however, the addition of new factors of production to the National Income equation is, in a sense, similar to Maslow’s Need Hierarchy.  The new factor does not displace the old, but rather creates a new margin for economic growth based upon a foundation consisting of existing factors of production.

In economics, National Expenditure and Income represent an accounting identity.  The one is exactly equal to the other, and are said to be identical, or in symbolic logic:

Ye = Yi = Y.

Pre -Classical Period

From the 16th until the end of the 18th century, it was accepted that only physical capital (K), e.g. gold, silver and land, was productive of an economic surplus.  Through re-investment of this surplus in primary industries like farming, fishing and mining, it was believed that national wealth would


increase.  In fact, these were considered the only productive sectors of the economy.  In symbolic logic, the assumption that National Income (Y) is a function of capital (K) is expressed:

Y= f (K).

European conquest of the New World appeared to confirm this view.  The English Pampheleteers and French economists Quesnay and Tourgot were the dominant exponents of this theory of value (Schumpeter 1954).  Today, these sectors make up what are called the Primary Industries of the National Accounts.  Monetarists and Gold Standard advocates continue to echo, in one form or another, this ancient economic dogma of value.

With respect to scientific knowledge, the Royal Society was established in England in 1660 as a focus for the scientific method.  Technology during this period, however, was essentially based on experiential knowledge developed by the guilds.  Scientific information was symbolic of national wealth, i.e. a nation rich in gold could demonstrate its wealth through pursuit of scientific knowledge.  Similarly, Art was considered a symbol, not a source of wealth:

the idea of using art as a form of investment was unknown in the eighteenth century... One bought paintings for pleasure, for status, for commemoration, or to cover a hole in the ancestral panelling. But one did not buy them in the expectation that they would make one richer (Hughes, October 1984: 25).

Classical Period

By the end of the 18th century, division and specialization of labour (L) combined with specialized industrial equipment (K) were accepted as productive of an economic surplus, i.e.

Y = f (K, L).

Investment in manufacturing industries was believed to increase national wealth.  Smith, Ricardo, Malthus, Marx and James Mill were the dominant theorists of this period (Barber 1967).  The success of the United Kingdom in the Industrial Revolution appeared to confirm this economic belief.

Manufacturing constitutes the Secondary Industries of contemporary National Accounts.  Today some market economists believe that only the manufacturing of physical goods is productive of an economic surplus.  On the other hand, there are Marxists who believe only the worker is productive.  During this Classical period, services including scientific research and the arts were considered important social activities, but not productive of national wealth (Barber 1967: 29).


To a degree this scepticism was justified because at the time major technological breakthroughs did not result from organized university-based scientific research, but rather from the experience of the individual inventor.

The men responsible for technological innovations ... during the beginning of the Industrial Revolution were non-conformists who had been excluded from the universities and learned their science indirectly while pursuing their trade.  In other words, the coupling between science and technology was very loose and did not rely on the established system of higher education (Senate Special Committee 1970: 21).

Neo-Classical Period

By the mid- to late-l9th century, systemic technological change (T) operating through perfectly competitive markets was recognized as productive of an economic surplus.  Investment in improving financial markets, steam-powered transportation and enhanced communications such as the telegraph was believed to increase national wealth, i.e.

Y = f (K,L,T).

The success of the United States in developing a continental economy (Chandler 1962) appeared to confirm this belief.  The dominant theorists of this period were John Stuart Mill and Alfred Lord Marshall (Mill 1848; Marshall 1890).  This type of technology is called disembodied technology, i.e. it does not refer to the application of a specific item of scientific information in a specific product, but rather to general systemic improvement in economic functions like transportation and communications.

Today, finance, transportation and communications form part of the Tertiary Sector or Service Industries of the National Accounts.  During this Neo-Classical period, government was generally considered an impediment rather than a source of national wealth.  This was the period known as laissez-faire liberalism.  Neo-conservatives who believe in setting business free through deregulation and shrinking the power and reach of government, accept this economic dogma of value

With respect to scientific knowledge, it was during this period in England that technology and the applied arts became formalized in institutions of higher learning called polytechnics.  The success of these institutions resulted in their eventual absorption into the traditional universities where the pure sciences and the scientific method combined with the applied sciences to produce the pattern of scientific learning we know today.  Furthermore, in 1870 compulsory primary education was introduced in England which began the process of diffusing scientific and experiential knowledge to a wider proportion of the population than at any time in history.  It is important to note, however, that the major innovations of the period, e.g. the telephone,


telegraph and electric light, did not result from university-based research, but from the insight of independent inventors, who, like Bell and Edison, created their own research institutes outside of the university.

