Is cultural capital important for economic growth?

by Hans Hoegh-Guldberg

Mainstream economists have only recently begun to recognise the link between a healthy and
diverse national cultural community and the general ability of that nation to grow and
compete internationally. There has long been a general feeling that the link is real, reflected in
cultural policies such as public funding of artists and cultural buildings, and in whatever
support is given to cultural education in schools and tertiary institutions. But it is not well
reflected in other contexts, notably the realm of international trade agreements.
The article features an important parallel between environmental and cultural economics,
first developed in Australia by our leading cultural economist David Throsby.
Four kinds of economic capital
Economic growth depends on the growth and nurturing of economic capital defined as long-
lasting assets needed to produce goods and services. Our understanding is being transformed
as the world becomes more complex and competitive, most recently through the forces of
globalisation and the digital revolution. But even as long as two centuries ago economists
recognised that manufactured physical resources, human resources in the form of labour and
natural resources in the form of land were required to sustain an economy.
Many economists have recently come to realise that cultural capital is an independent
economic force that augments future economic growth, adding to the other recognised kinds
of economic capital. It can be nurtured through appropriate policies, or allowed to die on the
vine from neglect and through loss of cultural richness and diversity in the many and varied
community and demographic groups making up a nation.
The two most important notions are substitution and sustainable development. Some kinds
of economic capital can be replaced by other kinds as drivers of economic growth. Human
skills and ingenuity have replaced manufactured or physical capital in the generation of an
economy’s capacity for growth, and the trend is accelerating. So the first central concept is
substitution: the extent to which one type of economic capital can be replaced by another.
Some kinds of economic capital, however, have few or no substitutes in the sense that they
can be replaced by other types of economic capital without causing loss of the quality or
quantity of this capital. This leads to the second central concept: sustainability. Most
dramatically, degradation of natural capital – the planet’s air, water and land resources – has
been allowed to occur in the belief that these basic resources can be used up legitimately in
the process of creating physical capital and using it to produce goods and services.
So, some economic capital can be replaced by other kinds; some can’t without endangering
the well-being of future generations.
Some combinations illustrating substitution and sustainability are:
• unsustainable substitution: physical economic capital such as factories (and the goods
they produce) created through the depletion of non-renewable natural capital - by far the
most prevalent phenomenon in our world of ecological exploitation
• sustainable substitution: human capital derived from education and technological
development reducing the need to use physical capital, as in today’s knowledge
economy, or renewable energy taking over from global-warming use of exhaustible fossil
resources
• joint creation of physical and cultural capital: cultural heritage buildings taking on
additional value in their capacity as iconic cultural structures
• joint creation of human and cultural capital: creation of cultural ambience and diversion
as a by-product of better education
• cultural heritage developed through a society’s history and traditions leading to richness
and diversity of culture: sustainable if nurtured and protected, unsustainable if not.
Of course, the world is more complex than these few examples suggest. The point,
however, is that substitution between different kinds of economic capital developed through
technology and human ingenuity, and sustainability through nurturing what has been given us
by nature or through the cultural traditions we pass on to our descendants, determine whether

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long-term economic growth occurs as a result, or is retarded.
Using natural capital to boost the growth in physical capital, continuing to emit greenhouse
gases into the atmosphere in the process, will eventually lead to physical degradation and
economic stagnation or worse in the absence of some currently unpredicted technological fix.
Similarly, depleting or failing to nurture our cultural heritage – reducing the stock of cultural
capital – must result in lower economic growth. All four types of economic capital are
instrumental in furthering economic growth, and neglect leading to a diminution of any
economic capital in a particular community will lead to reduced future economic growth in
that community.
Much physical or manufactured capital can be replaced as technology advances. The
current rapid transition into the digital age provides prime cases. So does the move towards
new technologies to save on fossil energy usage, which aims at mitigating or reversing the
degradation of natural capital.
Human capital (based on education and technological advance) is a prime mover in
reducing the rate of degradation of natural capital, hopefully in time.
Natural capital keeps being exploited, which is becoming an unrealistic option if we are to
hand our planet over to coming generations intact – especially as far as our non-renewable
atmospheric, oceanic and terrestrial resources are concerned.
Cultural capital is akin to natural capital in the sense that degradation may be irreversible
and may reduce our communities’ capacity to develop economically, whereas nurturing it
will assist economic growth. It overlaps with manufactured physical capital in the sense that
structures such as museum buildings and concert halls can be replaced with other venues for
cultural experience, but the original buildings may gain economic value above their
commercial real estate price as a depository of artefacts or artistic centre of excellence. The
additional economic value would not occur for ordinary buildings but represents a genuine
addition that can only be defined as cultural economic capital - just think spectacular
architectural icons like the Los Angeles Getty Centre or Sydney Opera House.
With human capital it overlaps to the extent that better education may lead to higher
cultural sensitivity. But by how far does this go? Even the best-educated scientist may not be
culturally sensitive in an education system that treats the humanities and arts as second
priority. It all comes back to the qualities of the education system, how our society and
political systems function and respond, and especially the way in which cultural and human
economic activities interact.
Both cultural and natural capital in the modern sense (ecosystems, air, water and land
resources which as late as fifty years ago were regarded as virtually inexhaustible) emerged as
independent economic concepts less than two decades ago. Both now play a crucial role in
our understanding of where our economy and society may be heading over coming decades
unless we take action now.
Cultural ambience and other intangible cultural resources have a particularly important
independent influence on future economic sustainability and growth which cannot be
explained by technological and educational advance alone. As independent contributors to
economic growth, a nation’s cultural infrastructure and its cultural diversity need continuing
protection from internal and external threats.
Two main influences on the development of this article are the work of David Throsby,
whose publications explore the parallel between cultural and natural capital, and the 2006
review of the economics of climate change by British economist Sir Nicholas Stern.i The
Stern report is so ground-breaking in its analysis of climate change – the key concern in
ecological economics – that we will concentrate on the parallels with cultural economics from
now on, while acknowledging Throsby’s pioneering analysis along the way.
Insights from the Stern review on climate change
Each subsection below contains quotations from the Stern Review in italics. The parallels
with cultural stock concern market failure, equity and sustainability, ethics, the nature of the
evidence, and whether the identified problems are worsening.

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Market failure
“Climate change presents a unique challenge for economics: it is the greatest example of
market failure we have ever seen. The economic analysis must be global, deal with long time
horizons, have the economics of risk and uncertainty at its core, and examine the possibility
of major, non-marginal change.” (Stern, p 1)
Market failure occurs when the price of goods and services does not reflect the full cost to
society, defined as conventional financial costs plus environmental externalities. “Climate
change is a result of the externality associated with greenhouse-gas emissions – it entails
costs that are not paid for by those who create the emissions.” (p 23)
The climate is a public good: “[T]hose who fail to pay for it cannot be excluded from
enjoying its benefits and one person’s enjoyment of the climate does not diminish the capacity
of others to enjoy it too. Markets do not automatically provide the right type and quantity of
public goods, because in the absence of public policy there are limited or no returns to private
investors for doing so: in this case, markets for relevant goods and services … do not reflect
the consequences of different consumption and investment choices for the climate. Thus,
climate change is an example of market failure involving externalities and public goods.” (p
25)
Applied to cultural economics, we find:
Market failure: There is an obvious difference in scale between the consequences of
climate change and withholding cultural support, but this does not prevent cultural and
ecological economics from having important features in common. In a world of unfettered
economic rationalism, survival of the fittest and strongest is viewed as efficient, and no
market failure perceived. Such a world, however, takes a short-term view based on economic
rationalism. It ignores the potential economic benefits of a richer and more diverse future
cultural sector – of the ability of cultural capital to add to the total economic capital stock.
Is it global in nature?: Chances are that as the supply of cultural goods and services is
globalised, many regional or national cultural expressions are marginalised. Cultural capital
may waste away as homogenised global products crowd it out. Moreover, cultural diversity
may also be endangered within nations, regionally or across genres and ethnic groups.
The impact is potentially serious in several respects:
• It limits the range of choices in societies that value the invigorating influence of cultural
diversity for its impact on community cultural health and, ultimately, economic growth
• It erodes the cultural ambience of societies and communities, thus reducing the range of
cultural inspirations available for the young in particular
• It aggravates the social injustice against professional artists and other cultural workers,
who are already supplying cultural product for love rather than fair return
• It erodes what would otherwise be regarded as fair infrastructure support generally
• Specifically, it reduces the actual or potential demand for better cultural education, which
puts the future supply of cultural education facilities at risk
• Reduced cultural diversity has a negative potential impact on the quantity and range of
public cultural funding.
Export opportunities will remain due to outstanding talent, and remaining artistic
expressions may find niches where global interests have not yet intruded. But this would also
be the case if cultural capital infrastructure (including education and training) received better
support, with further benefits for exports. Such further benefits would include the ability to
market local cultural products including new compositions and recordings through the
Internet with all its opportunities for individual innovative marketing (thus partly reversing
the homogenising influence of mass cultural products from abroad).
Time horizons: The above discussion implies that there are serious long-term implications.
If the infrastructure is eroded because of diminished demand for cultural goods and services,
rather than remaining in a position to expand the scope for artistic and cultural expression, the
ability to compete internationally and in the domestic market will also diminish. These effects
will interact further with those identified in the previous item.
Risk and uncertainty: As the Stern review puts it (p xvii), “uncertainty applied to climate