During this Neo-Classical period, works of art (including reproduction rights to paintings and drawings), when sold through the emerging bourgeois art market, were considered a source of national wealth.  The emergence of such reproduction rights reflected both the impact of new recording technologies as well as the emergence of new economic institutions such as the limited liability corporation (Hughes, October 1984).

In fact, it was at the very time that the Arts for Art’s Sake Movement (Henderson 1984: 46) withdrew from mainstream industrial society in the 19th and 20th centuries, that new communications media emerged.  These included the steel engraving plate followed by the photograph, sound recording, motion picture, radio, television and video recording.  These new technologies permitted the industrialization of Art through commercial exploitation of revenue streams implicit in copyright.  In addition, the commercial exploitation of these technologies by communications conglomerates has resulted in the emergence of what is called commercial Popular Culture and the eclipse of traditional folk art.

Keynesian Period

The Great Depression of the 1930s convinced most economists and policy-makers that the perfectly competitive market was no longer the dominant form of industrial organization.  Large scale industrial enterprise combined with widespread unionization required Government’s active involvement to maintain full employment and price stability in the face of imperfect markets.  Therefore, from the mid-1930s until the recessions of the late ‘70s and early ‘80s, Government (g) intervention was considered necessary to assure growth in National Income, i.e.

Y = f (K,L,T) g

Government fine-tuning of the economy and counter-cyclical management of aggregate demand were considered critical in assuring economic growth.  As indicated in the equation, however, Government was assumed not to generate wealth directly, but rather to maintain and sustain its growth by assuring the efficient interplay of capital, labour and technology.  Thus while tax cuts could stimulate growth, growth resulted from the return of resources to the private sector where improvements in the allocation and mix of capital, labour and technology were possible.  In effect, the Government became recognized as responsible for setting the rules of the game for economic behaviour.  The role of Government is recognized in the National Accounts as the Public Sector.  Lord Keynes was the dominant theorist of this period (Keynes 1936).  Liberals and social democrats committed to the active


intervention of the State continue to hold this Keynesian economic theory of value.

During this Keynesian period of economic thought, Art and Science were recognized as public goods.  It was accepted that if the social benefits of an activity could not be fully captured by private producers in the marketplace, then Government had a legitimate role in ensuring that an appropriate quantity and quality were made available to the general public (Baumol, Bowen 1966).

It was during this period that the university and university-based research became the dominant source of new technology including chemical, electrical and nuclear technologies.  The war years confirmed that scientific knowledge could serve a major role in the development of technology.  During this period, the concept of technological change evolved into embodied technological change, i.e. specific items of scientific knowledge were embodied in a specific product, e.g. the transistor radio.  Conventional wisdom held that the era of the independent, non-conformist inventor was drawing to an end.  However, this convention could be quickly swept away by the appearance of another Bell, Edison or Marconi.

Post-Modern Period

The success of the world economy from the Second World War through the early ‘70s led most economists and politicians to accept the Keynesian creed that government intervention was the ultimate guarantor of growth and development.  By the mid-’70s, however, stagflation, recession, the oil crisis, and growth of public sector debt created a crisis of confidence, a crisis predicted by Keynes himself.

Today, various economic theories and dogma compete for attention and acceptance.  To an extent, the 1980s are a time of Cultural Counter-Re formation in which many strive to resuscitate values and beliefs swept away by the turbulent cultural revolution of the 1960s, and the economic crises of the ‘70s and ‘80s.  This lack of confidence is similar to contemporary architecture in which the certainties of the modern or international style have been replaced by an eclecticism of design known as Post-Modern Architecture.  By analogy, we have entered the era of Post-Modern Economics, an era without a generally accepted dogma, an era in which we must begin again a long trek for economic truth, understanding, and public confidence.

At present, no single school of economic thought enjoys general public confidence.  Various new schools have, however, emerged in recent years which share a belief that new factors of production have become the source of economic growth.  Such new factors generally have been recognized through


re-definition of older concepts such as capital (K) and technological change (T) (Wriston 1985).

The importance of breaking out the constituents of traditional technological change is evident when its contribution to growth in National Income is considered.

Economists working in this area ... conclude that less than one-third of the growth rate of output per worker over the years from the turn of the century can be attributed to the rise in capital per worker.  Over two-thirds of the growth rate of output per worker has therefore to be attributed to all other factors covered by the catchall called technological advance (Shapiro 1970; 493).

Revision of the traditional concept of technological change permits recognition of new factors of production contributing to growth in National Income.  From this revisionist perspective, technology, as a factor of production in the National Income equation, has evolved from disembodied to embodied to epistemological technological change, i.e. changes and differences in the nature and sources of knowledge, specifically the Physical and Social Sciences and Art.