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change is an argument for a more, not less, demanding goal, because of the size of the adverse
climate-change impacts in the worst-case scenarios.” … “The uncertainties are large because
of the potential size, type and timing of impacts and because of the high potential cost of
combating climate change.” (p 25)
The parallel in cultural policy is that the uncertainty of any impact happening, and the
potential cost of damage control, increases the further we go into the future. Like climate,
cultural capital is a long-term asset, albeit obviously not at the same scale. Hence, risk and
uncertainty are important factors to consider in the analysis of whether and how we want to
protect and promote our cultural capital. The item below provides further backing for this
statement.
Non-marginal change: Major non-marginal change is a serious risk if no action is taken to
moderate climate change, because its impacts will be large relative to the global economy,
”much more so than for most other environmental problems” (Stern, p 34).
Non-action to protect and develop our cultural capital carries a lesser risk as it is not our
very existence on the planet that is under threat, but the risk remains that non-marginal change
may threaten our cultures and lifestyles. It may be possible to demonstrate that such threats
exist. The two-volume study of musical diversity by Richard Letts and his international
correspondents for the International Music Council (2006) may provide a starting point.ii One
can imagine situations where lack of preservation and development of different resources –
cultural capital, social infrastructure, political institutions, education – could lead to societal
instability through feedback effects among the resource policies mentioned. This is potential
non-marginal change.
Equity and sustainability
“Questions of intra- and inter-generational equity are central. … The effects of climate change
are global, intertemporal and highly inequitable. Generally, poor countries, and poor people in
any given country, suffer the most, notwithstanding that the rich countries are responsible for
the bulk of past emissions. These features of climate change, together with the fact that they
have an impact on many dimensions of human well-being, force us to look carefully at the
underlying ethical judgements and presumptions which underpin, often implicitly, the
standard framework of policy analysis.” (Stern, pp 23 and 28)
Throsby writes in the paper already quoted (p 4): “When applied to cultural sustainability,
this concept can be considered as relating principally to the management of cultural capital,
because the stock of cultural capital, both tangible and intangible, embodies the culture we
have inherited from our forebears and which we hand on to future generations.”
The greater the cultural benefits of a given stock of cultural capital, the faster will the
community’s cultural appreciation grow, but cultural appreciation can also decay if cultural
participation falls, and the cultural value of these assets declines through falling into disrepair
or other neglect. Importantly, new investment in cultural capital includes efforts to develop
the diversity and quality of our intangible cultural assets.
Throsby notes that the principle also applies to intra-generational equity, meaning fairness
in access to cultural participation across social classes, income groups, locations, and
minorities and disadvantaged groups (p 5).
In conclusion, cultural equity and sustainability go hand in hand. How to achieve equity
between generations (heritage) and within the present generation is crucial. Beyond our
responsibility to rectify current national and international inequities, this generation has an
ethical responsibility to sustain and develop its cultural capital, intangible as well as tangible.
It’s a formidable task but it is up to us to ensure the free development of future preference
patterns. We face an ethical imperative to act on behalf of our descendants to ensure that they
face as free and unfettered a choice as possible within the cultural heritage we pass on.
Ethics and economics
Ethical issues were raised just above, but Stern’s emphasis is central and warrants a separate
subheading. “The breadth, magnitude and nature of impacts imply that several ethical
perspectives, such as those focusing on welfare, equity and justice, freedoms and rights, are
relevant. Most of these perspectives imply that the outcomes of climate-change policy are to