Physical Technology

Advances in physical technology (T) result from research in the Physical Sciences.  In the last several generations such research has resulted in creation of the chemical, electrical, and nuclear industries.  In this generation, such research has resulted in creation of the electronic and bio-technology industries.  It is generally accepted that this type of technological change leads to growth in national wealth.  To the best of the author’s knowledge, however, there are no empirical studies that demonstrate a causal relationship between investment in physical research and development and growth in National Income.  Theoretical and political belief in the argument, however, is strong.  Various terms have been used to describe what, at any moment, is considered to be the most efficient physical technology.  The term leading edge has been used.  Similarly, the term State of the Art has been applied.

Organizational Technology

The ways in which workers and managers are motivated and the ways in which they combine with financial capital, plant and equipment to create business enterprise can be called Organizational Technology (O).  Advances in organizational technology emerge from research and development in the social and management sciences.  Such advances lead to growth in National Income and affect the capacity of a company or a country to effectively innovate new products and processes.  The economic impact of improved Organizational Technology on national wealth has been estimated at 20 to 40% of the net national product of the United States (Liebenstein 1981).  The Economic


Council of Canada has also recognized the negative consequences of poor organizational technology in Canada (Economic Council 1985).  The phrase which has become the touchstone for organizational success is In Search of Excellence.

Design Technology

Just as the physical and social sciences are the source of physical and organizational technological change, Art is the epistemologic source of improved product Design (D).  Unlike the sciences, however, advances in Art do not generally take place in the university but rather emerge from the professional non-profit fine arts where art for art’s sake is the dominant motivation (Chartrand 1987).

The contribution that Design brings to the marketplace can be called Elegance.  This term is also used in mathematics, the physical sciences and economics where it expresses Occam’s Razor, a guiding principle of the scientific method: Fewest assumptions for the maximum explanation.  Elegance can be defined as “ingeniously simple and effective” (Sykes 1985. 311)  This also catches the sense of economy as frugality.

Aesthetic Design is fundamentally different from technical or functional design such as a more fuel-efficient automobile engine.  Its impact on consumer behaviour involves what has been called “the best looking thing that works” (Cwi 1985).  If a consumer does not like the way a product looks, he or she may not try it.  Similarly, a rich endowment of natural resources does not guarantee a nation will develop up-scale value-added products, e.g. Canada is the largest timber producing country in the world and yet imports Swedish IKEA furniture.  This is not because Swedish pine is better, but rather due to superior design.

The importance of Art to international economic competitiveness was first recognized in the English-speaking world over 150 years ago in the United Kingdom with the establishment of the first school of design in 1836.  Until 1814, the Statute of Artificers had regulated training and employment of artisans in the craft guild tradition.  In that year, responding to deregulation or laissez-faire economic policies, Parliament abolished the Statute.  In short order, the guild system collapsed and the labour market became flooded with unskilled workers.  By 1835 the quality of British production, particularly textiles, had declined to the point that the British Board of Trade appointed a Select Committee to investigate the problem and recommend remedies.  The Committee called for the direct application of Art in manufacturing in order to maintain competitiveness with European rivals.  The result was creation of schools of design (Savage 1985: 94-97).

Similarly, in 1870, the Commonwealth of Massachusetts became the first American State to make Art Education a requirement in the public


schools with passage of the Drawing Act.  The Act originated through pressure by Boston manufacturers who argued that European students were trained in design and drawing and therefore American manufacturers suffered a competitive disadvantage (Freedman 1985: 21).  Within two decades, the same argument served to introduce art education in Canadian schools (Chalmers 1985: 108).  During this period, the most eminent of contemporary economists, Alfred Lord Marshall, explicitly recognized the importance of Art to economic life, even if he questioned the moral results of art education.

Education in art stands on a somewhat different footing from education in hard thinking: for while the latter nearly always strengthens the character, the former not infrequently fails to do this.  Nevertheless the development of the artistic faculties of the people is in itself an aim of the very highest importance, and is becoming a chief factor of industrial efficiency.... Increasingly wealth is enabling people to buy things of all kinds to suit the fancy, with but a secondary regard to their powers of wearing; so that in all kinds of clothing and furniture it is every day more true that it is the pattern which sells the things. (Marshall 1920: 177-178).

Since the Great Depression of the 1930s, however, the economic importance of design, and therefore the contribution of Art to National lncome, has, in effect, been forgotten.  Partially this reflects the perceived dubious morality of the artist reflected in Marshall’s words.  It also reflects the pedagogic triumph of the Pestalozzian rationale for art education, i.e. to develop creativity and expression, which displaced the economic rationale in the 1930s (Betenas 1985: 99-101).  It also reflects the traditional dis-ease concerning Art felt by political philosophers since the time of Plato (Plato. The Republic. Book X).

It also reflects, however, a general short-sightedness on the part of contemporary economists and other social scientists concerning the nature and implications of the Industrial Revolution.  The Industrial Revolution not only transformed economic production, it also transformed the nature of consumption making phenomena like advertising, the department store, fashion and the mail order catalogue critical to the modern economy (McCracken 1988: 4).  This lack of study has resulted in little empirical evidence concerning the impact of Art on economic competitiveness.  But while the impact of improved Design has not been quantified, its impact on competitiveness is again being recognized.

There is, then, another aspect to culture, namely good taste, good design and creative innovation, that should enable smaller industrial economies to compete effectively in the world economy... In this endeavour, higher quality implies an organic relationship between business and engineering, on the one hand, and design and craftsmanship, on the other... High quality products, technologies, plants, homes, cities and locales require the


presence of creative artists of all kinds.  To increase the long-run supply of artists... governments must support the artists and the arts.  The long-term return from investment in artists and the arts is real and substantial. In the absence of strong public support of this sector, Canada will not reap these benefits. Governments at all levels should increase their contribution to their respective arts councils (Royal Commission 1985:115-116).

Today the importance of design in international competitiveness can be seen in the United States and Canada where higher quality consumer products tend to come from abroad, particularly from Europe.  Why?  Given that capital plant and equipment in North America is as good as that in Europe, the answer is not superior European production technology.  In fact, it results from a feedback between skilled consumption and production resulting in superior design (Scitovsky 1976).

When the design advantage of European producers, and increasingly that of Japanese producers of consumer electronics, is combined with the wage advantage of offshore or Third World producers, then the North American producer is left with a narrowing mid-range market.  This combination of design and wage disadvantages may explain the apparent de-industrialization of North America.  Improved productivity through robotics and other new technologies may lower costs of production, but only improved design will secure for North American producers part of the growing up-scale consumer market.

The importance of enhanced design is becoming apparent to some major North American corporations including SCM, Teledyne, Black & Decker, and J.C. Penney.  This change reflects a bottom-line awareness that if a consumer does not like the way a product looks, then he or she may never get close enough to find out how well it performs, and therefore there is no chance for a sale.  Growing awareness of this basic principle is resulting in increased recognition of the importance of industrial design and the role it plays in helping companies meet sales and marketing goals.  More and more marketers are now enlisting the aid of design consulting companies or setting up their own in-house design departments (Skolnik October 1985: 46).  From where do design skills come?  They come from the practice of Art.

The Quaternary Sector

Changes in physical technology resulting from research in the physical sciences (T), improvements in organizational technology (O) resulting from social and management science research, and improvements in design (D) resulting from advances in the Arts (Shapiro 1970: 495) are now major sources of growth in National Income, i.e.

Y = f (K,L,T,O,D) g.


Advances in physical, organizational and design technology are legally protected by intellectual property rights legislation including: patents (emerging from the physical sciences); registered industrial design (emerging from the physical sciences and the arts); trademarks (emerging from the arts), and copyright (emerging from the physical and social sciences, humanities and the arts).  Managerial and industrial know-how also falls into this category of abstract goods and services.  At present such abstract goods and services constitute what can be called the Quaternary or Fourth Sector of the economy.

At any point in time, there exists a stock of capital and labour which embodies current and past technical and educational attainment.  Advances in physical, organizational and design technologies are flows that become embodied in new products, industrial processes and equipment, organizational methods, styles and fashions.

In dollar terms, research, both scientific and artistic, involves a tiny amount of resources compared to the existing capital stock and labour force.  However, its role in economic growth is that of a catalyst stimulating changes and improvements in the quality and efficiency of capital and labour (Shapiro 1970: 490-91).  The Information Economy is based on the buying, selling and licensing of abstract intellectual property rights which result from advances in physical, organizational and design technologies.


In this paper the changing nature and definition of National Income has been explored.  This involved inclusion of progressively more abstract concepts of National Income.  The examination began in the 16th century with a definition restricted to bullion and land.  This definition had evolved by the end of the 18th century to include capital plant, equipment and the division of labour.  In the 19th century, improvements in communications and transportation within a competitive marketplace became accepted as a source of growth in National Income.  By the middle of the 20th century, the role of Government as regulator of economic activity was recognized.  Today, advances in the Physical and Social Science and Art also contribute to growth in National Income.  Such advances are legally embodied in intellectual property legislation such as patents, copyright, registered industrial design and trademarks.  The buying, selling and licensing of these rights make-up the Quaternary Sector of the Post-Modern Economy.  Within this Quaternary Sector, Art contributes elegance in advertising, marketing and product design, particularly in the growing up-scale consumer goods marketplace.

Research Director, The Canada Council



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