4
be understood in terms of impacts on consumption, health, education and the environment
over time but different ethical perspectives may point to different policy recommendations.”
(p 23)
So a legitimate question to ask is whether ethics are irrelevant in the economic analysis of
cultural policy, as applied to perspectives on welfare, equity and justice, freedom and rights.
If so, where does this leave statements like the United Nations Declaration of Human Rights,
general national welfare policies – or arts funding policies? What about UNESCO’s
Convention on the Protection and Promotion on the Diversity of Cultural Expressions which
entered into force in March 2007 and is introduced as Cultural diversity: a new universal
ethic? Aren’t the impacts on consumption, health, education and the (socio-cultural)
environment also the governing criteria for assessment of cultural matters?
The answer to these questions are surely: yes, ethics are important. They permeate the
international conventions, and the ethics of our own public cultural funding policies should be
as transparent as possible. The final analysis of cultural policy should embrace the impacts
identified above as governing criteria, exploring the different ethical perspectives that are
implied in alternative policies.
The nature of the evidence
“Understanding the scientific evidence for the human influence on climate is an essential
starting point for the economics, both for establishing that there is indeed a problem to be
tackled and for comprehending its risk and scale. It is the science that dictates the type of
economics and where the analyses should focus, for example, on the economics of risk, the
nature of public goods or how to deal with externalities, growth and development and intra-
and inter-generational equity.” (Stern, p 3)
Is there a parallel named ‘understanding the cultural evidence’, and does ‘culture’
determine the type of economics and where the analysis should focus?
Cultural economics has not taken the quantum leap that the Stern review did with climate
change. The cultural evidence is well researched by cultural economists who understand the
threats to the cultural integrity of nations and regions and provide valuable advocacy. The
special issues associated with culture should be allowed to influence economic policy, since
the hurdle has been cleared that cultural capital is a legitimate concept.
Is the problem worsening?
“Results from new risk-based assessments suggest there is a significant chance that the
climate system is more sensitive than was originally thought. … In the future, climate change
itself could trigger additional increases in greenhouse gases in the atmosphere, further
amplifying warming. These potentially powerful feedbacks are less well understood and only
beginning to be quantified.” (Stern, pp 8 and 10)
There is a clear parallel here, since the problem could also be worsening in the cultural area
due to such factors as the homogenising impact of overseas competition, or other negative
influences on cultural diversity.iii If we have identified particular threats to cultural diversity
in a country, we should at least develop an analytic framework to determine whether the
threat is intensifying or abating, and devise appropriate policy guidelines.
Concluding observations
The Stern Review concludes (in part): “Much of the economics we have begun to describe
here and that is put to use in the subsequent parts of this Review is not simple. But the
structure of this economics is essentially dictated by the structure of the science. And we have
seen that it is not possible to provide a coherent and serious account of the economics of
climate change without close attention to the ethics underlying economic policy raised by the
challenges of climate change. … The urgency of the problems established by the science
points to the urgency of translating what we can already show with the economic analysis into
concrete policy actions. In doing so, the international dimension must be at centre stage.” (p
38)
The response, in cultural terms, relates primarily to policy:
• There are strong arguments that the ethics involved in such matters as intra- and inter-
generational equity are important to cultural policy.

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• The economics of cultural policy has taken some considerable steps forward, not least in
establishing the theory that cultural capital provides an added dimension in its own right.
This has been implicit in policies of public funding for several decades, but has not yet
been capable of successfully tackling some important issues in international trade, to take
but one example.
• One important way of providing convincing evidence for policy-makers is to provide
convincing empirical data. Better statistical backup is needed. This is possible but no
initiative to make it happen has been taken. The problem is generally applicable to the
arts and culture, which appears to remain low priority for the Australian Bureau of
Statistics.
• There is probably no centre stage. The battleground is international, as far as what might
be termed cultural imperialism is concerned, but it is also national, as far as the whole
gamut of policies are concerned, starting from the basic need to preserve cultural
diversity.

___________________________

Notes and Acknowledgments

Thanks to David Throsby for his encouragement of the project leading to the present article,
to David Stout for critical analysis of the economics of a previous draft, and to Dick Letts for
suggesting how to make the concepts as simply understood as possible. All errors remain
mine.
This article was derived from my paper on MCA’s Music in Australia Knowledge Base,
Cultural capital as an independent economic force
(http://mcakb.wordpress.com/context/cultural-economics/). I edit the knowledge base and am
the principal of cultural and ecological economic consultancy Economic Strategies Pty Ltd,
based in Oberon, NSW (http://economicstrategies.wordpress.com).
i
David Throsby has written several articles analysing the parallel between cultural and natural
capital, including On the sustainability of cultural capital (2005)
(http://www.econ.mq.edu.au/research/005/cult_cap_throsby.pdf). The Stern Review Report on the
Economics of Climate Change (UK Treasury) can be downloaded in full or in part from http://www.hm-
treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/stern_review_report.cf
m.
ii
Richard Letts, principal investigator (2006), The protection and promotion of musical diversity.
UNESCO (http://portal.unesco.org/culture/en/ev.php-
URL_ID=32569&URL_DO=DO_PRINTPAGE&URL_SECTION=201.html).
iii
It is acknowledged that in the modern digital world everyone has the opportunity to publicise his
or her own music, visual or literary art on the Internet. This may show a way towards less big-business
influence on cultural trends in the future but doesn’t obliterate the fact that for the present most of the
musical experiences happen through live performances, through physical recordings, and broadcast
performances. How this is changing is an important subject which we hope to elucidate on the MCA
Knowledge Base as it develops.